Court Opinion

ID: 4098945
Source: CourtListenerOpinion
Date Created: 2016-11-16 21:01:18.629424+00
Date Added: 2024-06-11T07:46:01.405371
License: Public Domain

FILED
                            NOT FOR PUBLICATION
                                                                              NOV 16 2016
                    UNITED STATES COURT OF APPEALS                        MOLLY C. DWYER, CLERK
                                                                            U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

STRATEGIC DIVERSITY, INC., a                     No.   14-16754
Massachusetts corporation; and
KENNETH P. WEISS, an unmarried man,              D.C. No. 2:07-cv-00929-GMS

              Plaintiffs-Appellees,
                                                 MEMORANDUM*
 v.

ALCHEMIX CORPORATION, an
Arizona corporation; and CHERYL
HALOTA HORTON, wife,

              Defendants,

 and

ROBERT R. HORTON, husband; and
MEDICI ASSOCIATES, LLC, a Delaware
limited liability company,

              Defendants-Appellants.

STRATEGIC DIVERSITY, INC., a                     No.   14-16887
Massachusetts corporation; and
KENNETH P. WEISS, an unmarried man,              D.C. No. 2:07-cv-00929-GMS

              Plaintiffs-Appellants,

       *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
v.

ALCHEMIX CORPORATION, an
Arizona corporation; and CHERYL
HALOTA HORTON, wife,

           Defendants,

and

ROBERT R. HORTON, husband; and
MEDICI ASSOCIATES, LLC, a Delaware
limited liability company,

           Defendants-Appellees.

STRATEGIC DIVERSITY, INC., a                No.   14-17051
Massachusetts corporation; and
KENNETH P. WEISS, an unmarried man,         D.C. No. 2:07-cv-00929-GMS

           Plaintiffs-Appellants,

v.

ALCHEMIX CORPORATION, an
Arizona corporation; et al.,

           Defendants-Appellees.

                Appeals from the United States District Court
                         for the District of Arizona
                 G. Murray Snow, District Judge, Presiding

                                     2
                     Argued and Submitted October 18, 2016
                            San Francisco, California

Before: GRABER and MURGUIA, Circuit Judges, and BENNETT,** District
Judge.

      In June 2001, Kenneth Weiss loaned Alchemix Corporation (“Alchemix”)

$500,000 through his investment company, Strategic Diversity, Inc. (“Strategic”).

In return, Alchemix granted Strategic a security interest in its patents and gave

Weiss a seat on the Alchemix board of directors.

      One year later, Robert Horton, CEO of Alchemix, entered into an investment

deal with Western Oil Sands (“Western”) in which Western committed to an initial

$3 million investment in Alchemix with the option to invest an additional $33

million. Horton spoke with Weiss and assured him that Western’s investment of

the additional $33 million would be a “certainty” if Strategic accepted early

repayment of the Alchemix loan, relinquished its security interest in the patents,

and gave up Weiss’ board seat. Horton also offered Weiss shares of Alchemix

stock at $1.00/share. Weiss agreed. On July 2, 2002, Strategic accepted early

repayment of the Alchemix loan and made the requested concessions. On July 8,

2002, Weiss purchased 250,000 shares of Alchemix stock at $1.00 per share. Weiss

       **
            The Honorable Mark W. Bennett, United States District Judge for the
Northern District of Iowa, sitting by designation.
                                          3
purchased his shares from Medici Associates, LLC (“Medici”), Horton’s holding

company. Richard Armstrong, Alchemix’s CFO, handled all the negotiations and

documentation.

      Sometime in late June or early July of 2002, Western decided not to invest

the additional $33 million. Horton immediately informed the Alchemix board, but

not Weiss, who was no longer on the board. The first time Weiss learned about

Western’s decision to halt further investment was in 2005 when he asked Horton

for an update on his Alchemix stock.

