Jett v. Sunderman

• Decision Date: 03 March 1988
• Docket Number: No. 86-6525,86-6525
• Citation: 840 F.2d 1487
• Parties: , Fed. Sec. L. Rep. P 93,653 Wayne JETT, Plaintiff-Appellant, v. Jeffrey S. SUNDERMAN; Sunrise Enterprise Corporation; National Union Fire Insurance Company of Pittsburgh; and Union Planters Bank, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1487

840 F.2d 1487

56 USLW 2588, Fed. Sec. L. Rep. P 93,653

Wayne JETT, Plaintiff-Appellant, v. Jeffrey S. SUNDERMAN; Sunrise Enterprise Corporation;

National Union Fire Insurance Company of

Pittsburgh; and Union Planters Bank,

Defendants-Appellees.

No. 86-6525.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 6, 1987.

Decided March 3, 1988.

Brian Ray Hodge, Jett, Clifford & Laquer, Los Angeles, Cal., for plaintiff-appellant.

Robert C. Rosen, Lewis, D'Amato, Brisbois & Bisgaard, Los Angeles, Cal., for defendants-appellees National Union Fire Ins. Co.

Thomas Larry Watts, Wildman, Harrold, Allen, Dixon, Barash & Hill, Los Angeles, Cal., for defendants-appellees Union Planters Nat. Bank.

Appeal from the United States District Court for the Central District of California.

Before CHAMBERS, WALLACE and POOLE, Circuit Judges.

OPINION

POOLE, Circuit Judge:

Wayne Jett appeals the district court's grant of summary judgment in favor of defendants-appellees Union Planters Bank ("Union Bank") and National Union Fire Insurance Company ("National Union") in an action alleging state and federal securities law violations, RICO violations, common law fraud and conversion, all arising from Jett's investment in a limited partnership which went into bankruptcy. We affirm in part and reverse in part.

FACTS AND PROCEEDINGS BELOW

In December 1983, Jett purchased an interest in a limited partnership ("Partnership") by making a cash down-payment of $11,000 and executing an interest bearing promissory note ("Note") for $90,000 payable to the limited partnership in five annual installments. The offering memorandum stated that the Partnership intended to use the investors' notes as security for a loan, and that National Union had orally committed to issue a surety bond as additional collateral to secure payment of the loan. Issuance of the bond was conditioned upon the limited partners executing an indemnification and pledge agreement in favor of National Union. Accordingly, Jett executed the required agreement ("Indemnification Agreement") at the time he made the investment. Union Bank subsequently issued a loan to the Partnership, and National Union issued a bond under which it guaranteed payment to Union Bank upon default on any of the notes issued by the limited partners ("Bond").

Jett made the first installment payment on the Note in March 1984. He later learned that the limited partnership had gone into bankruptcy, and he refused to make the second installment payment. He informed Union Bank that he believed the Note was unenforceable and demanded that Union Bank cease making demands on National Union for payment. In June 1985, National Union informed Jett that it had paid $28,329.32 on his behalf to Union Bank and demanded indemnification.

The following month Jett filed a complaint in district court against the Partnership, the general partners, Union Bank and National Union, alleging liability for fraud and conversion, and for violation of various state and federal securities laws and RICO. The gravaman of Jett's complaint against Union Bank and National Union concerned a waiver which was included in the Bond issued by National Union. ¹ Jett and the appellees dispute the meaning of the waiver. Jett contends that it had the effect of waiving his defenses to the promissory note, including possible defenses based on violations of federal securities laws. He also claims he had no knowledge of the waiver until June 1985, shortly before National Union demanded indemnification. Union Bank and National Union maintain that the waiver applied only to defenses which might be asserted by National Union against execution of the bond, and not to the investors' defenses to their notes.

In December 1985, the district court granted Union Bank's motion for summary judgment. The district court made oral findings that Union Bank: 1) was not a seller under the Securities Act; 2) was not an aider and abettor; 3) was not shown to have knowledge of the alleged wrongdoing; 4) was not a control person; 5) had no duty to disclose; and 6) had no relationship of trust or confidence with Jett. After granting Jett leave to amend his complaint, the district court granted National Union's motion for summary judgment. The court found that National Union was not a seller for purposes of Sec. 12(2) of the Securities Act, was not an aider or abettor, was not a control person, and that its failure to disclose the existence of the waiver was not actionable under Rule 10b-5 because it did not occur "in connection with" the sale of securities. The district court did not decide whether National Union had a duty to disclose the waiver to the investors, because the other findings made this determination unnecessary. Nor did the district court reach a conclusion about the meaning of the waiver agreement. ²

On appeal Jett challenges the district court's grant of summary judgment to the defendants-appellees and its refusal to allow additional discovery.

