Ross v. Bank South, N.A.
| Decision Date | 18 September 1989 |
| Docket Number | Nos. 86-7350,86-7790,s. 86-7350 |
| Citation | 885 F.2d 723 |
| Parties | Blue Sky L. Rep. P 73,025, Fed. Sec. L. Rep. P 94,730, RICO Bus.Disp.Guide 7327 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. 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, Alston & Bird, et al., Defendants-Appellees. George MILLER, individually and as representative of a bondholder class, 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.
Peter J. Anderson, Peterson, Young, Self & Asselin, Kirk M. McAlpin, Jr., Atlanta, Ga., for Peter Orr and Robinson-Hall.
Michael L. Edwards, Balch & Bingham, C. William Gladden, Patricia A. McGee, Birmingham, Ala., Jonathan R. Macey, c/o Cornell University School of Law, Ithaca, N.Y., for Laventhol & Horwatch.
James W. Gewin, Bradley, Arant, Rose & White, Jay D. St. Clair, Birmingham, Ala., for Alston & Bird, et al.
Lange, Simpson, Robinson & Somerville, John E. Grenier, Charles C. Pinckney, Sally S. Reilly, Birmingham, Ala., for Arthur Rice.
Stephen E. Hudson, Kilpatrick & Cody, Debbie W. Harden, Thomas H. Christopher, Jerre B. Swan, Atlanta, Ga., for Bank South.
Charles Cleveland, Cleveland & Cleveland, Birmingham, Ala., Robert Wiggins, Gordon, Silberman, Wiggins & Childs, Birmingham, Ala., R. Alan Stotsenburg, David C. Harrison, New York City, for Ross & Miller.
Gregory G. Little, Hunton & Williams, James L. Gardner, Knoxville, Tenn., for amicus National Assoc. of Bond Lawyers.
Frederick G. Boynton, Atlanta, Ga., Louis A. Craco, Willkie, Farr & Gallagher, New York City, for amicus American Institute of Certified Public Accountants.
Robert Dean Pope, Hunton & Williams, James W. Featherstone, III, Richmond, Va., for amicus National Ass'n of Bond Lawyers.
Andrew S. Bennett, SEC, Jacob H. Stillman, Eric Summergrad, Washington, D.C., for amicus Securities and Exchange Com'n.
Peter W. Homer, Greer, Homer, Cope & Bonner, Miami, Fla., J. Thomas Cardwell, Akerman, Senterfitt & Eidson, Orlando, Fla., for amicus Florida Bankers Ass'n.
R. Bruce McNew, Greenfield & Chimicles, Kenneth A. Jacobsen, Michael D. Gottsch, Haverford, Pa., for amici Certain Class Action plaintiffs.
William J. Fitzpatrick, Gen. Counsel, Securities Industry Ass'n, Inc., New York City, John L. Latham, Smith, Gambrell & Russell, Atlanta, Ga., for amicus Securities Industry Ass'n, Inc.
Appeals from the United States District Court for the Northern District of Alabama.
Before RONEY, Chief Judge, TJOFLAT, HILL, FAY, KRAVITCH, JOHNSON, HATCHETT, ANDERSON, CLARK and COX, Circuit Judges. *
Ernest Ross and George Miller (referred to in this opinion as appellants) sued various parties connected with the issuance of the First Mortgage Residential Facilities Revenue Bond (Mount Royal Towers, Inc. Project) Series 1981 bonds. In an action based primarily on Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated thereunder, Ross and Miller claimed the defendants had engaged in a fraudulent scheme to issue the tax-exempt bonds, which would be unmarketable absent the fraud. After certification of a class and substantial discovery, the district court granted summary judgment for the defendants and against the appellants on the securities claims. The appellants appeal from that judgment, and also from the dismissal of their claim based on RICO, see 18 U.S.C. Sec. 1961 et seq., and their various pendent state law claims based on the Alabama Blue Sky Act, Ala.Code Secs. 8-6-18, 8-6-19 (1977), Alabama statutory fraud provisions, Ala.Code Secs. 6-5-100 to 6-5-104 (1977), negligence and breach of contract. 1 We affirm.
