Cascade Energy and Metals Corp. v. Banks
| Decision Date | 16 February 1990 |
| Docket Number | Nos. 86-1156,86-1157 and 86-1202,s. 86-1156 |
| Citation | 896 F.2d 1557 |
| Parties | Blue Sky L. Rep. P 73,224, Fed. Sec. L. Rep. P 94,955 CASCADE ENERGY AND METALS CORPORATION, a Nevada corporation, Plaintiff-Appellee, Cross-Appellant, v. Jeffrey G. BANKS, Kenneth Caldwell, Coastal Computer Investments, a California partnership, Elmer J. Davis, Harmatz and Hodowski, a California partnership, David G. Henry, Roger A. Mann, H.E. Moses, Robert A. Nickerson, Peter P. Samarin, Herbert W. Stoltenberg, Edwin Stoltenberg, Chris Waugh, Samuel Harmatz, Bernard Hodowski, Patricia Stoltenberg, Mann Caldwell Partnership, a partnership, Delford R. Ashley, George Slater, Patricia Slater, Robert Doub, Sam Hambarian, Alyce Hambarian, Lionel Ascher, A.C. Nejedly, R.E. Donahey, Grace V. Duncan and Elliot Weinberg, Defendants-Appellants, Cross-Appellees. Jeffery G. BANKS, Kenneth Caldwell, Coastal Computer Investments, a California partnership, Elmer J. Davis, Harmatz and Hodowski, a California partnership, David G. Henry, Roger A. Mann, Mann Caldwell Partnership, H.E. Moses, Robert A. Nickerson, Peter P. Samarin, Patricia Stoltenberg, Herbert W. Stoltenberg, Edwin Stoltenberg, Chris Waugh, Delford R. Ashley, George Slater, Patricia Slater, Robert Doub, Sam Hambarian, Alyce Hambarian, Lionel Ascher, A.C. Nejedly, R.E. Donahey, Grace V. Duncan, Elliot Weinberg, Bernard Hodowski and Samuel Harmatz, Counterclaimants, Crossclaimants, Cross-Counterdefendants, Appellants, Cross-Appellees, v. CASCADE ENERGY AND METALS CORPORATION, Counterdefendant, Cross-Counterclaimant, Crossclaim Defendant, Appellee, and W. David Weston, Telegraph Mine Limited, a partnership, Rex Montis Silver Co., Telegraph Mine Joint Venture, Gold Technics, Ltd., a limited partnership, Interphase Corp., James F. Peters, as Trustee of the Gnolaum Unitrust, Cross-Counterclaimants, Cross-Defendants, Crossclaim Defendants, Appellees, Cross-Appellants. Harold Masunaga, Marion Harada, Ukio Ayabe, Lyle Muller, Charles Higashi, Joseph Green, and William Ohara, Amici Curiae. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Steven W. Snarr (Michael E. Talbot with him on the brief), Salt Lake City, Utah, for Cascade Energy and Metals Corp.
Richard A. Love of Reish & Luftman, Los Angeles, Cal. (George M. Haley of Haley & Stolebarger, Salt Lake City, Utah, with him on the brief), for Jeffery G. Banks, Kenneth Caldwell, Coastal Computer Investments, Elmer J. Davis, David G. Henry, Roger A. Mann, Mann Caldwell Partnership, Robert A. Nickerson, Peter P. Samarin, Patricia Stoltenberg, Herbert W. Stoltenberg, Edwin Stoltenberg, Delford Ashley, George Slater, Patricia Slater, Robert Doub, Sam Hambarian, Alyce Hambarian, and Lionel Ascher (the "Associate Defendants").
Richard A. Love of Reish & Luftman, Los Angeles, Cal., for Samuel Harmatz, Bernard Hodowski, A.C. Nejedly, Chris Waugh, H.E. Moses, R.E. Donahey, Grace V. Duncan, Elliot Weinberg, and Harmatz and Hodowski partnership (the "Gold Technics Defendants").
A. Park Smoot, Salt Lake City, Utah, for W. David Weston.
Ronald S. George, Pocatello, Idaho, for Telegraph Mine Ltd.
