Mullen v. Sweetwater Development Corp.
| Citation | 619 F. Supp. 809 |
| Decision Date | 08 October 1985 |
| Docket Number | Civ. A. No. 85-C-1121. |
| Parties | Frank H. MULLEN, et al., Plaintiff[s], v. SWEETWATER DEVELOPMENT CORPORATION, et al., Defendant[s]. |
| Court | U.S. District Court — District of Colorado |
COPYRIGHT MATERIAL OMITTED
Gregory R. Piche, Colorado Springs, Colo., Cassandra G. Sasso, Denver, Colo., for plaintiffs.
Robert E. Warren, Jr., J. Lawrence Hamil, Denver, Colo., Robert J. Mason, Colorado Springs, Colo., for defendants.
Plaintiffs, Rodney Preisser, James Dingeman, Jr., and Frank Mullen filed this action asserting seven claims for relief, two of which arise under the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78a et seq. (1982), one of which arises under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. (1982), and four of which are state common law claims. Jurisdiction over the federal claims is invoked under 15 U.S.C. § 78aa (1982), 18 U.S.C. §§ 1962 and 1964 (1982), and 28 U.S.C. § 1331 (1982). Pendent jurisdiction is asserted over the state claims.
Before me are the following motions: 1) a motion by all the defendants to dismiss or for judgment on the pleadings for lack of subject matter jurisdiction; 2) a motion by the defendants Western Consortium Inc. and Hydro Transfer Corporation for judgment on the pleadings; 3) a motion by the defendants Thomas Rhoades and the Tianna Corporation to dismiss; 4) a motion by the defendant Sandia Savings and Loan Association for judgment on the pleadings; 5) a motion by the plaintiffs for appointment of a receiver; 6) a motion by the plaintiffs for an order staying further conveyance of water rights; 7) a petition by the plaintiffs for an order to show cause; and 8) a motion by the defendant Western Consortium to disqualify one of the plaintiffs' attorneys. By this order, I resolve the first four of those motions. The remaining motions will be decided following a hearing.
The facts, viewed in a light most favorable to the plaintiffs, as I am bound to view them on these motions, are as follows. In 1981, Joe Farmer and Alexander Kane were the sole stockholders of the defendant, Sweetwater Development Corp. ("Sweetwater"). Farmer owned one-third of the shares of Sweetwater stock, and Kane owned the other two-thirds. Sweetwater held title to approximately ten water rights decrees in El Paso County, Colorado. According to the terms of the corporate charter, any shares of Sweetwater stock offered for sale were subject to a right of first refusal in favor of the corporation, and then to each of the individual shareholders.
In May, 1981, the defendant Samuel Morreale, the president of the defendant Blue Dolphin Investments, Ltd. ("Blue Dolphin"), began negotiations with Kane to acquire Kane's two-thirds interest in Sweetwater.
Shortly thereafter, on June 11, 1981, Farmer executed a contract with the plaintiffs. Under the terms of that contract, when Kane attempted to sell his stock interest in Sweetwater to Morreale and Blue Dolphin, Farmer would exercise his right of first refusal, obtain Kane's shares of Sweetwater stock, and then sell one hundred percent of the Sweetwater stock to the plaintiffs.
Farmer allegedly was prevented from exercising his right of first refusal by the operation of a clause in the Sweetwater stockholders' agreement that stated that a stockholder attempting to exercise a right of first refusal was required to pledge collateral at least equal in value to the collateral pledged by the party attempting to purchase the Sweetwater stock. Morreale and Blue Dolphin had pledged 350 acres of property which they represented to be worth at least $1.4 million. Because Farmer was unable to put up collateral worth $1.4 million to match the collateral value claimed by Blue Dolphin and Morreale, Farmer was not allowed to purchase Kane's Sweetwater stock.
Plaintiffs contend that the value of Blue Dolphin's security collateral was "fraudulently and grossly inflated." Complaint, para. 15. They allege that the land which Morreale and Blue Dolphin valued at $1.4 million was purchased by Morreale for $25,000 in 1978 and was appraised at $70,000 in 1982. Complaint, para. 16. Had it not been for the fraud perpetrated by Morreale and Blue Dolphin, the plaintiffs assert, Farmer would have successfully exercised his right of first refusal, acquired Kane's two-thirds interest in Sweetwater, and then sold all of the stock to the plaintiffs.
When Farmer's efforts to purchase the Sweetwater stock owned by Kane failed, he declared that his contract with the plaintiffs was void for failure of a condition precedent. Plaintiffs, in response, waived the condition that Kane's share of the stock be acquired and sought performance of the rest of the contract (for the remaining shares that Farmer owned outright). Negotiations failed to resolve the matter, and the plaintiffs filed an action in state court for specific performance, subject to a reduction in price to reflect Farmer's failure to acquire all of the Sweetwater stock. Judgment was entered in favor of the plaintiffs on August 28, 1984. The case is currently on appeal to the Colorado Court of Appeals.
Blue Dolphin appeared in the state suit for specific performance as a third-party defendant and attempted to assert the preemptive right of first refusal it had acquired by purchasing Kane's stock. The state court rejected Blue Dolphin's claim on the grounds of waiver and laches. Sweetwater did not appear as a party in the state specific performance action. Therefore, the state court did not rule on whether Sweetwater could exercise its right of first refusal.
