Ahern v. Gaussoin

Decision Date10 May 1985
Docket Number83-1963-RE to 83-1965-RE.,Civ. No. 83-1167-RE
Citation611 F. Supp. 1465
PartiesRobert E. AHERN, et al., Plaintiffs, v. Roy GAUSSOIN, et al., Defendants. SILVER EAGLE COMPANY, et al., Plaintiffs, v. William SANDERS, et al., Defendants. Ethel L. URBAN, Plaintiff, v. William SANDERS, et al., Defendants. James V. MITCHELL, et al., Plaintiffs, v. William SANDERS, et al., Defendants.
CourtU.S. District Court — District of Oregon





Bruce M. Hall, John F. McGrory, Jr., Sarah J. Ryan, Bruce MacGregor Hall, P.C., Portland, Or., for plaintiffs.

Leslie M. Roberts, Sullivan, Joselson, Johnson & Kloos, Portland, Or., for Silver Eagle plaintiffs.

Marco J. Magnano, Jr., Foster, Pepper & Riviera, Seattle, Wash., Donald Winfree, Portland, Or., for defendant Directors.

Paul A. Renne, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, Cal., Richard Bayless, Hampson, Bayless, Murphy & Stiner, Portland, Or., for defendant Accountants.

Wayne Hilliard, Craig D. Bachman, Spears, Lubersky, Campbell, Bledsoe, Anderson & Young, Portland, Or., for defendant Attorneys.

Frank H. Lagesen, Cosgrave, Kester, Crowe, Gidley & Lagesen, Portland, Or., for defendant Officers.

REDDEN, District Judge:

Plaintiffs in these actions are holders of 30 day variable rate demand notes issued by Tradex, Inc. (Tradex), an Oregon corporation. They seek relief based on numerous alleged violations of federal and state security laws, as well as on certain other statutory and common law claims. Plaintiffs move for partial summary judgment in their favor. All defendants have filed cross motions for partial summary judgment.

I. Parties and Posture of the Litigation

I am consolidating these four cases for all purposes (see pp. 69-70). In each case there are four separate groups of defendants: (1) former Tradex officers (defendant officers); (2) former Tradex directors (defendant directors); (3) Nicholas Fisher and Touche Ross & Co. (defendant accountants); and (4) Robert Simpson and Schwabe, Williamson, Wyatt, Moore & Roberts (defendant attorneys). The defendants are the same in each case, except that in Civil No. 83-1167 (Ahern), defendant officers include only David Fearn and Clyde Kaneshero. In Civil No. 83-1963, 1964 and 1965 (Silver Eagle cases), defendant officers include Fearn, Kaneshiro, Russell Brown, Jr. and Kenneth Delzer.

II. Facts

I find it unnecessary to recite all the details of Tradex's corporate history.1 It is sufficient to begin by saying that Tradex was originally a non-profit corporation factoring the freight bills of its member freight carriers. Tradex operated, at least primarily, in the Pacific Northwest. Tradex thus provided a service to the carriers by buying their freight bills from them (at a discount); Tradex then collected on the bills itself.

Tradex financed its operations through a line of credit with a major bank, most recently Seattle-First National Bank (SeaFirst). In the late 1960's and early 1970's Tradex began issuing notes to its members, members' employees and other persons connected with the trucking industry. Through this note program, Tradex obtained additional funds to finance its operations. Note purchasers received interest on their notes. These notes were not registered with the Securities and Exchange Commission (SEC).

In mid-1981, Tradex began a process of reorganization, which ultimately became effective June 1, 1982. Pursuant to the reorganization, Tradex became a for-profit corporation. Tradex's legal counsel, who are the present defendant attorneys, had concluded that the notes were "securities" under federal law. Thus, as part of Tradex's reorganization, the note program was registered with the SEC.

Defendant attorneys, Schwabe, Williamson, Wyatt, Moore & Roberts (Schwabe, Williamson) began preparation of an S-1 Registration Statement in the fall of 1981.2 Tradex filed a preliminary prospectus in the form of an S-1 Registration Statement with the SEC on December 11, 1981. Tradex issued a final prospectus, amending the earlier one, on March 29, 1982.

On April 19, 1982, Tradex also filed an S-1 Registration Statement covering the separate issuance of $30 million in variable rate 30-day demand notes. This registration statement was amended by a prospectus with an effective date of June 1, 1982.

