Court Opinion

ID: 3036988
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:55:27.060648+00
Date Added: 2024-06-11T11:40:55.825900
License: Public Domain

United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                   ___________

                                   No. 04-2019
                                   ___________

Michael Grassmueck, Bankruptcy        *
Trustee for the estates of W.J. Hoyt  *
Sons Management Co., Ltd. and         *
W.J. Hoyt Sons Ranches, MLP,          *
                                      *
            Appellant,                *
                                      * Appeal from the United States
      v.                              * District Court for the
                                      * District of Nebraska.
The American Shorthorn Association, *
a Nebraska corporation; Dr. Roger E. *
Hunsley, an individual,               *
                                      *
            Appellees.                *
                                  __________

                             Submitted: December 17, 2004
                                Filed: March 31, 2005
                                 ___________

Before WOLLMAN, MAGILL, and COLLOTON, Circuit Judges.
                          ___________

COLLOTON, Circuit Judge.

     Michael Grassmueck, a bankruptcy trustee, appeals from a grant of summary
judgment in favor of the American Shorthorn Association (“ASA”) and Dr. Roger
Hunsley, the ASA’s executive secretary and treasurer. Grassmueck is the bankruptcy
trustee1 for the estate of W.J. Hoyt Sons Management Co., Ltd., W.J. Hoyt Sons
Ranches, MLP, and numerous related entities. He brought this negligence action
against the ASA and Dr. Hunsley. The district court2 ruled that the Trustee’s claims
were barred by the equitable doctrine of in pari delicto and by the statute of
limitations. We affirm on the first ground, and need not address the second.

                                           I.

      This lawsuit arises out of a complex scheme of investments that are alleged to
have been administered in a fraudulent manner. Walter J. Hoyt III (“Hoyt”) was the
primary figure in a partnership with his brothers called “Hoyt & Sons Ranches.” The
family partnership raised cattle located for the most part in Nevada, Oregon, and
California. It also actively sought investors in its cattle-raising operations until its
dissolution in the late 1980s, when it was succeeded in relevant part by two other
Hoyt-owned entities, W.J. Hoyt Sons Management Co., Ltd., and W.J. Hoyt Sons
Ranches, MLP (together with Hoyt & Sons Ranches, the “Hoyt Entities”).

       The investments marketed by the Hoyt Entities were structured so that
investors would become partners in one or more investment partnerships. These
partnerships purchased cattle from the Hoyt Entities. The investment partnerships
paid for the cattle by assuming notes owed to the Hoyt Entities in a face value amount
equal to the price of the cattle. Investors became partners by assuming portions of
these notes. Investors were to pay only interest on the investment partnership notes
for five years, while claiming depreciation deductions on the cattle for tax purposes.

      1
       Grassmueck is the third trustee appointed for this estate, and we refer to him
and his predecessors as “the Trustee.”
      2
       The Honorable Laurie Smith Camp, United States District Judge for the
District of Nebraska.

                                          -2-
The Hoyt Entities represented that the cattle sold in this manner to the investment
partnerships were purebred shorthorn cattle. The Hoyt Entities attracted large
amounts of investment, allegedly in excess of $100,000,000, from thousands of
investors over a decade.

      There were several problems with the investments represented by the
partnerships. The IRS did not agree that the cattle depreciation deductions claimed
by investors were valid. See Bales v. Comm’r, 58 T.C.M. (CCH) 431 (1989). The
Hoyt Entities did not own as many cattle as they sold, and the cattle were not worth
as much as the investors paid for them.

       The Hoyt Entities entered Chapter 7 bankruptcy proceedings on February 24,
1997. The Trustee filed a Complaint for Substantive Consolidation against the
investment partnerships in September 1998, and the bankruptcy court granted the
consolidation in November 1998. The bases alleged for consolidation were that the
investment partnership assets and funds were intermingled with those of the Hoyt
Entities, and that the investment partnerships and the Hoyt Entities were dominated
by the same management. (J.A. at 821, 840-41). The investment partnerships,
moreover, shared locations and employees with the Hoyt Entities and suffered from
inadequate record-keeping. (Id. at 839).

