Hayes v. Arthur Young & Co.
| Citation | 34 F.3d 1072 |
| Decision Date | 26 August 1994 |
| Docket Number | 91-15546 and 91-15593,Nos. 91-15531,s. 91-15531 |
| Parties | NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. Thomas E. HAYES, Agretech Trustee, Steven Guttman, FPI Trustee, Plaintiffs-Appellants, v. ARTHUR YOUNG & COMPANY, Defendant-Appellee. Thomas E. HAYES, Agretech Trustee, Steven Guttman, FPI Trustee, FPI Nursery Partners 1985-I Public Offering Class, Plaintiffs-Appellees, v. Karl HAUSHALTER, Ernest & Young, formerly Arthur Young & Company, Defendants-Appellants. In re FPI/AGRETECH SECURITIES LITIGATION. Thomas E. HAYES, Agretech Trustee, FPI Nursery Partners 1985-I Public Offering Class, Plaintiffs-Appellants, v. Karl HAUSHALTER, Ernest & Young, formerly Arthur Young & Company, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Before: HALL, BRUNETTI, and LEAVY, Circuit Judges.
Chapter 11 bankruptcy proceedings were initiated against a tropical plant grower and a tax shelter promoter who contracted plant production out to the grower. Their bankruptcies provoked a number of lawsuits, two groups of which are before us on appeal.
The first group comprises three consolidated class actions filed by investors in eight of the limited partnership tax shelters against the promoter's accounting firm, for violations of state common law and federal securities law. The jury returned verdicts for the plaintiffs on all claims, and the accounting firm appeals. We affirm the Section 11 and state-law negligent misrepresentation verdicts, as well as the resulting awards of actual damages. We reverse the other verdicts and remand for retrial on the issue of punitive damages. We also reverse and remand several of the district court's post-trial rulings.
The second group comprises two lawsuits filed by the bankruptcy trustees of the two companies against the accounting firm for common law fraud and negligence. The district court granted the defendant's motion to dismiss, and the bankruptcy trustees appeal. We reverse the dismissals and remand for further proceedings.
FP Investments, Inc. ("FPI") was incorporated in 1980 to form and syndicate limited partnerships to be used as tax shelters by investors. Each partnership was sold to the public through a national network of independent brokers, by means of a written offering memorandum (prospectus) describing the business structure, purposes, and expectations for the partnership. Copies of the offering documents were delivered to the selling brokers, and in turn to the investors prior to investment.
Beginning in 1982, FPI focused its activities in the tropical foliage area. By early 1985, FPI had syndicated over forty partnerships to acquire tropical plants and cultivate them to maturity in Hawaii, with the object of then selling them to customers on the United States mainland, primarily in California. Most of these partnerships were private; one, FP Nursery Partners 1984-I L.P. ("1984-I"), was registered with the Securities and Exchange Commission ("SEC") and sold to the public.
FPI contracted the production of these plants out to Agricultural Research & Technology Group, Inc. ("Agretech"). Agretech provided all the labor, material, and facilities necessary to grow the plants to the specified saleable sizes. Agretech also marketed the plants at prices stated in the offering documents and remitted the sales proceeds to the partnerships.
Although Agretech was paid in advance for all plant material and services, it soon ran into trouble and found that it did not have the money or space to meet its obligations. To conceal these problems and to enable FPI to continue syndicating partnerships, the principals of FPI and Agretech hatched and implemented a "Ponzi scheme." Funds from new FPI plant partnerships were recirculated to investors in prior ones; the funds were disguised to make them look like the proceeds from sales of earlier partnerships' plants. However, the scheme failed; chapter 11 bankruptcy proceedings were initiated against Agretech in September 1986 and against FPI in March 1987, and several of the two companies' top executives went to jail.
From 1982 through early 1985, Coopers & Lybrand served as independent auditors for FPI. In February 1985, FPI discharged Coopers & Lybrand and hired appellants Arthur Young & Company 1 and Karl Haushalter, an Arthur Young audit partner (collectively "AY"). Unqualified AY audit reports were contained in the offering materials for eight partnerships: FP Nursery Partners 1985-I L.P. ("1985-I"), a public partnership offered between November 1985 and March 1986; five unregistered orchid partnerships, offered between February 1986 and July 1986; and the private partnerships Hawaiian Capital Partners and Hawaiian Nursery Partners ("HCP/HNP"), offered between September 1986 and December 1986. All of the funds invested in these partnerships were lost as a result of FPI's bankruptcy.
The collapse of FPI and Agretech provoked a large number of lawsuits against AY and others. These lawsuits were consolidated before Judge Real in the District of Hawaii. In one group of lawsuits, Thomas Hayes, the bankruptcy trustee of Agretech, and Steven Guttman, the bankruptcy trustee of FPI, sued AY and others for damages caused by, inter alia, negligence and fraud. AY moved to dismiss both complaints pursuant to Fed.R.Civ.P. 12(b)(6), and the district court granted the motions without leave to amend. The bankruptcy trustees appeal the dismissals.
