Durning v. Citibank, N.A.

• Citation: 950 F.2d 1419
• Decision Date: 09 December 1991
• Docket Number: No. 90-35172,90-35172
• Parties: Fed. Sec. L. Rep. P 96,412 Jean C. DURNING, Marvin B. Durning, Plaintiffs-Appellees, v. CITIBANK, N.A., the First Boston Corporation, First Interstate Bank of Casper, Defendants, and Wyoming Community Development Authority, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1419

950 F.2d 1419

Fed. Sec. L. Rep. P 96,412

Jean C. DURNING, Marvin B. Durning, Plaintiffs-Appellees, v. CITIBANK, N.A., the First Boston Corporation, First Interstate Bank of Casper, Defendants and Wyoming Community Development Authority, Defendant-Appellant.

No. 90-35172.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 4, 1991.

Decided Dec. 9, 1991.

Bennet A. McConaughy, Paul L. Ahern, Jr., Foster, Pepper & Shefelman, Seattle, Wash., for defendant-appellant.

James A. Webster, Lynn D. Weir, Webster, Mrak & Blumberg, Seattle, Wash., for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Washington.

Before WALLACE, Chief Judge, O'SCANNLAIN, Circuit Judge, and BURNS, ^* District Judge.

O'SCANNLAIN, Circuit Judge:

The Wyoming Community Development Authority (the "Authority") appeals from the district court's denial of its motion to dismiss for lack of jurisdiction. The Authority contends that it is an arm of the sovereign state of Wyoming and is therefore absolutely immune from suit in federal court under the Eleventh Amendment to the Constitution. Although we acknowledge that the question is close, we disagree and affirm.

I

In 1975, the Wyoming State Legislature enacted the Wyoming Community Development Authority Act (the "Act"), 1975 Wyo.Sess. Laws ch. 188, § 1 (codified as amended at Wyo.Stat. §§ 9-7-101 to 125 (1977)). The Act established the Authority and granted it substantial powers to perform two primary functions: (1) to help to alleviate "a critical shortage of adequate housing and a lack of funds [from] private mortgage lending institutions of the State which are available to finance new and existing housing at reasonable rates" and (2) "to promote the economic welfare of the state and its residents by increasing employment, stimulating economic activity, augmenting sources of tax revenue, fostering economic stability and improving the balance of the State's economy." Wyo.Stat. § 9-7-102(a)(i)-(ii) (1977).

In December 1981, in furtherance of these goals, the Authority issued $75 million in tax-exempt bonds through and to a syndicate of underwriters. The bonds were issued to finance the purchase of moderately priced single family homes by persons of low and moderate incomes. In connection with the issue, the Authority disseminated an Official Statement, a disclosure document equivalent in most respects to a stock offering's prospectus. The Official Statement disclosed the material terms of the offering, including the terms of redemption, and it indicated that redemptions would be made from specific sources of funds, including unexpended bond proceeds, mortgage prepayments, excess reserves, and excess revenues.

Appellees Marvin B. and Jean C. Durning, who represent the plaintiff class, purchased four of these bonds, each with a face value of $5,000, an interest rate of 13.375%, and an apparent maturity date of June 1, 1996. The Durnings made their purchase upon the recommendation of their broker and with the apparent understanding that the bonds were not redeemable before 1991. Mr. Durning received the Official Statement before finalizing his purchase, and his examination of the document apparently confirmed his understanding about the timing of redemptions. Nonetheless, in June 1983, the Authority recalled $28 million worth of the bonds, and in 1985, it recalled another $4 million, including one of the Durnings' bonds. Immediately after the second of these redemptions, the price of the bonds declined significantly in the secondary market, and the Durnings allegedly lost $4,000 in foregone interest payments.

The Durnings cried foul. On July 15, 1985, they filed the present action on behalf of themselves and others similarly situated. Relying primarily upon the implied cause of action under section 10(b) of the Securities Exchange Act of 1934, the Durnings charged the Authority; the lead underwriter, First Boston Corporation; and other institutions associated with the bonds with securities fraud. They alleged that the Official Statement did not adequately disclose that the bonds were redeemable prior to 1991 and that the redemptions of 1983 and 1985 were therefore impermissible. Since the Durnings filed their complaint, the Authority has continued to recall its bonds, including two more of the Durnings' bonds, and it has now retired approximately $65 million out of the original $75 million issued.

On January 7, 1986, the district court dismissed the Durnings' action for failure to state a claim. The court held that the Official Statement unambiguously informed the investors that the bonds were indeed redeemable prior to June 1, 1991. Durning v. First Boston Corp., 627 F.Supp. 393 (W.D.Wash.1986). On appeal, however, this court reversed and remanded. We held that "[t]he case at bar is not a case where the issue of adequate disclosure could be determined by a trial court as a matter of law" and that "[a] jury could conclude that a reasonable investor might fail to understand that the bonds are redeemable [prior to June 1, 1991 if funds are sufficient]." Durning v. First Boston Corp., 815 F.2d 1265, 1269 (9th Cir.), cert. denied, 484 U.S. 944, 108 S.Ct. 330, 98 L.Ed.2d 358 (1987).

