Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02579/USCOURTS-ca10-88-02579-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

THE BANK OF ALTON, EDWARD J. and DOROTHY 

c. SOPTIC, CLIFFORD A. and HELEN M. STRICK, 

CHARLES s. BATSCH, HARVEY A. and MARY P. 

TILLEY, ELTON R. GREER, OLIVER V. and 

JANICE A. GOMER, and DONALD G. BURWELL, 

Plaintiffs-Appellants, 

v. 

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) 

THE MISSION BANK, CAL CAUFIELD AND COMPANY, ) 

INC., NORMAN E. GAAR, P.A., JUDSON L. PALMER,) 

JR., P.C., WEBB R. GILMORE, P.C., JAMES S. ) 

ALLEN, JR., P.C., KIM B. WELLS, P.C., ) 

CHRISTOPHER D. AHREANS, P.C., ROBERT P. ) 

BALLSRUD, P.C., JOHN E. CATON, P.A., JOEL. ) 

NORTON, P.A., and JUDSON L. PALMER, JR., ) 

) 

Defendants-Appellees, ) 

---------------------------------------------} LOUIS L. FRYDMAN and JANE FRYDMAN, ) 

Plaintiffs-Appellants, 

v. 

THE MISSION BANK, CAL CAUFIELD AND COMPANY, 

INC., PAINE WEBBER JACKSON & CURTIS, INC., 

NORMAN E. GAAR, P.A., JUDSON L. PALMER, JR., 

P.C., WEBB R. GILMORE, P.C., JAMES S. ALLEN, 

JR., P.C., KIM B. WELLS, P.C., CHRISTOPHER 

D. AHREANS, P.C., ROBERTS. BALLSRUD, P.C., 

JOHN E. CATON, P.A., JOEL. NORTON, P.A., 

and JUDSON L. PALMER, JR., 

Defendants-Appellees. 

ORDER AND JUDGMENT* 

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) 

) 

) 

) 

) 

) 

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) 

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) 

) 

} 

) 

Fl LED 

United States Court of Appeals 

Tenth Circuit 

MAR 12 1990 

ROBERT L. HOECKER 

Clerk 

No. 88-2577 

(D. Kansas) 

(No. 85-2487-S) 

No. 88-2579 

(D. Kansas) 

(No. 85-2491-S) 

Before LOGAN, MCWILLIAMS, and BRORBY, Circuit Judges. 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 1 
The Bank of Alton, et al. (Appellants) appeal the trial 

court's grant of summary judgment in favor of various defendants 

below, contending: (1) the trial court erred in granting summary 

judgment to the Mission Bank because Appellants had inadequate 

time for discovery and also the trial court erred by concluding, 

as a matter of law, that the Mission Bank owed no duties to the 

plaintiffs and had not known of fraudulent activities; (2) the 

trial court erred in granting summary judgment to the Gaar & Bell 

defendants because there were factual issues regarding whether 

reasonable inquiry would have established potential causes of 

action against the defendants at the time the release was signed; 

(3) the trial court erred in granting Gaar & Bell's motion for 

summary judgment based upon a release because there were material 

issues of fact remaining with regard to the claim of economic 

duress; and (4) the trial court erred in granting summary judgment 

to the Gaar & Bell defendants based upon the releases because the 

releases were void. Appellant's Brief at i, ii. We review the 

trial court's grant of summary judgment under the same standard 

employed by the trial court, Osgood v. State Farm Mut. Auto. Ins. 

Co., 848 F.2d 141, 143 (10th Cir. 1988), and we affirm. 

In 1982, Kansas City, Kansas (the City) issued 1.65 million 

dollars of industrial revenue bonds to allow an entity named Six 

Hundred One Investors, Inc. (601) to purchase the assets of an 

existing business, Midwest Boneless Meat of Kansas, Inc. 

(Midwest). The Mission Bank agreed to purchase the bonds and to 

subsequently resell them to an underwriter named Cal Caulfield & 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 2 
Co., Inc. (Caulfield). In August of 1982, the Mission Bank bought 

the bonds at a discount and during September through November, 

1982, resold them to Caulfield who located investors for the 

bonds. April 14, 1986 Memorandum and Order. 

An offering circular for the investors was prepared which 

contained certain financial 

transaction, the results of an 

information 

appraisal of 

respecting 

the building 

the 

and 

equipment, and the plan for the construction of an addition to the 

building and purchase of new plant equipment. The trial court 

found the Mission Bank was not involved in the preparation of the 

offering circular, the accounting statement or the appraisal. 

April 14, 1986 Memorandum and Order at 4. 

