First Ark. Bank & Trust v. Gill Elrod Ragon Owen & Sherman, P.A.

• Decision Date: 30 May 2013
• Docket Number: No. 12–540.,12–540.
• Citation: 2013 Ark. 159,427 S.W.3d 47
• Court: Arkansas Supreme Court
• Parties: FIRST ARKANSAS BANK & TRUST, TRUSTEE; First Arkansas Bank & Trust; Bank of England; Merchants and Planters Bank; The Capital Bank; Heber Springs State Bank; Timberland Bank; Arkansas Bankers' Bank; and M & P Community Bancshares, Inc., Appellants v. GILL ELROD RAGON OWEN & SHERMAN, P.A.; Christopher L. Travis, P.A.; Dream Team Holdings 1, LLC; and Fayetteville Municipal Property Owners' Improvement District No. 12–Belclaire, Appellees.

2013 Ark. 159

427 S.W.3d 47

FIRST ARKANSAS BANK & TRUST, TRUSTEE; First Arkansas Bank & Trust; Bank of England; Merchants and Planters Bank; The Capital Bank; Heber Springs State Bank; Timberland Bank; Arkansas Bankers' Bank; and M & P Community Bancshares, Inc., Appellants

v.GILL ELROD RAGON OWEN & SHERMAN, P.A.; Christopher L. Travis, P.A.; Dream Team Holdings 1, LLC; and Fayetteville Municipal Property Owners' Improvement District No. 12–Belclaire, Appellees.

No. 12–540.

Supreme Court of Arkansas.

April 18, 2013.

Rehearing Denied May 30, 2013.

Thrash Law Firm, P.A., Little Rock, by: Thomas P. Thrash and Marcus N. Bozeman, for appellants.

Barber, McCaskill, Jones & Hale, P.A., Little Rock, by: Robert L. Henry, III, G. Spence Fricke, and S. Brent Wakefield, for appellees Gill Elrod Ragon Owen & Sherman, P.A.; Christopher L. Travis, P.A.; and Christopher L. Travis.

A. Heath Abshure, Commissioner, Arkansas Securities Department; Mac Dodson, President, Arkansas Development Finance Authority; and Candace A. Franks, Bank Commissioner, Arkansas State Bank Department; by: Colin R. Jorgensen, Ass't Att'y Gen., for amici curiae The Arkansas Securities Department, The Arkansas Development Finance Authority, and The Arkansas State Bank Department.

Elliott & Smith Law Firm, Fayetteville, by: Don R. Elliott, Jr., for amicus curiae The Arkansas Bankers Association.

Quattlebaum, Grooms, Full & Burrow PLLC, Little Rock, by: E.B. Chiles IV and Jennifer Wethington Merritt, for amicus curiae Stephens Inc.

JIM HANNAH, Chief Justice.

Appellants, First Arkansas Bank & Trust, Trustee; First Arkansas Bank & Trust; Bank of England; Merchants and Planters Bank; The Capital Bank; Heber Springs State Bank; Timberland Bank; Arkansas Banker's Bank; and M & P Community Bancshares, Inc., appeal an order of summary judgment entered in the Pulaski County Circuit Court in favor of Gill Elrod Ragon Owen & Sherman, P.A.; Christopher L. Travis, P.A., (collectively referred to as the Gill firm); Dream Team Holdings 1, LLC; and Fayetteville Municipal Property Owners' Improvement District No. 12–Belclaire. On appeal, appellants assert that the circuit court erred in determining that the Gill firm was not subject to liability under the Arkansas Securities Act, contract law, fraud, negligence, common-law fraud, or breach of a fiduciary duty. This case presents issues of first impression. Our jurisdiction is pursuant to Arkansas Supreme Court Rule 1–2(b)(1) (2012).

This case arose from a failed attempt to develop forty acres into a ninety-six-home subdivision. Sometime prior to June 2005, Brandon Barber, Seth Kaffka, and Brandon Rains formed Dream Team Holdings 1, LLC (Dream Team). Dream Team purchased the forty acres in Washington County on which they intended to build homes (the Belclaire development) and secured a mortgage on the property with First Federal Bank on June 3, 2005, to effect the purchase. The mortgage was recorded on August 2, 2005, in Washington County. Later in 2005, Dream Team filed a petition with the city of Fayetteville to form a municipal property owners' district. The petition was granted and Dream Team formed the Fayetteville Municipal Improvement District No. 12–Belclaire (the District).¹ The District wished to issue tax-free municipal bonds in order to finance the public-improvement needs, such as sewers, streets, curbing, etc.² On August 16, 2005, Christopher L. Travis of the Gill firm was retained by the District as legal counsel for the proposed issuance of improvement bonds to finance the public improvements in the Belclaire development.³

The Gill firm, specifically Travis, drafted the Preliminary Official Statement (POS) and the Official Statement (OS), the disclosure documents provided to underwriter American Municipal Securities, Inc. (AMS), for use in marketing the bonds. The District issued Series A and Series B bonds. Only Series B bonds are at issue in this case. Pursuant to the POS, the Series B bonds are “limited obligations of the District, to which the District has pledged the Capital Improvement Use Fee Revenues and a mortgage of the land located with[in] the District that is owned by the Developer.” The Series B bonds were to be paid by collection of the Capital Improvement Use Fees. The bonds were issued by the District and sold on February 6, 2006, to AMS. By February 7, 2006, AMS had sold the bonds to appellant Arkansas Banker's Bank. Arkansas Banker's Bank retained a portion of the Series B bonds and sold all remaining Series B bonds to the other appellants.