      In 2007, Weiss and Strategic filed suit in federal court against Horton,

Alchemix, Medici, and Horton’s wife Cheryl (only as a nominal defendant to

recover community property). The complaint alleged federal and state securities

fraud, along with several other contract and fraud claims. The district court entered

summary judgment for Defendants on all claims, and Weiss appealed. We reversed

and remanded only as to the federal and state securities fraud claims. Strategic

Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197, 1211 (9th Cir. 2012)

      On remand, Strategic withdrew from the case, and Weiss proceeded as the

sole plaintiff. A jury found that Horton had committed a material omission or

misrepresentation in connection with Weiss’ stock purchase. As a result, Medici

was found liable for securities fraud because it sold the stock. The district court

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also found Horton, but not Alchemix, jointly and severally liable. Finally, the

district court declined to enter judgment against Robert and Cheryl Horton’s

marital community because Weiss failed to produce evidence of Robert Horton’s

contribution to the community property.

      After a bench trial, Weiss decided to forgo damages and opted for a true

rescission with Medici. The district court awarded Weiss rescission of the stock

deal, and he recovered the $250,000 purchase price. The district court denied

Weiss punitive damages and prejudgment interest. The court also declined to

specify the rate of post-judgment interest.

      Both parties filed motions for attorney fees after final judgment. The court

denied in part Weiss’ request of $979,000 and awarded him only $143,400. The

court also partially granted Defendants’ request for attorney fees and awarded

$387,212. Finally, the court denied Weiss expert costs for his damages expert and

granted Alchemix costs as a prevailing party.

      On appeal, three different aspects of the proceedings are challenged: the jury

verdict, the final judgment, and the attorney fees order. We affirm the district court

on all issues except prejudgment interest and Weiss’ attorney fees.

      1.     We must sustain a jury verdict “if it is supported by substantial

evidence, which is evidence adequate to support the jury’s conclusion, even if it is

                                          5
also possible to draw a contrary conclusion.” Pavao v. Pagay, 307 F.3d 915, 918

(9th Cir. 2002). Here, circumstantial evidence showed that Horton knew of

Western’s decision before July 8, 2002: the timing of Western’s call (between July

3 and July 15); Western’s decision to abruptly abandon inspection of the Alchemix

site (late June); and Horton’s $900,000 loan to Alchemix, which was inconsistent

with the terms of the Western deal (late June or early July). That evidence supports

a reasonable inference that Horton possessed the requisite knowledge before

Weiss’ stock purchase and, therefore, omitted material information.1

      2.     The district court’s decision to hold Horton jointly and

severally liable is a mixed question of fact and law, which we review de novo.

FMC v. Shoshone-Bannock Tribes, 905 F.2d 1311, 1313 (9th Cir. 1990). The

decision to hold Horton liable as a “controlling person” was supported by Horton’s

own testimony that Medici was his personal holding company, as well as by

Defendants’ stipulation that Horton was the sole owner and sole member of

Medici. See Ariz. Rev. Stat. § 44-1999(B) (“Every person who . . . controls any

      1
        Because either an omission or a misrepresentation suffices to prove a
violation of the Arizona Securities Act, see Ariz. Rev. Stat. § 44-1991(A)(2), we
do not reach the question whether sufficient evidence supported the jury’s finding
of a material misrepresentation.
                                          6
person liable for violation of [securities fraud] is liable jointly and severally with

and to the same extent as the controlled person . . . .”).

      3.     The decision declining to hold Alchemix jointly and severally liable is

a mixed question of fact and law, which we review de novo. Shoshone-Bannock

Tribes, 905 F.2d at 1313. The district court did not err in holding that Alchemix,

through its CFO Richard Armstrong, did not “participate” in the stock sale under

Arizona Revised Statutes § 44-2003(A) because Armstrong played only a minimal

role. See Grand v. Nacchio 236 P.3d 398, 403 (Ariz. 2010) (holding that

“participation” requires active involvement with a stake in the outcome, not merely

an ancillary role in the stock sale). The bulk of Armstrong’s dealings concerned the

repayment of Strategic’s Note—not Weiss’ stock purchase. It was also unclear

whether Armstrong was acting as an agent of Alchemix in his negotiations with

Weiss.

      4.     The denial of punitive damages is reviewed for abuse of discretion.

Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1111 (9th Cir. 2001).

