Dinco v. Dylex Limited ( 1997 )


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  • USCA1 Opinion








    UNITED STATES COURT OF APPEALS
    FOR THE FIRST CIRCUIT

    ____________________

    No. 96-1519

    GARY A. DINCO, ETC., ET AL.,

    Plaintiffs, Appellees,

    v.

    DYLEX LIMITED, ET AL.,

    Defendants, Appellants.

    ____________________

    APPEAL FROM THE UNITED STATES DISTRICT COURT

    FOR THE DISTRICT OF NEW HAMPSHIRE

    [Hon. Shane Devine, Senior U.S. District Judge] __________________________

    ____________________

    Before

    Boudin, Circuit Judge, _____________

    Cyr, Senior Circuit Judge, ____________________

    and Lynch, Circuit Judge. _____________

    ____________________

    Paul S. Samson with whom Mark T. Vaughan, Riemer & Braunstein, _______________ ________________ ___________________
    Steven J. Kantor and Doremus Associates were on briefs for appellants. ________________ __________________
    Randall F. Cooper with whom Mary E. Maloney and Cooper, Deans & __________________ ________________ _______________
    Cargill, P.A. were on brief for appellees. _____________




    ____________________

    April 25, 1997
    ____________________


















    BOUDIN, Circuit Judge. Gary Dinco, Felix Weingart, Jr., _____________

    and a holding company owned by Dinco and Weingart,

    (collectively, "plaintiffs") brought this diversity action

    against numerous defendants alleging various fraud and

    securities-law claims in connection with the plaintiffs'

    purchase of Manchester Manufacturing, Inc. ("MMI"). After a

    lengthy trial, the jury found for the plaintiffs on their New

    Hampshire "Blue Sky" and common law fraud claims against five

    defendants who now appeal. We vacate the judgment and remand

    for a new trial.

    I.

    We begin with a description of the background events,

    identifying disputed issues as allegations. On sufficiency-

    of-evidence claims, the plaintiffs are entitled to have us

    assume that the jury saw matters their way. Ansin v. River _____ _____

    Oaks Furniture, Inc., 105 F.3d 745, 749 (1st Cir. 1997). For ____________________

    other issues (e.g., whether an error was prejudicial), all of ____

    the evidence may be pertinent. Davet v. Maccarone, 973 F.3d _____ _________

    22, 26 (1st Cir. 1992).

    At the outset, this case involved four corporate

    defendants: Sears, Roebuck & Co., a U.S. corporation; Dylex,

    Ltd. ("Dylex"), a Canadian corporation; Dylex (Nederland)

    B.V. ( Nederland ), a Netherlands corporation that is a

    wholly owned subsidiary of Dylex; and 293483 Ontario Ltd.

    ("Ontario"), a Canadian holding company owned and managed by



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    the individual defendants, Kenneth Axelrod, Mac Gunner, and

    Harold Levy. Axelrod, Gunner and Levy also served as

    management employees for a Canadian division of Dylex known

    as Manchester Childrens Wear.

    In 1974, Sears, Dylex, and Ontario formed MMI as a

    Delaware corporation based in New Hampshire, primarily to

    make children's clothing. MMI's common stock was issued to

    Dylex (42%), Ontario (30%), and Sears (28%). Dylex

    transferred its shares in MMI to its subsidiary, Nederland,

    in 1978. By agreement among the shareholders, sale of the

    stock was restricted and directorships were apportioned.

    The six members of MMI's board of directors at all

    pertinent times were Axelrod and Gunner (appointed by

    Ontario), Wilfred Posluns and Irving Posluns (appointed by

    Dylex), and Henry Schubert, Raymond Novotny, and Novotny's

    successor, Melville Hill (all appointed by Sears). Donald

    Williams, Dylex's chief financial officer and a director of

    Dylex and managing director of Nederland, attended most of

    MMI's board meetings. Axelrod and Gunner were elected

    annually as MMI's president and treasurer.

    At first, MMI successfully made clothing, primarily for

    Sears. During this early period, plaintiffs Dinco (hired in

    1976) and Weingart (hired in 1977) served respectively as

    MMI's plant manager and comptroller. However, competition

    from Asian manufacturers increased; around 1980, Sears began



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    to purchase apparel from overseas manufacturers and withdrew

    business from MMI.

    The loss of Sears' business threatened MMI's existence.

    Dylex favored liquidation, but Sears did not want to lose its

    investment in the company and suggested that MMI's New

    Hampshire facility be used to store and distribute inventory

    imported by Sears. MMI thus changed direction and in 1982,

    Sears and MMI entered a distribution contract. At this time

    Dinco and Weingart continued to run MMI's daily operations.

    MMI's distribution business with Sears grew steadily

    through 1986, when it represented about 70 percent of MMI's

    gross income. In August 1986, Sears completed an internal

    review of its warehousing and distribution business; the

    report, made known publicly in March 1987, recommended

    downsizing these operations to reduce inventory costs. Sears

    began selling its ownership interests and, by December 1988,

    MMI was the only remaining provider in which Sears held an

    ownership interest.

