693 F.2d 932 (9th Cir. 1982), 80-5097, Harmsen v. Smith

Docket Nº:80-5097 to 80-5099.
Citation:693 F.2d 932
Party Name:Fred H. HARMSEN, et al., Plaintiffs-Appellees, v. C. Arnholt SMITH, et al., Defendants-Appellants.
Case Date:December 01, 1982
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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693 F.2d 932 (9th Cir. 1982)

Fred H. HARMSEN, et al., Plaintiffs-Appellees,


C. Arnholt SMITH, et al., Defendants-Appellants.

Nos. 80-5097 to 80-5099.

United States Court of Appeals, Ninth Circuit

December 1, 1982

Argued and Submitted Feb. 5, 1982.

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Thomas R. Sheridan, Simon & Sheridan, Los Angeles, Cal., David E. Monahan, Gray, Cary, Ames & Frye, San Diego, Cal., Alan G. Martin, Horvitz & Greines, Encino, Cal., for defendants-appellants.

Susan Illston, San Mateo, Cal., argued for plaintiffs-appellees; Susan Illston, San Mateo, Cal., Gerald R. Schmelzer, San Diego, Cal., on brief.

Appeal from the United States District Court for the Southern District of California.

Before SKOPIL and SCHROEDER, Circuit Judges, and AGUILAR, [*] District Judge.

SCHROEDER, Circuit Judge.

This case arose out of the failure of United States National Bank (USNB) of San Diego and the disintegration of the financial empire of its former officer, director, and controlling shareholder, C. Arnholt Smith (C. Arnholt). C. Arnholt, in connection with members of his family and the directors and officers of corporations he controlled, allegedly engaged in continuing

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fraudulent activities from 1962 until 1973. Specifically, C. Arnholt, with his daughter Carol Smith Shannon (Shannon), his brother John, his wife Helen, numerous directors of USNB, and others allegedly materially misled USNB shareholders about the many illegal transactions in which defendants were engaged. These transactions generally took three forms: (1) misrepresentation of loan purposes on the books of USNB; (2) granting of loans in excess of National Bank Act (Bank Act) requirements and for insufficient collateral; and (3) funneling USNB loans for undisclosed personal gain.

On October 18, 1973, the Comptroller of the Currency declared USNB insolvent and appointed the Federal Deposit Insurance Corporation receiver. Subsequently, two class actions on behalf of minority shareholders were filed against C. Arnholt and the other USNB directors; Shannon, Helen, John, and the corporation John controlled, First National Finance Corporation FC, were also named as defendants, along with Phillip A. Toft (Toft), an officer and director of Westgate-California Corporation, a major conglomerate that included many Smith-controlled businesses. The two suits were consolidated into the present action.

In June 1974, the FDIC moved to intervene and be substituted for the minority shareholders. The district court permitted intervention but ruled that, under the Bank Act, the minority shareholders had a cause of action in their own right against the bank directors. We affirmed on interlocutory appeal, holding that minority shareholders have a cause of action under the Bank Act even when the only damage claimed is the diminution of the value of their shares. Harmsen v. Smith, 542 F.2d 496, 499 (9th Cir.1976) (Harmsen I ).

In May 1979, all directors of USNB, with the exception of C. Arnholt, settled, and were dismissed from the case. A jury trial followed to determine the liability of C. Arnholt, Helen, Shannon, Toft, John, and FNFC. The trial was bifurcated as to questions of liability and damages.

Plaintiffs proceeded in the liability phase of the trial on three general theories. The first theory, an alleged violation of section 93 of the National Bank Act, 1 was tried against C. Arnholt alone. Second, all defendants were alleged to have violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) 2, and SEC Rule 3 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5 (1981). Primary violations were

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alleged against C. Arnholt; all other defendants were charged with secondary participation in the violations. The secondary section 10(b) theories alleged were "control person" liability under section 20(a) of the Securities Exchange Act, 15 U.S.C. Sec. 78t(a), aiding and abetting liability, and liability for conspiracy to violate section 10(b). Third, pendent state claims of fraud, conspiracy to defraud, abuse of control, and conspiracy to abuse control were tried against all parties.

