Johnston v. HBO Film Mgmt. Inc.

• Decision Date: 14 September 2001
• Docket Number: No. 00-8070,00-8070
• Citation: 265 F.3d 178
• Court: U.S. Court of Appeals — Third Circuit
• Parties: (3rd Cir. 2001) MARGARET L. JOHNSTON AND PAUL E. FONTAINE, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PETITIONERS v. HBO FILM MANAGEMENT, INC., A DELAWARE CORPORATION; ENTERTAINMENT FINANCE SERVICES, INC., A DELAWARE CORPORATION; HOME BOX OFFICE, INC., A DELAWARE CORPORATION; KIDDER, PEABODY & CO., INCORPORATED, A DELAWARE CORPORATION; AND SMITH BARNEY, INC., A DELAWARE CORPORATION

Page 178

265 F.3d 178 (3rd Cir. 2001)

MARGARET L. JOHNSTON AND PAUL E. FONTAINE, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PETITIONERS v. HBO FILM MANAGEMENT, INC., A DELAWARE CORPORATION; ENTERTAINMENT FINANCE SERVICES, INC., A DELAWARE CORPORATION; HOME BOX OFFICE, INC., A DELAWARE CORPORATION; KIDDER, PEABODY & CO., INCORPORATED, A DELAWARE CORPORATION; AND SMITH BARNEY, INC., A DELAWARE CORPORATION

No. 00-8070

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued August 2, 2001

Filed September 14, 2001

On Appeal from the United States District Court for the Western District of Pennsylvania District Judge: Honorable William L. Standish (Docket No. 95-1300) [Copyrighted Material Omitted]

Anthony P. Picadio (argued) Tybe A. Brett Picadio McCall Kane & Norton 600 Grant Street 4680 Usx Tower Pittsburgh, PA 15219-2702, Thomas W. Henderson 3975 One Oxford Centre 300 Grant Street Pittsburgh, PA 15219, Attorneys for Appellants

Perry A. Napolitano (argued) Gregory B. Jordan Roy W. Arnold Traci S. Rea Reed Smith LLP 435 Sixth Avenue Pittsburgh, PA 15219, Attorneys for Appellees HBO Film Management, Inc., Entertainment Finance Services, Inc. and Home Box Office, Inc.

David A. Brownlee Kenneth M. Argentieri Michael J. Lynch David L. McClenahan (argued) Charles M. Tea Paul E. Del Vecchio Kirkpatrick & Lockhart LLP 535 Smithfield Street 1500 Oliver Building Pittsburgh, PA 15222-2312, Attorneys for Appellees Kidder Peabody & Co., Incorporated and Smith Barney, Inc.

Before: Becker, Chief Judge, Mansmann, and Greenberg, Circuit Judges

OPINION OF THE COURT

Greenberg, Circuit Judge

This case comes on before this court on an appeal from an order of the district court entered on November 22, 2000, denying a motion for class certification filed by plaintiffs Margaret Johnston and Paul Fontaine. The plaintiffs were investors in Cinema Plus, a limited partnership formed to finance the production of motion pictures. They claim that the defendants made several fraudulent misrepresentations in the marketing of Cinema Plus, alleging various violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. SS 1961-1968, and state law claims. The plaintiffs filed a motion for class certification which the district court, adopting the report and recommendation of a magistrate judge, denied. For the following reasons, we will affirm the district court's order denying class certification.

I. BACKGROUND

Cinema Plus, a limited partnership, was formed in Delaware in 1987 to produce and distribute feature-length motion pictures. Defendants HBO Film Management, Inc. and Entertainment Finance Services, Inc. were general partners of Cinema Plus and, according to plaintiffs' complaint, defendant Home Box Office, Inc. was a "de facto" general partner of Cinema Plus. Defendants Kidder, Peabody & Co., Inc. and Smith Barney, Inc. marketed interests in Cinema Plus to the public.

The plaintiffs allege that the defendants made material misrepresentations in marketing interests in Cinema Plus. Specifically, the complaint claims that the brokers distributed uniform marketing materials to their sales representatives which, among other things, emphasized Michael Douglas's participation in the production of films, but failed to disclose that he was not under contract to produce any films for Cinema Plus.¹ See App. at 1398-1400 (amended compl. P 21); id. at 1403-04 (amended compl. P 32). For instance, the marketing materials included such statements as:

`Hell Drivers' to be produced by Michael Douglas/Michael Phillips, will be the first partnership production.

Michael Douglas is the hottest name in Hollywood today, both as an actor who just won an Academy Award and a producer. He has just announced his newest production, `Hell Drivers,' and we own it!! That kind of sizzle will get every client's attention.

Investors `could more than double [their] money' or `earn a multiple of their investment' in three years through films produced by Michael Douglas, Michael Phillips, and Aaron Russo.

You know that Michael Douglas is one of the hottest producers today in the movie business. But did you know who was going to finance his next production? You are.