Lynn P. Heward, Salt Lake City, Utah, for Rex Montis Silver Co.
Delwin T. Pond, Salt Lake City, Utah, for Gnolaum Unitrust.
Delwin T. Pond, Salt Lake City, Utah, for amici curiae.
Before McKAY, BARRETT, and EBEL, Circuit Judges.
This diversity case involves a dispute over a gold mine. The basic controversy is between the mine's principal promoters (W. David Weston and his affiliated entities) and a group of investors in the mine.
The Weston entities basically appeal from the district court's determination after a bench trial that they breached their fiduciary duties to the investors by concealing large cost overruns during the mine's development and by then trying to assess the investors for the overruns. The Weston entities also challenge the district court's decision to pierce the corporate veil among the Weston entities and to nullify the investors' obligation to make additional payments on various promissory notes. The investors generally appeal from the district court's holding that their interests in the mine were not "securities" under We affirm in part, reverse in part, and remand.
federal and state securities laws and that the Weston entities did not defraud the investors into purchasing their interests at the outset.
Plaintiff Cascade Energy and Metals Corporation ("Cascade") is a Nevada corporation which owned and managed a gold mine. During the time relevant here, Weston owned or controlled over 50 percent of Cascade's stock and served as its president. Six other entities affiliated with Weston ultimately became parties to this lawsuit: Telegraph Mine Limited ("Telegraph Limited"), a Utah limited partnership having Cascade as its general partner; Rex Montis Silver Co. ("Rex Montis"), a Utah corporation, 41 percent of whose stock was owned by Weston; Interphase Corporation ("Interphase"), a Utah corporation, 77 percent of whose stock was owned by Weston; Gnolaum Unitrust, a revocable trust established by Weston for the benefit of himself, his wife, and his children; Gold Technics, Ltd. ("Gold Technics"), a California limited partnership having Rex Montis as its general partner; and Telegraph Mine Joint Venture, a joint venture among Telegraph Limited, Rex Montis, and Gold Technics.
This case started when Cascade filed suit in the United States District Court for the District of Utah against various investors in the gold mine (the "Associate Defendants"), seeking to assess them for additional capital contributions. 1 Cascade also sued eight limited partners of Gold Technics (the "Gold Technics Defendants") for allegedly interfering with the Associate Defendants' purported duty to pay additional capital assessments. 2 Another group of investors in the gold mine, who generally support Weston and Cascade in this litigation, are not parties but have been allowed to appear in this Court and below as amici curiae. 3
The Associate Defendants and the Gold Technics Defendants (collectively, the "defendants") counterclaimed against Cascade and brought additional claims against Weston and his affiliated entities. 4 Weston and his entities, in turn, counterclaimed against the defendants.
The following diagram summarizes the relationships among the principal parties at relevant times:
NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE
----------
The following recitation of facts is based upon the district court's findings, which we cannot conclude are clearly erroneous.
In 1974, Cascade purchased the "Telegraph" gold mine, located in eastern California. In 1976, Cascade leased the mine to Telegraph Limited, a Utah limited partnership controlled by Weston having Cascade as its general partner. In January At that time, in January 1979, Telegraph Limited (as 60 percent owner) and Gold Technics (as 40 percent owner) entered into a joint venture, the Telegraph Mine Joint Venture (the "Joint Venture"), to develop the mine. Cascade served as the manager of the Joint Venture.
1979, Telegraph Limited sold a 40 percent interest in the mine lease to Gold Technics for $150,000 ($50,000 in cash with the balance in an installment note). Gold Technics is a California limited partnership established by two accountants (Bernard Harmatz and Samuel Hodowski) and a group of their accounting clients and Weston.
In September 1980, Gold Technics sold three-fourths of its 40 percent interest in the mine to Rex Montis for 480,000 shares of unregistered Rex Montis stock. After the transaction, the mine lease and the Joint Venture were owned 60 percent by Telegraph Limited, 30 percent by Rex Montis, and 10 percent by Gold Technics. The transaction was contingent upon the completion of the sale of 35 working interests in the mine to private investors and upon Rex Montis' compliance with California's regulations governing transactions in unregistered securities. However, Rex Montis never obtained approval of the sale from the California Corporations Commissioner and never physically conveyed the Rex Montis shares to Gold Technics.
