In re Four Seasons Securities Laws Litigation

Decision Date18 January 1974
Docket NumberNo. 55,55
Citation370 F. Supp. 219
PartiesIn re FOUR SEASONS SECURITIES LAWS LITIGATION State of Ohio v. Crofters, Inc., Clark, et al.
CourtU.S. District Court — Western District of Oklahoma



William J. Brown, Atty. Gen., Ohio, Ronald B. Brown, Asst. Atty. Gen., Ohio, Richard F. Stevens, Sp. Counsel to the Atty. Gen., Wayne C. Dabb, Jr., Cleveland, Ohio (Eugene F. McShane, Asst. Atty. Gen., Ohio, John R. Ferguson, Baker, Hostetler & Patterson, Cleveland, Ohio, on the brief), for the State of Ohio.

Arthur F. Mathews, Robert B. McCaw, John H. Korns, Washington, D. C. (Michael R. Klein, Wilmer, Cutler & Pickering, Washington, D. C., Bradley Hummel, Gingher & Christensen, Columbus, Ohio, on the brief), for Jack L. Clark.



THOMSEN, District Judge.*

This opinion deals with a motion filed by Jack L. Clark for summary judgment in his favor on the various claims asserted against him in the complaint in this civil action filed by the State of Ohio against Crofters, Inc., Clark and twelve other defendants.1

Ohio's claims are based on alleged violations of the Securities Act of 1933, the Securities Exchange Act of 1934 and several Ohio statutory provisions, and on common law fraud.2

Clark contends that the claims against him are barred by res judicata and collateral estoppel as a result of rulings adverse to Ohio in the Chapter X reorganization proceedings in this court involving Four Seasons Nursing Centers of America, Inc. (Four Seasons) and related corporations.3


The history of Four Seasons and related corporations is set out in Opinion No. 2, Four Seasons Securities Laws Litigation, 58 F.R.D. 19, 21-26 (W.D. Okl. 1972).4 That opinion also contains a capsule history of the Chapter X proceedings filed by Four Seasons and by the related corporations, all of which were consolidated, and a history of the M.D.L. 55 proceedings, involving class actions and other actions filed by stockholders of one or more of the Four Seasons companies against various defendants, including Clark, 58 F.R.D. at 26-28 and 28-36, respectively.

The Ohio Loans

The claims which Ohio is asserting against Clark and others arise out of loans which were made by Ohio to Four Seasons some three months before that corporation filed its Chapter X petition on June 26, 1970. The facts with respect to those loans are set out in the opinion of the Tenth Circuit on Ohio's appeal from the denial of its reclamation petition filed in the Chapter X proceedings. State of Ohio v. Four Seasons Nursing Centers of America, Inc., 465 F.2d 25 (Aug. 3, 1972). The Tenth Circuit stated those facts as follows:

"In early 1970, Mr. Jack L. Clark, the president of Four Seasons, received information that a Mr. Ronald R. Howard of Los Angeles, California, was in a position to assist Four Seasons in borrowing needed funds for continued operation and expansion. Howard and Clark conferred in Oklahoma City for the purpose of consummating an agreement for the procurement of funds. It was anticipated that Four Seasons would borrow between $20,000,000 and $24,000,000 from the State of Ohio. Howard contacted Crofters, Inc., a Columbus, Ohio, investment firm. Mr. Harry A. Groban, the executive vice president of Crofters, requested a credit rating on Four Seasons from the National Credit Office, a division of Dun and Bradstreet. An employee of the National Credit Office procured the latest annual report of Four Seasons, as well as other statements and bank information concerning that corporation from Mr. John Mee, a vice president of and attorney for Four Seasons. Based on this material, the National Credit Office gave Four Seasons a rating of `prime' for commercial paper. This information was communicated by letter to Groban; Groban in turn furnished the information to Mr. Robert F. Gardner, Deputy Treasurer of the State of Ohio.
"Groban advised Mee that funds would be available to Four Seasons from the State of Ohio. Thereafter, Mr. Alex Russell, an officer of Four Seasons, went to Columbus, Ohio, to secure the funds. On March 9, 1970, Russell consummated a loan of $3,000,000 for Four Seasons with the State of Ohio through Gardner and in the presence of Groban. The loan was evidenced by two promissory notes of Four Seasons, one for $2,000,000 payable in 120 days and another for $1,000,000 due in two years. The $2,000,000 note was made on the basis of 120 days with the understanding that when due the note would be renewed for a period of two years. A second loan for $1,000,000 was advanced on March 23, 1970; a note for $1,000,000 payable in two years to the State of Ohio was executed on that date." 465 F.2d at 26, 27.
Ohio's Reclamation Petition in the Chapter X Proceedings

Ohio sought reclamation of the money loaned as against the Trustee in the Chapter X reorganization proceedings. Ohio argued that Four Seasons had intentionally made material and fraudulent misrepresentations concerning its financial condition to the National Credit Office to obtain a rating of prime, and that in reliance on this rating the loans of $4,000,000 had been made to Four Seasons by the State. Ohio also contended that the $4,000,000 loans were in violation of an Ohio statute and therefore void; consequently, the funds should have been returned to the State Treasurer. 465 F.2d at 27.

