Bennett v. Durham

• Decision Date: 28 June 2012
• Docket Number: 11–5918.,Nos. 11–5782,s. 11–5782
• Citation: 683 F.3d 734
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: Paul Daniel BENNETT, et al., Plaintiffs–Appellants, v. Hunter DURHAM; Durham & Zornes, Defendants–Appellees. Frederick P. Clayton, Jr., et al., Plaintiffs–Appellants, v. Heartland Resources, Inc., et al., Defendants, Hunter Durham, Defendant–Appellee.

683 F.3d 734

Paul Daniel BENNETT, et al., Plaintiffs–Appellants,

v.Hunter DURHAM; Durham & Zornes, Defendants–Appellees.

Frederick P. Clayton, Jr., et al., Plaintiffs–Appellants,

v.Heartland Resources, Inc., et al., Defendants,Hunter Durham, Defendant–Appellee.

Nos. 11–5782, 11–5918.

United States Court of Appeals,Sixth Circuit.

Argued: June 5, 2012.

Decided and Filed: June 28, 2012.

ARGUED:Tera Rica Murdock, Waller, Lansden, Dortch & Davis, LLP, Nashville, Tennessee, for Appellants. Eugene N. Bulso, Jr., Leader, Bulso & Nolan, PLC, Nashville, Tennessee, for Appellees. ON BRIEF:Tera Rica Murdock, Waller, Lansden, Dortch & Davis, LLP, Nashville, Tennessee, for Appellants in 11–5918. Joseph A. Woodruff, Rebecca Brinkley, Waller, Lansden, Dortch & Davis, LLP, Nashville, Tennessee, for Appellants in 11–5782 & 11–5918. Eugene N. Bulso, Jr., Leader, Bulso & Nolan, PLC, Nashville, Tennessee, Timothy L. Edelen, Bell, Orr, Ayers & Moore, PSC, for Appellees. Colleen Keefe, Commonwealth of Kentucky, Frankfort, Kentucky, for Amicus Curiae.

Before: MOORE, SUTTON and STRANCH, Circuit Judges.

OPINION

SUTTON, Circuit Judge.

The Kentucky Securities Act imposes liability on (1) anyone who “offers or sells a security” in violation of its terms and (2) any “agent” of the seller who “materially aids” the sale of securities, defined as someone who “effect[s] or attempt[s] to effect” the sale. Ky.Rev.Stat. §§ 292.480(1), (4); 292.310(1). These related cases present the same question: Does the Act impose liability on an attorney who performs traditional legal services for a company offering its securities for sale to the public? The answer is no.

I.

Paul Bennett, Frederick Clayton and their co-plaintiffs invested in oil-and-gas-exploration companies: either Heartland Resources or Mammoth Resource Partners. When the companies' wells produced little oil or gas, the investors lost money. They sued. Claiming Heartland and Mammoth violated state and federal law by selling unregistered securities and by making other material misrepresentations and omissions, they filed a complaint against the two companies and their officers. They did not stop there. They also sued Hunter Durham, the lawyer who represented Heartland and Mammoth in connection with the issuance and sale of the securities. Durham drafted the documents necessary for the deals, including joint-venture agreements and private placement memoranda that provided details about the investment opportunity. He also told the prospective investors he was available to answer their questions. All the while, Bennett and Clayton allege, Durham knew the documents contained material misrepresentations and omissions and that the securities were neither registered nor exempt from registration.

Durham responded that he merely provided traditional legal services in connection with the issuance and sale of the securities, work that the offer-and-sale provisions of the Kentucky securities laws by themselves do not regulate. In Bennett's lawsuit, the district court granted Durham's motion to dismiss the claim under Civil Rule 12(b)(6). In Clayton's lawsuit,the district court (through a different judge) granted Durham's motions for summary judgment under Civil Rule 56.

II.

Kentucky, like most States, regulates sales and offers of securities through “blue sky” laws, so named because they initially targeted swindlers so brazen and so shameless they would peddle shares of anything, including (allegedly) shares of the sky. See Jonathan R. Macey & Geoffrey P. Miller, Origin of the Blue Sky Laws, 70 Tex. L.Rev. 347, 359–60 & n. 59 (1991). Kentucky's law says, as relevant here:

(1) Any person, who offers or sells a security in violation of this chapter ... or offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact ..., and who does not sustain the burden of proof that he did not know and in the exercise of reasonable care could not have known of the untruth or omission[,] is liable to the person buying the security from him....

(4) Every person who directly or indirectly controls a seller or purchaser liable under subsection (1) or (2) of this section, every partner, officer, or director (or other person occupying a similar status or performing similar functions) or employee of a seller or purchaser who materially aids in the sale or purchase, and every broker-dealer or agent who materially aids in the sale or purchase is also liable jointly and severally with and to the same extent as the seller or purchaser, unless [he] sustains the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the existence of the facts by reason of which the liability is alleged to exist.

