*3 WRIGHT, and Before CHAMBERS THOMPSON,* Judges, Dis Circuit and Judge. trict CHAMBERS, Judge: Circuit In action to recover this of section 5 of violations Securities 10(b) and Act section and of Exchange Act of 10b—5 of the Securities Kemp appeal and plaintiffs Foster summary judgment for defend- us only before is wheth- ants. The issue true, er, taking plaintiffs’ allegations as violations of securities defendants’ any monetary to laws entitle relief. $10,000 paid

In each Exchange, Inc. American Information wholly subsidiary of (AIE), a owned de- Technology, Inc. Financial fendant privilege becoming of AIE (FTI), for the AIE, alleged, franchisees. failed obligations under the fran- perform its agreement, sought and chise $10,000. In settlement of return agreed claims FTI sell to each these 6,667 plaintiff shares of common stock of Resources, (BRI), another de- Basic fendant, Inc. be to FTI which was to issued properties. exchange oil The some agreement provided that the shares be April on or before delivered to 30, 1971, acceptance upon and that of plaintiffs were to execute releases shares they possessed against any claims AIE, FTI, and officers and di- their rectors, arising franchise out Also, agreed to agreement. Thompson, States District for the District of Neva *The R. United Honorable Bruce by designation. da, sitting taking action on the disagree. forbear claims cover. We The settlement 1971. The agreement, BRI shares prior as we it, construe was a bi- delivered, contract; and no never releases were lateral promise FTI’s to deliv- executed. given er the shares was in exchange for two promises by distinct plaintiffs: (1) January plaintiffs commenced promise unconditional to forbear FTI, BRI, against and action Clif- this bringing any action on the franchise Dillard, McLin and John officers A. ford agreement between the date of the con- Liability predicat- and BRI. FTI tract, February and April 30, register the sale the failure ed on 1971; (2) promise, performance and certain statements BRI shares which was upon conditioned acceptance in connection with the sale made shares, to execute formal releases. Dillard, misrepresented McLin performance the first FTI, probability position within *4 promise gave FTI one of the benefits it deal between FTI and BRI that the bargained had 75-day for—a period dur- consummated, be and BRI’s would ever ing which its officers could attempt to They position. damages seek financial close the deal with BRI and resolve they of the claims were to amount in the FTI’s difficulties, financial without $10,000. Because of FTI’s release — present threat of suit. We view this 75-day for- appears financial condition it rendered, bearance as consideration the plaintiffs principally look that as- reasonable value of which is recoverable the of individual defendants for re- sets covery. 12(1). under section pending, While this action was FTI en- plaintiffs If prevail can on proceedings Chapter tered under XI of claims, their 10b-5 they may be able to Bankruptcy Act. In proceed- the these obtain further general, relief. In rule ings plaintiffs each submitted verified permits 10b—5 buyers defrauded to re $10,000. plan arrange- claims for A of cover the difference between the value was confirmed in ment which they consideration gave and the 20,000 each to receive were shares of security value of the they received. See in FTI common stock settlement of their Seilon, Inc., Levine v. 328, 439 F.2d quotations From the stock claims. con- (2d plaintiffs, For damages record, in the it appears tained that aft- measured under this formula will be 20,000 er the settlement the shares could equal recovery to their under section $1,000. been sold for have 12(1). But in addition to these out-of- action, pocket damages, present In the federal judg- courts have in creasingly granted recognized buyer’s ment was the right defendants the that, consequential to regardless damages of ground whether where there it can proven be were violations of the reasonable certainty securities laws in damages such by connection with the sale of the caused BRI the de fendants’ plaintiffs, to 10b-5 shares are violation. Zeller enti- v. Bo gue Co., Elec. damages. Mfg. to tled no 476 F.2d 802-03 (2d Cir.), denied, cert. U.S. pretrial statement 38 L.Ed.2d (1973); Madi stipulated parties the sale of the gan, Goodman, Inc. v. 498 F.2d 238- BRI shares to subject 1974); accord, Restatement registration requirements of section (Second) of 549(l)(b) (Tent. Torts § 5 of Securities Act. only 11, 1965). Draft No. remedy for a violation of require these spelled by Reviewing is 12(1) allegations ments out section in recovery plaintiffs’ complaint, the Act: possible