Bank of Denver v. Southeastern Capital Group, Inc.

• Decision Date: 09 May 1991
• Docket Number: Civ. No. 90-B-1551.
• Citation: 763 F. Supp. 1552
• Parties: BANK OF DENVER, a Colorado Banking Association, Individually and on Behalf of all Others Similarly Situated, Plaintiff, v. SOUTHEASTERN CAPITAL GROUP, INC. f/k/a Southeastern Municipal Bonds, Inc., a Florida Corporation, First United Securities Group of California, Inc., a California Corporation, Michael Siemer, Kenneth W. Hutchison and Charlotte S. Hutchison, Robert C. MacElvain, Martha B. Taylor, Martha B. Taylor, P.C., Calkins, Kramer, Grimshaw & Harring, Calkins, Kramer, Grimshaw & Harring, P.C., H. Harold Calkins, Richard L. Harring, Victor L. Wallace, II, P.C., Robert L. Kirby, Ralph L. Poucher, P.C., James S. Bailey, Jr., P.C., John J. Tipton, P.C., Gilbert F. McNeish, P.C., Wayne B. Schroeder, P.C., Wendy J. Harring, Ward L. Van Scoyk, Bruce E. Deacon, T. Edward Icenogle, Richard L. Shearer, Matthew R. Dalton, John A. Eckstein, Frederick Huff, Charles E. Norton, and Terry L. Cook, Defendants.
• Court: U.S. District Court — District of Colorado

763 F. Supp. 1552

BANK OF DENVER, a Colorado Banking Association, Individually and on Behalf of all Others Similarly Situated, Plaintiff, v. SOUTHEASTERN CAPITAL GROUP, INC. f/k/a Southeastern Municipal Bonds, Inc., a Florida Corporation, First United Securities Group of California, Inc., a California Corporation, Michael Siemer, Kenneth W. Hutchison and Charlotte S. Hutchison, Robert C. MacElvain, Martha B. Taylor, Martha B. Taylor, P.C., Calkins, Kramer, Grimshaw & Harring, Calkins, Kramer, Grimshaw & Harring, P.C., H. Harold Calkins, Richard L. Harring, Victor L. Wallace, II, P.C., Robert L. Kirby, Ralph L. Poucher, P.C., James S. Bailey, Jr., P.C., John J. Tipton, P.C., Gilbert F. McNeish, P.C., Wayne B Schroeder, P.C., Wendy J. Harring, Ward L. Van Scoyk, Bruce E. Deacon, T. Edward Icenogle, Richard L. Shearer, Matthew R. Dalton, John A. Eckstein, Frederick Huff, Charles E. Norton, and Terry L. Cook, Defendants.

Civ. No. 90-B-1551.

United States District Court, D. Colorado.

May 9, 1991.

Joseph E. Meyer, III, Susan M. Hargleroad, William J. Martinez, Pendleton & Sabian, P.C., Denver, Colo., for plaintiff.

John D. Phillips, A. Peter Gregory, Hall & Evans, Denver, Colo., for Calkins' defendants except Van Scoyk.

Aldo DelPiccolo, Wood, Ris & Hames, P.C., Denver, Colo., for Taylors.

Larry F. Hobbs, Rita Byrnes Kittle, Hornbein MacDonald, Fattor and Hobbs, P.C., Denver, Colo., for Kenneth and Charlotte Hutchison.

Thomas D. Birge, Brega & Winters, P.C., Denver, Colo., for S.E. Capital.

Robert C. MacElvain, pro se.

Kim B. Childs, Dean A. McConnell, Cooper & Kelley, P.C., Denver, Colo., for Van Scoyk & Icenogle.

MEMORANDUM OPINION AND ORDER

BABCOCK, District Judge.

Hearing was held April 26, 1991 on four motions to dismiss plaintiff Bank of Denver's (the Bank) first amended class action complaint (amended complaint). The Bank alleges twelve claims arising from the issuance, offer and sale of bonds by the Will-O-Wisp Metropolitan District (the district) to finance a district development. The Bank alleges that the defendants violated federal and Colorado securities laws, and are liable for Colorado common law torts as well.

Because the Bank may show facts entitling it to relief on its claim under section 10(b) of the 1934 Security Exchange Act, and Securities Exchange Commission Rule 10(b)-5, I deny the motions to dismiss that claim. The amended complaint, however, fails to state a claim against the moving defendants under section 12(2) of the 1933 Securities Act and, thus, I grant the motions to dismiss that claim. I decline to exercise pendent jurisdiction over the Colorado state law claims, and I dismiss those claims without prejudice as to all defendants.

According to the amended complaint, the Bank brings this class action on behalf of itself and the purchasers of $4.1 million worth of bonds (the bonds) issued in August, 1986 by the Will-O-Wisp Metropolitan District. I have not certified any class. The bonds were to finance a development created and controlled by defendant developers. An ad valorem tax assessed by the district on real property in the district and the proceeds from a facilities fee agreement between the district and the developers were to repay the bonds. Defendant Robert C. MacElvain (guarantor) personally guaranteed the developers' obligation under the facilities fee agreement. The bonds were sold using a document entitled "Official Statement" which the Bank alleges was distributed to the purchasers. The official statement set forth the financing arrangement, including the facilities fee agreement and the guarantee.

According to the Bank, the developers have paid only $500,000 of the $1,110,000 cumulative total due September 1, 1988 under the facilities fee agreement. Furthermore, according to the Bank, the guarantor has failed to make good his guarantee. On December 29, 1989, the district filed for bankruptcy. The bond issue is now in default.

