Source: https://casetext.com/case/arthur-childrens-trust-v-keim
Timestamp: 2019-03-21 18:15:46
Document Index: 556835291

Matched Legal Cases: ['§ 78', '§ 240', '§ 78', '§ 1927', '§ 77', '§ 77', '§ 78', '§ 78', '§ 78', '§ 1927', '§ 1927', '§ 552', '§ 552']

Arthur Children&apos;s Trust v. Keim, 994 F.2d 1390 | Casetext
Arthur Children&apos;s Trust v. Keim
994 F.2d 1390 (9th Cir. 1993)
ReadReadAttorney AnalysesAnalyses0lockCiting BriefsBriefs14lockCiting CasesCiting Cases37
Arthur Children&apos;s Trustv.Keim
United States Court of Appeals, Ninth CircuitJun 1, 1993
Daryl Manhart and Edwin D. Fleming, Burch Cracchiolo, Phoenix, AZ, for defendants-appellees Howard and Jo Ann Keim.
David R. Schwartz, Udall, Shumway, Blackhurst, Allen Lyons, Mesa, AZ, for defendants-appellees Richard and Golda Faye Godfrey.
NOONAN, Circuit Judge:Page 1392
In these consolidated appeals Arthur Children's Trust et al. (the Investors) appeal summary judgments in favor of Howard Keim (Keim) and his wife, JoAnn, and in favor of Richard Godfrey (Godfrey) and his wife, Golda Faye. Russell Piccoli (Piccoli), Arthur Children's Trust's attorney, appeals the award of Rule 11 sanctions against himself. The underlying action against Keim is for securities fraud in violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1980). He is alleged to have been a control person as defined by 15 U.S.C. § 78t of an issuer of fraudulent securities. Godfrey is alleged to have abetted the securities fraud and to be liable for negligent misrepresentations as to two appraisals benefiting the issuer of the securities. We reverse the summary judgment in favor of Keim and the award of sanctions against Piccoli and remand. We affirm the summary judgment in favor of Godfrey.
Except as expressly provided herein, neither of the Venturers shall have the authority to act for the other Venturer, but instead the management of the business affairs of the Venture shall be vested in a Management Committee . . . Any major or significant business decisions affecting the Venture shall be made by the Management Committee, including, but not limited to . . . incurring of any obligation on behalf of the Venture in excess of Twenty Thousand Dollars ($20,000), the employment of professionals and other employees, and any other decision which may materially affect the Venture.
The purpose of the Venture was a real estate development south of Santa Fe which, when completed, would include private residences, retail shops, a hotel and — as a centerpiece — a stadium and accompanying facilities to constitute a major equestrian convention center — hence the project's appealing name, "The Horses," in Spanish.
In addition to being a member of the Management Committee of the Venture, Keim was chairman of its Development Committee. He had a 10 percent equity interest in the enterprise. He was also owed a $100,000 "development fee" by the Santa Fe company, a fee which he asserted in a letter to Larry LaPrade of November 27, 1985 had been assumed by LaPrade, apparently meaning that the Venture had assumed it. A budget of the Venture reflects only one fee for development — $100,000 owed Keim.
[V]arious discussions were had between members of the management committee, including Howard Keim, with respect to the raising of seed capital for the project. As time progressed throughout 1985, the project having continued to incur significant development expenses and no construction or permanent financing having been obtained for the project, these discussions among the members of the management committee included "rolling over" previous loans secured for the project by Michael Smith and Larry LaPrade together with the raising of new monies through additional loans.
Mr. Keim — who was constantly pressing the venture for payment of his own fees — was generally an advocate of Smith and LaPrade's lending activities, his comments essentially being to get it done.
After discovery had been conducted both in the LaPrade and Smith bankruptcies and in this case, Keim on January 21, 1991 moved for summary judgment. Piccoli, on behalf of the Investors, filed a response on March 4, 1991. Included with it was an unsigned affidavit of Mark Conkling, which was relied on in the response. Also included was an affidavit of Piccoli, submitted "pursuant to Fed. R.Civ.P. 56(f)," stating that he had interviewed Conkling on July 31, 1989 and memorialized Conkling's answers and sent him a draft affidavit reflecting them. Conkling had not responded. When Keim moved for summary judgment, Piccoli asked Conkling to sign the draft. Conkling refused, and also rejected a second draft which Piccoli sent him. The second draft, unsigned, was what Piccoli now submitted, noting that Conkling said it was "inaccurate," but stating that in Piccoli's belief it was "true and accurate." Piccoli noted that he was in New York preparing for trial as he faxed to Arizona his own affidavit to the district court.
