Canut v. Lyons

• Decision Date: 14 December 1977
• Docket Number: Civ. No. 77-1397-RJK,77-2864-RJK.
• Court: U.S. District Court — Central District of California
• Parties: A. Louis CANUT, etc., et al., Plaintiffs, v. David I. LYONS, Jr., et al., Defendants. A. Louis CANUT, etc., et al., Plaintiffs, v. Charles L. ABRAHAMS et al., Defendants.

450 F. Supp. 26

A. Louis CANUT, etc., et al., Plaintiffs, v. David I. LYONS, Jr., et al., Defendants.

A. Louis CANUT, etc., et al., Plaintiffs, v. Charles L. ABRAHAMS et al., Defendants.

Civ. Nos. 77-1397-RJK, 77-2864-RJK.

United States District Court, C. D. California.

December 14, 1977.

Buchalter, Nemer, Fields & Chrystie, Howard P. Miller, Mark A. Neubauer, Richard D. Bronner, David W. Levene, Los Angeles, Cal., for plaintiffs.

Feldman, Waldman & Kline, Richard L. Jaeger, Linus S. Masouredis, San Francisco, Cal., for defendants David I. Lyons, Jr. and Aileen McDonald.

Benton R. Fonner, Los Angeles, Cal., for defendant Margaret Ann White.

E. Belmont Herring, Santa Monica, Cal., for defendant Bradford J. Erickson.

Sullivan, Jones & Archer, Miles W. Newby, Jr., Los Angeles, Cal., for defendants Mario Ribeiro, Irving R. Stevens, Richard L. Robinson, Carl Herrgord and Kenneth A. Carter.

Zobrist, Garner & Garrett, Duane H. Zobrist, Robert S. Schulman, Los Angeles, Cal., for defendants Donald Tracy Rumford, Irving N. Fisher and Loan Corp.

Lee B. Stanton, Glendale, Cal., for defendant Robert Ambrose.

MEMORANDUM OF DECISION AND ORDER

KELLEHER, District Judge.

Motions to dismiss were filed by defendants in each of these actions. Canut v. Lyons, et al., CV 77-1397 and Canut v. Abrahams, et al., CV 77-2864. Since they involve identical issues, they will be treated together in this Memorandum of Decision and Order. The Order will apply to each action separately.

The genesis of these actions is the sale of limited partnership interests to numerous investors, from November 1974 through November 1976. The complaints allege that the sale of limited partnership interests was part of a fraudulent scheme which the defendants either set up or aided. The partnerships were ostensibly created to infuse capital into the operations of Lyons Oil Company of California (Lyons Oil), and Road Oil Sales, a subsidiary of Lyons.

Under each limited partnership agreement (76 agreements are involved), the individual investors were to be limited partners, and Road Oil Sales the general partner, in the exploration for oil and the drilling of oil wells in Kern County, California. In reality, the complaints allege, no wells were drilled; instead, the money was taken by David Lyons, the president and sole owner of Lyons Oil, and used to create a so-called "Ponzi scheme," by which early investors were paid dividends out of the funds contributed by later investors. Almost $6,000,000 worth of limited partnership interests were sold, until November of 1976, when the Securities and Exchange Commission (SEC) brought an injunction proceeding that halted the operation. The SEC action, which was heard in Judge Pregerson's court in this district, ended with the grant of a permanent injunction against the further sale of limited partnership interests, and the appointment of A. Louis Canut as conservator for Lyons Oil, Road Oil Sales, and the Lyons Oil Company Limited Partnerships.

Canut filed these actions in his capacity as conservator for the various entities. The complaints seek money damages and injunctive relief for violations of the federal securities laws, and California Corporations Code provisions, as well as stating a number of state common law theories of recovery, including fraud, breach of fiduciary duty, malfeasance, misfeasance, misappropriation, and corporate mismanagement. In Canut v. Lyons, CV 77-1397, plaintiff names four defendants: David Lyons, owner and president of Lyons Oil; Bradford Erickson, individually and doing business as Sterling Securities, a broker-dealer of the limited partnership interests; Aileen McDonald, an officer-employee of Lyons Oil; and Ann White, an employee of Erickson's. In Canut v. Abrahams, CV 77-2864, some 27 individuals or entities are named as defendants, each of whom is alleged to have been involved in the sale of the partnership interests.

Defendants in both actions have brought motions to dismiss, on the grounds that (1) the conservator lacks standing to bring the actions under the federal securities laws, and (2) in the event the federal claims are dismissed, the Court should also dismiss the state claims for lack of pendent jurisdiction. For the reasons outlined below, the motions to dismiss in each case are granted.

