Louis W. Wegerer and Judith A. Wegerer v. First Commodity Corporation of Boston

744 F.2d 719, 16 Fed. R. Serv. 1326, 1984 U.S. App. LEXIS 18783

• Court: Court of Appeals for the First Circuit
• Decided: September 10, 1984
• Docket: 82-1686
• Status: Published

Opinions

BARRETT, Circuit Judge.

First Commodity Corporation of Boston (FCCB), Donald R. Schleicher, and his brother, Richard A. Schleicher (Appellants) appeal from an adverse jury verdict and remittitur judgment entered in favor of Louis and Judith Wegerer (Wegerers). The Wegerers were awarded $10,775.00 in actual damages and $250,000.00 in punitive damages on a finding that appellants and one Robert Jones,¹ a former account executive for FCCB, conspired to defraud the Wegerers in the sale of two copper commodity option contracts. The evidence presented at trial was developed exclusively by the Wegerers; the appellants rested without presenting any evidence.

BACKGROUND

FCCB is a corporation doing business as a commodity option brokerage firm with its main office in Boston and sales offices in Chicago, Miami, San Francisco, New York, and Newport Beach. FCCB is a private, closely-held corporation whose stock is owned by Donald Schleicher (80%) and Richard Schleicher (20%). At all times relevant hereto, Donald Schleicher was president, treasurer and chairman of the board of directors of FCCB, while Richard Schleicher was vice-president, secretary, and the only other member of FCCB’s board of directors. Richard Schleicher did most of the research for FCCB. Over the years FCCB has enjoyed tremendous financial success and the Schleichers have profited accordingly. In his deposition Donald Schleicher testified that he and Richard had recently sold 20% of FCCB, for which he had received $3,900,000 and Richard had received $900,000; that FCCB was selling several of its offices to a partnership for $6,000,000, and that the proceeds of the sale would go to himself and his brother over a three to four year period. FCCB held itself out to be the oldest commodity options specialist on the East Coast with considerable financial strength, and one of America’s most accomplished and professional commodity option brokerage firms. FCCB employs several hundred salesmen to sell various option contracts.

On November 11, 1976, FCCB, through Donald Schleicher as President, and Donald and Richard Schleicher, individually, and on behalf of “their affiliates, officers, agents, servants, employees, attorneys, and assigns, and those persons in active concert or participation with them” (R., Pl.Ex. 33 at 2) entered into a consent decree with the Commodity Futures Trading Commission permanently enjoining each of them from using the mails or any means or instrumentalities of interstate commerce to cheat or defraud any person by: (1) disseminating by means of oral representations or written materials expected and predicted profits and returns from commodity options and futures transactions, (2) representing that commodity options or commodity transactions are guaranteed, backed, escrowed or collateralized for the benefit and protection of purchasers of commodity options, (3) failing to disclose or misrepresenting the actual amount of the purchase price of commodity options, including a separate listing of the premium, markups on the premium, costs, fees, and commissions, (4) executing commodity option transactions and commodity futures contracts without the consent, knowledge, and/or authorization of its customers; (5) failing or omitting to disclose or misrepresenting the price level which a commodity must reach during the life of an option before an option customer will realize a profit, (6) failing or omitting to disclose that specific market movements of a commodity or contract of sale of a commodity for future delivery cannot be accurately predicted, (7) failing or omitting to disclose the nature and character of a customer’s investment in commodity options, (8) failing or omitting to relate all additional costs which may be incurred by an option customer if the option is exercised, and (9) failing to disclose or misrepresenting the fact that a commodity option purchased by a customer had earlier been purchased for the account of FCCB or another customer of FCCB.

FACTS

During early April 1978, Louis Wegerer, a railroad engineer responded to an FCCB advertisement.² Although neither Louis nor his wife, Judith, both residents of Mari-, on, Kansas, knew anything about stocks, bonds, or commodities, they decided to respond to the FCCB advertisement which stated that “Mr. X invested $3,445; nine months later he received $24,213.” Within several days after responding to the ad, the Wegerers received the first of what was to be a series of phone calls from Robert Jones, an account executive for FCCB, from New York. Although the Wegerers told Jones that they knew nothing about dealing in commodities or investments and that they could not afford to invest in commodity option contracts, Jones persisted. He made thirty to forty telephone calls to the Wegerers over a period of several weeks. During the course of his telephone conversations with the Wegerers, Jones related, inter alia: an investment in copper commodity option contracts was completely safe; the Wegerers would make money with each rise in the price of copper; that copper was rising and the Wegerers were sure to make a profit; that the Wegerers should not review the documents and information mailed to them by FCCB because it was too complicated for them to understand and the information was sent out merely to fulfill a legal requirement; that he was an expert in commodities; and he was making many people a lot of money and that the Wegerers should trust him with their investment.

