Rehearing and Suggestion for Rehearing En Banc Denied November 12, 1993.
BARKSDALE, Circuit Judge:
This appeal from a summary judgment turns for the most part on the reach of the federal securities laws for entities that are not the primary parties for securities violations, and on the relief vel non to be accorded parties who, subsequent to entry of judgment, raise a new theory of liability. Investors in Courtside Ltd., a Louisiana partnership formed to acquire and operate an apartment community in Houston, Texas, brought suit against, inter alia, The Home Insurance Company and The Graham Company. As to them, they alleged that Home and Graham's continued participation as surety and bonding agent respectively for the Courtside transaction, despite their knowledge of misrepresentations and material omissions in the Private Placement Memorandum, violated, inter alia, federal securities laws and rendered the investors' indemnity agreements with Home unenforceable. The district court granted summary judgment in favor of Home and Graham and refused, post-judgment, to allow a new theory of liability to be raised. We AFFIRM.
In 1984, the Equity Group, Inc., formed Courtside, becoming the managing general
To obtain financing from Hibernia National Bank and Security Savings and Loan Association, Courtside pledged the limited partners' first notes to Hibernia as collateral; the second, to Security. As additional security, in late December 1984, Home, through its agent, Graham,
Home received a premium of $257,060 for its issuance of the bonds (total obligation of almost $5 million). In addition, Home required each investor to execute a pledge of partnership interest to Home, and sign an indemnity agreement protecting Home against, inter alia, all losses in connection with the bonds.
Graham, as agent for Home, required that each investor execute a limited partner's application for financial guarantee bond, and thus reviewed their creditworthiness. Home reserved the right to approve the language in any financial guarantee bond as well as in the general partner indemnification agreement, the limited partner indemnification and security agreement, and the remarketing agreement.
It is undisputed that neither Home nor Graham had direct communication with limited partners or their advisors prior to their investment in the partnership; rather, Equity solicited the limited partners primarily through the Private Placement Memorandum (PPM) (twice supplemented), and oral presentations. Alleged misrepresentations and material omissions in Equity's solicitation initiatives form the basis of this action. As for Home and Graham's involvement, the investors primarily rely on a legal memorandum prepared for Graham by the Duane, Morris & Heckscher (Duane Morris) law firm.
In the course of analyzing the transaction for Home, Philip Glick, vice president of Graham, sent a copy of Equity's PPM to Duane Morris for review, specifically requesting Donald Auten, a lawyer in the tax section,
Auten prepared a 15 page memorandum (Duane Memo); he stated in his deposition that he was singularly responsible for its contents, and that he based his analysis solely on his review of the PPM.
In September 1984, Glick (Graham) wrote a letter to Equity regarding changes to the PPM. He included several suggestions set forth in the Duane Memo, including the need to insert disclaimer language in the PPM and surety related documents. Shortly thereafter, Glick wrote a follow-up letter to Equity and attached a copy of the Duane Memo, noting that "this Memorandum highlights some additional technical corrections which we feel should be made in the Equity Group Offering Memorandum from a specific tax and securities disclosure standpoint". Glick requested Equity's "cooperation with us in including these changes in the supplement", and related that,
The first supplement to the PPM was released on November 21, 1984. It incorporated disclaimer language providing that Home and Graham "have not made any investigation ... as to the merits ... and make no representation nor express any opinion with respect thereto ...", along with an explicit acknowledgement that investment decisions were made without reliance on the surety (Home) or its agent (Graham). In addition, the supplement emphasized the investors' unconditional obligation to Home under the indemnity agreement. It did not, however, incorporate a number of the other changes suggested in the Duane Memo.
