Brown v. City of Covington
| Citation | 805 F.2d 1266 |
| Decision Date | 20 November 1986 |
| Docket Number | Nos. 85-5714,85-5715,s. 85-5714 |
| Parties | , Fed. Sec. L. Rep. P 93,004 LCDR (Ret.) Lawrence BROWN and Alice Brown, et al., Plaintiffs-Appellants (85-5714), Plaintiffs-Appellees (85-5715), v. CITY OF COVINGTON, Defendant-Appellee (85-5714), Defendant-Appellant (85- 5715). |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
Lawrence R. Elleman (argued), Cincinnati, Ohio, for defendant-appellee.
James A. Nolan, Nolan and Freihofer, Covington, Ky., Charles J. Hecht (argued), New York City, for plaintiffs-appellants.
James A. Nolan, Nolan and Freihofer, Covington, Ky., for plaintiffs-appellees.
Joseph T. Condit, Covington, Ky., Lawrence R. Elleman (argued), Cincinnati, Ohio, for defendant-appellant.
Before LIVELY, Chief Judge; MERRITT, Circuit Judge; and TIMBERS, Senior Circuit Judge. *
This class action concerns a bond issue by appellee City of Covington, Kentucky ("City"), to finance the construction of a health care center. Appellants, the class of persons who purchased the bonds, appeal from a judgment entered June 17, 1985 in the Eastern District of Kentucky, Henry R. Wilhoit, Jr., District Judge, dismissing appellants' federal securities law claims against the City. The court held that, since government entities like the City were not specifically included within the pre-1975 definition of the term "person" in Sec. 3(a)(9) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78c(a)(9) (1974) ("1934 Act"), appellants could not maintain an action against the City under Sec. 10(b) or Rule 10b-5. Appellants argue that the failure of Congress to include government entities like the City within the definition of "person" in Sec. 3(a)(9) was merely a stylistic oversight.
We hold that, prior to the 1975 amendment to Sec. 3(a)(9), cities were not within the definition of the term "person" in the 1934 Act. Consequently no action under Sec. 10(b) or Rule 10b-5 is maintainable against the City for acts committed prior to the effective date of the 1975 amendment. We affirm.
We summarize only those facts believed necessary to an understanding of the issues raised on appeal. 1
In June 1972, the City issued $4,425,000 principal amount of Health Care Revenue Bonds. The proceeds of these tax-exempt municipal revenue bonds were used to finance the development and construction of a City-owned, non-profit geriatric health care center. The idea for the health care center seems to have originated with the Mayor of the City and two independent promoters in early 1971. By October 1971 the promoters had set up a non-profit corporation to develop and run the health care center. Various feasibility studies were prepared at the behest of the promoters. While the results of these studies are disputed by the parties, it appears that the first two studies found no real demand for additional health care facilities in the area, and the two later studies found sufficient demand. The health care center corporation also hired a financial advisor/underwriter for the bond issue. It was discovered later that this underwriter was controlled by one of the promoters.
The bonds were sold through a final prospectus dated June 26, 1972. Shortly after the bonds were sold the Securities and Exchange Commission ("SEC") began an investigation of the offer. This investigation ended in permanent injunctions being entered against the promoters, among others, enjoining them from future violations of the federal securities laws. Senex Corp., supra note 1, 399 F.Supp. at 499. News of this investigation caused the trading price of the bonds to plummet.
On November 1, 1974, the instant class action was commenced on behalf of all those persons who had purchased the bonds between the bonds' initial offering and October 1, 1974. This class included not only those persons who held bonds at the time the complaint was filed, but also those persons who had sold their bonds at a loss prior to commencement of the action (collectively "appellants"). Appellants sued various defendants, including the City. Appellants' amended complaint alleged that the June 26, 1972 prospectus materially misstated and omitted relevant information about the bond offering. Appellants alleged that the prospectus failed to disclose a profit to the promoters from the construction cost of the center; that the prospectus failed to disclose the existence of the two unfavorable feasibility studies; that the prospectus failed to disclose the relationship between the underwriter and a promoter; and that the prospectus generally misstated the health care center's chances of profitability. Appellants claimed that these omissions and misstatements caused them to buy bonds at artificially inflated prices in violation of Sec. 10(b) of the 1934 Act, 15 U.S.C. Sec. 78j(b)(1974), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1974). Appellants alleged that the City was aware of the omissions and misstatement and "authorized and approved" the prospectus.
