Cromeans v. Morgan Keegan & Co.

• Decision Date: 23 September 2014
• Docket Number: No. 2:12-CV-04269-NKL,2:12-CV-04269-NKL
• Court: U.S. District Court — Western District of Missouri
• Parties: JOHN W. CROMEANS, JR., et al., Plaintiffs, v. MORGAN KEEGAN & CO., INC., et al., Defendants.

JOHN W. CROMEANS, JR., et al., Plaintiffs, v. MORGAN KEEGAN & CO., INC., et al., Defendants.

No. 2:12-CV-04269-NKL

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MISSOURI CENTRAL DIVISION

September 23, 2014

ORDER

Pending before the Court is the Plaintiffs' Motion for Class Certification [Doc. 218]. The motion is granted in part and denied in part.

I. Background

On July 15, 2010, the City of Moberly, Missouri approved the issuance of $39 million in municipal bonds by the Industrial Development Authority of the City of Moberly (the IDA). The IDA issued the bonds to finance a project that included acquiring and improving a 33-acre parcel of land, and constructing and equipping a sucralose manufacturing and processing facility in Moberly. The facility was to be operated by Mamtek U.S., Inc., a Delaware corporation registered to transact business in Missouri.

The City hired Defendant Morgan Keegan & Company, Inc., a Tennessee corporation, to underwrite the bonds. As underwriter, Morgan Keegan was responsible for preparing the Official Offering Statement, which provided information about the bond offering to prospective purchasers. Morgan Keegan engaged Defendant ArmstrongTeasdale, a St. Louis-based limited partnership, to serve as underwriter's counsel. The legal services Armstrong Teasdale provided included preparing the offering materials, a bond purchase agreement, and continuing disclosure agreement, as well as generally advising Morgan Keegan in connection with issuance of the bonds by the IDA.

In July 2010, Morgan Keegan purchased the bonds from the IDA, then sold them to about 133 persons or entities. About 30 of the bonds were sold to Missouri residents and the remainder to residents of 18 other states. Some of the bonds were subsequently resold one or more times. The trustee bank, UMB Bank, N.A., located in Missouri, held the proceeds of the sales of the Moberly Bonds, and disbursed the proceeds to Bruce Cole, the project promoter, who allegedly was not entitled to them. The Mamtek project failed and the bonds are now alleged to be worthless.

This putative class action was filed on behalf of the bond purchasers (collectively, the Bondholders). The Bondholders' claims are based in substantial part on alleged material misrepresentations and omissions contained in the Official Offering Statement, and the Defendants' alleged failure to conduct a due-diligence investigation concerning the accuracy of the representations in the statement. The Official Offering Statement included the following allegedly false claims:

• Mamtek operated a fully-functional sucralose production facility in China;

• Mamtek was one of only two significant global sucralose manufacturers;

• The US Patent and Trademark Office would grant Mamtek a patent on its sucralose manufacturing process within months;• Mamtek's unique manufacturing processes neither required nor produced any hazardous substances or resulted in any hazardous waste;

• Mamtek expected exponential expansion in production lines over the next two years;

• Mamtek had a sales contract with a Chinese company called Xibo Pharmaceutical Group;

• Mamtek had pledged valuable collateral as security for the bonds, which had been evaluated by a boutique valuation company, Pelligrino & Associates, LLC.

[Doc. 41, pp. 10-11 of 27.] It also contained the following paragraph:

The Underwriter has reviewed the information in this Official Statement in accordance with and as part of its responsibilities to investors under the Federal Securities Laws as applied to the facts and circumstances of this transaction and reasonably believes such information to be accurate and complete, but the Underwriter does not guarantee the accuracy or completeness of such information.

[Id.]

The Plaintiffs claim that the Defendants did not review the information in the Official Offering Statement and had no basis for believing that such information was accurate or complete. They also claim that Morgan Keegan representatives made additional false statements by email and in oral discussions. Finally, Plaintiffs claim that if Morgan Keegan and Armstrong Teasdale had conducted the Mamtek investigation with due diligence, they would have quickly discovered that numerous representations by Mamtek were false.

The Plaintiffs ask for certification of all claims contained in the first amended complaint. [Doc. 66-1.] The Court previously entered summary judgment in favor ofDefendant Armstrong Teasdale on two claims against it, negligent misrepresentation and omissions, and attorney malpractice [Doc. 170]. The remaining claims are:

Count I negligent underwriting, against Defendant Morgan Keegan;

Count II negligent misrepresentation and omissions, against Defendant Morgan Keegan;

Count III fraudulent misrepresentations and omissions, against both Defendants;

Count IV Missouri Blue Sky law violations, against both Defendants;

Count V moneys had and received, against both Defendants; and

Count VI unjust enrichment, against both Defendants.