Based on Jones’ representations, the Wegerers withdrew some of their savings and also obtained a bank loan, all in Kansas, for investing $5,375 with FCCB on May 8, 1978, and $5,400 with FCCB on May 30, 1978, in copper commodity options traded on the London exchange. Subsequent to making these investments, the Wegerers discovered, for the first time, (1) that FCCB charged a commission brokerage fee equal to 100% of the purchase price of the copper commodity options they had purchased, (2) that two days after they had purchased their second option contract, the sale of commodity options was banned in the United States by the Commodity Futures Trading Commission because of rampant fraud in the sale of such options, and (3) that the price of copper had to rise a fixed amount before they could even recover their initial investment.

After the Wegerers purchased their second contract, Jones stopped calling them. Despite repeated attempts, the Wegerers were unable to contact Jones again. The Wegerers subsequently sued FCCB, the Schleichers, and Jones alleging that they were persuaded to purchase two copper option contracts which were worthless at the time they were purchased and that the actions of the appellants and Robert Jones in inducing them to effectuate the purchases were in violation of federal law and constituted fraud and conspiracy to defraud under Kansas law.

Following a three day trial, the jury returned a verdict against FCCB and the Schleichers, awarding the Wegerers $15,-000 in actual damages and $1,000,000 in punitive damages. Following appellants’ post-trial motions, the district court entered an order denying a new trial and appellants’ motion for a judgment notwithstanding the verdict. The district court did, however, grant appellants’ motion for a remittitur. The court reduced the Wegerers’ actual damages to $10,775.00, the purchase price of the contracts, and the Wegerers’ punitive damages to $250,000.00.

ISSUES

On appeal FCCB and the Schleichers contend the district court erred by: (1) refusing to give their requested instruction on justifiable reliance, (2) refusing to grant a new trial after finding that the $1,000,000 punitive damage award was excessive, (3) denying their motions for directed verdict and a new trial, (4) submitting Instructions 9-11A since officers, directors or employees of a corporation acting in their official capacity on behalf of a corporation cannot conspire with their corporation, (5) holding that it had personal jurisdiction over the Schleichers, (6) admitting the 1976 consent decree, (7) admitting the testimony of two other FCCB customers, and (8) by ruling that various complaints filed with the Commodities Futures Trading Commissioner by unrelated parties could be used for cross-examination of any defendant.

I.

Appellants contend that the district court erred in refusing to give their requested instruction defining justifiable reliance. Appellants argue, citing to Goff v. American Savings Association of Kansas, 561 P.2d 897, 903 (Ct.App.Ks.1977), that the test for determining when reliance is justified is whether the plaintiffs had “information which would serve as a danger signal and a red light to any normal person of his intelligence and experience” and that the district court erred by not instructing accordingly.

In rejecting the appellants’ proferred instruction, the district court stated:

The reason I rejected this [instruction], the way you submitted it is that you are trying to get comparative fault in this case and the court isn’t about to let you turn, this into a negligence case.

(R., Vol. X at 304-305.)

Thereafter, the district court instructed the jury on justifiable reliance in Instruction No. 8:

A party claiming to have been defrauded by a false representation or concealment must not only have acted in reliance thereon but must have been justified in such reliance, that is, the situation must have been such as to make it reasonable for him, in the light of the circumstances and his intelligence, experience and knowledge, to accept the representation without making an independent inquiry or investigation.

(R., Vol. II at 291.)

