Rose v. Ark. Val. Environ. & Utility Auth.

Decision Date18 April 1983
Docket NumberNo. 81-0397-CV-W-0.,81-0397-CV-W-0.
Citation562 F. Supp. 1180
PartiesWayne G. ROSE, et al., Plaintiffs, v. ARKANSAS VALLEY ENVIRONMENTAL & UTILITY AUTHORITY, et al., Defendants.
CourtU.S. District Court — Western District of Missouri





Michael E. Waldeck, Niewald, Risjord & Waldeck, Kansas City, Mo., J. Michael Rediker, Ritchie & Rediker, Birmingham, Ala., for plaintiffs.

James Borthwick, Blackwell, Sanders, Matheny, Weary & Lombardi, Kansas City, Mo., Crawford S. McGivaren, Jr., and Larry B. Childs, Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, Ala., Lawrence Berkowitz, Stinson, Mag & Fizzell, F. Philip Kirwan, Margolin & Kirwan, Kansas City, Mo., for defendants.


ROSS T. ROBERTS, District Judge.

This is an action in which nine plaintiffs, as holders of certain revenue bonds issued by defendant Arkansas Valley Environmental & Utility Authority ("the Authority"), seek damages and other relief in connection with an alleged securities fraud relating to those bonds. Named as defendants together with the Authority are three business corporations, Milanson Development Co., Stone Enterprises, Inc., and C.M. Stone & Co.; a bank, Plaza Bank & Trust Company ("Plaza Bank"); and three individuals, Fred W. Rausch, an attorney, Julian M. Riley, an attorney, and one Roy G. Miller. The complaint is in seven counts, the first asserting claims under sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t, and under Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5. The remaining six counts allege state law claims for violations of the Uniform Securities Act as adopted in Missouri, Chapter 409 R.S.Mo. 1969 (as amended) (Second Claim), for common law fraud and deceit (Third Claim), for negligence (Fourth Claim), for punitive damages (Fifth and Sixth Claims), and for breach of trust (Seventh Claim).

The matter comes before me on separate motions to dismiss filed by defendants Rausch and Plaza Bank. Plaza Bank asserts thereby that plaintiffs' claims are time barred. Rausch joins in that suggestion, and additionally urges that plaintiffs Allgood, McFeely and Kessler lack standing to assert 10(b) and 10b-5 claims, that venue is improper with respect to plaintiffs' 10(b) and 10b-5 claims, that personal jurisdiction over him with regard to the state law claims is lacking, and that the complaint fails to state a claim as against him. None of the other defendants has filed a responsive pleading of any kind.

Neither defendant's motion is styled as one for summary judgment, but both moving defendants and plaintiffs have submitted affidavits and other evidentiary materials in support of their respective positions.1 Those materials relate to the statute of limitations question, the venue question, and the question of personal jurisdiction over defendant Rausch. Since I have not excluded the materials, the issues to which they relate will be treated under the summary judgment procedure provided for in Rule 56.2 See Fed.R.Civ.P. 12(b). The remaining issues raised by the motions will be dealt with directly under Rule 12(b).


In the spring of 1974, defendant Authority, an Oklahoma trust with its principal place of business in the State of Oklahoma, issued certain revenue bonds in the total principal amount of $840,000, to finance the construction of streets, curbs and gutters in a private real estate development in or near the community of Prue, Oklahoma. Those bonds are hereinafter referred to as the "Series A 1973" bonds. Plaintiffs (or in three instances, their respective predecessors in title) are purchasers of certain of the Series A 1973 bonds.