The Mission Bank initially dispersed over one million dollars 

to old owners of Midwest and paid certified invoices. Two of the 

documents submitted to the Mission Bank for payment were 

fraudulent in that the money paid thereon did not go for the 

stated purpose of purchase of plant equipment. The trial court 

found the Mission Bank had no knowledge that the submitted 

documents were fraudulent. April 14, 1986 Memorandum and Order at 

5. The amount paid through the fraudulent documents totaled 

$95,000 and those funds were diverted to an individual named 

Harold Audsley. The trial court found that Harold Audsley was an 

undisclosed principal of 601. April 14, 1986 Memorandum and Order 

at 5. 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 3 
The Mission Bank first learned of the fraud in November, 

1983, and thereafter disclosed this information to the 

bondholders. April 14, 1986 Memorandum and Order at 5. The bonds 

were declared in default, Appellees' Brief at 2, Midwest stopped 

doing business, and vacated the premises. A bondholders' meeting 

was called for December 7, 1983 to discuss the default and the 

options available to the bondholders. December 3, 1987 Memorandum 

and Order at 2. The bondholders chose Paul Utterback, Chairman of 

the Bank of Alton to take over and operate the facility. Brief of 

Appellee The Mission Bank at 8. In January, 1984, the bondholders 

committee met and accepted the Mission Bank's resignation as 

fiscal agent. April 14, 1986 Memorandum and Order at 5. 

In the Spring of 1985, a produce company called the Tanaka 

Brothers made an offer to lease the premises on the condition that 

new bonds be issued and that all bondholders consent to the 

reissuance. Brief of Appellee The Mission Bank at 8. The 

proposal was presented to the bondholders at a meeting on May 23, 

1985. The bondholders accepted the proposal and exchanged their 

bonds for new bonds issued by the City. Brief of Appellee The 

Mission Bank at 8. Gaar & Bell agreed to prepare the necessary 

documents free of charge, if the bondholders agreed to release 

them from all liability arising out of the original bond issuance. 

The release language was included in the bondholders' consent 

which was mailed to all bondholders on June 4, 1985. All 

bondholders executed the consent, including the release, and the 

new bonds were issued. December 3, 1987 Memorandum and Order at 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 4 
3. The Bank of Alton was designated as trustee pursuant to a 

Trust Indenture dated June 1, 1985. Brief of Appellee The Mission 

Bank at 8. 

A number of the bondholders filed suit against the Mission 

Bank and the bond underwriter, Caulfield, asserting claims under§ 

l0(b) of the Securities Exchange Act of 1934, § 17(a) and§ 12(2) 

of the Securities Act of 1933, the Racketeer Influenced and 

Corrupt Organizations Act (RICO), and pendent state claims under 

Kansas securities laws, common law fraud, and negligence. 

Bondholders Louis and Jane Frydman filed a separate complaint in 

the same forum against the Mission Bank, Caulfield, and Paine 

Webber Jackson & Curtis (Paine Webber). Except for the Frydmans' 

additional claims against Paine Weber, the Complaints were 

identical. Brief of Appellee The Mission Bank at 8-9. The cases 

were consolidated at the trial level. The court granted summary 

judgment to the Mission Bank in a Memorandum and Order dated April 

14, 1986. On December 3, 1987, the court also granted summary 

judgment to the Gaar and Bell law firm, which had been added as a 

defendant in Plaintiff's second amended complaint of September 10, 

1986. 

Summary Judgment in Favor of the Mission Bank 

Appellants argue the trial court erred in granting the 

Mission Bank's motion for summary judgment for two reasons: (a) 

Appellants were given inadequate discovery time; and (b} the trial 

court erred in determining the Mission Bank owed no duty of 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 5 
disclosure to Appellants. The Mission Bank argues that Appellants 

failed to preserve for appeal the issue of inadequate time for 

discovery, Brief of Appellee The Mission Bank at 16, and the trial 

court correctly ruled the Mission Bank was not a trustee with 

broad fiduciary obligations but had only those limited duties as 

paying agent and fiscal agent as expressly specified in the 

ordinance and lease. We agree with the Mission Bank. 

First we address the discovery issue. Appellants do not 

assert error in the trial court's treatment of the Mission Bank's 

motion to dismiss as one for summary judgment. Rather, they 

assert error in the trial court's ruling on the motion before 

Appellants gained the information they desired but did not 

request. Citing Cronin v. Midwestern Oklahoma Dev. Auth., 619 

F.2d 856 (10th Cir. 1980), Appellants state "the haste at which 

summary judgment was granted requires reversal." Appellant's 

Brief at 17. The record bears no indication that the Appellants 

sought additional time for discovery under Fed. R. Civ. P. 56(f) 

or made any timely objection to the trial court ruling on the 

motion when it ruled. 1 

1 As the Mission Bank correctly noted in its brief, 

The Bondholders' brief in opposition to the Bank's 

motion for summary judgment included an affidavit from 

their counsel in which he stated, inter alia, that 

certain discovery had recently been initiated and that 

"additional contemplated discovery will serve to 

substantially clarify the issues .... " (Document No. 