After numerous motions, the district court certified the class on July 8, 1978. Discovery on the merits ensued and culminated with the City's motion for summary judgment filed on July 19, 1979. The City argued that it was not a "person" within the meaning of the pre-1975 version of Sec. 3(a)(9) of the 1934 Act and therefore not susceptible of being held liable under Sec. 10(b) or Rule 10b-5. While this motion was pending, the City petitioned the court for permission to sell the health care center. Under an agreement approved by the court, most of the proceeds of the sale were used to purchase United States Treasury obligations in an amount large enough to insure the payment of principal and interest on all outstanding bonds. Another $64,899.45 of the proceeds was earmarked for those class members who had sold their bonds at a loss prior to the commencement of the action. The court ordered the remaining $150,000 in sale proceeds impounded until it could rule on the City's summary judgment motion.
On April 9, 1984 the court awarded summary judgment in favor of the City. The court held that the City was not a "person" within the pre-1975 definition of that term provided in Sec. 3(a)(9) of the 1934 Act. The court then reasoned that the City could not be held liable under Sec. 10(b) or Rule 10b-5 because the statute only proscribes fraudulent conduct by "any person". The court also dismissed appellants' pendent state law claims against the City for lack of jurisdiction.
Appellants settled with all remaining defendants. Under the terms of these agreements all class members were fully compensated for any proven losses they had incurred. These agreements plus the sale proceeds insured that all class members' claims were fully compensated. The settlement agreements also provided for a significant award of attorneys' fees to appellants' counsel. These agreements were approved by the court in an order dated June 6, 1985. On June 18, 1985 the court disbursed the remaining $150,000 in sale proceeds to the City and entered a final judgment in the case. Appellants have appealed from that portion of the judgment awarding the City summary judgment on appellants' 1934 Act claims and the disbursement to the City of the $150,000. 2 The City has cross-appealed from the court's approval of the award of attorneys' fees to appellants' counsel. 3
The only issue raised on this appeal is whether the City is a person within the meaning of the pre-1975 version of Sec. 3(a)(9) of the 1934 Act. For the reasons set forth below, we hold that the City is not a person within the pre-1975 version of Sec. 3(a)(9) of the 1934 Act and cannot be held liable under Sec. 10(b) or Rule 10b-5 for acts or omissions committed prior to the effective date of the 1975 amendment to Sec. 3(a)(9).
We start, as we must, with the language of the statute itself. The pre-1975 version of Sec. 3(a)(9) of the 1934 Act provided:
"The term 'person' means an individual, a corporation, a partnership, an association, a joint-stock company, a business trust, or an unincorporated organization."
1934 Act, ch. 404, Sec. 3(a)(9), 48 Stat. 882. In 1975 Congress amended Sec. 3(a)(9) to read:
"The term 'person' means a natural person, company, government, or political subdivision, agency, or instrumentality of a government."
15 U.S.C. Sec. 78c(a)(9) (1982). Appellants have conceded that the pre-1975 version of Sec. 3(a)(9) covers the City's bond offering. See Pub.L. 94-29 Sec. 31(a), 89 Stat. 97 (1975) ().
On its face, then, the pre-1975 version of Sec. 3(a)(9) does not include government entities like the City. In marked contrast to the 1934 Act, the definition of "person" in the nearly contemporaneously passed Securities Act of 1933 ("1933 Act") specifically includes such government entities. Section 2(2) of the 1933 Act has provided since its enactment that:
15 U.S.C. Sec. 77b(2) (1982) (emphasis added). The combination of the specific inclusion of government entities in the 1933 Act definition of "person" and the omission of such entities in the 1934 Act definition of "person" strongly suggests that Congress intended government entities to be outside the scope of those provisions of the 1934 Act which require the participation of a "person". Greenspan v. Crosbie, [1976-1977 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 95,780 (S.D.N.Y.1976) (...
To continue reading
Request your trial
-
State v. United States
...interpreting the term “person” from the Securities Exchange Act of 1934 sheds little light on the matter. See Brown v. City of Covington , 805 F.2d 1266, 1269 (6th Cir.1986) (holding that cities are not “persons” within the meaning of § 3(a)(9) of pre-1975 version of Securities Exchange Act......
-
Milam v. Mason Technologies
...the court held that the city of Covington is not a "person" and cannot be held liable for fraud under the Securities Exchange Act. Brown, 805 F.2d at 1270-1271. definition in question in Brown is, perhaps, the most similar to the one at issue herein. Both define "person" by stating what the......
-
Sonnenfeld v. Denver
...it did include corporations, which arguably could include municipal corporations. See Brown v. City of Covington, 805 F.2d 1266, 1271-75 (6th Cir. 1986) (Merritt, J., dissenting). The SEC has taken the position that issuers of municipal securities have been included in the definition of per......