First Interstate Bank of Nevada, N.A. v. Chapman & Cutler

• Citation: 837 F.2d 775
• Decision Date: 19 January 1988
• Docket Number: No. 86-2613,86-2613
• Parties: , Fed. Sec. L. Rep. P 93,610 FIRST INTERSTATE BANK OF NEVADA, N.A., as administrator of the estate of Johanna W. Nelson, and representative of a bondholder class, Plaintiff- Appellant, and Harold Olshansky, et al., Proposed Intervening Plaintiffs-Appellants, v. CHAPMAN & CUTLER, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 775

837 F.2d 775

56 USLW 2484, Fed. Sec. L. Rep. P 93,610

FIRST INTERSTATE BANK OF NEVADA, N.A., as administrator of the estate of Johanna W. Nelson, and representative of a bondholder class Plaintiff- Appellant and Harold Olshansky, et al., Proposed Intervening Plaintiffs-Appellants, v. CHAPMAN & CUTLER, Defendant-Appellee.

No. 86-2613.

United States Court of Appeals Seventh Circuit.

Argued April 8, 1987.

Decided Jan. 19, 1988.

R. Alan Stotsenburg, R. Alan Stotsenburg, P.C., New York City, for plaintiff-appellant.

John T. Hickey, Kirkland & Ellis, Chicago, Ill., for defendant-appellee.

Before WOOD, COFFEY, and RIPPLE, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

Johanna W. Nelson filed suit against the law firm of Chapman and Cutler, alleging that it had violated state and federal securities laws as well as federal racketeering laws in connection with several public bond offerings. Ms. Nelson died during the course of the litigation below and Judge Hart permitted the substitution of First Interstate Bank of Nevada, the executor of Ms. Nelson's estate, as the named plaintiff. The Bank sought certification of the action as a class action; certification was denied for lack of a proper class representative and the district court dismissed the complaint for failure to state a claim. Following dismissal, several other proposed class representatives sought to intervene in order to represent the class. Intervention was denied. The Bank, joined by the proposed intervenors, now appeals. ¹ We affirm.

A.

For purposes of evaluating a dismissal for failure to state a claim, we assume that the well-pleaded allegations of the complaint are true. A complaint may be dismissed for failure to state a claim only if the plaintiff can prove no set of facts upon which relief may be granted. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Meriwether v. Faulkner, 821 F.2d 408, 411 (7th Cir.), cert denied, --- U.S. ----, 108 S.Ct. 311, 98 L.Ed.2d 269 (1987). We reject at the outset the Bank's contention that Chapman and Cutler's motion to dismiss was converted by operation of law to one for summary judgment by the consideration of matters outside the pleadings. See Fed.R.Civ.P. 12(b)(6). The Bank fails to point to any matters outside the pleadings that the district court considered with respect to the dismissal for failure to state a claim. The Bank's sole contention is that the district court considered matters outside the pleadings when it ruled on a preliminary statute of limitations challenge almost one year earlier. The Bank has not shown that the court considered matters outside the pleadings in its dismissal on the merits.

1. The Complaint

The allegations of the complaint set out the following sequence of events. In the spring of 1973, Cornelius Pitt requested that Chapman and Cutler act as bond counsel in connection with a proposed public bond offering, McCormick A, to finance the construction of a nursing home. Chapman and Cutler eventually declined to act as bond counsel on the issue and advised Pitt that the proposed bonds would have to be registered with the Securities and Exchange Commission, meaning they would not be eligible for tax-exempt status, in part because of concerns about the not-for-profit status of the issuing corporation, McCormick Health Centers, Inc.

Later, in July 1975, Chapman and Cutler, in its role as bond counsel to the Cook County Board, issued a legal opinion to the Board in connection with the McCormick A bond issue. The opinion related to the bonds' tax-exempt status. The Cook County Board required such an opinion prior to adopting a resolution approving of the bond issue and accepting the nursing home as a gift from the issuer of the bonds. The resolution was necessary in order for the bonds to be tax-exempt. Chapman and Cutler's opinion was stated hypothetically: assuming certain facts, Chapman and Cutler gave its opinion that the bond issue would be tax-exempt. As it turned out, however, some of the "assumed facts" were not consistent with the actual facts Chapman and Cutler had learned earlier. The Board adopted the necessary resolution and the McCormick A bonds were issued.