1. Standing to Sue Under the Federal Securities Laws

The plaintiff-conservator has attempted in both actions to set forth claims for damages under the federal securities laws. In particular, the first three claims for relief in Lyons, and the first two claims for relief in Abrahams, are for violations of Sections 5, 12, 15 and 17, respectively, of the Securities Act of 1933, Sections 10(b) and 20, respectively, of the Securities Exchange Act of 1934, and Rule 10(b)-5 promulgated under the 1934 Act (15 U.S.C. §§ 77e, 77l, 77o, 77q, 78j, 78t, and 17 C.F.R. 240.10b-5, respectively).

The courts have restricted standing to sue for damages under the securities laws to buyers and sellers of securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952). Furthermore, as plaintiff admits in his memorandum opposing dismissal in Lyons, even sellers are not accorded standing under Sections 5, 12 and 15 of the 1933 Act, nor under Section 20 of the 1934 Act; only purchasers may sue under those sections. See, Greater Iowa Corp. v. McLendon, 378 F.2d 783 (8th Cir. 1967). To maintain the claims under the federal securities laws, then, plaintiff must show that he is either a purchaser (in which case he may sue under all of the sections) or a seller (in which case he may sue under either Section 10(b) of the 1934 Act or Section 17 of the 1933 Act) of the securities in question. Defendants do not challenge plaintiff's ability to represent his estate on any federal claims which it may have; rather, they assert that the estate of the conservator does not have any federal causes of action.

The conservator purports to bring the actions on behalf of Lyons Oil, Road Oil Sales, the limited partnerships, and the limited partnership investors. It is axiomatic that the conservator's power is derived from and limited by the order of the court appointing him; he may assert only claims which arise in favor of his estate. The order of appointment in this case empowered the conservator to take control of and manage the assets under the control of Lyons Oil, Road Oil Sales, the Lyons Oil Company Limited Partnerships, and their subsidiaries and affiliates. See Amended Final Judgment of Permanent Injunction and Order Appointing Temporary Conservator, pp. 8-9, filed in CV 76-3460-HP, Securities and Exchange Commission v. Lyons Oil Co., November 16, 1976. The order does not grant the conservator power with respect to the individual investors in the partnerships. Plaintiff asserts that the language in the order which charges him with "protecting the interests of the investors" (Id., at page 9) gives him power to sue in their behalf. The plaintiff is confusing the duty of the conservator with his power to act.

The conservator's duty to protect the interests of the investors is carried out through his powers over the conservatorship estate. His powers are limited to that estate, which does not include the individual investors, but is limited to the corporate and partnership entities. As neither the corporations nor the partnerships were purchasers of the limited partnership interests, the conservator may not bring an action under those sections of the securities laws which limit standing to sue to purchasers of securities, namely Sections 5, 12 and 15 of the 1933 Act, and Section 20 of the 1934 Act.

Parenthetically, it should be noted that the complaints contained language suggesting that the claims amounted to a class action. The complaints recite that the actions are brought "on behalf of all holders of Limited Partnership interests . . . who are so numerous that it is impracticable to bring them all before the court." See Lyons complaint, page 3 (filed 4/18/77); Abrahams complaint, page 3 (filed 8/1/77). Plaintiff does not directly assert that these are class actions, however. If a class action were alleged, the plaintiff could not satisfy the requirements which a class representative must meet under F.R.C.P. Rule 23. First, the plaintiff is not a member of the class of investors who purchased the limited partnership interests. Second, plaintiff's conservatorship duties would conflict with his pursuit of claims on behalf of the class, because as conservator, the plaintiff is charged with managing and preserving the assets of the corporate and partnership entities, and as class representative, the plaintiff would be attempting to secure those same assets on behalf of the investors in the limited partnerships.

Although the plaintiff-conservator is not a purchaser who can sue for damages under the securities laws, he may still maintain these actions if he qualifies as a seller under Section 17 of the 1933 Act, of Section 10(b) of the 1934 Act (and Rule 10(b)-5 promulgated thereunder). Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). As conservator, plaintiff is bound by the court order appointing him to prosecute all claims on behalf of the estate of conservatorship. Thus, if any of the entities comprising his estate has a cause of action, then plaintiff may bring the action on behalf of the entity. Neither Road Oil Sales nor the limited partnerships bought or sold the securities involved here, so neither may maintain an action under the Blue Chip rule. Lyons Oil was a seller of the partnership interests, however, so the conservator may maintain an action in its behalf, if the corporation's sale of securities gave it an action under the statutes. In this case, the corporation does not have an action under ...