On remand, the Authority raised the subject of the current dispute. It moved to dismiss all the claims that had been raised against it on the ground that it was immune from suit in federal court under the Eleventh Amendment. Upon the recommendation of a magistrate judge, the district court denied that motion on two grounds. The court held first, that the Authority is not an arm of the state of Wyoming and therefore is not entitled to invoke the defense of sovereign immunity; and second, that Congress has affirmatively abrogated any applicable state immunity under the federal securities laws.

The Authority then filed this timely appeal.

II

The district court had proper jurisdiction, if at all, under the general federal question statute, 28 U.S.C. § 1331, and the federal securities laws, 15 U.S.C. §§ 77v, 78aa. This court has proper jurisdiction under 28 U.S.C. § 1291. Whether a party is immune from suit under the Eleventh Amendment is a question of law that we review de novo. BV Eng'g v. University of Cal., Los Angeles, 858 F.2d 1394, 1395 (9th Cir.1988), cert. denied, 489 U.S. 1090, 109 S.Ct. 1557, 103 L.Ed.2d 859 (1989).

Although the denial of a motion to dismiss is not normally appealable, we have held that the denial of a motion to dismiss on grounds of sovereign immunity, if colorable, is immediately appealable under the collateral order doctrine first articulated in Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 545-47, 69 S.Ct. 1221, 1225-26, 93 L.Ed. 1528 (1949). See Marx v. Government of Guam, 866 F.2d 294, 296 (9th Cir.1989). As the Supreme Court has explained in cases discussing the related doctrine of official immunity, the denial of a substantial claim of absolute immunity is appealable before final judgment because the essence of absolute immunity is its possessor's entitlement not to have to answer for or even to defend conduct that it necessarily would have to defend in the course of any proceedings in pursuit of a final judgment; without immediate reviewability, rejection of a valid claim to immunity from suit would, in effect, not be reviewable at all. See Mitchell v. Forsyth, 472 U.S. 511, 525, 105 S.Ct. 2806, 2815, 86 L.Ed.2d 411 (1985); Nixon v. Fitzgerald, 457 U.S. 731, 742-43, 102 S.Ct. 2690, 2697, 73 L.Ed.2d 349 (1982); see also Marx, 866 F.2d at 296.

III

A

The Eleventh Amendment to the United States Constitution provides:

The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

U.S. Const. amend. XI. Although by its terms the Eleventh Amendment only withholds article III jurisdiction from cases predicated upon citizen-state diversity, the Supreme Court has judicially extended its reach to bar federal courts from deciding virtually any case in which a state or the "arm of a state" is a defendant--even where jurisdiction is predicated upon a federal question--unless the state has affirmatively consented to suit. See Hans v. Louisiana, 134 U.S. 1, 9-21, 10 S.Ct. 504, 504-09, 33 L.Ed. 842 (1890) (Eleventh Amendment shields states from suits brought by their own citizens); State Highway Comm'n v. Utah Constr. Co., 278 U.S. 194, 199, 49 S.Ct. 104, 106, 73 L.Ed. 262 (1929) (Eleventh Amendment shielded state agency that was "but the arm or alter ego of the State with no funds or ability to respond in damages"); see also Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 238-40, 105 S.Ct. 3142, 3145-46, 87 L.Ed.2d 171 (1985).

Despite the breadth of the Eleventh Amendment's reach, not all state-created or state-managed entities are immune from suit in federal court. First, an entity may be organized or managed in such a way that it does not qualify as an arm of the state entitled to sovereign immunity. See, e.g., Lake Country Estates, Inc. v. Tahoe Regional Planning Agency, 440 U.S. 391, 400-02, 99 S.Ct. 1171, 1176-77, 59 L.Ed.2d 401 (1979); Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299, 110 S.Ct. 1868, 1876-80, 109 L.Ed.2d 264 (1990) (Brennan, J., concurring). Second, the state can affirmatively waive the sovereign immunity that would otherwise cloak the defendant entity. See, e.g., Atascadero, 473 U.S. at 238, 241, 105 S.Ct. at 3145, 3146. Third, Congress can expressly abrogate state sovereign immunity in fields of federal regulation in which the states voluntarily choose to participate. Congress can effect such an abrogation through an unequivocal expression to that effect pursuant to its powers under section 5 of the fourteenth amendment, see, e.g., Fitzpatrick v. Bitzer, 427 U.S. 445, 456, 96 S.Ct. 2666, 2671, 49...