34) The Bondholders have not attempted to argue on 

appeal that this affidavit satisfies Rule 56(f), nor 

could they persuasively do so. In the first place, the 

affidavit neither refers to Rule 56(f), nor does it 

assert that additional time is needed in order to 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 6 
Rule 56(f) specifically addresses problems with premature 

motions. "Any potential problem with such premature motions can 

be adequately dealt with under Rule 56(f), which allows a summary 

judgment motion to be denied, or the hearing on the motion to be 

continued, if the nonmoving party has not had an opportunity to 

make full discovery." Celotex Corp. v. Catrett, 477 U.S. 317, 326 

(1986) (footnote omitted). When, as in this case, a party fails 

to make a proper Rule 56(f) request for additional discovery time 

and fails to object until he files the appellate brief, the issue 

is not preserved for appeal. Brown v. Chaffee, 612 F.2d 497, 505 

(10th Cir. 1979). 

Appellants next argue the trial court erred in determining 

the Mission Bank had no duty of disclosure. Appellants contend 

the Mission Bank had a duty of disclosure based upon their status 

as fiscal agent, paying agent, and trustee, and also based upon 

its action in connection with issuance and sale of the bonds. 

Appellants' Brief at 18, 22. In its Memorandum and Order dated 

properly respond to the Bank's motion. The affidavit 

filed by counsel as part of the Bondholders' motion for 

reconsideration in the Bank of Alton case likewise fails 

to satisfy Rule 56(f). (Document No. 48) This Court 

has held that mere references to discovery being 

incomplete, or statements regarding the status of 

discovery, are insufficient to invoke the shelter 

provided by Rule 56(f). Dreiling v. Peugeot Motors of 

America, Inc., 850 F.2d 1373, 1377 (10th Cir. 1988); 

Pasternak v. Lear Petroleum Exploration, Inc., 790 F.2d 

at 833; see also, Brae Transp. v. Coopers & Lybrand, 790 

F.2d 1439, 1443 (9th Cir. 1986) (references in memoranda 

and declarations to a need for discovery do not qualify 

as motions under Rule 56(f)). 

Brief of Appellee The Mission Bank at 18. 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 7 
April 14, 1986, the trial court fully analyzed the issue, and 

concluded the Mission Bank was not in a position of a trustee and 

did not owe fiduciary duties to the appellants. We have studied 

the record and applicable law and affirm the trial court's 

decision for substantially the same reasons stated in the 

Memorandum and Order dated April 14, 1986. 

Appellants also contend the trial court erred in granting 

summary judgment to the Mission Bank on the alleged liability as 

an aider and abettor. Appellants' Brief at 25. Their argument 

presumes that the Mission Bank had a duty of disclosure and 

therefore a lesser degree of scienter was required to establish 

liability. We agree with the trial court's determination that the 

Mission Bank had no such duty and therefore the degree of scienter 

which the Appellants must establish is increased to the level of 

"conscious intent." April 14, 1986 Memorandum and Order at 10. 

We also agree with the trial court that nothing in the record or 

the plaintiffs' allegations establish this level of scienter. On 

this issue we affirm for substantially the same reasons set forth 

in the trial court's Memorandum and Order of April 14, 1986. 

Summary Judgment in Favor of the Gaar and Bell Defendants 

Appellants contend the trial court erred in granting summary 

judgment to the Gaar and Bell defendants based upon the releases 

signed by the bondholders. The release signed by each bondholder 

is contained in a two-page document entitled "CONSENT, AGREEMENT 

TO EXCHANGE BONDS AND RELEASE" and contains the following 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 8 
language: 

"In consideration for the leasing of the Project to 

Tanaka by the City, the issuance of the Tanaka Bonds by 

the City, the granting by the City of a exemption for 

the Project from general ad valorem real estate taxes 

during the term of the Lease, and the preparation of the 

documents authorizing the issuance of the Tanaka Bonds 

and the rendering of an opinion on the validity and 

taxexempt status thereof, the undersigned hereby 

releases the City, its special bond counsel, John F. 

Steineger, Jr., and its bond counsel, Gaar and Bell, 

from any claim for liability or damages to the 

undersigned in connection with or arising out of the 

issuance and sale of the Midwest Bonds. This release 

shall not extend to any other party involved in the 

issuance and sale of the Midwest Bonds." 

(Emphasis added) Appellants' Addendum, tab 20. 

Appellants attack the release on several grounds: (a) the 

trial court erred in not subjecting the release to strict 

scrutiny, Appellants' Brief at 28; (b) the trial court erroneously 

applied an incorrect standard of knowledge, Appellants' Brief at 

30; (c) the trial court erred in concluding that they should have 

discovered the potential causes of action as a matter of law, 

Appellants' Brief at 34; (d) at the time of summary judgment there 

were material issues of fact remaining with regard to the claim of 

economic duress, Appellants' Brief at 38; and (e) the releases 

were obtained in violation of securities law and disciplinary 

rules relating to attorneys, Appellants' Brief at 44, 47. In its 

Memorandum and Order dated December 3, 1987, the trial court 

analyzed at length the validity of the releases and the issues of 

economic duress and public policy. We adopt and affirm the 

reasoning of the trial court in that regard. Further, we find no 

merit in the additional arguments lodged by appellants. 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 9 
The decision of the district court is AFFIRMED. 