consideration it is they argument, might prove paid. accepted Defendants’ be able to that theirs is an court, appropriate consequential the district is case for that because dam releases, ages. failed to execute At the time entered into no agreement consideration for them the settlement they there to re- pos- each steps to further harm. $10,000. reasonable avoid against AIE for claima sessed Although plaintiffs are not here assert- realized could have they Assuming that claim, ing a breach of contract the no- ultimately on these did than more tion of what constitutes reasonable con- upon them at they sued had claims time, nonbreaching party carries duct in apparently FTI when determination of amount over health, defendants’ financial sounder which plaintiffs’ loss for defendants forego this them inducing in conduct responsible. Consequent- be should held them proven, caused opportunity, ly, at where reasonable loss, com- should be a real suffer man—either because of breach These 10b-5. under pensable discovery of the fraud —would have tak- same damages opportunity-lost protect from further en action to himself where Zeller, incurred those kind as claim, depreciation in the value violation, corpo- the 10b-5 because plain- chain is cut and of causation would profits it the extra ration lost tiffs cannot recover for subse- its excess reinvested had it earned have quent losses. instead operation own its funds in using securities from purchase them There should also be subtracted at 803. the defendant. plaintiffs’ damages any portion they may the amount recover under sec proving add that in hasten to We 12(1) 75-day for their forbearance *5 damages, plain consequential these represents compensation that for their the issue of causation is on tiffs’ burden assumption that the amount risk first, They prove one. must light not a they realize their claims would could misrepresentations vio that defendants’ Otherwise, period. that diminish over 5; second, that but for lated 10b— receiving plaintiffs would be a double misrepresentations would these recovery. against their brought suit on claim have point additional requires One date; third, and that AIE at the earlier argue that comment. Defendants be plaintiffs incurred were a rea losses cause failed to execute the re consequence of these sonably foreseeable subsequently leases and submitted their misrepresentations. Chapter proceedings, claims in the XI Further, damages plaintiffs’ do precluded they recovering are dam necessarily not include the full differ presumably ages, under some notion of ' they ence between what could have real mistakenly election of remedies. This they ized on their claim had asserted assumes that the remedies rescission entering into the instead settlement consequential damages for losses they ultimately what realized in to rescission are in prior that suffered Chapter proceeding. XI As in all 10b—5 (Second) Restatement consistent. See cases, by their are limited what 549(l)(b), (Tent. of Torts Comment e § they they would have had act realized 11, 1965). No. As the above anal Draft upon they ed their claim when first indicates, plaintiffs’ we ysis believe learned of fraud or had reason to against FTI, prosecution of their claims Hirschi, Esplin it. know of 94, v. operating as election rather than 1968), (10th denied, 104r-05 cert. against seeking damages, was the rea 394 U.S. 22 L.Ed.2d required pro of them conduct sonable (1969). Moreover, in there this case further loss. Un themselves from tect may be an additional limitation as a re defendants, the rule advanced der apparent sult of the breach of FTI's fraud, learning upon plaintiffs, promise to the shares on or be deliver seeking the dilemma of re would face fore Under the familiar 1971. thereby waiving right scission and mitigation damages principle, party a damages, consequential or not to recover part recover cannot of his loss rescission, might subject seeking failure, caused his own once he has they to further losses for which them breach, reason to know of the to take compensation. receive no could the sale of the secu- plain in misrepresentation Because we conclude 78(j)). Initially, a mo- allegations entitle may relief, (15 them to § U.S.C. tiffs’ rities dismiss the com- monetary by defendants some the case is reversed and is re denied. judgment plaint to the district court consider manded parties On November presented by plaintiffs’ all issues ation joint pretrial a statement. filed Perti- pointed Thomp As out claims. admissions and claims are nent as fol- concurring some of opinion, the ar son’s lows: guments opinion considered in this were fully developed district court. not Undisputed “3. facts: February