The reclamation petition was denied by Chief Judge Bohanon, with an opinion which included findings of fact and one conclusion of law. 329 F.Supp. 647 (July 14, 1971). His last two findings of fact were as follows:

"14. There is no intimation in this record that Four Seasons defrauded the State of Ohio or made any misrepresentations to the State of Ohio, but at all times dealt above board and submitted all information requested and withheld nothing. Mr. Gardner made no reliance upon any alleged fraudulent document or statement made by the debtor corporation, its officers or agents, and no fraud here exists, and no misrepresentations were made to the State of Ohio, or others.
"15. Under the circumstances it would be grossly inequitable to all of the other creditors of the debtor corporation to allow Ohio to have the preference which it seeks." 329 F. Supp. at 651, 652.

In support of his conclusion — "that the Petition for Reclamation must be denied" — Judge Bohanon quoted passages from 37 Am.Jur.2d (Fraud and Deceit, §§ 438, 445), pp. 598, 609, and the following statement in Manly v. Ohio Shoe Co., 25 F.2d 384 (4 Cir. 1928):

"Bankrupt's fraud, to justify rescission of contract and reclamation of goods by seller, must be established to the satisfaction of the court by clear, unequivocal, and convincing evidence."
Ohio's Appeal from the Denial of Its Reclamation Petition

Ohio's arguments on appeal from Judge Bohanon's decision were summarized in the opinion of the Tenth Circuit, 465 F.2d at 27. The opinion then stated: "* * * We view the narrow issue presented in this appeal to be whether the State of Ohio may properly argue the application of a constructive trust to the funds in question."

The Tenth Circuit held that "appellant's right to the property in question will be decided by Oklahoma, not Ohio, law". 465 F.2d at 28. The opinion continued:

"We likewise reject appellant's argument that the prime rating relied upon by the Ohio State Treasurer in making these loans was obtained through Four Seasons' materially false statements concerning its financial status. The trial court found no fraud or misrepresentation after an evaluation of the testimony presented before it in a full hearing. We hold this decision to be adequately supported by the record; there is no cogent reason to reverse the trial court on this point. Accordingly, we affirm the finding of no fraud or misrepresentation in obtaining the rating of prime from the National Credit Office.
"We are unconvinced by appellant's remaining arguments that a constructive trust is applicable to the funds in question. The quantum of evidence required by Oklahoma for imposition of a constructive trust is substantial. Mere preponderance of the evidence is not sufficient to establish a constructive trust. Rather, it must be established by evidence which is clear, definite, unequivocal and satisfactory. The evidence must lead to but one conclusion, or leave no reasonable doubt as to the existence of the constructive trust. The evidence presented by appellant in the trial court does not rise to the quantum required by Oklahoma." 465 F.2d at 28.

The Tenth Circuit also concluded that "there was no illegality surrounding the procurement of these funds". It disagreed with the trial court that "the Ohio statute in question is inapplicable". After quoting the pertinent parts of that statute,5 the Court said: "The evidence presented by appellant in the trial court does not satisfactorily prove noncompliance with this statute." 465 F.2d at 28. The opinion then set out the reasons for that statement, and concluded: "Application of a constructive trust to these funds in toto or partially, via traditional tracing rules, would be grossly inequitable where no fraud was perpetrated by Four Seasons and no Ohio statutes violated by extension of these loans." 465 F.2d at 28, 29.

Clark's Participation in Opposition to Ohio's Petition

At the time the Chapter X proceedings were instituted and at the time Ohio's petition for reclamation was filed and heard in the District Court, Clark was a stockholder of Four Seasons, the debtor against which that petition was filed. Ohio's petition for reclamation was served on and opposed by the Trustee for the debtor, through his court-appointed attorney. It was not served on Clark. However, as permitted by 11 U. S.C. § 606,6 Clark, through his attorney, had theretofore entered his appearance in the Chapter X proceedings; he participated in various hearings therein, including the hearings on Ohio's reclamation petition. Clark was listed...

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