According to the averments of the complaint, paraphrased and synthesized for present purposes, with a liberal reading in plaintiffs' favor, the bonds in question were essentially worthless from the outset. In general, it is alleged that defendants assisted one another in the perpetration of a fraud in connection with that fact by causing the bonds to be issued and marketed, and by failing to disclose on the face of the bonds or otherwise in connection with their issuance and sale a number of matters which, if truly stated or revealed, would have disclosed to the buying public the inherently valueless nature of the instruments. Asserted as being among such matters was the fact that the bonds were (contrary to the pronouncement on the face of each bond) either totally unsecured or at least undersecured or improperly secured; the fact that the bonds had been issued without any closing procedure; the fact that the underwriting discounts, commissions and various fees connected with issuance amounted to over 30% of the total bond proceeds; the fact that the underlying project for which the bonds were issued was undercapitalized and would have been so even if all of the bond proceeds had been paid over to defendant Authority; the fact that no effort had been made to determine whether the revenues generated by the project would be sufficient to pay the interest on the bonds, and that in fact a realistic appraisal of the project would have demonstrated the negative of that proposition; the fact that the project developers were inexperienced in such projects; and the fact that, because of improper use of the bond proceeds, difficulties might exist with respect to federal income tax exemption for the bond interest. As to the roles of the alleged participants, plaintiffs assert that defendant Miller was a controlling person of the defendant Authority itself, as well as of defendant Milanson Development Co., the proposed lessee of the project property, and defendant C.M. Stone & Co., which apparently acted as the underwriter of the bond issue; that defendant Riley acted as a promoter of the project together with Miller; that defendant Rausch acted as bond counsel; and that defendant Plaza Bank acted as trustee and paying agent for the issue.

Precisely when the present plaintiffs or their predecessors acquired their bonds and when or in what manner difficulties first became apparent is unclear from the materials presently before me, although it is clear that a default in the payment of interest on the bonds occurred in June or July of 1975. In any event, our scene now shifts to the United States District Court for the Northern District of Alabama, where on May 2, 1977, one Clarence Bishop, as a purchaser and holder of certain bonds issued by the Authority a year prior to the Series A 1973 bonds (such earlier bonds being referred to hereinafter as "Series A 1972" bonds), and as the sole named plaintiff, instituted a class action proceeding alleging securities fraud claims in respect of both the Series A 1972 and Series A 1973 issues. Named as defendants therein were some 16 persons, corporations and business entities, including six of the defendants named in the present case.3 The complaint, except for its class action allegations and the fact that it dealt with both the Series A 1972 and Series A 1973 issues, was substantially similar to the complaint presently before me. The class for which certification was requested was described as being "composed of all persons who purchased the Series A, 1972 and 1973 Bonds," except for certain excluded groups consisting of underwriters, dealers and like persons.

From the information presently available it appears that the Bishop suit4 remained in its original posture (and without any class action certification) until October 31, 1979, when four of the present plaintiffs moved to intervene in the proceedings.5 That motion was granted on February 27, 1980. The class action aspect of the matter was resolved on March 28, 1980, with the District Court's certification of a Rule 23(b) class consisting (as presently material) of "all persons who now hold or who do not hold but purchased...Series A 1972 and Series A 1973 (Bonds)...." In that ruling, in response to defendants' argument that plaintiff Bishop lacked "standing," under the Supreme Court's holding in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), to assert any claim on behalf of the purchasers of Series A 1973 bonds, the court concluded that since intervening parties who had purchased Series A 1973 bonds were before it, and since the two bonds issues seemed intertwined in several respects, the appropriate procedure was to divide the general class into two subclasses consisting, respectively, of those who had purchased or who held Series A 1972 bonds, and those who had purchased or who held Series A 1973 bonds. Shores v. Arkansas Valley Environmental & Utility Authority, Fed.Sec.L.Rep. (CCH) ¶ 97,345 (March 28, 1980). An order approving the form of class action notice, and directing its issuance, was entered on September 22, 1980.

On February 4, 1981, however, the District Court reversed its position with respect to the "standing" issue presented by the joinder of claims on both series of bonds. The court apparently concluded, upon further reflection, that since Mr. Bishop himself had purchased only Series A 1972 bonds, and since the two bond issues were in fact separate, Mr. Bishop as the sole named original plaintiff lacked standing, under the Blue Chip rule, to maintain an action into which purchasers or holders of Series A 1973 bonds might properly have intervened. The court accordingly dismissed all claims relating to the Series A 1973 bonds, granted Plaza Bank's motion to dismiss it from the case (since it had acted only with respect to the Series A 1973 bonds) and, in effect, decertified the class with respect to purchasers or holders of Series A 1973 bonds. Official notice of this action, together with the court's certification of the ruling as final for purposes of appeal, was given on March 17, 1981.

The time for appeal of the Alabama District Court's order...

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