First American Bank of Virginia v. Kindschi

• Decision Date: 24 November 1986
• Docket Number: Nos. 85-1498,s. 85-1498
• Citation: 813 F.2d 400
• Parties: Unpublished Disposition NOTICE: Fourth Circuit I.O.P. 36.6 states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Fourth Circuit. FIRST AMERICAN BANK OF VIRGINIA, Appellee, v. Ronald O. KINDSCHI, Appellant, v. FUTURESOFT SYNERGIES, INC., Rardin, Kenneth D., Ganesa Group International, Inc., Third-Party Defendants, v. John W. FREAL, Appellee. FIRST AMERICAN BANK OF VIRGINIA, Plaintiff, v. Ronald O. KINDSCHI, Appellant, v. FUTURESOFT SYNERGIES, INC., Rardin, Kenneth D., Ganesa Group International, Inc., Appellees. and John W. FREAL, Third-Party Defendant. FIRST AMERICAN BANK OF VIRGINIA, Plaintiff, v. Ronald O. KINDSCHI, Appellee, v. FUTURESOFT SYNERGIES, INC., Appellant, v. RARDIN, Kenneth D., Ganesa Group International, Inc., John W. Freal, Third- Party Defendants. (L), 85-1803, 85-1882.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 400

813 F.2d 400

Unpublished Disposition

NOTICE: Fourth Circuit I.O.P. 36.6 states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Fourth Circuit.

FIRST AMERICAN BANK OF VIRGINIA, Appellee, v. Ronald O. KINDSCHI, Appellant, v. FUTURESOFT SYNERGIES, INC., Rardin, Kenneth D., Ganesa Group

International, Inc., Third-Party Defendants, v. John W. FREAL, Appellee.

FIRST AMERICAN BANK OF VIRGINIA, Plaintiff, v. Ronald O. KINDSCHI, Appellant, v. FUTURESOFT SYNERGIES, INC., Rardin, Kenneth D., Ganesa Group

International, Inc., Appellees.

and

John W. FREAL, Third-Party Defendant.

FIRST AMERICAN BANK OF VIRGINIA, Plaintiff, v. Ronald O. KINDSCHI, Appellee, v. FUTURESOFT SYNERGIES, INC., Appellant, v. RARDIN, Kenneth D., Ganesa Group International, Inc., John

W. Freal, Third- Party Defendants.

Nos. 85-1498(L), 85-1803, 85-1882.

United States Court of Appeals, Fourth Circuit.

Argued July 16, 1986.

Decided Nov. 24, 1986.

Before WINTER, Chief Judge, and HALL and SPROUSE, Circuit Judges.

James E. Coleman, Jr. (Wilmer, Cutler & Pickering; Faith D. Ruderfer; Stephen W. Preston, on brief), for appellant.

William T. Freyvogel (Adams, Porter & Radigan; Brian F. Kenney, on brief), Sally A. Hostetler (Odin, Feldman & Pittleman, P.C.), for appellee.

SPROUSE, Circuit Judge:

This consolidated appeal involves a diversity action by First American Bank of Virginia (First American) against a guarantor of a note, Ronald O. Kindschi; impleader of the principal maker, FutureSoft Synergies, Inc., its President, Kenneth D. Rardin, and a bank officer, John W. Freal, as third-party defendants; and counterclaims by FutureSoft and Rardin against Kindschi. The district court awarded summary judgment for the bank and Freal against Kindschi and after a bench trial granted a $10,000,000 judgment in favor of FutureSoft and Rardin against Kindschi. Kindschi appeals. We affirm the judgment in favor of the bank and Freal and affirm the liability findings in favor of FutureSoft and Rardin against Kindschi. We reverse the district court's damage award in the latter case, however, and remand for a new trial on the issue of damages due FutureSoft and Rardin.

I. Facts

Kindschi is a financial and investment advisor residing in California. Kindschi primarily offers his clients investments in limited partnerships, formed by himself or others, in real estate, oil and gas equipment, and insurance.

Kindschi and Rardin were introduced in 1981. Rardin was then chief operating officer for another corporation that develops software for mainframe computers. That corporation went public in 1981, and Rardin realized a substantial profit by selling his stock in the company. Rardin then went to Kindschi for financial advice and subsequently participated in a number of investments put together by Kindschi.

Rardin formed FutureSoft in April 1983 as a venture capital investment company that purchased large blocks of stock in start-up software companies and provided the companies management expertise. FutureSoft's first acquisition was a 51% interest in Strategy Wares, a small company specializing in software for the electric utility industry, for $300,000. Its second investment was $500,000 for a 30% interest in Ganesa Group International, Inc. (Ganesa) in September 1983. Ganesa, a microcomputer software company that specialized in business presentation graphics, statistical and demographic mapping, and micro-mainframe communications, had developed one product that showed particular promise--STATMAP, a computer-generated mapping system. FutureSoft considered Ganesa its "crown jewel," and later exercised an option to purchase an additional 20% of the company for $220,000, bringing its total interest in Ganesa to 50%. FutureSoft's final investment was in options that would allow it to purchase 49% of National Consumer Card Corp., a start-up consumer services company.