During the latter part of 1984, 40 of the Courtside units remained unsold, with the offering period scheduled to end on January 24, 1985. Four Louisiana general partnerships (E-C One, E-C Two, E-C Three and E-C Four) were formed to purchase the unsold units. Hibernia loaned the funds to each E-C partnership, requiring the Equity principals to become E-C partners and requiring each non-Equity partner in the E-C partnerships to execute a solidary continuing guarantee of the entire Hibernia loan. Home agreed to act as surety for the Hibernia loan. The formation of the E-C partnerships was disclosed in the second supplement to the PPM, issued on January 18, 1985.
In September 1986, over 40 Courtside investors brought suit against, inter alia, Equity, Home, and Graham. The complaint was amended several times, resulting in a third supplemental and amended complaint filed in March 1987. The investors made claims under, inter alia, violations of §§ 12(2) and 15 of the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1933 Act); §§ 20(a) and 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1934 Act), along with Rule 10b-5; the Louisiana Blue Sky Law, La.Rev.Stat.Ann. § 51:701 et seq.; and state law (Louisiana) for fraud and negligent misrepresentation. They sought damages and rescission. Home counterclaimed for enforcement of the indemnity agreements.
As noted earlier, the suits were based on the contention that Equity induced plaintiffs' investments through misrepresentations and omissions in the PPM, and misleading oral presentations. Specifically, they maintained that Equity, inter alia, misrepresented its financial health; the condition, location, occupancy, tenancy and fair market value of the property; and the soundness of the investment (i.e. "virtually risk free").
After over four years of discovery and pretrial motions, Equity, as well as other defendants, announced settlement. (All defendants ultimately settled, except for the Gerald Teel Company, Hibernia, Home, and Graham.) That day, the court granted judgment on Home and Graham's motion to reconsider its earlier denial of summary judgment on the remaining issues,
Over the next two years, the parties disputed issues of costs, interest, attorney's fees, and amounts due Home. Therefore, final judgment was not entered until January 1992. Ten days later, plaintiffs moved for a new trial. Upon denying plaintiffs' motions to file a supplemental memorandum raising a new theory of liability, and for reconsideration of same, the court denied plaintiffs' motion for a new trial. Since then, all but five of the plaintiffs have settled.
Appellants challenge the district court's disposition of the summary judgment motions, and also assert error based on the court's post-judgment rulings.
A. Summary Judgment
We review a summary judgment de novo. E.g., Degan v. Ford Motor Co., 869 F.2d 889, 892 (5th Cir.1989). It may be granted if there is "no genuine issue as to
The movant has the initial burden of demonstrating the absence of material fact issues. Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 82, 121 L.Ed.2d 46 (1992). To avoid summary judgment, the nonmovant must adduce evidence which creates a material fact issue concerning each of the essential elements of its case for which it will bear the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). "[A] dispute about a material fact is `genuine' . . . if the evidence is such that a reasonable jury could return a verdict for the nonmoving party". Anderson, 477 U.S. at 248, 106 S.Ct. at 2510. We resolve all factual inferences in favor of the nonmovant. Degan, 869 F.2d at 892. Needless to say, unsubstantiated assertions are not competent summary judgment evidence. Celotex Corp., 477 U.S. at 324, 106 S.Ct. at 2553.
1. Controlling Person
Sections 15 of the 1933 Act
The parties disagree on the elements for a prima facie case under §§ 15 and 20.
In Thompson, our court held that an officer and director, who owned 24% of the company, and was apparently involved in the day-to-day coordination of loan gathering,
It is clear that Thompson did not definitively address prong one of the Metge test, i.e. a required showing that the defendant exercised control over the general operations of the wrongdoer; nor did it adopt the two prong Metge test, as urged by appellees in reliance on the Seventh Circuit's opinion in Schlifke, 866 F.2d at 949; and, conversely, Metge did not cite Thompson as support for its formulation of prong one (only, as stated supra, as support for prong two).
Thus, the law is somewhat more unsettled as to prong one than Home and Graham would have it. Our decision in Dennis v. General Imaging, Inc., 918 F.2d 496 (5th Cir.1990), however, provides some guidance on that narrow ground. There we adopted a district court opinion, which interpreted Thompson as requiring a plaintiff, for a prima facie case, to show "actual power or influence over the controlled person".