    Around September 1987, the three Sears buying

    departments that used MMI s facility suggested that Sears

    store its inventory instead with a California firm. Sears'

    distribution department reported this plan to Novotny and

    Hill, who allegedly informed MMI's board of directors. In

    September or October 1987, the board decided to sell MMI. In

    October 1987, an acquaintance of Levy sought to purchase MMI



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    but withdrew when Gunner told him that Sears would not

    provide a requested guarantee of minimum sales volume for

    three years.

    In January 1988, Gunner, Axelrod and Levy informed Dinco

    and Weingart that MMI was being offered for sale; Dinco and

    Weingart were allegedly told that the reason for the sale was

    that Sears had decided to divest itself of ownership in

    affiliated factories, but that Sears' business with MMI would

    continue as usual.1 In February 1988, Dinco and Weingart met

    with Gunner, Levy, Hill, and brokers hired by the MMI board

    of directors to sell MMI. Hill stated that Sears would not

    make any written guarantees of business, but said that, in

    his experience, "99.9% of the time when the ties are cut" in

    divestiture sales, business with Sears remained the same or

    increased.

    Dinco and Weingart, concerned that MMI's sale might

    eliminate their jobs, formed a holding company to purchase

    MMI. At a meeting with Hill, Gunner, Levy and the brokers on

    May 14, 1988, Dinco and Weingart expressed interest in

    purchasing MMI; and Hill again said that based on his

    experience, MMI's business with Sears would be as good or


    ____________________

    1Weingart testified that Levy had made these statements
    but that they were "confirmed" by Gunner and Axelrod, who
    were participating by conference call. Admittedly, the
    testimony is not perfectly clear and, at the time, Dinco and
    Weingart were being addressed as employees, not as
    prospective buyers.

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    better after the sale. On May 19, Axelrod, Levy and Gunner

    allegedly said that they would support the efforts of Dinco

    and Weingart to buy MMI and confirmed that "Sears would be

    there in the future" and business "would be as usual."

    On June 3, 1988, Dinco and Weingart offered to purchase

    all of MMI's business assets and a portion of MMI's real

    estate for a total of $2,050,000. The offer was contingent

    upon a guarantee by Sears of $1.1 million in gross sales to

    MMI for one year after the sale. The offer was rejected, and

    Dinco and Weingart were told that MMI wanted to sell all of

    its real estate and that Sears would not provide any written

    guarantees of minimum business volume. A second and a third

    offer by Dinco and Weingart, each linked to a minimum volume

    of Sears business, were rejected over the next several

    months.

    In September 1988, Dinco and Weingart made a fourth

    offer to buy MMI, not contingent on any minimum volume

    guarantees. They obtained financing from several sources,

    some of it secured in reliance upon Hill's statement that he

    believed business with Sears would remain unchanged or

    improve. Finally, in late December 1988, the parties agreed

    that Dinco and Weingart would purchase MMI's real estate and

    outstanding stock for a total of $2,045,000. The deal closed

    that same month.





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    Following the sale of MMI to Dinco and Weingart, Sears'

    business with MMI continued to decline. A year later, on

    December 24, 1989, Dinco and Weingart were informed that

    their distribution contract with Sears was terminated. Dinco

    and Weingart were unable to meet their debt service, and one

    of the mortgagees, the First New Hampshire Bank, foreclosed

    on MMI's real estate in November 1990.

    In December 1991, Dinco, Weingart and their holding

    company filed suit against Sears, Dylex, Nederland, Ontario,

    Axelrod, Gunner and Levy.2 In addition to federal

    securities-law claims, the plaintiffs alleged violation of

    the New Hampshire Uniform Securities Act (also known as the

    "Blue Sky" law), N.H. Rev. Stat. Ann. 421-B:3, and common

    law claims for fraud. Prior to trial, all of the federal

    claims were dismissed or withdrawn. Manchester Mfg. _________________

    Acquisitions, Inc. v. Sears, Roebuck & Co., 802 F. Supp. 595 ___________________ ____________________

    (D.N.H. 1992); 909 F. Supp. 47 (D.N.H. 1995). On the eve of

    trial, Sears settled with the plaintiffs for $750,000.

    A 14-day jury trial began in October 1995. In November,

    the jury returned verdicts in favor of the plaintiffs against

    Dylex, Nederland, Ontario, Axelrod and Gunner, but not

    against Levy. Against the remaining five defendants, the

    jury awarded $2,385,000 on the statutory Blue Sky claim and

    ____________________

    2Axelrod's estate was the named defendant because
    Axelrod died prior to trial. For simplicity, we will refer
    to the defendant simply as "Axelrod."