Under these circumstances we hold that the district court did not err in refusing the appellants’ proffered instruction. Whereas a party is, upon proper request, entitled to an instruction upon his theory of the case if there is evidence to support it, Brandes v. Burbank, 613 F.2d 658 (7th Cir.1980), a party is not entitled to have the jury instructed in the particular language of its choice. Frosty Land Foods International, Inc. v. Refrigerated Transport Co., Inc., 613 F.2d 1344 (5th Cir.1980); Baker & Co. v. Preferred Risk Mutual Insurance Co., 569 F.2d 1347 (5th Cir.1978). Instructions must be considered as a whole and particular instructions and requests for instructions are to be considered in the framework of the entire charge. Marshall v. Ford Motor Company, 446 F.2d 712 (10th Cir.1971). The district court’s instructions were proper and adequate.

We have also considered the applicability of our Zobrist v. Coal-X, Inc., 708 F.2d 1511 (10th Cir.1983), cited by both parties in supplemental authority letters to the court. We hold Zobrist to be distinguishable.

Zobrist involved an action brought by purchasers of stock against the sellers to recover for fraud. In Zobrist we held that the warnings and statements contained in a private placement memorandum could be imputed to a sophisticated investor even though he had not read them and that the investor could not justifiably- rely on misrepresentations where the falsity of the misrepresentations is palpable. Such is not the case at hand.

Neither of the Wegerers were sophisticated investors. Furthermore, it is uncontested that the Wegerers were told not to read the materials sent to them; that Jones told the Wegerers the materials were sent by FCCB merely to comply with a legal requirement; that the Wegerers were lied to repeatedly; and that the Wegerers were “badgered” by numerous telephone calls and pressured into investing.

II.

Appéllants argue that the district court erred in admitting the 1976 consent decree executed by FCCB and the Schleichers.³ Appellants contend that although the district court admitted the decree for the limited purpose of showing intent and knowledge, and instructed the jury accordingly, that the consent decree was nonetheless inadmissible for any purpose under Rules 410, 408, 404(b), 403, 402 and 802 of the Federal Rules of Evidence. Appellants further contend that the limiting instruction given by the court did not cure the prejudice suffered by the appellants as a result of the admission of the consent decree. We disagree. We hold that the district court properly admitted the consent decree for the limited purpose of showing intent and knowledge under Rule 404(b).

Rule 404(b) provides:

Evidence of other crimes, wrongs or acts is not admissible to prove the character of a person or to show that he acted in conformity therewith. It may, however, be admissible for other purposes, such as proof of motive, opportunity, intent, preparation, plain knowledge, identity, or absence of mistake or accident.

Within Instruction No. 12 the district court charged the jury:

Certain evidence has been admitted of alleged similar misrepresentations made by defendants to one Jerry Kerr and Michael Collins. Also there has been received into evidence Exhibit 33, a consent decree involving claims between the Commodity Futures Trading Commission and persons named in the consent decree, including the defendants in this action.

This evidence has been admitted for limited purposes only as being relevant to defendants’ intent to defraud plaintiffs, any scheme or plan on the part of defendants to defraud plaintiffs, and also defendants' knowledge of the alleged falsity of misrepresentations made to plaintiffs.

The admission of the consent decree, as limited, was particularly appropriate in this case for purposes of showing intent and knowledge. In United States v. Barbieri, 614 F.2d 715, 719 (10th Cir.1980) we stated:

Under Fed.R.Evid. 404(b), evidence of crimes not charged in the indictment may be admitted to prove, among other things, intent and plan. See United States v. Ahern, 612 F.2d 507, 509 (10th Cir.1980). The admissibility of such evidence is within the sound discretion of the trial judge. See United States v. Nolan, 551 F.2d 266, 271 (10th Cir.), cert. denied, 434 U.S. 904, 98 S.Ct. 302, 54 L.Ed.2d 191 (1977). We find no abuse of discretion here.

Matters of intent and plan were crucial in this case. The evidence was relevant for a purpose other than showing bad character; it was clear and convincing; and its probative value substantially outweighed the danger of prejudice. See United States v. Scholle, 553 F.2d 1109, 1121 (8th Cir.), cert. denied, 434 U.S. 940, 98 S.Ct. 432, 54 L.Ed.2d 300 (1977). The St. Louis evidence showed the dimensions and continuing nature of Barbieri’s scheme. It put the activities in Oklahoma City in context. See United States v. Pauldino, 443 F.2d 1108, 1113 (10th Cir.), cert. denied, 404 U.S. 882, 92 S.Ct. 204, 30 L.Ed.2d 163 (1971). Finally, it provided a basis for understanding the testimony — ...