Entered for the Court: 

WADE BRORBY 

United States Circuit Judge 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 10 
IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF KANSAS 

THE BANK OF ALTON, et al., 

v. 

THE MISSION BANK, et al., 

) 

Plaintiffs, ) 

) 

) 

) 

) 

) 

) 

Defendants. ) ______________________ ) 

MEMORANDUM AND ORDER 

Fl LED 

APR 14-1981 

CIVIL ACTION 

NO. 85-2487-S 

This matter is before the court on the motion of 

defendant Mission Bank for summary judgment. Defendant filed 

this motion in lieu of an answer to plaintiffs' complaint. 

Affidavits were submitted in support of defendant's motion for 

the purpose of converting a Rule 12 motion into a Rule 56 

motion. See Rule 12(b), Federal Rules of civil Procedure. 

Plaintiff has had a reasonable opportunity to present material 

in opposition to defendant's motion. 

To rule favorably on a motion for summary judgment, 

the court must first determine that the matters considered in 

connection with the motion disclose •that there is no genuine 

issue as to any material fact and that the moving party is 

entitled to judgment as a matter of law.• Rule 56(c), Federal 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 11 
Rules of civil Procedure. The principal inquiry is therefore 

whether a genuine issue of material fact exists. Dalke v. The 

Opjohn co., 555 F.2d 245 (9th Cir. 1977); Hanke v. Global van 

Lines, Inc., 533 F.2d 396 (8th cir. 1976). A motion under Rule 

56 will be denied unless the movant demonstrates beyond doubt 

that he is entitled to a favorable ruling. Madison v. Deseret 

Livestock co., 574 F.2d 1027 (10th cir. 1978); Mustang Fuel corp. 

v. Youngstown Sheet & Tube Co., 516 F.2d 33 (10th Cir. 1975). 

Pleadings and documentary evidence are to be construed liberally 

in favor of a party opposing a Rule 56 motion. Harman v. 

Diversified Medical Investments corp., 488 F.2d 111 (10th Cir. 

1973), cert. denied 425 o.s. 951 (1976). However, once a summary 

judgment motion has been properly supported, the opposing party 

may not rest on the allegations of the complaint, but must 

respond with specific facts showing the existence of a genuine 

factual issue to be tried. Coleman v. Darden, 595 F.2d 533, 536 

(10th Cir.), cert. denied 444 U.S. 927 (1979). A party with 

evidence tending to create a factual issue must present that 

evidence to the trial judge or summary judgment is proper. 

Otteson v. United States, 622 F.2d 516, 520 (10th Cir. 1980). 

Additionally, in a case such as this where plaintiffs 

have had curtailed discovery, summary judgment is particularly 

disfavored. Cronin v. Midwestern Oklahoma Development Authority, 

619 F.2d 856 {10th Cir. 1980). 

The uncontroverted facts for the purposes of this 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 12 
motion are as follows. In the fall of 1982, Kansas City, Kansas 

[ hereinafter the City] issued 1. 65 mill ion dollars of industrial 

revenue bonds to allow Six Hundred one Investors, Inc., 

[ hereinafter 601], a new entity incorporated by James Schuler, 

Gerald Harvey and Robert Hart, to purchase the assets of an 

existing business, Midwest Boneless Meat of Kansas, Inc. 

[hereinafter Midwest]. Defendant Bank first learned of the 

proposed offering when its representative met with defendant 

Caulfield, who served as underwriter for this issue, in the early 

summer of 1982, to discuss the use of industrial revenue bonds to 

finance 601 's contemplated purchase of Midwest. The Bank agreed 

to purchase the bonds and to subsequently resell to defendant 

Caulfield, conditioned on the defendant Bank being named trustee 

and paying agent. In August of 1982, the defendant Bank bought 

the bonds at a discount and during September through November, 

1982, resold them to defendant Caulfield who located investors 

for the bonds. 

An offering circular for the investors was prepared 

which contained certain financial information respecting the 

transaction, the results of an appraisal of the building and 

equipment, and the plan for the construction of an addition to 

the building and purchase of new boning equipment. Defendant 

Bank has submitted an affidavit indicating it did not participate 

in preparing the offering circular, the accounting statement or 

the appraisal. Plaintiffs respond only that they have no 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 13 
A" '7'tA 

information to affirm or deny this affidavit although they 

believe that defendant Bank was in someway involved in approval 

of this offering circular based on the representations made by 

the defendant Bank that it would not transfer the securities 

unless •an official statement acceptable in form and substance to 

the City is prepared and made available to each subsequent 

transferee of the Bonds.• { Plaintiff's Exhibit 2, attached to 

Plaintiff's Suggestions 

Judgment of Defendant, 

this Exhibit and can 

in Opposition to 

Mission Bank.) The 

find nothing which 

Motion 

court 

would 

for Summary 

has reviewed 

indicate any 

potential involvement of defendant Bank in the offering circular 

and as plaintiff has not come forward with specific facts, the 

court must deem defendant's affidavit to be uncontroverted. 