The district court correctly held that the jury’s finding of a knowing securities

violation is insufficient by itself to justify punitive damages. Rawlings v. Apodaca,

726 P.2d 565, 578 (Ariz. 1986). The district court also did not abuse its discretion

in concluding that Horton’s prior business failures and financial non-disclosures

                                            7
did not justify punitive damages, as they were unrelated to the stock transaction at

issue here. See Gurule v. Ill. Mut. Life & Cas. Co., 734 P.2d 85, 87 (Ariz. 1987)

(explaining that prior harmful conduct must be related to present acts, such that a

defendant would know of the potential for injury).

      5.     The decision declining to specify the rate of post-judgment interest is

reviewed for abuse of discretion. The district court was legally correct in holding

that neither 28 U.S.C. § 1961(a) nor District of Arizona Local Rule 58.1(a)

requires federal courts to specify the rate of post-judgment interest. Perkins v.

Standard Oil Co. of Cal., 487 F.2d 672, 675 (9th Cir. 1973).

      6.     The decision declining to enter judgment against the Hortons’ marital

community is a question of state law interpretation, which we review de novo.

Gibson ex rel. Gibson v. County of Riverside, 132 F.3d 1311, 1312 (9th Cir. 1997).

The district court did not err in declining to enter judgment now against the

Hortons’ marital community because, pursuant to Arizona Revised Statutes § 25-

215(B), Weiss can seek to recover from Robert Horton’s contributions to the

community property in a separate, future action to enforce the judgment. See Nat’l

Union Fire Ins. Co. of Pittsburgh, Pa. v. Greene, 985 P.2d 590, 596 (Ariz. Ct. App.

1999) (demonstrating that a plaintiff can seek to recover from the marital

community in a subsequent proceeding to enforce the judgment).

                                          8
      7.     We review for abuse of discretion the district court’s grant of costs to

Alchemix. Draper v. Rosario, 836 F.3d 1072, 1087 (9th Cir. 2016). The district

court did not err in awarding costs to Alchemix as a “prevailing party” because

judgment was entered in its favor after it successfully defended against all the

claims brought by Weiss and Strategic. See d'Hedouville v. Pioneer Hotel Co., 552

F.2d 886, 896 (9th Cir. 1977) (“A party in whose favor judgment is rendered is

generally the prevailing party for purposes of Rule 54(d).”).

      8.     We review for abuse of discretion the district court’s denial of Weiss’

costs spent on the damages expert. Ass’n of Flight Attendants, AFL-CIO v.

Horizon Air Indus., Inc., 976 F.2d 541, 551 (9th Cir. 1992). The district court

correctly concluded that costs expended on the damages expert were unnecessary

to the ultimate recovery because Weiss did not rely on a single piece of evidence or

expert opinion adduced at the bench trial.

      9.     We review de novo the district court’s decision that Defendants were

entitled to attorney fees. Kona Enters., Inc. v. Estate of Bishop ex rel. Peters, 229

F.3d 877, 883 (9th Cir. 2000). The district court did not err because Arizona

Revised Statutes § 12-341.01 permits fees to successful parties in actions arising

out of contract.

                                           9
      First, the Arizona Securities Act does not displace § 12-341.01, because this

is not a situation in which a party seeks to circumvent a specific attorney fee

provision. Compare Lange v. Lotzer, 727 P.2d 38 (Ariz. Ct. App. 1986), with

Chaurasia v. Gen. Motors Corp., 126 P.3d 165 (Ariz. Ct. App. 2006). Here, Weiss

alleged both securities and contract claims, and each type of claim allows attorney

fees. Defendants are not attempting to undermine the Arizona Securities Act’s one-

way fee provision by seeking fees on the securities claim; rather, they seek fees for

successfully defending the six contract-based claims, which alleged fraudulent

inducement. See Marcus v. Fox, 723 P.2d 682, 684 (Ariz. 1986) (holding that § 12-

341.01 applies to actions seeking to invalidate a contract based on fraudulent

inducement).

      Next, the court reasonably determined that Defendants were “successful

parties” because they defended against seven out of eight claims, completely

defeated Strategic in the action, and prevented the bulk of relief sought by

prevailing on the debt-equity swap theory. See Schwartz v. Farmers Ins. Co. of

Ariz., 800 P.2d 20, 25 (Ariz. Ct. App. 1990) (“The trial court possesses discretion

to determine who is the successful party in multiple-party litigation and in cases

where there are multiple-parties as well as multiple-claims.”).

