Caviness v. Derand Resources Corp.
| Decision Date | 26 January 1993 |
| Docket Number | No. 92-1413,92-1413 |
| Citation | 983 F.2d 1295 |
| Parties | , Fed. Sec. L. Rep. P 97,354, RICO Bus.Disp.Guide 8205 Robert J. CAVINESS; Barry J. Friedman; Brian A. Johnson; Mark H. Tuohey, III; Patrick J. Haley, Jr.; Joseph E. Kampa; Michael Hasten Bowman; Carolyn Ann Bowman; Big Wheel Bikes, Incorporated; Caby C. Smith; Brian J. McGregor; Katherine S. Feghali; Charles L. Frazier; Deborah White; Richard J. Davey; Clifford R. Dunning, Plaintiffs-Appellants, and Jesus D. Tapiador; Kathleen H. Kampa; Michael D. Sendar, Plaintiffs, v. DERAND RESOURCES CORPORATION; Derand Equity Group, Incorporated; Derand Energy Corporation; Arlington Energy Corporation; Derand Corporation of America; Rome Resources Corporation; Derand Investment Corporation of America; Derand/Pennington/Bass, Incorporated; Randall N. Smith; Malcolm R. Rudolph; Denison E. Smith; Dan R. Kiely; William A. Conway; David B. Reese; Carlile and Howell, Incorporated; Marshall Exploration, Incorporated; Kenneth Q. Carlile, Defendants-Appellees, and Daniel C. Snyder; Rebecca J. Poth; Darcy Smith; Lynn Greenhouse; Frank H. Jacobeen, Jr.; Charles H. Chaney; John E. Johnson; Martex Drilling Co.; H & C Well Services, Incorporated; Crosstex Pipeline, Incorporated; Crosstex Pipeline Company; Quinton B. Carlile; T.D. Howell; Steven B. Carlile; James Lyle, Defendants. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Robert Norman Levin, Schweitzer, Bentzen & Scherr, Washington, DC, argued (William C. Dickerson, on brief), for plaintiffs-appellants.
Anthony John Trenga, Hazel & Thomas, P.C., Alexandria, VA, argued (Anne M. Richard, Hazel & Thomas, P.C., Alexandria, VA; Kim J. Askew, Theodore Stevenson, III, Hughes & Luce, L.L.P., Dallas, TX, on brief), for Marshall defendants-appellees.
Howard V.B. Sinclair, Arent, Fox, Kintner, Plotkin & Kahn, Washington, DC, argued (Jason S. Palmer, on brief), for DeRand, defendants-appellees.
Before NIEMEYER and HAMILTON, Circuit Judges, and SPROUSE, Senior Circuit Judge.
We are presented with questions about the proper application of statutes of limitations to securities fraud claims, the principal issues being whether the three-year period of repose contained in § 13 of the Securities Act of 1933 may be extended by a theory of integration 1 or tolled by fraudulent concealment or equitable estoppel. We are also presented with the question of whether allegations that state a claim for rescission under § 12(2) of the Securities Act satisfy the requirement of the Racketeer Influenced and Corrupt Organizations Act (RICO) that a loss be caused by a violation of the Act. See 18 U.S.C. § 1964(c).
Seventeen plaintiffs, who invested slightly more than $900,000 in oil and gas partnerships, sued more than 25 individuals and companies involved in developing and marketing these projects, alleging that the defendants' private placement memoranda were misleading because of untrue statements and omissions. They alleged federal and state securities laws violations, a RICO violation, and common law fraud. The district court granted defendants' motion for summary judgment, dismissing with prejudice all counts except a pendent claim under the Texas Blue Sky Law which it dismissed without prejudice because it decided not to exercise pendent jurisdiction (or supplemental jurisdiction). See 28 U.S.C. § 1367(c). The court relied on applicable statutes of limitations to dismiss the securities law counts and the absence of direct causation of loss to dismiss the RICO and fraud counts.
For the reasons given hereafter, we modify the dismissal of Count V (alleging a Louisiana Securities Act claim) to be without prejudice and, with that modification, affirm the judgment of the district court.
During the period from May 1987 through December 1988, the plaintiffs invested approximately $905,000 in oil and gas wells located in Louisiana and Texas by purchasing partnership interests in one or more of five oil and gas limited partnerships. 2 These partnerships were created and managed by various persons and companies within the group of defendants referred to in this litigation as the "DeRand defendants." 3 The DeRand defendants, who were generally engaged in selling securities to raise venture capital, formed the limited partnerships in this case to purchase lease rights in oil and gas wells, mainly from the second group of defendants referred to as the "Marshall defendants." 4 The Marshall defendants were engaged in the exploration and development of oil and gas wells. The Marshall defendants were also retained as operators of the properties. They continue in that capacity today, distributing revenues to the limited partnerships, which in turn distribute them to the plaintiffs.
