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Nature of Suit Code: 140
Nature of Suit: Negotiable Instruments
Cause of Action: 

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FILED 

Unit.eel States Court of Appeals Tenth Circuit 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

OCT 1 6 1991 

ROBERT L. HOECKER 

ZIONS FIRST NATIONAL BANK, N.A. as Clerk 

INDENTURE TRUSTEE FOR NOTEHOLDERS 

OF CFS KEEGAN'S GLEN I, LTD., 

Plaintiff-Appellee, 

v. 

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) 

) 

) 

) 

) 

) 

) 

JOSEPH N. BAILEY, POLLY G. BAILEY, ) 

J. THOMAS BALZLI; MARSHA D. BALZLI; ) 

WALTER E. BAUMANN; LYNETTE A. BAUMANN; ) 

ROBERT JOSEPH CATER; BARBARA KAY CATER; ) 

MICHAEL P. COUCH; SUSAN M. COUCH; ) 

JOBE N. CURTIS; KENNETH R. DIDDIE; ) 

PAMELA J. DIDDIE; GERALD E. GAIGE; ) 

MANOOCHEHR KHATAMI; STEVE F. MONTOYA, ) 

JR.; JAMES P. O'CONNELL; JULIA J. ) 

O'CONNELL; DAVE A. ROBERTS; CATHY M. ) 

ROBERTS; KYOO SANG RO; JOHN R. SANDERS; ) 

CYNTHIA ROSS SANDERS; C. J. SANDERS; ) 

GWEN B. SANDERS; PAUL T.SIEMERS; SURI ) 

Y. SURAINDER; GARY SYMONDS; CHESTER K. ) 

WHITE, and ELSIE D. WHITE, ) 

Defendants, 

CLAYTON CHING; DAVID R. HICKS; 

JANET K. HICKS; HARRY E. LIVINGSTON; 

SANDRA O. LIVINGSTON; MARGARET ANN 

SCHMITT; PAUL A. STEWART, Trustee for 

the STEWART FAMILY TRUST, and JOHN R. 

THOMPSON, JR., 

Defendants-Appellants. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

ORDER AND JUDGMENT* 

No. 90-4087 

(D.C. No. 88-C-l0W) 

(Dist. of Utah) 

Before McKAY, LOGAN and MOORE, 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 estoppal. 10th Cir. R. 36.3. 

Appellate Case: 90-4087 Document: 010110091361 Date Filed: 10/16/1991 Page: 1 
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This is an appeal by certain investors in a bankrupt limited 

partnership from a judgment of the district court which held the 

investors liable for the payment of notes pledged by the 

partnership as security for loans to the partnership. The 

investors raised a number of defenses which the district court 

held unavailing upon cross motions for summary judgment. After a 

subsequent trial on one issue remaining after plaintiff's motion 

for summary judgment was partially granted, the district court 

entered judgment in full against the investors. Finding no error 

in the district court's analysis of the principal issues properly 

presented to it, we affirm. Because the record does not include 

findings of fact on one specific issue pertinent to the liability 

of one of the defendants, however, we reverse that judgment and 

remand for findings of fact. 

Investors (defendants) purchased limited partnership 

interests in CFS Keegan's Glen I, Ltd. by paying a portion of 

their capital contribution in cash and the remainder in the form 

of promissory notes (Investors' notes) payable to Keegan's Glen. 

Keegan's Glen in turn borrowed $600,000 from twelve pension plans 

(Noteholders) in exchange for which Keegan's Glen executed 

indenture notes secured by the Investors' notes. The partnership 

and appellee, Zions First National Bank, then executed an 

indenture agreement by which the bank agreed to serve as indenture 

trustee for the Noteholders. 

Keegan's Glen ultimately defaulted on the indenture notes, 

causing the bank to proceed against all the limited partners to 

foreclose upon the Investors' notes. While certain of the 

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Appellate Case: 90-4087 Document: 010110091361 Date Filed: 10/16/1991 Page: 2 
" 

limited partners responded with payment, others refused to do so. 

The Bank, in its representative capacity as trustee for the 

Noteholders, then commenced this action for collection. 1 The 

Investors asserted several counterclaims against the bank in its 

individual capacity. 

Cross-motions for summary judgment were filed by the parties. 

Defendants asserted their right to judgment based upon a number of 

claims: alleged securities violations committed by Keegan's Glen; 

"failure of consideration, and/or frustration of partnership 

purpose, and/or breaches of fiduciary duty;" lack of 

ripeness; satisfaction; the statute of frauds; and invalidity of 

claim. Plaintiff asserted there were no material disputes of fact 

and that it was entitled to judgment upon the Investors' notes as 

a matter of law. 