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    $523,500 on the common law fraud claim. The court awarded

    attorneys' fees, costs, and prejudgment interest to the

    plaintiffs. The five defendants held liable now appeal on

    various grounds.













































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    II.

    We begin with the legal elements of the claims at issue

    and with attacks on the district court's jury instructions,

    for it is hard to discuss sufficiency of the evidence without

    legal benchmarks. And while there is not much doubt about

    most of the elements of common law fraud and New Hampshire's

    Blue Sky law--we describe both briefly--the vicarious

    liability rules attending such claims are very much in

    dispute.

    Pertinently, under New Hampshire law, common law fraud

    requires that the defendant fraudulently misrepresent a

    material fact and that the plaintiff justifiably rely upon

    the misrepresentation. Gray v. First NH Banks, 640 A.2d 276, ____ ______________

    279 (N.H. 1994). A Blue Sky claim is made out where, inter _____

    alia, the defendant, "in connection with the offer, sale, or ____

    purchase of any security, directly or indirectly" makes an

    untrue statement of material fact or omits to state a

    material fact "necessary . . . to make the statements made .

    . . not misleading." N.H. Rev. Stat. Ann. 421-B:3.3

    The next link in the chain is vicarious liability. In

    this case Sears had settled for itself and its employee Hill,

    who had made the most blatantly misleading statements. Thus,

    ____________________

    3New Hampshire's statute is a version (largely
    unmodified) of the Uniform Securities Act, also adopted in
    some form by thirty-seven other states. 1 Blue Sky L. Rep.
    (CCH) 5500, at 1503 (1995). Pertinent provisions of the
    statute are reprinted in an appendix to this opinion.

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    to reach the remaining corporate and individual defendants,

    the plaintiffs relied heavily, although not exclusively, upon

    common-law theories that make one person liable for the acts

    of another: agency, partnership, and civil conspiracy.

    The district court obliged, instructing the jury as to

    each of these three theories and providing definitions. The

    three theories were actually four, because under the heading

    of agency the district court instructed separately as to

    apparent authority and as to liability for acts done within

    the scope of employment. The plaintiffs' counsel began his

    closing argument by laying stress on such theories and

    returned to them throughout in discussing the evidence.

    The defendants' first argument on appeal is that

    "vicarious liability" is not a permissible theory under the

    New Hampshire Blue Sky statute in light of Central Bank of _______________

    Denver, N.A. v. First Interstate Bank of Denver, N.A., 114 S. ____________ _____________________________________

    Ct. 1439 (1994). The phrase "vicarious liability" is

    something of a trap where used promiscuously to embrace

    markedly different theories of third-party liability, such as

    agency, partnership and civil conspiracy. Central Bank _____________

    involved none of these concepts, but rather rejected "aiding

    and abetting" liability under section 10(b) of the Securities

    and Exchange Act of 1934, 15 U.S.C. 78j.

    Although New Hampshire's Blue Sky law is to be construed

    in conjunction with "the related federal regulation," N.H.



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    Rev. Stat. Ann. 421-B:32, the notion that all vicarious

    liability is barred under the state statute is fanciful. The

    statute in detail specifies that third-party liability may be

    based upon "control," "aiding," partnership, and other

    particular grounds. Id. 421-B:25(III). At the same time, ___

    reasonable lack of knowledge is an affirmative defense

    against these forms of vicarious liability. Id. 421- ___

    B:25(IV). Curiously, the district court made no reference to

    these statutory concepts in its instructions.

    Thus, the defendants' general proposition is wrong:

    vicarious liability--of several types--is provided for by the

    statute itself. What is more, the defendants' broad

    assertion was not preserved by objection after the judge

    instructed the jury, as Fed. R. Civ. P. 51 requires, and is

    therefore lost absent plain error. The defendants say that

    they raised the objection earlier in motion papers, but that

    is not enough, see Transamerica Premier Ins. Co. v. Ober, 107 ___ _____________________________ ____

    F.3d 925, 933 (1st Cir. 1997), and the transcript refutes

    their claim that they renewed their broad objection after the

    jury was instructed.

    If we could rescue this verdict by resort to Rule 51, we

    would readily do so: it is counsel's obligation to comply

    strictly with Rule 51, especially so in a long and complex

    civil proceeding. Yet, for other reasons this case must go

    back for a new trial, and it is unfair to leave the district



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    court in the dark on the true issue--namely, whether under

    the Blue Sky statute, one or more of the traditional common

    law theories of third-party liability can be used to

    supplement the statutory vicarious liability provision.

    Unfortunately, this is an exceedingly difficult question to

    which no certain answer can be returned.