[Doc. 66-1.]

II. Discussion

The following requirements must be met under Federal Rule of Civil Procedure 23(a) to maintain suit as a class action:

(1) The class is so numerous that joinder of all members is impracticable;

(2) There are questions of law or fact common to the class;

(3) The claims or defenses of the representative parties are typical of the claims or defenses of the class; and

(4) The representative parties will fairly and adequately protect the interests of the class.

One of the three subsections of Rule 23(b) must also be met. The Plaintiffs elect to proceed under Rule 23(b)(3), which provides that:

[T]he questions of law or fact common to the members of the class predominate over any questions affecting onlyindividual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The matters pertinent to these findings include:

(A) the class members' interests in individually controlling the prosecution or defense of separate actions;

(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;

(C) the desirability of concentrating the litigation of the claims in the particular forum; and

(D) the likely difficulties in managing a class action.

Rule 23 also permits part of a claim to be certified under some circumstances. See Fed. R. Civ. Pro. 23 (c)(4).

To prevail on their motion, the Plaintiffs must "affirmatively demonstrate" their compliance with Rule 23. Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2551-52 (2011). A district court has broad discretion in determining whether class certification is appropriate. Luiken v. Domino's Pizza, LLC, 705 F.3d 370, 372 (8^th Cir. 2013). Nevertheless, a class action cannot be certified unless the court "'is satisfied, after rigorous analysis, that the prerequisites of'" the rule have been met. Dukes, 131 S.Ct. at 2551 (quoting General Telephone Co. v. Falcon, 457 U.S. 147, 160 (1982)).

A. Preliminary issues

Morgan Keegan preliminarily argues that class treatment is precluded because the Plaintiffs' definition of the class is overly broad, and because the Plaintiffs and many putative class members have binding agreements that require them to arbitrate any claims. Neither argument is persuasive.

1. Definition of the class

The Plaintiffs have proposed a class that consists of:

All persons who purchased Moberly bonds from July 23, 2010 through Sept. 30, 2011 [the date of the first offering and the date Morgan Keegan reduced the price of the bonds, respectively].

[Doc. 219, p. 16.]

While the Eighth Circuit has not addressed the issue, the Court will assume that the proposed class must be definite or ascertainable. See Matamoros v. Starbucks Corp., 699 F.3d 129, 139 (1^st Cir. 2012); In re. Initial Public Offerings Securities Litigation, 471 F.3d 24, 30 (2^nd Cir. 2006); Chiang v. Veneman, 385 F.3d 256, 271 (3^rd Cir. 2004); John v. Nat'l Sec. Fire and Cas. Co., 501 F.3d 443, 445 (5^th Cir. 2007); and Marcus v. BMW of N.A., LLC, 687 F.3d 583, 593 (7^th Cir. 2012).

Morgan Keegan argues that the class is not sufficiently ascertainable because the persons who did not purchase bonds directly from Morgan Keegan may be difficult to identify, inasmuch as Morgan Keegan does not know who they are. This argument does not persuade the Court because Morgan Keegan's knowledge does not determine whether the identity of the class can be ascertained. Given the objective criteria in the definition, it is more likely than not that the purchasers of the Moberly Bonds can be identified through discovery, and by tracing secondary sales from purchasers who did buy directly from Morgan Keegan.

2. Arbitration agreements

The three named Plaintiffs and a number of other putative class members—about 70 in all—signed arbitration agreements with Morgan Keegan. Morgan Keegan argues that Bondholders with arbitration agreements are required to arbitrate—not litigate—their claims. [E.g. Doc. 259, p. 30 (arbitration agreements cannot "be vitiated by simply filing a class action").] Morgan Keegan also argues that "consistent with the" Federal Arbitration Act (FAA), such Bondholders should be "exclude[d] from any purported class[.]" [Doc. 259, p. 32.]

A valid arbitration agreement is a contract and enforced according to its terms. Owen v. Bristol Care, Inc., 702 F.3d 1050, 1051 (8^th Cir. 2013). "[A] party cannot be forced to submit to arbitration any dispute he has not agreed to submit." Keymer v. Management Recruiters Intern, Inc., 169 F.3d 501, 504 (8^th Cir. 1999). Here, the arbitration agreements explicitly exempt arbitration of claims that are being dealt with in a class action, or are the subject of a not-as-yet-ruled motion to certify a class. [E.g., Doc. 259-17, p. 4 of 8; and Doc. 259-18, pp. 3-4 of 30.] Both parties agreed to this provision and Morgan Keegan cites no section of the FAA nor any other law that prevents the parties' voluntarily agreement to this...