Based on the allegations, the Bank asserts twelve causes of action. Named in the amended complaint are: (1) underwriters (a) Southeastern Capital Group, Inc. (Southeastern), (b) First United Securities Group of California, Inc. (First United) and (c) Michael Siemer (Siemer) (director of First United and employed as an underwriter); (2) the developers Kenneth W. and Charlotte S. Hutchison; (3) guarantor Robert C. MacElvain; (4) attorneys (a) Martha B. Taylor & Martha B. Taylor, P.C. (Taylor) and (b) Calkins, Kramer, Grimshaw & Harring (Calkins) and partners of the firm. The Bank alleges in:

Count 1 all defendants violated section 10(b) of the 1934 Security and Exchange Act (1934 Act), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (the 10(b) claims);

Count 2 all defendants violated section 12(2) of the 1933 Securities Act (1933 Act), 15 U.S.C. § 77l(2) (the 12(2) claims);

Count 3 Siemer violated section 20 of the 1934 Act, 15 U.S.C. § 78t;

Count 4 Siemer violated section 15 of the 1933 Act, 15 U.S.C. § 77v;

Count 5 all defendants violated sections 11-51-123 and 125(2) of the Colorado Securities Act;

Count 6 all defendants violated sections 11-51-125(3) and 125(5) of the Colorado Securities Act;

Count 7 all defendants are liable for negligent misrepresentation and negligence;

Count 8 all defendants are liable for fraud and deceit;

Count 9 all defendants are liable for civil conspiracy;

Count 10 Taylor is liable for professional negligence;

Count 11 Calkins, in its capacity as counsel for the underwriters, is liable for professional negligence;

Count 12 Calkins, in its capacity as bond counsel, is liable for professional negligence.

Defendants move to dismiss the 10(b), 12(2) and pendant state claims. Only counts three and four, against Siemer are unchallenged in the dismissal motions. Calkins has withdrawn its motion to dismiss the 10(b) claim.

Dismissal under Rule 12(b)(6) is proper when it is evident from the plaintiff's amended complaint that the defendant is not liable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). When ruling on a motion to dismiss, "the allegations of the complaint should be construed favorably to the pleader." Scheuer, 416 U.S. at 236, 94 S.Ct. at 1686.

I. THE 10(b) CLAIMS

In the 10(b) claim, the Bank alleges that the official statement was materially false in: (1) omitting that the net worth of the guarantor was insufficient to provide meaningful security for the payment of obligations under the facilities fee agreement; (2) overestimating the current value of the land and improvements in the Will-O-Wisp subdivision, the tax on which was the ultimate security for payment of the bonds, through the financial statement attached to the official statement; (3) captioning the bonds as "General Obligation Bonds" as opposed to indicating the bonds were revenue bonds; and (4) omitting that the bonds were not exempt from registration under section 3(a)(2) of the 1933 Act (15 U.S.C. § 77c(a)(2)), and that the trust agreement between the district and Colorado National Bank, the trustee, was not qualified as required by the Trust Indenture Act of 1939 (15 U.S.C. § 77aaa et seq.). Amended Complaint at 12-13 ¶¶ 45-48.

A. Statute of Limitations

Although the parties differ on the statute of limitations period applicable to 10(b) actions, I previously addressed that issue in Johnston v. CIGNA Corp., 755 F.Supp. 339 (D.Colo.1991). As in Johnston, I conclude here that the three-year limitations period of Colorado Revised Statute section 11-51-123(1), the state counterpart to federal 10(b), applies to the Bank's 10(b) claims. See Bath v. Bushkin, Gaims, Gaines and Jonas, 913 F.2d 817, 818-19 (10th Cir.1990).

On the motions to dismiss, I cannot conclude that the action is barred by the statute of limitations. Even assuming, as defendants urge, that the statutory period began to run when the official statement and bonds were issued some four years before the Bank filed suit, because federal equitable tolling rules apply, the Bank may be able to show that the statute of limitations has not run.

B. Specificity

Defendant Southeastern contends that the amended complaint fails to allege a 10(b) claim because it does not meet the pleading specificity requirements of Federal Rule of Civil Procedure 9(b).

Rule 9(b) does not ... require the pleading of detailed evidentiary matter, nor does it require any particularity in connection with an averment of intent, knowledge, or condition of mind. It only requires identification of the circumstances constituting fraud or mistake. That requirement means ... that individual plaintiffs should identify particular defendants with whom they dealt directly, and from whom they purchased stock; that individual plaintiffs should designate the occasions on which affirmative statements were allegedly made to them — and by whom; and that individual plaintiffs should designate what affirmative misstatements or half-truths were directed to them — and how.

Trussell v. United Underwriters, Ltd., 228 F.Supp. 757, 774-75 (D.Colo.1964). The Tenth Circuit has adopted this formulation as "a correct statement of Rule 9(b) requirements in securities fraud cases." Seattle-First Nat'l Bank v. Carlstedt, 800 F.2d 1008, 1011 (10th Cir.1986).

1. Scienter

Southeastern asserts that the Bank has not pled scienter adequately. In the amended complaint, the Bank alleges that Southeastern was "at least reckless in not ensuring that the truth was disclosed" in the official statement. Amended Complaint at 14 ¶ 50. Consistent with Seattle-First Nat'l Bank's holding that 9(b) does not "require any particularity in connection with an averment of intent, knowledge, or condition of mind," I conclude that the Bank has pled scienter adequately.

2. Reliance

Southeastern next claims that the Bank does not allege direct reliance on the official statement in purchasing the...