This case concerns the issuance on September 30, 1981, of bonds with a face value of $29,950,000. The bonds were issued by the defendant Special Care Facilities Financing Authority of the City of Vestavia Hills ("the Authority") to pay for the construction The bond issue came at the end of a long series of attempts to finance the project. Originally, the project was to be conventionally financed, but in 1978, Arthur Rice, the developer and a defendant in this action, decided to finance the project through tax-exempt bonds. To this end, Mount Royal Towers, Inc. was incorporated as an Alabama nonprofit corporation. After Rice first contacted another Alabama city about sponsoring the bonds, he approached the defendant City of Vestavia Hills. Vestavia Hills agreed to sponsor the project by forming the Authority and issuing the bonds on behalf of the facility. 2
of a residential and medical facility for the elderly. The facility, known as Mount Royal Towers, was to be located in Vestavia Hills, a suburb of Birmingham, Alabama.
Rice then went about setting up the deal. In 1979, he negotiated with the firm of Underwood, Neuhaus to underwrite the bond issue, but in the beginning of 1980 Underwood declined on account of poor conditions in the bond market which hindered marketing even "safe" bonds. After exploring the financing market, Rice then turned to another firm, Henderson, Few & Company, which had been associated with the earlier effort, for a revised bond issue of approximately $19,000,000.
In December of 1980, Henderson, Few & Company decided against underwriting the issue, again due to poor conditions in the market. The plan had contemplated using the bond revenues to construct the project, and then using the occupancy fees (i.e., the price of an apartment unit) to repay the bonds. When Rice was advised of Henderson, Few & Company's decision to abandon the underwriting at least temporarily, Rice was also cautioned that the proposed occupancy fees were already as high as the Birmingham market would bear, and that the projected revenue from the fees was insufficient to service bonds with interest rates high enough to be attractive to the bond market. Thus the feasibility of the issue as then structured was called into question. At the end of December, 1980, the defendant Board of Trustees of Mount Royal Towers passed a resolution abandoning the project.
Immediately following the abandonment of the project by Henderson, Few & Company, Rice determined to restructure the deal. At the beginning of 1981, he formed a joint venture, defendant Total Concept Retirement Communities, to act as the developer of the new version of the project. The joint venture was composed of a company owned by Rice (the Wellington Corporation), a subsidiary of the new underwriter for the deal, Hereth, Orr & Jones (the Finerock Corporation), and an Atlanta brokerage firm (Robinson-Hall, Inc.). In addition to Hereth, Orr & Jones, a new bond counsel, Jones, Bird & Howell, 3 and a new feasibility consultant, Laventhol & Horwath, were added. Peter Wright, a Jones, Bird attorney, drafted the joint venture agreement. Bank South, N.A., was the indenture trustee. All of these parties were defendants in the action.
Under the previous version of the deal, the occupancy fees ranged from $17,000 to $87,000, depending on the type of apartment. The amount of the bond issue was raised under the new version of the deal from $19,000,000 at 11 1/2% to $29,950,000 at 15 1/2 to 17%, reflecting increased interest rates and other costs. To provide repayment of this increased amount, the occupancy fees for the apartments were increased. Thus, under the new plan, the units ranged from $54,000 to $172,000, not including monthly fees for services.
Under the earlier plans the occupancy fee (the major cost of becoming a resident) was only partially refundable if the resident moved within four years and was not refundable at all after four years or if the resident died after one year. Under the Marketing efforts for the previous version had begun in January, 1978. From the beginning the project was structured to require "pre-sales" of 50% of the units. 4 By late 1979, there were applications and initial deposits for 135 of the units, but this number began to decline during 1980, reaching approximately half that number at the time the previous version of the deal was abandoned in December 1980. With the restructuring of the project, marketing began anew. Initially, a deposit of $1,000 was required; however, fifteen applicants who had previously applied and had forfeited $100 were not required to make any additional deposit. After falling initially with the increase in prices, the number of units reserved rose from 17% in April, 1981, to 24% in June, to 32% in July. Beginning around this time, no deposit was required to reserve a unit; of the 103 units (50% of the total) which were "pre-sold" at the time of the closing of the bond issue, 15 had applications secured with only the aforesaid $100 and an additional 33 had applications without any deposit at all.
new price structure, the entire occupancy fee was to be refundable upon terminating the residency contract or the death of the resident, although the refund was conditioned upon resale of the unit and was subordinated to the bonds.
The bonds, in the amount of $29,950,000, were...
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