Feigin v. DIGITAL INTERACTIVE ASSOC., 95CA0387.

• Decision Date: 04 February 1999
• Docket Number: No. 95CA0387.,95CA0387.
• Citation: 987 P.2d 876
• Parties: Philip A. FEIGIN, Securities Commissioner for the State of Colorado, Plaintiff-Appellant, v. DIGITAL INTERACTIVE ASSOCIATES, INC.; Terry K. Vickery; Michael S. Beeler; Robert Kirk; Paul Montroy; Jay Katz; Jamie Tsutsui; Kenneth King; Paul Weidmaier; Anton Walker; Russ Howard; Barbara Beagan; Elizabeth Littleton; Charles (Chas) Gunther; and Douglas Ethan Mallach, Defendants-Appellees.
• Court: Colorado Court of Appeals

987 P.2d 876

Philip A. FEIGIN, Securities Commissioner for the State of Colorado, Plaintiff-Appellant, v. DIGITAL INTERACTIVE ASSOCIATES, INC.; Terry K. Vickery; Michael S. Beeler; Robert Kirk; Paul Montroy; Jay Katz; Jamie Tsutsui; Kenneth King; Paul Weidmaier; Anton Walker; Russ Howard; Barbara Beagan; Elizabeth Littleton; Charles (Chas) Gunther; and Douglas Ethan Mallach, Defendants-Appellees.

No. 95CA0387.

Colorado Court of Appeals, Div. I.

February 4, 1999.

Rehearing Denied March 11, 1999.¹ Certiorari Denied October 18, 1999.²

Gale A. Norton, Attorney General, Martha Phillips Allbright, Chief Deputy Attorney General, Richard A. Westfall, Solicitor General, William Higgins, Assistant Attorney General, M. Ashley Albright, Assistant Attorney General, Denver, Colorado, for Plaintiff-Appellant.

McAllister & Murphy, P.C., Robert T. McAllister, Kathryn Haight, Denver, Colorado, for Defendants-Appellees Digital Interactive Associates, Inc.; Terry K. Vickery; Michael S.Beeler; Robert Kirk; Paul Montroy; Jay Katz; Jamie Tsutsui; Kenneth King; Paul Weidmaier; Anton Walker; Russ Howard; Barbara Beagan; Elizabeth Littleton; and Charles (Chas) Gunther.

Haddon, Morgan & Foreman, P.C., Harold A. Haddon, Saskia A. Jordan, Pamela R. Mackey, Denver, Colorado, for Defendant-Appellee Douglas Ethan Mallach.

Opinion by Judge ROY.

Plaintiff, Phillip A. Feigin, Colorado Securities Commissioner (the commissioner), appeals the trial court's denial of his summary judgment motion asserting qualified immunity as to a counterclaim asserted by defendants, Digital Interactive Associates, Inc., Terry K. Vickery, Michael S. Beeler, Robert Kirk, Paul Montroy, Jay Katz, Jamie Tsutsui, Kenneth King, Paul Weidmaier, Anton Walker, Russ Howard, Barbara Beagen, Elizabeth Littleton, Charles (Chas) Gunther, and Douglas Ethan Mallach. We reverse.

Digital Interactive Associates, Inc., (Digital) is a venture capital firm which sold interests in IVDS Interactive Acquisition Partners (IVDS), a Nevada general partnership with offices in Florida using, allegedly, scripted "cold calling." The individual defendants were Digital corporate officers and sales representatives.

The investigation of Digital's activities was apparently prompted by inquiries from several individuals who had been approached by telephone with an opportunity to purchase units in IVDS for $6,000 each. IVDS was formed to participate in an auction to be conducted by the Federal Communications Commission at which licenses to operate interactive video and data services were to be sold.

Search warrants for the search of Digital's offices and banks were obtained based on the affidavit of an investigator in the commissioner's office. The execution of the search warrant on the banks resulted in some of Digital's bank accounts being temporarily frozen or rendered inaccessible.

Among other matters, the affidavit described and characterized written materials provided to investors, or potential investors, describing the partnership and its business purpose. This description included the undisputed fact that the affairs of the partnership would be managed by a previously elected Management Committee.