The jury returned a verdict against C. Arnholt on the Bank Act claim, the section 10(b) primary claim, the section 10(b) conspiracy claim, and the four pendent state claims. Helen, Shannon, Toft, John, and FNFC were found liable for secondary violations of section 10(b) and for pendent state violations of fraud, conspiracy to defraud, and conspiracy to abuse control. No defendant except C. Arnholt was found liable for direct abuse of control. 4

After the jury returned its verdicts in the liability phase of the trial, the district court, pursuant to plaintiffs' request, appointed a special master to gather data to be presented to the jury regarding plaintiffs' damages. The special master sent questionnaires to all USNB shareholders requesting various information, including the date they purchased their shares. The special master prepared two schedules, one based on the actual responses and one based on extrapolations from the actual responses. These schedules were presented to the jury to be considered in its calculation of damages. After instructions by the court, the jury awarded damages of several million dollars on each violation against each defendant. 5

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Punitive damages were also awarded against each defendant with respect to the state law violations. Upon motion of the defendants, the court reduced compensatory damages to the maximum amount for which each defendant was found liable under any one count, and retained punitive damages in full. 6

Each defendant now appeals and raises a number of issues. Aside from questions concerning the general sufficiency of the evidence, the principal contentions of the separate defendants can be summarized as follows:

Helen, joined by the other defendants, focuses her arguments on the propriety of the jury verdict against her under the Securities Exchange Act. As a preliminary matter, she asks this court to reexamine prior holdings that there exists a private right of action under section 10(b).

C. Arnholt does not appeal the adverse verdict of over $12,000,000 for violation of the Bank Act. He does contend, however, that any liability based on section 10(b) or on the pendent state claims was improper because section 93 of the Bank Act provides the exclusive remedy against a bank director.

All of the defendants, other than C. Arnholt, urge that they could not have been secondarily liable under section 10(b) if no primary violation of the same statute was properly asserted against C. Arnholt. They further argue that if no federal cause of action existed against them under section 10(b), the court was without jurisdiction to consider the pendent state law claims. A key jurisdictional issue is, therefore, the claimed exclusivity of the Bank Act.

John and FNFC's principal argument is that the jury was wrongly instructed to give conclusive effect to the specific findings made in a related bankruptcy case, In re Westgate-California Corp., No. 74-413 (S.D.Cal. Feb. 9, 1978). The court there found that John and FNFC had been involved in fraudulent transactions with USNB. This court recently reversed that decision. Westgate-California Corp. v. First National Finance Corp., 650 F.2d 1040 (9th Cir.1981).

Defendants also assert that the pendent state claims are wholly derivative and cannot be maintained by the shareholders themselves. Finally, all defendants also claim irregularities with respect to class certification and the damages calculation.


Preliminary Issues

We begin with the assertion by Helen that this case presents an appropriate opportunity to "reexamine" the availability of a private right of action under section 10(b) of the Securities Exchange Act. We find no such need. The Supreme Court has clearly established the right of individual enforcement under section 10(b) and Rule 10b-5. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 729-30, 95 S.Ct. 1917, 1922-23, 44 L.Ed.2d 539 (1975); Affiliated Ute Citizens v. United States, 406 U.S. 128, 150-54, 92 S.Ct. 1456, 1470-72, 31 L.Ed.2d 741 (1972); Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971). Helen's suggestion that the recent Supreme Court decisions in Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979), and Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979), cast some doubt on the continued validity of the private right of action under section 10(b) is not persuasive. Those cases considered private rights of action under different statutory provisions with different legislative histories. They do not indicate that section 10(b) falls short of meeting the test for implying private rights of action set forth in Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2088, 45 L.Ed.2d 26 (1975).

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The next issue is the claimed exclusivity of section 93 of the Bank Act. We address whether pendent state law claims or section 10(b) claims can be maintained against C. Arnholt for conduct that also allegedly violates section 93.

The question of the availability of relief under state law for conduct covered by the Bank Act has not been litigated often. This court has, however, in the earlier interlocutory appeal of this case, Harmsen I, supra, considered the issue. In Harmsen I we stated that

[P]endent state law claims asserted by the plaintiffs here must be with respect to causes not authorized by reason of Section...

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