Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Harnett v. Ryan Homes Inc.

decided: April 29, 1974.



Van Dusen and Adams, Circuit Judges, and Huyett, District Judge.

Author: Adams


ADAMS, Circuit Judge.

The principle issue presented by this case relates to the operation of the inveterate legal concepts of materiality and reliance in the context of a suit under Section 10(b) of the Securities and Exchange Act of 1934*fn1 and Rule 10b-5 of the Securities and Exchange Commission.*fn2

This action was brought by William H. Harnett, a former shareholder-employee of a closely-held corporation, Ryan Homes, Inc., against Edward Ryan, the chief officer and majority shareholder of the corporation, and the corporation. The purported transgressions prompting this litigation emerge from the business and financial relationship between top personnel of this ostensibly prosperous enterprise. The company was engaged in home building, sales and land development, an industry, during the years relevant here, subjected to both favorable and not-so favorable economic winds.

Harnett became an employee of Ryan Homes, Inc. in 1961. His skills impressed Edward Ryan and Harnett made quick advancement. By 1965, he had attained the position of Vice-President of Marketing, and was a member of the Operating Committee.

During his tenure with Ryan Homes, Harnett acquired 1000 shares in the corporation. Resale of employee stock in Ryan Homes was governed by an agreement between Ryan Homes and its employees, including Harnett, which required "that when a stockholder left the employ of the company that [sic] he sell his shares back to the company at a price equal to their book value" at the end of the quarter preceding the sale.*fn3

In 1963 or early 1964, Edward Ryan began to investigate the possibility of developing a tract of land near St. Charles City, Maryland. Ryan Homes' formal connection with the resulting project is not entirely clear and, in some respects, disputed. For the purposes of this appeal, however, it is important to note that Edward Ryan actively sought in 1965 an accomplished executive to manage the St. Charles development. After failing to persuade his brother, James, to undertake the task, Edward Ryan attempted to recruit Harnett.

Ryan Homes was, at the time, making preparations for a public offering of its stock. The projected market value of the stock was substantially in excess of its book value. Thus, if the employees, including Harnett, were released from their stockholder agreements with the company and permitted to participate in the public offering, they could reap substantial profits. At a meeting of the Board of Directors on April 24, 1965, however, Edward Ryan, in the presence of Harnett, announced, on the basis of advice from the underwriters, that he himself would be the only employee allowed to participate in the public offering, and that no other employee would be able to sell his shares to the public for five years.

On May 13, 1965, Harnett and Edward Ryan agreed that Harnett would resign from Ryan Homes, sell his stock back to the company for $150. per share, accept significant responsibilities with another corporation involved in the St. Charles project, and receive a salary increase from $1700. to $4000. per month. The portion of the agreement relating to the sale of the stock provided further that Harnett would receive any difference between the $150. per share figure and the stock's book value on December 31, 1965. The $150. price was later reduced to $142., but the provision for payment of the difference between the June, 1965 selling price and the December 31st book worth figure remained unaltered. Harnett's move to the St. Charles project proved particularly propitious. Although the district court made no specific finding, it did note that Harnett became very wealthy as a result of his involvement in the St. Charles development, owning at the time of the lawsuit, stock worth $6,750,000.

Ryan Homes did not go public in 1965 as contemplated, and business reversals delayed the public offering of Ryan Homes stock until 1968. However, in April, 1965, when he stated to the Board that employees would not be free to participate in the public offering, Edward Ryan apparently had given some thought to permitting such participation if the underwriters so agreed. In fact, in 1968, some Ryan Homes employees, in addition to Edward Ryan, were permitted to sell their stock to the public.*fn4

Harnett, in his capacity as seller of his stock in Ryan Homes, claimed below, among other things, that Edward Ryan's failure to reveal to him in April, 1965 Edward's thoughts with respect to the possible employee participation in the impending public offering breached Rule 10b-5. These thoughts, at that time, were, at least in part, in writing. Harnett also asserted that Edward Ryan and Ryan Homes did not fulfill their obligation, included in the agreement terminating Harnett's employment with Ryan Homes, to compensate him for the difference between the $142. per share payment and the December 31, 1965 book value figure of the stock.

Ryan and Ryan Homes denied the existence of both a violation of 10b-5 and a duty to pay to Harnett any additional consideration for the Ryan Homes stock. In addition, they contended that Harnett received payments amounting to $16,000. not attributable to any services performed for Ryan Homes by Harnett. Edward Ryan and Ryan Homes sought to ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.