Paracor Finance, Inc. v. General Elec. Capital Corp.

• Decision Date: 20 September 1996
• Docket Number: No. 94-15633,94-15633
• Citation: 96 F.3d 1151
• Parties: Blue Sky L. Rep. P 74,088, Fed. Sec. L. Rep. P 99,315, 96 Daily Journal D.A.R. 11,563 PARACOR FINANCE, INC., (fka Elders Finance, Inc.), a New York Corporation; Cargill Financial Services Corporation, a Delaware Corporation; Lutheran Brotherhood, a Minnesota Corporation; Farm Bureau Life Insurance Company, an Iowa Corporation, Plaintiffs-Appellants, v. GENERAL ELECTRIC CAPITAL CORPORATION, a New York Corporation; Jordan D. Schnitzer; Burton A. Burton; Jerry C. Holland, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1151

96 F.3d 1151

Blue Sky L. Rep. P 74,088, Fed. Sec. L. Rep. P 99,315,

96 Daily Journal D.A.R. 11,563

PARACOR FINANCE, INC., (fka Elders Finance, Inc.), a New

York Corporation; Cargill Financial Services Corporation, a

Delaware Corporation; Lutheran Brotherhood, a Minnesota

Corporation; Farm Bureau Life Insurance Company, an Iowa

Corporation, Plaintiffs-Appellants, v. GENERAL ELECTRIC CAPITAL CORPORATION, a New York

Corporation; Jordan D. Schnitzer; Burton A.

Burton; Jerry C. Holland, Defendants-Appellees.

No. 94-15633.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Aug. 14, 1995.

Decided March 13, 1996.

As Amended on Denial of Rehearing and Rehearing En Banc

Sept. 20, 1996.

Michael Traynor, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, California, for the plaintiffs-appellants.

Robert A. Van Nest and Michael J. Proctor, Keker & Van Nest, San Francisco, California, for defendant-appellee General Electric Capital Corporation.

Robert A. Shlachter, Stoll, Stoll, Berne, Lokting & Schlachter, Portland, Oregon, for defendant-appellee Jordan D. Schnitzer.

Charles D. Chalmers, Skjerven, Morrill, MacPherson, Franklin & Friel, San Francisco, California, for defendant-appellee Burton.

Appeal from the United States District Court for the Northern District of California; Charles A. Legge, District Judge, Presiding.

Before FLETCHER, POOLE, and O'SCANNLAIN, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

In reviewing this saga of a debenture offering turned sour, we must decide whether any of the supporting cast on the offeror's side have violated the securities laws. In particular, we must determine whether the lender in a financial transaction should be considered a "controlling person" of its borrower.

I

We begin with the facts that led up to the debenture offering at issue here as an appeal from a "Final Partial Judgment" under Federal Rule of Civil Procedure 54(b) which recapped a series of prior orders of the district court granting summary judgments. Jordan Schnitzer, a Portland businessman, hired Bear, Stearns & Co. to locate a profitable corporation which he could purchase and merge with an unprofitable corporation he owned in order to utilize his corporation's net operating loss carryforwards and obtain certain tax benefits. He was directed to Casablanca Industries, Inc., a California manufacturer of ceiling fans.

In December 1988, Schnitzer approached General Electric Capital Corp. ("GE Capital") for financing for a leveraged buyout of Casablanca. After undertaking its own due diligence, GE Capital agreed to provide a bridge loan for the acquisition. One condition of the bridge loan was that the acquired Casablanca would immediately sell $27 million in high-yield subordinated debentures (aka "junk bonds"), which would be used partially to pay down the loan. The bridge financing would then be replaced with permanent financing by GE Capital. A bridge loan of $53 million to Casablanca Acquisition Corp., a company formed by Schnitzer to make the acquisition, was eventually made in April 1989.

In March 1989, Shearson Lehman Brothers Inc. ("Shearson") was retained to place the subordinated debentures with investors. Shearson prepared a Private Placement Memorandum ("Placement Memorandum") for this purpose. The Placement Memorandum contained various representations about Casablanca including sales projections of $83.3 million and earnings of $8.5 million for fiscal year 1989. Shearson distributed the Placement Memorandum to various institutional investors active in the subordinated debt market.

Elders Finance, Inc. (now known as Paracor Finance, Inc.), Cargill Financial Services Corp., Lutheran Brotherhood, and Farm Bureau Life Insurance Co. (collectively "the Investors") received the Placement Memorandum. During the following weeks, analysts for the Investors performed their own due diligence on the offering. The analysts inspected Casablanca's books, met with its management, visited Casablanca's offices, and had occasional contacts with GE Capital (the substance of which forms part of this dispute). By early May, the Investors had decided to purchase the debentures. ¹ The closing of the deal was delayed until late June, however, by continuing negotiations over its terms.