Dennis is consistent with Metge to the extent that both require a separate showing of control over the controlled entity (Equity); but appellants insist that our circuit only requires that they show Home and Graham's power to control Equity, not the actual exercise of that power. We need not presently analyze the above distinction because, even assuming that only the former applies, a reasonable jury could not so find based on the record before us.
According to the affidavits of John MacGregor (assistant vice president of Home), and Glick (Graham), neither Home nor Graham nor their respective employees and representatives were stockholders, directors, officers, employees, or partners of Equity; they did not attend its board or committee meetings; they were not involved in decisions by Equity to purchase properties for syndications to investors; they were not involved in operations of properties purchased by Equity or its affiliates; and they were not otherwise involved in the general operations of Equity, including business, financial and marketing plans.
Appellants fail to contradict these statements with evidence of Home and Graham's power to control the general affairs of Equity. Graham's involvement with the issuance of financial guarantee bonds for other Equity projects,
Appellants' remaining evidence is less persuasive, as it narrowly relates to Home and Graham's involvement in the Courtside transaction.
2. Aider and Abettor
Appellants maintain that fact issues remain concerning Home and Graham's liability under § 10(b) of the 1934 Act
To establish liability, the plaintiff must show (1) that the primary party committed a securities violation; (2) that the aider and abettor had "general awareness" of its role in the violation; and (3) that the aider and abettor knowingly rendered "substantial assistance" in furtherance of it. Abell v. Potomac Ins. Co., 858 F.2d 1104, 1126 (5th Cir.1988) (internal quotations omitted), vacated, Fryar v. Abell, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989).
For the first element, we again assume underlying securities fraud. See notes 27 and 28, infra. Underlying the other two elements — "general awareness" and "knowing substantial assistance" — is a single scienter requirement that varies on a sliding scale from "recklessness" to "conscious intent". Abell, 858 F.2d at 1126-27. The plaintiff must show conscious intent, unless there is some special duty of disclosure, or evidence that the assistance to the violator was unusual in character and degree. Akin, 959 F.2d at 526, 531.
Throughout the district court proceedings, appellants maintained that Equity violated § 10 and Rule 10b-5 by inducing appellants to invest in Courtside through oral and written
The district court concluded that the summary judgment record lacked probative evidence of Home and Graham's "substantial assistance" in the alleged violations,
First, we address appellants' assertion that Home and Graham had a duty to disclose the contents of the Duane Memo. They urge, inter alia, that this duty of disclosure arises from Home's status as their surety. Home and Graham counter by stating that generally, a surety has no legal duty of disclosure. As our court noted in Akin, the "theory" of liability based on a special duty of disclosure is "mushy and difficult to apply", as the source and scope of such a duty is not based on any textual provision of the securities laws, but "appears to be a specie of federal common law". 959 F.2d at 526. We thus refrain from specifically defining the disclosure obligations of a surety and its agent; rather, applying relevant factors annunciated by our court in First Virginia Bankshares v. Benson, 559 F.2d 1307 (5th Cir.1977), cert. denied, Walter E. Heller & Co. v. First Virginia Bankshares, 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d 802 (1978), and applied by other circuits, see Arthur Young & Co. v. Reves, 937 F.2d 1310, 1330 (8th Cir.1991), cert. denied, Reves v. Ernst & Young, ___ U.S. ___, 112 S.Ct. 1165, 117 L.Ed.2d 411 (1992); Jett v. Sunderman, 840 F.2d 1487, 1493 (9th Cir.1988); Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir.1986), cert. denied, 480 U.S. 946, 107 S.Ct. 1604, 94 L.Ed.2d 790 (1987),
We first examine the parties, "relative access to the information to be disclosed". First Virginia Bankshares, 559 F.2d at 1314. To be sure, the summary judgment record reflects that Home and Graham were privy to additional information due to their involvement with the issuance of the bonds, and from Graham's prior dealings with Equity; however, as stated, the standard is "relative access to the information to be disclosed". Id. (emphasis added). Because appellants neglect to demonstrate that such access supplied Home and Graham with superior knowledge of the allegedly misleading aspects of the PPM,
We next examine the benefit derived from the sale of securities. Home and Graham received a premium of $257,060 for bonding a risk of almost $5 million. Given the risk of loss, this factor only slightly supports a duty to disclose.