Additionally, plaintiff's belief that the defendant Bank was 

involved in some fashion in the approval of the offering circular 

does not controvert defendant Bank's statement that it did not 

participate in the preparation of the circular, the accounting 

statements or the appraisal. 

Defendant Bank initially dispersed a little over one 

million dollars to old owners of Midwest and paid certified 

invoices. Two of the documents submitted to the defendant Bank 

for payment were fraudulent in that the money paid thereon did 

not go to the stated purpose of purchase of plant equipment. 

Defendant Bank has submitted an affidavit stating that it had no 

knowledge that the submitted documents were fraudulent. 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 14 
Plaintiffs counter that knowledge must be imputed because of 

self-contradictory statements contained in the involved payment 

certificates. The court has examined Exhibits 7 and 8 attached 

to Plaintiff's suggestions in Opposition to Motion for summary 

Judgment of Defendant Mission Bank and finds no inconsistencies 

which would impute knowledge of fraud to the defendant Bank. The 

amount paid through the fraudulent documents totaled Ninety-Five 

Thousand Dollars ($95,000), which funds were diverted to an 

individual named Harold Audsley. The defendant Bank asserts that 

Harold Audsley was an undisclosed principal of 601. Plaintiffs 

contest this assertion because the defendant Bank had previously 

represented that it was fully aware of the condition, financial 

and otherwise, of 601. This representation does not controvert 

the defendant Bank's assertion that it was unaware of 60l's 

undisclosed principal. The fact that · defendant Bank in a 

purchaser's receipt and representation letter (Plaintiff's 

Exhibit 2) indicated it was aware of the condition of 601 does 

not lead to the conclusion that it was also aware of 60l's 

undisclosed principal. Plaintiffs have failed to controvert this 

assertion by the defendant Bank. 

The defendant Bank first learned of the fraud in 

November, 1983, and thereafter disclosed this information to the 

bondholders. In January, 1984, the bondholders committee met and 

accepted defendant Bank's resignation as 

Plaintiffs brought suit against the defendant 

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fiscal age'nt. 

Bank, alleging 

Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 15 
violation of§ l0(b) of the 1934 Securities Exchange Act, the 

1933 Securities Act, the Racketeer Influenced & corrupt 

Organizations Act [hereinafter RICO], and pendant state claims 

for violation of K.S.A. 17-1268(a), the Kansas Blue Sky Law, and 

common law fraud. 

The court will first consider plaintiffs' claims under 

§ lO(b). Plaintiffs allege that defendant Bank as trustee, 

fiscal agent and seller, was primarily liable for violations of§ 

l0(b) of the Securities Exchange Act. Plaintiffs alternatively 

allege that defendant Bank is secondarily liable for knowingly or 

with reckless disregard, conspiring with or aiding and abet ting 

601 in its fraudulent scheme to defraud bondholders. 

As to the question of its primary liability, defendant 

Bank asserts that it is entitled to summary judgment on the basis 

that it was not a trustee for plaintiffs, did not owe plaintiffs 

a fiduciary duty, and therefore had no duty to disclose under S 

l0(b). The ordinance passed by the Kansas City, Kansas, City 

council in issuing the bonds states in section 3: 

[ T]he Bonds and the interest thereon shall be 

payable . • . as they respectively become due 

at The Mission Bank, in the City of Mission, 

Kansas, such Bank being hereby designated as 

the City's paying agent for the payment of the 

principal of said interest on the Bonds herein 

authorized and sometimes referred to herein as 

the 'Paying Agent'. 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 16 
A072A 

Defendant Bank's duties were further specified in 

Sections 6, 11, 12 and 13 of the Ordinance pertaining to 

accounts to be maintained and situations involving unclaimed 

principal and interest held by the Bank. Section 10 of the 

Ordinance designates the defendant Bank as the fiscal agent. 

Section 25(b) states: •[T]he Fiscal Agent's duties and 

responsibilities shall be 1 irni ted to those expressly set forth 

in this Ordinance and the Lease.• The lease generally refers 

back to the Bond Ordinance in specifying defendant Bank's duties 

as a fiscal agent. 

If defendant Bank was acting as a mere transfer agent 

for the bonds and their proceeds, no S l0(b) liability 

attaches. see Woods v. Hornes & Structures of Pittsburg, Kansas, 

489 F.Supp 1270, 1277 (D. Kan., 1980). However, the Bank may be 

found primarily liable if it owed a direct duty to the public. 

Id. at 1278. A bank with a duty to disclose material 

misrepresentations to the public may be found liable under 

§ l0(b) because of its silence or inaction. Id. 

