Ockerman v. May Zima & Co.

• Decision Date: 28 June 1994
• Docket Number: Nos. 92-5265,92-5266,s. 92-5265
• Citation: 27 F.3d 1151
• Parties: , Fed. Sec. L. Rep. P 98,252 Frank M. OCKERMAN, individually and on behalf of all others similarly situated, Plaintiff-Appellant (92-5265), Plaintiff-Appellee, v. MAY ZIMA & COMPANY, et al., Defendants-Appellees, Defendants-Appellants (92-5266).
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1151

27 F.3d 1151

63 USLW 2048, Fed. Sec. L. Rep. P 98,252

Frank M. OCKERMAN, individually and on behalf of all others

similarly situated, Plaintiff-Appellant (92-5265), Plaintiff-Appellee, v. MAY ZIMA & COMPANY, et al., Defendants-Appellees,

Defendants-Appellants (92-5266).

Nos. 92-5265, 92-5266.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 2, 1993.

Decided June 28, 1994.

John W. Wagster, Hollins, Wagster & Yarbrough, Nashville, TN, Richard H. Adams, Jr. (briefed), Richard D. Connor, Jr. (argued and briefed), Pleus, Adams & Spears, Orlando, FL, for plaintiff-appellant.

Thomas P. Kanaday, Jr., Michael L. Dagley (argued), Farris, Warfield & Kanaday, Nashville, TN, Thomas J. Guilday, M. Kay Simpson (argued and briefed), Huey, Guilday, Kuersteiner & Tucker, Tallahassee, FL, for defendants-appellees.

Kenneth Jones, Sherrard & Roe, Nashville, TN, for Thomas W. Hunter, Maggie Ferguson, Barbara June Hunter, James Knight, Retirement Villages, Inc.

Bryson Hill, Jr., pro se.

Jere R. Lee, Nashville, TN, Richard Montague, Jr., Heidelberg & Woodliff, Jackson, MS, for Buchanan & Co., Inc., Robert Buchanan.

Peggy Newton, St. Petersburg, FL, for J. Milton Newton, Inc.

Robert S. Patterson, Kim A. McMillan, Boult, Cummings, Conners & Berry, Nashville, TN, George E. Mueller, Jr., P.A., George E. Mueller, Jr.

E. Lynn Wagner, C & E Management Co., pro se.

Jere R. Lee, Nashville, TN, Gene D. Berry (briefed), Heidelberg & Woodliff, Jackson, MS, for Richard A. Montague, Jr.

Before: KENNEDY and NORRIS, Circuit Judges; and LIVELY, Senior Circuit Judge.

KENNEDY, Circuit Judge.

We permitted this interlocutory appeal on two issues decided by the District Court on a claim brought under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j, and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5. The first issue, appealed by plaintiff Frank Ockerman, is whether the District Court applied the appropriate statute of limitations when it ruled that plaintiff's 10b-5 claim is barred by the statute of repose found in Tennessee's Securities Act of 1980 (also referred to as Tennessee's Blue Sky law). The second issue, appealed by May Zima & Co., is whether plaintiff is entitled to a presumption of reliance based on a fraud-created-the-market theory and, if so, how such a theory applies to the newly-issued tax-exempt bonds in this case. On appeal, plaintiff argues that (1) the District Court erred by applying Tennessee's Securities Act statute of limitations and repose to the present case rather than Tennessee's statute of limitations for common law fraud; (2) in applying Tennessee's Securities Act, the District Court erred by applying the statute of repose section of the statute as opposed to the limitation period and by failing to equitably toll the running of the statute; and (3) the District Court erred by failing to apply the one year-three year statute of limitations and repose set forth in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). On defendant May Zima & Company's ("May Zima") appeal, it argues that the District Court erred by recognizing a novel fraud- created-the-market theory of reliance.

I.

The facts as set out by the District Court are as follows. ¹ On August 4, 1983, defendants publicly sold Mortgage Revenue Bonds issued by the City of Bowling Green, Kentucky, for $5,500,000.00, the proceeds of which were intended to acquire, construct and equip a retirement village in Bowling Green, Kentucky ("the Project"). Plaintiff purchased $5,000 worth. From the proceeds of the bonds, the promoters succeeded in substantially building and furnishing the Project. Soon thereafter, however, the Project failed. The retirement center never opened for business and never received one deposit. The indenture trustee declared the Project in default in July of 1985, and the partnership that owned the Project filed for bankruptcy on August 30, 1985. In January of 1989, the Project was sold for $1,350,000.00. As of the appeal date, the bondholders had recouped only $485,382.11 of the original $5,500,000.00 investment.