                                          10
      10.    We review for abuse of discretion the denial of prejudgment interest

under state law. Champion Produce, Inc. v. Ruby Robinson Co., 342 F.3d 1016,

1020 (9th Cir. 2003).

      The Arizona Securities Act allows a defrauded purchaser “to recover the

consideration paid for the securities, with interest.” Ariz. Rev. Stat. § 44-2001(A).

“The general rule in Arizona is that a liquidated claim entitles its holder to

prejudgment interest.” Trimble v. Am. Sav. Life Ins. Co., 733 P.2d 1131, 1140

(Ariz. Ct. App. 1986). A claim is liquidated if the amount sought can be calculated

with exactness and does not rely on opinion or discretion. Able Distrib. Co. v.

James Lampe, Gen. Contractor, 773 P.2d 504, 511 (Ariz. Ct. App. 1989).

      The court erred in denying prejudgment interest because the $250,000 that

Weiss recovered is a liquidated sum. Weiss alleged a claim under the Arizona

Securities Act for the “consideration paid,” and he expressly stated the amount

paid for the stock ($250,000). See Homes & Son Constr. Co. v. Bolo Corp., 526

P.2d 1258, 1261 (Ariz. Ct. App. 1974) (holding that a claim is liquidated if it

provides sufficient information “to enable [a defendant] to ascertain the amount

owed”).

                                          11
      11.    Finally, we review for abuse of discretion the district court’s decision

to grant only part of Weiss’ request for attorney fees. Price v. Seydel, 961 F.2d

1470, 1475 (9th Cir. 1992).

      The court erred in refusing to award any fees for research, discovery, or trial

work performed on the debt-equity swap theory. The debt-equity swap theory is a

legally cognizable claim for rescission under the Arizona Securities Act. Grand,

236 P.3d at 401. Moreover, in the first appeal, we tacitly endorsed the legal

viability of the theory by allowing Weiss to obtain rescissionary damages on the

entire debt-equity swap. Strategic Diversity, 666 F.3d at 1208. Finally, the debt-

equity swap theory was premised on the same misrepresentations by Horton that

induced Weiss’ stock sale; therefore, any work done on the debt-equity swap

theory is inextricably intertwined with the claim on which Weiss ultimately

prevailed. See Modular Mining Sys., Inc. v. Jigsaw Techs., Inc., 212 P.3d 853, 860

(Ariz. Ct. App. 2009) (explaining that a successful party on a claim may recover

attorney fees expended in litigating an “interwoven” claim).

      But the district court did not err when it refused to award fees for work

performed in the damages phase. After conducting an entire bench trial and hiring

an expert to opine on rescissionary damages, Weiss ultimately chose to pursue a

straight rescission with Medici, rendering the bench trial on damages unnecessary.

                                         12
See Van Gerwen v. Guarantee Mut. Life Co., 214 F.3d 1041, 1047 (9th Cir. 2000)

(“We accord considerable deference to the district court’s findings regarding

whether hours claimed by prevailing counsel are excessive, redundant or otherwise

unnecessary.” (emphasis added)).

      In conclusion, we affirm as to the jury verdict and the following decisions by

the district court: holding Horton liable, declining to hold Alchemix liable, denying

punitive damages, declining to specify the rate of post-judgment interest, declining

to enter judgment against the Hortons’ marital community, granting Alchemix’s

costs, denying Weiss’ expert costs, and granting Defendants’ attorney fees.

      We reverse as to the denial of prejudgment interest and denial in part of

Weiss’ attorney fees. We remand for the district court to award prejudgment

interest on the $250,000 judgment. We also remand for the district court to award

attorney fees to Weiss for work performed on the debt-equity swap theory from the

inception of the case through the jury verdict. On remand, the district court may

reduce fees for hours expended on the unnecessary damages trial and for hours

solely attributable to Weiss’ unsuccessful contract-based claims.

      AFFIRMED in part, REVERSED in part, and REMANDED. The parties

shall bear their own costs on appeal.

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