Another group of lawsuits consisted of class actions filed by partnership investors against AY and others. Judge Real certified class representatives for the 1985-I investors, who asserted claims under Sec. 11 of the Securities Act of 1933, 15 U.S.C. Sec. 77k (1988); Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1988); and California common law fraud, negligence, and negligent misrepresentation doctrines. Judge Real also certified a class representative for the investors in the seven 1986 private partnerships, who asserted Sec. 10(b) and common law fraud, negligence, and negligent misrepresentation claims. These investors will be referred to collectively as "plaintiffs."
After a three-week trial, the jury returned verdicts against AY on all claims. Following a reduction of damages to prevent multiple recoveries for the same claims or injuries, and application of a settlement agreement to the private partnership plaintiffs' damages, the 1985-I plaintiffs were awarded $5.2 million in compensatory damages, $3.0 million in prejudgment interest, and $1.75 million in attorneys' fees, plus all costs. The private partnership plaintiffs were awarded $2.3 million in compensatory damages, $1.1 million in prejudgment interest, and all costs. AY appeals the verdicts and judgments on numerous grounds.
Two crucial factors in the partnerships' viability were the sufficiency of available bench space to grow the quantities of plants envisioned and the adequacy of Agretech's financial resources to cultivate the plants. Prior to trial, plaintiffs moved for partial summary judgment, asking the district court to order that certain material facts be deemed established at the trial. The district court granted part of their motion, and instructed the jury that
[t]he following material facts are without substantial controversy, and are deemed to be established:
[...]
B, the bench space requirements of NP 1985-I and for the other FPI partnerships were not disclosed in the prospectus or in the registration statement for NP 1985-I or in the 1986 offerings.
C, the amount of bench space which Agretech actually had was not disclosed in the prospectus or in the registration statement of NP 1985-I or in the 1986 offerings.
D, the amount of bench space which Agretech had, the amount of bench space which would have been required for 1985-I, if fully funded, and the amount of bench space that would have been required for the other FPI partnerships were material facts which were required to be disclosed in the prospectus and in the registration statement for 1985-I and in the 1986 offerings.
E, as of October 1985, Agretech had an aggregate negative balance of $61,143.55 in all of its bank accounts.
F, the amounts that were allocated and to be paid by NP 1985-I to Agretech for cultivation and facilities lease rental, assuming full funding, were as follows: For the cultivation of plants, from the offering proceedings, $821,600; from plant sales, $1,041,700; on behalf of the lease rental, $376,900, for a total of $2,240,200.
G, the amount that would actually have been required to cultivate the plants to be acquired by NP 1985-I, the amount that would have been required to cultivate the plants for the FPI partnerships formed prior to NP 1985-I, and Agretech's financial circumstances as of November 1985, were not disclosed in the prospectus or in the registration statement for NP 1985-I or in the 1986 offerings.
H, the amounts that would actually have been required to cultivate the plants to be acquired by NP 1985-I, the amounts that would be required to cultivate the plants for the NP partnerships formed prior to NP 1985-I, and Agretech's financial circumstances as of November 1985, were material facts which were required to be disclosed in the prospectus and in the registration statement for NP 1985-I and in the 1986 offerings.
(Emphasis added).
AY contends that the district court erred in granting plaintiffs' motion, on the ground that whether the facts were "material" was an issue for the jury to decide. We review the district court's grant of summary judgment de novo. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors'...
To continue reading
Request your trial
-
State Farm Fire & Cas. Co. v. Woods
...475, 85 S.Ct. at 1146 (Harlan, J., concurring), and is thus rightly decided as a procedural matter under rule 42(b). Hayes v. Arthur Young & Co., 34 F.3d 1072 (9th Cir.1994); Simpson v. Pittsburgh Corning Corp., 901 F.2d 277 (2d Cir.1990); Getty Petroleum Corp. v. Island Transp. Corp., 862 ......
-
Voeltz v. Bridge Charleston Invs. E, LLC
...85 S. Ct. 1136, 1141 (1965). Decisions on whether to bifurcate a trial are procedural rather than substantive. See Hayes v. Arthur Young & Co., 34 F.3d 1072 (9th Cir. 1994) (holding bifurcation is an issue of federal procedural rules) citing Simpson v. Pittsburgh Corning Corp., 901 F.2d 277......
-
Willcox v. Lloyds TSB Bank
...damage pools. See, e.g., Van Gemert v. Boeing, 739 F.2d 730, 815-16 (2d Cir. 1984); see also Hayes v. Arthur Young & Co., 34 F.3d 1072, at *17 (9th Cir. 1994) (unpublished table decision). 4. See Newberg on Class Actions § 12.30 (5th Ed. 2016) (concluding that "the settlement fund does not ......