As for the third factor, "the defendant's awareness of plaintiff's reliance on defendant
Finally, we can quickly dispose of the fourth factor, "the defendant's role in initiating the purchase or sale", id., as it is undisputed that neither Home nor Graham had contact with investors regarding their investment decisions. In sum, we conclude from our analysis of the above factors that Home and Graham did not owe appellants a duty of disclosure.
Appellants next maintain that even if Home and Graham lacked a duty to disclose, their participation in the formation of the E-C partnerships constituted "substantial assistance", unusual in scope and degree; thus, they need not prove conscious intent, only recklessness. Once again, we disagree.
Although there is evidence that Home and Graham were included in discussions regarding the possible failure to fully subscribe Courtside by the closing date, we agree with the district court that there is no evidence that their role extended beyond that of a surety and bonding agent. Rather, the only evidence of involvement by Home and Graham was their refusal to bond the remaining 40 units under one partnership, and subsequent agreement to bond the units under four partnerships (the E-C partnerships); decisions central to their designated function. We thus consider the above assistance, even if substantial, see Insurance Co. of North America v. Dealy, 911 F.2d 1096, 1101 (5th Cir.1990) ("the routine extension of a loan does not amount to substantial assistance"), to be merely "grist of the mill".
Because appellants failed to establish either a duty of disclosure or atypical assistance, they must provide evidence of conscious intent, rather than recklessness. (In considering whether they meet this burden, we assume, without deciding, that Home and
With apparently good intentions, Graham forwarded the Duane Memo to Equity, and suggested that Equity incorporate its counsel's suggestions. Home and Graham's continued participation, despite Equity's failure to adopt some of the suggestions, does not signal their intent to further the fraudulent scheme.
Likewise, Home and Graham's receipt of a reasonable premium for participation in the transaction does not supply a motive. We agree with the Second Circuit that "almost any entity playing a role in a securities transaction will have some economic motivation for doing so". National Union Fire Insurance Co. v. Turtur, 892 F.2d 199, 207 (2d Cir.1989).
In sum, in view of the lack of evidence of intent, the district court properly disposed of appellants' aiding and abetting claim.
3. Fraud and Negligent Misrepresentation
Appellants maintain Home and Graham's failure to disclose misrepresentations and material omissions in the PPM, brought to their attention through the Duane Memo, constitutes negligent misrepresentation under Louisiana law.
In fact, on appeal, appellants do not challenge the court's finding on reliance;
4. Indemnity Agreements
Appellants maintain that fact issues remain concerning the enforceability of their indemnity agreements.
In Dealy, we held that an indemnity agreement is unenforceable due to fraud in the subscription agreement where the surety was "a party to the fraud [as an aider or abettor] or a coconspirator in it". 911 F.2d at 1100.
Our analysis of Louisiana law produces the same result. Even if we construe the indemnity and subscription agreements as interdependent,
To satisfy article 1956, appellants must not only show that a reasonable jury could find the requisite knowledge based on the Duane Memo (and subsequent insertion of exculpatory language in the PPM), but, also, that error resulting from the alleged misrepresentations and material omissions contained in the PPM, and referenced in the Duane Memo, "substantially influenced that consent". La.Civ.Code.Ann. art. 1955. Because the summary judgment record is lacking on evidence of reliance, see supra note 39, appellants' fraud defense fails. See In re J.M.P., 528 So.2d 1002, 1010 (La.1988) (stating that to vitiate consent on the ground of fraud, "the party who asserts that the obligation is null must prove some type of causal relationship between his consent and the vice that influenced it").
