South Carolina Nat. Bank v. Stone, Civ. A. No. 7:88-79117.

• Decision Date: 25 July 1990
• Docket Number: Civ. A. No. 7:88-79117.
• Citation: 749 F. Supp. 1419
• Court: U.S. District Court — District of South Carolina
• Parties: The SOUTH CAROLINA NATIONAL BANK, as the Trustee, and Gordon K. Billipp and Elizabeth W. Billipp, on behalf of themselves and all other persons similarly situated, Plaintiffs, v. C. Donald STONE; James A. Stone; Buchanan & Co.; Robert M. Buchanan; Unico Development Services, Inc.; United Medical and Surgical Supply Corporation; C. Benjamin Smith; Ann H. Smith; Benan, Inc.; Retirement Horizons, Inc.; Tom L. Sizemore; John J. Bandy, Sr.; Kenny O. Merritt; Rickey Merritt; Horace C. Smith; J.W. Wakefield; Harold Fleming; Heritage Living Centers, Inc.; J.R. Randall; Joanne J. Randall; Parker & Kotouc, a Partnership; Thomas O. Kotouc; Low & Furby, a Partnership; John T.C. Low; Whiteside, Smith, Jones & Duncan, a Partnership; May Zima & Co., individually and as Class Representative of a Defendant Class described herein, Defendants.

749 F. Supp. 1419

The SOUTH CAROLINA NATIONAL BANK, as the Trustee, and Gordon K. Billipp and Elizabeth W. Billipp, on behalf of themselves and all other persons similarly situated, Plaintiffs,
v.
C. Donald STONE; James A. Stone; Buchanan & Co.; Robert M. Buchanan; Unico Development Services, Inc.; United Medical and Surgical Supply Corporation; C. Benjamin Smith; Ann H. Smith; Benan, Inc.; Retirement Horizons, Inc.; Tom L. Sizemore; John J. Bandy, Sr.; Kenny O. Merritt; Rickey Merritt; Horace C. Smith; J.W. Wakefield; Harold Fleming; Heritage Living Centers, Inc.; J.R. Randall; Joanne J. Randall; Parker & Kotouc, a Partnership; Thomas O. Kotouc; Low & Furby, a Partnership; John T.C. Low; Whiteside, Smith, Jones & Duncan, a Partnership; May Zima & Co., individually and as Class Representative of a Defendant Class described herein, Defendants.

Civ. A. No. 7:88-79117.

United States District Court, D. South Carolina, Spartanburg Division.

July 25, 1990.

749 F. Supp. 1420

William Llewellyn Pope, Pope and Rogers, Columbia, S.C., Thomas Allen Hutcheson, Charleston, S.C., Michael Rediker, David Donaldson, David Guin, Ritchie & Rediker, Birmingham, Ala., for plaintiffs South Carolina Nat. Bank, Gordon K. Billipp and Elizabeth W. Billipp.

C. Donald Stone, Greenville, S.C., pro se.

James A. Stone, Greenville, S.C., pro se.

Robert M. Buchanan, Buchanan & Co., Jackson, Miss., pro se.

Unico Development Services, Inc., Greenville, S.C., pro se.

United Medical & Surgical Supply Corp., Greenville, S.C., pro se.

Retirement Horizons, Inc., Montgomery, Ala., pro se.

Joseph M. Jenkins, Jr., Horton, Drawdy, Ward & Johnson, P.A., Greenville, S.C., for defendant J.R. Randall.

Joanne J. Randall, Greenville, S.C., pro se.

Wilmot B. Irvin, Glenn, Irvin, Murphy, Gray & Stepp, Robert Erving Stepp, Columbia, S.C., Geoffrey B. Schwartz, M. Kay Simpson, Thomas J. Guilday, Huey, Guilday, Kuersteiner & Tucker, Tallahassee, Fla., for May Zima & Co.

Robert Erving Stepp, Columbia, S.C., for defendants Judith Baker, Maurice A. Barineau, William J. Boshell, Edwin Chase, Redford A. Cherry, Charles B. Eldridge, Rene G. Fernandez, William L. Gaddoni, Harry G. Harrell, David M. Johnston, Robert L. Johnson, Charles L. Lester, Robert D. May, Ronald R. Moats, Robert E. Salveson, William Schapley, Marvin Shams, John P. Thomas, John P. Vodennicker, Wallis L. Walker, Jr., David P. Yon, John A. Vonkosky, Richard M. Young and Donald A. Zima.

MEMORANDUM OPINION AND ORDER

JOSEPH F. ANDERSON, JR., District Judge.

On June 12, 1990, the Court conducted a final hearing in this cause with respect to whether the several settlement agreements by and between the Plaintiffs and certain Defendants described further herein should or should not be approved.

