Fortson v. Winstead, McGuire, Sechrest & Minick, 91-2303

• Citation: 961 F.2d 469
• Decision Date: 07 April 1992
• Docket Number: No. 91-2303,91-2303
• Parties: Kent D. FORTSON; Kermit R. Ary, Jr.; Donald G. Bell, Jr.; Eugene H. Boyle; Steven W. Bryan; A.T. Carroll; Ida Mae Carroll; E. Mark Deister; John R. Fleck; Larry J. Gerbens; Michael W. Gibson; Eugenia D. Grizzaffi; Sam H. Grizzaffi; Randy J. Henderson; Gail S. Henderson; J. Ray Ivester; Mary E. Ivester; Phyllis K. Johnson; Richard Kelly; Frank Knight; Geraldine Knight; Howard D. Linders; W. Christopher Maxwell; Samuel Mizrahi; George E. Newstedt; Patricia K. Newstedt; William C. Peterson; Richard G. Powers; Stephen Sadove; Douglas A. Smith; Larry R. Smith; Nancy K. Strohs; Richard L. Sussman; George C. Turner; Katherine G. Warwick; William G. Warwick; Marsie R. Hass; Scott D. Hite; Jack J. Tumminello, Plaintiffs-Appellants, v. WINSTEAD, McGUIRE, SECHREST & MINICK, Defendant-Appellee, and Craig Hall; Hall Financial Group; Hall Financial Group, Incorporated; Hall 85 Associates; Arkansas Associates I, Limited; Arkansas Associates II, Limited; Hall Real Estate Corporation; Hall Securities Corporation; Hall Management Corporation; Hall Western, Incorporated; Larry E. Levey; Piers L. Chance; Ted P. Wittner; Wittner Properties, Incorporated; City Centre Limited; Arthur Anderson & Company; Meritor Savings Bank; Hall City Centre Associates Limited Partnership, Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 469

961 F.2d 469

60 USLW 2660

Kent D. FORTSON; Kermit R. Ary, Jr.; Donald G. Bell, Jr.;

Eugene H. Boyle; Steven W. Bryan; A.T. Carroll; Ida Mae

Carroll; E. Mark Deister; John R. Fleck; Larry J.

Gerbens; Michael W. Gibson; Eugenia D. Grizzaffi; Sam H.

Grizzaffi; Randy J. Henderson; Gail S. Henderson; J. Ray

Ivester; Mary E. Ivester; Phyllis K. Johnson; Richard

Kelly; Frank Knight; Geraldine Knight; Howard D. Linders;

W. Christopher Maxwell; Samuel Mizrahi; George E.

Newstedt; Patricia K. Newstedt; William C. Peterson;

Richard G. Powers; Stephen Sadove; Douglas A. Smith;

Larry R. Smith; Nancy K. Strohs; Richard L. Sussman;

George C. Turner; Katherine G. Warwick; William G.

Warwick; Marsie R. Hass; Scott D. Hite; Jack J.

Tumminello, Plaintiffs-Appellants, v. WINSTEAD, McGUIRE, SECHREST & MINICK, Defendant-Appellee, and Craig Hall; Hall Financial Group; Hall Financial Group,

Incorporated; Hall 85 Associates; Arkansas Associates I,

Limited; Arkansas Associates II, Limited; Hall Real Estate

Corporation; Hall Securities Corporation; Hall Management

Corporation; Hall Western, Incorporated; Larry E. Levey;

Piers L. Chance; Ted P. Wittner; Wittner Properties,

Incorporated; City Centre Limited; Arthur Anderson &

Company; Meritor Savings Bank; Hall City Centre Associates

Limited Partnership, Defendants.

No. 91-2303.

United States Court of Appeals, Fourth Circuit.

Argued Feb. 5, 1992.

Decided April 7, 1992.

John Umana, Umana & Associates, Washington, D.C., argued (Ansley J. Robin, Arlington, Va., on brief), for plaintiffs-appellants.

David P. Durbin, Washington, D.C., Jordan, Coyne, Savits & Lopata, Washington, D.C., argued (Marianne I. Dunaitis, on brief), for defendants-appellees.

Before SPROUSE, WILKINSON, and WILKINS, Circuit Judges.

OPINION

WILKINSON, Circuit Judge:

This case raises a question that often arises where one party to a commercial transaction is accused of fraud: whether legal counsel to the allegedly defrauding party owes a duty of disclosure to the allegedly defrauded party. In this case, a group of investors in a real estate limited partnership brought suit against the law firm retained by the general partners to prepare the tax opinion for an offering memorandum. Plaintiffs alleged that the offering memorandum for the limited partnership failed to disclose certain material facts, and they asserted claims for securities fraud and common law claims for fraud, breach of fiduciary duty, and negligent misrepresentation. The district court granted summary judgment to the law firm on all claims, and plaintiffs appeal.

Plaintiffs' claims can survive summary judgment only if the law firm owed them a duty of disclosure. Because plaintiffs have identified no basis in federal or state law for imposing such a duty, we affirm the judgment of the district court. ¹

I.

In 1985, Hall Financial Real Estate Group (HFG) formed the Hall City Centre Limited Partnership (City Centre Partnership) to acquire and operate a commercial office tower in St. Petersburg, Florida. HFG retained the law firm of Winstead, McGuire, Sechrest & Minick (Winstead) to render an opinion concerning certain tax aspects of the City Centre Partnership. In November 1985, HFG commenced an offering of securities in the City Centre Partnership.

