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Darnall Kemna & Co. v. L. & M. Heppinstall (5/7/93), 851 P 2d 73
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors to
the attention of the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order that corrections
may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
DARNALL KEMNA & CO., INC., a )
California Corporation AND )
GEORGE CLARK, )
)
Appellants, ) File No. S-4407
)
v. ) 3AN 88 7722 CI
)
LESLIE HEPPINSTALL AND ) O P I N I O N
MARK HEPPINSTALL, )
) [No. 3951 - May 7, 1993]
Appellees. )
________________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Karen L. Hunt, Judge.
Appearances: William H. Breck, San
Francisco, CA for Appellant Darnall Kemna &
Co. Christopher J. Heaphy, Bankston &
McCollum, Anchorage, for Appellees.
Before: Rabinowitz, Chief Justice, Burke,
Matthews, Compton and Moore, Justices.
BURKE, Justice.
This appeal arises out of the lawsuit Leslie and Mark
Heppinstall filed in superior court against Darnall Kemna & Co.,
Inc. and George Clark. The Heppinstalls sued Darnall Kemna,
their stockbroker, and Clark, Darnall Kemna's agent in Anchorage,
because they suffered losses following the "crash"in the United
States securities markets in October 1987. Darnall Kemna
asserted a counter-claim against the Heppinstalls to recover
$63,141.37 which Darnall Kemna had paid to cover the margin call
on the Heppinstalls' stock. The superior court granted partial
summary judgment to the Heppinstalls, ruling that Darnall Kemna
and Clark had conclusively admitted facts sufficient to establish
Darnall Kemna's and Clark's liability and the Heppinstall's
concomitant right to rescissionary damages under AS 45.55.220.
Following a trial to determine the amount of damages, the
superior court awarded the Heppinstalls $106,177.00. Darnall
Kemna and Clark were held jointly and severally liable for this
amount. The court declined to enter judgment in favor of Darnall
Kemna on its counter-claim. Darnall Kemna and Clark appeal these
decisions.
I. FACTS AND PROCEEDINGS
Darnall Kemna, a California corporation, was a broker-
dealer registered with the Securities & Exchange Commission (SEC)
and the National Association of Securities Dealers (NASD). In
the late summer of 1987, Clark became affiliated with Darnall
Kemna as Darnall Kemna's agent in Anchorage. In September 1987
Anchorage residents Leslie Heppinstall and his son Mark opened an
account as joint tenants with Darnall Kemna through Clark.
During the period when these transactions occurred, Darnall Kemna
was not registered with the Alaska Department of Commerce and
Economic Development, Division of Securities under AS
45.55.030(a). The Heppinstalls had been one of Clark's clients
previously and agreed to "transfer" with him in his new
relationship with Darnall Kemna. On September 1st the
Heppinstalls executed a margin agreement and an option agreement
through Clark.
During the period from September 1 to October 15,
purchase and sale transactions were made in the Heppinstall
account, resulting in a net positive equity of $115,141 at the
close of business on Friday, October 16. Over the next three
business days (October 19, 20, and 21), the U.S. securities
markets "crashed,"resulting in a reduction of the net equity in
the Heppinstall account from a positive $115,141 on October 16th
to a negative $34,004 at close of business on October 21. Margin
calls were issued to the Heppinstalls on October 19, 20, and 21,
requiring the immediate deposit of cash or marketable securities
into their account to avoid the liquidation of the remaining
securities in the account. The Heppinstalls did not make any
deposit, and the remaining securities in their account were sold
on October 26 and 27. The account was subsequently closed in
December.
Following liquidation of the Heppinstall account, there
remained a negative balance of $63,141.37. Darnall Kemna paid
this amount when the Heppinstalls failed to do so.
In late July 1988, the Heppinstalls filed a complaint
against Darnall Kemna and Clark alleging that the broker and its
agent had traded in securities in the state without being
registered with the Alaska Department of Commerce and Economic
Development, Division of Securities, thus violating AS
45.55.030(a). The Heppinstalls sought rescissionary damages to
return them to the financial position they had occupied prior to
their dealings with Darnall Kemna. The superior court granted
summary judgment in favor of the Heppinstalls on the issue of
liability. The superior court found that Darnall Kemna had
admitted in its answer both that it was a broker-dealer for the
purposes of the Alaska Securities Act of 1959 and that it had
sold securities in the state to the Heppinstalls.1 The trial
court also found that Darnall Kemna admitted that it was not
registered in the state as required by AS 45.55.030,2 during the
time that the Heppinstalls purchased and sold securities. The
court thus concluded that Darnall Kemna was "engaged in the
business of effecting transactions in securities for the account
of [the Heppinstalls] during the period of time in question . . .
