Frankel v. Wyllie & Thornhill, Inc.

• Decision Date: 15 April 1982
• Docket Number: Civ. A. No. 72-C-5-C.
• Court: U.S. District Court — Western District of Virginia
• Parties: Charles J. FRANKEL, et al., Plaintiffs, v. WYLLIE & THORNHILL, INC., et al., Defendants and Third-Party Plaintiffs, v. Edward H. DEETS, Jr., Third-Party Defendants and Defendants.

537 F. Supp. 730

Charles J. FRANKEL, et al., Plaintiffs, v. WYLLIE & THORNHILL, INC., et al., Defendants and Third-Party Plaintiffs, v. Edward H. DEETS, Jr., Third-Party Defendants and Defendants.

Civ. A. No. 72-C-5-C.

United States District Court, W. D. Virginia, Charlottesville Division.

April 15, 1982.

COPYRIGHT MATERIAL OMITTED

Edward B. Lowry, Michie, Hamlett, Donato & Lowry, Charlottesville, Va., for plaintiff.

George R. St. John, Charlottesville, Va., Robert L. Dolbeare, Richmond, Va., Wayt B. Timberlake, Jr., Staunton, Va., Haugh & Helvin, Robert M. Musselman, Charlottesville, Va., Malcolm M. Christian, Richmond, Va., Fred G. Wood, Jr., Charlottesville, Va., T. L. Plunkett, Jr., Roanoke, Va., John W. Edmonds, III, Richmond, Va., T. Munsford Boyd, Charlottesville, Va., John O. Peters, Richmond, Va., Paxson, Smith, Boyd, Gilliam & Gouldman, Inc., Charlottesville, Va., Jeffrey M. Zwerdling, Richmond, Va., Robert E. Taylor, Lloyd T. Smith, Jr., Charlottesville, Va., for defendants.

Memorandum Opinion and Order

TURK, Chief Judge.

This is an action to redress alleged violations of § 10(b)¹ of the Securities Exchange Act of 1934 and § 12(2)² of the Securities Act of 1933. Currently before the court is the motion for summary judgment of National Bank and Trust Company ("National Bank"), a defendant and third-party defendant. The standard to be applied on such a motion is well-settled: granting the party opposing summary judgment the benefit of all favorable inferences that can be drawn from the evidence before the court and resolving doubt as to the existence of any genuine issue of fact against the moving party,

summary judgment `should be granted only where it is perfectly clear that no issue of fact is involved * * * and this is true even where there is no dispute as to the evidentiary facts in the case but only as to the conclusions to be drawn therefrom.'

Johns Hopkins Univ. v. Hutton, 488 F.2d 912, 918 (4th Cir. 1973), cert. denied, 416 U.S. 916, 94 S.Ct. 1622, 40 L.Ed.2d 118 (1974).³ See also Cram v. Sun Ins. Office, Ltd., 375 F.2d 670, 674 (4th Cir. 1967).

Applying this standard to the facts of this case, as they pertain to National Bank and are summarized below, there remain factual and inferential disputes that can be resolved only by a trier of fact. Accordingly, the motion for summary judgment will be denied. The court writes here not to demonstrate the inappropriateness of summary judgment, which is apparent from the factual disputes engaged in by the parties in their briefs, but rather to settle questions of law necessary to speedily and efficiently bring this litigation finally to a close.

I. Summary of the Facts

This controversy arose from the inadequacy of collateral securing thirteen series of first deeds of trust real estate bonds issued to the public by O'Neill Enterprises, Inc. in 1969 and 1970. Frank A. O'Neill, president and together with his wife sole stockholder in O'Neill Enterprises, Inc., was engaged in the 1960's and early 70's in the purchase, development, and sale of real estate in the Charlottesville, Virginia area. He originally secured his financing through bank loans, but in 1969 turned to real estate bonds as a further source of capital. Between April 15, 1969 and August 15, 1970, O'Neill Enterprises, Inc. issued first deeds of trust real estate bonds totalling $4,285,000, purportedly secured by properties owned by the corporation worth far more than the amount of the issues.

Following serious financial difficulties, the O'Neills and their corporation were adjudicated bankrupts by this court early in 1972. At the same time it was discovered that the properties held by the corporation securing the O'Neill bonds were insufficient to redeem the bonds. This action was then commenced by eighteen bond purchasers against Wyllie & Thornhill, Inc., the Charlottesville brokerage firm that had underwritten and marketed the bonds.⁴ After 331 bondholders had intervened as plaintiffs, the suit was certified as a class action by order of May 10, 1972. Frankel v. Wyllie & Thornhill, Inc., 55 F.R.D. 330 (W.D.Va. 1972).

