Nuveen Mun. High Income Opportunity Fund v. City of Fin.

• Decision Date: 19 September 2013
• Docket Number: Nos. 11–17391,11–17496.,s. 11–17391
• Parties: NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND; The Nuveen Municipal Trust on behalf of its Series Nuveen High Yield Municipal Bond Trust, Plaintiffs–Appellants, v. CITY OF ALAMEDA, CALIFORNIA, on behalf of itself and Alameda Power & Telecom; Alameda Power & Telecom, a department of the City of Alameda; Alameda Public Financing Authority; Alameda Public Improvement Corporation, Defendants–Appellees. Nuveen Municipal High Income Opportunity Fund; The Nuveen Municipal Trust on behalf of its Series Nuveen High Yield Municipal Bond Trust, Plaintiffs–Appellees, v. City of Alameda, California, on behalf of itself and Alameda Power & Telecom; Alameda Power & Telecom, a department of the City of Alameda; Alameda Public Financing Authority, Alameda Public Improvement Corporation, Defendants–Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

730 F.3d 1111

NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND; The Nuveen Municipal Trust on behalf of its Series Nuveen High Yield Municipal Bond Trust, Plaintiffs–Appellants,

v.CITY OF ALAMEDA, CALIFORNIA, on behalf of itself and Alameda Power & Telecom; Alameda Power & Telecom, a department of the City of Alameda; Alameda Public Financing Authority; Alameda Public Improvement Corporation, Defendants–Appellees.

Nuveen Municipal High Income Opportunity Fund; The Nuveen Municipal Trust on behalf of its Series Nuveen High Yield Municipal Bond Trust, Plaintiffs–Appellees,

v.City of Alameda, California, on behalf of itself and Alameda Power & Telecom; Alameda Power & Telecom, a department of the City of Alameda; Alameda Public Financing Authority, Alameda Public Improvement Corporation, Defendants–Appellants.

Nos. 11–17391, 11–17496.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 13, 2013.

Filed Sept. 19, 2013.

Scott W. Wilkinson (argued), Michael P. Cillo, and Melissa J. Hessler, Davis & Ceriani, P.C., Denver, CO, for Plaintiffs–Appellants and Cross–Appellees.

Gregory R. Aker (argued), Eric J. Firstman, and Richard E. Elder, Wulfsberg Reese Colvig & Firstman, P.C., Oakland, CA; Janet C. Kern, Office of the City Attorney, City of Alameda, Alameda, CA, for Defendants–Appellees and Cross–Appellants.

Appeal from the United States District Court for the Northern District of California, Susan Illston, District Judge, Presiding.

Before: M. MARGARET McKEOWN and PAUL J. WATFORD, Circuit Judges, and ALGENON L. MARBLEY, District Judge.^*

OPINION

McKEOWN, Circuit Judge:

This appeal stems from the City of Alameda's offering of municipal bonds to finance the development of a cable and Internet system. Nuveen Municipal High Income Opportunity Fund, the Nuveen Municipal Trust for the Nuveen High Yield Municipal Bond Fund, and Pacific Specialty Insurance Company (collectively, “Nuveen”) purchased about twenty million dollars worth of the bonds and then lost money on the bonds when the City sold the system several years later. Nuveen brought federal and state securities claims against the City, alleging that the City misrepresented the risks to investors. We affirm the district court's summary judgment in favor of the City.

For its federal claims under Section 10b–5 and Section 20(a) of the Securities Exchange Act of 1934, Nuveen has not shown a triable issue of fact on the issue of loss causation. Nuveen's theory that it would not have purchased the securities but for the City's alleged misrepresentation of the risks goes only to show reliance, or transaction causation. Missing is the necessary link between the claimed misrepresentations and the economic loss Nuveen suffered.

Although Nuveen pitches its appeal as novel because the notes were traded on an inefficient market, rather than a more familiar efficient market like one of the stock exchanges, this wrinkle does not change the result. Federal securities law requires proof of both transaction and loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005).

The City enjoys statutory immunity from suit on Nuveen's state claims. California courts have applied § 818.8 of California's Government Claims Act to immunize public entities from liability for misrepresentations sanctioned by those entities. The California Corporate Securities Act does not override that immunity.

Finally, we also affirm the district court's denial of the City's motion for defense costs. Although the City is entitled to summary judgment, Nuveen had reasonable cause to bring suit and the evidence suffices to establish its good faith.

