Buford White Lumber Co. v. Octagon Properties

• Decision Date: 11 May 1989
• Docket Number: No. CIV 88-1829-R.,CIV 88-1829-R.
• Parties: BUFORD WHITE LUMBER COMPANY PROFIT SHARING AND SAVINGS PLAN & TRUST, et al., Plaintiffs, v. OCTAGON PROPERTIES, LTD., et al., Defendants.
• Court: U.S. District Court — Western District of Oklahoma

740 F. Supp. 1553

BUFORD WHITE LUMBER COMPANY PROFIT SHARING AND SAVINGS PLAN & TRUST, et al., Plaintiffs, v. OCTAGON PROPERTIES, LTD., et al., Defendants.

No. CIV 88-1829-R.

United States District Court, W.D. Oklahoma.

May 11, 1989.

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Ernest J. Istook, Oklahoma City, Okl., for plaintiffs.

Arlen E. Fielden, Arthur F. Hoge III, Crowe & Dunlevy, Warner E. Lovell, Jr., Burck Bailey, Eric S. Eissenstat, Fellers Snider Blankenship Bailey and Tippens, B.J. Brockett, Anthony L. Jackson, J. Mark Spaeth, Brady Schaulat Falsetti & Connell, Oklahoma City, Okl., for defendants.

ORDER

DAVID L. RUSSELL, District Judge.

Before the Court is the motion of Defendant Andrews Davis Legg Bixler Milsten & Murrah, Inc. to dismiss Plaintiffs' Amended Complaint pursuant to Rule 9(b) and 12(b)(6), F.R.Civ.P.

In the Amended Complaint, Plaintiffs allege that Defendant prepared a series of prospectuses, offering circulars and related documents relating to the sale of limited partnerships and stock in Octagon Properties, Ltd. with the purpose and intent that they would be relied upon by potential investors such as the Plaintiffs. See Amended Complaint at ¶ 64. See also id. at ¶ 77. Plaintiffs specifically allege that Defendant prepared a "February, 1986, stock offering document" which included false and misleading statements, all of which related to the financial condition of Octagon Properties, Ltd. Id. at 65-66. Plaintiffs allege that Defendant by the exercise of due diligence either knew or should have known that statements in the offering document were false and misleading, id. at ¶ 66, and that Defendant made no effort to verify the accuracy of information concerning the financial condition of Octagon Properties, Ltd. or to require inclusion in the offering document of "independent data" concerning Octagon's financial condition. See id. at ¶ 67. Rather, Plaintiffs allege that Defendant "accepted unquestionably and uncritically the information supplied by Dennis Lowder and Octagon Properties." Id. Plaintiffs further allege that Defendant had an obligation to the public and to Plaintiffs under federal and state securities laws to register the securities and to exercise due diligence to assure that statements and representations in "said documents" were true and accurate but that Defendant breached these duties. Id. at ¶ 68. Had Defendant "exercised due diligence, provided the required registration statements, and assured that all necessary information was obtained, ... was correct, and was disclosed," id. at ¶ 70, Plaintiffs aver that they wouldn't have invested what they did with Octagon Properties and would "not have lost their investments." Id. Additionally, Plaintiffs allege that Defendant acted either with knowledge of the mis-statements or "with such reckless disregard ... as amounts in law to malicious, intentional and knowing conduct, due to their failure to exercise due diligence to inquire into the true circumstances." Id. at ¶ 73. See also id. at ¶ 77. Plaintiffs allege that they relied on Defendant's mis-representations to their detriment and damage. Id. at ¶ 77. Plaintiffs further allege that Defendant is a seller of securities, id. at ¶ 75, and that it received from Octagon in excess of $42,000.00 for its services in preparing offering documents, id. at ¶ 71, an amount Plaintiffs allege exceeds "fair compensation for the degree of inquiry conducted." Id.

I. Violations of Sections 12(1) and 12(2) of the Securities Act of 1933, 15 U.S.C. § 771

A. Primary Liability

In support of its motion to dismiss Plaintiffs' Section 12(1) and Section 12(2) claims, Defendant first asserts that Plaintiffs have not alleged, nor could they allege, that Defendant "sold" or "solicited" the sale of securities to Plaintiff within the contemplation of Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988).

In Pinter v. Dahl, the United States Supreme Court rejected the "substantial factor" test for primary liability under Section 12(1) and held that the class of Defendants subject to primary liability under Section 12(1) of the Securities Act of 1933 is limited to 1) those who pass title to the security to a buyer for value; and 2) those who successfully solicit the purchase of a security, "motivated at least in part by desire to serve ... their own financial interests or those of the securities owner." 486 U.S. at 640-652 & 647, 108 S.Ct. at 2075-2081 & 2078, 100 L.Ed.2d at 678-685 & 682.