On case here is different from that The 15, 1971, when defendants made their party a to assert where seeks for the plaintiffs, offer defendants were claim, defense, time on appeal first by as defined Securities ‘insiders’ objection. from the out Act of 1934. Defendants were di- they has been that were wrongfully set rectors and officers FTI and BASIC promise to release or induced release RESOURCES They CORPORATION. against only their claims AIE. The offer to compromise did make the we question proper consider here plaintiffs’ claims and the offer was ac- of their relief. these measure circum cepted. No certificates were in fact guidelines appellate stances re delivered. It is admitted the securities rigidly should not be view Further, so construed. offered to regis- not held this court has that where Security tered Exchange & so

justice requires, may case be re though they Commission were within manded court district to decide requirements registration argued it originally. issues before E. ready, 1933 Act. Plaintiffs stand will- Sorensen, g., Nuelsen v. F.2d ing and formal able to execute releas- The facts of this promised, though es as have unique complicat case and the issues yet have not as executed such a *6 allegations ed. Plaintiffs’ they indicate formal release. $10,000 are' and have little to .show Disputed o^t it. “4. issues: factual Plain- required for Since a remand in tiffs contend defendants failed to dis- event, any we it proper believe for the position close the weak financial of district court to plain consider whether BASIC RESOURCES CORPORATION are tiffs entitled to the relief discussed to sell the at the time the offer securi- herein. Had the ties made. disclosure Reversed. made, been would not have accepted the offer. THOMPSON, BRUCE R. District prayed: prom- “5. Relief Judge (concurring). claims ise to release their was worth concur, I reluctantly, albeit in the plaintiff $10,000, seeks and each that of opinion Judge Chief My Chambers. Under sum from defendants. the fail- reluctance stems a belief from that the theory, plaintiffs register ure to are “sandbagged” by District the agreed value of entitled to the their presentation by made counsel on the $10,000. mo- claim, wit: released for summary judgment. tions Liability 6. Points of law: under complaint present- Plaintiffs’ amended register, theory the failure to is abso- relief, two basic ed claims for a claim made an lute. The defendants offer Section under 5 of the Securities Act of subject registra- to sell securities alleging by a sale defendants not; of tion, though they were the value unregistered (15 securities U.S.C. 77e §§ the paid of claim $10,- was a release 777) and and a claim under Section 10b plaintiffs’ remedy and for failure 000, Rule and 10b—5 of the Securities Ex- been register has not by barred the change Act of alleging fraud and Statute of Limitations. violation of 15 77e but § U.S.C. “Loss, Security Regulations, Volume presumably on the deny liability, 11c, 1693. 3, Chapter p. Plaintiffs lease a defendants.” tion and “The recovery their crucial therefore contend have claim (Emphasis been constitutes entitles their of law damaged at all. $10,000 promise added.) plaintiffs to is whether considera- to re- from entered into is ground transaction court tion as to whether “There is to undo. Since ^[*] that ^[*] in the apparently a serious wholly executory. agreement instant case for the there has been at the which was present ques- any genuine a issue of fact as time there is a mo- 1973, filed 4, May On has ever been a re- to whether there judgment directed summary for plain- question, lease of the claims in claim, the sale the Section solely to summary judgment motion for By affidavit tiffs’ securities. unregistered court, however, must be denied. The motion, reaf- support the defendants to move for present invites “In the position: firmed case, prior to trial. If summary judgment, in the claims released Plaintiffs can show affidavit $20,000, consid- defendants amount aggregate never been executed securities, the release has said release eration pursuing the controversy.” being in released, they allegedly claims court the district May On showing is not contradicted and that summary denying the order entered affidavit, judg- opposing summary and said: judgment appropri- defendant will be ment for any § U.S.C. “Pursuant necessary additional time is ate. If to offer or the mails who uses person summary judgment mo- perfect Act, with- subject to the security a sell tion, court will entertain a motion being in registration statement out a present trial date.” to vacate security is liable to as effect “ * * purchasing person plaintiffs moved for On June * * * to security him such rehearing of their motion for paid for such consideration recover 27, 1973, July judgment, and on defend- thereon, less interest security with summary judgment. ants moved for On there- received income amount August court en- district security, such tender of on, upon the denying plaintiffs an order tered rehearing longer owns damages if he no granting defendants’ mo- security.’ summary judgment. Sep- tion for On *7 is clear. purpose judgment of this section “The a was entered tember Congress’s par- intention that a was dismissing complaint. It the ty who registered the tered his sue in rev’d owns ^[1124] ages. Hutton, consideration, transaction. the under equity for recision (4th Cir. Johns purchased 297 other security may and should have been the Act is entitled to undo F.Supp. 1165 Hopkins University v. grounds 1970). he stock which was not The or if he no purchaser 422 F.2d and return of sue for dam- (D.Md.1968), longer regis- 1126 may light was and, tioned upon sideration Court. ed entirely executory. 1971 This to the district never asserted to the district court for the contract between in Chief in the briefs on chronology point the of forbearance to sue relied matter, way Judge that the contractual con- court, is the case The important was Chambers’ the the appeal proofs not even February 15, was parties present- showed opinion to this high- men- was have moved for sum- conclusively that the stock of Basic Re- “The According sources, to the judgment. been delivered mary Inc. had never the defend- statement and that had never joint pre-trial to sell was that the offer and delivered releases of executed ants admit

1075 registered against Technology, claims Financial Inc. securities had wholly been ex- Nevertheless, ecutory, agreement judgment dismissing settlement it was correct. But provide respect would forbear did to the 10b—5 30, 1971, claim, there until was an disputed suit or other action obvious is- performed was sue of joint and this consideration material fact under pre- consideration, trial obviously good what, a so statement any, and is as to mis- entirely representations not executo- was had been agreement made first noted of record sellers. ry. precluded This This summary judg- Judge case when Chief Chambers ment on in this this claim. We can find no opinion. his evidence the record that prepared ever part waived or abandoned this Throughout proceedings, defend- complaint. They simply amended have contended that a contract ants press chose Section 5 claim unregistered security in sell an violation partial summary judgment motion for of 1933 is unen- of the Securities Act they thought because liability was clear illegal bargain. This is forceable as an undisputed as a matter of law. the law. Frost & Co. v. Coeur d’Al- not opinion 61 Chief Chambers’ Corp., ene Mines 312 U.S. shows (1941); that the measure of 85 L.Ed. 500 Judson v. for a viola- (2nd 1942); may of 10b-5 Buckley, substantially 174 Cir. be 130 F.2d dif- Ryan recovery v. Pat ferent Life Ins. Co. & violation of Occidental Inc., Assoc., (4th 5 of the 496 F.2d 1255 Cir. Section Securities Act of 1933. Reznik, 1974); (7th Wood v. 248 F.2d 549 unnecessary allege It is prove 1957); Chapman v. Rudd Paint Cir. & completed consummated or sale of secu- Co., (9th Varnish 409 F.2d Cir. as a recovery rities condition to under 1969). Exchange Section 10b of the Securities foregoing pos Act and Rule If recitation of the SEC 10b-5. Commerce Puretec, Inc., Reporting of the action in the trial court v. ture Co. case, F.Supp. (S.D.N.Y.1968); is to the I would vote to all there M. L. Lee & judgment upon affirm the the Co. v. Packaging American Cardboard & long-established appellate Corp., (E.D.Penn.1964); review F.R.D. 27 Cf. Dynamics, Goldmuntz, appeals court will not Radiation Inc. v. reverse (2nd 1972). the trial court on a contention that Cir. presented never to it. Walker v. Conti my Inasmuch as it is view that Company, nental Life & Accident 445 summary judgment for defendants was (9th 1971); F.2d 1072 Goldberg v. improvidently granted on the 10b—5 Weiner, 480 F.2d 1067 action, cause of there is little reason not is, however, problem judgment There another to reverse the a whole. as all, judgment appellate and that is that After the rule of review de- ground presented dismissed the 10b—5 not to reverse on a fendants claim as jurisdictional merely well as the below not but is Section Securities Act practice respect may With a rule of claim. Section 5 be relaxed claim, may injustice might well be that the out-of- when otherwise result. Inn, pocket rule is the correct Krause v. measure of Sacramento 479 F.2d 988 *8 and, if the contract to sell un-