       According to the Trustee, the investment partnerships lacked independent
substance: partners were moved repeatedly “from one partnership to another without
the partner's knowledge,” sometimes even “into partnerships that had previously been
terminated.” (Id. at 842). Investors who purchased cattle in an individual capacity
were erroneously placed into investment partnerships. (Id.). As a result of
inadequate documentation, ownership of the notes assumed by the investment
partnerships was “[u]ncertain.” (Id. at 821, 844).

                                        -3-
         The Trustee sued the ASA and Dr. Hunsley on November 3, 2000, alleging that
they had breached their duties of care to the investment partnerships. The ASA,
according to the Trustee, disregarded its protocols for certifying and registering
shorthorn cattle as purebred, thus resulting in the certification and registration of
cattle that were not purebred. Dr. Hunsley, as an officer of the ASA, was involved
in the alleged negligent certification and registration procedures. He also acted as an
expert witness for the Hoyt Entities in Tax Court proceedings. The Trustee alleges
that the ASA’s involvement “gave an aura of legitimacy to the entire Hoyt scheme,”
and that the ASA aided “the Hoyts by failing to exercise reasonable care in the
performance of their registration and certification obligations to the detriment of the
. . . [p]artnerships.” (Id. at 755).

                                          II.

       A Chapter 7 bankruptcy trustee is required to “collect and reduce to money the
property of the estate for which the trustee serves.” 11 U.S.C. § 704(1). The property
of the estate created by the commencement of Chapter 7 proceedings consists of the
items delineated in 11 U.S.C. § 541, which include “all legal or equitable interests of
the debtor in property as of the commencement of the case” not expressly excluded.
11 U.S.C. § 541(a)(1). The estate, therefore, encompasses “causes of action
belonging to the debtor at the time the case is commenced.” 5 Collier on Bankruptcy
¶ 541.08, at 541-44 (15th ed. rev. 2004).

       A trustee’s ability to assert causes of action on behalf of the bankrupt estate
is subject to any equitable or legal defenses that could have been raised against the
debtor. 5 Collier on Bankrutpcy, supra, ¶ 541.08, at 541-46. In particular, the
equitable defense of in pari delicto is available in an action by a bankruptcy trustee
against another party if the defense could have been raised against the debtor. See
Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340,
355-56, 358 (3d Cir. 2001); 5 Collier on Bankruptcy, supra, ¶ 541.08, at 541-46 n.11.

                                         -4-
The doctrine of in pari delicto is the “principle that a plaintiff who has participated
in wrongdoing may not recover damages resulting from the wrongdoing.” Black’s
Law Dictionary 806 (8th ed. 2004).

       Whether in pari delicto may be asserted by a third party against a wrongdoer’s
partner turns on the relationship between the partners, which is a question of state
law. In re Newman, 875 F.2d 668, 670 (8th Cir. 1989). The district court deemed it
unnecessary to resolve which state law applies to this dispute, and we observe that all
States whose laws might govern this action3 have adopted the Uniform Partnership
Act (“UPA”) in relevant part. Cal. Corp. Code §§ 16100-16962; Neb. Rev. Stat.
§§ 67-401to -467; Nev. Rev. Stat. §§ 87.010-.560; Or. Rev. Stat. §§ 67.005-.815.4
There are no court decisions in these States dealing directly with the doctrine of in
pari delicto and the imputation of wrongdoing by a general partner to a partnership
under facts similar to this case, but the parties do not contend that any variation
among the laws of the various States would affect our analysis. The case is governed
by a uniform statute and principles of common law that are likely to be uniform in
each of the jurisdictions.

      Summary judgment is appropriate if, viewing the facts in the light most
favorable to the non-moving party, there is no genuine issue of material fact to be
resolved. Fed. R. Civ. P. 56(e). We review a grant of summary judgment de novo.