On May 30, 1991, the district court found that Keim had no control over the financing and was therefore not a control person. Moreover, the court found "nothing to indicate that Keim knew anything about `false representations.' Therefore, he is not liable as a controlling person." The court did not discuss the Venture's role as issuer of the notes. The court granted Keim's motion for summary judgment and denied the Investors' cross-motion.
The Investors moved to alter or vacate the judgment. Their motion was denied. The district court proceeded to hold a hearing on whether it should sanction Piccoli under Fed. R.Civ.P. 11. On September 21, 1991 the court found that Piccoli, in submitting the Conkling affidavit, had submitted a false, unsigned affidavit and did so although he could have moved for more time to conduct discovery. The court also held that Piccoli's summary of Keim's deposition was incorrect. The use of the unsigned affidavit and the summary was stamped by the court as an attempt "to manufacture facts" warranting Rule 11 sanctions. The court also concluded that Piccoli had not made reasonable inquiry, as required by Rule 11, before filing his opposition to Keim's motion for summary judgment. According to the court, Piccoli "knew at that time that he could not establish control person liability against Keim." Rule 11 sanctions were, in the court's view, appropriate for the failure of Piccoli at this point to concede his case. Finally, the court concluded that Piccoli should pay personally for the expense he had inflicted on Keim by opposing Keim's summary judgment motion because Piccoli had violated 28 U.S.C. § 1927, making personally liable any attorney "who so multiplies the proceedings in any case unreasonably and vexatiously." The court awarded attorney's fees of $24,000 against Piccoli and directed that Piccoli's conduct be brought to the attention of the State Bar of Arizona.
ANALYSIS The Case Against Keim
The Issuer. The notes and mortgages given to the Investors by the Venture in 1985 and 1986 were investment contracts constituting securities under the Securities Act of 1933, 15 U.S.C. § 77b(1) (Supp. 1992). SEC v. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946); Safeway Portland Employees' Fed. Credit Union v. C.H. Wagner Co., 501 F.2d 1120, 1123 (9th Cir. 1974). Accordingly, the Venture was an issuer under the statute. 15 U.S.C. § 77b(4) (1981).
The Issuer's Scienter. If the representations made by LaPrade were false, the issuer had the scienter that Ernst Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) requires for Rule 10b-5 liability. Id. at 212-14, 96 S.Ct. at 1390-91. The issuer is chargeable with the knowledge of LaPrade, the head of its Management Committee, acting to market the issuer's securities. That LaPrade acted through Incor cannot insulate the issuer from his knowledge. The issuer is equally possessed of scienter if the providing of the appraisal reports to Incor for fund-raising is found to have been the providing of information not fraudulently but recklessly. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990), cert. denied, ___ U.S. ___, 111 S.Ct. 1621, 113 L.Ed.2d 719 (1991). Such recklessness would be established by showing that knowing of Incor's fund-raising, the issuer provided the reports to be read by laypersons in "`an extreme departure from the standards of ordinary care'" and with the danger of misleading the purchasers of the securities "`so obvious'" that the issuer must have been aware of it. Id. (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 225, 54 L.Ed.2d 155 (1977).
The Controlling Persons of the Issuer. In general, the determination of who is a controlling person for purposes of liability under 15 U.S.C. § 78t is an intensely factual question. See 4 Louis Loss Joel Seligman, Securities Regulation 1724 (1990). A director is not automatically liable as a controlling person. Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir. 1984) (a director who was uninvolved in the company's day-to-day cattle business and was without experience in the business and had nothing to do with the prospectuses issued to the doctor investors was not a controlling person, nor was a director who had minimal interaction with the company, due partly to ill health). Citing Burgess, Loss and Seligman observe: "Accordingly, although a person's being an officer or director does not create any presumption of control, it is a sort of red light." 4 Loss Seligman, supra, at 1724 (emphasis in original). It is not uncommon for control "to rest with a group of persons, such as the members of the corporation's management." Id. at 1722.
According to the minutes of the Management Committee for July 10, 1985, which Keim attended, there was explicit discussion of the "financing package" — necessarily a reference to the package to be put together by Incor, the company doing the financing. Sheet 16 of that package, dealing with the residential property of the project, was discussed in terms of expected profits. The amount to be raised was discussed. Keim specifically addressed the tapping of pension plan money. Keim also took the lead in stating what rate of interest should be paid.
Keim states that in fact he had no control over LaPrade, Smith and Incor and argues that this undisputed fact should relieve him of liability as a controlling person. Keim misunderstands the basis on which his liability is alleged. He is sued not because he controlled those marketing the investment contracts but because he was one of the persons controlling the issuer of the investment contracts. The Controlling Person's Scienter. To establish the liability of a controlling person, the plaintiff does not have the burden of establishing that person's scienter distinct from the controlled corporation's scienter. If the plaintiff had this obligation, the controlling person provision "would hardly make anyone liable who would not be so otherwise." G.A. Thompson Co. v. Partridge, 636 F.2d 945, 960 (5th Cir. 1981). But a defendant who is a controlling person of an issuer with scienter has the burden of proving his absence of scienter. Hollinger, 914 F.2d at 1575; Partridge, 636 F.2d at 960. Under the controlling person statute that means that Keim, as a person controlling the issuer, was subject to liability unless he establishes that he "acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. § 78(a) (1981).
