U.S. Financial Securities Litigation, In re, s. 77-2993

Citation609 F.2d 411
Decision Date10 December 1979
Docket NumberNos. 77-2993,s. 77-2993
Parties, Fed. Sec. L. Rep. P 97,199 In re U. S. FINANCIAL SECURITIES LITIGATION. Michael FABRIKANT and Milton Binswanger, Petitioners-Appellants, v. BACHE & CO., Basle Securities Corp. et al., Respondents/Appellees. FIRST NATIONAL BANK OF TOLEDO, etc. et al., Petitioners/Appellants, v. R. H. WALTER, J. B. Halverson, R. G. Steward et al., Respondents/Appellees. MELLON BANK, N. A., ("Mellon") et al., Petitioners/Appellants, v. U. S. FINANCIAL, Salmon Bros. et al., Respondents/Appellees. Petition of Charles D. PRUTZMAN, Jr. Petition of UNION BANK. Petition of TOUCHE ROSS AND COMPANY. Petition of Angelo ADAMS. Petition of BROWN, Wood, Ivey, Mitchell & Petty. Petition of SOCIETE GENERALE DE BANQUE, RENTINVEST, et al. COLONIAL GROWTH SHARES, INC., Petitioner/Appellant, v. TOUCHE ROSS & CO. et al., Respondents/Appellees. Michael FABRIKANT and Milton Binswanger, Plaintiffs/Appellees, v. Philip HAMPTON, Philip D. Reed et al., Defendants/Appellants. Michael FABRIKANT and Milton Biswanger, Plaintiff/Appellees, v. John WEINBERG, etc. et al., Defendants/Appellants. to 77-2995, 77-3063, 77-3064, 77-3093, 77-3099, 77-3121, 77-3122, 77-3333, 77-3344 to 77-3345.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Mitchell L. Lathrop, Los Angeles, Cal., for Richard Gant & V. Frank asaro.

Charles D. Siegal, Los Angeles, Cal., for Charles D. Prutzman.

James W. Colbert, III, Los Angeles, Cal., for Union Bank.

Robert F. Brown, for Crosby, Fox, et al.

Stephen D. Miller, Beverly Hills, Cal., for Angelo Adams.

James M. Shaughnessy, New York City, for Societe Generale de Banque etc.

J. Asa Rountree, New York City, for Philip Hampton, Philip D. Reed, et al.

Winthrop J. Allegaert, New York City, for Colonial Growth Shares, etc.

Irwin F. Woodland, Los Angeles, Cal., for Touche Ross & Co.

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

Before KILKENNY and ANDERSON, Circuit Judges, and BYRNE, * District judge.

J. BLAINE ANDERSON, Circuit Judge:

This appeal presents a challenge which strikes at the heart of this country's system of jurisprudence. Simply stated, we are asked to decide whether there is a "complexity" exception to the Seventh Amendment right to a jury trial in civil cases. We answer this question in the negative and reverse the decision of the district court.


U.S. Financial (USF) was a high-flying real estate development company which began losing altitude in 1972 and finally crashed in 1973. This spawned an abundance of lawsuits. 1 The present case concerns twenty separate suits filed by a variety of plaintiffs who were on the most part purchasers or representatives of purchasers of the different stock and debenture offerings made by USF. 2 The various defendants include USF, certain closely-related companies, assorted USF insiders, underwriters, outside attorneys and accountants. All of the lawsuits present common issues relating to the allegations of federal and state securities law violations, common law fraud and negligence.

The different lawsuits were filed in federal court for the Southern District of California and four other federal judicial districts. The Judicial Panel on Multidistrict Litigation found that the prevalence of common issues and allegations justified transfer of the several cases to the Southern District of California for coordinated or consolidated pretrial proceedings. In re U. S. Financial Securities Litigation, 385 F.Supp. 586 (Jud.Pan.Mult.Lit.1974); In re U. S. Financial Securities Litigation, 375 F.Supp. 1403 (Jud.Pan.Mult.Lit.1974).

On its own motion, the court below struck all demands for jury trial in these consolidated cases. Judge Turrentine reasoned that the legal and factual issues were of such complexity as to be beyond the practical abilities and limitations of a jury. In re U. S. Financial Securities Litigation, 75 F.R.D. 702 (S.D.Cal.1977). Recognizing the importance of the jury trial question, it was certified for interlocutory appeal under 28 U.S.C. § 1292(b). By an order filed on August 29, 1977, this court granted permission to appeal.


