Topalian v. Ehrman

Decision Date06 March 1992
Docket Number90-2105 and 90-2106,Nos. 90-2104,s. 90-2104
Citation954 F.2d 1125
PartiesFed. Sec. L. Rep. P 96,584, RICO Bus.Disp.Guide 7957 Michael K. TOPALIAN, Don W. Boyett, Bobby McDonald, MJM Ventures, Richard H. Manuel, Jack E. Borroughs and Charles W. Anderson, Plaintiffs-Appellants, v. John N. EHRMAN, Rockwood Insurance Company, et al., Defendants-Appellees. Michael K. TOPALIAN, Warren B. Fienga, Richard H. Manuel, Don W. Boyett, Bobby W. McDonald, Charles F. Lacelle and MJM Ventures, Plaintiffs-Counter Defendants-Appellants, v. John N. EHRMAN, Etc., et al., Defendants, Ehrman Investment Group, Inc., Defendant-Counter Plaintiff-Appellee, and Onshore Exploration Ltd. 1984 Mid-Year Drilling Program, Counter Plaintiff-Appellee. Michael K. TOPALIAN, et al., Plaintiffs-Appellants, v. John N. EHRMAN, Individually, Etc., et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Armando Lopez, Lopez & Ramirez, Houston, Tex., W. Sherman Rogers, Washington, D.C., Gillis & Slogar, Houston, Tex., for Michael K. Topalian et al.

Don Jackson, Paul S. Wells, Vinson & Elkins, Houston, Tex., for Houston Petroleum Corp. & Richard O'Donnell.

Stephen W. Schueler, Charles M. Silverman, Neil A. Wasserstrom, Margraves, Kennerly & Schueler, Frank Pinedo, James Austin Pinedo, Pinedo, Cezeaux & Sweeney, Houston, Tex., for Rio Bravo Oil and Bert Gamble.

W. Roderick Johnson, Butler & Binion, Kevin F. Risley, Houston, Tex., for W. Roderick Johnson.

John R. Knight, Morris & Campbell, Houston, Tex., for Robert E. Eckis, Jr.

Frank Pinedo, James Austin Pinedo, Pinedo, Cezeaux & Sweeney, Houston, Tex., for counter plaintiff-appellee in No. 90-2105.

Kevin F. Risley, Butler & Binion, Houston, Tex., for Rockwood Ins.

Frank Pinedo, James Austin Pinedo, Pinedo, Cezeaux & Sweeney, Houston, Tex., for Ehrman and Ehrman Inv. Group in No. 90-2106.

W. Roderick Johnson, Houston, Tex., for W.R. Johnson and W.R. Johnson, P.C. in No. 90-2106.

Don Jackson, Vinson & Elkins, Houston, Tex., for O'Donnell and Houston Petroleum.

Dale Jefferson, D. John Leger, Houston, Tex., for Victor Russek and Russek Co.

Stephen W. Schueler, Neil A. Wasserstrom, Charles M. Silverman, Margraves, Kennerly & Schueler, Houston, Tex., for Bert Gamble and Rio Bravo Oil Co. in Nos. 90-2105 & 90-2106.

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

Before DUHE, WILLIAMS, and GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Onshore Exploration Ltd. ("Onshore") is a Texas limited partnership formed to engage in oil and gas drilling ventures. On December 3, 1987, plaintiffs--fifteen out of seventy-seven Onshore investors--brought this action against twenty-three defendants. 1 Plaintiffs, alleging that they suffered damages as a result of the offer and sale to them of limited partnership interests in Onshore and that they are the victims of a conspiracy in which all defendants participated, sought damages under:

(i) sections 12(1) and 12(2), 15 and 17(a) of the Securities Act of 1933, as amended [15 U.S.C. §§ 77l(1)-(2), 77o, 77q(a) (1988) ];

(ii) section 10(b) of the Securities Exchange Act of 1934, as amended [15 U.S.C. § 78j(b) (1988) ] and Rule 10b-5 thereunder (17 C.F.R. § 240.10b-50);

(iii) the Racketeer Influenced and Corrupt Organization Act (RICO) [18 U.S.C. § 1964(c) (1988) ];

(iv) the Texas Securities Act [Tex.Rev.Civ.Stat.Ann., art. 581-33 (West Supp.1987) ]; and

(v) common law fraud and deceit, breach of fiduciary duty and "other conduct alleged to be in violation of the laws of the State of Texas." 2

The district court, finding no material fact issues in dispute, granted defendants' motion for summary judgment. Plaintiffs now appeal from that judgment seeking:

(i) reversal of the district court's summary judgment in favor of defendants;

(ii) removal to a new court; and, ultimately,

(iii) rescission of the transactions resulting in purchase of investment units;

(iv) treble damages under RICO;

(v) imposition of a constructive trust;

(vi) appointment of a receiver;

(vii) costs and attorney's fees; and

(viii) "other relief as may be just and proper."