      3
       Hoyt Entities pastured cattle in California, Nevada, and Oregon, and some of
the investment partnerships were formed in California and Nevada. Nebraska is the
residence of Dr. Hunsley and the principal place of business of the ASA.
      4
        California and Oregon have adopted the 1997 version of the UPA in relevant
part, while Nebraska and Nevada retain some of the language of the 1914 UPA. As
discussed infra at 9, the 1997 revisions to the UPA effected no substantive change to
the provisions of the UPA at issue here, so the variations between the versions are
not relevant to our analysis. Unless otherwise noted, we refer to the 1997 version of
the UPA.

                                         -5-
Dillon v. Brown County, 380 F.3d 360, 362-63 (8th Cir. 2004). The parties agree that
if Hoyt’s fraud can be charged to the cattle partnerships, the doctrine of in pari delicto
will bar this negligence action against the ASA and Dr. Hunsley. The material facts
underlying this issue are undisputed, so the case may be resolved by summary
judgment. See Zurad v. Lehman Bros. Kuhn Loeb, Inc., 757 F.2d 129, 133 (7th Cir.
1985) (describing the applicability of in pari delicto as “a legal question”).

       The district court held that Hoyt’s fraud was chargeable to the investment
partnerships. The court acknowledged that, under the UPA, the normal rule imputing
knowledge from one partner to the partnership does not apply when the partner in
question is acting fraudulently. This is known as the “adverse interest exception” to
the imputation rules. The refusal to impute knowledge to the principal of an agent
who is acting adversely to the principal is an acknowledgment that the usual legal
fiction of complete agent-principal communication is unjustified where the agent is
acting adversely. Martin Marietta Corp. v. Gould, Inc., 70 F.3d 768, 773 (4th Cir.
1995). Section 102(f) of the UPA, which expresses this adverse interest exception,
reads as follows:

      A partner’s knowledge, notice, or receipt of notification of a fact relating
      to the partnership is effective immediately as knowledge by, notice to,
      or receipt of a notification by the partnership, except in the case of a
      fraud on the partnership committed by or with the consent of that
      partner.

Id. (emphasis added).

       The district court concluded that the adverse interest exception was qualified
in these circumstances by the “sole actor” doctrine.5 The sole actor doctrine provides

      5
       The sole actor doctrine is also known in this context as the “sole
representative” or “alter ego” doctrine. See Young v. Deloitte & Touche, LLP, No.

                                           -6-
that “where the principal and agent are one and the same,” the agent’s knowledge is
imputed to the principal despite the fact that the agent is acting adversely to the
principal. Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822, 827 (2d
Cir. 1997). Where the principal and agent are alter egos, there is no reason to apply
an adverse interest exception to the normal rules imputing the agent’s knowledge to
the principal, because “the party that should have been informed [of the fraudulent
conduct] was the agent itself albeit in its capacity as principal.” Id. In this case, the
district court reasoned that the investment partnerships were mere alter egos of Hoyt
during the period in which he defrauded investors, and that Hoyt’s knowledge was
properly imputed to the partnerships. (Add. at 14).

       The Trustee advances two primary arguments why the district court was wrong.
First, he argues that the sole actor doctrine should not have been applied because it
contravenes the plain language of section 102(f) of the UPA, and because it is not
established in the law of any of the States whose law might govern this dispute.
Second, the Trustee maintains that even if the doctrine applies, Hoyt was not a sole
actor with respect to the investment partnerships.

                                           A.

      We disagree with the Trustee’s first contention. It is true that the plain
language of the UPA codifies the adverse interest exception and does not expressly
mention the sole actor doctrine. Section 104 of the UPA, however, provides that “the
principles of law and equity” are to “supplement” the UPA “[u]nless displaced by

040807BLS, 2004 WL 2341344, at *9 (Mass. Super. Ct. Sept. 20, 2004) (noting that
where an agent “is the sole representative in the transaction, and is in effect the alter
ego, notice to him is imputable to the principal”) (internal quotations and alterations
omitted); William Meade Fletcher, 3 Fletcher Cyclopedia of the Law of Private
Corporations § 827 (1931) (“[t]his qualification of the [adverse interest] exception
[is] known as the “sole actor,” or the “sole representative” doctrine”).

