EARL G. BOXA, ELIZABETH BOXA, BRENT COMBS, et al v. PAUL VAUGHN, PAUL VAUGHN INSURANCE INC., and SCOTT VANDERBEEK 2003 SD 154
Annotate this CaseEARL G. BOXA, ELIZABETH BOXA,
BRENT COMBS, as guardian ad litem for
JOHNATHAN L. COMBS, BRENT COMBS,
JENNIFER COMBS, SHIRLEY A. VOSIKA,
POLLY ANNE CERNEY, EMIL J. CERNEY
ESTATE, MARJORIE HARRISON, and
VERNE ELLSTON
Plaintiffs and Appellees,
v.
PAUL VAUGHN, PAUL VAUGHN
INSURANCE INC.,
Defendants and Appellants,
and
SCOTT VANDERBEEK
Defendant.
[2003 SD 154]
South Dakota Supreme Court
Appeal from the Circuit Court of
The Sixth Judicial Circuit
Gregory County, South Dakota
Hon. Kathleen Trandahl, Judge
J.M. GROSSENBURG
Winner, South Dakota
Attorney for plaintiffs and appellees.
MARK V. MEIERHENRY
CLINT SARGENT of
Danforth, Meierhenry & Meierhenry
Sioux Falls, South Dakota
Attorneys for defendants and appellants.
Considered on Briefs on October 6, 2003
Opinion Filed 12/30/2003
#22756
SABERS, Justice
[¶1.] Plaintiff purchasers[1] brought suit against Paul Vaughn for damages, alleging that he sold purchasers unregistered business opportunities in violation of the Business Opportunities Act (Act). SDCL 37-25A-7. Vaughn did not dispute that he sold the purchasers unregistered business opportunities but he raised the affirmative defenses of waiver and failure to mitigate damages. Purchasers moved for directed verdict at the close of Defendant’s evidence arguing that (1) the affirmative defense of waiver was not permissible under the Act. The trial court agreed and granted purchasers’ motion for directed verdict and found that (2) Defendant did not meet his burden to show Plaintiffs failed to mitigate damages. Vaughn appeals. We affirm (1) for a different reason and affirm (2).
FACTS
[¶2.] Vaughn approached each of the Plaintiffs and offered them an investment opportunity with a 14.1% return. The plan was for Plaintiffs to purchase pay telephones for $7,000 each, and then lease them back to Phoenix Telecom which would pay Plaintiffs $82.25 per month. Each Plaintiff also entered into an “Option to Sell” agreement with Phoenix entitling Plaintiffs to terminate the lease at the end of five years and Phoenix would buy back the telephones for the original purchase price. Plaintiffs were told they could pull their money out of the plan at any time and that there was little risk in the investment.
[¶3.] Vaughn sold phones from September 1999 until January 2000 when he received a cease and desist order from the South Dakota Division of Securities (Division). The Division found that Phoenix’s products were business opportunities which needed to be registered with the Division. Phoenix was also issued a cease and desist order. After the cease and desist orders were issued, the Division directed Phoenix to send an offer of rescission to the South Dakota purchasers. On March 3, 2000, Phoenix sent a letter to each Purchaser informing them that Phoenix had failed to register the product with the Division and that Plaintiffs were entitled to rescind their purchases. Agents were told by Phoenix to “contact each Lessor and advise them to expect the letter, and then reassure the client that they should not be alarmed upon receipt.”
[¶4.] Plaintiffs testified that Vaughn urged them not to rescind, telling them that he would take care of the problem and encouraging them to hold on to their “investment.” Although the parties dispute the reason why, each of the Plaintiffs chose not to rescind their contracts. By July of 2000, Phoenix could no longer make its lease payments to the Plaintiffs. Phoenix transferred its leases to ETS Payphones. Plaintiffs agreed to the transfer, but in September 2000, ETS stopped making lease payments. Phoenix and ETS have filed for bankruptcy.
[¶5.] On September 29, 2000, the SEC filed a complaint against ETS alleging that ETS engaged in fraud in the offer and sale of unregistered securities. In its complaint, SEC asserts that investors were not told ETS was losing money, had a negative net worth and was dependent on new investors to continue in business. The “investment opportunity” was actually a pyramid, or “Ponzi scheme” wherein Phoenix and ETS[2] used the money they received from later purchasers to pay earlier purchasers.