HFG offered the securities through a Private Placement Memorandum (PPM), in reliance on an exemption from the registration requirements of the federal securities laws. The PPM, which was drafted and approved by in-house counsel to HFG, disclosed the details of the financing of the City Centre development, reviewed the financial status of the general partners, and identified the risks involved in the investment. It also included a tax opinion letter prepared by Winstead.

Appellants, 55 of the 117 limited partners, purchased about one-third of the securities. Four years later, the value of the investment had declined, and appellants brought this lawsuit, alleging securities fraud and several common law claims. Appellants sued Craig Hall, the syndicator of the offering; the general partners and other affiliates of Hall (referred to collectively as the Hall defendants); and Winstead. Specifically, appellants alleged that the PPM included material misstatements and omissions, thus misleading appellants as to HFG's true financial condition and as to the projected success of the City Centre Partnership. Appellants sought to recover from Winstead on the ground that the firm breached its duty under federal securities laws and state common law by failing to inquire into and ensure complete and accurate disclosure.

Winstead moved for summary judgment on all counts. The thrust of Winstead's motion was that it owed no duty to appellants, and thus could not be held liable for the general partners' failures of disclosure. The district court agreed, and dismissed all claims against Winstead. The court held that uncontroverted evidence established that Winstead's role was limited to providing an opinion to the partnership regarding tax benefits, and did not include confirming the adequacy of the PPM's financial disclosures. In addition, the court ruled that there was no evidence to support a secondary liability claim under the federal securities laws, no evidence of any fraudulent misrepresentations on the part of Winstead that could constitute fraud or negligent misrepresentation, and no evidence that Winstead owed a fiduciary duty to the limited partners. ²

This appeal followed. ³

II.

Appellants do not challenge the accuracy of Winstead's tax opinion. Instead, they challenge the sufficiency of the information provided to them as potential investors and contend that Winstead had a responsibility to ensure full and accurate disclosure. First, appellants complain that Winstead failed to ensure the disclosure of the true financial health of Craig Hall and HFG--that Winstead should have made certain that the PPM or its tax opinion letter disclosed the prior performance of Hall partnerships and certain details about the acquisition financing for City Centre. Further, appellants complain that Winstead failed to reveal the full basis for the PPM's projection of a 95% occupancy rate for City Centre. Finally, appellants contend that Winstead failed to supplement the information conveyed in the PPM with updated financial information as it became available. ⁴

Because of Winstead's failure to ensure accurate disclosure, appellants claim that the law firm should be liable under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and under state common law for fraud, negligent misrepresentation, and breach of fiduciary duty. Liability requires, however, that appellants establish the existence of a duty of disclosure on the part of the law firm arising out of a fiduciary or other relationship of trust. Under § 10(b), a failure to disclose material information constitutes securities fraud only upon proof of a duty to disclose. Chiarella v. United States, 445 U.S. 222, 228, 100 S.Ct. 1108, 1114, 63 L.Ed.2d 348 (1980). Several circuits, including this one, have concluded that the federal securities laws are not the source of such a duty. Schatz v. Rosenberg, 943 F.2d 485, 490-92 (4th Cir.1991); Abell v. Potomac Ins. Co., 858 F.2d 1104, 1124 (5th Cir.1988), vacated on other grounds, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989); Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 496 (7th Cir.1986). Rather, the duty to disclose material facts arises only where there is some basis outside the securities laws, such as state law, for finding a fiduciary or other confidential relationship. Windon Third Oil & Gas Drilling Partnership v. FDIC, 805 F.2d 342, 347 (10th Cir.1986); Barker, 797 F.2d at 496.

Appellants' need to establish a duty of disclosure on the part of Winstead is no less pressing in their state law actions. Texas law (which governs this dispute by the terms of the partnership agreement and the subscription documents) conditions recovery for fraud, negligent misrepresentation, and the like on the existence of a duty. See Hermann Hosp. v. National Standard Ins. Co., 776 S.W.2d 249, 253 (Tex.Civ.App.1989) (duty is essential element of negligent misrepresentation); Moore & Moore Drilling Co. v. White, 345 S.W.2d 550, 555 (Tex.Civ.App.1961) (actual and constructive fraud, if based on failure to disclose, require proof of some duty of disclosure). Under Texas law, that duty must arise out of some fiduciary or other relationship of trust between Winstead and appellants. Marshall v. Quinn-L Equities, Inc., 704 F.Supp. 1384, 1395-96 (N.D.Tex.1988) (reviewing Texas cases requiring fiduciary relationship for claims of negligent misrepresentation, constructive fraud, and breach of fiduciary duty).

In this case, a duty to disclose plainly ran from Craig Hall and HFG itself to the limited partners. Whether such a duty ran from the law firm, however, is a different question. Appellants contend that the district court erred in finding that it did not. They would locate such a duty either in Texas common law or in certain regulations governing attorneys who issue tax shelter opinions. We shall address those sources in turn.

A.

The limited partners first argue that Winstead owed them a duty under state common law as the intended third-party beneficiaries of the legal services Winstead provided to HFG. Appellants point out that the PPM identified Winstead as "counsel for the Partnership" and represented that the tax opinion was "for the benefit of the Partnership and the Partners." Appellants also insist that Winstead's role was broader than that of an outside tax firm. Winstead was involved, for example, in drafting a disclosure letter to investors in other HFG partnerships. In appellants' view, Winstead's significant role in HFG's affairs and its knowledge that the limited partners would rely upon the offering documents entitles them to sue under state law as the "foreseeable and intended...