Davis v. Metro Productions, Inc.

• Citation: 885 F.2d 515
• Decision Date: 31 August 1989
• Docket Number: Nos. 87-2739,87-2741,s. 87-2739
• Parties: RICO Bus.Disp.Guide 7303 Dale C. DAVIS, Plaintiff-Appellee, v. METRO PRODUCTIONS, INC.; Ralph Smith, Defendants, and Michael L. Miller, Defendant-Appellant. Dale C. DAVIS, Plaintiff-Appellee, v. METRO PRODUCTIONS, INC.; Michael L. Miller, Defendants, and Ralph Smith, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 515

885 F.2d 515

RICO Bus.Disp.Guide 7303

Dale C. DAVIS, Plaintiff-Appellee, v. METRO PRODUCTIONS, INC.; Ralph Smith, Defendants, and Michael L. Miller, Defendant-Appellant.

Dale C. DAVIS, Plaintiff-Appellee, v. METRO PRODUCTIONS, INC.; Michael L. Miller, Defendants, and Ralph Smith, Defendant-Appellant.

Nos. 87-2739, 87-2741.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 14, 1988.

Decided Aug. 31, 1989.

Michael Miller, Torrance, Cal., pro. per.

William L. Thorpe, Fennemore Craig, Phoenix, Ariz., for defendant-appellant Ralph Smith.

J. Clayton Berger, Teilborg, Sanders & Parks, Phoenix, Ariz., for plaintiff-appellee.

Appeal from the United States District Court for the District of Arizona.

Before GOODWIN, Chief Judge, SNEED, Senior Circuit Judge, and HUG, Circuit Judge.

GOODWIN, Chief Judge:

A disappointed purchaser of a tax shelter later held by the Internal Revenue Service to be defective sued for treble damages under the Arizona Racketeering Act, alleging fraud and unlawful securities transactions. The plaintiff, Dale C. Davis, had purchased the tax shelter from Metro Productions, Inc. ("Metro"), a California corporation. He sued Metro, but also sued Ralph Smith and Michael L. Miller, the sole stockholders of Metro, personally for their activities in the transaction. The trial court asserted long-arm jurisdiction over the corporation and the individual defendants, and, applying Arizona law, entered judgment against them. Defendant Metro does not appeal, but defendants Smith and Miller appeal, contending that the exercise of jurisdiction over them as individuals violated due process. We affirm.

I. FACTS

A. Metro Productions, Inc.

Appellants Smith and Miller were at all times the sole shareholders and officers of Metro, a California corporation incorporated in 1977. Neither appellant was nor is a resident of Arizona, nor has a place of business within Arizona.

From 1977 to 1978, Metro produced nearly 1,000 thirty-minute television episodes in several series. The series covered topics such as sewing, cooking, diet and health, religious singing, and game shows, and were said to be intended for distribution to cable companies and the like. Each half-hour show was sold as a tax shelter through Producer's Liaison Corporation ("Producer's"), Metro's wholly owned subsidiary and marketing arm, or by outside commissioned salesmen, to investors throughout the United States.

The shows were produced as videotapes. Metro edited each master videotape purchased by an investor and copyrighted it in the investor's name. The master videotape was placed in storage in the investor's name, and each investor paid an annual rental fee through the videotape distributor chosen by the investor to manage his show or shows.

B. Information Memorandum

Metro and its marketing agents used an information memorandum prepared by Metro in their solicitations of master videotape sales. The information memorandum contained background material regarding Metro and its producers, clippings showing the possible markets for videotapes, and schedules summarizing the tax savings opportunities alleged to be available from depreciation and investment tax credit, even if no income were to be realized from the investment. The package also contained a tax opinion letter written by Metro's law firm. In the memorandum, Metro identified Investor's Management Services, Inc. ("Investor's") as "a Management Services Group specializing in handling the placement and exploitation of video tape masters, which is accessible by telephone."

C. Production Service Agreement

These so-called shows were sold pursuant to a contract entitled "Production Service Agreement" for a purchase price of $90,000, ¹ with a $7,000 down payment, and a promissory note for $83,000. The note called for 7% annual interest with full recourse against the purchaser. A minimum annual payment of $2,000, to be applied against interest only, was to be made for five years. At the end of that period, the investor could extend the five-year period, or, for a payment of an additional $1,000, convert the note to nonrecourse.

Other than the minimum annual payment, the only other mandatory payments of principal and the accrued, but unpaid, interest, were to be made out of the revenues derived from marketing the individual television segments by the investor.

In the Production Service Agreement, the buyer was informed that "it will be necessary for you to take the initiative to engage a Management Services Group, which will act as your Agent to obtain a Distributor to market your television video tapes." The buyer was reminded that he "must engage in efforts to produce income from the programs ... to utilize certain possible tax incentives."

