Court Opinion

ID: 9491143
Source: CourtListenerOpinion
Date Created: 2023-08-05 14:04:52.852232+00
Date Added: 2024-06-11T17:54:32.172569
License: Public Domain

KENNEDY, Circuit Judge,
dissenting.
Because I believe that Barnhart had no duty to disclose to plaintiffs MDI’s possible defaults with Star Bank and that Rubin and Cohen’s reliance on Barnhart’s statements was reckless, I must respectfully dissent from the majority opinion. The majority opinion examines two theories presented by the plaintiffs to support their claim of securities violations: omissions of material fact and misrepresentations.1 I, as well, examine the two theories in turn.
*271To begin, while the majority correctly states the rule that where a plaintiff alleges a securities violation based on omissions of material facts, reliance may be presumed, I believe the law recognizes that an attorney for a party’s duty to disclose is fundamentally different from a lay person’s duty to disclose material facts.
The courts, including our own, that have considered claims against attorneys for securities violations in the context of their representation of the issuer of stock have focused, as I believe we should here, on the absence of a fiduciary relationship between the plaintiff and the attorney and the purpose for which the attorney was hired. In particular, the United States Courts of Appeal for the Fourth and Ninth Circuits have made such distinctions. In Schatz v. Rosenberg, 943 F.2d 485 (4th Cir.1991), the Fourth Circuit held that the silence of an attorney does not give rise to a securities violation absent a duty to disclose. Id. at 990. In Schatz, MER Enterprises, purchased an eighty percent interest in two companies owned by the plaintiffs. As payment for the eighty percent interest, plaintiffs received $1.5 million in promissory notes issued by MER. In accepting the notes, the plaintiffs relied on a financial statement and an update letter delivered at closing indicating that the net worth of Mark Rosenberg, the creator of MER, exceeded $7 million. The financial documents failed to disclose that Rosenberg’s largest company had filed for bankruptcy and that Rosenberg himself had filed for bankruptcy. Rosenberg and his entities were represented by a law firm named as a defendant in the suit. Id. at 488. The plaintiffs alleged the law firm violated Section 10(b) by remaining silent when it knew that Rosenberg was financially insolvent.
Noting that “(sjilence, absent a duty to disclose, does not violate section 10(b) and Rule 10b-5,” the court framed the issue for its determination as whether “federal securities laws impose upon an attorney a duty of disclosure to third parties who are not the attorney’s clients.” Id. at 490. Recognizing-that a duty to disclose arises only where “ ‘a fiduciary or other similar relation of trust and confidence’ ” exists between parties, the court held that a lawyer or law firm is not liable for failing to disclose information about their client to a third party unless some fiduciary or other confidential relationship exists with the third party. Id. at 490. Because no fiduciary or confidential relationship existed between the law firm and the plaintiffs in Schatz, the court refused to hold the firm liable under Section 10(b). The court carefully distinguished the facts before it from cases where an attorney issues a misleading legal opinion and from cases where an attorney drafts false prospectuses or other securities documents and therefore makes affirmative misrepresentations in connection with the solicitation of securities. Id. at 491-92.
In Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646 (9th Cir.1988), investors contended a law firm violated section 10(b) by failing to include, in a title opinion regarding property purchased by the investors, that another party had an interest in the same property and that the law firm represented the interested party. Id. at 653. After stating the rule that the law firm need have only included the omitted information if it had a duty to disclose it, the Ninth Circuit concluded the law firm had no duty to disclose in light of the following facts. First, the law firm was retained only to determine the marketability of the title and, therefore, the only duty owed the plaintiff concerned the issue of marketability. Second, the plaintiff had equal access to the records examined by the law firm, and lastly, the law firm did not initiate the transaction in securities. Id. at 654.
Our Court’s decision in Molecular Technology v. Valentine, 925 F.2d 910 (6th Cir.1991), similarly focused on the purpose for which an attorney was hired in holding that a triable fact issue existed as to whether an attorney was liable under section 10(b)/rule 10b-5. In Molecular Technology, Donovan Snyder, an *272attorney, was hired by SDE Robotics and Automation Company to prepare an offering circular and the offering circular itself was misleading.2 We concluded that, as the preparer of the offering memorandum, Snyder had a duty to disclose material information relating to the offering of the securities for purchase. Id. at 918. Unlike Molecular Technology, the information Rubin and Cohen allege should have been disclosed to them did not relate to the purpose for which Barnhart was hired. MDI hired Barnhart to draft an opinion letter stating the law firm’s opinion as to whether the investment was within MDI’s corporate powers and whether the note was authorized by MDI, validly executed and delivered, and enforceable against MDI. The scope of the attorney’s duties, thus, did not include informing investors of the status of loans made by a bank to the borrower.
