Opinion ID: 618229
Heading Depth: 3
Heading Rank: 3

Heading: State Securities Fraud

Text: As in his federal securities claim, Weiss argues that the district court erred in dismissing his securities fraud claim under Ariz. Rev. Stat. § 44-1991 because Arizona securities law does not require a showing of damages in a rescission suit. Unlike federal law, rescission under Arizona securities law does not require the existence of damages. [12] Under section 44-1991(A)(2) of the Arizona Revised Statutes, a plaintiff need not demonstrate the existence of damages. See Aaron v. Fromkin, 196 Ariz. 224, 228 (Ct. App. 2000). “[E]stablishing statutory securities fraud requires only that a misrepresentation of material fact was made in the sale of securities.” Id. (citing State v. Superior Court of Maricopa Cnty., 123 Ariz. 324, 331 (1979)). Thus, because the district court erroneously dismissed Weiss’s securities fraud claim for lack of damages, we remand this claim to the district court.2 D. Common Law Fraud & Negligent Misrepresentation Weiss claims that the district court also erred in granting summary judgment on his common law fraud claim for lack of damages. Citing Lehnhardt v. City of Phoenix, 105 Ariz. 2 With respect to loss causation in a suit for rescissionary damages, Arizona law directs the court to consider “equitable considerations” to determine whether loss causation is required. See Grand v. Nacchio, 214 Ariz. 9, 28 (Ct. App. 2006). We leave that determination to the district court on remand. 20632 STRATEGIC DIVERSITY v. ALCHEMIX CORP. 142, 144 (1969), Weiss argues that his claims for common law fraud and negligent misrepresentation do not require a showing of damages. We disagree and thus affirm the district court’s ruling. [13] Weiss reads Lehnhardt too broadly. Lehnhardt dealt with innocent misrepresentation, not fraud. It held that “a transaction induced by the material though innocent misrepresentation of a party is voidable against that party.” Id. In other words, one may seek to rescind on the basis of an innocent misrepresentation, and proof of all the “nine elements of actionable fraud” is not essential.3 Assuming arguendo that Weiss’s claim was for innocent misrepresentation, it does not necessarily follow that damages are not required. As other courts have recognized, the element required in a common law fraud action that is not required in an innocent misrepresentation claim is the speaker’s knowledge of the falsity. See, e.g., Lundy v. Airtouch Communs., Inc., 81 F. Supp. 2d 962, 968 (D. Ariz. 1999). In contrast, “if the party seeking [rescission] asserts only fraudulent misrepresentation . . . then proof of all nine of the elements of actionable fraud appears to be required . . . .” Id. Given that common law fraud pertains to fraudulent conduct, we conclude that damages are a required element of the claim. In addition, Weiss claims that the district court erred in dismissing his negligent misrepresentation claim for a lack of damages. His argument is without merit. “[A] cause of action for negligent misrepresentation includes damage as an element.” Fromkin, 196 Ariz. at 229. 3 The elements of common law fraud under Arizona law are: “(1) A representation; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) his consequent and proximate injury.” Staheli v. Kauffman, 122 Ariz. 380, 383 (1979) (internal quotations omitted). STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20633 [14] Not only do the above claims require a showing of damages, Arizona law requires an out-of-pocket, not rescissionary, measure of damages with respect to these claims. See Standard Chartered PLC, 190 Ariz. at 35 (trial court did not err in granting partial summary judgment limiting damages to an out-of-pocket measure). As Weiss failed to present evidence of out-of-pocket damages, summary judgment on these claims was proper. E. Mutual Mistake Under Arizona law, “[m]utual mistake of fact is an accepted basis for rescission.” Renner v. Kehl, 150 Ariz. 94, 96 (1986). “[A] contract may be rescinded when there is a mutual mistake of material fact which constitutes ‘an essential part and condition of the contract.’ ” Id. at 97. “However, the mistake must not be one on which the party seeking relief bears the risk under the rules stated in § 154(b) of the Restatement.” Nelson v. Rice, 198 Ariz. 563, 566 (Ct. App. 2000). “The most obvious case of allocation of the risk of a mistake is one in which the parties themselves provide for it by their agreement.” Restatement (Second) of Contracts, § 154, cmt. b. [15] Here, Weiss argues that an essential part of the agreement to surrender the Note for an equity investment was a mutual understanding that Western’s decision to invest a total of $36 million in Alchemix had been made. Looking to his 2001 and 2002 agreements that accompanied the investment in Alchemix and purchase of stock, both agreements appear to allocate the risk of mistake on Weiss. Thus, summary judgment on Weiss’s claim of mutual mistake was proper because Weiss bore the risk of any mistake. F. Failure of a Condition Precedent [16] The district court held that failure of a condition precedent was not a recognized cause of action. The district court 20634 STRATEGIC DIVERSITY v. ALCHEMIX CORP. did not err in its conclusion in that Arizona law employs the failure of a condition precedent as a defense to contract formation. See, e.g., Watts v. Hogan, 111 Ariz. 536, 538 (1975). Weiss fails to show how Arizona law considers this an independent ground for relief. Accordingly, we affirm the district court’s grant of summary judgment on this claim. G. Equitable Restitution/Unjust Enrichment [17] Weiss claims that the district court erroneously dismissed his equitable restitution and unjust enrichment claims. Here as well, Weiss fails to cite any relevant Arizona law on this point. Furthermore, he fails to adequately brief the point in his opening brief. See United States v. Ullah, 976 F.2d 509, 514 (9th Cir. 1992) (matters on appeal that are not specifically and distinctly argued in appellant’s opening brief are not considered). Accordingly, we conclude the district court did not err in dismissing these claims. H. Attorneys’ Fees Because we find that remand is appropriate on some of the claims above, we vacate the award of attorneys’ fees and dismiss the appeal of this award as moot.