Arthur Young & Co. v. Reves

• Citation: 937 F.2d 1310
• Decision Date: 29 August 1991
• Docket Number: 87-1803W,Nos. 87-1726W,87-1727W,87-2533WA and 88-1014WA,s. 87-1726W
• Parties: Fed. Sec. L. Rep. P 96,060, RICO Bus.Disp.Guide 7793 ARTHUR YOUNG & CO., Appellant, v. Bob REVES; Robert H. Gibbs; & Frances Graham, Appellees. Thomas E. ROBERTSON, Jr., As Trustee of the Farmer's Co-op of Arkansas and Oklahoma, Inc., and as representative of a class of members, depositors, and equity security holders, who are similarly situated to him; Bob Reves; Frances Graham; Robert H. Gibbs, individually; Robert H. Gibbs, as natural guardian of his minor children, Thomas A. Gibbs and Robert H. Gibbs, Jr.; and Robert H. Gibbs, as Trustee of the Muskogee Internal Medicine Group Profit Sharing Funds, Appellants, v. ARTHUR YOUNG & CO., Appellee. Thomas E. ROBERTSON, Jr., As Trustee of the Farmer's Co-op of Arkansas and Oklahoma, Inc., and as representative of a class of members, depositors, and equity security holders, who are similarly situated to him, Appellees, v. ARTHUR YOUNG & CO., Appellant. Thomas E. ROBERTSON, Jr., etc., et al. v. Jack WHITE, et al. Thomas E. ROBERTSON, Jr., As Trustee of the Farmer's Co-op of Arkansas and Oklahoma, Inc., and as representative of a class of members, depositors, and equity security holders, who are similarly situated to him; Bob Reves; Frances Graham; Robert H. Gibbs, individually; Robert H. Gibbs, as natural guardian of his minor children, Thomas A. Gibbs and Robert H. Gibbs, Jr.; and Robert H. Gibbs, as Trustee of the Muskogee Internal Medicine Group Profit Sharing Funds, Appellees, v. ARTHUR YOUNG & CO., Appellant. Thomas E. ROBERTSON, Jr., etc., et al. v. Jack WHITE, et al. Robert R. CLOAR, Class Counsel, Appellant, v. Bob REVES, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 1310

937 F.2d 1310

Fed. Sec. L. Rep. P 96,060, RICO Bus.Disp.Guide 7793

ARTHUR YOUNG & CO., Appellant, v. Bob REVES; Robert H. Gibbs; & Frances Graham, Appellees.

Thomas E. ROBERTSON, Jr., As Trustee of the Farmer's Co-op

of Arkansas and Oklahoma, Inc., and as representative of a

class of members, depositors, and equity security holders,

who are similarly situated to him; Bob Reves; Frances

Graham; Robert H. Gibbs, individually; Robert H. Gibbs, as

natural guardian of his minor children, Thomas A. Gibbs and

Robert H. Gibbs, Jr.; and Robert H. Gibbs, as Trustee of

the Muskogee Internal Medicine Group Profit Sharing Funds, Appellants, v. ARTHUR YOUNG & CO., Appellee.

Thomas E. ROBERTSON, Jr., As Trustee of the Farmer's Co-op

of Arkansas and Oklahoma, Inc., and as representative of a class of members, depositors, and equity security holders, who are similarly situated to him, Appellees, v. ARTHUR YOUNG & CO., Appellant.

Thomas E. ROBERTSON, Jr., etc., et al. v. Jack WHITE, et al.

Thomas E. ROBERTSON, Jr., As Trustee of the Farmer's Co-op

of Arkansas and Oklahoma, Inc., and as representative of a

class of members, depositors, and equity security holders,

who are similarly situated to him; Bob Reves; Frances

Graham; Robert H. Gibbs, individually; Robert H. Gibbs, as

natural guardian of his minor children, Thomas A. Gibbs and

Robert H. Gibbs, Jr.; and Robert H. Gibbs, as Trustee of

the Muskogee Internal Medicine Group Profit Sharing Funds, Appellees, v. ARTHUR YOUNG & CO., Appellant.

Thomas E. ROBERTSON, Jr., etc., et al. v. Jack WHITE, et al.

Robert R. CLOAR, Class Counsel, Appellant, v. Bob REVES, Appellee.

Nos. 87-1726WA, 87-1727WA, 87-1803WA, 87-2533WA and 88-1014WA.

United States Court of Appeals Eighth Circuit.

Submitted March 12, 1991.

Decided June 27, 1991.

Rehearing Denied Aug. 29, 1991.

John Matson, New York City, argued (Kathryn A. Oberly, Washington D.C., Fred Lovitch, Kansas City, Mo., and Carl D. Liggio and John Matson, New York City, on brief), for appellant.

John R. McCambridge, Chicago, Ill., argued (Jay R. Hoffman, Chicago, Ill., and Robert R. Cloar, Fort Smith, Ark., on brief), for appellee.

Before FAGG and MAGILL, Circuit Judges, and SNEED, ^* Senior Circuit Judge.