The basis of the complaint therefore is that Chapman and Cutler, at the time it issued its opinion to the Cook County Board in 1975, knew, based on information it had received and conclusions it had arrived at in 1973, that the issuing corporation had not complied with the requirements necessary in order to achieve status as a not-for-profit corporation. Thus the assumption on which the opinion was based (which depended on whether the corporation qualified as a not-for-profit corporation), was false. ²

The McCormick A bonds were fully refunded. The money used to refund the McCormick A bonds came from later bond issues: McCormick B, McCormick C, Domicile A, and Domicile B. The Bank refers to this as a classic Ponzi scheme, meaning that the later revenues were diverted from their stated purposes and used to pay off the McCormick A bond issue. Chapman and Cutler issued legal opinions similar to the one issued for McCormick A bonds on two of the other bond issues, Domicile A in June 1977 and Domicile B in May 1979. The Domicile A opinion was addressed to the president and board of trustees of the Village of Glenview, while the Domicile B legal opinion was again addressed to the Cook County Board. Again, the opinions were based on an assumption concerning the bond issue's tax-exempt status which, the complaint alleges, Chapman and Cutler either knew to be false or recklessly assumed to be true.

The bond issuers became bankrupt. Only the McCormick A issue was ever refunded. The remaining bond issues, McCormick B, McCormick C, Domicile A, and Domicile B, defaulted. The amount defaulted on the remaining bond issues exceeds twelve million dollars. Ms. Nelson, the original plaintiff, had purchased one McCormick B bond.

2. Prior Proceedings

Ms. Nelson initially filed suit on behalf of herself and as representative of a class whose members were the purchasers of bonds from all four of the defaulted bond issues against the underwriters, promoters, bond counsel, controlling persons, and others in November 1980 before Judge Plunkett. Chapman and Cutler was not a defendant in that suit. The parties subsequently stipulated that Ms. Nelson was a proper class representative. During discovery in that case she learned of Chapman and Cutler's involvement in the transactions, including the facts surrounding Chapman and Cutler's declining to act as bond counsel in 1973. After Judge Plunkett denied her motion to add Chapman and Cutler as a defendant in that case, this lawsuit was filed.

B.

1. Count I

Count I forms the heart of the complaint. The Bank alleged that Chapman and Cutler, by issuing its legal opinions to the municipalities, aided and abetted violations of or conspired to violate the federal securities laws, specifically Sec. 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and Sec. 17(a) of the Exchange Act of 1933. The district court rejected the Bank's claim, holding that the complaint merely alleged that Chapman and Cutler's actions were a "but-for" cause of the McCormick B bond issue which she had purchased.

All plaintiff alleges is that the McCormick B issue would never have taken place but for the McCormick A issue (and its near default), and the McCormick A issue would never have taken place but for Chapman & Cutler's failure to reveal the real facts that destroyed the tax exempt status of the bonds.

Mem. Op. of June 19, 1986 at 8. The court relied on Judge Plunkett's reasoning in an opinion rendered in the first class action as well as Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61-62 (2d Cir.1985). The district court rejected the Bank's argument that Chapman and Cutler's involvement in the Domicile A and B bond issues was in any way relevant, noting "causation does not (in law anyway) run backwards in time." The court also summarily rejected plaintiff's conspiracy allegations. On reconsideration, the court acknowledged that the Domicile A bonds, for which Chapman and Cutler had given an opinion to the Village of Glenview, were issued before, not after, plaintiff's McCormick B bond. Nonetheless, it found that plaintiff had merely shown "that it had another 'but-for' cause for the collapse of McCormick B, and that is still insufficient." Mem. Op. of September 4, 1986 at 2. The court also pointed to this Circuit's then-recent decision in Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490 (7th Cir.1986), as an additional reason for affirming the dismissal. The court quoted our language in Barker to the effect that when the alleged securities law violation is "a failure to 'blow the whistle,' the defendant must have a duty to blow the whistle." Id. at 496 (emphasis supplied), quoted in Mem. Op. of September 4, 1986 at 2.

On appeal the Bank first argues that the court misread Judge Plunkett's opinion in the first class action and the holding of Bloor. We disagree. In the main case, Judge Plunkett dismissed the complaint against two lawyers who allegedly made false statements only with respect to the McCormick A issue, reasoning that the misapplication of the proceeds of the later bond issues was a superseding event. It was the misuse of those proceeds to refund the McCormick A issue which allegedly caused the plaintiff's injury; the two lawyers had been involved only with the McCormick A issue, not the later, defaulted bond issues. Judge Plunkett thus rejected the notion that the subsequent bond issues were the inevitable result of the defendants' need to acquire funds to avoid defaulting on the McCormick A issue. This reasoning is applicable here. The misuse of the McCormick B bond proceeds can in no way be said to be the inevitable result of Chapman and Cutler's prior allegedly false opinions regarding the tax-exempt status...