Toombs v. Leone

• Decision Date: 26 November 1985
• Docket Number: No. 84-6039,84-6039
• Citation: 777 F.2d 465
• Parties: Blue Sky L. Rep. P 72,320, Fed. Sec. L. Rep. P 92,394 B.G. TOOMBS, Plaintiff/Appellant, v. Michael F. LEONE, Jr., American Food Resources, Inc., Harlyn C. Enholm, Joy S. Davis, James M. Davis, Thomas E. Perkins, dba Thomas E. Perkins & Associates, Commercial Fleet Operations, Ltd., and Seafood Special, Ltd., Defendants/Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 465

777 F.2d 465

Blue Sky L. Rep. P 72,320, Fed. Sec. L. Rep. P 92,394

B.G. TOOMBS, Plaintiff/Appellant, v. Michael F. LEONE, Jr., American Food Resources, Inc., Harlyn C. Enholm, Joy S. Davis, James M. Davis, Thomas E. Perkins dba Thomas E. Perkins & Associates, Commercial Fleet Operations, Ltd., and Seafood Special, Ltd., Defendants/Appellees.

No. 84-6039.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 3, 1985.

Decided Nov. 26, 1985.

Robert K. Schraner, Miller, Boyko & Bell, San Diego, Cal., for plaintiff, appellant.

Michael W. Stelzer, Fresno, Cal., for defendants, appellees.

Appeal from the United States District Court for the Southern District of California.

Before SNEED, NELSON, and NORRIS, Circuit Judges.

NELSON, Circuit Judge:

B.G. Toombs appeals the decision of the district court to dismiss all of his claims pursuant to Fed.R.Civ.P. 41(b) and to impose sanctions against his counsel for failure to comply with the court's Local Rule 235-4(j). We affirm both the 41(b) dismissal and the imposition of sanctions.

FACTUAL AND PROCEDURAL BACKGROUND

In early 1978, Toombs paid $150,000 for a 15% share in Commercial Fleet Operations, Ltd. ("CFO"), a limited partnership organized by general partners Michael Leone and American Food Resources, Inc., intending to operate a commercial fishing venture off the coast of Colombia, South America. ¹

At the first investor meeting, in October 1978, Leone stated that he had replaced CFO's manager, and that CFO would not fish for lobster, red snapper, and conch, as originally planned, but instead would fish for shrimp. Leone offered to buy out the investors dissatisfied with these changes. At the next meeting, in May 1979, Leone told investors that he had replaced the second manager with yet a third, and that because of financing and licensing problems, as well as unforeseen competition, projections for the venture were revised downward. He again offered to buy out dissatisfied investors. At a third meeting, in January 1980, projections were again revised downward, and at a fourth meeting, in May 1980, Leone asked for additional investor money and stated that he would try to sell the boats and close the fishing operation by the following April. In October 1981, the boats were sold in order to avoid bank foreclosures.

Thereafter, on March 4, 1981, Toombs filed this lawsuit, alleging violations of federal and state securities laws common law fraud, negligent mismanagement, and breach of fiduciary and contractual obligations. After Toombs presented his evidence at trial, the district court granted CFO's ² motion to dismiss "on the ground that upon the facts and the law the plaintiff ha[d] shown no right to relief." Fed.R.Civ.P. 41(b).

The court also imposed sanctions against Toombs's counsel for failure to comply with Local Rule 235-4(j) of the United States District Court for the Southern District of California. The rule provides that briefs must be served and filed and copies of exhibits exchanged "no less than seven calendar days prior to the date on which the trial is scheduled to commence." Toombs's counsel filed a 148 page brief and 282 exhibits on the morning of the scheduled trial. When trial was convened on March 10, 1983, CFO's counsel moved to continue the trial and, in the alternative, to strike Toombs's late submissions from the record. Following consideration of respective counsels' arguments, the district court granted the motion for continuance and ruled that sanctions would be imposed on Toombs's counsel in an amount designed to reimburse CFO for attorney's fees incurred because of the continuance.

ISSUES

I. Whether Toombs's claim under Section 12(1) (sale of an unregistered security) of the 1933 Securities Act is time-barred.

II. Whether Toombs's other federal securities claims were properly dismissed.

III. Whether Toombs's state securities and common law fraud claims were properly dismissed.

IV. Whether Toombs's other common law claims were properly dismissed.

V. Whether the district court's imposition of monetary sanctions against Toombs's counsel was an abuse of its discretion.

DISCUSSION

I. Toombs's Section 12(1) Claim is Time-Barred by the Statute of Limitations Set Forth in Section 13

Toombs alleged that the offer, sale, conveyance, and delivery of the CFO interests violated Section 12(1) of the Securities Act of 1933, 15 U.S.C. Sec. 77l (1). That section creates civil liability where mails and other instrumentalities of interstate commerce are used in connection with the sale, delivery, or offer of sale of an unregistered security, as prohibited by Section 5 of the 1933 Act, 15 U.S.C. Sec. 77e.

