Krim v. BancTexas Group, Inc.

• Decision Date: 12 May 1993
• Docket Number: No. 92-1208,92-1208
• Citation: 989 F.2d 1435
• Parties: Fed. Sec. L. Rep. P 97,451 Jerry KRIM, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. BANCTEXAS GROUP, INC., et al., Defendants, BancTexas Group, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1435

989 F.2d 1435

Fed. Sec. L. Rep. P 97,451

Jerry KRIM, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. BANCTEXAS GROUP, INC., et al., Defendants BancTexas Group, Inc., Defendant-Appellee.

No. 92-1208.

United States Court of Appeals Fifth Circuit.

May 12, 1993.

Harvey Greenfield, New York City, W.D. Masterson, Kilgore & Kilgore, Dallas, TX, for plaintiff-appellant.

Robert R. Cole, Jr., Gregory A. Harwell, Gardere & Wynne, Dallas, TX, for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, SMITH, and EMILIO M. GARZA, Circuit Judges.

GOLDBERG, Circuit Judge:

On July 31, 1987, Jerry Krim purchased 100 shares of common stock in BancTexas Group, Inc. ("BTX"), a company which was in the process of restructuring after significant financial reversals. Krim maintains that his decision to invest in BTX was made in reliance upon a BTX prospectus dated May 13, 1987. The prospectus described in some detail BTX's recent financial reversals and warned that investment in BTX was suitable only for persons who could tolerate a high degree of risk. The prospectus disclosed that it was likely that BTX would continue to lose money in the near future (at least until the restructuring was completed). At the same time, however, the prospectus stated that management hoped the restructuring would cure the financial difficulties of BTX. The value of BTX stock continued to decline precipitously. Plaintiff contends that BTX knew to a certainty at the time the prospectus was issued that BTX would continue its downward trajectory.

BTX contends that when the prospectus was prepared management had reason to believe that restructuring could save BTX from further decline, and that the deterioration of the company's financial health was due to changes in the economic climate that BTX could not have predicted. However, Krim claims that unfavorable material financial information that was later disclosed to federal regulators (in September, 1987) was known to BTX at least as early as May, 1987 (when BTX prepared and distributed its prospectus), and that BTX never made any attempt to disclose this material information to investors, either in the prospectus or in any amendment thereto.

On September 30, 1988, Krim filed suit against BTX alleging violations of the federal securities laws and certain pendent state law claims. ¹ He alleged that "BTX made optimistic statements about the effect of the BTX restructuring and the future prospects without any factual basis for such statements and while it had information which rendered those statements materially false and misleading." The plaintiff's allegations of omissions or distortions of material fact in the prospectus included the following: (1) an alleged promise that the restructuring of BTX would "address the Company's financial problems and return the Company to a stable financial condition"; (2) an alleged failure to disclose that BTX had $50 million in loans for which payments were 30-89 days overdue, and instead reported that it had $25 million in "potential problem loans," which it defined as loans that management had reason to be concerned about; (3) an alleged failure to disclose that operating expenses could not be reduced substantially, and that BTX would be unable after restructuring to operate profitably regardless of the state of the economy; and (4) an alleged misrepresentation of the amount of loans held by BTX which were "energy related" (the prospectus showed $54 million in loans as "energy related," but BTX's loan portfolio contained other loans which "were also dependent on the financial health of the energy industry.... [F]ailure to disclose these loans gave a false appearance of diversification"). Plaintiff also alleged that BTX knew or should have On November 16, 1988, Krim amended his complaint, calling it for the first time a "class action complaint." BTX took Krim's deposition, but Krim did not attempt to take any depositions. On May 2, 1989, the district court issued an order requiring all discovery pertaining to the issue of class certification to be completed by August 1, 1989. On July 14, 1989, plaintiff moved for class certification. The court never set a hearing date on that issue. In October, 1989, BTX offered Krim the opportunity to spend two days reviewing its files, during which time Krim made photocopies of at least 104 BTX documents. Krim had not yet made any requests for discovery on the merits; indeed, he was precluded from doing so by Northern District of Texas Local Rule 10.2(c) ("Local Rule 10.2(c)"), which provides:

known that the percentage of its assets which were "nonperforming" would increase and that losses from bad loans would exceed the amount available from "loan loss reserves."