FutureSoft was capitalized primarily through loans from Rardin. By late 1983, he had loaned FutureSoft almost $1.2 million to enable it to acquire its interests in Strategy Wares and Ganesa. Rardin personally borrowed $500,000 from one Virginia bank and $300,000 from First American as part of the $1.2 million. FutureSoft soon needed additional capital, however, to develop Strategy Wares and Ganesa, which were both losing money, and to invest in additional software companies. Rardin contacted Kindschi in January 1984 about the possibility of a private offering of FutureSoft stock to raise capital, and the two men met at Kindschi's offices in Los Angeles later that month.

At the meeting, Rardin forecast a highly profitable future for FutureSoft and predicted Ganesa would go public sometime in 1984 with a value of $20 million. He explained to Kindschi that he needed to raise $3.5 million by April to satisfy FutureSoft's immediate needs for cash, as well as a large personal tax liability. ¹ Rardin proposed a private placement of FutureSoft stock by Kindschi's company on a firm commitment basis, i.e., Kindschi's company would be required to purchase any FutureSoft stock that remained unsold at the end of the offering period. Kindschi was also expansive. He boasted of his ability to raise large amounts of capital from investors in a short period of time and expressed an enthusiastic interest in underwriting an offering of FutureSoft stock. The two men agreed that Rardin would immediately begin drafting a summary prospectus for an offering. Kindschi provided Rardin with the summary prospectus from one of Kindschi's recent limited partnership offerings, Turbo Partners, Ltd., and suggested that Rardin use it as a guide.

Rardin returned to Virginia and, using the Turbo Partners document as a model, drafted a "summary brochure" for the FutureSoft offering. The summary projected remarkable growth in the value of FutureSoft, but included the usual disclaimers regarding the risks involved and the assumptions underlying the projections. Rardin sent the summary brochure to Kindschi on February 4, 1984. In a letter accompanying the summary, Rardin explained that the document contained "numerous assumptions" and was a "rough draft" to "give you an overall view of the offering and to give us a starting point."

Rardin and Kindschi met in Los Angeles for a second time on February 6, 1984. After reviewing the draft summary brochure prepared by Rardin, they discussed the mechanics of a private offering of FutureSoft stock. Rardin indicated a desire to limit the offering to accredited investors, ² while Kindschi expressed doubts whether the offering could be accomplished as quickly as Rardin hoped. They agreed that Rardin and his lawyers would begin drafting a detailed private placement memorandum to give to potential investors. Because of the expense involved in such an undertaking, Rardin asked Kindschi to sign a letter of intent to underwrite the offering. Kindschi agreed and requested that Rardin draft a suitable letter for his signature.

After returning to Virginia, Rardin dictated a letter of intent to Kindschi's secretary over the telephone. Kindschi signed and returned it to Rardin on February 23, 1984. In subsequent conversations, Kindschi pressed Rardin for additional information, such as "best case" and "worst case" financial projections, to help him sell the offering to his clients. Rardin responded on March 6, 1984 with a letter that addressed the areas of concern raised by Kindschi. The letter contained several "off the record" financial projections, without supporting data, and the caveat that the projections were "highly speculative and for discussion purposes only."

On March 7, 1984, Rardin's attorneys sent the first draft of the private placement memorandum to Kindschi. Like the earlier summary brochure, the memorandum forecast rapid growth in the value of FutureSoft, projecting an investment of $100,000 in 1984 would be worth $995,000 in 1988. The document explained, however, the speculative nature of its financial projections, the high degree of risk an investor had to be willing to assume, and that FutureSoft and each of its subsidiaries currently had negative stockholders' equity and were losing money--Ganesa alone at the rate of almost $900,000 per year. The letter accompanying the draft memorandum asked Kindschi to review the document and respond with comments and possible changes.

On March 16, 1984, Rardin again travelled to Los Angeles to meet with Kindschi. While there, he gave a two-hour presentation on FutureSoft and the stock offering to a number of broker-dealers who occasionally worked in association with Kindschi's firm. After the presentation, Rardin gave Kindschi an Underwriting Agreement drafted by his attorneys. The Agreement provided that Kindschi's firm would sell 35% of FutureSoft's stock for $3.5 million, less commissions. It further stated that the firm would purchase any of the stock that remained unsold after the thirty-day offering period expired. Kindschi apparently never objected to nor sought to negotiate the value placed on the stock by Rardin. Kindschi made two handwritten changes to the agreement and signed it on behalf of his firm. Kindschi and Rardin also discussed FutureSoft's immediate need for cash. Although Kindschi claims that he agreed only to assist FutureSoft in obtaining an interim loan from a California bank, the district court found that Kindschi agreed to loan FutureSoft $1.5 million to satisfy its immediate cash needs.

Following a series of letters and phone calls, it became apparent by April 4, 1984 that Kindschi was not going to loan any money to FutureSoft. Kindschi did agree, however, to give his personal guaranty to a loan from First American to FutureSoft, and he sent Rardin his personal financial statement the next day. The loan was to be for only 120 days, as Rardin expected to have the...