Background

I. The Notes

The City of Alameda decided to expand its municipal electrical system to include telecommunications—cable TV and Internet—in the late 1990s. Alameda Power & Telecom (Alameda Power or “APT”), a division of the City, borrowed money to construct the system. In 2004, Alameda Power issued $33 million in Revenue Bond Anticipation Notes (“Notes”) to refinance its debt and complete construction. Alameda Power hired Stone & Youngberg, a municipal bond underwriter, to prepare the Official Statement accompanying the Notes, which set forth projections regarding the telecom system's viability and profitability. Alameda Power also hired consultant Uptown Services to issue a feasibility report on the proposed refinancing, on which Stone & Youngberg relied in part.

The Official Statement included discussion of “certain risk factors” affecting the viability of the system. It specifically disclosed the risk of competition from other cable television and Internet service providers, chief among them Comcast. It also discussed the risks presented by competitive technologies such as Internet and satellite-based television, programming costs, limited financial resources that could “increase the vulnerability of the Telecom System to general adverse economic and cable industry conditions,” limited operating history, and limited franchise authority. Although the Official Statement expressed an expectation that the system could be a strong competitor in the field, it specifically warned that “no assurances in this regard can be provided to investors in the Notes or in any future financing which Alameda P & T may require to repay the Notes.”

As the Notes were not rated, the Official Statement also warned that they had limited liquidity. The minimum purchase amount for the Notes was $250,000, limiting the offering to sophisticated investors. The Notes offered an interest (coupon) rate of 7 percent, with yield to maturity at 7.25 percent. Reflecting the high-risk nature of the Notes, this return was more than double the yield of a typical taxfree municipal bond in 2004.

The Official Statement included Uptown's feasibility report as an appendix. In preparing the August 2003 report, Uptown relied on information that Alameda Power provided as of July 2003, including a five-year financial forecast and subscriber and financial growth projections.

Nuveen purchased $17,750,000 in face value of the Notes at issuance and made several additional purchases of the Notes over the following year and a half. Ultimately, Nuveen held $20,550,000 in face value of the Notes. Nuveen received interest payments totaling $6,516,003 over the life of the Notes.

The Notes were set to mature on June 1, 2009. Repayment of the Notes was secured by three sources: (1) net revenue generated by the telecom system, (2) a potential refinancing of the telecom system prior to or at maturity, and (3) net available proceeds from the sale of the system. The Official Statement represented that Alameda Power did not expect that net revenues would suffice to cover the principal of the Notes at maturity and that it “expect[ed] to be dependent for the payment of principal on a revenue bond or similar financing to the extent such a financing may be feasible at that time.”

The system performed poorly in the years following the issuance of the Notes. Competition from Comcast was fierce. In 2007, the United States economy began to show signs of a recession that deepened in 2008. During this period, the Notes were traded infrequently. There were eighteen trades between January 31, 2005 and May 1, 2008, all of which were at or near the face value of the Notes.

In June 2008, Alameda Power determined that refinancing the Notes was not a viable option in light of the overall economic downturn and decided to sell the telecom system. Comcast bought the telecom system in November 2008 for approximately $15 million, and the City paid all net proceeds from the sale to the Noteholders. Nuveen received $10,105,110 toward the principal of the Notes it held, a shortfall of approximately $10 million.

II. Procedural History and Nuveen's Claims

Nuveen brings claims against the City for alleged violations of Section 10b–5 and Section 20(a) of the Securities Exchange Act of 1934 and California Corporate Securities Act §§ 24000, 25500, and 25504.1. Nuveen argues that the Official Statement contained inflated and unrealistic projections that materially overstated the telecom system's anticipated performance. According to Nuveen, these misrepresentations induced Nuveen to purchase the Notes and caused Nuveen to suffer economic losses when the system was sold. Nuveen seeks to recover as damages the entire difference between the $20,550,000 face value of its Notes and the $10,105,110 it received from the sale of the system.

The City moved for summary judgment on all claims. On the federal claims, the City argued Nuveen could not establish a triable issue that the City's alleged material misrepresentations caused Nuveen's losses. Nuveen relied on expert testimony to show this causal connection. Its primary expert, Dr. David Sosa, took the position that the City's June 2008 notice of the planned sale of the system served as a “corrective disclosure” that revealed the truth about the City's allegedly fraudulent conduct, causing the Notes to lose value.

Nuveen also relied on the testimony of Gregory Rosston, a Ph.D. economist, who was of the view that “[t]he projections in the Official Statement lacked a reasonable basis because they did not reflect the available information when the Official Statement was issued on April 8, 2004.” Rosston stated that the OS relied on “outdated assumptions that artificially increased the expected [average revenue per unit] and number of subscribers in the subsequent five years.” Specifically, he noted that the Official Statement incorporated the Uptown feasibility report prepared in August 2003, even though “additional information about APT Cable's performance in the seven months from September 2003 to March 2004 and Alameda Power's expectations about future performance” had come to light. Rosston also noted that ten days before issuance of the Official Statement, the Alameda Public Utilities Board adopted a five-year business plan for...