Danzig v. Jack Grynberg & Associates

Decision Date21 November 1984
Citation208 Cal.Rptr. 336,690 P.2d 709,161 Cal.App.3d 1128
CourtCalifornia Court of Appeals Court of Appeals
PartiesPaul DANZIG et al., Plaintiffs and Respondents, v. JACK GRYNBERG & ASSOCIATES et al., Defendants and Appellants. AO 14853.

Jon Wallace Upton, Kimble, MacMichael, Jackson & Upton, Fresno, William G. Horlbeck, Denver, Colo., Jerome I. Braun, Deborah A. Schafer, Farella, Braun & Martel, San Francisco, Rodney R. Patula, Pryor, Carney & Johnson, Englewood, Colo., Jeffrey L. Beattie, Law & Scheid, Neil E. Ayervais, Denver, Colo., Haas & Pahlmeyer, Oakland, for defendants and appellants.

Sandra J. Shapiro, Bancroft, Avery & McAlister, San Francisco, for plaintiffs and respondents.

RACANELLI, Presiding Justice.

This appeal is taken by defendants Jack J. Grynberg, doing business as Jack Grynberg & Associates, and his wife Celeste Grynberg, from a judgment rendered by the court (sitting without a jury) in favor of plaintiffs individually and as class representatives of all limited partner investors in an oil and gas limited partnership known as the "Greater Green River Basin Drilling Program 72-73" (hereafter GGRB). 1 Following an extended trial the court entered its judgment in favor of plaintiff class on a theory of rescission grounded upon findings of fraudulent misrepresentations and nondisclosures in inducing the members of plaintiff class to subscribe to limited partnership interests in, and to contribute working capital to, the GGRB partnership venture. The judgment provided, inter alia, for restitution to the class in the total sum of approximately $4.1 million and compensatory damages in the total sum of $2.2 million together with punitive damages against defendant Jack Grynberg only in the total sum of $431,000, the punitive award to be apportioned among the class members in accordance with their prorated interests.

On appeal defendants attack the validity of the class certification and resulting judgment, the sufficiency of the evidence in support of the findings and the award of damages. Celeste Grynberg separately raises a jurisdictional challenge to the judgment against her. For the reasons which we explain, we conclude that no reversible error is shown, and accordingly affirm the judgment.

PROCEDURAL AND FACTUAL BACKGROUND

The underlying action arose from a 1972 public offering by defendant Grynberg of limited partnership interests in GGRB, in which Grynberg was designated as the sole general partner. The partnership purpose was to explore for oil and gas drilling prospects and potential production in the Greater Green River Basin of Colorado, Utah and Wyoming upon oil and gas leases held either by Grynberg or his wife Celeste Grynberg. Through an active solicitation program conducted in over a dozen states, Grynberg sold the eventual $4 million registered offering to approximately 55 limited partner investors in subscription units of $200,000 each, or fractions thereof. The largest number of investors, including the named plaintiffs, were California residents. The principal sales tool was the written prospectus which was amended several times during the course of the public offering. The original or preliminary prospectus provided that in consideration for a 50 percent interest, the general partner (Grynberg) "shall commit" certain oil and gas leases to some 200,000 acres in the basin and other areas; in response to an official SEC inquiry as to the meaning of the word "commit," the prospectus was amended to provide that approximately 202,000 net acres in the tri-state area held under leases owned by the Grynbergs would not be used by the general partner for his own account but Grynberg "shall make them available to the Partnership" for inclusion within drillable prospect areas. Identical language was contained in the next four versions of the revised prospectus. Two of the revised documents were accompanied by written summary sheets outlining key features of the proposal together with page references to the prospectus itself. The summary sheets repeated the language contained in the earlier versions of the prospectus concerning commitment of leases. 2

The partnership commenced actual operations on December 1, 1972. On December 21, 1972, the Grynbergs transmitted a letter to the limited partners which purported to assign to the partnership their interests in the oil and gas leases. However, the Grynbergs' recorded assignments of the leases, unknown to the limited partners, specified a right of reversion upon termination of the partnership: December 31, 1974, or whenever the capital contributions were exhausted, whichever first occurred.

