Schlifke v. Seafirst Corp.

• Decision Date: 19 January 1989
• Docket Number: No. 87-2898,87-2898
• Citation: 866 F.2d 935
• Parties: , Fed. Sec. L. Rep. P 94,174 Bernard A. SCHLIFKE and Harvey Kallick, d/b/a K & S Investments Co., a partnership, Plaintiffs-Appellants, v. SEAFIRST CORP. and Seattle-First National Bank, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 935

866 F.2d 935

57 USLW 2468, Fed. Sec. L. Rep. P 94,174

Bernard A. SCHLIFKE and Harvey Kallick, d/b/a K & S

Investments Co., a partnership, Plaintiffs-Appellants, v. SEAFIRST CORP. and Seattle-First National Bank, Defendants-Appellees.

No. 87-2898.

United States Court of Appeals, Seventh Circuit.

Argued May 23, 1988.

Decided Jan. 19, 1989.

Philip S. Nathanson, Nathanson & Wray, Chicago, Ill., for plaintiffs-appellants.

Bruce D. Lamka, Davis Wright & Jones, Seattle, Wash., for defendants-appellees.

Before CUDAHY, RIPPLE, and KANNE, Circuit Judges.

CUDAHY, Circuit Judge.

Plaintiffs-appellants Bernard A. Schlifke and Harvey Kallick commenced this securities fraud suit against several defendants, including Seattle-First National Bank, ¹ alleging that the defendants violated the federal securities laws in connection with the sale of limited partnership interests in an oil and gas exploration program. ² Plaintiffs advanced multiple theories of primary and secondary liability under section 12(2) of the Securities Act of 1933, 15 U.S.C. Sec. 77l (2); section 10(b) of the Securities Exchange Act of 1934 ("SEA"), 15 U.S.C. Sec. 78j(b) and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. Sec. 240.10b-5; section 17(a) of the SEA, 15 U.S.C. Sec. 77q(a); and section 20(a) of the SEA, 15 U.S.C. Sec. 78t(a). The district court granted summary judgment in favor of the defendants on all counts. We affirm.

I.

A summary judgment motion is properly granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In reviewing a summary judgment, we must view the record and the inferences drawn from it in the light most favorable to the non-moving party. See United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962); Rodeo v. Gillman, 787 F.2d 1175, 1177 (7th Cir.1986) (citations omitted). However, where the non-moving party will bear the burden of proof on an issue at trial, Rule 56(e) requires that the nonmovant go beyond the pleadings and affirmatively demonstrate, by specific factual showings, that there is a genuine issue of material fact requiring trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). With these principles in mind, we shall examine the facts of this case.

In 1981, ENI Corporation ("ENI") sold limited partnership interests in ENI Exploration Program 1981-III ("ENI 1981-III"), a limited partnership organized to engage in oil and gas exploration and managed by ENI Exploration Company ("ENIX"). ENI obtained financing for the 1981-III program from Seattle-First National Bank (the "Bank"). Under the terms of the executed Loan Agreement, borrowings by ENI 1981-III were to be secured by letters of credit from investors, equivalent to 116% of each investor's financial commitment to the program. The Bank established certain criteria for banks issuing letters of credit to ensure that they were financially secure. By arranging these letters of credit to secure the Bank's loan to the exploration program and by assuming a proportionate share of the indebtedness pursuant to an Assumption Agreement, investors were afforded a tax deduction without any initial cash outlay.

Before investing in ENI 1981-III, Schlifke, a banking lawyer, and Kallick, a certified public accountant, received a Prospectus and Subscription Supplement, the latter of which included the following loan documents prepared by the Bank: a Loan Agreement between ENI 1981-III and the Bank; a Promissory Note from ENI 1981-III to the Bank; a form Irrevocable Letter of Credit; and an Assumption Agreement pursuant to which the individual investors agreed to assume a proportionate share of the ENI 1981-III indebtedness to the Bank in the event that the letters of credit were not honored. ENI sales personnel were responsible for distributing these documents and soliciting prospective investors. In the solicitation of Schlifke and Kallick, ENI sales personnel allegedly made several fraudulent representations which induced them to purchase three units of a limited partnership interest at $50,000 each. After ENI informed the plaintiffs that their tendered letter of credit was rejected for failure to comply with the Bank's requirements for issuing banks, the plaintiffs eventually submitted an acceptable irrevocable letter of credit in the amount of $174,000, naming the Bank as beneficiary. In 1983, due to its failure to produce sufficient oil and gas revenues, ENI 1981-III defaulted on its loan, and the Bank made presentment and demand for payment of the letters of credit securing the loan.