The court partially granted Zions' motion for summary 

judgment but reserved for trial the question of whether Keegan's 

Glen partnership interests were sold in violation of the 

securities laws and whether the Investors could assert such a 

violation as a defense to Zions' recovery on their notes. 

Following trial, the district court concluded§ 29(c)(2) of the 

Securities Exchange Act, 15 U.S.C. § 78cc(c)(2), prohibited 

Investors from asserting the alleged securities violations as a 

defense because the Noteholders were without actual knowledge of 

the alleged violations at the time they extended their loans. The 

court consequently granted Zions judgment in full on the notes 

1 After suit was filed, a 

investors entered into 

present eight defendants 

number of the formerly recalcitrant 

settlements with the Bank until only the 

remain in the action. 

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Appellate Case: 90-4087 Document: 010110091361 Date Filed: 10/16/1991 Page: 3 
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and awarded attorney fees and costs in accordance with the terms 

of the indenture trust. 

Investors' primary strategy on appeal seems to be to obscure 

two facts. First, they refuse to acknowledge Zions appears in 

this action only in its representative capacity. Second, they 

blur the legal effect of the pledging of the Investors' notes as 

2 security for loans by the Noteholders. The overall effect of the 

Investors' efforts is to complicate this case to the point of 

abject confusion. 

There is only one valid issue before us applying to all 

Investors: Are they entitled to raise the alleged securities 

violations of Keegan's Glen, or are they estopped by § 29(c)(2) 

from doing so because the Noteholders had no knowledge of the 

alleged violations? The district court's holding on this issue 

moots most of Investors' arguments. Naturally, were we to reverse 

that holding, the issue of validity of the offering and the other 

defenses to recovery would then arise, but the efforts expended on 

appeal by Investors to persuade us that we should consider 

11 t 1 . h b t f · t· 3 co a era issues as een a was e o precious ime. 

2 Investors argue: "There is something inherently wrong with 

enforcing contracts, otherwise illegal as violative of State and 

Federal registration laws, just because the perpetrator is 

bankrupt, dead and gone." Nonetheless, it is undisputed that the 

Noteholders advanced $600,000 to the partnership partially in 

reliance upon the security provided by the Investor notes. As we 

view this action, it is not one to enforce the investment 

contracts but to liquidate the security for Noteholders' loans. 

3 In addition to those arguments, Investors strongly contended at 

oral argument that Utah law should govern this case, citing Utah 

Code Ann. § 61-l-22(b). We have been unable to find where that 

issue was raised in the district court, and Investors' brief fails 

to show us as required by 10th Cir. R. 28.2(d). 

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Appellate Case: 90-4087 Document: 010110091361 Date Filed: 10/16/1991 Page: 4 
It has been established in the record that Zions' interest in 

the collection of the Investors' notes is only as a representative 

of the beneficiaries of the indenture trust. 4 Although Investors 

argue that the "Zions, as Trustee for the Noteholders, stands in 

the shoes of the Partnership and can claim no greater rights 

against the Defendants than those that would exist if the general 

partners were before the Court," absolutely no authority is cited 

to support that statement. 

Thus, the propriety of the district court's holding turns on 

the single issue of whether it correctly interpreted§ 29(c)(2) to 

call into question the knowledge of the Noteholders rather than 

that of Zions. Under the facts of this case, we believe the 

5 answer is a resounding yes. 

We read the clear language of§ 29(c)(2) as an unassailable 

directive to that conclusion. The statute says: 

Nothing in this chapter shall be construed ... to 

afford a defense to the collection of any debt or 

obligation or the enforcement of any lien by any person 

who shall have acquired such debt, obligation, or lien 

in good faith for value and without actual knowledge of 

4Indeed, in comments from the bench in response to Investors' 

counsel, the trial judge stated: 

[W]hatever Zions may have done in this thing ... it's 

very clear to me that Zions is simply a collection 

system for these people that testified in this courtroom 

[Noteholders). And that they are here as a trustee. 

And part of this PPM that we've talked so much about is 

that your client's notes have been assigned as security 

to pay these people that have loaned money." 

5 The district court found that none of the Noteholders had 

knowledge of any violations by Keegan's Glen, and that finding has 

not been seriously challenged. 

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Appellate Case: 90-4087 Document: 010110091361 Date Filed: 10/16/1991 Page: 5 
the violation of any provision of this chapter or any 

rule or regulation thereunder affecting the legality of 

such debt obligation, or lien. 

