Banc One Capital Partners Corp. v. Kneipper

Decision Date03 November 1995
Docket NumberNo. 93-1423,93-1423
PartiesFed. Sec. L. Rep. P 98,935, 33 Fed.R.Serv.3d 949 BANC ONE CAPITAL PARTNERS CORPORATION, et al., Plaintiffs-Appellants, Cross-Appellants, v. Richard K. KNEIPPER and Jones, Day, Reavis & Pogue, Defendants-Appellees, Cross-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

W.D. Masterson, John H. Crouch, III, Theodore C. Anderson, Robert M. Thornton, Kilgore & Kilgore, William Michael Byrd, Jr., Cohan, Simpson, Cowlishaw & Wulff, L.L.P., Dallas, TX, for appellants.

Bruce W. Claycombe, Geary, Porter & Donovan, P.C., Dallas, TX, for Kneipper.

Marvin S. Sloman, Craig W. Weinlein, James E. Coleman, Jr., Carrington, Coleman, Sloman & Blumenthal, Dallas, TX, for Jones, Day, Reavis & Pogue.

Appeals from the United States District Court for the Northern District of Texas.

Before SMITH and EMILIO M. GARZA, Circuit Judges, and BERRIGAN, District Judge. *

EMILIO M. GARZA, Circuit Judge:

A group of disgruntled investors filed this suit for securities fraud arising out of the defendants' failed efforts to successfully capitalize FilmDallas, Inc. ("FilmDallas"), a Dallas-based movie production company. After a five-week trial, the jury returned a verdict against the plaintiff investors on their federal and Texas state securities fraud claims, but in favor of the plaintiffs on their claim of civil conspiracy. The jury also found that two of the investors were in pari delicto with the defendants.

The district court disregarded the jury's civil conspiracy verdict and entered a "take nothing" judgment in favor of the defendants, reasoning that there was no "wrongdoing" upon which a finding of civil conspiracy could be based. The plaintiffs appeal from this judgment and from the district court's grant of summary judgment on their claims for professional negligence and legal malpractice. The defendants appeal from the district court's denial of their summary judgment motion in which they asserted the defense of res judicata. We reverse in part, affirm in part and remand for new trial.

I

The defendant Richard K. Kneipper was chairman of the Board of Directors and an officer in FilmDallas when the private offering of securities in FilmDallas was made. He was also a partner in the defendant law firm Jones, Day, Reavis & Pogue ("Jones Day"), which served as counsel to FilmDallas for the offering.

Kneipper and Sam Grogg, 1 a film industry veteran, had formed FilmDallas in 1986 to participate in a joint enterprise agreement with New World Company Pictures, Inc. ("New World"), an independent film producer and distributor. FilmDallas and New World together would own FilmDallas Pictures, Inc. ("FilmDallas Pictures"), which was to produce and distribute films and would be managed by FilmDallas. Under the joint venture agreement, FilmDallas and New World were each required to contribute to the capitalization of the venture.

Because the resources of Kneipper and Grogg fell short of the needed contribution, they decided to fund FilmDallas' portion through the private offering in FilmDallas. Kneipper and Jones Day prepared a private offering memorandum which detailed the proposal. According to the terms of that memorandum, the proposed offering was on an "all or none" basis: if a minimum of $7.5 million was not raised and deposited in escrow by December 15, 1986, all the money would be returned to the investors.

MVenture/Banc One was the first plaintiff to invest when its board approved a $1 million investment in November 1986, based on a draft of the private offering memorandum. By December, FilmDallas Pictures was already up and operating on loans from New World and contributions from Kneipper and Grogg. At this point, the private offering had not received the required $7.5 million commitment, and Kneipper and Grogg were forced to negotiate an extension on the deadline set forth in the private offering memorandum and an extension on the joint venture deadline with New World.

In early 1987, the plaintiffs C.A. Rundell, William R. Johnson, James A. Bancroft and Thomas and Luanne Tierney also agreed to invest. FilmDallas, however, was still far short of the mark required under the terms of the private offering memorandum. Kneipper was pursuing a $1.2 million investment from a Swiss investor, Geoffrey Jurick, who owned an office building in Dallas, but by early March 1987 there was still no final agreement. After consenting to a series of extensions, the investors eventually issued an ultimatum that they would withdraw unless the offering was by March 18, 1987.

