Mirotznick v. Sensney, Davis & McCormick, C85-1076

• Decision Date: 14 August 1986
• Docket Number: C85-0108.,No. C85-1076,C85-1076
• Court: U.S. District Court — Western District of Washington
• Parties: Rosalyn MIROTZNICK, et al., Plaintiffs, v. SENSNEY, DAVIS & McCORMICK, a partnership, et al., Defendants. AETNA CASUALTY & SURETY CO., Plaintiff, v. SENSNEY, DAVIS & McCORMICK, a partnership, et al., Defendants.

658 F. Supp. 932

Rosalyn MIROTZNICK, et al., Plaintiffs, v. SENSNEY, DAVIS & McCORMICK, a partnership, et al., Defendants.

AETNA CASUALTY & SURETY CO., Plaintiff, v. SENSNEY, DAVIS & McCORMICK, a partnership, et al., Defendants.

Nos. C85-1076, C85-0108.

United States District Court, W.D. Washington.

August 14, 1986.

COPYRIGHT MATERIAL OMITTED

AMENDED ORDER^*

WILLIAM D. BROWNING, District Judge.

These cases, consolidated for pretrial purposes, are two recent additions to the massive litigation arising out of the Washington Public Power Supply System municipal bond default. These particular lawsuits involve claims brought against the local attorneys and their respective law firms that signed opinion letters in 1976 regarding their clients' participation in Projects 4/5.¹ Claims are asserted on behalf of Projects 4/5 bond purchasers pursuant to federal and Washington State securities laws, and several common law theories.²

Defendants have moved to dismiss the allegations of both complaints on a number of grounds including Rule 12(b)(6) failure to state a claim, and Rule 9(b) failure to plead fraud with particularity. In addition, certain of the non-Washington defendants have raised the defense of lack of jurisdiction. The jurisdictional defense was first raised in response to the original Aetna complaint which did not include a claim under federal securities law. Aetna was subsequently given leave to amend to add a claim under § 10(b) of the Exchange Act. Since both complaints now before the Court are brought under the federal securities laws, jurisdiction is determined according to the sufficiency of contacts with the United States rather than with the forum district. See Securities Investment Protection Corp. v. Vigman, 764 F.2d 1309 (9th Cir.1985). There is no serious contention that the Vigman test for personal jurisdiction is not met here.³

STATEMENT OF FACTS

On April 15, 1976, a year prior to the first issuance of municipal bonds for Projects 4/5, each participating utility was requested to deliver to the Supply System an opinion letter executed by that Participant's counsel. Each of the 88 Participants delivered such a letter to the Supply System. The first bonds for Projects 4/5 were offered for sale on February 23, 1977 and continued through fourteen bond offerings totalling approximately $2.25 billion in principal amount. Termination of construction on Projects 4 and 5 was announced by the Supply System on January 22, 1982. Thereafter, some of the municipal Participants sought a judicial declaration that they lacked the authority to have entered into the Participants' Agreements.

Against this background, plaintiffs allege that local counsel for the Participants, defendants here, engaged in securities fraud, or aided and abetted others engaged in securities fraud, by signing the opinion letters.

APPLICABLE LEGAL STANDARDS

Defendants argue that the allegations in the complaints are insufficient as a matter of law. In order to grant the defendants' motions to dismiss, this Court must be able to say that "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). For purposes of applying this test, the Court must view the material allegations of the complaints in the light most favorable to plaintiffs, assuming all factual allegations to be true and resolving all doubts to the benefit of plaintiffs. These stringent standards reflect the belief that in most cases the disposition of claims should be on the merits after the plaintiff has had an opportunity to develop and present the evidence. Rennie & Laughlin, Inc. v. Chrysler Corp., 242 F.2d 208, 213 (9th Cir.1957).

However, despite the reticence of courts to grant a judgment on the pleadings, "On occasion motions to dismiss supply a useful technique for the prompt disposition of suits," Gruen Watch Co. v. Artists Alliance, 191 F.2d 700, 705 (9th Cir.1951). In those instances where a Court is convinced that even under the most generous construction, the allegations in the complaint are not adequate to support the claim being asserted, a judgment on the pleadings is a way to avoid wasteful litigation.