    In construing the Securities Exchange Act, this court

    concluded that the statutory section imposing vicarious

    liability (section 20, 15 U.S.C. 78t(a)) did not foreclose

    alternative common-law avenues. In re Atlantic Financial _____ __________________

    Management, Inc., 784 F.2d 29, 35 (1st Cir. 1986), cert. _________________ _____

    denied, 481 U.S. 1072 (1987). But in Central Bank, the ______ _____________

    Supreme Court more recently said that Congress' choice in

    section 20 "to impose some forms of secondary liability, but

    not others, indicates a deliberate congressional choice with

    which the courts should not interfere," 114 S. Ct. at 1452,

    casting some doubt on Atlantic Financial. See id. at 1460 ___________________ ___ ___

    n.12 (Stevens, J., dissenting). But see Seolas v. Bilzerian, _______ ______ _________

    951 F. Supp. 978, 984 (D. Utah 1997).

    In any event, federal case law is only suggestive as to

    how the state statute should be construed, and the New

    Hampshire statute differs from federal securities law by,

    among other differences, providing that it "does not create

    any cause of action not specified in this section." N.H.

    Rev. Stat. Ann. 421-B:25(XI). This language, together with



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    Central Bank's general reasoning, suggests that the New _____________

    Hampshire statute has developed a self-contained regime for

    third-party liability, displacing common law theories. Other

    courts, construing state versions of the Uniform Securities

    Act akin to New Hampshire's statute, appear to have taken

    this view. Connecticut Nat'l Bank v. Giacomi, 659 A.2d 1166, ______________________ _______

    1176-77 (Conn. 1995); Atlanta Skin & Cancer Clinic, P.C. v. ___________________________________

    Hallmark Gen. Partners, Inc., 463 S.E.2d 600, 604-05 (S.C. _____________________________

    1995).

    The district court on retrial is free to reach a

    different conclusion. Obviously it should do so if in the

    meantime the New Hampshire Supreme Court so instructs in

    another case; and it may do so if it is persuaded differently

    by the parties on remand, since the parties here have

    scarcely addressed the pertinent statutory provisions. But

    defendants' past failure to comply with Rule 51 does not

    justify perpetuating possible error where a new trial is

    necessary in any event.

    This brings us to a set of objections that the

    defendants clearly did renew after the jury instructions had

    been given: that the evidence did not support instructions

    on either a partnership or civil conspiracy theory. The

    defendants do not dispute that such bases of liability are

    legally available for common law fraud, and (as noted) they

    have forfeited the objection on this go-around as to the Blue



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    Sky claim. But the issue here is different: the defendants

    objected that the instructions were improper in this case for ____________

    lack of evidence as to partnership and conspiracy.

    Normally, it is error--although not necessarily

    prejudicial error--to instruct on an independent theory of

    liability where the evidence is inadequate to permit a

    reasonable jury to find the facts necessary to make out the

    theory. E.g., Sexton v. Gulf Oil Corp., 809 F.2d 167, 169 ____ ______ ______________

    (1st Cir. 1987). Here, over explicit objection, the district

    court gave substantial and independent instructions as to

    partnership and civil conspiracy, placing these separate

    bases of vicarious liability squarely before the jury.

    It is a closer question whether this issue, timely

    raised in the district court, has been adequately preserved

    on appeal, for the defendants challenge the evidence but do

    not focus upon the instructions. We think that, just barely,

    the propriety of the instructions is impugned by the

    defendants' detailed argument that the evidence failed to

    support vicarious liability. This attack in turn has

    provoked a response from plaintiffs that allows us to see

    what record evidence they think supports such liability.

    We conclude that the partnership instruction cannot be

    justified in this case and that its inclusion may well have

    misled the jury. What the district court said on this issue

    is as follows:



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    The plaintiffs here also contend
    that the nature of the relationship among
    the various defendants was that of a
    partnership, and in that respect you are
    instructed that when two or more persons
    join in a business enterprise or some
    activity with a common purpose and each
    has a right to control or manage, then
    each is liable for any legal fault of the
    others committed within the scope of the
    enterprise.

    Every partner is an agent of the
    partnership for the purposes of the
    business, and the act of every partner
    including the execution and the
    partnership name of any instrument or
    apparently carrying on in the usual way
    the business of the partnership of which
    he or she is a member binds the
    partnership unless the partner so acting
    has in fact no authority to act for the
    partnership in the particular manner and
    the person with whom he is dealing has
    knowledge of the fact that he has no
    authority.

    The difficulty is that there was no evidence of a

    partnership among the defendants. There are corporations and

    their officers, employees and agents--but nowhere is there a

    partnership visible on the defense side. We are talking

    here, it should be remembered, not about a colloquial usage

    of the term "partner" but about a legal relationship that __________________

    broadly imposes liability without fault upon otherwise

    innocent parties. H. Reuschlein & W. Gregory, The Law of ___________

    Agency and Partnership 203, at 306-10 (2d ed. 1990). ______________________

    The individual defendants did not even arguably fit in

    this discrete business category. Perhaps the nearest

    possibility is to call the venture among the corporate owners


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    of MMI a partnership; but shareholders of a closely held

    company are not ipso facto partners, nor can they normally be __________

    treated as partners simply because they join to sell their

    shares to a single purchaser. Otherwise, we would undo the

    ordinary protections of corporate form in many close

    corporations. Cf. Terren v. Butler, 597 A.2d 69, 72-73 (N.H. ___ ______ ______

    1991).