By the summer of 1974 the partnership operating capital was virtually expended. At about the same time, Grynberg obtained an amendment to the partnership agreement to permit additional contributions by the limited partners in conjunction with the Kent Ranch drilling project. Thereafter he solicited and obtained approximately $400,000 in "voluntary contributions" from some of the investors. The Kent Ranch well was eventually abandoned.

In 1975 the named plaintiffs filed the underlying suit individually and on behalf of all of the limited partners of GGRB. 3 Following a hearing plaintiffs' action was certified as a class action, and notice was sent to all limited partners. None opted out of the lawsuit.

At the pretrial conference held in 1979 plaintiffs were permitted to amend their complaint to seek rescission and restitution on an alternative theory (in the event the subject leases were not distributable assets of the partnership) that the plaintiff class had been detrimentally misled by the material representations contained in the amended versions of the prospectus and summary sheets. Following the overruling of defendants' demurrer, trial commenced on the issues framed in the complaint as amended. After submission of the cause, the court filed its notice of intended decision granting relief to plaintiff class in the form of rescission and restitution of their net capital contributions together with accrued interest and punitive damages against Jack Grynberg alone, assessed on the basis of 10 percent of each contribution.

The common thread running through the court's extensive findings in support of rescission and damages was the fraudulent misrepresentations and nondisclosures of Grynberg with respect to the summary sheets' characterization that the leases would be committed as partnership assets, and the related failure to reveal to plaintiff class that the leases which were not drilled would revert to the Grynbergs upon termination and dissolution of the partnership; that such misrepresentations and nondisclosures were intentional and willful in order to induce the plaintiff class to subscribe to partnership interests. Moreover, the court explicitly found that the members of plaintiff class reasonably and justifiably relied upon such misrepresentations and nondisclosures in purchasing their respective partnership interests; that but for such fraudulent conduct the members of plaintiff class would not have subscribed to the limited partnership offering as paid investors.

In determining that plaintiff class was entitled to rescission, compensatory and punitive damages, the court also ordered restoration of the leases, producing wells and other partnership assets to the Grynbergs together with certain enumerated compensating offsets.

I. Class Certification

Grynberg first argues that once the complaint was amended changing its focus from one of enforcement of the partnership agreement to that of avoidance based upon allegations of common law fraud implicating conflict-of-law issues, the original class certification was vitiated and a class judgment was improper. Plaintiff class responds that Grynberg's failure to move timely to decertify the class certification after the complaint was amended constituted a waiver of any objections to such certification. We agree.

The thrust of Grynberg's challenge to the class judgment is directed at the alleged lack of community of interest of the diverse members of the class. The claim comes too late. The proper time to challenge the procedural propriety of a class action is before proceedings have been undertaken on the merits; judicial review, if necessary, is available by extraordinary writ. (Blue Chip Stamps v. Superior Court (1976) 18 Cal.3d 381, 387, fn. 4, 134 Cal.Rptr. 393, 556 P.2d 755.)

California decisions uniformly hold that the propriety of a class action must be decided at the earliest possible stage. (Home Sav. & Loan Assn. v. Superior Court (1974) 42 Cal.App.3d 1006, 1010, 117 Cal.Rptr. 485 [error to bifurcate trial to decide liability first]; Massey v. Bank of America (1976) 56 Cal.App.3d 29, 32, 128 Cal.Rptr. 144 [dismissal sanction proper for delay in determining propriety of class action].) That determination may be made either on motion of a party or by the court sua sponte. (City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 453-454, 115 Cal.Rptr. 797, 525 P.2d 701.) Once the initial determination has been made, a motion to decertify the class action may be used whenever changed circumstances render class status no longer appropriate. (Occidental Land, Inc. v. Superior Court (1976) 18 Cal.3d 355, 360, 134 Cal.Rptr. 388, 556 P.2d 750.) But a request for decertification must be made before a decision on the merits. (Green v. Obledo (1981) 29 Cal.3d 126, 145-149, 172 Cal.Rptr. 206, 624 P.2d 256.)

Herein, Grynberg registered no formal objections to the initial certification of the class. Indeed, he conceded that the action may be a "proper class action" while expressing concern only that divergent views within the class be represented. Nor did he move to decertify the class after the amendment to the complaint seeking rescission.

Grynberg's challenge to the class certification was raised for the first time in his objections to the...

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