Shawmut Bank, N.A. v. Kress Associates
| Decision Date | 08 September 1994 |
| Docket Number | 92-55913 and 92-55932,Nos. 92-55907,s. 92-55907 |
| Parties | Fed. Sec. L. Rep. P 98,433 SHAWMUT BANK, N.A., as Trustee; Eaton Vance California Municipals Trust, Plaintiffs, and Municipal Securities Trust High Income Series 10; Municipal Securities Trust High Income Series 11, Plaintiffs-Appellants, v. KRESS ASSOCIATES; Paul F. Klapper; Brobeck, Phleger & Harrison; Jones, Hall, Hill & White; Freytag & LaForce; Bear, Stearns & Company, Inc., Defendants, and First Interstate Bank of California, Defendant-Appellee. SHAWMUT BANK, N.A., as Trustee; Municipal Securities Trust High Income Series 10; Municipal Securities Trust High Income Series 11, Plaintiffs, and Eaton Vance California Municipals Trust, Plaintiff-Appellant, v. KRESS ASSOCIATES; Paul F. Klapper; Brobeck, Phleger & Harrison; Jones, Hall, Hill & White; Freytag & LaForce, Defendants, and Bear, Stearns & Company, Inc.; First Interstate Bank of California, Defendants-Appellees. SHAWMUT BANK, N.A., as Trustee; Eaton Vance California Municipals Trust; Municipal Securities Trust High Income Series 10; Municipal Securities Trust High Income Series 11, Plaintiffs, v. KRESS ASSOCIATES; Paul F. Klapper, et al., Defendants, and Thomas C. Dashiell, Esq., Defendant-Appellee, and Freytag & LaForce, Defendant-Cross-Defendant-Appellee, v. FIRST INTERSTATE BANK OF CALIFORNIA, Defendant-Cross-Claimant-Appellant, v. BROBECK, PHLEGER & HARRISON; Jones, Hall, Hill & White, Defendants-Cross-Defendants-Appellees, v. BEAR, STEARNS & COMPANY, INC., Defendant-Third-Party-Defendant-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John B. Quinn, Quinn, Emanuel Urquhart & Oliver, Calvin House, Fulbright & Jaworski, Los Angeles, CA, for plaintiffs-appellants.
Ronald K. Meyer, Munger, Tolles & Olson, Los Angeles, CA, Jeh C. Johnson, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, David A. Lombardero, Hughes, Hubbard & Reed; Los Angeles, CA, Thomas Clifton, Jones, Hall, Hill & White, San Francisco, CA, for defendants-appellees.
Appeals from the United States District Court for the Central District of California.
Before: FLETCHER, PREGERSON and NORRIS, Circuit Judges.
Opinion by Judge FLETCHER; Partial Concurrence and Partial Dissent by Judge NORRIS.
These three related appeals arise from the collapse of a commercial real estate development project financed by industrial development bonds. Bondholders Eaton Vance California Municipals Trust, Municipal Securities Trust High Income Series 10, and Municipal Securities Trust High Income Series 11 sued the developer and affiliated companies, the trustee, and various law firms involved in the bond issue. One of the bondholders, Eaton Vance, also sued the underwriter. The bondholders settled with the developer and the law firms, and the district court entered summary judgment in favor of the underwriter and the trustee. The bondholders appeal these judgments.
Eaton Vance's claims against Bear, Stearns & Co., Inc., the underwriter, are based on alleged misrepresentations in the offering documents and alleged breaches of fiduciary duty. We affirm the district court's dismissal of all of Eaton Vance's claims against Bear Stearns except the sixth claim, for breach of fiduciary duty--although as set forth below, we reverse only as to a narrow segment of that claim.
The bondholders' five claims against the trustee, First Interstate Bank of California, are based primarily on the Indenture of Trust, the contract which specified the terms on which the bond proceeds could be disbursed to the developer. The district court concluded that one of those claims had been waived, and that the breaches alleged under other claims did not cause the bondholders' injuries. We affirm in part and reverse in part.
The trustee filed a protective cross-appeal against two of the settling law firms, contending that the district court's order granting the law firms' motion for a good faith settlement determination was based on the mistaken assumption that the trustee's opposition to the motion was mooted by the summary judgment in its favor. Since our partial reversal of the summary judgment in favor of the trustee means that the trustee's opposition to the good faith settlement determination is not moot, and since it is far from clear that the district court's ruling was based on the merits, rather than on an assumption of mootness, we remand.
Eaton Vance v. Bear Stearns
At the end of 1986, Bear Stearns underwrote a $9.7 million issue of industrial development bonds, the purpose of which was to finance the Kress Project, a commercial real estate development project in Long Beach, California. Industrial development bonds, or IDB's, are issued by a municipality; the bond proceeds are lent to a private developer, and the municipality ceases to be liable on the bonds. The advantages attaching to municipal bonds, however, remain: the bonds are exempt from the registration requirements of the Securities Act of 1933, 15 U.S.C. Sec. 77c(a)(2), and even from the private antifraud provisions of the 1933 Act, 15 U.S.C. Sec. 77l(2); see Richard Jennings & Harold Marsh, Securities Regulation at 294-95 (6th ed. 1987). Moreover, the interest paid to the holders of IDB's is tax-exempt. Id.
This latter advantage was largely swept away by the Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat. 2085, and this is in part what led to the complexity of the case before us: all parties involved in the bond issue were eager to close the deal before January 1, 1987, when the new tax laws went into effect, and in order to do so they had to move quickly in the last weeks of December 1986. Ultimately they were forced to structure the transaction in two steps: an initial closing in December 1986, and a second closing in April 1987.
The other twist to this case is that Richard Deringer, one of the principals of the developer Kress Associates, diverted most of the bond proceeds intended for the project to other companies he controlled. He has since pled guilty to two counts of bank fraud.