                                          -7-
particular provisions.” UPA § 104(a). These principles of law and equity include
“the law of agency,” as well as the law relative to fraud and “other common law
validating and invalidating causes.” UPA § 104 cmt.6 The sole actor doctrine is an
established principle of agency law, see 3 Am. Jur. 2d, Agency § 281 (2004), and it
therefore applies under the UPA unless displaced by a particular provision.

       Section 102(f), the UPA’s codification of the adverse interest exception, does
not displace the sole actor doctrine. The 1914 version of the UPA was clear that
supplemental principles of agency law were to govern the scope of imputation. In
commentary to the section entitled “Knowledge and Notice,” the 1914 UPA explained
that “how far notice to an agent is notice to a principal” is “wholly a question of the
law of agency,” and “is not a question within the scope of a partnership act.”
UPA § 4 cmt. (1914). We think it is evident that the same holds true for imputation
of knowledge. Subsequent revisions of the UPA were not intended to effect any
substantive change from section 4 of the 1914 UPA. UPA § 104 cmt. The UPA’s
provision that the scope of imputation should be determined by agency law, therefore,
suggests strongly that section 102(f) was not intended to displace any agency law
exceptions to the adverse interest rule.

      Application of the sole actor doctrine to the UPA’s adverse interest rule is also
consistent with established rules of statutory interpretation. Statutory codifications

      6
       Section 104 is, in part, a revised version of section 4(3) of the 1914 UPA,
which mandated that “[t]he law of agency shall apply under this act.” UPA § 4(3)
(1914); see Kansallis Fin. Ltd. v. Fern, 659 N.E.2d 731, 736 (Mass. 1996) (approving
reference to the Restatement (Second) of Agency in applying the UPA “[b]ecause the
[UPA] specifically provides that the law of agency applies”). According to the
commentary accompanying the current version of the UPA, section 104’s general
statement that “the principles of law and equity supplement” the UPA is intended to
combine several rules contained in section 4 of the 1914 UPA, including section 4(3).
The comment after section 104 states that “[n]o substantive change from . . . the
[1914] UPA . . . is intended.”

                                         -8-
of common law rules are often subject to implicit exceptions that were recognized at
common law. See Sabbath v. United States, 391 U.S. 585, 591 n.8 (1968) (stating
that “there is little reason why” common law exceptions to announcement and entry
rules would not also apply to the statutory embodiment of those rules, “since they
existed at common law, of which the statute is a codification”); Hatley v. Stafford,
588 P.2d 603, 605 n.1 (Or. 1978) (implying common law exceptions to the statutory
parol evidence rule where the statute was “a codification of the common law parol
evidence rule”); People v. Maddox, 294 P.2d 6, 9 (Cal. 1956) (holding that a statutory
codification of the common law “may reasonably be interpreted as limited by . . .
common law rules” even though the common law rules are not mentioned in the
statute); Cram v. Chicago, B & Q R.R. Co., 122 N.W. 31, 33 (Neb. 1909) (“It is also
a truism that: When statutes are made there are some things which are exempted and
foreprized out of the provisions thereof, by the law of reason, though not expressly
mentioned. Thus, things for necessity’s sake, or to prevent a failure of justice, are
excepted out of statutes.”) (internal quotation omitted). Section 102(f) is, in relevant
part, a codification of the common law adverse interest rule, see Restatement
(Second) Agency § 282 (1958), to which the sole actor doctrine was a common law
exception. None of the common law exceptions to the adverse interest rule are
mentioned in section 102(f), and there is no indication that the drafters of the UPA’s
general “Knowledge and Notice” provision wished to eliminate them. We therefore
believe that the adverse interest rule in statutory form remains subject to the sole actor
doctrine, as it did at common law.7

      The Trustee’s argument that the district court erred by applying the sole actor
exception because none of the States involved has embraced the doctrine is similarly
unpersuasive. While it may be true that the sole actor exception is not well-

      7
       The sole actor doctrine has been applied frequently in the corporate context,
even where a state statutory scheme governs many aspects of the relationship between
corporate employees and corporations. E.g., In re Mediators, 105 F.3d at 827.