Appellants next assert that even if the indemnity agreement is independent, rather than interdependent, and thus unaffected by fraud in the inducement of the subscription agreement, it does not obligate them to indemnify Home. A contract of indemnity is construed in accordance with the general rules governing contract interpretation — "[w]hen the words of a contract are clear, unambiguous, and lead to no absurd consequences, the contract is interpreted by the court as a matter of law." Carter v. BRMAP, 591 So.2d 1184, 1188 (La.App. 1st Cir.1991) (emphasis in original). "Agreements to indemnify are strictly construed and the party seeking to enforce such an agreement bears the burden of proof." Liem v. Austin Power, Inc., 569 So.2d 601, 608 (La.App. 2d Cir.1990).
The indemnity agreement provides:
The referenced bonds provide that "[a] default occurs regardless of whether the Principal for any reason shall have no legal obligation to discharge his, her or its obligations under the Notes to the Obligee or the Permitted Assignee whichever holds the Note(s) which are guaranteed in part by the Surety". (Emphasis in original.) In the same paragraph, Home waives its defenses to payment.
In view of this language, we conclude that the indemnity agreement encompasses fraud; however, even if we accept appellants' assertion that the contract is ambiguous and thus look outside the contract to discern the parties' intent, appellants nonetheless fail to create a material fact issue. The first supplement to the PPM evidences Home's intent that the indemnity agreement impose an unconditional obligation on the investors.
We summarily dismiss appellants remaining two bases for nullifying their obligations.
Second, we reject appellants' attempt to void the indemnity agreements pursuant to § 29(b) of the 1934 Act, 15 U.S.C. § 78cc(b).
In sum, appellants failed to establish a material fact issue regarding the enforceability of the indemnity agreements. Accordingly, in view of their plain meaning, we conclude, as a matter of law, that the investors are obligated to Home, and thus affirm the summary judgment. In so doing, we complete our review of the summary judgment, and turn to appellants' contentions concerning the district court's post-judgment rulings.
B. Post-Judgment Rulings
Appellants object to the rulings on their attempt to rely on a newly raised legal theory as a basis for reconsideration of the summary judgment. Judgment was entered on January 31, 1992. Ten days later (February 10), appellants moved for a new trial (Fed. R.Civ.P. 59), reiterating arguments presented in their pre-judgment motions.
A month later (March 9), appellant-investor Turnbull enrolled new counsel, who, on March 27, filed a motion for leave to file a supplemental memorandum in support of the February 10 motion. The supporting memorandum, adopted by the other plaintiff-investors, asserted for the first time that Home and Graham had aided and abetted Equity in violation of Rule 10b-9, issued under § 10(b) of the 1934 Act.
On April 1, the parties argued the merits of the original (February 10) motion for a new trial. In addition, Turnbull urged that the court consider the Rule 10b-9 theory presented in the supplemental memorandum (which the court had not allowed to be filed), and gave a brief overview of the applicable law. The court agreed with Home and Graham that Rule 10b-9 had not been raised in six years of litigation, and thus refused to consider the new theory/issue. The court also denied the motion for a new trial.
Appellants do not dispute the district court's disposition of their motion for a new trial; rather, they object to its refusal to consider Turnbull's supplemental memorandum. For starters, they contend that simply by raising § 10(b) early on, they put in issue any and all rules adopted pursuant to it. Obviously, this contention is totally without merit. It goes without saying that, in order to be properly raised, an issue must be more specifically framed than as appellants claim. Otherwise, the court, not the parties, would be charged with deciding which claims should be pursued.