    The partner-liability instruction given here effectively

    invited the jury to find a partnership somewhere in this case

    based on a brief but broad definition ("business enterprise

    or some activity with a common purpose" plus joint control).

    A jury, uncertain about the proof on conspiracy or agency,

    could easily have thought that the mere association of the

    defendants in seeking to sell MMI made each liable for

    whatever the others did in connection with the sale. That is

    not the law.

    Frequently, in civil jury cases with multiple theories,

    judges use special verdicts or interrogatories to isolate

    potential problems. See Fed. R. Civ. P. 49. Here, for ___

    example, the district court could have asked the jury to say,

    as to each defendant and each of the two claims, whether it

    based liability on direct participation, agency, partnership

    or conspiracy. But the court asked only for separate

    verdicts against each defendant on the common law and

    statutory claims. Thus, on each count, liability could



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    easily have been based on partnership--the vicarious

    liability theory, at least as defined, with the fewest

    strings attached.

    Assessing the risk of prejudice from an uncalled-for

    instruction is no easy matter. If the evidence were

    overwhelming on alternative theories, we might well treat as

    harmless an error whose inherent tendency is to cure itself.

    Jerlyn Yacht Sales, Inc. v. Wayne R. Roman Yacht Brokerage, ________________________ _______________________________

    950 F.2d 60, 69 (1st Cir. 1991). But the breadth of the

    partnership instruction dampened this tendency; and, as will

    become clear, vicarious liability on other theories is at

    best a close call.

    We are also doubtful whether there was an adequate

    evidentiary basis for instructing on civil conspiracy,

    although this is a closer question. To oversimplify

    slightly, the civil conspiracy charge required proof that two

    or more of the individuals on the defense side had agreed to

    the use of lies or culpable omissions about MMI's post-sale

    prospects. Aetna Cas. Sur. Co. v. P&B Autobody, 43 F.3d _____________________ ____________

    1546, 1564 (1st Cir. 1994); Ferguson v. Omnimedia, Inc., 469 ________ _______________

    F.2d 194, 197 (1st Cir. 1972).4 The companies, of course,



    ____________________

    4Civil conspiracy can be used to impose vicarious
    liability in a fraud case. E.g., Aetna, 43 F.3d at 1564-65. ____ _____
    As already noted, it is not clear that it is available under
    the Blue Sky statute, although the "aiding" provision of that
    statute may create an overlapping basis for liability.

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    could also be conspirators, but only if individuals acting

    for the companies made such agreements.

    No direct proof of such an agreement was offered, but in

    conspiracy cases proof by inference is common, and such proof

    may suggest either that there was a formal (but concealed)

    agreement or that there was a working understanding that

    amounted to an implicit agreement. See United States v. ___ ______________

    Moran, 984 F.2d 1299, 1303 (1st Cir. 1993). In certain _____

    situations, circumstantial proof to this end may be

    compelling: if a gang of drug dealers were caught in the

    middle of a sale, it would be a very small step to infer a

    prior agreement.

    Here, however, the central activity--the sale of MMI--

    was entirely lawful and of necessity involved some

    consultation among the owners. The limited

    misrepresentations alleged to have occurred were sporadic,

    oral comments of a few individuals (Hill, Gunner, Axelrod,

    and Levy). Each one had independent reasons to make the sale

    succeed and, assuming the plaintiffs' version of events, each

    made varying statements that a jury could find to be

    culpable. To infer an agreement to lie or conceal is another _________

    matter entirely.

    We need not resolve the issue since a retrial is needed

    on account of the partnership instruction. The conspiracy

    issue has not been thoroughly briefed, the evidence on



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    retrial may vary, and courts have sometimes been generous in

    allowing the jury to infer agreement even where criminal

    conspiracy is not involved. If the trial court does allow

    the conspiracy charge to reach the jury, it might wish to ask

    a separate question on this issue, and perhaps on other

    theories of primary and vicarious liability as well. See 9A ___

    C. Wright & A. Miller, Federal Practice and Procedure: Civil ______________________________________

    2d 2505, at 166-67 (1995). __

    III.

    Apart from their new trial claims, the defendants argue

    that they are entitled to outright dismissal because the

    plaintiffs failed to produce sufficient evidence to sustain

    any valid theory of liability. This claim was properly ___

    preserved in the district court and we review de novo the _______

    denial of motions for judgment as a matter of law. Ansin, _____

    105 F.3d at 753. We reverse a denial only if "reasonable

    persons could not have reached the conclusion that the jury

    embraced." Sanchez v. Puerto Rico Oil Co., 37 F.3d 712, 716 _______ ___________________

    (1st Cir. 1994).