                                           -9-
developed in the law of the States that potentially governs this action, that does not
mean that the courts of those States would decline to apply the exception if faced with
these facts. If the path that a state court would follow when presented with a novel
question is unclear, then we may decide the issue by predicting what the state court
would do. Karas v. Am. Family Ins. Co., 33 F.3d 995, 999-1000 (8th Cir. 1994).

       In formulating our prediction, the approach taken by other jurisdictions is
relevant. The sole actor doctrine is an agency law principle well-established at
common law. See Munroe v. Harriman, 85 F.2d 493, 496 (2d Cir. 1936) (“[T]here
is substantial authority in support of the ‘sole actor’ doctrine.”).8 Principles of agency
law, moreover, are incorporated into the UPA in all of the relevant States. See Neb.
Stat. § 67-304(3); Cal. Corp. Code § 16104; Or. Rev. Stat. § 67.020; Nev. Rev. Stat.
§ 87.040.

       California and Oregon have applied the sole actor doctrine. Nat’l Bank of San
Mateo v. Whitney, 180 P. 845, 848-49 (Cal. Dist. Ct. App. 1919); Saratoga Inv. Co.
v. Kern, 148 P. 1125, 1127-28 (Or. 1915). There is no indication that Nebraska or
Nevada would apply the established principles of agency law any differently. See
Rose v. Gisi, 298 N.W. 333, 337 (Neb. 1941) (citing the Restatement (Second) of
Agency and Massachusetts case law for a “generally accepted rule” regarding
principal liability); Hunter Mining Labs., Inc. v. Mgmt. Assistance, Inc., 763 P.2d
350, 352 (Nev. 1988) (citing the Restatement (Second) of Agency and Maryland,
Illinois, Virginia, Florida, and California case law regarding the scope of control
required to establish an agency relationship); see also Allard v. Arthur Anderson &

      8
       Cases applying the sole actor doctrine to impute an agent’s fraud to his
principal are numerous. See, e.g., Curtis, Collins & Holbrook Co. v. United States,
262 U.S. 215, 222 (1923); Schneider v. Thompson, 58 F.2d 94, 99 (8th Cir. 1932);
Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., 80 F.
Supp.2d 129, 138 (S.D.N.Y. 1999) (applying Texas law); Puget Sound Nat’l Bank v.
St. Paul Fire & Marine Ins. Co., 645 P.2d 1122, 1127 (Wash. Ct. App. 1982).

                                          -10-
Co., 924 F. Supp. 488, 495 (S.D.N.Y. 1996) (refusing to apply adverse interest
exception to the imputation of knowledge where the agent acts both for himself and
for his principal because “there is no reason to believe that a Michigan court would
depart from the New York and Restatement rule” to the same effect). Accordingly,
we believe that under the law of any of the jurisdictions that might govern this action,
the sole actor doctrine would apply as an exception to the adverse interest rule stated
in Section 102(f) of the UPA.

                                          B.

       The Trustee’s second argument, that Hoyt was not a sole actor with respect to
the investment partnerships, also fails. As discussed above, a sole actor relationship
is found when “the principal and agent are one and the same.” In re Mediators, Inc.,
105 F.3d at 827. Here, the investment partnerships lacked independent identities.
The Trustee conceded in connection with his motion for summary judgment that the
investment partnerships “were entities of convenience and not separate business
units.” (J.A. at 835). He also acknowledged that “[t]he Hoyt cattle investment
operation was run by Walter J. Hoyt III as a unified business,” and that “[a]ll entities
were used as instrumentalities by Walter J. Hoyt III in an attempt to gain tax
advantages for himself and his investors.” (Id. at 845). The Trustee admitted in
interrogatory answers, moreover, that “there is no way to identify any of the
individual ‘[investment] [p]artnerships.’ Instead, there was a single entity which
commingled all assets and liabilities of the so-called individual partnerships.” (Id.
at 739).