Plaintiffs filed suit in November of 1983 against two sets of defendants--ENI and related entities, and the Bank--claiming that their investment had been fraudulently procured in violation of federal and state securities laws. The complaint alleged that the defendants failed to disclose material facts and made material false representations in connection with the solicitation of the plaintiffs to purchase interests in the ENI 1981-III limited partnership. During discovery, plaintiffs adduced facts which, in their view, established the Bank's culpability. For example, they learned that two months prior to their investment, the Bank had increased its line of credit to ENIX from $9.5 to $46.5 million. This increase was approved on behalf of the Bank by its chief executive officer, William Jenkins, who at the same time had $300,000 of his own money invested in earlier ENI oil and gas limited partnerships. In addition, discovery revealed that the Bank had extended substantial personal loans to Victor Alhadeff, the principal operating officer of ENIX.

In response to the Bank's motion for summary judgment, plaintiffs posited a number of theories for imposing liability on the Bank. These are all predicated essentially upon the same facts involving the Bank's purported misrepresentations and omissions in soliciting the plaintiff-investors. These theories include: (1) primary liability as a "seller" of securities under section 12(2) of the Securities Act of 1933; (2) secondary liability as an aider and abettor of a section 12(2) violator; (3) primary liability under section 17(a) of the SEA; (4) primary or, alternatively, secondary liability under section 10(b) of the SEA and the concomitant SEC Rule 10b-5; ³ and (5) "controlling person" liability under section 20(a) of the SEA. The district court found that nothing in the plaintiffs' complaint demonstrated that the Bank's participation in the ENI 1981-III program amounted to anything more than a customary financing transaction. See Schlifke v. Seafirst Corp., No. 83 C 8591, mem. op. at 4 (N.D.Ill. Jan. 26, 1987) ("Schlifke I ") Accordingly, the court found no factual conflicts which could result in recovery under any theory. We agree and therefore affirm the grant of summary judgment in favor of the Bank.

II.

A. Section 12(2) Liability

In applying section 12(2) of the Securities Act of 1933, ⁴ this court has previously stated that "the statute explicitly requires privity between plaintiff-purchaser and defendant-seller." Sanders v. John Nuveen & Co., Inc., 619 F.2d 1222, 1226 (7th Cir.1980), cert. denied, 450 U.S. 1005, 101 S.Ct. 1719, 68 L.Ed.2d 210 (1981). See also Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 494 (7th Cir.1986) (law firm and accounting firm which rendered services in connection with the sale of securities by a corporation cannot be Sec. 12(2) sellers). The Third Circuit has also espoused this view. See Collins v. Signetics Corp., 605 F.2d 110, 113 (3rd Cir.1979) ("[Section 12(2) ] is designed as a vehicle for a purchaser to claim against his immediate seller. Any broader interpretation would not only torture the plain meaning of the statutory language but would frustrate the statutory scheme...."). Notwithstanding contentions that the language in Sanders is non-binding dictum, the district courts of this circuit have quite consistently construed Sanders as persuasive authority for "requir[ing] that the defendant be one who could have passed title to the security in question." Steinberg v. Illinois Co., 659 F.Supp. 58, 60 (N.D.Ill.1987) (collecting cases); Beck v. Cantor Fitzgerald & Co., 621 F.Supp. 1547, 1560-62 (N.D.Ill.1985); Kennedy v. Nicastro, 503 F.Supp. 1116, 1118 (N.D.Ill.1980). ⁵ The court below apparently applied a strict privity test finding that the plaintiffs had failed to establish that the Bank was an "immediate seller" or that a "purchaser-seller relationship" existed between the parties. See Schlifke I, mem. op. at 5.

The language of Sanders, although dictum, is this court's only clear interpretation of who may be a "seller" under section 12(2). Other circuits, however, have liberalized the privity requirement and have variously crafted tests for imposing liability. For example, the Fifth and Sixth Circuits have held that section 12(2) sellers include those persons who "proximately caused" a securities transaction. See Davis v. AVCO Financial Services, Inc., 739 F.2d 1057, 1065 (6th Cir.1984), cert. denied, 470 U.S. 1005, 105 S.Ct. 1359, 84 L.Ed.2d 381 (1985) ("But for the presence of the defendant ... in the negotiations preceding the sale, could the sale have been consummated?" (quoting Lennerth v. Mendenhall, 234 F.Supp. 59 (N.D.Ohio 1964))); Croy v. Campbell, 624 F.2d 709, 713 (5th Cir.1980). A different Fifth Circuit panel, as well as the Fourth, Eighth, Ninth and Eleventh Circuits, have embraced a...