After careful review of the record, weighing the facts 

in plaintiffs' favor, the court cannot conclude that the Bank 

was in a position of a trustee. The required features for a 

trust are set out in Jennings v. Jennings, 211 Kan. 515, 507 

P.2d 241 (1973). A trust requires an explicit declaration and 

intention to create a trust, the transfer of lawful and definite 

property made by a person capable of making a transfer thereof, 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 17 
and a requirement to hold as trustee for benefit of a cestui ~ 

trust with directions as to the manner in which the trust funds 

are to be applied. Id. 211 Kan. at 521, 507 P.2d at 247. The 

words •trust• or •trustee• need not be used to establish a 

trust. Id. 

The documents examined by the court do not indicate 

any intention to create a trust. The Bank was merely a fiscal 

and paying agent hired to perform specific duties. 

Additionally, the duties of the Bank were specifically 1 imi ted 

to those as specified. Further, 

have been created, there were 

beneficiaries who would be able 

trust. 

at the time the trust would 

no existing and identifiable 

to enforce the terms of the 

The court likewise finds that the defendant Bank owed 

no fiduciary duties to the plaintiffs. A fiduciary relationship 

may be specifically created by contract or implied in law due to 

the factual situation surrounding the involved transaction and 

the relationship of the parties to each other and to the 

questioned transaction. Denison State Bank v. Madeira, 230 Kan. 

684, 640 P.2d 1235 (1982). Generally, in a fiduciary 

relationship, the property, interest or authority of the other 

is placed in charge of the fiduciary. Id. The fiduciary 

relationship implies a condition of superiority of one of the 

parties over the other. The defendant Bank had clearly limited 

duties as fiscal and paying agent for the city, which duties 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 18 
AO 7?A 

were spelled out in the Ordinance & Lease. A general fiduciary 

relationship of unlimited scope cannot be implied. The 

defendant Bank herein had only limited administrative duties. 

Plaintiffs argue that the defendant Bank should be 

given the status of a seller in the questioned transactions. 

There is nothing in the record indicating the Bank aided in the 

issuance of the bonds. Liability may arise if the defendant 

Bank participated in the issuance of the bonds and thus had a 

duty to disclose. Cronin, 619 F.2d at 862. The only 

involvement the defendant Bank had in the bonds issuance was in 

the purchasing and financing of the underwriter. 

Next before the court is the determination of 

secondary liability on the part of defendant Bank. Plaintiffs 

argue that defendant Bank is liable as an aider and abettor. 

The elements of aiding and abetting in a Rule l0(b) violation 

are: • (1) proof of securities law violations; ( 2) proof that 

the alleged aider-abettor knew of the violations and of its role 

in the scheme, and (3) proof that the alleged aider-abettor 

knowingly and substantially assisted in the violation.• Woods, 

489 F.Supp at 1278. 

Viewing the facts in plaintiffs' favor, there is 

nothing in the record to establish that the defendant Bank had 

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Appellate Case: 88-2579 Document: 01019966080 Date Filed: 03/12/1990 Page: 19 
A072A 

any knowledge of a fraudulent scheme on the part of 601 or that 

the defendant Bank assisted in this scheme. The court has 

previously determined that the defendant Bank had no duty of 

disclosure to the plaintiffs-bondholders. In Woodward v. Metro 

Bank of Dallas, 522 F.2d 84, 97 {5th Cir. 1975), the court 

therein stated: 

When it is impossible to find any duty of 

disclosure, an alleged aider-abettor should be 

found liable only if scienter of the high 

'conscious intent' variety can be proved. 

Where some special duty of disclosure exists, 

then liability should be possible with a 

lesser degree of scienter . . . In a case 

combining silence/inaction with affirmative 

assistance, the degree of knowledge required 

should depend on how ordinary the assisting 

activity is in the business involved. If the 

evidence shows no more than transactions 

constituting the daily grist of the mill, we 

would be loathe to find lOb-5 liability 

without clear proof of intent to violate the 

securities laws. Conversely, if the method or 

transaction is atypical or lacks business 

justification, it may be possible to infer the 

knowledge necessary for aiding and abetting 

liability. In any case, the assistance must 

be substantial before liability can be imposed 

under lOb-5. [Citations omitted.] 

In this case, the defendant Bank engaged in ordinary 

business transactions providing customary banking functions. 

There was nothing atypical about the arrangements made with 

defendant Caulfield or the City, nor was there lack of business 

justification for the Bank's actions. Plaintiffs must establish 

that defendant Bank's degree of scienter was conscious intent. 

~ woods, 489 F. Supp at 1279. There is nothing in the record 

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Af\ 7?A 

or in plaintiffs' allegations to establish this standard. 