    On this record, the jury could have concluded--although

    just barely--that Gunner and Axelrod were liable for their

    own misrepresentations. As already noted, Weingart testified

    that, during a conference call in January 1988, Gunner and

    Axelrod "confirmed" that the sale of MMI "had nothing to do

    with the Sears contract business" and that MMI's business



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    with Sears would continue as usual. And, at a meeting on May

    19, 1988, Gunner and Axelrod said that "as far as they knew

    Sears would be there in the future."

    It was Hill who made the more specific misstatements

    already described, saying several times in the presence of

    Gunner and perhaps Axelrod that MMI's business with Sears

    would almost certainly continue unchanged or increase.

    Absent conspiracy, the latter two are perhaps not directly

    accountable for the former's misstatements. But it may be

    that the milder statements of Axelrod and Gunner were made

    even more misleading in the context of Hill's statements.

    Axelrod did warn the plaintiffs against buying MMI, but the

    jury could have regarded a generic warning as insufficient to

    overcome misrepresentations.

    Since Sears provided a large proportion of MMI's

    business, these statements were plainly material. And there

    was evidence, albeit disputable, that could have persuaded

    the jury that Gunner and Axelrod knew that these statements

    were false or misleading at the time they were made, thus

    satisfying the scienter element for common law fraud. As for

    the Blue Sky law, it appears likely that mere negligence is

    enough. See Sprangers v. Interactive Tech., Inc., 394 N.W.2d ___ _________ _______________________

    498, 503 (Minn. Ct. App. 1986).

    The evidence of knowledge was indirect, resting on two

    linked premises: that the Sears members of MMI's board knew



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    about the probable withdrawal of Sears' business and that

    they conveyed this information to the full board, including

    Gunner and Axelrod. Susann Mayo, a Sears distribution

    manager, gave deposition testimony on both points; and

    Novotny testified that in February 1987, he was told by

    another Sears employee that "nobody in his right mind would

    buy [MMI] without some sort of guarantee that Sears business

    will continue," and also testified about his general practice

    of providing information to MMI's board of directors.

    The common law claim required "clear and convincing

    proof" of fraud, reflecting at least a "conscious

    indifference to [the] truth." Brochu v. Ortho Pharm. Corp., ______ __________________

    642 F.2d 652, 662 (1st Cir. 1981). But if Mayo's testimony

    were credited and indirectly confirmed by Novotny, the jury

    could find clear and convincing proof that Gunner and Axelrod

    knew that Sears business with MMI was likely to decline and

    that the sale of MMI was prompted by this concern. The case

    is not overwhelming, but was sufficient to get to the jury

    based on actual knowledge. We reject, however, plaintiffs'

    attempt to impute all of Sears' knowledge to the other

    defendants on a partnership theory.

    The final fact at issue is reasonable reliance by the

    buyers, a familiar element for the common law claim, Gray, ____

    640 A.2d at 279, and perhaps, but less clearly so, for the

    Blue Sky claim. Compare Gohler, IRA v. Wood, 919 P.2d 561, _______ ___________ ____



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    566 (Utah 1996) (reliance not required under the Uniform

    Securities Act). There is no rigid rule on what makes

    reliance reasonable; courts, including this one, have

    resorted to checklists of factors. Kennedy v. Josephthal & _______ ____________

    Co., 814 F.2d 798, 804 (1st Cir. 1987). ___

    Here, it is a close question whether reliance was

    reasonable. Dinco and Weingart knew a good deal about MMI's

    business and also that one of the Sears departments was

    discontinuing business with MMI. Their repeated efforts to

    secure a guarantee of continued Sears business show that they

    were well aware of the danger. There was testimony, which

    the jury may not have credited, that Novotny warned them that

    MMI could not rely upon continued business with Sears, and

    Axelrod also gave a more general warning.

    At the same time, the jury could have found that Axelrod

    and Gunner knew that continued Sears business was not only

    uncertain but unlikely. And, taking the disputed facts

    favorably to the verdict, both defendants had specific

    information as to why it was unlikely--information that was

    not available to the buyers, whatever their general knowledge

    about MMI's business. The jury was thus permitted, although

    certainly not required, to find reasonable reliance.

    This brings us to the responsibility of the corporate

    defendants, perhaps the most difficult issue in the case.

    Partly this is so because the law on this issue is complex



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    (and differs as between the common law fraud and the Blue Sky

    claims) and partly because of the entangled relationships

    between the individuals and the companies. Let us start with

    a few basics, beginning with ordinary rules of agency that

    unquestionably apply to the common law fraud claim.

