Banton v. Hackney
557 So. 2d 807 (1989)
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Rule of Law:
The sale of 100% of a company's stock constitutes the sale of a "security" subject to the Alabama Securities Act. Summary judgment on a claim under this act is improper when genuine issues of material fact exist, such as whether the seller knew or, in the exercise of reasonable care, could have known of material misrepresentations, which is a question for the jury.
Facts:
- James F. Banton and Jane J. Long were the sole shareholders of Banton, Inc., a manufacturing company.
- In late 1987, Banton engaged a broker to sell the company, who connected him with prospective buyer T. Morris Hackney.
- Banton and Long provided Hackney with audited and unaudited financial statements that portrayed the company as profitable and financially healthy.
- These financial statements contained material misrepresentations, including fictitious accounts receivable, overstated inventory (e.g., counting boxes of parts as completed units), and inflated gross sales figures.
- Prior to the sale, Banton and Long were aware of information contradicting the financial statements, such as a letter from a purported debtor, J & J Sales, explicitly denying it owed the company over $200,000.
- On January 19, 1988, Hackney signed an agreement to purchase all of Banton, Inc.'s stock, relying on the financial statements which Banton and Long warranted were "true and correct."
- The sale closed on February 2, 1988, with Hackney paying Banton and Long cash and personally guaranteeing approximately $5 million of the company's debt.
- Shortly after the closing, Hackney discovered the company's dire financial condition and the falsity of the financial information he had been provided.
Procedural Posture:
- T. Morris Hackney sued James F. Banton and Jane J. Long in the Jefferson County Circuit Court (trial court) for fraud and violations of the Alabama Securities Act.
- Hackney filed a motion for a preliminary injunction to impose a constructive trust on the sale proceeds.
- Hackney also filed a motion for partial summary judgment on his claim under the Alabama Securities Act.
- The trial court granted Hackney's motion for a preliminary injunction and his motion for partial summary judgment, entering a judgment that rescinded the stock purchase.
- The trial court imposed a constructive trust and equitable liens on real property Banton had purchased with the proceeds from the sale.
- Pursuant to Rule 54(b), the trial court certified its judgment as final.
- James F. Banton and Susan A. Banton appealed the final judgment to the Supreme Court of Alabama.
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Issue:
Did the trial court err by granting summary judgment on a securities fraud claim when genuine issues of material fact existed regarding the seller's knowledge of the alleged misrepresentations?
Opinions:
Majority - Per Curiam
Yes, the trial court erred in granting summary judgment. The sale of all of a company's stock is a 'security' transaction subject to the Alabama Securities Act, adopting the rationale of the U.S. Supreme Court's decision in Landreth Timber Co. v. Landreth. However, summary judgment was improper because the trial court made findings on disputed questions of fact, such as the falsity of the financial representations and the sellers' knowledge thereof. These determinations, which involve weighing evidence, are reserved for the jury. Although intent to defraud is not an element of a claim under § 8-6-19, factual issues remain for the jury regarding the sellers' affirmative defense—whether they knew or, in the exercise of due care, could have known of the misrepresentations. The preliminary injunctive relief, including the constructive trusts and equitable liens, remains in effect pending a final adjudication by a jury.
Dissenting - Houston, J.
No, the trial court did not err in granting summary judgment. While the Alabama Securities Act does apply to the sale of all of a corporation's stock, the evidence of the sellers' material misrepresentations was undisputed. Because there were no genuine issues of material fact regarding the securities law violation, the trial court was correct to grant summary judgment in favor of Hackney.
Analysis:
This decision formally aligns Alabama securities law with federal precedent by rejecting the 'sale of business' doctrine, confirming that the anti-fraud protections for securities transactions apply even when 100% of a company's stock is sold. It also reinforces the strict standard for summary judgment in fraud-based claims, emphasizing that a judge cannot resolve factual disputes or weigh evidence, which is the exclusive province of the jury. By allowing the preliminary constructive trust to remain in place while reversing the summary judgment, the court demonstrates a balance between protecting a plaintiff's potential remedy and preserving a defendant's constitutional right to a jury trial on the ultimate issues of liability.