[and] that Darnall-Kemna was an unregistered broker-dealer not
able to do such transactions within the State of Alaska," and
determined that summary judgment on the liability claim was
appropriate.
After a trial to establish damages, the superior court
awarded the Heppinstalls rescissionary damages in the amount of
$106,177 plus interest, costs, and attorney's fees. This amount
reflected the net equity transferred into the Heppinstalls'
account on September 17, 1987. The superior court also denied
recovery of the $63,141.37 that Darnall Kemna spent to cover the
Heppinstalls' margin calls. Final judgment was entered in
December 1990.
Darnall Kemna and Clark now appeal these decisions.
II. STANDARD OF REVIEW
When reviewing a grant of summary judgment, we must
determine whether any genuine issue of material fact exists, and
whether the moving party is entitled to judgment as a matter of
law. In reaching our decision, all reasonable inferences of fact
from proffered materials must be drawn against the moving party
and in favor of the non-moving party. Wright v. State, 824 P.2d
718, 720 (Alaska 1992).
III. DISCUSSION
A. Liability
The superior court granted summary judgment for the
Heppinstalls on their liability claim against Darnall Kemna. The
court granted summary judgment because it found that Darnall
Kemna admitted facts in its answer sufficient to establish
liability under AS 45.55.220. See infra, Damages, at 9.
The court supported this conclusion by finding that
Darnall Kemna "admitted in its answer . . . that Darnall Kemna is
a broker-dealer for the purposes of the Alaska Securities Act of
1959." Darnall Kemna also "admitted that it sold securities in
the State of Alaska to [the Heppinstalls]." The court further
found that Darnall Kemna "admitted . . . that Darnall Kemna was
not registered as required by Alaska Stat. 45.55.030."
The general rule provides that admissions made in the
pleadings are conclusively established. IX John H. Wigmore,
Wigmore on Evidence 2590, at 822 (Chadbourn rev. 1981);3 see
A.B.M. v. M.H., 651 P.2d 1170, 1174 (Alaska 1982); Alaska R. Civ.
P. 36(b). Thus, the sole remaining issue is whether Darnall
Kemna did, in fact, admit facts sufficient to make out a prima
facie case for liability with no countervailing defenses.
Darnall Kemna admitted in its Answer to First Amended
Complaint that it was a "broker-dealer for the purposes of the
Alaska Securities Act of 1959." Darnall Kemna also specifically
admitted that it "sold securities in the State of Alaska to
plaintiff[s]." Further, Darnall Kemna stated in its Answer that
it "ADMITS that it was not registered under AS 45.55.030, due to
an administrative oversight."
We hold that these admissions are conclusive of
liability and affirm the trial court's grant of partial summary
judgment for the Heppinstalls.4 Darnall Kemna claims on appeal
that it falls within an exception to the definition of broker-
dealer. However, Darnall Kemna's present denial on appeal of
status as a broker-dealer, after earlier admitting to the trial
court that it does fall within the definition, is misplaced.
Given that we accept the finding that Darnall Kemna admitted to
being a broker-dealer, we will not now reexamine whether Darnall
Kemna falls under an exception to the definition.
Darnall Kemna and Clark argue, with respect to Clark,
that the trial court erred by ruling that Clark had violated AS
45.55.030 based solely on admissions in the pleadings. Alaska
Statute 45.55.030(a) provides that agents must be registered.
However AS 45.55.130(2)5 excludes from its definition of "agent"
anyone who "represents an issuer in effecting transactions."
Thus, Darnall Kemna and Clark contend that because Clark
represented an issuer, he is exempt from the registration
requirements.
Under AS 45.55.130(2), the exception to the
registration requirement would not apply to Clark because Clark
did not represent an issuer. "[I]ssuer means a person who issues
or proposes to issue any security, . . . " AS 45.55.130(7).
Clark was representing a broker-dealer, Darnall Kemna, and
therefore had to be registered. "[B]roker-dealer means a person
engaged in the business of effecting transactions in securities .
. . ." AS 45.55.130(3).
Regarding Clark's registration status under AS
45.55.030(a), Darnall Kemna argues that there was no competent
evidence before the trial court as to whether Clark was or was
not registered. Therefore, the trial court erred by granting
summary judgment against Clark. See Concerned Citizens of S.
Kenai Peninsula v. Kenai Peninsula Borough, 527 P.2d 447, 450
(Alaska 1974) (party seeking summary judgment may only discharge
its burden of showing that the case presents no issue of material
fact by submission of material admissible evidence).
This argument fails, however, in light of a further
provision of AS 45.55.030(b) which states that "[t]he
registration of an agent is not effective during a period when
the agent is not associated with a particular broker-dealer
registered under this chapter." Thus Clark's registration would
only be effective if Darnall Kemna had been properly registered
in Alaska. Even if Clark was registered in Alaska, he would have
to be affiliated with a registered broker-dealer for his own
registration to be effective. Clark was not affiliated with a
registered broker-dealer and thus did not satisfy the
registration requirements.
