Mercer v. Jaffe, Snider, Raitt and Heuer, PC

• Decision Date: 03 January 1990
• Docket Number: G87-56 CA1.,No. G88-380 CA1,G88-380 CA1
• Citation: 730 F. Supp. 74
• Parties: Harold MERCER, et al., Plaintiffs, v. JAFFE, SNIDER, RAITT and HEUER, P.C., et al., Defendants. Robert N. SCHRIEMER, et al., Plaintiffs, v. Barton GREENBURG, et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

730 F. Supp. 74

Harold MERCER, et al., Plaintiffs, v. JAFFE, SNIDER, RAITT and HEUER, P.C., et al., Defendants.

Robert N. SCHRIEMER, et al., Plaintiffs, v. Barton GREENBURG, et al., Defendants.

Nos. G88-380 CA1, G87-56 CA1.

United States District Court, W.D. Michigan, S.D.

January 3, 1990.

Tolley, Fisher & Verwys, P.C. by Thomas F. Koernke, Todd R. Dickinson and James B. Doezema, and Norris & Associates, P.C. by Sharon H. Norris, Grand Rapids, Mich., for plaintiffs.

Morton H. Collins and Clayton F. Farrell, Collins Einhorn & Farrell, P.C., Southfield, Mich., for Jaffe Snider Raitt & Heuer, Peter Sugar and David Warner.

Frank J. Kelley, Atty. Gen. by Ronald W. Emery, Asst. Atty. Gen., Tort Defense Div., Lansing, Mich., for Frederick Hoffecker.

Frank J. Kelley, Atty. Gen. by George H. Weller, Asst. Atty. Gen., Executive Div., Lansing, Mich., for James Karpen.

William M. Saxton and Keefe A. Brooks, Detroit, Mich., for Yaffe & Co.

Cholette, Perkins & Buchanan by Bruce M. Bieneman, Grand Rapids, Mich., for Ronald M. Barron and Ronald M. Barron & Associates, P.C.

Richard A. Kay and Terrance R. Bacon, Grand Rapids, Mich., for Follmer, Rudzewicz & Co.

Steven L. Schwartz, Farmington Hills, Mich., for Cohen & Leff, P.C.

Annis, Annis & Visser, Comstock Park, Mich., for George J. Yusko.

Erwin A. Rubenstein and Arnold F. Farwell, Southfield, Mich., for Ernst & Co.

Gary L. Mitchell, Bloomfield Hills, Mich., pro se.

Andrew S. Conway, Miro Miro & Weiner, Bloomfield Hills, Mich., for George Hamilton.

Thomas F. Blackwell, Jr. and T.J. Ackert, Smith Haughey Rice & Roegge, Grand Rapids, Mich., for Lloyd Bridges.

OPINION ON PENDING MOTIONS

HILLMAN, Chief Judge.

These consolidated actions arise from the so-called Diamond Mortgage Corporation/A.J. Obie and Associates (Diamond/Obie) mortgage-backed securities fraud. The general background of this litigation is set forth in Mercer v. Jaffe, Snider, Raitt and Heuer, P.C., 713 F.Supp. 1019 (W.D.Mich.1989) and Stone v. Mehlberg, 728 F.Supp. 1341, (W.D.Mich.1989).

Briefly, plaintiffs are nearly one thousand investors who bought now worthless mortgage-backed securities from Diamond/Obie. Defendants include Diamond/Obie's principal, a celebrity paid to endorse Diamond/Obie investments, three of Diamond/Obie's lawyers and their law firms, a state securities regulator, a state assistant attorney general, and the State of Michigan. Plaintiffs seek to impose liability upon defendants for plaintiffs' lost investments under a variety of statutory and common law theories. The federal question statute, 28 U.S.C. § 1331, and principles of pendent jurisdiction provide the court's jurisdiction.

The matter is before the court on six motions filed by various defendants. The court experienced some momentary difficulty in sorting out the motions due to defendants' general failure to follow the captioning instructions contained in the June 28, 1989 case management order. Further difficulty stemmed from the fact that several motions address the third amended complaints filed in both the Mercer and Schriemer cases, but those pleadings have been superseded by plaintiffs' timely filing of fourth amended complaints. To make matters worse, the fourth amended complaint in Mercer is actually only the third complaint submitted.

Despite these problems, the court has determined which motions pertain to which parties, pleadings, and cases. Although it is easy to see why confusion results given the nature and history of these actions, the court urges all counsel to pay attention to the details so that progress will continue without impediment. The court will first discuss the motions submitted in Mercer, and then turn to those pending in Schriemer.

I. Mercer

A. Karpen and Hoffecker. At all relevant times, defendant James Karpen was the Director of the Michigan Corporations and Securities Bureau. Defendant Frederick Hoffecker was the Assistant Attorney General in charge of the Michigan Attorney General's Consumer Protection Division. Karpen and Hoffecker remain in this case under Count II of plaintiffs' fourth amended complaint. Count II charges all defendants with aiding and abetting Diamond/Obie's violations of section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act), 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. See generally Mercer, 713 F.Supp. at 1033.

