Ben Doud v. Toy Box Development Co.
2015 U.S. App. LEXIS 14445
| 8th Cir. | 2015Background
- Toy Box offered investments in an "all-or-nothing" offering requiring $500,000 (later amended to $350,000) to be deposited by a deadline; funds were to remain in escrow unless the threshold was met.
- Doud subscribed and paid $100,000; by July 2008 Toy Box had actually received $200,000, below the amended $350,000 threshold.
- Toy Box's managers authorized release of escrow funds before receiving the required cash and then told investors it had "exited escrow with $425,000 in place."
- Toy Box later suffered losses and Doud lost his $100,000 investment; Doud sued for breach of contract, violations of Rule 10b-9, Rule 10b-5, Iowa securities law, and breach of fiduciary duty.
- Toy Box admitted breaking escrow early in interrogatory answers; the district court granted partial summary judgment for Doud on breach of contract, Rule 10b-9, Rule 10b-5, and the Iowa Uniform Securities Act, left damages to be resolved, and denied fiduciary-duty summary judgment.
- On appeal, the Eighth Circuit affirmed summary judgment for Doud on the federal and state securities claims and breach of contract.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Toy Box violated Rule 10b-9 and required scienter | Doud: breaking escrow before receiving bona fide minimum funds and misrepresenting funding violated Rule 10b-9; knowledge of conduct supplies scienter | Toy Box: had sufficient subscriptions (commitments) that reached threshold; lacked scienter | Held: Violation. Rule 10b-9 requires actual receipt of bona fide funds; Toy Box knew it lacked such funds, so scienter shown |
| Whether Toy Box violated Rule 10b-5 (securities fraud) | Doud: same facts coupled with misrepresentation about having raised $425,000 amount to securities fraud causing his loss | Toy Box: challenges sufficiency of fraud/scienter showing | Held: Violation. Breaking escrow and false statement were manipulative/deceptive; scienter established; summary judgment appropriate |
| Whether Iowa Uniform Securities Act claim requires scienter and was violated | Doud: the state statute prohibits material misrepresentations in sale of securities; scienter either proven or not required | Toy Box: argued lack of scienter undermines state claim | Held: Summary judgment affirmed. Because scienter was shown under federal claims, Toy Box's state-law challenge fails (court did not decide whether Iowa law independently requires scienter) |
| Whether Toy Box breached the subscription/escrow agreement | Doud: offering promised not to release escrow until threshold met; Toy Box breached and caused loss | Toy Box: disputed breach/defense not persuasive on summary judgment | Held: Breach proven. Express promise existed and Toy Box broke escrow early; summary judgment proper |
Key Cases Cited
- Loomis v. Wing Enters., Inc., 756 F.3d 632 (8th Cir. 2014) (standard of review for summary judgment)
- Aaron v. S.E.C., 446 U.S. 680 (1980) (scienter requirement for §10(b) claims)
- Ferris, Baker Watts, Inc. v. Ernst & Young, LLP, 395 F.3d 851 (8th Cir. 2005) (elements of a Rule 10b-5 claim)
- Howard v. S.E.C., 376 F.3d 1136 (D.C. Cir. 2004) (Rule 10b-9 violation characterized as improperly closing an offering)
- Svalberg v. S.E.C., 876 F.2d 181 (D.C. Cir. 1989) (knowledge of consequences suffices for scienter in all-or-none offerings)
- SEC v. Falstaff Brewing Corp., 629 F.2d 62 (D.C. Cir. 1980) (discussing scienter standard in securities-rule context)
- Molo Oil Co. v. River City Ford Truck Sales, Inc., 578 N.W.2d 222 (Iowa 1998) (elements required to prove breach of contract)