Corwin v. Marney, Orton Investments
| Decision Date | 26 April 1988 |
| Docket Number | No. 87-2771,87-2771 |
| Parties | Fed. Sec. L. Rep. P 93,940, 10 Fed.R.Serv.3d 1362, RICO Bus.Disp.Guide 6933 Charles T. CORWIN, D.D.S., et al., Plaintiffs-Appellants, v. MARNEY, ORTON INVESTMENTS, a General Partnership, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Michael S. Tomasic, Houston, Tex., for Corwin, et al.
Larry R. Veselka, David Lamb, Houston, Tex., for Marney.
John A. Irvine, Boyar, Norton & Blair, Houston, Tex., for Sidney Orton.
Stephen R. Kirklin, Jack J. Garland, Jr., Houston, Tex., Robert R. Robey, Dallas, Tex., for Venita Van Caspel.
Appeal from the United States District Court for the Southern District of Texas.
Before THORNBERRY, GEE, and POLITZ, Circuit Judges.
Appellants, investors in a Houston office building project, come to this court for a second time. They sued under the securities laws and the Racketeer Influenced and Corrupt Organizations Act (RICO) when their investment lost money. On their first appeal, we reversed a summary judgment for the defendants, holding that a fact issue existed as to whether limitations had run on the Rule 10b-5 claim. Corwin v. Marney Orton Investments, 788 F.2d 1063 (5th Cir.1986) [hereinafter Corwin I ]. We also reversed the dismissal of the RICO claim and the pendent state-law claims. On remand the district court again dismissed all the claims. On summary judgment, the district court again held the Rule 10b-5 and RICO claims barred by the statute of limitations and exercised its discretion to dismiss the pendent state-law claims. We reverse.
On this appeal from summary judgment, we must view the facts in the light most favorable to the appellants. Prinzi v. Keydril Co., 738 F.2d 707, 709 (5th Cir.1984). The facts, viewed in this light, were fully set forth in Corwin I. We repeat those facts that are relevant to this appeal.
Marney, Orton Investments, a general partnership composed of Ronald D. Marney and Sidney Orton, prepared a lengthy set of documents entitled "Confidential Private Offering Memorandum" to be sent to several individuals in Texas. This memorandum, dated November 1, 1980, offered investment opportunities in twenty-one units of a limited partnership known as the Woodway III Office Building, Ltd. ("the building partnership"). The general partner in the building partnership was Marney, Orton Investments. Each limited partnership unit was priced at $60,000. Marney, Orton Investments formed the building partnership to own, develop, and operate a professional office building on a certain tract of land on Woodway Drive in Houston. Another limited partnership, Woodway III, Ltd. ("the land partnership") had contributed this tract to the building partnership in exchange for nine limited partnership units in the building partnership.
Charles T. Corwin and six others received this offering memorandum and each decided to invest. The six investors other than Corwin received information and advice from Venita VanCaspel, principal owner and chief executive officer of VanCaspel & Company, Inc., who promoted these investments and received commissions on the funds invested. Each of the seven investors purchased one unit of the building partnership in December 1980, paying $30,000 in cash and signing a note for another $30,000 payable in November 1981. Each investor paid the note when due. Marney, Orton Investments made two "cash calls" of approximately $17,000 each in 1983 and 1984 and each of the investors responded. Thus, each investor made a total investment of about $94,000.
After the building was completed Corwin became dissatisfied and hired an accountant, James R. Ferrel, to review the records of the building partnership. Ferrel's review began on May 2, 1984, but was halted on July 31, 1984 when he was denied further access to records. From his partial investigation, Ferrel concluded that the land partnership's true equity in the contributed property was not fully disclosed by the offering memorandum. Ferrel also found that various construction and finishing costs were higher than stated in the offering memorandum and that various instances of managerial malfeasance had occurred, including undisclosed rent concessions to certain tenants and undisclosed payments to certain entities related to Marney, Orton Investments. Corwin also discovered that VanCaspel owned a substantial portion of the land partnership at the time she was promoting investment in the building partnership.