    A principal is liable for actually authorized wrongs,

    but there was no proof that any of the charged misstatements

    was directly authorized by anyone. Indeed, in his charge the

    district court instead emphasized apparent authority and

    respondeat superior liability; as to the latter, he said that

    a company is liable for acts of an employee or agent "acting

    within the scope of his employment." The defendants do not

    dispute that the agency rules were correctly stated. See ___

    Atlantic Financial, 784 F.2d at 31-32. __________________

    Given these rules, we think that the evidence permitted

    the jury to impose liability both on Ontario and upon Dylex

    and its Nederland subsidiary.5 Gunner and Axelrod both

    worked for Dylex and were themselves the owners (with Levy)

    and chief officers of Ontario. Even if Hill were taken as

    primarily representing Sears, Axelrod and Gunner (together




    ____________________

    5As noted earlier, Dylex owned Nederland, Nederland
    owned Dylex's MMI stock, and Gunner and Axelrod worked for an
    unincorporated division of Dylex. Perhaps because of this
    intertwining, the defendants' brief has made no effort to
    distinguish the respective roles of Dylex and Nederland, and
    we pass over this possibility.

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    with Levy) were the only direct links between the buyers and

    the corporate defendants other than Sears.

    Indeed, both Axelrod and Gunner received compensation

    only from Dylex, even though they also served as officers and

    directors of MMI; and their May 19, 1988 meeting with the

    plaintiffs about the prospective sale, during which Axelrod

    and Gunner made misleading statements, took place at Dylex's

    offices in Montreal. In the context of the sale, Axelrod and

    Gunner could be treated without difficulty as agents or

    apparent agents both of Dylex and Ontario for purposes of

    making the sale. Cf. Restatement (Second) of Agency ___ ________________________________

    14L(1), 226 (1958).

    Turning to the Blue Sky claim, that statute imposes

    vicarious liability on every person who "directly or

    indirectly controls a person" who has direct liability. N.H.

    Rev. Stat. Ann. 421-B:25(III). And, as noted, Gunner and

    Axelrod were employees of Dylex and owners and officers of

    Ontario. This is enough to make a prima facie case that the ___________

    corporate defendants were "controlling persons." See SEC v. ___ ___

    First Sec. Co. of Chicago, 463 F.2d 981, 987-88 (7th Cir.), __________________________

    cert. denied, 409 U.S. 880 (1972). ____________

    A controlling person may defeat liability if it proves

    that it did not know, and despite reasonable care could not

    have known, the true facts. Id. 421-B:25(IV). But Ontario ___

    could hardly make such a showing since Gunner and Axelrod



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    were its chief officers; and, as Axelrod was a director of

    Dylex, his knowledge about Sears' prospects could be imputed

    to Dylex. See Sutton Mut. Ins. Co. v. Notre Dame Arena, ___ _____________________ __________________

    Inc., 237 A.2d 676, 679 (N.H. 1968). Nederland alone might ____

    dispute controlling person liability, but has not sought to

    distinguish itself from Dylex. Thus, the defendants are not

    entitled to judgment as a matter of law on the common law or

    Blue Sky claims.





































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    IV.

    The defendants have made numerous claims of trial error

    under five additional heads. The claims relate, primarily,

    to plaintiffs' expert testimony on corporate practice, to the

    admission or exclusion of specific documents and statements,

    and to damages. Most of the issues do not involve abstract

    legal rulings but judgments about the permissible uses of

    certain evidence, the soundness of premises used by the

    experts, and how damage issues in this case should be

    structured for the jury.

    Many of the issues may not arise in the same form on

    retrial or the trial judge may treat them differently. We

    are unwilling to go very far in tying the hands of the trial

    judge on matters where on-the-spot judgments are crucial,

    discretion is substantial, and more than one alternative is

    often permitted. But this is a case that patently should be

    settled, as we told the parties at oral argument, and it may

    assist the parties for us to make three general comments

    about certain of the defendants' claims of error.

    First, the defendants sought to exclude as hearsay-

    within-hearsay Sears documents that cast a pessimistic light

    on Sears' internal plans for MMI's future. The district

    court disagreed and admitted the documents alternatively as

    admissions by an agent or servant, Fed. R. Evid.

    801(d)(2)(D), or as admissions by a co-conspirator, id. ___



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    801(d)(2)(E). Proof of conspiracy was meager, and we have

    even more difficulty seeing how in preparing these documents

    the Sears authors (such as Mayo and Novotny) served as agents

    or employees of any of the remaining non-Sears defendants.

    Nonetheless, the defendants ought to appreciate that

    many of the Sears documents might be admissible to show the

    state of knowledge of Sears' representatives on the MMI

    board. To the extent that other evidence indicates that

    Sears' plans were conveyed to MMI's other directors, this

    could affect the knowledge of other defendants. We do not

    purport to rule on particular documents but think that the

    defendants should be aware of this logic in assessing their

    position.

    Second, the defendants complain that Mark McKinsey, a

    plaintiffs' expert who testified on corporate practice,

    should not have been allowed to testify and, in any event,

    went too far in telling the jury how to decide contested

    issues. As to the expert's qualifications, close cases are

    largely for the district court. Espeaignnette v. Gene _____________ ____

    Tierney Co., 43 F.3d 1, 11 (1st Cir. 1994). Given what we ___________

    currently know of defendants' objections, we would be

    unlikely to reverse the district court if it deemed this

    expert qualified and left weight to the jury.

