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Mcpherson v. Hewitt

OCTOBER 3, 1975.

H. WILLIAM MCPHERSON ET AL., PLAINTIFFS-APPELLEES,

v.

JOHN HEWITT, DEFENDANT-APPELLANT.



APPEAL from the Circuit Court of Du Page County; the Hon. PHILIP F. LOCKE, Judge, presiding.

MR. JUSTICE GUILD DELIVERED THE OPINION OF THE COURT:

The plaintiffs, H. William McPherson and Howard G. Read, filed an action in the circuit court of Du Page County alleging that John Hewitt violated the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1969, ch. 121 1/2, par. 137.1 et seq.), and committed common-law fraud in the sale of Valley Aviation Corporation *fn1 securities to them. In a bench trial the circuit court ruled in favor of plaintiffs on both counts and awarded them jointly $10,000, plus attorney fees of $2,000. Hewitt's appeal presents three questions for review: (1) whether the plaintiffs are precluded from recovering under the Illinois Securities Law of 1953; (2) whether the manifest weight of the evidence will support the judgment on the fraud count; and (3) whether it was error to award the plaintiffs $2,000 in attorney fees.

The record reveals that on April 1, 1969, a meeting took place at McPherson's home between McPherson, Read and Hewitt. The purpose of the meeting was to discuss the possible investment of funds by McPherson and Read in a land-development project, Tyler Creek Land Company, in which Hewitt was involved. Tyler Creek Land Company had authorized the issuance of 30,000 shares of common stock and Hewitt explained that he had a right to receive one-third of that stock, which he intended to exercise through a second corporation, Valley Aviation Corporation. Valley Aviation Corporation was supposed to have authorized 30,000 shares of common stock. Hewitt advised McPherson and Read that if they jointly invested $10,000 in Valley Aviation Corporation that they would jointly receive one-fourth of the authorized common stock, or 7500 shares. Hewitt said he would invest $20,000 and receive 15,000 shares and that one Walter Newman would invest $10,000 and receive 7500 shares. Hewitt also told them that Valley Aviation Corporation was incorporated on March 16, 1969; that the sole assets of Valley Aviation Corporation would be the Tyler Creek Land Company stock; and that McPherson and Read would be the first ones to receive a return on the investment in Valley Aviation Corporation. Hewitt showed them the architect's drawings of the development as it would look when finished and then presented each man with a written instrument captioned, "TYLER CREEK LAND COMPANY, VALLEY AVIATION, COMMON STOCK SUBSCRIPTION AGREEMENT." That night both men agreed to invest $5,000 each in the Valley Aviation Corporation and signed the agreement. Hewitt signed the agreement as President, Valley Aviation Corporation, Tyler Creek Land Company. McPherson gave Hewitt $5,000 in cash that night and received a copy of a written agreement as his receipt. McPherson's copy had the following handwritten notation on it: "Received $5,000.00, APR 1 1969 J. Hewitt." On June 9, 1969, Read gave Hewitt a check for $5,000 and received a copy of the agreement he signed April 1, 1969, as his receipt. Read's copy had the following handwritten notation on it: "9 JUN 1969, Received $5,000.00 J.H., Check # 392." Hewitt endorsed and cashed the check.

Over the next two years McPherson and Read were kept informed of the progress of Valley Aviation Corporation and Tyler Creek Land Company through conversations with Hewitt. Neither McPherson nor Read ever received any stock in any corporation or written reports about Valley Aviation Corporation, Valley Air Service Corporation or Tyler Creek Land Company. Then Hewitt told them that a transaction had "gone sour" and that they had lost their investment. McPherson and Read demanded to see proof that the transaction had, in fact, gone sour and how it occurred. They have never received this information.

In June, 1971, Read contacted a law firm on his own behalf to determine his legal rights. The law firm contacted Hewitt to gain information about the transaction and was referred to Roy Lasswell, Hewitt's lawyer. Lasswell was sent a letter on June 23 requesting information about Valley Aviation Corporation and Tyler Creek Land Company, the use of Read's $5,000 and how money was invested by others. There has been no response to this inquiry.

On January 5, 1972, McPherson authorized the same law firm to represent him with reference to the Valley Aviation Corporation investment. Prior to that time McPherson had not contacted an attorney about this matter, although he had discussed the matter with Read.

On January 26, 1972, a letter was sent Certified Mail-Return Receipt Requested by the law firm to Hewitt informing him of the lack of cooperation by Lasswell and demanding proof that the transaction was not fraudulent within 15 days or else McPherson and Read would treat the transaction as fraudulent and instigate appropriate legal action. Hewitt's personal secretary signed for the letter. A copy of the letter was also sent to Lasswell. Neither responded.

On February 22, 1972, the law firm representing McPherson and Read received certified letters from the Secretary of State's Securities Division Office stating, as of February 17, 1972, that their records did not disclose any qualifications or registration under the Illinois Securities Law of 1953, of any type or class of security issued or issuable by Valley Aviation Corporation or Tyler Creek Land Company.

On February 28, 1972, a letter was sent, Registered Mail-Return Receipt Requested, by the law firm to Hewitt notifying him that McPherson and Read claimed that he violated section 12 of the Illinois Securities Law of 1953 and that they elected to void the contract, as provided in section 13 of the Act. Included in the letter were McPherson and Read's copies of the contract with an explanation that they were tendering back the contracts and demanding the return of their monies, plus interest. The letters threatened suit within 15 days if Hewitt did not comply with the demands. Hewitt's personal secretary signed for this letter. Hewitt did not respond.

On March 27, 1972, McPherson and Read filed suit and received judgment in the amount of $10,000, plus $2,000 attorney fees against Hewitt.

On appeal, Hewitt contends that the trial court erred in that: (1) the plaintiffs are precluded from recovering under the Securities Law because (a) the evidence shows no violation of the Illinois Securities Act; (b) the sale of stock was an exempt transaction; and (c) if there were violations, the plaintiffs failed to comply with the Act by not notifying Hewitt of their election to void the sale of the securities within 6 months after plaintiffs had knowledge that the sale was voidable; (2) the trial court awarded plaintiffs $2,000 for attorney's fees without any proof of reasonableness; and (3) the manifest weight of the evidence shows that there was no fraudulent or false representation of a material fact upon which the plaintiffs relied to support a fraud judgment.

We find Hewitt's contentions are without merit and affirm the judgment of the trial court.

Securities are defined in the Illinois Securities Act as including an "investment contract." In an article entitled Exemptions from Registration under the Illinois Securities Law of 1953, 1961 U. Ill. L.F. 205, Samuel H. Young, one of the principal drafters of the 1953 Act, states:

"* * * it is pointed out that the definition of the term `securities' in the 1953 law was taken from the Federal Securities Act of 1933, and therefore decisions under that Act should have considerable weight with the judiciary. These decisions include such broad interpretations of the term `securities' as * * * cases * * * which hold that the phrase `investment contract' includes the sale of an interest in any type of profit-seeking venture whereby the investor transfers ...


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