In reaching these conclusions regarding the defendant 

Bank's liability under § l0{b), the court is aware of the heavy 

burden placed on the defendant Bank to sustain summary 

judgment. The court has read the record in the light most 

favorable to plaintiffs, but finds that the defendant Bank has 

established that there are no genuine factual issues which would 

preclude summary judgment. This case differs from woods, 489 

F. Supp 1270, in that the court therein found that inferences 

could be drawn against the defendant Bank because of its actions 

contrary to the written trust agreement, its allowance to the 

underwriters of sixty { 60) additional days in which to pick up 

and pay for the bonds, and its allowance of the bonds being 

picked up on a piecemeal basis at a fifteen percent {15%) 

discount over the objections of the issuer's attorney. There is 

nothing in the instant case which establishes the defendant 

Bank's actions to be beyond ordinary business practices. 

The court has also been cautious in granting summary 

judgment on these issues in light of plaintiffs' limited 

discovery. The court in Cronin, 619 F. 2d 856, cautions against 

summary judgment in such instances involving complex legal 

issues along with curtailed discovery. However, Cronin does not 

stand for the proposition that summary judgment may never be 

granted in such instances. 

Next, defendant Bank seeks summary judgment on 

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.,.. .,,.,. 

plaintiffs' claims under the 1933 Securities Act, S 17(a) and § 

12(2), 15 u.s.c. § 77-q(a) and§ 77-1(2). First, defendant Bank 

argues that no private cause of action exists under § 17 (a). 

woods, 489 F.Supp 1270, has previously so held. The court 

therein noted that the courts are split on this issue but found 

the reasoning in those cases denying a private cause of action 

under § 17(a) to be most persuasive. Quoting Dyer v. Eastern 

Trust & Banking company, 336 F.Supp 890 (D. Maine, 1971), the 

court noted that the 1933 Act was much narrower than the 1934 

Act and deals only with disclosure and fraud in the sale of 

securities •• 

In 1942, the Securities & Exchange commission 

adopted the language of S 17 (a) in drafting 

Rule l0b-5, 17 C.F.R. § 240.l0b-5, which was 

promulgated under the authority of§ l0(b) of 

the 1934 Act, and the courts have implied a 

private right of action under S l0(b) and Rule 

l0b-5. Given the almost identicial language 

of Rule l0b-5 and § 17 (a) and the fact that 

Rule l0b-5 is a broader provision than§ 17(a) 

and that it covers both purchases and sales of 

securities, some courts see no practical point 

in denying the existence of such a private 

right of action under § 17. However, the 

practical significance of denying a private 

right of action under § 17 is that plaintiffs 

will be unable to circumvent the express civil 

remedies of both the 1933 and 1934 Acts. such 

a rationale is sufficient to satisfy the court 

that a private right of action should not be 

allowed under S 17(a). 

Woods, 489 F.Supp at 1287. 

The court further found that a plaintiff may seek 

injunctive relief under S 7 (a) along with er iminal prosecution 

in the case of willful violations: 

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A072A 

Furthermore, an aggrieved purchaser has a 

private action under SS 11 and 12 of the 1933 

Act and § lO(b) of the 1934 Act subject to 

certain congressional and judicial 

limitations. If these provisions do not 

supply such a purchaser with a cause of 

action, it is because congress or the Supreme 

court did not intend the purchaser to have a 

cause of action. such a purchaser should not 

be allowed to do by implication under S 17 

what he is expressly not permitted to do by 

the terms of the above-mentioned provisions 

which provide civil matters. 

The language of § 17 gives no indication 

that congress intended to create a private 

cause of action for violation of S 17 . . . . Furthermore, an implied private cause of 

action under § 17 (a) is unnecessary to ensure 

the fulfillment of congress' purpose in 

adopting the federal securities laws and, 

therefore, is unnecessary •... 

Id. at 1288. Quoting Dyer v. Eastern Trust and Banking company, 

336 F.Supp 890. 

The plaintiffs argue that the court should find a 

private cause of action under S 17(a) based on Seiffer v. 

Topsy's International, Inc., 487 F.Supp 653 (D. Kan., 1980). 

That case was decided prior to Woods, 489 F.Supp 1270, and did 

not consider a private cause of action under § 17 (a) absent a 

§ lO(b) claim. Section 17(a) was combined with a S lO(b) action 

and whether there was a private cause of action under S 17 (a) 

was found to be irrelevant because of its similarity to a 

S lO(b) action. Further, the court in woods considered its 

Seiffer opinion when making its finding that no private cause of 

action exists under § 17 (a). This court finds the reasoning in 

woods to be applicable and holds that no private cause of action 

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A072A 

(Rev.8182) 

exists under§ 17(a). 

Next before the court is the consideration of 

plaintiffs' claims under § 12 ( 2). Defendant Bank argues that 

plaintiffs' claim under this section is barred by the statute of 

limitations, that the bonds in issue do not qualify as 

tax-exempt industrial revenue bonds under the 1933 Act, and 

further, that it was not a seller or a direct participant in the 

sale of the bonds. 