[¶6.] On October 19, 2000, the original Plaintiffs filed an amended summons and complaint against Vaughn for damages, alleging that he sold unregistered business opportunities in violation of SDCL 37-25A-7. The parties went to trial, and at the close of evidence, Plaintiffs moved for a directed verdict on the basis that Vaughn’s affirmative defense of waiver was not allowed under the Act. The trial court granted the motion, directed a verdict in Plaintiffs’ favor, and entered a judgment for purchasers’ statutory damages less lease payments received. Vaughn appeals raising two issues:
1. Whether the Business Opportunities Act’s anti-waiver provision precludes the affirmative defense of waiver, and if not, whether waiver was established.
2. Whether Vaughn established that Plaintiffs failed to mitigate damages.
STANDARD OF REVIEW
It has been brought to our attention by the Director of the Division of Securities of the Department of Commerce and Regulation . . . that business opportunities were sold by [Phoenix Telecom] prior to complying with all of the requirements of the South Dakota Business Opportunity Act.
Therefore, it is necessary at this time to inform you of your right to rescind your purchase from the above referenced company and we hereby offer to repurchase the interest sold for a purchase price equal to the full amount paid therefore, plus interest at an annual rate of 12 per cent per annum from the date of purchase. If you elect to rescind the offer, ownership of the payphones and equipment you purchased from Phoenix Telecom, L.L.C. must be transferred to Phoenix Telecom, L.L.C. as well as all rights and interests in those payphones and equipment.
If you elect to rescind the offer, you will be entitled to the receipt of $7,000.00 per unit plus interest less any income received from lease payments. Interest shall accrue from the date of purchase until the date of payment. If you accept the offer, payment will be made to you within thirty (30) days of receipt of your written acceptance.
This offer shall continue in force for thirty (30) days from the date on which this offer is received by you. Please notify our office of your decision to accept this offer of rescission by signing at the bottom of this letter and returning this letter to our office in the enclosed envelope. If we do not receive written notice from you accepting this offer of rescission before the expiration of thirty (30) days, we will presume you are refusing this offer and thus affirming your previous purchase from the above-referenced company.
[1] . The original purchasers were Earl and Elizabeth Boxa, Jonathon, Brent and Jennifer Combs, Shirley Voskia, Polly Anne Cerney, the Emil J. Cerney Estate, Marjorie Harrison and Verne Ellston. Some of the plaintiffs were dismissed from the suit prior to trial. For ease of reading, those remaining will be referred to collectively as “Purchasers” or “Plaintiffs.”
[2] . The SEC believes that Phoenix and ETS are “very close.”
[3] . It is noteworthy that by the time the purchasers brought this suit against Vaughn, Phoenix was insolvent and had been acquired by ETS, which also became insolvent.
[4] . Compare SDCL 37-25A-48 at ¶10 with SDCL 37-25A-47, under which a knowing violator can be prosecuted. SDCL 37-25A-47 provides in part, “[a]ny person who willfully violates § 37-25A-7 [] is guilty of a Class 5 felony[.]” (Emphasis supplied).
[5] . Dear Lessor,
ETS received your letter dated September 18, 2000, and we apologize for the delay in reply. We are sure you can understand we have been receiving a large volume of letters and phone calls and, unfortunately, do not have the resources to reply in the expeditious manner we would like.
On September 11, 2000, ETS Payphones, Inc. (“ETS”) filed a voluntary petition in the United States Bankruptcy Court, District of Delaware under Chapter 11 of the Bankruptcy Code. Upon filing this petition, a statutory stay became effective which protects ETS against the pursuit of actions by any party with respect to any assets or other rights of ETS that are considered property of the bankruptcy estate. This means that you, as a creditor of ETS, are precluded from taking any action against ETS with respect to any alleged pre-bankruptcy debt. This prohibition is so broad as to preclude you, our creditor, from making requests for payment during the stay period.
A willful violation of the stay may result in you being held in contempt by the United States Bankruptcy Court. Further you may be liable for compensatory and punitive damages resulting from your violation of the stay.
We at ETS wish we could furnish you with more information at this point, but there are formal proceedings associated with the administration of ETS reorganization which must and will be followed. This is a statutorily mandated process designed to protect you, the creditor, and ETS. ETS must insist that this process be allowed to take its course without interference from the creditors. We will achieve this goal only through your understanding and patience.
Sincerely,
ETS Payphones, Inc.
Leasing Department
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