2 F.3d 613 (5th Cir. 1993), 92-3376, Abbott v. Equity Group, Inc.

Docket Nº:92-3376.
Citation:2 F.3d 613
Party Name:Walter R. ABBOTT, M.D., et al., Plaintiffs-Appellants, and Mrs. E. Elizabeth Turnbull and Louis R. Koerner, Plaintiffs-Appellants, v. The EQUITY GROUP, INC., et al., Defendants, The Home Insurance Company and the Graham Company, Defendants-Appellees. In re Ronald C. ELLINGTON, et al., Debtors. Mrs. E. Elizabeth Turnbull and Louis R. Koerner, Claima
Case Date:September 28, 1993
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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2 F.3d 613 (5th Cir. 1993)

Walter R. ABBOTT, M.D., et al., Plaintiffs-Appellants,

and

Mrs. E. Elizabeth Turnbull and Louis R. Koerner, Plaintiffs-Appellants,

v.

The EQUITY GROUP, INC., et al., Defendants,

The Home Insurance Company and the Graham Company,

Defendants-Appellees.

In re Ronald C. ELLINGTON, et al., Debtors.

Mrs. E. Elizabeth Turnbull and Louis R. Koerner, Claimants-Appellants.

No. 92-3376.

United States Court of Appeals, Fifth Circuit

September 28, 1993

Rehearing and Suggestion for Rehearing En Banc Denied Nov. 12, 1993.

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[Copyrighted Material Omitted]

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Neal D. Hobson, Jean M. Stallard, Milling, Benson, Woodard, Hillyer, Pierson & Miller, New Orleans, LA, for Mrs. E. Elizabeth Turnbull and Sibley & Parish.

Louis R. Koerner, Jr., New Orleans, LA, for Koerner.

Charles Thensted, Skye McLeod, Gelpi, Sullivan, Carroll & Gibbens, New Orleans, LA, for Abbott, et al.

Steven Jacobson, Charles C. Coffee, Simon, Peragine, Smith & Redfearn, New Orleans, LA, for Home Ins. Co.

J. Walter Ward, Jr., Daniel A. Rees, Christovich & Kearney, New Orleans, LA, for Graham Co.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before REAVLEY, DUHE, and BARKSDALE, Circuit Judges.

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.

I.

In 1984, the Equity Group, Inc., formed Courtside, becoming the managing general

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partner. 1 Limited partners were required to execute a subscription agreement, which, inter alia, emphasized that the investment involved "a high degree of risk and special risks". The purchase price per unit investment was a combination of cash ($1,500) 2 and credit, consisting of two promissory notes for approximately $38,000 (first note) and $7,000 (second note).

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, 3 issued a financial guarantee bond in favor of each bank as permitted assignee, with the Courtside investors as principals, and the partnership (Courtside) as obligee. The bonds obligated Home to pay Hibernia up to $3,941,025 and Security up to $1,050,000.

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, 4 to "review the contents of this Memorandum and provide us with your comments on the structure and adequacy of disclosure, the reasonableness of the tax position taken and the adequacy of the tax opinion relative to the tax discussion". Glick also welcomed "any other observations you [Auten] may have relative to the tax structure and legal disclosure in relation to other projects you may have seen".

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. 5 The Duane Memo began by stating that "[o]ur overall reaction to the adequacy of the disclosure in the PPM from a securities standpoint is that the PPM would appear deficient in several material respects and should be supplemented". Among the items mentioned were (1) the absence of discussion and analysis relating to the prior history of the project; 6 (2)

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troublesome tax issues arising from an appraisal showing a fair market value ($12,700,000) in excess of the arm's length purchase price ($10,249,250); (3) inconsistent calculations of expected proceeds upon sale of the project in 1992 or 1994; (4) the risks to the investors and to Home of a procedure allowing the partnership to hold an interim closing, providing that Equity purchase any remaining Units (up to 146) on the final closing date; 7 (5) the failure to explicitly disclose the true effective interest rate (17%) with respect to the new money under the wraparound mortgage; 8 and (6) the need to include an exculpatory statement in the PPM precluding the investors' reliance on Home in making their investment decisions.

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,

[f]rom past experience we have found that obtaining another viewpoint on our clients' Memorandums has often resulted in some worthwhile improvement, both from a legal and marketing standpoint. I hope these comments will be helpful to you and that they will provide additional comfort to the Home Insurance Company in conjunction with the issuance of its bond.

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. 9

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Subsequent to the expiration of the offering on January 24, 1985, Courtside experienced financial problems and ultimately declared bankruptcy. Because Courtside failed to meet its financial obligations, the banks called the investors' notes. The investors (limited partners) defaulted, thus obligating Home to make payments under the terms of each bond. Home, in turn, looked to the investors for a full accounting, pursuant to the indemnity agreements.

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 Secs. 12(2) and 15 of the Securities Act of 1933, 15 U.S.C. Sec. 77a et seq. (1933 Act); Secs. 20(a) and 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78a et seq. (1934 Act), along with Rule 10b-5; the Louisiana Blue Sky Law, La.Rev.Stat.Ann. Sec. 51:701 et seq.; and state law (Louisiana) for fraud and...

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