See also Jerry J. Kerr v. First Commodity Corporation of Boston, 735 F.2d 281 (8th Cir.1984) in which the Court upheld the admission of the same consent decree here involved “solely for the purpose of demonstrating First Commodity’s knowledge and intent to commit the fraud insofar as such knowledge and intent are relevant to the issue of punitive damages” at 286. Although the district court in the instant case did not limit the consent decree solely for consideration of punitive damages, the decree was properly admitted since the Wegerers not only sued FCCB, but also the Schleichers, and the punitive damages awarded the Wegerers were assessed only against FCCB.

III.

Appellants contend that the district court erred in giving Instructions 9 through 11A on conspiracy because the evidence failed to establish that any of the individual defendants were acting outside their official capacities on behalf of FCCB. Appellants cite May v. Santa Fe Transportation Co., 189 Kan. 419, 370 P.2d 390 (1962) for the general rule that officers, directors or employees of a corporation, acting in their official capacities on behalf of the corporation, cannot conspire with the corporation. Appellants acknowledge that the court in May implicitly recognized an exception to the general rule, set forth in Greenville Publishing Co. v. Daily Reflector, Inc., 496 F.2d 391 (4th Cir.1974) and Jewel Foliage Co. v. Uniflora Overseas Florida, 497 F.Supp. 513 (M.D.Fla.1980), that officers, directors, or employees of a corporation who personally benefit from the illegal activities in a way separate and distinct from the corporation may be held to be a participant in a conspiracy with their corporation. Appellants contend that the pivotal question of whether the Schleichers conspired with FCCB must be resolved by determining whether they were acting within their official capacities on behalf of the corporation or whether they were acting for their individual benefit.

Appellants argue that the evidence presented by the Wegerers does not contradict their contention that the individual defendants were acting within their official capacities for FCCB when dealing with the Wegerers. They cite Jewel Foliage v. Uni-flora Overseas Florida, supra, for the proposition that mere stock ownership does not preclude the application of May, and Stanfield v. Osborne Industries, Inc., 7 Kan.App.2d 416, 643 P.2d 1115 (1982) for the proposition that the mere accrual of personal benefits to individual shareholders, such as the Schleichers, does not remove a case from the May holding, whenever the actions of the individual defendants are completely related to their corporate responsibilities. Finally, appellants contend that “the 1976 consent decree provides no evidence of the individual benefit which plaintiffs must prove the Schleichers received in order to prove a civil conspiracy.” (Brief of Defendants-Appellants at 22.)

Kansas has long recognized that there may be recovery against all the members of a civil conspiracy by one who has suffered damages as a result of actionable conduct by one or more of the conspirators pursuant to the conspiracy. Ammon v. Kaplow, 468 F.Supp. 1304, 1312 (D.Ks.1979), citing International Union, United Auto, et al. v. Cardwell Mfg. Co., 416 F.Supp. 1267, 1290 (D.Ks.1976). Under the law of Kansas, a plaintiff may either prove the conspiracy by admissible acts of the conspirators, or by admissible acts of different persons. Beverly v. McCullick, 211 Kan. 87, 505 P.2d 624, 626 (1973). Furthermore, the reckless misrepresentations of an employee such as Jones, who is also a co-conspirator, are imputed to FCCB. First Commodity Corporation of Boston v. CFTC, 676 F.2d 1 (1st Cir.1982).

Within Count II of their complaint, the Wegerers alleged that FCCB, Donald and Richard Schleicher, together with Robert Jones, pursuant to a conspiracy to defraud, committed tortious acts against them, i.e., false and fraudulent representations and concealing material facts which they relied upon in purchasing two copper commodity option contracts from FCCB for $10,775.00. In determining whether the district court properly instructed on conspiracy we must decide whether (1) the Wegerers established a civil conspiracy, and (2) whether the Wegerers established that the Schleichers were acting outside their official capacities for their personal gain.