The claims of fraud and conspiracy are based on Kneipper and Grogg's responses to the concerns of the investors during the early months of 1987. The gist of the fraud was defendants' alleged failure to disclose material information at the time it became known to them. The substance and significance of the information was not seriously disputed at trial. Instead, the trial focused on when the information became known to the defendants. The plaintiffs claimed that the misrepresentations and omissions occurred at a time when they could have withdrawn their investments, while the defendants contended that the information became known at a later date when they no longer owed a duty to disclose.

The first material misrepresentation involved defendants' failure to disclose a rent escrow agreement on Jurick's Dallas property, which effectively reduced his net contribution by approximately $500,000. The second involved multiple representations made in order to induce the investors to agree to lower the private offering minimum to $7 million. For example, Kneipper and Grogg represented that New World, out of enthusiasm for the joint venture, had agreed to invest up to $500,000 in the FilmDallas private offering, in addition to its one-half contribution to FilmDallas Pictures. In actuality, New World required the two of them to personally sign a repurchase agreement for the FilmDallas stock. 2

After FilmDallas represented to the investors that final commitments for the $7 million had been reached as of March 18, 1987, the "closing" or "pre-closing," as it was variously referred to at trial, took place that day in a meeting at the offices of Jones Day. In connection with the closing, Jones Day issued an opinion letter stating that all of FilmDallas' material contracts and agreements had been disclosed. On April 21, 1987, all of the signed subscriptions had been received and the escrow agent finally released the funds. FilmDallas subsequently failed, and the plaintiffs lost their entire investment.

II

The investors contend that the charge given to the jury on the securities fraud claims was defective in several respects. We address the one contention that is central to the dispute at trial regarding when information became known to the FilmDallas officers. The investors assert that the district court erred by giving an incorrect instruction on "materiality" 3 in the context of an "all or nothing" offering of securities.

While great latitude is shown the trial court in fashioning jury instructions, we will review them to determine whether they accurately and completely state the law. "[A] trial court has a duty to instruct the jurors, fully and correctly, on the applicable law of the case." Horton v. Buhrke, 926 F.2d 456, 460 (5th Cir.1991); see also EEOC v. Manville Sales Corp., 27 F.3d 1089, 1096 (5th Cir.1994) (upholding charge only if it does not mislead, prejudice, or confuse jury), cert. denied, --- U.S. ----, 115 S.Ct. 1252, 131 L.Ed.2d 133 (1995); FDIC v. Wheat, 970 F.2d 124, 130 (5th Cir.1992) ("Appellate review looks to whether the instruction accurately states the law, and does not mislead the jury.").

The district court gave the following instruction on "materiality" in conjunction with the federal and Texas state securities fraud claims:

For each plaintiff, the date on which the materiality of a fact is to be determined is the date when that plaintiff committed to purchase his FilmDallas securities. Materiality is not determined as of any later date, such as, for example, the formal closing date. To determine whether a violation occurred, you are to look at the date or dates when each plaintiff committed himself to invest in FilmDallas. After such date, disclosure of later-learned information is not required, because the investment decision has already been made.

This instruction was derived from Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876 (2d Cir.1972). 4 The investors contend that this instruction is erroneous in the context of an "all or none" securities offering because it does not acknowledge that their "commitment" was contingent in nature.

We have previously examined the issue of an ongoing duty to disclose in the context of a contingent commitment. See Stier v. Smith, 473 F.2d 1205 (5th Cir.1973). The plaintiff investor in Stier had made the negotiation of his check tendered for payment of the stock contingent on the defendant making a successful public offering. Id. at 1209. The plaintiff claimed the defendant owed a continuing duty to disclose material information concerning the public offering until it was completed. We agreed, holding that whether or not the sale was finalized with the tender was irrelevant where the sale was subject to the condition that the public offering occur and the defendant knew the plaintiff was relying on the success of the public offering. Id. at 1209-10.

An "all or none" offering involves a similarly contingent commitment by the investor. If the offering minimum is not raised and deposited in escrow by a given date, all the money previously "committed" will be returned to the investors. 5 This type of offering was designed to protect the investor in a number of ways. "The all-or-nothing provision serves not only to ensure that the issuing firm has sufficient funds to complete its project, but also to give investors some reasonable indication that they are...

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