Section 13 of the same Act, 15 U.S.C. Sec. 77m, imposes a requirement of timeliness in the prosecution of a Section 12(1) cause of action. It states, in relevant part: "No action shall be maintained ... to enforce a liability created under section ... 77l (1) of this title, unless brought within one year after the violation upon which it is based." Toombs's claim is thus governed by a one-year limitation period measured from the date of CFO's last sales-related activity.

In asserting a violation of Section 12, the plaintiff must affirmatively plead sufficient facts in his complaint to demonstrate conformity with the statute of limitations. See Ingenito v. Bermec Corp., 441 F.Supp. 525, 553 (S.D.N.Y.1977); Kroungold v. Triester, 407 F.Supp. 414, 419 (E.D.Pa.1975). Toombs alleges that he purchased his interest in CFO on March 15, 1978. He makes no allegation with respect to the date upon which his securities were delivered. Nor does he allege any dates upon which securities were sold to other CFO investors. ³ Thus, this court must take March 15, 1978 as the time of the alleged violation. Toombs filed his lawsuit more than one year later, on March 4, 1981. Accordingly, we find that Toombs's Section 12 claim is time-barred by the one-year limitations period.

Having disposed of the Section 12(1) claim on limitations grounds, we need not reach the substance of Toombs's claim--that because there was insufficient evidence to show that CFO's offering was private, it did not qualify for exemption from the securities registration requirements.

II. Toombs's Other Federal Securities Claims Fail for Lack of Proof that CFO Misstated or Omitted a Material Fact

Toombs also alleged violations of Sections 12(2) ⁴ and 17 of the 1933 Securities Act, 15 U.S.C. Secs. 77l (2) and 77q, Sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C. Secs. 78j (b), 78t (a), and 78t (b), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5. A required element of proof under all of the provisions is a misstatement or omission of material fact in connection with an offer or sale of a security.

The district court found that none of the information contained in the CFO broker/dealer summary misstated or omitted a material fact. ⁵ A fact is material if its existence or nonexistence is a matter to which a reasonable person would attach importance in determining his choice of action in the transaction. TSC Industries v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976); Admiralty Fund v. Hugh Johnson & Co., 677 F.2d 1301, 1306 (9th Cir.1982) (citing Northwest Paper Corp. v. Thompson, 421 F.2d 137, 138 (9th Cir.1969)); SEC v. Murphy, 626 F.2d 633, 643 (9th Cir.1980).

The question of materiality is a mixed question of law and fact, but involves "assessments peculiarly within the province of the trier of fact." Arrington v. Merrill Lynch, Pierce, Fenner & Smith, 651 F.2d 615, 619 (9th Cir.1981). See also TSC Industries, 426 U.S. at 450, 96 S.Ct. at 2133. It is therefore reviewed for clear error. Arrington, 651 F.2d at 619; see also United States v. McConney, 728 F.2d 1195, 1203 (9th Cir.1984) ("essentially factual" inquiry subject to clearly erroneous review) (quoting Pullman-Standard v. Swint, 456 U.S. 273, 288, 102 S.Ct. 1781, 1790, 72 L.Ed.2d 66 (1982)). A finding is clearly erroneous only when, although there is evidence to support it, the court is firmly and definitely convinced that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948); Arrington, 651 F.2d at 619; Thomas v. S.S. Santa Mercedes, 572 F.2d 1331, 1335 (9th Cir.1978).

Having reviewed the trial record, we are not so convinced here. Because the partnership's operation did not predate his entry into the venture, Toombs cannot complain that he received no financial information about the issuer. See SEC v. Murphy, 626 F.2d at 643. Further, the district court determined that Toombs knew CFO was a new business enterprise, and that this information was not material to him. While the broker/dealer summary upon which Toombs relied did not set forth the risks of investment, Toombs "essentially admitted he was aware of these various risks." The summary also neglected to state whether CFO would buy or lease its fishing boats. However, we are not persuaded that the district court was clearly erroneous in concluding that the issue was immaterial to Toombs at the time of his investment, given Toombs's own admission "that it was not an issue" when he purchased his interest. Similarly, there is sufficient evidence to support the district court's finding that there was no omission with respect to the terms of CFO's purported contract with its initial manager and no misstatement with respect to his qualifications. Finally, Toombs complains that the summary indicated that the boats would be fishing for red snapper, lobster, and conch, and that it made no reference to shrimp. Again, there was sufficient evidence for the district court to conclude that CFO's decision to fish for shrimp was immaterial to Toombs's decision to invest. Moreover, the district court concluded that CFO's decision was made after the close of its offering. Materiality, of course, must be determined in light of facts existing at the...