The Wegerers presented evidence which established that: they responded to an FCCB advertisement which stated that one of its clients had made a profit of 827% in one year; Donald and Richard Schleicher were the principal officers and only directors and shareholders of FCCB; Robert Jones, an FCCB account executive, made numerous phone calls to them within a relatively short period of time during which time he held himself out to be an expert; Jones stated that the Wegerers did not need to read the written material sent to them by FCCB since they would not be able to understand it and the information was being sent out merely to fulfill a legal requirement; Jones stated that copper prices were rising and that they were certain to make a profit; the Wegerers wired FCCB funds totaling $10,775; FCCB accepted the wired funds and mailed out confirmations; FCCB did not sent the Wegerers the contracts Jones said would be sent; the Wegerers were not knowledgeable, sophisticated investors; the Wegerers relied exclusively on Jones as an employee of FCCB in purchasing the option contracts; the Wegerers were unaware that the commission fees on their purchases would equal 100% of the purchase price of the option contracts; FCCB and the Schleichers had entered into a consent decree in 1976 in which FCCB and the Schleichers agreed to cease and desist from a variety of deceptive practices, many of which were identical to the practices utilized in defrauding the Wegerers.

Under these circumstances, we hold that the Wegerers established a civil conspiracy to defraud. We further hold that this same, uncontested, evidence established that the Schleichers were acting outside their official capacities as officers and directors of FCCB. They were acting for their personal gain.

In evaluating whether the Schleichers were acting outside of their official capacities for their own personal gain, we view the consent decree executed by FCCB and the Schleichers to be of primary importance. Under the decree, voluntarily executed by FCCB and the Schleichers, the Schleichers agreed to be permanently enjoined from cheating or defrauding any other person by, inter alia: representing expected or predicted profits and returns from commodity options, failing to disclose or misrepresent the actual purchase price of commodity options, failing to disclose that the market movements of commodity options or contract cannot be accurately predicted, and failing or omitting to disclose material facts about the nature and character of a customer’s investment in commodity options.

Notwithstanding the Schleichers’ voluntary execution of the consent decree on November 11, 1976, the Wegerers presented unchallenged evidence that: after November 11, 1976, FCCB sold them and numerous other customers commodity options utilizing the very fraudulent and deceptive practices permanently enjoined by the consent decree; subsequent to the execution of the consent decree, FCCB’s earnings flourished and Donald and Richard were personally able to sell 20% of FCCB for $4,800,000 and to also personally sell several sales offices for $6,000,000, and that sales proceeds went directly to the Schleichers; and that during this period the Schleichers were borrowing large sums of money from FCCB at six percent per annum interest rates with very favorable repayment terms.

Under all of the circumstances, we hold that the Wegerers presented substantial evidence from which the jury could find that the Schleichers were acting outside of their official capacities as officers and directors of FCCB for their personal benefit and that the Schleichers could, accordingly, conspire with FCCB in defrauding the Wegerers. The Schleichers personally benefited from the illegal activities (fraudulent sale of commodity options) in a way separate and distinct from FCCB.

Assuming, arguendo, that the Wegerers did not present sufficient evidence upon which the jury could find that the Schleichers were acting outside their official capacities for their personal benefit, the facts in evidence do, in our view, support the application of the alter ego doctrine. In Quarles v. Fuqua Industries, Inc., 504 F.2d 1358, 1362 (10th Cir.1974) we stated:

Kansas, however, has recognized the alter ego doctrine. Kilpatrick Bros., Inc. v. Poynter, 205 Kan. 787, 473 P.2d 33 (1970). Under this doctrine, the corporate entity is disregarded and liability fastened on an individual who uses the corporation merely as an instrumentality to conduct his own personal business. The liability must arise from fraud or injustice perpetrated on third parties dealing with the corporation. Id. 473 P.2d at 42. See Doyn Aircraft, Inc. v. Wylie, 443 F.2d 579 (10th Cir.1971).

It is uncontested that the appellants’ liability to the Wegerers arose from the fraud perpetrated on them (Wegerers) through their dealings with FCCB. There is sufficient evidence in the record permitting the jury to conclude that the Schleichers, as the principal officers and only-shareholders and directors of FCCB, were utilizing FCCB “merely as an instrumentality to conduct... [their] own personal business.” This is particularly true when, as here, the Schleichers executed the 1976 consent individually. Applying the alter ego doctrine to the facts herein, FCCB’s existence as a corporate entity must be disregarded and the Schleichers reliance on May, supra, for the general rule that officers, directors or employees of a corporation acting in their official capacities cannot conspire with the corporation, is without merit. Thus, we hold that the district court properly instructed the jury by giving Instructions 9 through 11A on conspiracy.