Discovery. After commencement of an alleged class action, discovery shall proceed only as to facts relevant to the certification of the alleged class. Although discovery relative to class certification may overlap with discovery on the merits, discovery concerning facts relevant only to the merits of the lawsuit shall not begin until the Court has ruled on the motion for certification.

On December 7, 1990 Krim made his first formal request for production of documents, despite the fact that the district court had not yet ruled upon the class certification question. Most of plaintiff's request for production pertained exclusively to the merits, as opposed to class certification.

On December 17, 1990, BTX filed a motion for a protective order and a stay of discovery. The defendant's motion was unopposed by the plaintiff. On December 18, 1990, the court issued a protective order which cited Local Rule 10.2(c) and stated that until the question of class certification was decided by the court, BTX need only respond to those of plaintiff's requests for production which pertained to the class certification issue.

On July 19, 1991, while the stay of merits discovery was still in effect, BTX moved for summary judgment. Plaintiff did not move for a continuance to permit plaintiff to undertake discovery on the merits in accordance with Fed.R.Civ.P. 56(f), but submitted an affidavit suggesting that there was further discovery that he wished to complete. The affidavit cross-referenced plaintiff's December 7, 1990 document demand pertaining to the merits. Attached to the affidavit was a handwritten list of documents obtained by plaintiff from BTX in October, 1989. Some of the documents on the list attached to the affidavit appear to have been appended in their entirety to the fourth amended complaint, but the affidavit does not state whether any of the listed documents match any of the documents appended to the fourth amended complaint. ²

The district court considered the affidavit submitted by plaintiff's attorney to be insufficient to show that additional discovery would enable him to rebut the defendant's allegation that there was no dispute as to any material fact on the essential elements of plaintiff's federal securities law claims. The court granted defendant's motion for summary judgment on February 14, 1992. The court never addressed the class certification question.

We are called upon to decide whether the court below erred in entering summary judgment without permitting further discovery. We have jurisdiction over this appeal pursuant to 28 U.S.C. § 1291.

ANALYSIS

I. DID THE DISTRICT COURT ERR IN REFUSING TO PERMIT FURTHER DISCOVERY ON THE MERITS PRIOR TO CONSIDERING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT?

More than two years after he filed his class action complaint, plaintiff filed a We review the district court's decision to preclude further discovery prior to granting summary judgment for abuse of discretion. Solo Serve Corp. v. Westowne Assoc., 929 F.2d 160, 167 (5th Cir.1991); Carriere v. Sears, Roebuck & Co., 893 F.2d 98, 102 (5th Cir.), cert. denied, 498 U.S. 817, 111 S.Ct. 60, 112 L.Ed.2d 35 (1990); Fontenot v. Upjohn Co., 780 F.2d 1190, 1193 (5th Cir.1986); SEC v. Spence & Green Chemical Co., 612 F.2d 896, 901 (5th Cir.1980), cert. denied, 449 U.S. 1082, 101 S.Ct. 866, 66 L.Ed.2d 806 (1981). No matter how the documents obtained in October, 1989 are characterized, and regardless of whether Local Rule 10.2(c) prohibited merits discovery pending resolution of the class certification question, the court's decision to consider defendant's motion for summary judgment was not an abuse of discretion, because plaintiff had failed to respond to defendant's motion for summary judgment with a statement specifically indicating why plaintiff was unable to oppose the motion at the time and how further merits discovery would enable him to respond. ³

                document demand pertaining to the merits of the case.   Plaintiff now maintains that due to the existence of Local Rule 10.2(c), he should not have been required or permitted to perform any merits discovery until the district court had ruled on the class certification question.   Twelve months after the original complaint was filed, BTX permitted plaintiff to peruse BTX's files for at least two full days, despite the existence of Local Rule 10.2(c).   Plaintiff complains that the documents he was able to obtain from BTX during this period were not the result of "true" discovery because they were obtained pursuant to settlement negotiations and were "hand-selected" by defendant during the period of time in which merits discovery was prohibited by Local Rule 10.2(c).   It was not until twenty-six months had passed from the date of filing of plaintiff's original complaint that BTX finally moved for a protective order and stay of discovery based on Local Rule 10.2(c).   This motion was unopposed by plaintiff and was granted by the court.   When the motion for summary judgment was granted, the case had been before the district court for over three years
                

Fed.R.Civ.P. 56(e) provides:

.... When a motion for summary...