Green v. Behrens

• Decision Date: 20 August 2010
• Docket Number: Nos. 09-2960, 09-2963, 09-2965, 09-2969, 09-3349, 09-3352, 09-3355, 09-3356.,s. 09-2960, 09-2963, 09-2965, 09-2969, 09-3349, 09-3352, 09-3355, 09-3356.
• Citation: 619 F.3d 867
• Parties: Marlin LUSTGRAAF; Jean Poole, Trustee of the Poole Family Trust, also known as JP; Dee Poole, Trustee of the Poole Family Trust; Milo Vacanti; William Green; JoAnn Green, Plaintiffs-Appellants, v. Bryan S. BEHRENS, Defendant, Sunset Financial Services, Inc.; Kansas City Life Insurance Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

619 F.3d 867

Marlin LUSTGRAAF; Jean Poole, Trustee of the Poole Family Trust, also known as JP; Dee Poole, Trustee of the Poole Family Trust; Milo Vacanti; William Green; JoAnn Green, Plaintiffs-Appellants,

v. Bryan S. BEHRENS, Defendant,Sunset Financial Services, Inc.; Kansas City Life Insurance Company, Defendants-Appellees.

Nos. 09-2960, 09-2963, 09-2965, 09-2969, 09-3349, 09-3352, 09-3355, 09-3356.

United States Court of Appeals,Eighth Circuit.

Submitted: April 15, 2010.

Filed: Aug. 20, 2010.

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Patrick Edgar Brookhouser, Jr., argued, Omaha, NE, for appellant.

John W. Shaw, argued, Timothy D. Wallner, on the brief, Kansas City, MO, for Sunset Financial Services.

Nick J. Kurt, argued, David F. Oliver, on the brief, Kansas City, MO, for Kansas City Life Insurance Company.

Before LOKEN, BRIGHT, and MELLOY, Circuit Judges.

MELLOY, Circuit Judge.

This appeal concerns Appellants' claims against Appellees Sunset Financial Services, Inc. (“Sunset”) and Kansas City Life Insurance Company (“KCL”) for damages arising out of a Ponzi scheme perpetrated by Bryan Behrens, a registered representative of Sunset and general agent of KCL. Appellants brought claims against Sunset and KCL based on theories of federal and state control-person liability and common law theories of secondary liability. The district court granted Sunset's and KCL's motions to dismiss for failure to state a claim and denied Appellants' motions for leave to file amended complaints. Appellants challenge each of these rulings. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

I. Background

KCL is licensed with the Nebraska Department of Insurance to deal in sickness and accident insurance, life insurance, variable life insurance, and variable annuities. KCL also offers various investment options through Sunset, its wholly-owned subsidiary. Sunset is a broker-dealer registered with the Securities and Exchange Commission (“SEC”). KCL describes Sunset as an “in-house broker/dealer ... giving agencies and producers the flexibility to offer quality life insurance as well as securities products through a single relationship.” Appellants allege that Sunset markets itself as a trusted financial advisory firm with agents and representatives who can be trusted to give advice on insurance and financial matters.

Behrens was President and CEO of 21st Century Financial Group, Inc., which Appellants allege he operated as a branch office of Sunset. He was also a registered representative of Sunset and a general agent of KCL. Appellants allege that KCL promoted Behrens and gave him a number of awards that “expressly and implicitly suggested that Behrens was trustworthy and acting with the authority, consent, and approval of [KCL] and its affiliates and subsidiaries,” giving Behrens an “aura of authority.”

Appellants allege they invested money with Behrens through National Investments, Inc., an entity that Behrens controlled. In connection with these investments, Behrens sold promissory notes to Appellants, listing National Investments as the borrower. Appellants allege that Behrens took their money with the promise that he would invest it and provide them with a steady stream of income. Rather than invest the money, Behrens “misappropriated the funds for his personal use, spent the money in other ways, or simply transferred money among [Appellants] and other investors to prevent them from discovering the fraud.”