Michael Douglas does not realize his profits as a producer until the investor has been made whole.

Upside potential is a multiple of investment in three years through films by Michael Douglas, Michael Phillips, Aaron Russo and other top producers.

Id. at 1427-30. Similarly, the prospectus wrapper, a summary of information contained in the prospectus distributed to the brokers, included such statements as:

The Partnership has already signed three outstanding producers: Michael Douglas, Michael Phillips and Aaron Russo.

Cinema Plus has already contracted with three leading producers: Michael Douglas..., Michael Phillips..., and Aaron Russo....

Cinema Plus, L.P. is committed to working exclusively with successful producers; only those with commercial track records will produce the Partnership's films. The Partnership has already signed Agreements with Michael Phillips and Michael Douglas, through their partnership, Mercury/Douglas Films....

The producers already under contract to the Partnership are responsible for a succession of hits that have helped fuel revenue growth in the motion picture industry.

Id. at 106-07; id. at 111. The sales representatives purportedly relied upon these materials and represented to the plaintiffs that Michael Douglas would produce two to four films for Cinema Plus. The brokers, however, did not disclose the alleged falsity of their statements.

Further, the plaintiffs claim written materials distributed to the investors, namely the prospectus, created a false and misleading impression, not otherwise rebutted, that Michael Douglas was committed to produce films for Cinema Plus. The prospectus states, in relevant part, that:

The Partnership has contracted for Michael S. Phillips and Michael Douglas to render producing services for a minimum of two and a maximum of four feature-length motion pictures for the Partnership.

. . . .

Either Mr. Phillips and/or Mr. Douglas will be actively involved in a production capacity in all phases of production of all Partnership Films produced under the Mercury/Douglas Agreement.

Id. at 158, 173. The plaintiffs allege they relied detrimentally on their brokers' misrepresentations and omissions of material information as well as those in the prospectus, in investing in Cinema Plus.

In fact, Michael Douglas did not produce any films for Cinema Plus, although the limited partnership did finance and market four films. The films were largely unsuccessful financially, however, resulting in a loss for the partnership, and ultimately, this lawsuit.

The plaintiffs' original complaint stated four counts, alleging one claim arising under RICO, with the predicate offenses of securities fraud, and state law claims for breach of fiduciary duty, negligent misrepresentation and deceptive business practices. The defendants filed motions to dismiss the complaint which, in a report and recommendation filed on January 30, 1996, a magistrate judge recommended be granted. After objections were filed, the district court adopted the magistrate judge's recommendations and granted the defendants' motions. The plaintiffs then appealed to this court.

On appeal, we reversed the district court's order as we found that the facts alleged in the complaint stated a claim under RICO. See Johnston v. HBO Film Mgmt., Inc., 129 F.3d 1255 (3d Cir. 1997) (table). In our opinion, we summarized the plaintiffs' claims:

In short, plaintiffs allege that the appellees misrepresented that Cinema Plus was a safe and prudent investment when, in reality, (1) its primary purpose was to generate large commissions and fees and create opportunities for self-dealing for the defendants and (2) the `protection' of the [Assured Return of Film Payments] was merely an illusory benefit that obfuscated the risky nature of the investment defendants were marketing.

Appellants' Br. Ex. A at 3 (magistrate judge's report & recommendation). We, however, expressly did not address the plaintiffs' claims regarding misrepresentations about Michael Douglas's participation in Cinema Plus, finding them to be outside the scope of our analysis. See id. at 3-4.

On remand, the defendants filed renewed motions to dismiss, which the district court denied. Thereafter, plaintiffs filed an amended complaint alleging the same four counts. Then, they filed a motion for class certification, which, in a report and recommendation filed October 18, 2000, the magistrate judge recommended be denied. On November 22, 2000, the district court adopted the recommendation and denied the plaintiffs' motion.

Therefore, on December 7, 2000, plaintiffs filed a petition for permission to appeal from denial of class certification, pursuant to Fed. R. Civ. P. 23(f). By order dated December 29, 2000, a motions panel of this court denied plaintiffs' petition. See App. at 32. Then, on January 16, 2001, plaintiffs filed a petition for rehearing. On March 15, 2001, the motions panel vacated its earlier order and referred plaintiffs' petition to a merits panel. See id. at 20. Thereafter, on August 1, 2001, in light of our decision in Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., No. 00-1586, 259 F.3d 154, at 162-66 (3d Cir. Aug. 6, 2001), we granted the plaintiffs' petition for leave to appeal.²

II. DISCUSSION

In assessing whether the district court erred in denying plaintiffs' motion for class certification, we apply the abuse of discretion standard.³ See In re LifeUSA Holding Co., Inc., 242 F.3d 136, 143 (3d Cir. 2001); Holmes v. Pension Plan of Bethlehem Steel Corp., 213 F.3d 124, 136 (3d Cir. 2000). A district court abuses its discretion if its decision " `rests upon a clearly erroneous finding of fact, an errant conclusion of law or an improper application of law...