In addition, the affidavit stated:

Your affiant then made available a copy of each interview memorandum with promotional materials for each of the individuals who had been solicited and then contacted the DIVISION [Division of Securities] and your affiant's investigative reports to Philip A. Feigin ... for his review.... After Commissioner FEIGIN also reviewed the information in the previous paragraphs of this affidavit, and took particular note of the IVDS partnership agreement, he concluded the IVDS investment arrangement, including the selling of units in this `general partnership', is an `investment contract' and therefore falls within the definition of a `security' pursuant to section 11-51-201(17), C.R.S. (1993). Commissioner FEIGIN told your affiant that his conclusion is based on Colorado case law holding that an `investment contract' is an arrangement with the expectation of a profit based upon the essential managerial efforts of the promoter or a third party. Commissioner FEIGIN concluded from his review of the materials pertaining to IVDS and DIGITAL that investors are being solicited by DIGITAL to invest money in the IVDS venture with the expectation that they, the investors, will earn a profit on their investments based on essential managerial efforts of IVDS, DIGITAL, Carlo Annede and Terry Vickery in raising funds for the IVDS venture and IVDS then successfully setting up and marketing the appropriate licenses and television stations. Therefore, according to Commissioner FEIGIN, the purported general partnership interests being offered and sold by IVDS and DIGITAL are `investment contract securities.'

In subsequent challenges to the search warrant and in the counterclaim at issue here, defendants have relied on the failure of the commissioner to cite Banghart v. Hollywood General Partnership, 902 F.2d 805 (10th Cir.1990) in his opinion and have asserted that the omission made the affidavit false or misleading.

In Banghart, while stating that there is a strong rebuttable presumption that an interest in a general partnership is not a security, the court held that the inquiry as to whether such an interest is a security is limited to the partnership agreement and the substantive state partnership law.

After execution of the search warrant, the commissioner filed a civil complaint against defendants alleging various violations of securities laws, and obtained an ex parte temporary restraining order (TRO) freezing assets prohibiting the individual defendants from, inter alia, accessing their personal bank accounts and various other personal assets. In the affidavit supporting the motion for the TRO, the commissioner's investigator again stated the commissioner's opinion that a partnership interest in IVDS was a security under Colorado law and again failed to cite the Banghart case.

Defendants do not dispute the truth of the representation that the commissioner held the opinion expressed, or that the affidavits prepared by his agent accurately reflected that opinion. Defendants do dispute the commissioner's conclusion that a partnership interest in IVDS marketed by them was a security under Colorado law, and they did allege that the commissioner's failure to cite the Banghart case was intentional and knowing.

Defendants filed an emergency motion to modify the ex parte TRO. The trial court, acting through the judge who originally issued the TRO, concluded that the issuance of the TRO without notice had not been necessary on the grounds that the previously issued and executed search warrant had effectively frozen Digital's bank accounts, at least temporarily. The trial court, acting through a different judge, subsequently dissolved the TRO in its entirety as to the individual defendants and their funds were released.

Defendants then filed a counterclaim against the commissioner, individually, based on 42 U.S.C. § 1983 (1994), alleging a violation of their Fourth Amendment and procedural and substantive due process rights. The commissioner filed a motion to dismiss pursuant to C.R.C.P 12(b) or, alternatively, for summary judgment pursuant to C.R.C.P. 56, on the grounds of qualified immunity. The trial court denied the motion and the commissioner's appeal of that denial to this court was dismissed. The commissioner then filed a petition for a writ of certiorari with the supreme court which was granted, and the matter was remanded to the trial court, without opinion, for reconsideration in light of that court's opinion in City of Lakewood v. Brace, 919 P.2d 231 (Colo.1996).

Upon reconsideration, the trial court found that 1) the commissioner's failure to cite the Banghart case in the affidavit in support of the search warrant was a material omission which violated clearly established Fourth Amendment rights; 2) that the commissioner's conduct in failing to inform the court of parallel criminal proceedings at the time the TRO was requested violated defendants' clearly established procedural due process rights; 3) that defendants had not stated a substantive due process violation; and 4) that genuine issues of material fact remained as to the commissioner's state of mind, making the entry of summary judgment improper. This appeal followed.

I.

We first address, and reject, defendants' assertion that the interlocutory appeal must be dismissed for lack of a reviewable order. The denial of a motion to dismiss pursuant to C.R.C.P 12(b), or a motion for summary judgment pursuant to C.R.C.P. 56, is normally not reviewable, much less immediately reviewable, as they are not final orders. Section 13-4-102, C.R.S.1998; City of Lakewood v. Brace, supra.

In City of Lakewood v. Brace, supra,

however, the supreme court announced a two-part test for deciding whether an order denying a motion for summary judgment asserting qualified immunity is immediately appealable. First, the trial court must determine as a matter of law whether the alleged facts state a violation of a clearly established constitutional right. If the answer to this question is in the affirmative, the inquiry stops and that determination is immediately reviewable on appeal. But, if the answer to the question is in the negative, then the trial court must determine whether there are genuine issues as to a material fact such that the issue of qualified immunity must be decided by a fact finder. This second determination is not reviewable.

Defendants contend that this is not an appropriate interlocutory appeal and this court lacks jurisdiction because the commissioner does not challenge whether the rights he may have violated were clearly established but rather he appeals the factual issue of whether he actually violated those rights. We disagree as to the nature of the commissioner's challenge.

In challenging the trial...