    But we have little doubt that a tighter rein should be

    kept on this expert if another trial proves necessary. It is



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    one thing to testify about ordinary corporate practice; it is

    quite another for the expert to tell the jury at length that

    the plaintiffs reasonably relied upon specific statements

    made to them. Yes, the bar on "ultimate issue" opinions has

    been abolished in civil cases, Fed. R. Evid. 704(a); but that

    is not a carte blanche for experts to substitute their views _____________

    for matters well within the ken of the jury. See United ___ ______

    States v. Duncan, 42 F.3d 97, 101 (2d Cir. 1994). ______ ______

    Third, the jury awarded plaintiffs $2,908,500, almost $1

    million more than the price that they paid for MMI; and their

    expert--who sponsored an even larger figure--explicitly based

    his calculations of lost profits by projecting 20 years of

    continued Sears business for MMI. Even under a "benefit of

    the bargain" theory, Wilson v. Came, 366 A.2d 474, 475 (N.H. ______ ____

    1976), it seems to us that no purchaser could reasonably take

    the assurances provided by any defendant as a guarantee that

    Sears business would continue unabated for 20 years.

    There is no need for us to address another concern about

    this damage award--importantly, the risk that double recovery

    may have occurred; this is a matter that can be guarded

    against on retrial through the use of instructions and

    verdict forms, now that the problem is fully in focus.

    Whether any award based on future profits is too speculative, ___

    cf. Hydraform Prod. Corp. v. American Steel & Aluminum Corp., ___ _____________________ _______________________________

    498 A.2d 339, 345 (N.H. 1985), is an issue we do not decide.



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    To conclude, the plaintiffs have a potential, but hardly

    certain, case against the defendants. The defendants have to

    consider the Sears documents and jury sympathy; the

    plaintiffs, the risk of recovering nothing and some limits on

    just how ambitious a recovery could be sustained. Now that

    the appeal is resolved and both sides face the expense of a

    retrial, counsel owe it to their clients to renew

    discussions.

    The judgment is vacated and the case is remanded for a _______ ________

    new trial consistent with this decision.

































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    APPENDIX APPENDIX

    This appendix contains pertinent provisions of the
    Uniform Securities Act, N.H. Rev. Stat. Ann. 421-B:1 et __
    seq. ____

    421-B:3. Sales and Purchases 421-B:3. Sales and Purchases

    It is unlawful for any person, in connection with the
    offer, sale, or purchase of any security, directly or
    indirectly:

    I. To employ any device, scheme, or artifice to defraud;

    II. To make any untrue statement of a material fact or
    to omit to state a material fact necessary in order to make
    the statements made, in the light of the circumstances under
    which they are made, not misleading; or

    III. To engage in any act, practice, or course of
    business which operates or would operate as a fraud or deceit
    upon any person.

    421-B:2. Definitions 421-B:2. Definitions

    * * * * *

    XVI. "Person" means an individual, corporation,
    partnership, association, joint stock company, trust where
    the interests of the beneficiaries are evidenced by a
    security, unincorporated organization, a government,
    political subdivision of a government, or any other entity.

    * * * * *

    421-B:25. Civil Liabilities 421-B:25. Civil Liabilities

    * * * * *

    II. Any person who violates RSA 421-B:3 in connection
    with the purchase or sale of any security shall be liable to
    any person damaged by the violation of that section who sold
    such security to him or to whom he sold such security . . . .
    Damages in an action pursuant to this paragraph shall include
    the actual damages sustained plus interest from the date of
    payment or sale, costs, and reasonable attorney's fees.

    III. Every person who directly or indirectly controls a
    person liable under paragraph I or II, every partner,
    principal executive officer, or director of such person,
    every person occupying a similar status or performing a
    similar function, every employee of such person who














    materially aids in the act or transaction constituting the
    violation, and every broker-dealer or agent who materially
    aids in the acts or transactions constituting the violation,
    are also liable jointly and severally with and to the same
    extent as such person. There is contribution as in cases of
    contract among the several persons so liable.

    IV. No person shall be liable under paragraphs I and III
    who shall sustain the burden of proof that he did not know,
    and in the exercise of reasonable care could not have known,
    of the existence of facts by reason of which the liability is
    alleged to exist.

    * * * * *

    XI. The rights and remedies promulgated by this chapter
    are in addition to any other right or remedy that may exist
    at law or in equity, but this chapter does not create any
    cause of action not specified in this section or RSA 421-B:8,
    V. . . .

    421-B:32. Statutory Policy 421-B:32. Statutory Policy

    This chapter shall be so construed as to effectuate its
    general purpose to make uniform the law of those states which
    enact it and to coordinate the interpretation of this chapter
    with the related federal regulation.

























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