Appellants Lustgraaf, Jean and Dee Poole (collectively “Poole”), and Vacanti filed their initial complaints in July 2008, seeking relief from Sunset on theories of federal and state control-person liability and common law theories of secondary liability. They did not name KCL as a defendant in the original complaint. In response, Sunset filed a motion to dismiss Appellants' claims under Rule 12(b)(7) for failure to join a necessary party under Rule 19; Rule 12(b)(6) for failure to state a claim; and Rule 9(b) and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(1), for failure to plead with particularity. Appellants Lustgraaf, Poole, and Vacanti amended their complaints in January 2009 while Sunset's motion to dismiss was pending before the district court. The amended complaints added KCL as a defendant, but did not make any other changes. Appellants William and JoAnn Green (collectively “Green”) then filed an initial complaint alleging the same violations against Sunset and KCL. Sunset subsequently filed a motion to dismiss Green's complaint, and KCL filed a motion to dismiss as to all parties.

In March 2009, the district court granted Sunset's motion to dismiss as to Lustgraaf, Poole, and Vacanti. In July 2009, the district court granted Sunset's motion to dismiss as to Green and KCL's motion to dismiss as to all parties. At that time, the district court also denied Appellants' various motions for leave to file second amended complaints. ¹ The sole ground for the district court's denial was that the proposed second amended complaints failed to correct the deficiencies in the operative complaints and were therefore futile.

On appeal, Appellants argue that the district court erred in dismissing the operative complaints, and, alternatively, that the district court erred in denying their various motions for leave to file second amended complaints. Appellants also argue that the district court improperly took judicial notice of the fact that William Green was a director on National Investments's board. Sunset and KCL argue that the district court correctly granted their motions to dismiss and that we may affirm on alternative grounds. We consider these arguments in turn.

II. Discussion

The operative complaints allege that Sunset and KCL are liable for Behrens's conduct based on theories of: (A) federal control-person liability; (B) state control-person liability; (C) apparent authority; and (D) respondeat superior. We review the district court's dismissal of these complaints de novo. Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 591 (8th Cir.2009). In so doing, we take as true the factual allegations and grant all reasonable inferences in favor of the nonmoving party. Id. We owe no deference, however, to legal conclusions or “formulaic recitation[s] of the elements of a cause of action.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). To survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). The plausibility of a complaint turns on whether the facts alleged allow us to “draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

The PSLRA imposes a heightened pleading standard in cases alleging securities fraud. Claims governed by the PSLRA must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading” (the “falsity requirement”), 15 U.S.C. § 78u-4(b)(1), and “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” (the “scienter requirement”), id. § 78u-4(b)(2); see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).

Finally, where relevant, we address the district court's denial of Appellants' motions for leave to file second amended complaints. Because the district court dismissed Appellants' motions based on futility, and not as an exercise of its discretion, our review is de novo. See Pierson v. Dormire, 484 F.3d 486, 491 (8th Cir.2007), vacated in part on other grounds, 276 Fed.Appx. 541 (8th Cir.2008).

A. Federal Control-Person Liability

Counts II and III of the operative complaints allege claims against Sunset and KCL for control-person liability under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). The purpose of the federal control-person statute is to “prevent people and entities from using straw parties, subsidiaries, or other agents acting on their behalf to accomplish ends that would be forbidden directly by the securities laws.” Laperriere v. Vesta Ins. Group, Inc., 526 F.3d 715, 721 (11th Cir.2008) (per curiam). To that end, the statute provides for liability of those who, subject to certain defenses, “directly or indirectly” control a primary violator of the federal securities laws. 15 U.S.C. § 78t(a). In providing for liability of controlling persons, however, Congress did not define the meaning of control. See H.R.Rep. No. 73-1383, at 26 (1934) (“It was thought undesirable to attempt to define [control]. It would be difficult if not impossible to enumerate or to anticipate the many ways in which actual control may be exerted.”). Rather, it left that task to the courts. Our Court has held that the statute is “ ‘remedial and is to be construed liberally. It has been interpreted as requiring only some indirect means of discipline or influence short of actual direction to hold a ‘controlling person’ liable.' ” Farley v. Henson, 11 F.3d 827, 836 (8th Cir.1993) (quoting Myzel v. Fields, 386 F.2d 718, 738 (8th Cir.1967)). To meet this standard, a plaintiff must prove: (1) that a “primary violator” violated the federal securities laws; (2) that “the alleged control person actually exercised control over the general operations of the primary violator”; and (3) that “the alleged control person possessed-but did not necessarily exercise-the power to determine the specific acts or omissions upon which the underlying violation is predicated.” Farley, 11 F.3d at 835. Culpable participation by the alleged control person in the primary violation is not part of a plaintiff's...