Ross v. Bank South, N.A.
| Decision Date | 17 February 1988 |
| Docket Number | Nos. 86-7350,86-7352 and 86-7790,s. 86-7350 |
| Citation | 837 F.2d 980 |
| Parties | , Fed. Sec. L. Rep. P 93,639, 10 Fed.R.Serv.3d 823 Ernest ROSS, individually and as representative of a bondholder class, Plaintiff-Appellee, v. BANK SOUTH, N.A., et al., Defendants, Alston & Bird, et al., Defendants-Appellants. George MILLER, Individually and as a representative of a class of bondholders described in the complaint, Plaintiff-Appellee, v. Arthur M. RICE, Jr., Defendant, William V. Weldon, et al., Defendants-Appellants. Ernest ROSS, individually and as representative of a bondholder class, Plaintiff-Appellant, v. BANK SOUTH, N.A., et al., Defendants-Appellees. George MILLER, individually, and as a representative of a class of bondholders described in the complaint, Plaintiff-Appellant, v. Arthur M. RICE, Jr., et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
William J. Cobb, Kocher, Wilson, Korschun & Cobb, H. Marshall Korschun, Atlanta, Ga., for Jack Hereth.
William H. Mills, Redden, Mills & Clark, L. Drew Redden, Birmingham, Ala., for Weldon, Rogers, Blanton, Lee & Moffett.
Herbert P. Schlanger, Atlanta, Ga., for Alan O. Jones.
Robert Wyeth Lee, Jr., Wininger & Lee, Birmingham, Ala., for R. Davidson.
Kirk M. McAlpin, Jr., Peterson, Young, Self & Asselin, Atlanta, Ga., for Peter Orr and Robinson-Hall.
Michael L. Edwards, Balch & Bingham, Birmingham, Ala., C. William Gladden, Birmingham, Ala., for Laventhol and Horwatch.
R. Alan Stotsenburg, R. Alan Stotsenburg, P.C., David C. Harrison, New York City, for Ross & Miller.
James W. Gewin, Bradley, Arant, Rose & White, Jay St. Clair, Birmingham, Ala., for Alston & Bird, et al.
Fred McCallum, Jr., Lange, Simpson, Robinson & Somerville, John E. Grenier, Charles C. Pinckney, Janet W. Taylor, Sally S. Reilly, Birmingham, Ala., for Arthur Rice.
Stephen E. Hudson, Kilpatrick & Cody, Atlanta, Ga., Debbie W. Harden, Thomas H. Christopher, Jerre B. Swan, Atlanta, Ga., for Bank South.
Charles Cleveland, Cleveland & Cleveland, Robert Wiggins, Gordon, Silberman, Wiggins & Childs, Robert F. Childs, Jr., Birmingham, Ala., for Ross & Miller.
W. Michael Atchison, Starnes & Atchison, Jeff Friedman, Birmingham, Ala., for City of Vestavia Hills.
Michael L. Edwards, Balch & Bingham, Patricia A. McGee, Birmingham, Ala., for Laventhol & Horwath.
Charles C. Pinckney, Lange, Simpson, Robinson & Somerville, Birmingham, Ala., John E. Grenier, Janet W. Taylor, Sally S. Reilly, Birmingham, Ala., for Arthur Rice and John S. Schuler.
Appeals from the United States District Court for the Northern District of Alabama.
Before FAY and CLARK, Circuit Judges, and ALLGOOD *, Senior District Judge.
Named plaintiffs Ernest Ross and George Miller claim the defendants were involved in a fraudulent scheme to issue unmarketable tax-exempt bonds and that the plaintiffs (and the class they purport to represent) purchased these bonds in reliance on the integrity of the market. They claim the defendants knew the bonds were not properly tax-exempt, that the defendants knew the underlying construction project would not generate sufficient income to repay the bonds, and that insolvency and default were inevitable after completion of the retirement facility. It is undisputed that neither of the named plaintiffs read the disclosure statement which accompanied the issuance of the bonds. Accordingly, plaintiffs rely on the "fraud on the market" theory announced by our predecessor court in Shores v. Sklar, 647 F.2d 462 (5th Cir. May 1981) (en banc), 1 cert. denied, 459 U.S. 1102, 103 S.Ct. 722, 74 L.Ed.2d 949 (1983). 2
At this point, a general statement of the facts is sufficient, and we will present these facts in the light most favorable to plaintiffs because there has been no fact finding in this case. Because plaintiffs bear the burden of proof on several relevant issues, however, and because there has been adequate discovery, our resolution of the summary judgment issues (see Section III infra ) will depend in part upon the strength of plaintiffs' evidence. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
The bonds in controversy were issued to finance the construction of Mount Royal Towers, a residential/medical facility for the elderly, located near the Birmingham suburb of Vestavia Hills, Alabama. Defendant Arthur Rice was the developer of the project.