DISCUSSION

The allegations against defendants in the cases at bar center on the opinion letter signed by each defendant in 1976 while serving as local counsel for entities that became Participants in Projects 4/5.⁴ Each such opinion letter was patterned after a sample opinion letter provided to the client (Participant) by the Supply System together with a copy of the Participants' Agreement to be signed by the client, and a draft Bond Resolution which was incorporated by reference in the Participants' Agreement. (¶ 162, ¶ 114)⁵ The opinion letters, signed by the defendants and addressed to their respective clients (the Participants), provided in pertinent part:

As your attorney, I have examined the Washington Public Power Supply System Nuclear Projects Nos. 4 and 5 Participants' Agreement between Participant and the Washington Public Power Supply System.

I am familiar with your official proceedings authorizing execution and delivery of the Agreement and with all contracts, instruments and documents to which you are a party that might affect the validity or operation thereof.

It is my opinion:

(a) That the Agreement has been duly authorized, executed and delivered by Participant and constitutes a valid and binding agreement of Participant, enforceable in accordance with its terms.

(b) That the authorization, execution, and delivery by Participant of the Agreement and compliance by Participant with all the terms and provisions thereof to be carried out and performed by it do not conflict with and are not in violation of any law of the State.... (¶ 163, ¶ 115)

The complaints allege that the representation made in paragraph (a) of each opinion letter was false. (¶ 170, ¶ 122) This falsity is explained in subsequent allegations to have resulted from the failure of defendants to disclose "material adverse information about Supply System Project Nos. 4 and 5 and the bonds financing them" and "substantial questions regarding the Participants' authority to enter into said agreements and/or that there was a substantial risk in investing in the bonds if the Participants were unable to or refused to perform their obligations." (¶¶ 179, 181; ¶¶ 133-135).

The plaintiffs further allege that the defendants knew that Projects 4 and 5 would be financed by bond offerings and that the success of the bond offerings that financed Projects 4 and 5 depended upon the market being convinced that the Participants' Agreement had been "duly authorized, executed, and delivered" and "constituted a valid and binding agreement ... enforceable in accordance with its terms." (¶ 175; ¶ 127)

The plaintiffs further allege, on information and belief, that Supply System bond and special counsel relied on, and essentially republished, defendants' opinion letters in rendering their own opinion letter published as part of the Official Statement accompanying each bond offering. (¶ 177, ¶ 129) The individual defendants are not identified anywhere in any offering materials, but the opinion letter of special and bond counsel states,

In rendering this opinion, we have relied upon the opinion of counsel for each of such Participants and said Company that the Participants' Agreement or Ownership Agreement to which said Participant or Company is a party has been duly executed and delivered by such Participant or Company and is not in conflict with, or in violation of, and will not be a breach of, or constitute a default under, the terms and conditions of any other agreement or commitment by which such Participant or Company is bound. (¶ 177)

Essentially, these allegations are the basis for the plaintiffs' claims that defendants are either primarily or secondarily liable for securities fraud violations. Before looking more carefully at what is, and is not, alleged against these defendants, a quick review of the relevant law to be applied to these claims is in order.

Rule 10b-5, promulgated under § 10(b) of the 1934 Exchange Act, makes it unlawful for any person 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 light of the circumstances under which they were made, not misleading" in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5(b). Construed in the broadest terms, this rule could require persons even peripherally involved in securities transactions to become the guarantors of the accuracy of their statements, even those made negligently or in good faith. While it has been easy for courts to reject that kind of extreme interpretation of securities fraud liability, the precise limits of the duty imposed by Rule 10b-5 has been subject to varying definitions.

In the Ninth Circuit, a flexible duty test is used in determining whether the actions of a particular defendant are subject to Rule 10b-5 liability. See White v. Abrams, 495 F.2d 724 (9th Cir.1974).⁶ This test recognizes that the duty owed by a defendant to a plaintiff will vary according to the factual setting. The flexible duty test provides a framework of five factors to be considered by the Court in assessing the scope of duty, and hence, potential 10b-5 liability of an individual defendant. The five factors to be considered under the flexible duty test are:

1. the relationship of the defendant to the plaintiff;

2. the defendant's access to information as compared to the plaintiff's access;

3. the benefit that the defendant derives from the relationship with the plaintiff;

4. the defendant's awareness of plaintiff's reliance;

5. the defendant's activity in initiating the securities transaction in question.

In applying this test on a motion to dismiss, the court must consider...