We therefore affirm the superior court's decision to
grant partial summary judgment to the Heppinstalls on the
liability issue.6
B. Damages
Darnall Kemna violated AS 45.55.030(a) by not being
registered in Alaska as a broker-dealer when it sold certain
stocks and stock options to the Heppinstalls during the weeks
immediately preceding the market "crash"on October 19, 1987.
Therefore, Darnall Kemna is strictly liable under AS 45.55.220(a)
either for the consideration paid for the security or for
damages, if the buyer is unable to tender back the security. AS
45.55.220 provides in part:
(a) A person is liable to the person
buying the security from the person for the
consideration paid for the security, together
with interest at six percent a year from the
date of payment, costs, and reasonable
attorneys' fees, less the amount of income
received on the security, upon the tender of
the security, or for damages if the seller no
longer owns the security, if the seller
(1) offers or sells a
security in violation of AS
45.55.030(a). . . .
. . . .
(b) Damages are the amount that would
be recoverable upon a tender less the value
of the security when the buyer disposed of it
and interest at six percent a year from the
date of disposition.
The definition of damages in AS 45.55.220(b) is
essentially identical to the definition in the original Uniform
Securities Act section 410(a). See generally 11C-Part 2,
Business Organizations, Hugh L. Sowards & Neil H. Hirsch, Blue
Sky Regulation 9.04, at 932 n.2 (1992). The damages awarded
when the buyer no longer owns the security is "designed to be the
substantial equivalent of rescission." Louis Loss, Commentary on
the Uniform Securities Act 146 (1976); see also Sowards & Hirsch,
supra.
Parts of section 410 were in turn modeled after section
12 of the Securities Act of 1933, 15 U.S.C. 77l(2) (1988). See
Loss, supra at 147. In Randall v. Loftsgaarden, 478 U.S. 647
(1986), the United States Supreme Court assumed without
discussion that section 12 required that a rescissionary measure
of damages be employed where the plaintiff no longer owns the
security. Id. at 656. "[T]he plaintiff is entitled to a return
of the consideration paid, reduced by the amount realized when he
sold the security and any `income received' on the security."
Id.
The goal of such a rescissionary measure of damages is
to return an injured party to the position that he or she was in
before entering into a transaction. Id. Indeed, the Court noted
in Randall that by choosing a rescissionary remedy when it
enacted section 12(2), it could be inferred that Congress
intended to shift the risk of an intervening decline in the value
of the security to the seller of the security. Randall, 478 U.S.
at 659 ("[R]escission adds an additional measure of deterrence as
compared to a purely compensatory measure of damages.").
Although there is no evidence that Darnall Kemna
intentionally violated AS 45.55.030(a), the proper remedy is
still rescission. The Heppinstalls were thus entitled to damages
in an amount which placed them in the same position as they were
in before the illegal sales. They are therefore entitled to the
net equity in their Darnall Kemna account on the date of the
initial transfer ($106,177.00), plus interest, costs, and
attorney's fees. Furthermore, Darnall Kemna may not
recover the $63,141.37 expended in covering the loss incurred by
the clearing broker both because Darnall Kemna is barred from
recovery under AS 45.55.220(g)7 and because the Heppinstalls
never would have incurred that debit on their account but for the
illegal sales.
The decision of the superior court is AFFIRMED.
_______________________________
1. The superior court also relied on the judicial
admissions contained in the federal litigation Darnall Kemna
instituted against the Heppinstalls.
2. Alaska Statute 45.55.030(a) states that:
It is unlawful for a person to transact
business in this state as a broker-dealer or
agent unless the person is registered under
this chapter.
3. "The vital feature of a judicial admission is
universally conceded to be its conclusiveness upon the party
making it, i.e., the prohibition of any further dispute of the
fact by him and of any use of evidence to disprove or contradict
it." IX John H. Wigmore, Wigmore on Evidence 2590, at 822.
4. We also rely on the admissions Darnall Kemna made in
the federal case.
5 Alaska Statute 45.55.130(2) states in part:
"[A]gent"means an individual other than
a broker-dealer who represents a broker-
dealer or issuer in effecting or attempting
to effect purchase or sale of securities; . .
. "agent"does not include an individual who
represents an issuer in effecting
transactions[. . . .]
(emphasis added.)
6. Darnall Kemna also argued that puts and options were
not securities within the meaning of AS 45.55.220. We have
examined Darnall Kemna's remaining contentions and find them
lacking in merit.
7. Alaska Statute 45.55.220(g) states in part:
A person who makes or engages in the
performance of a contract in violation of a
provision of this chapter . . . may not base
a suit on the contract.
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