D. Davis's Involvement

During 1979, Dale C. Davis, D.D.S., an Arizona resident, introduced his accountant, James Allen, to Duane McCleary, who sold Metro's Production Service Agreements on a commission basis. McCleary was not licensed as a securities salesman. Allen was invited to accompany McCleary and to travel from Arizona, where he was a resident, to Los Angeles, for the purpose of meeting with Smith and Miller, the principals of Metro. During the meeting, Allen was advised that Investor's was available to market the videotapes on behalf of purchasers of Production Service Agreements, and that McCleary would pay Allen a fee for each client of Allen's who purchased a Production Service Agreement.

Shortly thereafter, Davis purchased from Metro, through Allen in Arizona, one episode of the "Sam Diego Show." He entered into the Production Services Agreement and engaged Investor's as his management agent. Thereafter, the Internal Revenue Service determined that the investment was an abusive tax shelter and disallowed the tax benefits.

II. PRIOR PROCEEDINGS

Davis first brought suit in Arizona Superior Court under the Arizona Racketeering Act, Ariz.Rev.Stat.Ann. [hereinafter ARS] Sec. 13-2301 et seq. (Supp.1988), against defendants Smith and Miller, appellants here, Metro, and Producer's. He contended that defendants' sale to him, as a tax shelter, of a master videotape constituted an investment contract and therefore a security. Because the alleged security concededly was not registered and was sold by unlicensed salesmen, he alleged defendants had committed a securities violation, a predicate act under the Arizona Racketeering Act. Id. Sec. 13-2301(D)(4)(s). Davis also alleged that the defendants had committed securities fraud, which is another predicate act. Id. Sec. 13-2301(D)(4)(s). Alternatively, Davis alleged that if the tax shelter investment was not a security, then the Metro program constituted a scheme or artifice to defraud under A.R.S. Sec. 13-2301(D)(4)(t). The suit was brought against the backdrop of three cases heard in the Arizona court system, involving the same scheme, and against the same defendants. ²

Defendants removed the suit to United States District Court for the District of Arizona on the basis of diversity of citizenship. They made a Rule 12(b)(2), Fed.R.Civ.P., motion to dismiss based on lack of in personam jurisdiction. The denial of that motion presents the principal issue on appeal.

While the case was pending in the district court, the Arizona Court of Appeals handed down its decision in Wetzel v. Arizona State Real Estate Dep't, 151 Ariz. 330, 727 P.2d 825 (App.1986), cert. denied, 482 U.S. 914, 107 S.Ct. 3186, 96 L.Ed.2d 674 (1987). That decision approved the offensive use of nonmutual collateral estoppel. Citing Wetzel, Davis moved for summary judgment, but his motion was denied.

The case was set for trial. The district judge informed the parties by letter that he considered the matter of personal jurisdiction to have been decided on the Rule 12(b)(2) motion, and that it would not be an issue at trial.

At the trial to the bench, Davis renewed his summary judgment motion. By this time, the Arizona Supreme Court had denied review ³ of the Wetzel case. The district judge granted the motion, and entered judgment for Davis.

III. DISCUSSION

A. Personal Jurisdiction Over Smith and Miller

1. Arizona Law on Collateral Estoppel

Davis argues on appeal that the basis for the district court's assertion of personal jurisdiction may have been collateral estoppel, inasmuch as the Arizona Court of Appeals held three times, in cases with nearly identical facts, ⁴ that in personam jurisdiction was proper over these same two individual defendants. However, the record before us shows that even if the collateral estoppel doctrine served as the basis for the granting of plaintiff's summary judgment motion, that ruling related solely to the substantive securities law question, and did not involve the jurisdictional dispute.

Davis maintains on appeal that regardless of what reasoning lay behind the district court's ruling, we should nonetheless apply collateral estoppel to affirm the ruling. Appellants argue that Arizona law does not permit the offensive use of nonmutual collateral estoppel. Davis argues to the contrary, that the current law in Arizona allows him to prevail through offensive use of the doctrine of collateral estoppel.

The parties dispute vigorously the recent developments in Arizona law on this issue and their implications. It may well be that Arizona courts are in the process of shifting from the First Restatement view, which does not allow the offensive use of nonmutual collateral estoppel, see Restatement of Judgments Sec. 93 (1942), to the view of the Second Restatement, which does. See Restatement (Second) of Judgments Sec. 29 (1982); see also Wetzel, 727 P.2d 825. Whether this transition has been completed or is still inchoate, however, is a question we need not determine because, as we discuss below, we view personal jurisdiction as a matter that must be independently determined by the federal court.

2. Due Process Considerations

Sitting in diversity, we, like the...