Accountant defendants Touche Ross & Co. (Touche Ross) audited Tradex's financial statement for the fiscal year ending August 31, 1982, and certified the accuracy of that statement in the March 29 and June 1 prospectuses. Touche Ross conducted post-audit reviews of the financial statement in connection with both prospectuses. It also assisted with preparation of certain unaudited interim financial statements dated February 28, 1982.3

On April 12, 1982, Tradex held its 1981 annual meeting, which apparently had been postponed due to delays connected with the reorganization. At the meeting, the proposed reorganization was presented to Tradex's members, who approved it.

Throughout the relevant time period, Tradex operated pursuant to a line of credit from SeaFirst. Plaintiffs' notes were subordinated to the SeaFirst loan. The limit on the line of credit from SeaFirst was originally $12 million, and was subsequently increased to $20 million. On January 26, 1983, SeaFirst declared Tradex to be in default of its loan agreement with SeaFirst. Plaintiffs' notes, which were subordinated to SeaFirst's lien on Tradex's receivables, were "frozen" by SeaFirst. Plaintiffs have been unable to redeem the notes.

Plaintiffs subsequently filed these actions. The Ahern plaintiffs assert claims under sections 11, 12, 15 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l, 77o and 77q(a), sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j and 78t(a), and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961, et seq. The Ahern plaintiffs also assert pendent claims for violations of Oregon securities statutes, the Oregon RICO statute, conversion, fraud, negligence, gross negligence and money had and received. The Silver Eagle plaintiffs assert claims for violations of sections 11, 12 and 17(a) of the Securities Act of 1933, section 10(b) of the Securities Exchange Act of 1934 and O.R.S. 59.115.

Plaintiffs' claims are based on their contentions that various Tradex documents, and certain statements made by defendants, contained fraudulent misrepresentations and omissions. Many of these particulars are better addressed in the discussion of plaintiffs' specific claims, but certain of them are central to plaintiffs' claims and to the background of these cases. These are: (1) Tradex's relationship with Animated Electronics, Inc. (Animated); (2) Tradex's relationship with IML Freight, Inc. (IML); and (3) an alleged check "kite" employed by Tradex.

A. Tradex's relationship with Animated

On or about January 26, 1982, Tradex and Animated entered into an agreement pursuant to which Tradex agreed to factor Animated's accounts and contracts receivable. Animated was Tradex's first factoring customer from outside the transportation industry. Animated was a manufacturer and seller of novelty devices.4

Plaintiffs allege that prior to the agreement, Animated had suffered financial difficulties, and had difficulty obtaining financing. Its source of financing, the Walter Heller Company, had expressed concern with Animated's slow collection rate and had renewed its annual agreement with Animated on a restricted month-to-month basis. Walter Heller ultimately refused to continue financing Animated in January 1982.

Plaintiffs allege that the negotiations culminating in the Animated-Tradex agreement included discussions of Animated's financial and financing difficulties. Plaintiffs contend the high delinquency rate on Animated's invoice receivables was specifically discussed and considered.

The minutes from the January 26, 1982 meeting which approved the Animated factoring agreement show that the projected revenues from the agreement were anticipated to be $7 million in 1982. Animated's individual accounts were located in almost every state in the country, as well as Canada and Mexico.

Tradex began accepting receivables and machine purchase contracts from Animated. The contracts provided for monthly payments over a 24 to 36 month period, as opposed to the short term accounts receivable. Tradex continued factoring both accounts receivable and contracts during the spring and summer of 1982.

On July 27, 1982, Tradex President David Fearn advised the Tradex board that Animated's receivables amounted to $3.5 million. The minutes of that board meeting indicate Tradex's intention to "phase out" of factoring Animated accounts. The various defendants deny knowledge of Tradex's factoring of long term contracts but it did become a subject of concern to Tradex's directors in the fall of 1982. Fearn then reported that Tradex was working on a method for selling factored accounts back to Animated. This problem had not been resolved when SeaFirst declared Tradex in default.

In its January 26, 1983 letter to Tradex, SeaFirst claimed Tradex had been improperly including long term contracts in its borrowing base (which the contract provided was 75% of eligible accounts receivable), and had therefore been exceeding the limits of the loan agreement. SeaFirst also declared that:

We view your financing of Animated Electronics, Inc. and the existing deterioration of Animated Electronics, Inc.'s ability to meet its obligations to you as a matter not fairly disclosed to us, resulting in a violation of your representations and warranties contained in the Loan Agreement.
B. Tradex's Relationship with IML

IML was Tradex's largest customer. On April 12, 1982, Tradex's Board of Directors gave permission to IML to collect its own freight bills, obviating...

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