Ky.Rev.Stat. § 292.480 (emphases added). These provisions, along with the rest of Kentucky's blue-sky law, derive from the Uniform Securities Act of 1956, a model law authored by the National Conference of Commissioners on Uniform State Laws, a group of state legislators, judges and legal scholars. Thirty-six other States have adopted the Act in whole or in part. See Jay H. Knight & Garrett P. Baker, Kentucky Blue Sky Law: A Practitioner's Guide to Kentucky's Registrations and Exemptions, 34 N. Ky. L.Rev. 485, 486 (2007); Joel Seligman, The New Uniform Securities Act, 81 Wash. U. L.Q. 243, 243 (2003). Both provisions, Bennett and Clayton maintain, cover Durham's conduct.

A.

Does an attorney who provides legal advice in connection with a securities transaction “offer[ ] or sell[ ] a security,” as required to impose liability under subsection (1) of the statute? The customary meaning of the words suggests not, as Durham never offered to sell or sold shares to anyone. His clients sold the shares, and we do not attribute the transactions of a client to its attorney. An attorney may draft an offering memorandum for his client, but that does not mean the attorney, as opposed to the client, offers to sell the securities. The client and its broker-dealers sell the securities. Durham no more “offered” or “sold” these securities than the lawyer representing Magic Johnson's investment group recently “bought” the Los Angeles Dodgers. See Bill Shaikin, Sale Stirs Hostility Before OK, L.A. Times, Apr. 14, 2012, at C1.

Interpretations of the federal Securities Act of 1933 confirm the point. The federal Act likewise reaches “any person who offers or sells a security” in violation of its rules. 15 U.S.C. § 77 l (a)(1). And the Court likewise has construed it to cover only “persons who pass title and persons who ‘offer,’ including those who ‘solicit’ offers.” Pinter v. Dahl, 486 U.S. 622, 650, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988) (quoting 15 U.S.C. § 77b(a)(3)). In rejecting a more expansive definition, Pinter reasoned that it “might expose securities professionals, such as accountants and lawyers, whose involvement is only the performance of their professional services,” to liability, even though “[t]he buyer does not, in any meaningful sense, purchase the security from such a person.” Id. at 651, 108 S.Ct. 2063. Following Pinter's lead, our court has taken a similar stance. “A non-owner cannot be a seller ... unless he urges a prospective purchaser to buy.... It is not enough that the putative seller stands to benefit if the sale goes through; to be liable under a solicitation theory, he must have engaged in actual solicitation.” Smith v. Am. Nat. Bank & Trust Co., 982 F.2d 936, 941 (6th Cir.1992).

All of this matters not just because the Supreme Court and our court have interpreted “offer” and “sell” to rule out liability for attorneys performing traditional legal services in connection with a securities offering. What is particularly revealing is that Kentucky based its blue-sky law on the Uniform Securities Act, which itself “is borrowed substantially” from the same federal law (the Securities Act of 1933) construed in Pinter and Smith. Uniform Securities Act of 1956 § 401 cmt. subsec. j; see also Ashland, Inc. v. Oppenheimer & Co., 648 F.3d 461, 471 (6th Cir.2011) (noting that the Kentucky provision “mirror[s]” federal law); compare15 U.S.C. §§ 77b(a)(3), 77 l (a), withKy.Rev.Stat. §§ 292.310(17), 292.480(1). There is no reason to think the Kentucky courts would construe the words differently. Since Pinter, moreover, other state courts have construed their own blue-sky laws the same way. See, e.g., Meyers v. Lott, 133 Idaho 846, 993 P.2d 609, 613 (2000); Klein v. Oppenheimer & Co., 281 Kan. 330, 130 P.3d 569, 582 (2006); Wilson v. Misko, 244 Neb. 526, 508 N.W.2d 238, 248 (1993); Biales v. Young, 315 S.C. 166, 432 S.E.2d 482, 484–85 (1993); see also Allstate Indus. Loan Plan, Inc. v. Mihalek, 555 S.W.2d 585, 586–87 (Ky.1977) (relying on precedents from other States in construing the Kentucky Securities Act).

That is all well and good, Bennett and Clayton respond, but Durham was not just a lawyer doing his job. That would be a strong argument—if the facts backed it up. They do not. Bennett alleges and Clayton has put forth facts showing only that Durham drafted and distributed investment documents, made himself available to answer questions from prospective investors and represented clients in an enforcement proceeding. That is the type of ordinary legal work securities lawyers do every day.

Bennett and Clayton persist that Durham “went beyond a role of serving as counsel,” R.37 (No. 11–5782) ¶ 31, and “was not merely an attorney and legal advisor,” R.112 (No. 11–5918) ¶ 237. But they do not say how or when or otherwise elaborate on what that means. Even on summary judgment Clayton was able to identify only one plaintiff who spoke to Durham before investing, and the investor testified that Durham answered his questions, not that Durham solicited or offered to sell any securities. One can go beyond the role of serving as counsel in all sorts of ways—providing informal business advice, helping find a printing firm to produce the...