The court will first consider the questions 

surrounding the statute of limitations. Section 13 of the 1933 

Act, 15 u.s.c. S 77m provides in pertinent part: 

No action shall be maintained to enforce any 

liability created under .•. section 12(2) 

•.. unless brought within one year after 

the discovery of the untrue statement or the 

omission, or after such discovery should have 

been made by the exercise of reasonable 

diligence • • . . In no event shall any such 

action be brought to enforce a liability 

created under Section 12 ( 2) . . . more than 

three years after the sale. 

The complaint in this case was filed on October 1, 1985. 

Defendant Bank's Exhibit c attached to its suggestions in 

Support of its Motion for summary Judgment indicates purchases 

of the bonds made prior to October 1, 1982. Additionally, 

Exhibit E, attached to defendant Bank's reply brief, contains 

the minutes of a December 7, 1983 meeting in which the 

bondholders were advised that a notice of default was sent 

because of 60l's failure to file the proper financial statements 

for Midwest, that Midwest was not then operating, that the 

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AO 72A 

prospect of receiving the December 15, 1983, principal and 

interest payment was uncertain, that the $95,000 payment made by 

the defendant Bank had been diverted, and that the appraisal 

given to the City had overstated the business' value. 

As of the date of this meeting, the bondholders, in 

the exercise of reasonable diligence, should have discovered the 

fraud. Plaintiffs assert that the date of delivery of the bonds 

is crucial and further discovery is required to establish this 

date. The court finds this argument unpersuasive. Plaintiffs 

are in a position to know when they received the bonds and to 

bring such evidence before the court. Additionally, the 

relevance of the delivery date is questionable in light of 

plaintiffs' knowledge of the condition of Midwest as of 

December , 19 8 3. The court finds that plaintiffs' claims under 

S 12(2) are barred by the applicable statute of limitations. 

Plaintiffs have also asserted a claim under the 

Racketeer Influenced & corrupt Organizations Act [hereinafter 

RICO], 18 U.S.C. § 1961 et seq. To prove a violation of the 

substantive RICO statute, 18 u.s.c. § 1962, the plaintiff must 

prove: 

(1) the existence of an enterprise which 

affects interstate or foreign commerce; (2) 

that the defendant [was 'employed by' or] 

'associated with' the enterprise; (3) that the 

defendant participated in the conduct of the 

enterprises' affairs; and (4) that the 

participation was through a pattern of 

racketeering activity, i.e., by committing at 

least two acts of racketeering activity 

designated in 18 u.s.c.A. § 1961(1). 

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AO 72A 

Maxwell v. Southwest National Bank, Wichita, Kansas, 593 F.Supp 

25 0, 256 ( D. Kan., 1984) ( quoting Alcorn county Mississippi v. 

United States Interstate Supplies, 731 F.2d 1160, 1167-68, 

quoting United States v. Phillips, 664 F.2d 971 (5th Cir. 

1981)). The United States Supreme court in Sedima v. Imrex co., 

105 s.ct. 3275, (1985), emphasized that RICO's purpose is not 

aimed at the isolated offense. The court at note 14 indicated 

that two isolated acts of racketeering activity do not 

constitute a pattern, rather, it is the factor of continuity 

plus relationship which combines to produce a pattern. 

Multiple acts implementing the same fraudulent scheme 

will not suffice to establish a pattern of racketeering 

activity. Northern Trust Bank/O'Hare, N.A. v. Inryco, Inc., 615 

F.Supp 828, 833 (D. Ill., 1985). A pattern presumes repeated 

criminal activity, not merely repeated acts to carry out the 

same criminal activity. Professional Assets Management, Inc. v. 

Penn Square Bank, 616 F.Supp 1418, 1421 (D. Okl., 1985). See 

also Allington v. carpenter, 619 F.Supp 474 (D. Cal., 1985). 

In the instant case, all allegations raised by 

plaintiffs against the defendant Bank are the result of its 

involvement in one alleged criminal enterprise. Plaintiffs have 

failed to allege a pattern of racketeering 

allegations refer only to a single scheme. 

activity as 

rt follows 

the 

that 

summary judgment must be granted in defendant's favor on this 

claim. 

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DES:JAM:rs 

A072A 

Plaintiffs remaining claims are based on Kansas law, 

in particular, K.S.A. 17-1268(a} and common law fraud. As no 

federal claims remain, it is within the court's discretion to 

determine whether to exercise pendant jurisdiction over the 

state claims. United Mine workers of America v. Gibbs, 383 U.S. 

715 (1966}. Where federal claims are dismissed prior to trial, 

it is also appropriate to dismiss the state claims. Id. at 

726. The court declines to exercise pendant jurisdiction over 

plaintiffs' state claims and finds that they must likewise be 

dismissed. 

IT IS BY THE COURT THEREFORE ORDERED that the motion 

of defendant Mission Bank for summary judgment is hereby granted. 

DATED: 

Kansas. 

This 14th day of April, 1986, at Kansas City, 

DALEE. SAFFELS 

United states Di 

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