Binder v. Gillespie

• Decision Date: 26 July 1999
• Docket Number: No. 97-35943,97-35943
• Citation: 184 F.3d 1059
• Parties: (9th Cir. 1999) ALBERT BINDER; ESTELLE BINDER, in their individual capacities and on behalf of one or more classes of persons similarly situated, Plaintiffs-Appellants, v. THOMAS GILLESPIE; MARIE MULLEN GILLESPIE; T. GORDON SIM; DIANE L. KARBAN; JOHN A. GOOD, Defendants, IAN R. WILSON; CARY S. FITCHEY; MARK L. STEVENS; DELOITTE & TOUCHE; MARK STEVENSON, Defendants-Appellees
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1059

184 F.3d 1059 (9th Cir. 1999)

ALBERT BINDER; ESTELLE BINDER, in their individual capacities and on behalf of one or more classes of persons similarly situated, Plaintiffs-Appellants, v. THOMAS GILLESPIE; MARIE MULLEN GILLESPIE; T. GORDON SIM; DIANE L. KARBAN; JOHN A. GOOD, Defendants, IAN R. WILSON; CARY S. FITCHEY; MARK L. STEVENS; DELOITTE & TOUCHE; MARK STEVENSON, Defendants-Appellees.

No. 97-35943

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted October 6, 1998,

Decided March 30, 1999.

Opinion Withdrawn July 26, 1999.

Decided July 26, 1999.

Robert H. Bretz, Marina del Ray, California, for the plaintiffs-appellants.

Jeffery J. Ventrella, Elam & Burke, Boise, Idaho, for defendants-appellees Wilson, Fitchey, and Stevens.

Lois D. Thompson and Erik M. Silber, Proskauer Rose, Los Angeles, California, for defendant-appellee Deloitte & Touche.

Appeal from the United States District Court for the District of Idaho. Mikel H. Williams, Chief Magistrate Judge, Presiding. D.C. No. CV-94-00528-MHW.

Before: Otto R. Skopil, Jr., Jerome Farris, and Stephen Reinhardt, Circuit Judges.

ORDER

The majority opinion and dissent, reported at 172 F.3d 649 (9th Cir. 1999), is hereby withdrawn and superseded by the attached majority opinion and dissent. With the filing of these opinions, Judges Skopil and Farris vote to deny the petition for rehearing; Judge Reinhardt votes to grant rehearing. Accordingly, the petition for rehearing is DENIED.

The new majority opinion and dissent have been circulated to all active judges of the court, along with appellants' petition for rehearing en banc, amicus curiae brief in support of rehearing en banc, and appellees' briefs in opposition to rehearing en banc. No active judge has called for a vote en banc. Accordingly, the petition for rehearing en banc is DENIED.

Opinion

SKOPIL, Circuit Judge:

Albert Binder brought this action against Aqua Vie Beverage Corporation (AVBC), various AVBC officers and directors, and the accounting firm of Deloitte & Touche (Deloitte), asserting, on his own behalf and as a representative for a class of investors, that defendants violated federal and state securities laws. The district court decertified the class and declined to exercise supplemental jurisdiction over the related state law class claims. The court also granted summary judgment in favor of three AVBC officers and directors and for Deloitte on all of Binder's individual claims. Final judgments were entered pursuant to Federal Rule of Civil Procedure 54(b). We affirm.

I.

Tom Gillespie and Marie Mullen Gillespie formed AVBC in 1991 by purchasing a publicly owned shell corporation and merging it with their Hawaii-based beverage company, KWC, Inc. They moved their operations to Sun Valley, Idaho. Shortly thereafter, Diane Karban joined the company as Chief Financial Officer and Deloitte was hired as the company's accounting firm. AVBC stock soon began trading publicly on the over-the-counter (OTC) market.

In the summer of 1991, Cottell Bottling agreed to manufacture, and Golden Brands agreed to distribute, AVBC's product - "lightly flavored," noncarbonated spring water. Industry publications touted AVBC as a promising, if speculative, investment, and AVBC stock sold for $ 2.75 per share by August. On September 24, 1991, Binder purchased 3000 shares at $ 4.00 per share. A month later, AVBC's bid price reached its peak at $ 4.50 per share.

AVBC began production in 1992. Chief of quality control John Good, however, warned CEO Tom Gillespie and consultant Gordon Sim that there was instability in the product formula. Sixty days after it was bottled, the water turned brown. AVBC adjusted the formula but continued to experience problems with the product's shelf life. By the end of the year, AVBC was forced to repurchase the defective water from Golden Brands, which eventually resigned as AVBC's distributor and sued for past-due debts.

In 1993, AVBC struggled to raise funds and to establish a distribution network for its product. On December 29, 1993, Binder sold his 3000 shares at less than one dollar per share. In 1994, AVBC suspended operations, and Binder filed this action. Default was entered against the Gillespies and, later, a default judgment for $ 5736.00. All remaining parties, except for defendants AVBC and the Gillespies, consented to proceedings before a magistrate judge. In February 1995, the action against AVBC was stayed pending Chapter 11 bankruptcy proceedings.