Karpen and Hoffecker have filed two motions. The first motion seeks to strike portions of the third amended complaint. Plaintiffs have removed the offending language from the fourth amended complaint, however, so the court will dismiss the motion to strike as moot.

In their second motion, Karpen and Hoffecker ask the court to dismiss plaintiffs' complaint under Fed.R.Civ.P. 12(b)(6) on the basis of a recent Michigan Court of Appeals decision, Thomas v. State Mortgage, Inc., 176 Mich.App. 157, 439 N.W.2d 299 (1989) (per curiam). In Thomas, the Michigan Court of Appeals held that under the prevailing facts an A.J. Obie investor assigned a promissory note and mortgage executed by a borrower in favor of a Diamond Mortgage Corp. affiliate that in fact provided the borrower no funds on a purported home loan mortgage transaction could assert holder in due course status on the note in an action brought by the borrower to quiet title on the mortgaged property. 439 N.W.2d at 300-03. After making this determination, the Thomas court remanded the case to the trial court to decide, among other things, whether the investor/assignee could foreclose on the mortgage. Id. 439 N.W.2d at 303. Plaintiffs inform the court that the borrower in Thomas has petitioned the Michigan Supreme Court for leave to appeal.

Karpen and Hoffecker assert that Thomas requires that plaintiffs in this case, in order to state a claim upon which relief may be granted, must plead that they attempted to foreclose on any mortgages assigned to them as a result of their Diamond/Obie investments. In the absence of a foreclosure attempt, Karpen and Hoffecker contend, no plaintiff can prove section 10(b) and Rule 10b-5 damages.

The court finds Karpen's and Hoffecker's position unpersuasive. First of all, many plaintiffs in this action are in a different situation than the investor in Thomas. Some were never assigned notes or mortgages, or their notes or mortgages were double or triple assigned to other investors. Others undoubtedly cannot assert holder in due course status on assigned notes, as a consequence of obligor defenses under either state negotiable instruments law or the federal Truth in Lending Act, 15 U.S.C. § 1601 et seq. See Stone, 728 F.Supp. 1345-50.

Moreover, Thomas does not hold that any investor able to establish a borrower's liability on a negotiable note is ipso facto entitled to foreclose on the borrower's home. The note and the mortgage are separate instruments, see Stone, 728 F.Supp. at 1348, governed by separate bodies of law. Karpen and Hoffecker have cited no Michigan decision holding that an assigned mortgage is foreclosable under the circumstances that obtain in this case.

Finally, the court agrees with plaintiffs that Karpen's and Hoffecker's reliance on Thomas in essence raises a mitigation issue. In other words, plaintiffs' damages were complete upon the loss of their investments. Potential foreclosure on any mortgage securing those investments only relates to recoupment of losses already suffered. As a general proposition, plaintiffs are not required to plead mitigation of damages, which is usually regarded as an affirmative defense. See, e.g., TCP Industries, Inc. v. Uniroyal Inc., 661 F.2d 542, 550 (6th Cir.1981) (contract); Hines v. Grand Trunk Western Railroad Co., 151 Mich.App. 585, 391 N.W.2d 750, 755 (1985) (per curiam) (tort). Traditional mitigation rules apply in section 10(b) and Rule 10b-5 cases, Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 620 (9th Cir.1981), and therefore it is defendants who must plead and prove failure to mitigate.

In sum, Karpen and Hoffecker have not satisfied the court that Thomas makes plaintiffs' fourth amended complaint insufficient as a matter of law, or that plaintiffs can prove no set of facts entitling them to section 10(b) and Rule 10b-5 relief. See Mercer, 713 F.Supp. at 1023. Accordingly, the court will deny the motion to dismiss.

B. State of Michigan. Plaintiffs added the State of Michigan as a party defendant to this action in Count II of the fourth amended complaint. They assert that Michigan is vicariously liable for Karpen's and Hoffecker's alleged aiding and abetting of Diamond/Obie's section 10(b) and Rule 10b-5 violations. Michigan has moved for dismissal under Fed.R.Civ.P. 12(b)(1), contending that the Eleventh Amendment to the United States Constitution bars the court from exercising subject matter jurisdiction.

Initially, the court notes that some doubt exists regarding the Sixth Circuit's recognition of traditional vicarious liability under the antifraud provisions of the federal securities laws. In Securities and Exchange Commission v. Coffey, 493 F.2d 1304, 1315-16 (6th Cir.1974), cert. denied, 420 U.S. 908, 95 S.Ct. 826, 42 L.Ed.2d 837 (1975), the court identified three exclusive categories of federal securities fraud secondary liability: aiding and abetting, conspiracy, and "controlling person" liability, applicable in that case under section 20 of the 1934 Act. Accord, Herm v. Stafford, 663 F.2d 669, 684 (6th Cir.1981). The exclusivity of this listing in Coffey suggests that the court did not accept the proposition that secondary liability could depend on common law notions of respondeat superior. Securities and Exchange Commission v. Washington County Utility District, 676 F.2d 218, 224 n. 11 (6th Cir. 1982).

In contrast to Coffey, at least one Sixth Circuit panel has explicitly acknowledged the availability of respondeat superior liability under section 10(b) and Rule...