Opinion ID: 685627
Heading Depth: 2
Heading Rank: 4

Heading: Summary Judgment as to Merrill Lynch on Closing Fraud Claim

Text: 35 The Becherer plaintiffs accuse Merrill Lynch of violating its responsibilities under 17 C.F.R. Secs. 240.10b-9 4 and 240.15c2-4 5 in two respects. First, they allege that Merrill Lynch closed the interim escrow account despite the fact that the offering was not fully subscribed until April 1985. Second, the Becherer plaintiffs allege that Merrill Lynch permitted the sale closing to occur and accepted the balance of its fee despite knowing that the hotel was not substantially complete. 36 In addressing these claims, the District Court focused on the latter claim and found that 37 Rules 10b-9 and 15c2-4 protect investors' funds when securities are sold subject to a minimum sales condition. Merrill Lynch satisfied these rules on February 15, 1985, when the minimum sales conditions were met and the escrow was closed, thus irrevocably binding the investors. The conduct that plaintiff class 6 claims violated these rules occurred at or near the October 31, 1986 closing of title. Rule 10b-9 and 15c2-4 do not apply to Merrill Lynch's conduct, which occurred after the February 15, 1985 closing of escrow. Thus, plaintiff class' Rule 10b-9 and 15c2-4 fraud claim must be dismissed.... 38 Becherer, 799 F.Supp. at 770. 39 Before discussing the Becherer plaintiffs' arguments, we need to review some of the background underlying this case. Two relevant escrow accounts existed in this case. The first one is often referred to as the interim escrow account. Merrill Lynch acted as agent for this account. Merrill Lynch closed the offering and the interim escrow account after the minimum subscription level was met and TMC approved the investors for financing. The contents of the interim escrow account were then transferred into the closing escrow account. Midwest served as escrow agent for this second escrow account. In the PPM, Merrill Lynch specifically disclaimed any responsibilities for supervising the status of the completion of the hotel: Neither Selling Agent nor any of its affiliates has undertaken to Investors to monitor construction of the Hotel or to inspect the Hotel upon its completion. 40 The Becherer plaintiffs present three reasons to support their contention that the District Court erred in dismissing their fraud claims against Merrill Lynch. First, they claim that the District Court's own findings of fact state that the minimum subscription level was not attained until April 1985, almost two months after the closing of the interim escrow account. 41 Although the Becherer plaintiffs have not identified the findings of fact to which they refer, we assume they are referring to the findings in the District Court's August 7, 1992 order. In those factual findings, the District Court does state that [b]etween February, 1984, and April, 1985, plaintiff class entered into contracts with SSG for the purchase of Hotel Units in The Registry Hotel.... Becherer, 799 F.Supp. at 762. Later on in his factual findings, however, the district judge declared, I find that investors became 'irrevocably bound' to complete their purchases on February 15, 1985, the day their funds were delivered into escrow.... Id. at 763. This latter finding would seem to imply that the offering was sufficiently subscribed on February 15, 1985, when the interim escrow account was closed. 42 While it can be argued that these findings are in conflict, they can also be reconciled. It is conceivable that the offering was sufficiently subscribed at the time the interim escrow account was closed, but that investors were allowed to back out after that date. Merrill Lynch then found substitute investors, which could explain why the District Court found that investors executed Unit Sale Agreements as late as April 1985. 43 It is also conceivable that the minimum subscription level was something less than 100%. The parties have not defined that term for us, and we decline to hunt through the thousands of pages that comprise the record in this case. If minimum subscription level does not mean fully subscribed, then it is possible that new investors could have been accepted after the closing of the interim escrow account. 44 Because the Becherer plaintiffs have raised this issue on appeal, they bear the burden of establishing that such explanations are clearly erroneous. Contrary to the Becherer plaintiffs' assertions, the District Court never made an explicit finding about when the minimum subscription level was reached. The Becherer plaintiffs have not directed our attention to any evidence that addresses this issue, nor have they said why the above reconciliation of the District Court's findings is not supported by the record. 45 In their second argument, the Becherer plaintiffs allege that the District Court erroneously concluded that Rules 10b-9 and 15c2-4 apply only to a minimum sales condition. This argument misconstrues both the facts of this case and the context of the District Court's opinion. While the District Court did state that Rules 10b-9 and 15c2-4 protect investors' funds when securities are sold subject to a minimum sales condition, put in context it is clear that the District Court was actually holding that the securities regulations apply to the interim escrow account and not to the closing escrow account. This interpretation is consistent with the plain language of the regulations, and the Becherer plaintiffs have provided us with no reasons and no authority to find that this interpretation is erroneous. 46 In their third argument, the Becherer plaintiffs contend that Merrill Lynch kept itself informed about the progress of the hotel construction and that it accepted its fees and allowed the premature closing to occur despite knowing that the closing conditions had not been met. Whether or not Merrill Lynch kept informed about the hotel progress is irrelevant. What is important is whether Merrill Lynch represented to the investors at any time that Merrill Lynch was assuming responsibility for monitoring the construction progress. As we stated earlier, Merrill Lynch specifically disclaimed this responsibility in the PPM. The Becherer plaintiffs have not pointed us to any contrary evidence. 47 We affirm the District Court's decision to dismiss the Becherer plaintiffs' securities claims against Merrill Lynch.