Appellants also use more specific approaches to attempt to save this new issue. "[A] trial court may in the exercise of its sound discretion allow a tardy amendment stating an additional ground for a new trial." Dotson v. Clark Equipment Co., 805 F.2d 1225, 1228 (5th Cir.1986) (emphasis in original). The district court certainly did not
First, we agree with the district court that the Rule 10b-9 theory is "new". (In fact, at the April 1 hearing, Turnbull's counsel admitted that a new theory was being presented: "I suggest that all the facts are before the Court, have been before the Court, and this is simply another theory." (Emphasis added.)) As is apparent from Turnbull's post-judgment efforts and brief on appeal, appellants' theory requires the assertion of legal issues not previously raised;
The court was under no obligation to permit appellants to interject a new legal theory, without explanation, after they had failed to do so during three years of discovery, two additional years between the court's granting summary judgment and entering judgment, and almost two months following that entry. See Allied Bank-West, N.A. v. Stein, 996 F.2d 111, 115 (5th Cir.1993) (internal quotations omitted) ("[m]otions for new trial cannot be used to argue a case under a new legal theory"); Simon v. United States, 891 F.2d 1154, 1159 (5th Cir.1990) (stating same with respect to a motion to alter or amend);
For the foregoing reasons, the judgment of the district court is
Thus, it recommended a change in procedure:
It added that "[t]he existing procedure completely undermines that concept of requiring a minimum number of Units to be sold before closing can take place".
15 U.S.C. § 77o.
15 U.S.C. § 78t(a).
17 C.F.R. § 230.405(f) (quoted in Id. at 957-58).
15 U.S.C. § 78j(b).
17 C.F.R. § 240.10b-5 (1992).
As noted in Akin, 959 F.2d at 526 n. 2, although we used the modifier "severe", our definition of recklessness is the same as applied by other circuits.
As for the former, we conclude that the summary judgment evidence of Graham's involvement as bonding agent for other Equity projects, see supra note 19, does not create the inference of particularly substantial or unusual assistance. Our finding to the contrary in Akin, 959 F.2d at 531, is distinguishable. Suffice it to say, the scope and degree of involvement by the defendant/accountant in Akin was far greater than that before us.
As for the latter, the above-quoted statement is perhaps probative evidence of Home's substantial assistance, but it is not sufficient evidence from which a jury could conclude that such assistance was unusual. Interpreting the statement, Pine explained that Home was critical to the closing, and more helpful than A.I.G. (National Union Insurance Company) due to its ability to efficiently process the multitude of documents. Of course, contrary inferences are possible, including that urged by appellants; however, such an inference is not sufficient to create a material fact issue.
In addition, Glick testified that the supplemental PPM sufficiently addressed the concerns of Home and Graham. Finally, in late December, 1984, Home and Graham received an opinion letter from counsel for Courtside stating that
Of course, Home and Graham are not responsible for oral misrepresentations inconsistent with, or not pertinent to, aspects of the PPM discussed in the Duane Memo, as appellants' action against them is based on appellees' failure to correct or otherwise disclose misleading information referenced in the Duane Memo, and their continued participation in the Courtside transaction despite their knowledge of same.
17 C.F.R. § 240.10b-9 (1992) (emphasis in original). "Once the part or none representation has been made, it may not be circumvented by transactions primarily designed to create the appearance of a successful offering in order to avoid the refund feature of the offering". C.E. Carlson, Inc. v. S.E.C., 859 F.2d 1429, 1434 (10th Cir. 1988).
Appellants' assertion that these arguments were raised previously is not supported by the record. Evidence of the formation of the E-C partnerships was used primarily to establish Home and Graham's involvement with Equity, not to establish that formation of those partnerships contravened the terms of the offering in violation of § 10 and Rule 10b-5.
Even if the court abused its discretion in refusing to allow Turnbull to supplement the record for appeal, any error is harmless, because our review is limited to the record before the district court when it ruled. See Topalian, 954 F.2d at 1131-32 n. 10 ("This court's inquiry is limited to the summary judgment record before the trial court: the parties cannot add exhibits, depositions, or affidavits to support their positions on appeal."). For the same reason, we refuse to consider that evidence as it appears in Turnbull's record excerpts.