Chief Magistrate Judge Mikel H. Williams decertified the class of AVBC investors and dismissed all federal and state class claims. He also granted summary judgment on all of Binder's individual federal and state claims against Deloitte and AVBC officers and directors Ian Wilson, Mark Stevens, and Cary Fitchey. The court entered final judgments pursuant to Rule 54(b). Meanwhile, Binder's individual actions against the remaining defendants are pending in district court.

II.

We begin our inquiry by examining whether we have jurisdiction to consider Binder's appeal. A magistrate judge may conduct civil proceedings and order the entry of judgment if the parties consent. 28 U.S.C. 636(c); FED. R. CIV. P. 73(b). If the parties fail to consent in writing, the magistrate judge does not have jurisdiction and any judgment entered is a nullity. See Aldrich v. Bowen, 130 F.3d 1364, 1365 (9th Cir. 1997). A notice of appeal from such a judgment does not transfer jurisdiction to the court of appeals. See Estate of Conners v. O'Connor, 6 F.3d 656, 658 (9th Cir. 1993). Here, however, all parties to this appeal signed a stipulation consenting to proceedings before a magistrate judge. Accordingly, we conclude that Chief Magistrate Judge Williams had jurisdiction over this action and entered valid judgments. The notice of appeal properly conferred jurisdiction to this court.

III.

Judge Williams ruled that claims by the class - AVBC investors who purchased stock between August 1, 1991 and February 28, 1994 - must be dismissed because the class could not, as a matter of law, satisfy all elements of a claim under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j (b), and Securities and Exchange Commission (SEC) Rule 10b-5(b), 17 C.F.R. 240.10b-5. A successful securities fraud action requires proof of (1) a misrepresentation or omission (2) of material fact (3) made with scienter (4) on which the plaintiff justifiably relied (5) that proximately causes the alleged loss. See Gray v. First Winthrop Corp., 82 F.3d 877, 884 (9th Cir. 1996).

The district court reasoned that the class would have to satisfy the reliance element through a presumption; otherwise individual questions of reliance would predominate over questions common to the class. See FED. R. CIV. P. 23(b)(3); Basic Inc. v. Levinson, 485 U.S. 224, 242, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988) (noting that individualized proof of reliance by each class member would preclude a class action). The court concluded that no presumption was available under the facts of the case, and, accordingly, decertified the class for the period until December 1993.

After that date, when AVBC stock began trading on the Boston Stock Exchange, Judge Williams acknowledged that the class might qualify for a presumption of reliance; however, he elected to decertify the class for the remaining period between December 1993 and February 28, 1994 on the ground that the class could not prove causation. That decision resulted in the dismissal of all class claims based on federal law and, because the court declined to exercise supplemental jurisdiction, it ended the state law class claims as well.

A.

Binder argues that the class is eligible for a presumption of reliance pursuant to Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972). Such a presumption is generally available to plaintiffs alleging violations of section 10(b) based on omissions of material fact. See Kramas v. Security Gas & Oil, Inc., 672 F.2d 766, 769 (9th Cir. 1982) (recognizing Affiliated Ute rule). The district court, however, characterized Binder's action as "not primarily an omissions case" and held that the Affiliated Ute presumption was unavailable. We agree with the district court's characterization of Binder's action. Binder's complaint contains both allegations of omissions and misrepresentations, and at the very least, must be characterized, as the district court noted, as "a mixed case of misstatements and omissions."

We have applied the Affiliated Ute presumption to cases that "are, or can be, cast in omission or non-disclosure terms." Blackie v. Barrack, 524 F.2d 891, 905 (9th Cir. 1975); see also Arthur Young & Co. v. United States Dist. Court, 549 F.2d 686, 694 (9th Cir. 1977). We have not squarely decided, however, whether the presumption may be invoked in a case involving misrepresentations or both omissions and misrepresentations. See Little v. First Cal. Co., 532 F.2d 1302, 1305 n.4 (9th Cir. 1976) (noting that "the categories of 'omission' and 'misrepresentation' are not mutually exclusive" and that a case involving a "representation from which material facts are omitted" presents "a true dilemma" because the plaintiff must show reliance, whereas the plaintiff in a pure omissions case may rely on the presumption); Kramas, 672 F.2d at 769 n.2 (noting that whether the presumption applies to misrepresentations had already been "twice reserved"). Nevertheless, in Blackie, we embraced the presumption because of the difficulty of proving "a speculative negative" - that the plaintiff relied on what was not said. Blackie, 524 F.2d at 908. This suggests to us that Affiliated Ute should be confined to cases that primarily allege omissions.

Most circuits have limited the presumption accordingly. See generally Tim A. Thomas, Annotation, When Is It Unnecessary to Show Direct Reliance on Misrepresentation or Omission in...