In order to place this case and the question presented by it in perspective, its background is developed more fully than is normally necessary. Recently, there has been considerable controversy surrounding the Seventh Amendment's guarantee of civil jury trial and the abilities of jurors as fact-finders in complex lawsuits. 3 We therefore briefly sketch the history of USF, the status of the present litigation, the analysis used by the court below, and that used by the other federal district courts which have lately addressed the same issue.

1. History of USF

USF grew slowly for the first three years after it was incorporated in 1962 as West Coast Financial. 4 Initially, it was primarily engaged in small accounts receivable financing. In 1964 the USF name was adopted and the company expanded into real estate financing and title insurance. USF also made its first public stock offering and filed a registration statement with the SEC in 1964.

USF's growth and expansion began in earnest when R. H. Walter was appointed president in 1966. Walter brought his two real estate development companies and the joint venture concept with him to USF. 5 That same year, USF formed U.S. Mortgage as a subsidiary to make long-term loans on real estate projects.

In 1967, USF acquired Capital Leasing Company. It also formed another subsidiary, U. S. Realty, as a real estate sales and management company. And in 1968, USF sold 250,000 shares of common stock in an interstate offering at $10.75 per share.

During 1969 it continued to expand its operations in the real estate field. Twenty million dollars was raised from a public offering of 15,000 units, each consisting of ten shares of common stock and one 51/2% Convertible subordinated debenture with a face value of $1,000, due in 1989. USF organized and acquired additional title insurance companies, and expanded its real estate operations with the acquisition of San Carlos Construction Co. and Duc and Elliott Development Company. Additionally, U.S. Guaranty Capital was formed to make interim construction loans.

USF continued its capital expansion in 1970 with another securities offering through U. S. Financial Overseas, N.V., a wholly-owned Netherland Antilles subsidiary of USF. 6 The offering was for $12.5 million in 9% Debentures, due 1982, guaranteed by USF, and which came with attached warrants for the purchase of ten shares of USF common stock. During 1970 USF acquired three more companies, Development Creators, Inc., an architectural firm, Mosser Construction, Inc., an Ohio corporation engaged in heavy construction, and Shelton Corporation, a Hawaiian real estate company. In keeping with its rapid growth, USF common stock was listed on the New York Stock Exchange in December of 1970.

USF's capital growth continued in 1971 with the offering of $35 million of 51/2% Convertible subordinated debentures in this country. Unfortunately for its investors, 1971 was the last year of USF's phenomenal growth. USF's reported assets had risen from $338,795 in 1962 to more than $310 million in 1971, its revenues from $8,876 to more than $180 million, and its earnings from $1,215 to over $6 million. The price of USF common stock had also increased correspondingly. From a selling price of less than $5.00 per share it soared to $92.00 per share in 1969, and following a three for two split in 1969 it had risen to a price of $57.00 per share in 1971.

USF was a vertically-integrated company at the time of its downfall. It was in the business of developing, constructing, operating, marketing, and financing real estate projects, individually and as a "participant" in joint ventures. The construction and financing of the real estate developments were controlled through its subsidiary corporations. These various operations were further supplemented by USF's wholly-owned title insurance and casualty insurance companies.

Despite some problems in 1971, the collapse did not begin until 1972 after the SEC had begun investigating the USF operations. 7 In late 1972 the SEC suspended trading in USF securities altogether. At this time USF had approximately 4.5 million outstanding shares of common stock. In 1973, USF began a Chapter XI arrangement proceeding in bankruptcy which has since been converted into a Chapter X reorganization proceeding.

2. Status of the Present Litigation

On June 24, 1977, when the district court entered its order striking the demands for jury trial, there were eighteen consolidated cases. 8 Subsequently, certain plaintiffs brought additional claims, increasing the total number of actions to twenty. 9 However, several of the cases have been settled and dismissed since the district court's order. 10 This court has been advised that there are ten cases remaining, four of which, while still pending, have never been, and are not now, being actively pursued. 11

Thus, there are six remaining active cases. The appellants maintain 12 that these six actions actually amount to only three separate prosecutions. The three remaining cases brought by Societe Generale De Banque, they contend, allege a single continuing scheme to defraud, causing damages to a class of debenture purchasers, by Touche Ross & Co., Union Bank, and Brown, Wood. Liability is predicated upon violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, and also for common law fraud and negligence. The appellants contend that the two separate actions brought by Colonial Growth, and the one action by Bank of Toledo, are all based upon the same continuing scheme to defraud which forms the basis of the Societe Generale De Banque actions.

The appellees claim that the dismissals have done little, if anything, to reduce the complexity of the issues,...

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