The statute does not, by its own terms, apply only to holders in 

due course within the definition of the Uniform Commercial Code; 

to "a party who is essentially a stranger to the original 

transaction;" or to parties who "hold" a lien, as argued by the 

Investors. The only requirements of. the statute are that the 

party asserting a lien or debt have acquired it (1) in good faith; 

(2) for value; and (3) without actual knowledge of a violation. 

We are unpersuaded by the Investors that any other requirements 

should be read into the statute. See Wilson v. Stocker, 819 F.2d 

943, 948 (10th Cir. 1987)("When the terms of a statute are clear 

and unambiguous, that language is controlling absent rare and 

exceptional circumstances," quoting, Howe v. Smith, 452 U.S. 473, 

483 ( 1981)). 

In this case, it was the Noteholders who acquired the debt 

represented by the Investors' notes, not Zions. Thus, it would 

require a labored construction of§ 29(c)(2) to apply it to the 

bank. No such construction is required to conclude the 

Noteholders are the parties to whom the protection of the statute 

is intended to apply. See Gunter v. Hutcheson, 674 F.2d 862, 874-

76 (11th Cir.), cert. denied, 459 U.S. 826 (1982). 6 

One of the Investors, the Stewart Family Trust, argues 

6 In Gunter, the Eleventh Circuit held the Federal Deposit 

Insurance Corporation was entitled to assert§ 29(c)(2) against 

note makers who claimed the notes should be violated for 

securities law violations. The FDIC had acquired the notes, which 

had been given to purchase an interest in a subsequently failed 

bank, through the process of liquidation. 

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Appellate Case: 90-4087 Document: 010110091361 Date Filed: 10/16/1991 Page: 6 
summary judgment was improperly granted against it since its debt 

is made unenforceable by Utah Code Ann.§ 70A-8-319 because the 

signature on the investment contract of the trustee, Dr. Paul A. 

Stewart, was forged. 7 Counsel argues the district court erred in 

holding Dr. Stewart had ratified the documents by making payments 

to the partnership. She contends under Utah law ratification 

cannot occur unless the principal has knowledge of all material 

facts and an intent to ratify. She urges that Dr. Stewart did not 

know his signature had been forged until his deposition was taken. 

The bank, however, points to several facts demonstrating Dr. 

Stewart's awareness of the consummated transaction. Specifically, 

the bank points to payments made by Dr. Stewart in 1983 and 1984 

as required by the Investors' notes; the utilization of tax 

deductions arising from the investment; Dr. Stewart's testimony 

that he was "in the deal;" and that he never advised his sales 

representative that his signature was not genuine. 

The record on this issue is unclear. The Stewart Family 

Trust asserts the trial court decided the issue of ratification on 

summary judgment; however, the order disposing of the motions is 

silent on the question. The findings of fact entered following 

trial state: 

In connection with their purchase of limited partnership 

7The Stewart 

states the 

writing if: 

Trust does not, however, cite § 70A-8-319(d) which 

sale of a security is enforceable without a signed 

the party against whom enforcement is sought admits in 

his pleading, testimony, or otherwise in court that a 

contract was made for sale of a stated quantity of 

described securities at a defined or stated price. 

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Appellate Case: 90-4087 Document: 010110091361 Date Filed: 10/16/1991 Page: 7 
interests in Keegan's Glen, each of the 

[Investors] signed (or, as in the case 

Family Trust, ratified) a "Security 

provided for jurisdiction and venue 

entitled court, and a "CFS Keegan's 

Ching defendants 

of the Stewart 

Agreement" that 

in the above 

Glen I, Ltd. 

Subscription Agreement for Limited Partnership 

Interests." 

(Emphasis added). This is the only written reference to 

ratification that we can find, and the parties have provided us 

with no other citation in the record where the trial court made 

additional findings. Thus, while there certainly appears to be 

evidence that would support a conclusion of ratification by the 

Stewart Family Trust, without specific findings on the contested 

issues, we have no basis for determining whether the conclusion is 

erroneous. We believe, then, consistent with 

Fed. R. Civ. P. 52(a) we must partially remand this case for 

findings of fact on the issue of ratification. 

We have, however, considered the remaining issues raised by 

the Investors and find them without merit. Accordingly, the 

judgment of the district court is AFFIRMED except for that portion 

of the judgment against the Stewart Family Trust. That portion of 

the judgment is REVERSED AND REMANDED for findings of fact on the 

issue of ratification. 

Entered for the Court 

John P. Moore 

Circuit Judge 

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