Prior to the June 12, 1990 hearing, the Court reviewed the extensive record in this action, including numerous affidavits filed by Plaintiffs' counsel and the indenture

749 F. Supp. 1421

trustee concerning the notice given to members of the Plaintiff Class by publication and by mail, briefs in support of the proposed settlement filed by the Plaintiffs, the Defendant Wyche, Burgess, Freeman & Parham, P.A., Defendant Whiteside, Smith, Jones & Duncan, and an objection to the settlement filed by certain non-settling Defendants to the extent that any order be issued barring claims for contribution

STATEMENT OF FACTS

This case arises out of the issuance on May 30, 1985 of revenue bonds in the original principal amount of $16,000,000 by Spartanburg County, South Carolina.¹ The proceeds of the sale were loaned to Retirement Horizons, Inc. ("RHI"), a South Carolina non-profit corporation, to construct, equip, market, and finance a 240-unit retirement facility intended for persons aged 65 years and above ("Skylyn Hall" or "Project" herein) located near Spartanburg, South Carolina. The bonds were offered and sold through the underwriter Buchanan & Co. ("Buchanan"), pursuant to a Preliminary Official Statement ("POS") and an Official Statement ("OS") prepared primarily by Buchanan and its counsel, Low & Furby (the "Low firm"). The OS included a feasibility study of the Project prepared by an Atlanta accounting firm, May Zima & Co. The Defendant Wyche, Burgess, Freeman & Parham, P.A. (the "Wyche firm") acted as bond counsel in the transaction. The units in the Project were to be marketed by Benan, Inc. ("Benan"), whose principals were Ben Smith and his wife, Ann Smith (the "Smiths"); Benan was also to manage the Project. Settling Defendants J.W. Wakefield and Harold Fleming were, along with defendant Horace Smith (a member of the Whiteside firm, which served as Benan's counsel), alleged directors of Benan and received certain payments in connection with Benan or the Project. Defendants Sizemore and Bandy were directors of RHI and defendant Kotouc and his law firm (Parker & Kotouc) served as RHI's counsel.

On or about November 25, 1986, RHI failed to make certain payments required by its loan agreement. Plaintiff The South Carolina National Bank, as indenture trustee ("SCNB") issued a notice of default to bondholders on February 24, 1987 and on April 6, 1987, SCNB filed a complaint in the South Carolina Court of Common Pleas on behalf of the bondholders to foreclose on the project. After receiving sealed bids and entering into a contract with a purchaser following a bondholder balloting process, in April, 1988, SCNB closed the sale of the Skylyn Hall facility, and in July, 1988 distributed approximately $7,370,000 to bondholders, consisting of the net cash proceeds of the sale as well as most of the undisbursed proceeds of the bond offering held by SCNB in various trust accounts, except for several hundred thousand dollars retained by it to defray certain administrative costs as well as costs of this litigation (pursuant to notice to, and voting ballots received from, the bondholders).

On March 25, 1988, SCNB and two bondholders, Mr. and Mrs. Gordon Billipp of New Hampshire, on behalf of a purported class of approximately 1,765 bondholders of record (and perhaps as many as 2300 current and former bondholders and beneficial owners), filed the original complaint in this action. In the complaint as last amended through the Second Amended Complaint, Plaintiffs allege that the Official Statement and the POS contained numerous omissions of material fact relating to, among other things: (1) the non-existence of (and certain deceptive practices concerning) 60 bona fide reservation agreements and deposits at the time of closing, as required by the underwriter as a precondition to closing; (2) alleged bond issue defaults or problems with other retirement facilities with which a number of the Defendants had previously been involved; (3) the existence of a prior report by Ernst & Whinney ("E & W") that recommended a higher level of pre-sale reservations (50%) than that recommended by the underwriter;

749 F. Supp. 1422

(4) a number alleged flaws in the feasibility study prepared by May Zima and included as an Appendix to the Official Statement (primarily in the nature of assumptions which allegedly had no reasonable basis in fact or which various Defendants allegedly knew were unreasonable); (5) the existence of a prior feasibility study by American Retirement Corp. of Nashville for a project of this type in the same area which concluded that not more than 130 units, of a rental-only nature, were feasible in the relevant market and which also recommended a 50% presale of units to prove the market; (6) the absence of a marketing person (Mary Lancaster) described in the OS as Director of Marketing, and generally the alleged omission of facts about certain Defendants' concerns over the lack of adequate marketing and management expertise for this Project; (7) alleged inadequacy of working capital and of reserve funds; (8) certain alleged kickbacks, transfers of money, and lack of arms' length dealings between Defendants other than the law firms; (9) pending grand jury investigation for federal law fraud against certain affiliated of the developers and certain affiliates; and (10) the lack of provisions for approximately $300,000 of kitchen equipment in the furniture, fixtures and equipment contract. The Complaint seeks recovery against all Defendants under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, the South Carolina Uniform Securities Act and various principles of common law. In addition, a claim under the Federal Racketeering Influenced and Corrupt Organizations Act ("RICO") is asserted against certain of the Defendants. The Defendants vigorously dispute these allegations and any liability to the Plaintiffs

Shortly after the initiation of the action, Plaintiffs and Defendants embarked on substantial pre-trial discovery. Discovery included both formal and informal production of documents by all parties to the case, entailing the production and examination of tens of thousands pages of documents by SCNB, the Whiteside firm, the Wyche firm, the Low firm, Buchanan & Co., May Zima, Kotouc and virtually all other parties as well as numerous non-parties. In addition, the parties took between 40 and 50 depositions of various party and non-party fact witnesses during the course of which more than 1400 exhibits were marked.

In December, 1989, subsequent to the completion of depositions of all fact witnesses, Plaintiffs entered into serious settlement discussions with a number of the settling Defendants.² Those most-recent, serious discussions, which also involved representatives of insurance carriers of some of the settling Defendants, continued for almost three months. Following earlier notice to the Court of impending settlement, on February 28, 1990 the Plaintiffs, the Wyche firm, the Whiteside firm and Kotouc and his firm filed with the Court their joint memorandum of pro tanto settlement. On March 1, 1990, the Court held an open court hearing on that motion, was advised by the parties of certain...