The plaintiffs are, for the most part, accountants and lawyers in the Washington, D.C., area who invested in these projects primarily for tax reasons. They claim that they have not been receiving the financial returns which they were led to expect and that the private placement memoranda on which they relied to make their investment decisions were misleading. In particular, the plaintiffs allege that they were provided with unaudited financial data which failed to disclose the existence of significant litigation, when audited statements were available. They also contend that the auditors "had come to very different valuations" of the assets. Finally, they contend that management fees paid to various defendants were not adequately disclosed.
The plaintiffs filed suit on August 28, 1991, and, in their amended complaint (filed thereafter), they alleged a violation of § 12(2) of the Securities Act (Count I), a RICO violation (Count II), violations of the securities laws of Virginia (Count III), Texas (Count IV), and Louisiana (Count V), and common law fraud (Count VI).
The defendants have denied that any information on which the plaintiffs could have relied was misleading. They note that audited financials were made available to at least some of the plaintiffs and contend that the undisclosed pending litigation was not material, particularly in view of the fact that the defendants were later vindicated.
On defendants' motion for summary judgment raising various technical defenses to each count, the district court ruled that (1) the federal securities claims of all plaintiffs, except plaintiffs Caviness, Frazier, and White, were barred by the three-year statute of repose contained in § 13 of the Securities Act; (2) the federal securities claims of Caviness, Frazier, and White were barred by the one-year limitation of § 13; (3) all claims under the Virginia and Louisiana statutes were likewise barred by the applicable statutes of limitations; and (4) the RICO and common law fraud claims failed to contain allegations of a loss caused by the violations alleged. The remaining claim under Texas law (Count IV) was dismissed without prejudice, the court finding "no basis ... to exercise its pendent jurisdiction."
This appeal followed.
Applying the three-year limitation provision of § 13 of the Securities Act, 5 the district court dismissed the federal securities law claims of all but three of the plaintiffs because the "sales" at issue occurred more than three years before suit was filed. 6 Among the theories advanced by plaintiffs on why § 13 should not be applied to bar their action is their contention that the district court erred in applying the three-year limitation period to each sale separately. They argue that all sales from the various offerings put together by the defendants should be integrated and that the date when the three-year period should begin to run for all purchasers is the date of the last sale in the integrated offering. Because the last sale of any of the related partnership interests was in December 1988, a suit filed in August 1991 was filed well within the three-year limitation period.
For determining when to integrate offerings for the purpose of applying the limitations statute, the plaintiffs would have the court borrow the factors enumerated in Securities Act Release No. 4552 (Nov. 6, 1962), 27 Fed.Reg. 11316 (), which listed factors to be considered in determining whether multiple offerings and sales should be integrated for purposes of satisfying an exemption from registration requirements under the Securities Act. To support their argument, plaintiffs rely mainly on the decision in Currie v. Cayman Resources Corp., 595 F.Supp. 1364 (N.D.Ga.1984), reviewed on other grounds, 835 F.2d 780 (11th Cir.1988). The court in Currie integrated a series of related and similar offerings, holding that because the criteria for integration had been substantially met and the fraud occurred throughout the offering period, "the date of the final capital contribution [to the limited partnership] [was] the date on which limitations [began] to run." 595 F.Supp. at 1377 (emphasis added).
The defendants point out that the factors listed in Release No. 4552 were intended to apply only to the issue of whether an offering is "public" and subject to registration, not to the question of when various statutes of limitations begin to run. The defendants argue that there is no basis in the Securities Act for extending the limitation period beyond three years after the sale to the plaintiff investor, finding support for this position in Hayden v. McDonald, 742 F.2d 423, 436-37 (8th Cir.1984) (), and Bresson v. Thomson McKinnon Sec., Inc., 641 F.Supp. 338, 344 (S.D.N.Y.1986) ().
No circuit decision considering the issue presented by the parties has been cited, and we are aware of none.
We begin the inquiry, as we...
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...existence of a `direct relation between the injury asserted and the injurious conduct alleged.'" Id. (quoting Caviness v. Derand Resources Corp., 983 F.2d 1295, 1305 (4th Cir.1993)). Each Plaintiff and his associated corporate entity, if any, will be considered separately to determine wheth......
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