Defendant May Zima was the feasibility consultant for the Project. May Zima prepared the Financial Feasibility Study in which it concluded that the data and assumptions upon which the success of the Project was predicated were reasonable and that the Project would most likely succeed. May Zima had previously provided several health care facilities with auditing, accounting, management consulting and feasibility study services. It appears, however, that many of May Zima's employees who worked on the Project had little or no experience with retirement facilities and the employees who had such experience provided little input into the Bowling Green feasibility study. May Zima's handling of the Bowling Green feasibility study also may have lacked proper oversight or direction.

The chief promoters of the Project, Thomas Hunter and Bryson Hill, were also collaborators in the development of two retirement centers in Hendersonville and Jackson, Tennessee, begun shortly before the Project. The Hendersonville and Jackson projects were substantially identical to the initial plans for the Project. At the time of the Project offering, these other ventures were plagued by marketing failure.

The defendants failed to disclose any of the Hendersonville and Jackson problems to the Project investors. In the literature surrounding the Project offering, Hill was presented as the "money man" in the deal and his companies were to participate as the management and marketing firms for the Project. What was not disclosed was Hill's complete financial status at the time of the offering. Hill had sold a nursing home company for a substantial profit but received from the buyer a long-term promissory note instead of cash. Though Hill's assets were substantial, his commitments of working capital and guarantees to other retirement facilities in which he was involved far outstripped his assets and thereby undermined his purported ability to provide working capital and marketing funds for the Project. In 1984, a year after the bond offering, Hill filed for bankruptcy.

Other shortcomings of the plans for the Project are alleged to include the occupancy projections and the rental rates. As the plans for the Project developed, the promoters and May Zima raised the projected occupancy in the first year from sixty-six percent to seventy percent despite the fact that the Jackson and Hendersonville centers had failed to attract pre-opening subscriptions. The promoters made this projection notwithstanding May Zima's inability to cite a retirement facility that had reached seventy percent occupancy in its first year. The monthly rental rates, as originally planned by Hunter and Hill, were to be $580 for a studio, $630 for a studio deluxe, and $790 for a two bedroom. According to May Zima's research and fieldwork, less than two percent of all apartments in the Bowling Green area charged more than $300 per month and the high rental rates were going to be the greatest obstacle in marketing the facility.

In order to meet financing demands, the promoters raised the proposed monthly rental rates even higher, as disclosed in the final offering circular, to $800 per person for a four person semi-private room, $850 for an efficiency, $900 for a one bedroom, and $975 for a two bedroom. The offering circular indicated that apartments could provide competition for the retirement village units, but failed to disclose the vast difference in rental rates between local apartments and the units at the Project. Prospective residents at the Hendersonville facility had complained of its high rental rates prior to the bond offering for the Project. In addition, financing demands caused the promoters to charge entry fees at all three facilities even before the rent payments began. Even with these obvious obstacles to marketing, the promoters proceeded with the Project.

There was also a disparity between the services and amenities advertised in the offering circular and those that would in fact be available. Further, the consultants on the Project knew that the room sizes resembled a nursing home and were too small for a retirement village.

The promoters also eliminated the Project's nursing service. Originally, the promoters intended to provide the facility's residents with a nurse on location. Kentucky law, however, permits nurses on location only at facilities that obtain a certificate of need. The Project had not done so. The offering circular omitted the fact that the nursing service was cut out shortly before the bond offering. Such a service was important to the viability of a facility that was to charge monthly rental rates in excess of $800 in an area where rental rates rarely exceeded $300.

Similarly, although each living unit was to have a full kitchen, the bond counsel opined that, if the units had kitchens, the bonds would not qualify for tax-exempt status under the Internal Revenue Code. Therefore, the final plans for the Project provided only two hot-plate burners and an under-the-counter refrigerator in only some of the units. The promoters compromised marketability for compliance with the applicable law without reassessing the overall feasibility of the Project.

The promoters also may have purchased more land than was necessary for the Project. The Hendersonville and Jackson facilities had been built upon approximately seven or eight acres, but the Project bought nineteen acres. Although the promoters intended that condominiums or independent living units would be built upon the excess land in the future, they did not disclose this to the investors.

On October 15, 1985, plaintiff filed suit in the District Court for the Middle District of Tennessee, alleging that May Zima's conduct surrounding the sale of the Project bonds was in violation of Section 10(b) of the...