Ocm Principal Opportunities Fund v. Cibc

• Decision Date: 05 December 2007
• Docket Number: No. B172588.,B172588.
• Citation: 68 Cal.Rptr.3d 828,157 Cal.App.4th 835
• Court: California Court of Appeals Court of Appeals
• Parties: OCM PRINCIPAL OPPORTUNITIES FUND et al., Plaintiffs and Appellants, v. CIBC WORLD MARKETS CORP., Defendant and Appellant; TCW Shared Opportunity Fund II et al., Plaintiffs and Appellants, v. CIBC World Markets Corp., Defendant and Appellant.

68 Cal.Rptr.3d 828 157 Cal.App.4th 835 OCM PRINCIPAL OPPORTUNITIES FUND et al., Plaintiffs and Appellants,
v.
CIBC WORLD MARKETS CORP., Defendant and Appellant;
TCW Shared Opportunity Fund II et al., Plaintiffs and Appellants,
v.
CIBC World Markets Corp., Defendant and Appellant. No. B172588. Court of Appeal, Second District, Division 4. December 5, 2007.

[68 Cal.Rptr.3d 838]

Mayer, Brown, Rowe & Maw, Donald M. Falk, Neil M. Soltman and Fredrick S. Levin, Los Angeles, for Defendant and Appellant.

Hennigan, Bennett & Dorman, J. Michael Hennigan, Robert L. Palmer, William B. Stoner, James P. Habel, Michael Swartz, Jeffrey S. Koenig and Allison K. Chock, Los Angeles; Greines, Martin, Stein & Richland, Irving H. Greines and Marc J. Poster, Los Angeles, for Plaintiffs and Appellants.

MANELLA, J.

Several investment funds initiated actions against CIBC World Markets Corp. (CIBC), alleging misrepresentation and fraud in connection with the issuance and sale of promissory notes. After a jury returned a verdict in favor of the investment funds, the trial court denied prejudgment interest to three of the funds, namely, OCM Principal Opportunities Fund, L.P. (OCM); together with Pacholder Value Opportunity Fund, L.P., and Pacholder Heron Limited Partnership (collectively, Pacholder). CIBC appeals from the judgment in favor of the investment funds, and OCM and Pacholder cross-appeal from the denial of prejudgment interest. We reverse the denial of prejudgment interest, and otherwise affirm the judgment in favor of the investment funds.

FACTUAL AND PROCEDURAL BACKGROUND

Renaissance Cosmetics, Inc. (RCI) manufactured and marketed perfumes, colognes, make-up, and related products. In early 1997, CIBC assisted RCI in raising approximately $200 million through a sale of high-yield promissory notes with a maturity date of February 15, 2004. The sale was conducted under Securities and Exchange Commission (SEC) Rule 144A (17 C.F.R. § 230.144A) (Rule 144A), which permits an entity to sell securities that are not registered under the Securities Act of 1933 (15 U.S.C. §§ 77a et seq.)—and thus cannot be publicly traded—to enumerated qualified buyers (In re Livent, Inc. Noteholders Securities Litig. (S.D.N.Y.2001) 151 F.Supp.2d 371, 431). Following a well-established practice, RCI sold the unregistered notes, and later exchanged them for substantially identical—but registered— notes that could be publicly traded.¹

CIBC oversaw the creation of an offering memorandum regarding the unregistered notes, and acted as the "initial purchaser" of the notes. In February 1997, RCI and CIBC issued the offering memorandum, which contained RCI's promise that it would ultimately exchange them for registered notes. CIBC also bought unregistered notes with a face value of $200 million from RCI at a three percent discount, and resold these notes to qualified buyers. In May 1997, RCI conducted the promised exchange.

68 Cal.Rptr.3d 839

OCM and Pacholder, along with TCW Opportunities Fund II, L.P., TCW Shared Opportunities Fund IIB, L.L.C., TCW Shared Opportunity Fund III, L.P., TCW Leveraged Income Trust, L.P., and TCW Leveraged Income Trust II, L.P. (collectively, TCW), began buying the registered notes in February 1998. General Electric Capital Corporation (GECC), RCI's senior creditor, forced RCI into liquidation in June 1999.

In April 2000, OCM and Pacholder initiated an action against CIBC, asserting claims that CIBC had engaged in fraud, misrepresentation, and violations of federal and state securities laws in connection with RCI's notes. TCW initiated a similar action against RCI for fraud and misrepresentation in May 2001. These actions were later consolidated.

Trial was by jury. At trial, TCW, OCM, and Pacholder asserted three claims for intentional and negligent misrepresentation, and intentional nondisclosure; in addition, OCM and Pacholder asserted two claims for violation of Corporations Code section 25500 and federal securities law. Following the close of the plaintiffs' case-in-chief, the trial court denied CIBC's motions for nonsuit. On September 4, 2003, the jury returned its verdict, concluding that OCM, Pacholder, and TCW had suffered damages as the result of CIBC's negligent misrepresentation and intentional nondisclosure. The trial court subsequently denied OCM and Pacholder's request for prejudgment interest pursuant to Corporations Code section 25500.