      Hoyt’s actions here were indistinguishable from those of the investment
partnerships. Hoyt was made general partner of all of the investment partnerships,
thereby assuming the role of principal as well as an agent. See Goehring v. Superior
Court, 73 Cal. Rptr. 2d 105, 112 (Cal. Dist. Ct. App. 1998) (“[g]eneral partners are
both agents and principals of the partnership”). The Trustee contends that Hoyt was

                                         -11-
not “‘one and the same’ with the partnerships” because “each partnership was made
up of a number of general partners.” (Appellant’s Brief at 28). The Trustee has
stated in the district court, however, that “[t]he investor partners played no part in the
management of their . . . [p]artnerships or the other Hoyt [E]ntities.” (J.A. at 840).
In addition, Hoyt received a power of attorney from each investor, thus enabling him
to act on the investor’s behalf with respect to the investment partnerships, and giving
Hoyt singular domination over the partnerships. (Id.). Indeed, according to the
Trustee’s own allegations, Hoyt dominated both the investment partnerships and the
Hoyt Entities. (J.A. at 821). No similar facts are alleged with respect to the investors.

        The Trustee argues that Hoyt was not the “sole representative” of the
investment partnerships because a Hoyt Entity employee, Marketing Director Donna
Schnitker, also dealt with the ASA. The ASA and Hunsley do not dispute the
allegation that Schnitker dealt with the ASA on behalf of Hoyt. This is not a material
fact, however, because the sole actor doctrine does not require that the agent whose
knowledge is to be imputed literally act alone; the doctrine still applies if the “sole
actor” uses subordinates in perpetrating a fraud. See Munroe, 85 F.2d at 496
(imputing bank president’s knowledge of fraud to the bank under the sole actor rule
despite the involvement of other bank employees). The central inquiry in the sole
actor context is whether the agent committing fraud is also the principal that should
have been informed. In re Mediators, Inc., 105 F.3d at 827. There is no allegation
here that Schnitker was a partner in or a principal of the investment partnerships. In
fact, the only evidence in the record indicates that Schnitker “had nothing to do with
the investor partnerships,” (J.A. at 726, 731), and worked only as an employee of one
of the Hoyt Entities. (Id. at 708-11).

       The Trustee argues finally that the sole actor doctrine cannot be asserted by the
ASA because it was “not acting in good faith.” (Appellant’s Br. at 29). It is true that
the sole actor exception “may not be invoked where third persons use the agent to
further their own frauds upon the principal.” Bland v. Allstate Ins. Co., 944 S.W.2d

                                          -12-
372, 376 (Tenn. App. 1996) (internal quotation omitted). The Trustee does not
allege, however, that the ASA or Dr. Hunsley used Hoyt to further their own frauds
upon the investors. The amended complaint expressly disclaims any fraud on the part
of the ASA or Dr. Hunsley, and restricts its allegations to mere negligence. (J.A. at
755) (the “ASA and Hunsley . . . did not themselves have fraudulent intent”).

                                  *      *       *

       The undisputed facts show that the investment partnerships established by Hoyt
were not independent entities, but existed in form only and were indistinguishable
from Hoyt. As a result, the sole actor doctrine applies, and Hoyt’s fraud is imputed
to the investment partnerships. Because the partnerships are deemed to have
participated in Hoyt’s wrongdoing, the Trustee is barred by the doctrine of in pari
delicto from pursuing this negligence action against the ASA and Dr. Hunsley.
Accordingly, we affirm the judgment of the district court.
                          ______________________________

                                        -13-