By June, Schnitzer had successfully completed his tender offer and merged his corporation with Casablanca. In the interim, Casablanca's fortunes had been declining. Casablanca's April sales were only $7.88 million, compared with projections of $10.195 million. May and June sales were also below projections. During this time, Burton Burton was the CEO of Casablanca (though the extent of his involvement in its affairs is disputed), and Jerry Holland was the President.

A Debenture Purchase Agreement ("Purchase Agreement") was eventually negotiated between the Investors and Casablanca. In the Purchase Agreement, Casablanca represented that "[s]ince March 31, 1989, Casablanca has not suffered any Material Adverse Effect." The Investors represented that they "had access to the information [they] requested from [Casablanca]" and that they "made [their] own investment decision with respect to the purchase of the Debentures ... without relying on any other Person." On June 17, 1989, the parties signed the deal documents. On June 23, the Investors wired $27 million to GE Capital as the escrow agent for the various parties to the transaction.

After its first payment of interest on the debentures in August, Casablanca defaulted. Casablanca filed for bankruptcy a little over a year later in November 1990. The Investors, needless to say, were upset.

In March 1991, the Investors filed suit against everyone involved in the transaction, including Casablanca, GE Capital and Schnitzer, Burton, and Holland (collectively "the defendants"). The Investors claimed (1) primary and secondary violations of section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, (2) violations of Oregon Revised Statute § 59.115 (the "Oregon Securities Law"), and (3) common-law torts of fraud and negligent misrepresentation. The Investors also brought a claim of unjust enrichment against GE Capital alone. The Investors' claims against Casablanca were subject to the bankruptcy stay. ²

After a round of discovery, the defendants brought motions for summary judgment on the section 10(b) claims. The district court originally rendered a decision on statute of limitations grounds, but reset the hearing on the defendants' motions after Congress altered the statute of limitations. ³ In January 1992, the court orally granted GE Capital's and Burton's motions for summary judgment against the Investors on the merits but denied Holland's motion. The court also denied Schnitzer's motion without prejudice because the Investors had yet to depose him.

The defendants (other than Schnitzer) next moved for summary judgment on the Oregon Securities Law and common-law claims. In August 1992, the district court orally denied GE Capital's and Burton's motions on the Oregon Securities Law claims, stating: "Bottom line, I think this case is going to have to go to trial at least on the Oregon statutes." The district court granted GE Capital's and Burton's motions against the Investors on the fraud and negligent misrepresentation claims. ⁴

In February 1993, Schnitzer re-filed his motion for summary judgment. Among other things, Schnitzer (joined by the other defendants) claimed that the Oregon Securities Law claims were precluded by a New York choice-of-law provision in the debentures. In April 1993, in its Order on Motions, the district court held that the New York choice-of-law provision precluded application of the Oregon Securities Law and therefore dismissed the Oregon Securities Law claims against all of the defendants, superseding its earlier ruling. Schnitzer had also re-moved for summary judgment on the section 10(b) claims and the common-law claims. Because of the district court's previous rulings in favor of GE Capital and Burton on these claims, the Investors did not oppose Schnitzer's motion, but reserved their right to appeal.

GE Capital next moved for summary judgment on the Investors' unjust enrichment claim against it. In May 1993, the district court orally granted GE Capital's motion.

Finally, the Investors moved for reconsideration of the rulings on the section 10(b) and common-law claims and on the New York choice-of-law ruling. In December 1993, the district court denied the motion. ⁵ On March 15, 1994, the court entered its Final Partial Judgment pursuant to Federal Rule of Civil Procedure 54(b), which recapped all of its holdings in the case.

The Investors timely brought this appeal and make three primary claims. First, they claim that both GE Capital and Burton have committed violations of section 10(b) and Rule 10b-5. Second, they claim that both GE Capital and Burton are secondarily liable as "controlling persons" of Casablanca, who has allegedly also committed violations of section 10(b) and Rule 10b-5. Third, they claim that GE Capital and Burton have violated the Oregon Securities Law, and that the New York choice-of-law clause in the debentures does not preclude them from bringing this claim. We address each of these claims in turn.

II

The Investors contend that GE Capital and Burton are primarily liable for violations of section 10(b) and Rule 10b-5 for making affirmative misrepresentations and for failing to disclose material facts about Casablanca's sales. The heart of the Investors' claim is that they were not provided with the negative sales data for the three months immediately prior to the closing.

Rule 10b-5(b), enacted under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), makes it unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were...