Plaintiffs in response first assert that the Pinter decision's application is limited to defining those who may be primarily liable for violations of Section 12(1). While the Pinter case expressly addressed Section 12(1) only and its holding is limited to who may be primarily liable under that section, the reasoning of the Pinter decision is equally applicable to Section 12(2) inasmuch as Section 12(2), like Section 12(1), applies to persons who "offer" and "sell" securities and the same definitions of those terms, see 15 U.S.C. § 77b(3), which the Supreme Court construed in Pinter, apply to both subsections (1) and (2) of Section 12. Accord Abell v. Potomac Insurance Co., 858 F.2d 1104, 1113-115 (5th Cir.1988), petition for cert. filed March 13, 1989.

The Court therefore examines Plaintiffs' allegations that Defendant offered and sold securities in violation of Sections 12(1) and 12(2) in light of the teaching of Pinter v. Dahl. Plaintiffs first allege that Defendant "is a seller of securities, within the meaning of 15 U.S.C. § 77l (2) ... in that it was a substantial factor in causing said sales to take place, and aided and abetted the conspiracy previously described...." Amended Complaint at ¶ 75. Plaintiffs also allege that as a seller, Defendant prepared at least one prospectus, for the February 1986 stock offering (and possibly others, see id. at ¶¶ 76), and that by preparing the offering of securities, Defendant "obtained money for itself, and for Octagon Properties." Id. at ¶ 78.

Plaintiffs' allegations of a motive of financial gain for itself or the issuer satisfy that aspect of the Pinter definition of an offeror or seller. Thus, the sole question presented by Plaintiffs allegations and Defendant's Pinter-based argument is whether a law firm which prepares an offering document, motivated at least in part by a desire to obtain financial benefit for itself and/or the issuer can, without more, be a "solicitor" of a purchase or offer to purchase.

Upon a careful examination of the Supreme Court's description of the terms "solicit" and "solicitation," as well as its stated rationale for rejecting the "substantial factor" test, the Court is persuaded that it may not. First, a law firm which prepared an offering memorandum is not one which would "commonly be said, and would be thought by the buyer, to be among those `from' whom the buyer `purchased'. ..." 486 U.S. at 643, 108 S.Ct. at 2077, 100 L.Ed.2d at 680. Secondly, mere preparation of an offering memorandum is not actively "directed at producing the sale," 486 U.S. at 646, 108 S.Ct. at 2078, 100 L.Ed.2d at 682; rather, such activity may more properly be characterized as a condition necessary to a sale, or as an activity without which there would be no sale, satisfying a mere "but for" causation test. See e.g., Davis v. Avco Financial Services, Inc., 739 F.2d 1057, 1067 (6th Cir.1984), cert. denied, 470 U.S. 1005, 105 S.Ct. 1359, 84 L.Ed.2d 381 (1985) (overruled on other grounds in Pinter v. Dahl, see 486 U.S. at 649 n. 25, 108 S.Ct. at 2080 n. 25, 100 L.Ed.2d at 683 n. 25). A law firm which does no more than prepare an offering memorandum is not "persuading" or "urging" a person to purchase and thus is not "soliciting" a purchase as contemplated by the Supreme Court in Pinter v. Dahl. See 486 U.S. at 646, 108 S.Ct. at 2078, 100 L.Ed.2d at 682. While it is true that a preparer of an offering memorandum may be "well positioned to control the flow of information to a potential purchaser" and may be said to "disseminate material information to investors," id. (emphasis added), it is apparent that the relationship between a law firm which prepared an offering document and a plaintiff purchaser is not that of a seller or solicitor and purchaser as contemplated by the Supreme Court:

The "purchase from" requirement of § 12 focuses on the defendant's relationship with the plaintiff-purchaser. The substantial-factor test, on the other hand, focuses on the defendant's degree of involvement in the securities transaction and its surrounding circumstances. Thus, although the substantial-factor test undoubtedly embraces persons who pass title and who solicit the purchase of unregistered securities as statutory sellers, the test would also extend § 12(1) liability to participants only remotely related to the relevant aspects of the sales transaction. Indeed, it might expose securities professionals, such as accountants and lawyers, whose involvement is only the performance of their professional services, to § 12(1) strict liability for rescission. The buyer does not, in any meaningful sense, "purchase the security" from such a person.

486 U.S. at 651, 108 S.Ct. at 2081, 100 L.Ed.2d at 684-85 (footnote omitted).

In the face of the foregoing language, it must be concluded that a law firm which is alleged to have prepared an offering memorandum but not to have any personal contact with the plaintiff purchasers at best merely assists in another's solicitation efforts or participates in soliciting a purchase, neither of which relationships with the plaintiff purchasers are sufficient to render the law firm a statutory seller. See 486 U.S. at 651 n. 27, 108 S.Ct. at 2081 n. 27, 100 L.Ed.2d at 685 n. 27.

B. Statutes of Limitations

Defendant asserts that Plaintiffs' Section 12(1) and 12(2) claims are barred by the applicable one-year and two-year statutes of limitations, respectively, 15 U.S.C. § 77m inasmuch as the sales of securities...