Some guiding principles can be gleaned from Molecular Technology, Schatz, and Roberts. First, an attorney may be liable for securities fraud where there exists a confidential or fiduciary relationship between the attorney and the third party. Here, as in Molecular Technology, Schatz, and Roberts, there is no confidential or fiduciary relationship. Second, courts are inclined to hold counsel liable where the attorney omits material information directly relevant to the specific purpose for which the attorney was hired. See, e.g., Kline v. First W. Gov’t Secs., Inc., 24 F.3d 480, 490 (3d Cir.1994). As aforementioned, Barnhart was hired only to draft an opinion letter stating the law firm’s view as to whether the investment was within MDI’s corporate powers and whether the note was authorized by MDI, validly executed and delivered, and enforceable against MDI. The scope of the attorney’s duties, thus, did not include informing investors of the financial stability of the borrower. Specifically, the status of loans to MDI from Star Bank was not relevant to those issues upon which Barnhart was hired to issue an opinion. Thus, in my view, liability cannot be premised on Barnhart’s failure to speak where he had no duty to speak.
I have elaborated on the circumstances triggering an attorney’s duty to disclose because the majority opinion is unclear as to whether it holds that an attorney has a duty to disclose absent a fiduciary relationship or where the attorney omits material information directly relevant to the specific purpose for which the attorney was hired. The opinion first states that “[ujnder the long-established precedent of this circuit, the conversations between Barnhart and the plaintiffs clearly were instances of ‘direct contacts’ sufficient to give rise to a duty to disclose.” At the same time, the majority acknowledges that while “an attorney representing the seller in a securities transaction may not always be under an independent duty to volunteer information about the financial condition of his client,” he does “assume a duty to provide complete (and completely) truthful information with respect to subjects on which he undertakes to speak.” Under either a silence scenario or a material omissions scenario, the majority has imposed upon attorneys involved in securities transactions a duty that is unworkable. While the majority contends that attorneys should not be distinguished from other professionals and individuals, I disagree in light of the unique duty of confidentiality attorneys owe to their clients. What is an attorney to do when he possesses information learned from his client relative to an impending deal? Under the majority rule, if the attorney spoke on any matter not directly related to the purpose for which the attorney was hired, the attorney would have to disclose any other relevant information to the investor in violation of his ethical duty to keep his clients’ matters confidential. I would not adopt such a rule.
One further clarification is needed. While plaintiffs’ complaint alleges only silence or *273material omissions, plaintiffs’ response to defendants’ motion for judgment on the pleadings included affidavits attesting that false statements were made upon which they relied. One or more of those statements were misrepresentations for which defendants could be liable. While Barnhart denied making the statements and the pleadings were not amended to allege misrepresentations, the district court considered the misrepresentation theory of liability. Thus, whether defendants were entitled to summary judgment turns on whether plaintiffs recklessly relied on Barnhart’s alleged misrepresentations and not on whether Barnhart had a duty to disclose possible defaults or whether Barnhart uttered statements seemingly true but ultimately false due to the omission of material information.
Turning then to the plaintiffs’ .theory that Barnhart uttered misrepresentations tp the plaintiffs, I disagree with the majority’s conclusion that the plaintiffs’ reliance on Barn-hart’s statements was not reckless. Whether a plaintiff has justifiably relied on a misrepresentation is judged by a recklessness standard in our Circuit. See Molecular Tech. Corp. v. Valentine, 925 F.2d 910, 918 (6th Cir.1991). In Molecular Technology,, we cited the following eight factors which should be considered in determining whether reliance is reckless:
(1) The sophistication of expertise of the plaintiff in financial and securities matters; (2) the existence of longstanding business or personal relationships; (3) access to the relevant information; (4) the existence of- a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff initiated the stock transaction or sought to expedite the transaction; and (8) the generality or specificity of the misrepresentations. .

Id.