In 1978, Rice was unable to obtain conventional financing for his project, so he turned to the possibility of financing through tax-exempt bonds. 3 In furtherance of this plan, Mount Royal Towers, Inc. was incorporated in 1979 as an Alabama nonprofit corporation. Rice first approached the City of Homewood, Alabama about sponsoring the bonds, but the overture was rejected after the city attorney questioned the legality of sponsoring the project. Rice then contacted the defendant City of Vestavia Hills, which agreed to sponsor the project and to permit the bonds to be issued on its behalf with title to Mount Royal reverting to the city when the bonds were paid. The city established the defendant Special Care Facilities Financing Authority to issue the bonds to build Mount Royal. Rice began negotiations with the underwriting firm of Underwood, Neuhaus regarding the bond issue, but Underwood declined to underwrite the project because conditions in the market were poor even for "safe bonds" and as a result there was "no currently existing market for more speculative types of bond issues" such as Mount Royal. Exh. 108. A group of Birmingham investment bankers also declined to underwrite the project. Rice next turned to the underwriting firm of Henderson, Few & Company. Henderson, Few decided against underwriting the $18,000,000 bond issue in December of 1980 because of poor conditions in the bond market. Henderson, Few and the accounting firm of Peat, Marwick & Mitchell (who had been retained as a feasibility consultant) advised Rice that the proposed sales price of Mount Royal apartment units was already as high as the Birmingham market would bear, but was still insufficient to produce enough revenue to repay bonds carrying sufficient interest rates to be marketable.
During this period, Rice had been engaging in premarketing research. There were to be 205 apartments available in Mount Royal. During 1980, Rice had presold more than 130 units, but this number declined to 107 by September, 1980, and finally declined to zero by the end of that year. This decline allegedly was due to long delays in construction and in obtaining financing. In December, 1980, the board of trustees of Mount Royal Towers, Inc. abandoned the project, citing the cancellation of deposit agreements with potential purchasers, the failure to obtain conventional financing, and the expiration of the IRS 501(C)(3) advance ruling. On January 8, 1981, Peat, Marwick notified Rice that it could not continue to act as an independent feasibility consultant until it was paid for its past work. Rice was reminded that Peat, Marwick's fee was in no way contingent upon the result of the feasibility study or the issuance of the bonds.
Rice stood to lose a substantial personal investment in the project if the bonds were not issued. Apparently he was undaunted by the failures and warnings of 1980. After being turned down by Henderson, Few, Rice immediately hired a new underwriter (defendant Herreth, Orr & Jones), bond counsel (defendant Jones, Bird & Howell), 4 and feasibility consultant (defendant Laventhol & Horwath). A joint venture (defendant Total Concept Retirement Communities) was formed to develop the project. Defendant Peter Wright, an attorney employed by Jones, Bird, drafted the joint venture agreement. The venture was composed of defendant Wellington Corporation (owned by Rice), defendant Finerock Corporation (a subsidiary of Herreth, Orr & Jones) and defendant Robinson-Hall, Inc. (an Atlanta brokerage firm whose principals, along with Attorney Wright, arranged the initial meeting between Rice and Herreth, Orr). Under this agreement, Finerock was to advance $12,500 per month for development costs and was to be reimbursed with interest out of Mount Royal development fee funds. Although defendants Laventhol and Jones, Bird were not parties to the joint venture, payment of their fees was contingent on the closing of the bond issue. Thus, unlike their counterparts in the earlier failed attempts to market the bonds, each of these new participants had a direct financial interest in the successful marketing of the bonds due to the contingent fee arrangements and the joint venture agreement with advances by Finerock.
The new underwriter determined that the bond issue had to be raised from $18,000,000 to $29,000,000 to ensure repayment and proper interest rates. To meet this obligation, prices for the Mount Royal apartment units had to be raised. Under the original plan, the units would have ranged in price from $17,000 (studio apartments) to $83,000 (penthouse apartments). Henderson, Few and Peat, Marwick had concluded that these prices were as high as the Birmingham market would bear. The project, as restructured in February, 1981, included units priced from $54,900 for studio apartments to $172,400 for penthouse apartments. As a specific example, plaintiffs note that the very same apartment "presold" in 1980 for $72,900 with $976 in monthly service fees would now cost $148,500 with $1,542 in monthly fees. Plaintiffs claim the prices were increased solely to make the bonds appear marketable, and that the defendants simply disregarded the advice of Henderson, Few and Peat, Marwick that the price of the units was already as high as the market would bear. Defendants counter that the higher prices were justified because, under their "new" pricing structure, purchasers of apartments would find it easier to receive refunds of their purchase prices in the event of death or...
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