Dream Team, as property owner, defaulted on payment of the Capital Improvement Use Fees on the Series B bonds. Subsequently, Dream Team defaulted on the original mortgage securing the purchase of the development property, and the property was sold. Appellants sued the Gill firm, alleging that the loss of security had compromised their Series B bonds and alleging violations of the Arkansas Securities Act, attorney malpractice, and other causes of action arising from a failure to disclose in the bond offering that the purchase mortgage was superior to the lien created by the Capital Improvement Use Fees obligation.

The Gill firm moved for summary judgment. At the hearing on the motion, the circuit court, with appellants' approval, summarized appellants' allegations as follows:

1. Legal malpractice and fraud were committed by a failure to disclose in the bond offering documents that there was a debt on the development property secured by a promissory note and mortgage;

2. Failure to disclose the same debt, promissory note, and mortgage constituted a violation of the Arkansas Securities Act;

3. The same inaction constitutes a breach of duty under a negligence cause of action.

The order of summary judgment concluded as follows:

1. There was no attorney/client relationship providing the direct privity required to sue in legal malpractice and no evidence to support any of the exceptions to the requirement of direct privity;

2. There is no liability under the Arkansas Securities Act because “an attorney acting as the attorney for the issuer of securities is not liable to the ultimate purchasers and does not act as a seller, a control person, an agent, or anyone who materially aids in the sale of the securities;”

3. All remaining causes of action “such as breach of contract, breach of fiduciary duty, negligence and fraud” fail as a matter of law because they are derivative of liability under attorney malpractice or the Arkansas Securities Act.

Summary judgment should be granted only when there are no genuine issues of material fact to be litigated and the moving party is entitled to judgment as a matter of law. See Searcy Cnty. Counsel for Ethical Gov't v. Hinchey, 2013 Ark. 84, at 5, 2013 WL 781099. Once the moving party has established a prima facie entitlement to summary judgment, the opposing party must meet proof with proof and demonstrate the existence of a material issue of fact. See id. On appellate review, we determine if summary judgment was appropriate based on whether the evidentiary items presented by the moving party in support of the motion leave a material fact unanswered. See id. We view the evidence in the light most favorable to the party against whom the motion was filed, resolving all doubts and inferences against the moving party. Seeid. Our review considers the pleadings and also the affidavits and documents filed by the parties. See id.

At issue in this lawsuit are causes of action alleged to arise from representations, lack of representations, or misrepresentations made at the time of the negotiation and purchase of unrated municipal-improvement bonds. The appellants allege that the Gill firm had a duty to inform them of the mortgage on the real property and that they failed to inform them. Appellants further allege that had they been informed of a mortgage on the real property to which improvements were to be made with bond proceeds and that the Series B bonds were not secured by a first lien on the real property, they would not have purchased the bonds.

We first consider appellants' argument that the Gill firm is liable under the Arkansas Securities Act. The correct application and interpretation of an Arkansas statute is a question of law, which this court decides de novo. Broussard v. St. Edward Mercy Health Sys., Inc., 2012 Ark. 14, 386 S.W.3d 385. The basic rule of statutory construction to which all interpretive guides must yield is to give effect to the intent of the General Assembly. Falcon Cable Media LP v. Ark. Pub. Serv. Comm'n, 2012 Ark. 463, 425 S.W.3d 704. When reviewing issues of statutory interpretation, the first rule in considering the meaning and effect of a statute is to construe it just as it reads, giving the words their ordinary and usually accepted meaning. Scudder v. Ramsey, 2013 Ark. 115, 426 S.W.3d 427.

Section 23–42–106 provides in relevant part as follows:

(a)(1) Any person who commits the following acts is liable to the person buying the security from him or her, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at six percent (6%) per year from the date of payment, costs, and reasonable attorney's fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he or she no longer owns the security:

(A) Offers or sells a security in violation of § 23–42–301, § 23–42–212(b), § 23–42–501(1) or (2), or any rule or order under § 23–42–502 which requires the affirmative approval of sales literature before it is used, or in violation of any condition imposed under § 23–42–403(d), § 23–42–404(g), or § 23–42–404(i); or

(B) Offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of circumstances under which they are made, not misleading, the buyer not knowing of...