Ritzau v. Warm Springs West

• Decision Date: 29 January 1979
• Docket Number: Nos. 76-1284,76-1605,76-1530 and 75-3258,s. 76-1284
• Citation: 589 F.2d 1370
• Parties: 26 UCC Rep.Serv. 94 Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. WARM SPRINGS WEST, Robert L. Brown, Jr. and Cornelia Brown, his wife, Defendants-Appellants. Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. Frederick W. KIMBALL, Defendant-Appellant. Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. Richard W. LOMAS and Jeanne Lomas, his wife, Defendants-Appellants. Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. John C. ALBERTSON, Gayle P. Albertson, his wife, and Peter Flood,Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1370

589 F.2d 1370

26 UCC Rep.Serv. 94

Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. WARM SPRINGS WEST, Robert L. Brown, Jr. and Cornelia Brown,

his wife, Defendants-Appellants.

Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. Frederick W. KIMBALL, Defendant-Appellant.

Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. Richard W. LOMAS and Jeanne Lomas, his wife, Defendants-Appellants.

Philip B. RITZAU and Pamela Ritzau, his wife, Plaintiffs-Appellees, v. John C. ALBERTSON, Gayle P. Albertson, his wife, and Peter

Flood,Defendants-Appellants.

Nos. 76-1284, 76-1605, 76-1530 and 75-3258.

United States Court of Appeals Ninth Circuit.

Jan. 29, 1979.

Richard H. Greener, Jack S. Gjording, John C. Ward, Boise, Idaho, for defendants-appellants.

James K. Norman, Auburn, Cal., for plaintiffs-appellees.

Appeal from the United States District Court for the District of Idaho.

Before BROWNING, CHAMBERS and SMITH, ^* Circuit Judges.

J. JOSEPH SMITH, Circuit Judge:

These are four consolidated appeals by defendants from a judgment of the United States District Court for the District of Idaho, J. Blaine Anderson, Judge, in a securities act, negotiable instruments, contract and fraud action by investors in a real estate development. We affirm in part, reverse in part and remand.

The complete factual background of this controversy as found by the district court, as to which there is little dispute, is set forth as Appendix A. We will summarize here the facts most pertinent to this appeal.

In 1968, appellants Robert L. Brown, Dr. Richard Lomas and John C. Albertson undertook a ski resort development. They organized and became sole stockholders of a corporation, Calico Enterprises, Inc. ("Calico"), which managed the building of the project through a wholly-owned subsidiary, Calico Construction and Development, Inc. ("Calico Construction"). A partnership of these three individuals and their wives, ¹ Warm Springs West ("W.S.W."), took title to the land subject to a purchase money mortgage. As the project progressed, parcels of land were from time to time deeded by W.S.W. to Calico, mortgaged to financial institutions to secure construction loans and reconveyed to W.S.W. Later, appellant Frederick W. Kimball and two individuals not involved in this action were brought in to provide additional financing for furnishings and equipment through Enterprises of Sun Valley ("E.S.V."). They were made directors of Calico and given the right in case of default by Calico to name a majority of its board.

In 1970, plaintiff Philip B. Ritzau became interested in entering into a business venture in the ski country of the Western United States. As a result, he and a friend, appellant Peter Flood, began discussions with Albertson and Brown. In June, Flood joined Calico as a hotel manager and executive vice president. On December 10 and 11, 1970 Ritzau and his wife concluded an agreement to buy into the project, which was already going sour, contracting to purchase Albertson's 10% Share in Calico, Calico Construction and W.S.W. at a cost of $75,000. An original proposal that Ritzau purchase Albertson's share directly from Albertson was changed at Ritzau's request to provide for purchase by Ritzau from Calico and W.S.W. Ritzau also agreed to work as "construction manager" on the project.

Ritzau paid the agreed $75,000 in several installments. Notes were signed by Brown individually and on behalf of Calico and W.S.W. as security for the amount paid by Ritzau. Of the $75,000, $50,000 went to Albertson, but $25,000 was used up in the project and never reached Albertson. Ritzau never received Albertson's stock, and the articles of partnership were not amended to reflect any change of membership. Ritzau subsequently brought this action to recover his $75,000.

The district court, in its second amended judgment from which these appeals were taken, found Albertson, Brown, Flood, Calico, Calico Construction and W.S.W. liable to Ritzau for violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. This liability was based on failure to disclose that the actual reason for Albertson's sale was distrust of Brown, failure to disclose that the Calico books omitted substantial payables and failure to disclose the default control provisions of the E.S.V. lease. The court also found Brown, Calico and W.S.W. liable on the notes signed by Brown, and Calico and W.S.W. liable for breach of contract. Lastly, the court found that Albertson, Brown, Lomas, their wives and Kimball were individually responsible as partners for the liability incurred by W.S.W.