STANDARD OF REVIEW

We review the district court's grant of summary judgment de novo. ³ Summary judgment is appropriate if, viewing the evidence in the light most favorable to Jett, there were no genuine issues of material fact and the defendants-appellees were entitled to judgment as a matter of law. Berg v. Kincheloe, 794 F.2d 457, 459 (9th Cir.1986). We review the district court's rulings concerning discovery for an abuse of discretion. Hatch v. Reliance Ins. Co., 758 F.2d 409, 416 (9th Cir.), cert. denied, 474 U.S. 1021, 106 S.Ct. 571, 88 L.Ed.2d 555 (1985).

DISCUSSION

I. FRAUD IN THE OFFER OR SALE OF SECURITIES IN VIOLATION OF Sec. 12(2) OF THE SECURITIES ACT.

Section 12(2) of the Securities Act of 1933 provides that a person who offers or sells securities by means of a prospectus or oral communication containing material misrepresentations or omissions shall be liable to the purchaser in an action for rescission or damages. 15 U.S.C. Sec. 77l (2). Under the doctrine of participant liability, a person may be liable as a "seller" even if he was not the one who passed title. S.E.C. v. Murphy, 626 F.2d 633, 649-50 (9th Cir.1980). But the participant is liable as a seller only if his actions were both necessary to and a "substantial factor" in bringing about the sales transaction. Id. "The test is whether the injury to the plaintiff flowed directly and proximately from the actions of the defendant." S.E.C. v. Seaboard Corp., 677 F.2d 1289, 1294 (9th Cir.1982). Acts which we have considered pertinent to the participant liability determination include: (1) devising the issuer's corporate financing scheme, (2) preparing or reviewing offering memoranda, (3) meeting personally with broker-dealers or investors, and (4) participating in promotional seminars or sales meetings. Murphy, 626 F.2d at 652. See also S.E.C. v. Rogers, 790 F.2d 1450, 1457 (9th Cir.1986); Anderson v. Aurotek, 774 F.2d 927 (9th Cir.1985) (per curiam); Seaboard Corp., 677 F.2d at 1293-95.

Union Bank submitted declarations of three of its officers and managers demonstrating the bank's lack of involvement in the offer and sale of the Partnership interests. The declarations stated that Union Bank: (1) had no communications with Jett or the other investors prior to closing the loan to the Partnership, ⁴ (2) did not participate in preparing the offering materials and did nothing to promote the investment, and (3) followed routine banking practices in evaluating and approving the loan, requiring loan documentation which was standard for that type of transaction.

National Union submitted the declarations of one of its claim managers and one of Union Bank's officers in support of its motion for summary judgment. The claims manager stated that National Union: (1) did not participate in preparation of the offering materials, (2) did not communicate with any of the investors prior to their investing in the Partnership, and (3) had no involvement in the transaction except for guaranteeing the investors' notes.

Jett submitted only two declarations prior to the ruling on Union Bank's motion--his own and his attorney's. By the time the district court ruled on National Union's motion, Jett had submitted two additional declarations--another of his own and one from a certified financial planner. None of these declarations controverted the statements summarized above concerning Union Bank's and National Union's lack of involvement in the sale of interests in the limited partnership. Jett offered no other evidence to show that the defendants-appellees were a "substantial factor" in bringing about the transaction. Consequently, we find that Jett failed to raise any genuine issues of fact concerning the appellees' liability as participants. Summary judgment on the Sec. 12(2) claim is affirmed as to both appellees.

II. FRAUD IN CONNECTION WITH THE SALE OF SECURITIES IN VIOLATION OF Sec. 10(b) OF THE EXCHANGE ACT.

Rule 10b-5, promulgated under Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), makes it unlawful for any person:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. Sec. 240.10b-5 (1987).

Jett argues that Union Bank and National Union violated Rule 10b-5 in three different ways. First, he argues that both appellees violated the rule by failing to disclose the existence of the waiver agreement. Second, he contends that execution of the waiver agreement was itself a fraudulent scheme or deceptive practice prohibited by Rule 10b-5, independent of the failure to disclose. Third, he...