                MAGILL, Circuit Judge
                I.    BACKGROUND ................................ 1314
                      A.... The Co-op                             1315
                      B.... The Gasohol Plant                     1315
                      C.... The 1981 Audit                        1316
                      D.... The 1981 Audit Report to the Board    1318
                      E.... The 1982 Annual Meeting               1318
                      F.... The 1982 Audit                        1319
                      G.... The 1982 Audit Report to the Board    1320
                      H.... The 1983 Annual Meeting               1320
                      I.... Bankruptcy                            1320
                      J.... Trial                                 1321
                      K.... Subsequent History                    1322
                II.   ISSUES ON MAIN APPEAL ..................... 1323
                      A.... Class Certification                   1323
                      B.... Robertson's Breach of Contract Claim  1323
                      C.... The RICO Claim                        1323
                      D.... Demand Notes and Arkansas Law         1324
                      E.... State Securities Fraud Claim          1324
                      F.... The Rule 10b5 Claim                  1327
                      G.... Arthur Young's Contribution Claim     1333
                      H.... The Damages                           1334
                      I.... The Settlement Credit                 1337
                      J.... Conclusion                            1338
                III.  ISSUES ON CONSOLIDATED APPEAL ............. 1338
                      A.... Interest                              1338
                      B.... Costs                                 1338
                      C.... Fees                                  1339
                      D.... Class Counsel                         1339
                      E.... Conclusion                            1339
                IV.   CONCLUSION ................................ 1339
                ----------
                

Arthur Young appeals from the district court's entry of judgment against it after a jury found that the firm had violated both federal and state securities laws. ¹ On appeal, Arthur Young argues that the district court erred in (1) certifying the plaintiff class; (2) holding that the financial instruments at issue in this case were securities under Arkansas law; (3) denying its motion for judgment notwithstanding the verdict on the state and federal securities claims; and (4) denying its motion for a new trial on the ground that a requested instruction on contribution was not given to the jury. Arthur Young also argues that the damages awarded to the appellees were not supported by the evidence and challenges the district court's awards of attorney fees, costs, and interest to the appellees. On cross-appeal, Reves and Robertson challenge a number of the district court's rulings, including its dismissal of Robertson's breach of contract claim, its granting of summary judgment in favor of Arthur Young on Reves' RICO claim, its crediting of settlement proceeds against the jury's verdict, and its decision on fees for Reves' counsel. We affirm in part and reverse in part.

I.

A. The Co-op

The facts of this case involve the Farmer's Cooperative of Arkansas and Oklahoma, Inc. (Co-op), which was organized in 1946 and operated in western Arkansas and eastern Oklahoma. Any farmer in the area could become a member, and as a member was entitled to one share and one vote. Each year the Co-op's members elected twelve of their own to serve on a Board of Directors. The Board met monthly to review the Co-op's operations, but delegated actual management of the Co-op to a general manager, whom the Board appointed. In 1952, the Board named Jack White as general manager. White served in that capacity until the Board removed him in mid-1982.

To raise money for its operating expenses, the Co-op sold promissory notes payable to the holder on demand. These demand notes, while uncollateralized and uninsured, were nonetheless attractive to investors because they paid a higher interest rate than that local financial institutions offered. The Co-op advertised the demand note program in its monthly newsletter as an "Investment Program." The advertisement stated the rate of interest the notes would earn and claimed: "YOUR CO-OP has more than $11,000,000 in assets to stand behind your investments. The Investment is not Federal [sic] Insured but it is ... Safe ... Secure ... and available when you need it. Interest is computed to the day of withdrawal." See, e.g., Joint Appendix (JA) at 1820 (ellipses in original).

B. The Gasohol Plant

In 1979, the Co-op's general manager, White, joined with entrepreneur Edwin Dooley to finance and construct a gasohol plant. Dooley and White each invested $125,000 of their own funds and as a result each owned half of the enterprise, which was known as Big D & W Refining and Solvents, Inc. Dooley served as president of the corporation; White was its secretary. Construction of the plant began in June 1979. Four months later, White, financed by a loan from the Citizens Bank & Trust Company (Citizens Bank), purchased Dooley's interest in Big D & W and renamed the company White Flame Fuels, Inc. (White Flame).

Beginning in January 1980, White obtained loans from the Co-op to finance the continued construction and the initial operation of the gasohol plant. White personally guaranteed these loans. The plant finally began producing gasohol the following April, but was soon beset by problems stemming from the plant's poor design and outside economic factors. White continued to obtain loans from the Co-op; by December 1980, these loans totalled approximately $4 million.

In September 1980, White was indicted for federal tax fraud. The indictment charged, among other things, that White had engaged in a course of self-dealing with the Co-op and had filed fraudulent tax returns. Also indicted with White was Gene Kuykendall, the Co-op's longtime accountant, who was also White Flame's accountant at this time.

Shortly after the indictment, at a November 12, 1980, Board meeting, White proposed that the Co-op purchase White Flame. The Board agreed and voted to acquire the company. One month later, however, the Co-op filed a declaratory action against White and White Flame in state court. The complaint had been drafted by White's attorneys, and alleged that on February 15, 1980, White had told the Board that all of White Flame's stock would be transferred to the Co-op in exchange for the Co-op's assumption of White's debts to the Co-op and Citizens Bank. ² The complaint alleged that in reliance on this agreement, the Co-op invested further sums in White Flame, based on the assumption that it owned the company. The complaint next alleged that White did not transfer the stock as agreed, and that the Co-op had not executed a note assuming White's debts to Citizens Bank. Based on these allegations, the Co-op sought a declaratory judgment stating that the Co-op had acquired White Flame on or about February 15, 1980; that the Co-op had assumed Jack White's debt to Citizen's Bank; that all amounts the Co-op lent to Jack White or White Flame before February 15, 1980, were investments in White Flame; and that Jack White was discharged from any debts to the Co-op relating to White Flame.

Shortly after the complaint was filed, White's attorneys sent the Co-op's attorney, Carl Creekmore, White's answer and a proposed consent decree. Creekmore filed the answer and obtained the state court's approval of the decree on December 19; but the decree was not filed until January 26, 1981. The decree provided that the Co-op had owned White Flame since February 15, 1980; that the Co-op had assumed White's debt to Citizen's Bank; and that White was discharged from any liability to the Co-op for loans for White Flame. The result of this friendly suit was that White was relieved of over $4 million of debt and that the Co-op owned White Flame as of February 15, 1980.

C. The 1981 Audit

Both White and...