Corwin and the six other investors filed suit in federal district court on September 4, 1984. This was less than four years after the date on the offering memorandum and the date of their investments. Named as defendants were Marney, Orton Investments, the estate of Ronald D. Marney, Suzann M. Marney, MOH, Inc. and Marney Properties, Inc. (two Texas corporations originally owned by Marney and Orton that sold interests in the building partnership and managed its property), Sidney Orton, Venita VanCaspel, and VanCaspel and Company. The complaint charged the defendants with violations of the Securities Act of 1933, sections 5(a), 5(c), 12(2), and 17(a), 15 U.S.C. Secs. 77e(a), (c), 77l (2), 77q(a). The complaint also charged violations of the Securities Exchange Act of 1934, sections 10(b), 15 U.S.C. Sec. 78j(b), and 20(a), 15 U.S.C. Sec. 78t(a), and Rule 10b-5. The complaint in addition included a RICO claim, with alleged predicate acts of federal and state securities law violations, federal mail fraud, and various Texas criminal statutes. Finally, the complaint alleged various pendent state law claims.
The district court originally granted the defendants' motion for summary judgment, dismissing all of the plaintiffs' claims. In Corwin I, we affirmed the district court except as to the dismissal of the claims under section 10(b), Rule 10b-5, RICO, and the state-law claims. 788 F.2d at 1069. We remanded those claims to the district court for further proceedings.
Following our remand, the defendants again moved for summary judgment. The plaintiffs responded with a motion for a continuance. The plaintiffs asserted that pursuant to a prior order, they had taken no discovery since the remand. Additionally, the plaintiffs noted that defendants' counsel, Larry Veselka, had agreed to advise the plaintiffs of which allegations in the complaint the defendants intended to contest so that the plaintiffs could prepare an amended complaint. Also, Mr. Veselka had agreed that an amended complaint was necessary, because Corwin I had affirmed the dismissal of several of the claims in the original complaint. The plaintiffs also filed a response to the motion for summary judgment. Thereafter, the plaintiffs filed a motion to amend their complaint. The district court denied this motion.
The plaintiffs then filed affidavits to be used as summary judgment evidence. The parties were given an opportunity for an "evidentiary hearing," but they all agreed that a hearing was unnecessary because "all the facts necessary for a complete and just adjudication were before the Court." The district court then granted summary judgment for the defendants. The court held that the plaintiffs should have discovered the misleading statements and omissions by December 1980, thus barring their securities claims under the applicable two-year statute of limitations. Next, the court held that the RICO claim was barred under a two-year statute of limitations as the most analogous state statute. Finally, the court dismissed without prejudice the state-law claims.
The plaintiffs appealed.
The appropriate limitations period for the Rule 10b-5 claims in Texas is two years. Wood v. Combustion Engineering, Inc., 643 F.2d 339, 346 (5th Cir.1981). The limitations period, however, does not begin to run until the plaintiffs have discovered, or reasonably should have discovered, the defendants' alleged misdeeds. Breen v. Centex Corp., 695 F.2d 907, 911 (5th Cir.1983). On summary judgment, the district court held that the plaintiffs should have discovered any misleading or omitted statements by December 1980, and it dismissed the claims.
In Corwin I we noted that the plaintiffs had alleged and supported their contention that they did not know of the 10b-5 violations until Ferrel's audit, which occurred within the two-year time limit. 788 F.2d at 1069. Thus, the plaintiffs had raised a genuine issue of material fact on the issue of their actual knowledge of the alleged misdeeds. We will not reconsider this earlier determination. On the question of when the plaintiffs discovered the alleged misleading or omitted information, there exists an issue of fact. Unless this claim can be disposed of on another issue, a trial is required to determine when the plaintiffs discovered the improper information.
Even if the plaintiffs had no actual knowledge of the information, however, the limitations period would begin if the plaintiffs should have known of the misleading or omitted statements. In Corwin I we said that, if the offering memorandum and supporting documents were misleading or fraudulent, it was not clear when the plaintiffs should have made this discovery. Id. at 1068-69. We said this because the defendants had not presented any evidence on the should-have-known question. Additionally, we stated that "[o]ther than the initial offering memorandum and supporting documents, the defendants have identified no communications or occurrences which would have alerted the suspicions of a reasonably diligent investor." Id. at 1069. This statement, accompanied by our reversal of the summary judgment, implied that the initial offering memorandum and supporting documents were insufficient for a finding against the plaintiffs on this issue on summary judgment. We did, however, leave room for the defendants, after the remand, to produce evidence of other communications or...
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