On October 15, 2003, the trial court entered a judgment that awarded OCM, Pacholder, and TCW, respectively, $13,412,489, $2,440,504, and $16,249,490 in damages, and later denied CIBC's motions to vacate the judgment and for judgment notwithstanding the verdict (j.n.o.v.).² CIBC appealed from the judgment, and OCM and Pacholder cross-appealed from the denial of their request for prejudgment interest under Corporations Code section 25500.

DISCUSSION I.

CIBC contends that (1) its motions for nonsuit and for j.n.o.v. were improperly denied, and (2) the judgment incorporates an impermissible double recovery of damages.³

A. Motions For Nonsuit And J.N.O.V.

CIBC contends that the trial court erred in denying nonsuit and j.n.o.v. because the evidence is insufficient to support the claims for negligent misrepresentation and intentional nondisclosure.

1. Governing Principles

The crux of respondents' fraud claims is that CIBC misrepresented the success of RCI's business strategy and growth plan, and concealed RCI's failed

68 Cal.Rptr.3d 840

marketing strategy and weak financial condition, as well as sales tactics RCI used to disguise its poor prospects for survival. Generally, "'"[t]he elements of fraud, which give[] rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or `scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage."' [Citation.]" (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 173, 132 Cal.Rptr.2d 490, 65 P.3d 1255.)

Claims for negligent misrepresentation and intentional concealment deviate from this set of elements. "The tort of negligent misrepresentation does not require scienter or intent to defraud. [Citation.] It encompasses `[t]he assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true' [citation], and `[t]he positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true' [citations]." (Small v. Fritz Companies, Inc., supra, 30 Cal.4th at pp. 173-174, 132 Cal.Rptr.2d 490, 65 P.3d 1255.) Additionally, to establish fraud through nondisclosure or concealment of facts, it is necessary to show the defendant "was under a legal duty to disclose them." (Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735, 29 Cal.Rptr. 201.)

Rulings on motions for nonsuit and for j.n.o.v. are reviewed for the existence of substantial evidence. (Kidron v. Movie Acquisition Corp. (1995) 40 Cal. App.4th 1571, 1580, 47 Cal.Rptr.2d 752 [nonsuit]; Stubblefield Construction Co. v. City of San Bernardino (1995) 32 Cal. App.4th 687, 703, 38 Cal.Rptr.2d 413 [j.n.o.v.]) Although the trial court addressed different bodies of evidence in issuing these rulings, we examine the entire record for substantial evidence to support them. Whereas the body of evidence pertinent to nonsuit is that identified in the plaintiffs opening statement or case-in-chief (7 Witkin, Cal. Procedure (4th ed. 1997) Trial, § 416, p. 477), the entire body of evidence presented at trial is pertinent to a j.n.o.v. motion. (Pusateri v. E.F. Hutton & Co. (1986) 180 Cal.App.3d 247, 250, 225 Cal.Rptr. 526). However, "an order denying nonsuit will not be disturbed on appeal despite justification of nonsuit by evidence presented at close of [the] plaintiffs case, if the evidence subsequently introduced by [the] defendant `cures' the missing element." (Housley v. City of Poway (1993) 20 Cal.App.4th 801, 814, 24 Cal.Rptr.2d 554.)

Substantial evidence is not "`synonymous with "any" evidence. It must be reasonable ..., credible, and of solid value....' [Citation.]" (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1633, 29 Cal.Rptr.2d 191.) However, "... the power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted* or uncontradicted, which will support the determination [of the trier of fact], and when two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the [trier of fact]." (Bowers v. Bernards (1984) 150 Cal. App.3d 870, 873-874, 197 Cal.Rptr. 925, italics omitted.)

As we elaborate below (see pt. I.A.2., post), respondents' theory at trial was that in late 1996, CIBC decided to terminate its role as RCI's creditor. To this end, CIBC conducted a Rule 144A transaction with RCI in early 1997 which permitted RCI to repay CIBC's loans through funds obtained from the sale of the unregistered notes. In arranging the transaction,

68 Cal.Rptr.3d 841

CIBC determined that RCI had experienced poor holiday sales in 1996 and that its marketing strategy was failing. As the initial purchaser of the unregistered notes, CIBC prepared a misleading offering memorandum, knowing that if it disclosed RCI's poor holiday sales and unsuccessful business strategy, the sale of the unregistered notes and subsequent sale of the registered notes would collapse. CIBC reviewed RCI's registration statement, which triggered the exchange of the unregistered notes.for the registered notes, and which reaffirmed many of CIBC's misrepresentations. CIBC then repeated its favorable characterization of RCI in investment opinions intended to guide buyers of the registered notes. Respondents relied on CIBC's misrepresentations in buying the registered notes, and ultimately...