In December 1980, the Joint Venture (through Cascade as manager) sold 35 undivided working interests in the mine to various individual and corporate investors. The investors collectively were known as the Telegraph Mining Associates (the "Associates"). As part of the transaction, the Associates agreed to hire Cascade (of which Weston was president) to develop and operate the mine on the Associates' behalf. The Associates further agreed to pay the Joint Venture, as sublessee of the mine, an "annual minimum royalty" of $74,285 per 1/35th unit, consisting of $30,000 in cash and a $44,285 recourse royalty note. 5 That amount, $74,285, was to be paid each year, regardless of whether there was any mineral production. 6 However, by the third year, "production proceeds" were supposed to pay all or most of the $74,285-per-unit minimum royalty payment.
The sale of the 35 units raised $1.05 million immediately, of which $800,000 was to be lent back to the Associates by the Joint Venture as a development loan. Cascade, acting as the Associates' project manager, was to use the $800,000 development loan to develop the mine for the Associates and to prepare the site for gold production. 7
The Associates who purchased the 35 units fell generally into four groups: (1) persons affiliated with Gold Technics, and their friends and acquaintances; (2) other persons whom Weston solicited at a gold convention and elsewhere; (3) a group of Hawaiian investors who were participants in some of Weston's other enterprises (and who are not parties to this appeal but have filed an amicus brief stating their position); and (4) Weston himself and some of his affiliated entities, including his revocable trust, Gnolaum Unitrust. In this litigation, the first and second Associate groups are...
To continue reading
Request your trial
-
In re Pajaro Dunes Rental Agency, Inc.
...Sons Co., Inc., 206 Cal.App.2d 848, 853, 24 Cal.Rptr. 311 (1962). It should be approached with caution. Cascade Energy and Metals Corp. v. Banks, 896 F.2d 1557, 1576 (10th Cir.), cert. denied sub nom., Weston v. Banks, 498 U.S. 849, 111 S.Ct. 138, 112 L.Ed.2d 105 (1990). Relevant examples o......
-
Las Palmas Associates v. Las Palmas Center Associates
...sound public policy dictates that imposition of alter ego liability be approached with caution. (Cascade Energy and Metals Corp. v. Banks (1990) 896 F.2d 1557, 1576.) Nevertheless, it would be unjust to permit those who control companies to treat them as a single or unitary enterprise and t......
-
ENVIRONMENTAL DYNAMICS v. ROBERT TYER AND ASSOC.
...is lifted only in "extreme circumstances" and "only reluctantly and cautiously." Id. at 1051 (citing Cascade Energy and Metals Corp. v. Banks, 896 F.2d 1557, 1576 (10th Cir.), cert. denied, 498 U.S. 849, 111 S.Ct. 138, 112 L.Ed.2d 105 (1990)). Furthermore, "piercing the corporate veil is an......
-
ALT Hotel, LLC v. Diamondrock Allerton Owner, LLC (In re ALT Hotel, LLC)
...piercing when no Michigan court had addressed the issue and other courts had "reached varying results"); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1577 (10th Cir. 1990) (refusing to recognize reverse piercing without guidance from Utah courts); Estate of Daily v. Title Guar. Es......
-
Securities fraud.
...is called a stock and bears the characteristics of a stock, the securities laws apply); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1580-81 (10th Cir. 1990) (finding that working interests in mining claims were "securities" because there was "no ambiguity in the statutory def......
-
Securities fraud.
...instrument bears label "stock" and possesses all characteristics associated with stock); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1580-81 (10th Cir. 1990) (finding that working interests in mining claims were "securities" because there was "no ambiguity in the statutory de......
-
Securities fraud.
...is called a stock and bears the characteristics of a stock, the securities laws apply); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1580-81 (10th Cir. 1990) (finding that working interests in mining claims were "securities" because there was "no ambiguity in the statutory def......
-
Securities fraud.
...is called a stock and bears the characteristics of a stock, the securities laws apply); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1580-81 (10th Cir. 1990) (finding that working interests in mining claims were "securities" because there was "no ambiguity in the statutory def......