Plaintiffs' original complaint alleged numerous violations of federal securities law. The prospectuses, or "new issue sheets," disseminated by Wyllie & Thornhill, Inc. allegedly contained misrepresentations and omissions of material fact and were not registered either with the Securities and Exchange Commission or with the Virginia State Corporation Commission. The balance sheets of O'Neill Enterprises, Inc. used by Wyllie & Thornhill, Inc. in connection with the issuance and sale of the O'Neill bonds also allegedly contained misrepresentations and omissions, chiefly failing to disclose the fact that O'Neill Enterprises had been operating at an annual loss in excess of $1,000,000.

Plaintiffs complained that the deeds of trust securing the O'Neill bonds contained a provision for the "substitution of collateral" which could be utilized by the trustees alone without notification or consent of the bondholders and which was in fact employed without their knowledge or consent. The appraised values of the properties used for these frequent substitutions or collateral were allegedly much higher than the real market values, thus substantially impairing the actual value of the bonds.⁵

On May 24, 1972, Wyllie & Thornhill, Inc. and its two principal officers filed a third-party complaint against those they believed primarily responsible for the plaintiffs' losses. Among those sued were William E. Bell and Alvin R. Clements, two of the appraisers who had valued the properties securing the bonds, and National Bank and Trust and Citizens Bank and Trust, the employers of Bell and Clements respectively.⁶ The third-party complaint alleged in particular that the appraisers, and their employers, were aware that their appraisals were being used in connection with the issuance and sale of the O'Neill bonds and that they represented that their appraisals accurately reflected the true values of the properties.⁷ On October 10, 1972, plaintiffs filed a third-party claim under Rule 14(a) directly against the banks and their appraisers, and other third-party defendants, restating in substance the allegations of Wyllie & Thornhill's third-party complaint.

For six years following the entry of the third-party defendants into this suit, all activity ceased. Early in 1979 the litigation resumed and, after extensive discovery, plaintiffs amended their complaint on July 14, 1981 with leave of court to include expanded allegations against the banks and the appraisers. The crux of plaintiffs' allegations can be simply stated as follows: Plaintiffs allege that the appraisers, acting within the scope of their actual or apparent authority as officers of the banks, performed appraisals on the O'Neill properties knowing or recklessly disregarding knowledge that the values they assigned to those properties grossly inflated the actual fair market values, and knowing or recklessly disregarding knowledge that their appraisals were being used in connection with the issuance and sale of the O'Neill bonds.⁸

The appraisals unquestionably played a crucial role in floating the O'Neill bonds. The commitment letters from Wyllie & Thornhill, Inc. to O'Neill Enterprises, Inc., stating the terms under which the bonds would be underwritten and marketed, required, among other things, appraisals from one bank officer from a Charlottesville bank and another from an appraiser of O'Neill's choice reflecting a required ratio of the value of the collateral to the principal amount of the bond issue.⁹ The "new issue sheets" circulated to the public by Wyllie & Thornhill, Inc. represented that William E. Bell, a Vice-President of National Bank, and Alvin Clements, Executive Vice-President of Citizens Bank, had appraised the property securing the bonds at a value more than sufficient to cover the amount of issue. Further, the appraisals were used in the O'Neill balance sheets, allegedly to inflate the capital of the corporation and to mask its continuing losses.

The role of the appraisals is clear. Without appraisals reflecting sufficient value on the properties used to secure the bonds, the ratio of debt to collateral required by the commitment letters and by the deeds of trust could not have been established and the bonds could not have been issued. Similarly, without such appraisals, there would be no way to show on the required financial statements that the net worth of O'Neill Enterprises, Inc., allegedly operating at the time at an annual loss of $1,000,000, was in the black.

Also clear is the present posture of the case, renewed after a hiatus of six years. Plaintiffs never asserted claims against the O'Neills and their corporation, as the adjudication in bankruptcy had rendered them judgment-proof. Having determined that a substantial recovery is also unlikely against Wyllie & Thornhill, Inc., which has long been out of business, plaintiffs are now pressing their claims against the appraisers and the banks. The banks are strenuously objecting to the attempted "transfer" of liability from the original defendants to parties who, they argue, were involved peripherally, if at all, in the alleged scheme to defraud. But sufficient facts are present in the substantial record developed in this case to raise a genuine dispute concerning the degree of scienter on the part of the appraisers and their banks. Whether they only negligently failed to discover the role they undoubtedly played in floating the O'Neill bonds, or whether they suspected their role and recklessly closed their eyes to it, or whether they knew affirmatively of that role and consciously furthered the alleged scheme of the primary parties, are questions only a trier of fact can resolve. Here the court writes only to settle legal issues necessary to prepare this case for trial.

II. Reliance and "Fraud on the Market"

Reliance by the plaintiff on a...