IV.

The Schleichers contend that the district court erred in finding that it had personal jurisdiction over them.⁴ The Schleichers argue that the district court erroneously asserted jurisdiction under K.S.A. § 60-308(b)(2) (1976) when the only contacts they had with Kansas were: (1) execution of the 1976 Consent Decree, (2) in an affidavit, Don Schleicher stated a form letter bearing his signature stamp was mailed to Louis Wegerer in Kansas, and (3) copies of investment recommendations generated by Richard Schleicher were mailed to the Wegerers in Kansas. The Schleichers argue that the district court erroneously concluded that this evidence presented a prima facie showing that the Schleichers had committed a tortious act within Kansas and had sufficient “minimum contacts” with the state to satisfy due process. Schleichers also argue that the district court erroneously found jurisdiction over them individually by way of jurisdiction over FCCB.

A party invoking the jurisdiction of the federal courts has the burden of proving that federal jurisdiction does exist. Basso v. Utah Power and Light Company, 495 F.2d 906 (10th Cir.1974). A federal court, in diversity actions, may obtain personal jurisdiction over nonresidents of the state in which the district court is located by complying with the state’s long-arm statute. Quarles v. Fuqua Industries, Inc., supra. Jurisdiction over the individual officers of a corporation, however, may not be obtained merely by accomplishing jurisdiction over the corporation. Escude Cruz v. Ortho Pharmaceutical Corporation, 619 F.2d 902 (1st Cir.1980); Wilshire Oil Company of Texas v. Riffe, 409 F.2d 1277 (10th Cir.1969).

In meeting the threshold burden of establishing in personam jurisdiction in a diversity action, a Kansas plaintiff need only make out a prima facie case of the jurisdictional fact of conspiracy or entry into the state. Professional Investing Life Ins. Co. v. Roussel, 445 F.Supp. 687 (D.Ks.1978). Kansas’ long-arm statute, § 60-308(b)(2), provides in part:

Any person, whether or not a citizen or resident of this state, who in person or through an agent or instrumentality does any of the acts hereinafter enumerated, thereby submits the person ... to the jurisdiction of the courts of this state as to any cause of action arising from the doing of any of these acts:

* # # >}: >¡t *

(2) commission of a tortious act within this state;

Fraud and deceit in inducement to contract are clearly torts that may cause Kansas residents sufficient injury to invoke Kansas’ legitimate protective interests under § 60-308(b)(2). J.E.M. Corporation v. McClellan, 462 F.Supp. 1246, 1252 (D.Ks.1978). A plaintiff need not establish that a defendant was actually present in Kansas to effectuate service under § 60-308(b)(2), or that the tortious act complained of occurred in Kansas. In J.E.M. Corporation, supra, the court opined:

It is inconceivable that the legislature did not also intend to extend service to tortious acts outside the forum that cause tortious injury to a resident in the state, particularly in this day of instant long-range communications when one can engage in extensive purposeful activity here without ever actually setting foot in the state. See Professional Investors Life Ins. Co. v. Roussel, supra, at 695, quoting Ghazoul v. International Management Services, Inc., 398 F.Supp. 307 (S.D.N.Y.1975).

462 F.Supp. at 1252.

Applying these standards to the facts herein, we hold that the district court did not err in finding that it had in personam jurisdiction over the Schleichers.

V.

We have carefully considered the appellants’ remaining allegations of error and find them to be individually and collectively without merit.

WE AFFIRM.

1 . Robert Jones was never served and was, accordingly, never a part of the lawsuit.

2 . Although Wegerer responded to an FCCB advertisement in the Houston Post, FCCB was also advertising in the Kansas City Star and Wichita Eagle during 1977 and 1978.

3 . The decree was also executed by John Farwell Howe, III, individually, who is not a party herein.

4 . We previously denied the Schleichers’ Writ of Prohibition which sought review of the district court’s denial of their motion to dismiss for lack of personal jurisdiction. First Commodity Corporation of Boston v. The United States District Court, No. 80-1766 (Aug. 29, 1980).