Schneberger v. Wheeler

• Decision Date: 10 November 1988
• Docket Number: 87-6025,Nos. 87-5583,s. 87-5583
• Citation: 859 F.2d 1477
• Parties: Blue Sky L. Rep. P 72,945, Fed. Sec. L. Rep. P 94,134, 9 UCC Rep.Serv.2d 158 Robert M. SCHNEBERGER, et al., Plaintiffs-Appellants, v. W. Randolph WHEELER, et al., Defendants, United States Trust Company of New York, a New York Corporation, Defendant-Appellee. UNITED STATES TRUST COMPANY OF NEW YORK, A New York Corporation, Plaintiff-Counterclaim-Plaintiff-Appellant, v. Warren J. PLOTNER, Defendant- Counterclaim-Plaintiff- Appellant, v. Randolph WHEELER, Andrew A. Levy, and Buckeye Petroleum Co., et al., Counterclaim-Defendants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1477

859 F.2d 1477

Blue Sky L. Rep. P 72,945, Fed. Sec. L. Rep. P 94,134,

9 UCC Rep.Serv.2d 158

Robert M. SCHNEBERGER, et al., Plaintiffs-Appellants, v. W. Randolph WHEELER, et al., Defendants,

United States Trust Company of New York, a New York

Corporation, Defendant-Appellee.

UNITED STATES TRUST COMPANY OF NEW YORK, A New York

Corporation, Plaintiff-Counterclaim-Plaintiff-Appellant, v. Warren J. PLOTNER, Defendant- Counterclaim-Plaintiff- Appellant, v. Randolph WHEELER, Andrew A. Levy, and Buckeye Petroleum Co., et al., Counterclaim-Defendants.

Nos. 87-5583, 87-6025.

United States Court of Appeals Eleventh Circuit.

Nov. 10, 1988.

Giselle D. Lylen, Carl H. Hoffman, Hoffman & Hertzig, Coral Gables, Fla., for plaintiffs-appellants.

John T. Kolinski, Shutts & Bowen, Miami, Fla., for U.S. Trust.

Appeals from the United States District Court for the Southern District of Florida.

Before KRAVITCH and EDMONDSON, Circuit Judges, and HOFFMAN ^*, District Judge.

EDMONDSON, Circuit Judge:

Appellants allege that U.S. Trust violated the Florida Securities and Investor Protection Act and Section 10(b) of the Securities Exchange Act of 1934. Appellants base additional counts on conspiracy and the Uniform Commercial Code. U.S. Trust's motions for summary judgment were granted in these separate but related cases. We affirm.

I. Facts

William Randolph Wheeler and Andrew A. Levy organized Buckeye Petroleum Company, Inc. to form oil and gas limited partnerships. Wheeler and Levy, on behalf of Buckeye, arranged a letter of credit loan program with U.S. Trust, a financial institution, for Buckeye oil and gas limited partnerships. Based on the security to be provided by the promissory notes of investors and letters of credit issued by banks, U.S. Trust proceeded to lend money to limited partnerships formed by Buckeye, Wheeler and Levy. The investors in these limited partnerships, including appellants, never spoke to anyone at U.S. Trust before agreeing to purchase their Buckeye limited partnership interests. U.S. Trust required each appellant to sign an acknowledgement letter by which the signer waived "as against the Bank any defenses, set-offs, counterclaims or other objections to the payment of the Note which they may have against the Partnership."

In October 1981, U.S. Trust received financial statements from Buckeye. Andrew Carstensen, a U.S. Trust officer, made a detailed analysis of the statements. Although Carstensen's analysis was not, on the whole, negative, it did raise questions about the financial solidity of Buckeye. In December 1981, Thurlow West, a vice-president in the personal banking group at U.S. Trust, discussed with Levy an investor suit and a supplier suit against Buckeye.

In the summer of 1983, U.S. Trust agreed to extend for one year its loans to the limited partnerships. Buckeye gave all investors, including the appellants, the option of paying off the entire amount due on their promissory notes or executing new promissory notes to extend the letters of credit. Michael Berry elected to pay off his promissory note. Sheldon Haffner and Larry Mizrach elected to allow U.S. Trust to draw on its letters of credit to pay off their notes. All other appellants executed new promissory notes. Appellant Warren Plotner eventually failed to pay the balance on his note.

Appellants filed suit (Schneberger et al., v. Wheeler ) alleging that U.S. Trust participated in the illegal sale of the limited partnership interests promoted by Wheeler, Levy and Buckeye. The district court granted U.S. Trust's Motion for Summary Judgment on these claims. In a separate suit, U.S. Trust sued Plotner on his promissory note, and the trial court granted U.S. Trust's Motion for Summary Judgment. Although the Plotner case was never formally consolidated with the earlier Schneberger action, the trial court in the Plotner proceedings predicated its summary judgment upon the res judicata effect of the summary judgment entered in the Schneberger suit. The district court entered final judgment in favor of U.S. Trust and granted U.S. Trust's Motion for Certification pursuant to Rule 54(b).