The major players involved in the issuance of the bonds were the City of Long Beach; Kress Associates, whose partners were Richard Deringer and Paul Klapper; First Interstate Bank of California (FICAL), the bondholders' trustee; Bear Stearns, underwriter for the bond issue; and three law firms: Jones, Hall, Hill & White, representing the City; Freytag & LaForce, representing Kress Associates; and Brobeck, Phleger & Harrison, representing Bear Stearns.
The significant documents were the Purchase Agreement, a contract between the City and Bear Stearns in which Bear Stearns agreed to purchase the bond issue for face value, less a reoffering discount; the Loan Agreement, a contract between the City and Kress Associates which set forth the terms of the City's loan of bond proceeds to Kress; the Company Note, in which Kress agreed to repay the City; the Indenture of Trust, a contract between the City and FICAL as trustee for the bondholders, which assigned the City's rights under the Loan Agreement and Company Note to FICAL, and set forth the terms under which bond proceeds could be disbursed to Kress; the Guaranty of Operating Deficits by Kress Associates' partners, which was to provide security for certain of Kress's obligations under the Loan Agreement; and the Surety Bond, which provided additional security for the guaranty.
The bonds were issued on December 23, 1986; bond proceeds were to be held in escrow by FICAL until Kress Associates satisfied various outstanding conditions of the Indenture--obtaining a construction contract, a surety bond, and title to the development property. The Indenture provided that if the conditions were not met by April 15, 1987, the bonds would be subject to mandatory redemption, to take place on June 1, 1987.
Between December 1986 and March 1987, Eaton Vance, an institutional investor, placed orders for and subsequently "settled" or finalized the purchase of $4.5 million in bonds, in four installments. At the time it placed its first order, the only offering document available was a Preliminary Official Statement (POS), prepared by Bear Stearns through its counsel, the Brobeck firm. Before the settlement date for the first and all subsequent orders, Bear Stearns mailed out the Official Statement (OS), which superseded the POS. It is not disputed that Eaton Vance received the OS. Eaton Vance's portfolio manager, however, testified that nobody at Eaton Vance read the OS in connection with the first two or three purchases, and that he himself could not recall having read the OS before making any of the purchases. The bulk of Eaton Vance's claims against Bear Stearns rest on alleged misrepresentations and omissions in the POS and the OS.
Eaton Vance made its final bond purchase in mid-March, 1987. As the April 15, 1987 escrow deadline approached, Bear Stearns learned that the conditions for closing escrow had not been met. According to Bear Stearns, a Bear Stearns director contacted Eaton Vance and two other institutional bondholders and got their permission to extend the deadline by one week. According to Eaton Vance, there is a dispute of fact on this issue. The escrow conditions were apparently fulfilled by April 22, 1987, and the bond proceeds became available for release from FICAL's Construction Fund.
A year later, Eaton Vance learned that Kress Associates had made very little progress on the construction project, despite having drawn down nearly all of the bond proceeds. Eaton Vance contacted Bear Stearns and requested rescission of its purchase contract. That request was refused. In October 1988, Eaton Vance and the other bondholders replaced FICAL with a different trustee. Kress Associates was declared to be in default on its loan agreement and note, and the project was abandoned. On December 1, 1988, Kress Associates' semiannual debt service...
To continue reading
Request your trial
-
Holden v. Deloitte and Touche Llp
...the Ninth Circuit has observed that California's law of loss causation is far from clear or settled. Shawmut Bank, N.A., et al. v. Kress Assoc., et al., 33 F.3d 1477, 1495 (9th Cir.1994). Specifically, the Shawmut Bank court observed that "[t]he parties' and district court's confusing use o......
-
New Gold Equities Corp. v. Jaffe Spindler Co.
...Fed.Appx. 118, 122 (3d Cir. 2006) ; In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1309 (11th Cir. 2006) ; Shawmut Bank, N.A. v. Kress Assocs., 33 F.3d 1477, 1491 (9th Cir. 1994) ; Lorenz v. CSX Corp., 1 F.3d 1406, 1415 (3d Cir. 1993) ; Premier Bank v. Tierney, 114 F.Supp.2d 877, 881 (W.D.......
-
Lopes v. Vieria
...at a minimum, knowledge of changes made in the [offering document] must be imputed to [plaintiff].Shawmut Bank, N.A. v. Kress Assoc., 33 F.3d 1477, 1485 n.1 (9th Cir. 1994). There is a dispute as to what was disclosed about Mr. Vieira and the accountants' work and analysis in the financial ......
-
Dell'Oca v. Bank of New York Trust Co.
...upon a consideration of the insufficiency of the evidence to support the verdict"'"].) Plaintiffs cite Shawmut Bank, N.A. v. Kress Associates (9th Cir.1994) 33 F.3d 1477 (Shawmut), a case with some factual similarities to the present case, but also with differences that illustrate the flaws......
-
The Comprehensive Environmental Response, Compensation, and Liability Act: the correct paradigm of strict liability and the problem of individual causation.
...Corp., 155 F.3d 1130, 1135 n.1 (9th Cir. 1998) ("Much confusion surrounds the term `proximate cause.'"); Shawmut Bank v. Kress Assoc., 33 F.3d 1477, 1495 (9th Cir. 1993) ("The parties' and the district court's confusing use of the term proximate cause to describe the concept of cause in fac......
-
Half-truths: protecting mistaken inferences by investors and others.
...shown an inclination in securities fraud cases to make such determinations "as a matter of law." See, e.g., Shawmut Bank v. Kress Assoc., 33 F.3d 1477, 1485 (9th Cir. 1994) (holding that an underwriter's failure to disclose a developer's principal's prior diversion of money to his other com......