Examining each of the factors, I can arrive only to the conclusion that the plaintiffs’ reliance was reckless. Rubin was not only a sophisticated investor,3 but he was also represented by sophisticated counsel, there was no longstanding business or personal relationship between Rubin and Barnhart,' Rubin had access to the relevant information, no fiduciary relationship existed, there was no attempt to conceal the fraud, Rubin initiated the stock transaction, and Barnhart’s representations were of a general nature. While the majority proposes that Rubin did not have access to the relevant information and therefore the reliance was not reckless, a close examination of the facts reveals that Rubin’s haste in closing this transaction impeded his ability to learn some of the relevant information. First, the default provisions that Star Bank relied upon were in the loan agreements between MDI and Star Bank. Plaintiffs asked the Todds for the loan documents but went ahead with the loan prior to receiving the documents from the Todds. Second, Rubin requested MDI’s au-. dited financial statements but did not wait for them either, Further, I believe reliance was reckless because the plaintiffs did not even attempt to contact Star Bank to inquire about the status-of loans to MDI. Plaintiffs knew, this company was in serious financial trouble. While in its first two years of business, MDI experienced significant growth, its gross revenues dramatically decreased when, in 1991, an article in the New England Journal of Medicine questioned the effectiveness of its product, TENS. The Todds informed Rubin and Cohen that MDI would need $150,000 additional capital in order to proceed with its business plans and offered to sell a thirty-three percent equity interest in the corporation for only $3,300. Given the sophistication of these investors, the Todds’ explicit disclosure that the plaintiffs’ loan and stock purchases would allow the company to continue its business, and the remarkably low sale price of such a large portion of the company, warning bells should have sounded that a company suffering, as was MDI, might be running into trouble with its bank. This is particularly so because plaintiffs were represented in this transaction by their own sophisticated attorney. If warning bells did not sound for plaintiffs, their lawyer should have at least been sufficiently alerted to *274prompt him to conduct his own due diligence investigation into MDI’s relationship with Star Bank.
I agree with the majority that we cannot know whether Star Bank would have disclosed the default to Rubin; however, had Rubin inquired of the Bank and had it declined to disclose information regarding MDI, he would have at least demonstrated some attempt to exercise due diligence. The majority, in fact, concedes that “... Rubin and Cohen’s behavior might be thought reckless in the context of a multimillion-dollar securities purchase ...” Although it might have been even more reckless to invest several million dollars, the $153,000 investment at issue here is not insignificant. While the majority proposes that “[tjhere is no rule that requires a single, constant level of due diligence in every business transaction regardless of size,” there is similarly no rule that the determination of whether investors have recklessly relied on misrepresentations should rise or fall on the monetary value of the transaction. Yet, the majority has effectively imposed an additional factor, the dollar amount of the transaction, to the eight-factor test established by our Court in Molecular Technology. While I might be persuaded that a court ought to consider whether a purchase of securities was a significant or insignificant investment, I cannot agree to a rule that would judge recklessness by the amount of the transaction.
I would hold that plaintiffs, who were investing in what they knew to be a financially troubled company, acted recklessly in failing to examine audited financial statements, review loan documents, and contact the financial institution with whom the company transacted business, before purchasing securities and infusing capital into the company. Accordingly, I would affirm the judgment of the District Court granting summary judgment to the defendants.

. While for purposes of the posture of this appeal, we must assume that the statements plaintiffs allege as misrepresentations were uttered by Barnhart, the defendants have denied throughout these proceedings that Barnhart spoke with plaintiffs about MDI's relationship with Star *271Bank. In fact, the plaintiffs’ complaint and amended complaint made no mention of any statements uttered by Barnhart. It was not until Schottcnstein, Zox & Dunn and Barnhart filed a motion for judgment on the pleadings that plaintiffs submitted the affidavits of Rubin and Weiss, the plaintiffs' counsel, alleging that Barnhart made four misrepresentations to plaintiffs.

. Specifically, the offering circular failed to disclose that
60,000 shares (representing about 90% of the outstanding shares) of State Die [the predecessor company to SDE] were in escrow; ... that the title to the real property of State Die, which was part of the consideration in the merger with Extra Production, was held by an unrelated leasing company and, thus, not transferable ... and ... that State Die had substantial debts, including one $194,000 bank debt.
Id. at 918.

. Rubin attested in his affidavit that he has "invested several million dollars in various companies."