II. Securities Law Claims

A. Florida Security and Investor Protection Act

Appellants claim that U.S. Trust violated Fla.Stat. section 517.07 and Fla.Stat. section 517.301. Fla.Stat. section 517.211 extends liability under these sections to a "person making the sale," a "person ... selling a security," and a "director, officer, partner, or agent of or for the seller." Because there is no evidence that U.S. Trust was an offeror, a seller or an agent of a seller, appellants' claims under the Florida Security and Investor Protection Act are without merit.

B. Section 10(b)

Woodward v. Metro Bank of Dallas sets forth the elements necessary to establish liability for damages as an aider and abettor of a violation of section 10(b) or Rule 10b-5: "[A] person may be held as an aider and abettor only if ... the accused party had general awareness that his role was part of an overall activity that is improper, and if the accused aider-abettor knowingly and substantially assisted the violation." 522 F.2d 84, 94-95 (5th Cir.1975); Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009 (11th Cir.1985).

Woodward and Woods make clear that knowledge of both the fraudulent scheme and of one's own role in that scheme is required to satisfy the test for aider and abettor liability. Woods, 765 F.2d at 1010. This knowledge may be inferred from circumstantial evidence. Woodward, 522 F.2d at 96. As evidence of U.S. Trust's scienter, appellants point to the following facts: (1) U.S. Trust knew that its loan program would make the investment more attractive; (2) U.S. Trust had Buckeye's financial statements which raised questions about the financial solidity of Buckeye; (3) U.S. Trust knew that Buckeye had been sued by an investor and a supplier; and (4) U.S. Trust insisted that appellants execute acknowledgment letters.

The degree of scienter necessary to make out a section 10(b) claim varies with the circumstances of each case:

For a defendant whose only role is to remain silent in the face of securities violations, liability might depend upon a duty owed to the other parties.... A defendant who is not under any duty to disclose can be found liable ... only if he acts with a high degree of scienter, that is, with a "conscious intent" to aid the fraud. ... [L]iability could be imposed upon an aider and abettor who is under a duty to disclose if he acts with a lesser degree of scienter. For an aider and abettor who combines silence with affirmative assistance, the degree of knowledge required should depend upon how ordinary the assisting activity is ...

Woods, 765 F.2d at 1010.

Appellants argue that U.S. Trust did more than remain silent in the face of securities violations. Although U.S. Trust's loans did make the limited partnership interests more attractive to investors, this "participation" in the alleged violation was slight at best. U.S. Trust had no duty to disclose based upon its role as lender. The question is therefore whether there is a genuine issue that U.S. Trust possessed a degree of scienter sufficient, in the light of its slight level of participation in the alleged wrongdoing, for aider and abettor liability. We hold that there was not. The evidence of scienter cited by appellants shows at most that U.S. Trust knew about Buckeye's shaky financial situation. Knowledge of Buckeye's weak financial situation amounts neither to a duty to disclose this information nor to knowledge of fraud. There is no genuine issue that U.S. Trust possessed a mix of scienter and participation sufficient for aider and abettor liability under section 10b-5.

III. Breach of Warranty

Appellants claim also that U.S. Trust is liable for wrongfully calling the investor's letters of credit and seeking to enforce the promissory notes. Appellants contend that U.S. Trust warranted that the promissory notes were valid, but that the notes were void as products of an illegal transaction. If a contract or note is void ab initio, it is a nullity. This defense applies even against a holder in due course.

A. Validity of Promissory Notes

Appellants cite Frye v. Taylor, 263 So.2d 835 (Fla. 4th Dist. Ct. App. 1972), and Edwards v. Trulis, 212 So.2d 893 (Fla. 1st Dist. Ct. App. 1968). These cases hold that contracts made in violation of law are void. In Frye, the plaintiff sponsored the defendant's elevation to a directorship position in an illegal pyramid scheme. The defendant executed a promissory note to secure a loan made by the plaintiff to enable the defendant to purchase the directorship. The court held that "[s]ince the note in question was given in consideration of participation in an illegal transaction the obligation evidenced thereby is a nullity and is of no legal effect." Frye, 263 So.2d at 840. The court hoped to deter illegal contracts by refusing to enforce them. Id.

Similarly, in Edwards the court refused to allow an unlicensed stockbroker to enforce an oral brokerage contract providing for commissions. Unlike the contract in Edwards, the notes at issue in the instant case...