On October 10, 1984, Farmer gave notice to Sweetwater of the pending sale of his Sweetwater stock to the plaintiffs. The next day, Sweetwater (controlled by Morreale and Blue Dolphin) attempted to exercise its right of first refusal by tendering performance. The tender was refused. In December, 1984, Sweetwater commenced an action in state court to prevent the transfer of Farmer's stock to the plaintiffs. On March 15, 1985, a preliminary injunction was granted in favor of Sweetwater. That injunction is currently on appeal to the Colorado Court of Appeals.
While the plaintiffs' specific performance action concerning Farmer's one-third interest in Sweetwater was in progress, Blue Dolphin defaulted on a payment of $140,000 due to the Kanes on June 10, 1982. Kane commenced a breach of contract action in state court. While that action was pending, the majority stockholders of Sweetwater (Morreale and Blue Dolphin), over Farmer's objections, granted the Tianna Corporation ("Tianna") an option to purchase Sweetwater's water rights for $3.3 million. The option was given in exchange for an unsecured, non-interest bearing promissory note for $33,000 from Tianna.
On August 9, 1983, the terms of the option were modified. The selling price was increased from $3.3 million to $3.7 million, and the terms of purchase were revised. The new terms required a fifteen percent cash down payment at closing and payment of interest only for ten years on a twenty-year promissory note.
On January 5, 1985, under the direction of Morreale and Blue Dolphin, Sweetwater transferred its water rights to Western Consortium, Inc. in exchange for 3.7 million shares of Western Consortium stock. In addition, 19.3 million shares of Western Consortium stock were transferred to Tianna in exchange for its release of the option to purchase Sweetwater's water rights. Sweetwater's water rights represented 82.6 percent of Western Consortium's book value, but Sweetwater received only 13.3 percent of Western Consortium's stock. Tianna received 68.9 percent of Western Consortium's stock in exchange for its option to purchase Sweetwater's water rights. Tianna is owned by Thomas S. Rhoades, the president of Western Consortium.
On August 23, 1984, Western Consortium secured a loan from Sandia Savings and Loan Association ("Sandia") for $3 million. The loan was secured by a lien on the water rights acquired from Sweetwater and a forty-five percent profit participation by Sandia in any subsequent sale of the water rights. Plaintiffs allege that the proceeds from the loan were used to extinguish Blue Dolphin's debt to Kane. Kane's suit against Blue Dolphin was dismissed on August 31, 1984.
On January 23, 1985, Western Consortium transferred the water rights to Hydro Transfer Corporation ("Hydro"), a wholly owned subsidiary of Western Consortium. The transfer was without consideration. The same Rhoades who is the president of Western Consortium and the owner of Tianna is the president of Hydro. Plaintiffs allege that "at some time during April, 1985, Hydro further encumbered the Sweetwater water rights by entering into a Water Purchase and Delivery Contract with Frank Lynch."
On July 3, 1985, Western and Hydro filed with this court a notice of their intention to further encumber the Sweetwater water rights by using them a security for a $6.8 million loan.
Defendants have moved for judgment on the pleadings under Fed.R.Civ.P. 12(c) asserting that the plaintiffs have no standing to file this action. The parties have treated this action as if it were simply a shareholder derivative action and have argued the issue in those terms. Review of the complaint, however, reveals that this is both a direct and a derivative action. The First Claim for Relief alleges that the defendants violated federal securities law in connection with the transfer of the Sweetwater water rights for Western Consortium stock. This is clearly a derivative action. The alleged injury from this asserted conduct clearly would be to the corporation. The Second Claim for Relief alleges that the same conduct violated state securities law. This too is a derivative claim, as is the Fourth Claim which alleges that the...
To continue reading
Request your trial
-
Federal Deposit Ins. Corp. v. Kerr
...notice of the alleged fraud to allow an adequate responsive pleading, then leave to amend is usually granted. Mollen v. Sweetwater, 619 F.Supp. 809, 819 (D.C.Col. 1985). A "pattern" of racketeering activity "requires at least two acts of racketeering activity." 18 U.S.C. § 1961(5). "Two iso......
-
In re Krause
...claims is determined by state substantive law, while for federal claims, federal substantive law controls. Mullen v. Sweetwater Dev. Corp., 619 F.Supp. 809 (D.C.Colo.1985), see, e.g., Fischer v. CF & I Steel Corp., 599 F.Supp. 340 (S.D.N.Y. 1984) (Federal law controls when plaintiffs assert......
-
Brennan v. EMDE Medical Research, Inc.
...rights in the common law sense do not appear to be required to state a cause of action under § 10(b). See Mullen v. Sweetwater Development Corp., 619 F.Supp. 809, 814 (D. Colo. 1985) ("purchase and sale" within the meaning of the 1934 Act is not necessarily used in the common law sense). It......
-
Mroz v. Hoaloha Na Eha, Inc.
...and thus they deemed an exception to the continuous share ownership requirement appropriate. Id.; see also Mullen v. Sweetwater Development Corp., 619 F.Supp. 809, 817(D.Col.1985) (finding that despite the fact that plaintiffs never actually owned shares in corporation, they had standing to......