Concluding that plaintiffs have failed to set forth specific facts and establish a genuine issue worthy of trial, we affirm the district court's summary judgment in favor of defendants.

I
A

Onshore was formed in September 1984 under Texas law for the purpose of raising funds for oil and gas drilling ventures. The enterprise was presented to potential investors as a tax shelter and a sound, legitimate investment vehicle. On September 26, 1984, Onshore entered into a Joint Venture Agreement with Defendant Houston Petroleum Company ("HPC"), Onshore agreeing to use its best efforts to raise a minimum subscription of $3,600,000 in capital contributions on or before December 31, 1984.

The defendants, general partners of Onshore, decided to raise this 3.6 million dollars by selling limited partnership units. Onshore actively began to solicit investors in November 1984. According to plaintiffs, Onshore's general partners represented to prospective investors that the Onshore offering was exempt from registration under the Security and Exchange Commission's Rule 506 of Regulation D. See 17 C.F.R. § 230.506 (1989). 3 This Rule 506 exemption to the registration requirements of section 5 of the Securities Act of 1933 is limited to offerings made to not more than 35 non-accredited investors. See id. Although the Onshore offering was made primarily to accredited investors, defendants and their seller-agents allegedly offered and sold the Onshore securities to more than 35 non-accredited investors.

In their effort to obtain adequate financing, defendants printed at least two different offering memoranda, one dated September 30, 1984 and another dated November 30, 1984. 4 The November 30, 1984 memorandum stated that the offering termination date--the date by which the partnership needed to raise a minimum subscription of $3,600,000 in capital contributions--was December 31, 1984. 5 As that deadline approached, defendants were short of the minimum subscriptions required to continue the partnership. Rather than dissolving the partnership and reimbursing the limited partners as promised in the original offering memoranda, in January 1985 Onshore forwarded a document to each investor who had subscribed on or before December 31, 1984 which permitted each subscriber to rescind or affirm her respective purchase of Onshore interests. To compensate for Onshore's subscription deficiency, the general partners then allegedly decided to pledge the limited partners' promissory notes as security for a bank loan made to Onshore by Interdiscount Ltd. ("IDL") and guaranteed by Ehrman Investment Group, Ltd. ("EIG"). 6 These loan proceeds were allegedly spent financing the Onshore venture.

B

Plaintiffs filed their original complaint on December 3, 1987. On December 18, 1987, they filed their first amended complaint, alleging that, with the help of others, Onshore's general partners--EIG and W. Roderick Johnson--engaged in a scheme to defraud them in the sale of Onshore limited partnership securities.

Defendants filed motions to dismiss, and, with the exception of claims brought under section 17 of the Securities Act of 1933, the district court denied these motions. Plaintiffs were directed to amend their complaint to specifically refer to the defendants against whom allegations were being made and comply with the court's RICO standing order. Discovery commenced. In August 1988, plaintiffs filed their Second Amended Complaint, which the district court struck. 7 In September 1988, plaintiffs filed a Motion for Leave to File a Second Amended Complaint or in the Alternative a Motion for Joinder of Persons Needed for Just Adjudication. In October 1988, the district court held a pre-trial conference on matters including this motion--a motion the district court ultimately denied.

In January 1989, the court considered a joint motion to amend the scheduling order of August 1988, and extended the discovery cut-off date to April 1989. At this January hearing, the court admonished all counsel to cooperate in discovery and reserved a ruling on pending motions for sanctions. The court set July 28, 1989 for the hearing and disposition of pending motions.

Defendants filed motions for summary judgment on June 15, 1989. Although responses to these motions were due on July 10, 1989, plaintiffs did not file their responses until July 27, 1989. Plaintiffs were also late in filing their motions for summary judgment. In October 1989, the district court granted summary judgment in favor of the Ehrman defendants and against plaintiffs. In December 1989, the district court first granted summary judgment in favor of EIG, Onshore, and Rockwood on their counterclaims against certain plaintiffs. Later that same month, the district court entered its final judgment, granting summary judgment to all the remaining defendants. The district court also held a hearing on pending motions for sanctions and granted defendants' motion for sanctions against some of the plaintiffs and against their counsel, Mr. Armando Lopez.

II

Plaintiffs seek reversal of the district court's grant of summary judgment, and they have pinned a tail of reversible-error assertions to this summary judgment challenge. 8 Defendants deny plaintiffs' allegations, and they allege that even if the facts were true, plaintiffs' causes of action are time-barred by (i) the one and three-year statutes of limitations applicable to claims brought under the Securities Act of 1933, (ii) the two-year statute of limitations applicable to claims under the Securities Exchange Act of 1934, and (iii) the fact that plaintiffs failed to state a claim under RICO. Some of the defendants deny participating in the offer and sale of the units, and they further deny that they had any fiduciary or...

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