Some of our earlier cases took the position that in proving the liability of a controlling person, the plaintiff has the burden of showing that the defendant does not come within the good faith exception. E.g., Christoffel v. E.F. Hutton Co., 588 F.2d 665, 668-69 (9th Cir. 1978). But it has now been established that this burden falls upon the controlling person. Hollinger, 914 F.2d at 1575. Although Hollinger is specifically directed to a broker-dealer in relation to its registered securities salesman, id. at 1575 n. 24, we have extended the holding beyond this context. See San Mateo County Transit Dist. v. DeArman, Fitzgerald and Roberts, Inc., 979 F.2d 1356 (9th Cir. 1992). There is no reason to construe the statute as though it were restricted only to broker-dealers and their salespersons. Congress was well aware of the special duties owed by a broker-dealer and could have put the rules on control person liability solely in that context if it so desired. See e.g., 15 U.S.C. § 78k and 78 o. Congress did not act in this restricted way. Those controlling an issuer of securities are liable for the conduct of the issuer and so are liable if an issuer intentionally or recklessly permitted the fraudulent marketing of its securities.
The Sanctions Imposed on Piccoli. Rule 11 of the Federal Rules of Civil Procedure requires a district court to impose sanctions upon any person signing a pleading, motion, or other paper if it is either frivolous or filed for an improper purpose. Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1365 (9th Cir. 1990) (en banc). The imposition of sanctions is reviewed for abuse of discretion. Id. at 1365-66. "A district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or a clearly erroneous assessment of the evidence." Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359 (1990). In granting Keim's motion for summary judgment and imposing sanctions upon Piccoli the district court failed to consider the argument advanced by Investors that Keim could be liable by virtue of his control over the Venture. We have held that Keim's control over the Venture precludes summary judgment in his favor. Piccoli's opposition to the motion was not frivolous. The district court's decision to impose sanctions for opposing summary judgment was based upon an erroneous view of the law and must be reversed as an abuse of discretion. Because the motion for summary judgment was properly opposed, Piccoli did not "unreasonably and vexatiously" multiply the proceedings. 28 U.S.C. § 1927 (Supp. 1992). The award of costs in favor of Keim under § 1927 also was an abuse of discretion.
Section I — Equestrian Center and Land Thirteen Million Dollars $13,000,000.00
Section II — Vacant Residential Lots (Sheet 16) One Million Seven Hundred Thousand $1,700,000.00
Arizona has adopted the Restatement of Torts, § 552, whose title is "Information Negligently Supplied For The Guidance of Others." As the first Arizona case to apply this provision observed, the Restatement originally stated the liability in terms of one who negligently "in the course of his business or profession supplies information," but revision inserted the term "false" between "supplies" and "information." Arizona Title Ins. and Trust Co. v. O'Malley Lumber Co., 14 Ariz. App. 486, 484 P.2d 639, 644 (1971); Restatement (Second) of Torts § 552. The duty established by the Restatement is a duty not to make a misrepresentation, a duty "not to misstate existing, ascertainable facts." O'Malley Lumber, 484 P.2d at 646. Explicitly adopting the Restatement (Second) and citing O'Malley Lumber with approval, the Arizona Supreme Court laid down the rule as governing one who "supplies false information for the guidance of others in their business transactions." St. Joseph's Hosp. v. Reserve Life Ins. Co., 154 Ariz. 307, 742 P.2d 808, 813 (1987).
The Investors say that their case now and "throughout" has been "that four out of five sections of the appraisal — the sections involving over 2,000 acres — failed to disclose that the values given were predicated on completion of the center." (Emphasis added). This phrasing of the Investors' position fails for two reasons: First, the Sheet 16, July 31, 1985 appraisal of the residential lots speaks of "Proposed Development" and gives a "Final Value Estimate" of the property "as developed." The August 31, 1985 appraisal of Lots 15 and 16 gives the "Retail Value" "as if fully developed and subdivided" and the "Introduction" refers to estimating the value of the property "as it will be developed into salable residential lots." The August 31, 1985 appraisal of Lots 4-12 describes what is being valued as "vacant commercial site at the Santa Fe Ranch" and gives the "Retail Value" "as if fully developed and ready for immediate sale and improvement." No reasonable person reading these reports would have understood that they were current valuations of "raw land," as now argued by the Investors; they were estimates of land as developed.