Judgment was entered for the sum of $75,000 against all appellants (except that Calico's liability on the notes was limited to $25,000), for an additional amount of $7,500 for attorney's fees against those found liable on the notes, with interest at 6% From March 21, 1971 to date of judgment and thereafter at 8%, and for costs.

I.

Appellant Kimball has moved to dismiss the appeals of Flood and Lomas on the ground that they have entered into agreements of settlement with the Ritzaus. Flood and Lomas have not withdrawn their appeals, and the terms of the covenants and agreements are not before us. Plaintiffs do not deny and Flood and Lomas admit that money has been paid by and covenants entered into with Flood and Lomas not to sue on or execute any judgments against them in this action. In view of the possible effect on rights of Kimball, Flood and Lomas to contribution or indemnity in actions presently pending in state courts, however, this court may retain jurisdiction of their appeals. Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966). The motion to dismiss the appeals of Flood and Lomas is denied. ²

II.

The principal issues on appeal are the sufficiency of the evidence to support the findings of membership of Kimball in the partnership, of the scope of authority of Brown to bind the partnership and of the capacity in which signers became liable on the notes; the sufficiency of the findings on the § 10(b) and Rule 10b-5 claim to meet the standards of Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), decided subsequent to the decision below; the identity of the parties liable for breach of contract; and the measure of damages for breach of contract.

III.

The findings as to failure to disclose and materiality of the three items (1) that the real motivation for the sale was distrust of Brown, (2) the omission of the payables from the books, and (3) the control provisions of the E.S.V. lease, as well as the findings as to execution of the notes and breach of the contract to deliver the agreed interests to the plaintiffs, are all supported by substantial evidence in the record and are not clearly erroneous. The finding of membership of Kimball in the W.S.W. partnership is likewise supported in the record.

IV.

We are not satisfied that the findings and conclusions, drawn in the light of the flexible duty standard we adopted in White v. Abrams, 495 F.2d 724 (9th Cir. 1974), support the judgment of liability under § 10(b) and Rule 10b-5. We must remand for reconsideration of this issue under the standards since established by Ernst & Ernst v. Hochfelder, supra, 425 U.S. 185, 96 S.Ct. 1375.

The district court's reliance on the "flexible duty" standard of White v. Abrams was well placed at the time of decision, but the Supreme Court has since explicitly rejected that standard in Ernst & Ernst v. Hochfelder,supra, 425 U.S. at 193 n. 12, 96 S.Ct. 1375, a rejection binding on us. We must apply the law as it is at the time of our decision in this case, not as it was or appeared to be at the time of the decision below.

Hochfelder has made it plain that recovery under § 10(b) requires "some element of scienter and cannot be read to impose liability for negligent conduct alone," Id., at 201, 96 S.Ct. at 1385. "Scienter" is defined as "intent to deceive, manipulate or defraud," Id., at 193, 96 S.Ct. at 1381. The Court has left open the question whether under some circumstances recklessness might furnish a basis for a finding of the requisite intent, Id., at 193-94 n. 12, 96 S.Ct. 1375. However, the court below made no finding as to the existence of the necessary intent as to any of the appellants and we must therefore reverse the finding of liability based on violation of § 10(b) and Rule 10b-5. ³

V.

The district court held Kimball liable as a general partner of W.S.W. The record shows that on February 20, 1970 Brown and Kimball entered into an agreement whereby Brown would sell or assign to Kimball "as a limited partner, a 25% Interest in Warm Springs West" in exchange for $300,000 of financing. On March 20, 1970 Brown and Kimball agreed that Kimball would be admitted to W.S.W. as a limited partner and signed an addendum to the W.S.W. Articles of Partnership purporting to admit Kimball as a limited partner under a provision in the partnership agreement granting Brown very broad powers in the administration of the affairs of the partnership. On September 17, 1970 Lomas wrote to Brown that he had never been advised "as to the financial and business relationship with Mr. Fred Kimball" and he requested that Albertson and he be compensated for this and other of Brown's activities. On October 29, 1970 Albertson wrote to Brown that the "reluctant sale" of his interest in W.S.W. was brought about because Brown had made decisions "without telling me exactly of the nature of the effect on the partnership and in this regard I cite the additional partnerships of Fred Kimball and Peter Flood." The general ledger of W.S.W., kept by Brown, contains an entry in the amount of $1.00 dated December 31, 1970 "To Record Kimball."

Ritzau made the final payment for his interest in W.S.W. on March 12, 1971. Ritzau testified that he first learned of the addendum to W.S...