Abbott v. Equity Group, Inc.

United States Court of Appeals,
Fifth Circuit.
No. 92-3376.
Walter R. ABBOTT, M.D., et al., Plaintiffs-Appellants,
and
Mrs. E. Elizabeth Turnbull and, Louis R. Koerner, Plaintiffs-Appellants,
v.
The EQUITY GROUP, INC., et al., Defendants,
The Home Insurance Company and, the Graham Company, Defendants-Appellees.
In re Ronald C. ELLINGTON, et al., Debtors.
Mrs. E. Elizabeth Turnbull and, Louis R. Koerner, Claimants-Appellants.
Sept. 28, 1993.
Appeals from the United States District Court for the Eastern District of Louisiana.
Before REAVLEY, DUHÉ, and BARKSDALE, Circuit Judges.
BARKSDALE, Circuit Judge:
This appeal from a summary judgment turns for the most part on the reach of the federal
securities laws for entities that are not the primary parties for securities violations, and on the relief
vel non to be accorded parties who, subsequent to entry of judgment, raise a new theory of liability.
Investors in Courtside Ltd., a Louisiana partnership formed to acquire and operate an apartment
community in Houston, Texas, brought suit against, inter alia, The Home Insurance Company and
The Graham Company. As to them, they alleged that Home and Graham's continued participation
as surety and bonding agent respectively for the Courtside transaction, despite their knowledge of
misrepresentations and material omissions in the Private Placement Memorandum, violated, inter alia,
federal securities laws and rendered the investors' indemnity agreements with Home unenforceable.
The district court granted summary judgment in favor of Home and Graham and refused,
post-judgment, to allow a new theory of liability to be raised. We AFFIRM.
I.
In 1984, the Equity Group, Inc., formed Courtside, becoming the managing general partner.1
Limited partners were required to execute a subscription agreement, which, inter alia, emphasized
that the investment involved "a high degree of risk and special risks". The purchase price per unit
investment was a combination of cash ($1,500)2 and credit, consisting of two promissory notes for
approximately $38,000 (first note) and $7,000 (second note).
To obtain financing from Hibernia National Bank and Security Savings and Loan Association,
Courtside pledged the limited partners' first notes to Hibernia as collateral; the second, to Security.
As additional security, in late December 1984, Home, through its agent, Graham,3 issued a financial
guarantee bond in favor of each bank as permitted assignee, with the Courtside investors as
principals, and the partnership (Courtside) as obligee. The bonds obligated Home to pay Hibernia
up to $3,941,025 and Security up to $1,050,000.
Home received a premium of $257,060 for its issuance of the bonds (total obligation of almost
$5 million). In addition, Home required each investor to execute a pledge of partnership interest to
Home, and sign an indemnity agreement protecting Home against, inter alia, all losses in connection
with the bonds.
Graham, as agent for Home, required that each investor execute a limited partner's application
for financial guarantee bond, and thus reviewed their creditworthiness. Home reserved the right to
approve the language in any financial guarantee bond as well as in the general partner indemnification
agreement, the limited partner indemnification and security agreement, and the remarketing
agreement.
It is undisputed that neither Home nor Graham had direct communication with limited
partners or their advisors prior to their investment in the partnership; rather, Equity solicited the
1
The Equity Group, Michael B. Smuck, Mark H. Strauss, Joseph T. Michelli, and Ronald C.
Ellington were named as general partners.
2
After November 21, 1984, the cash portion of the purchase price decreased to $2,500 for two
units.
3
Graham is a property and casualty broker. In September 1983, Home entered into a general
agency agreement with it for the issuance of limited partnership financial guarantee bonds.
limited partners primarily through the Private Placement Memorandum (PPM) (twice supplemented),
and oral presentations. Alleged misrepresentations and material omissions in Equity's solicitation
initiatives form the basis of this action. As for Home and Graham's involvement, the investors
primarily rely on a legal memorandum prepared for Graham by the Duane, Morris & Heckscher
(Duane Morris) law firm.
In the course of analyzing the transaction for Home, Philip Glick, vice president of Graham,
sent a co py of Equity's PPM to Duane Morris for review, specifically requesting Donald Auten, a
lawyer in the tax section,4 to "review the contents of this Memorandum and provide us with your
comments on the structure and adequacy of disclosure, the reasonableness of the tax position taken
and the adequacy of the tax opinion relative to the tax discussion". Glick also welcomed "any other
observations you [Auten] may have relative to the tax struct ure and legal disclosure in relation to
other projects you may have seen".
Auten prepared a 15 page memorandum (Duane Memo); he stated in his deposition that he
was singularly responsible for its contents, and that he based his analysis solely on his review of the
PPM.5 The Duane Memo began by stating that "[o]ur overall reaction to the adequacy of the
disclosure in the PPM from a securities standpoint is that the PPM would appear deficient in several
material respects and should be supplemented". Among the items mentioned were (1) the absence
of discussion and analysis relating to the prior history of the project;6 (2) troublesome tax issues
arising from an appraisal showing a fair market value ($12,700,000) in excess of the arm's length
purchase price ($10,249,250); (3) inconsistent calculations of expected proceeds upon sale of the
project in 1992 or 1994; (4) the risks to the investors and to Home of a procedure allowing the
partnership to hold an interim closing, providing that Equity purchase any remaining Units (up to 146)
4
Auten testified that he did not "pretend to be a "securities lawyer' "; but he was "familiar in a
general way with Rule 10(b)(5)".
5
According to Auten, his engagement "was simply to take this red book [the PPM] and read it
from one end to the other".
6
The Duane Memo opined that this was "[p]erhaps the most serious omission in the PPM from
a securities standpoint" and recommended that "[a]t a minimum, the adverse prior history should
be discussed and analyzed in the text of the PPM".
on the final closing date;7 (5) the failure to explicitly disclose the true effective interest rate (17%)
with respect to the new money under the wraparound mortgage;8 and (6) the need to include an
exculpatory statement in the PPM precluding the investors' reliance on Home in making their
investment decisions.
In September 1984, Glick (Graham) wrote a letter to Equity regarding changes to the PPM.
He included several suggestions set forth in the Duane Memo, including the need to insert disclaimer
language in the PPM and surety related documents. Shortly thereafter, Glick wrote a follow-up letter
to Equity and attached a copy of the Duane Memo, noting that "this Memorandum highlights some
additional technical corrections which we feel should be made in the Equity Group Offering
Memorandum from a specific tax and securities disclosure standpoint". Glick requested Equity's
"cooperation with us in including these changes in the supplement", and related that,
[f]rom past experience we have found that obtaining another viewpoint on our clients'
Memorandums has often resulted in some worthwhile improvement, both from a legal and
marketing standpoint. I hope these comments will be helpful to you and that they will provide
additional comfort to the Home Insurance Company in conjunction with the issuance of its
bond.
The first supplement to the PPM was released on November 21, 1984. It incorporated
7
The Duane Memo stated that "[t]his procedure creates a serious risk to the investors as well
as to the Surety". It explained:
Because the offering may close and the Project may be purchased with far fewer
than 146 Units having been sold, if the Managing General Partner were to become
financially embarrassed between October 1, 1984, and January 24, 1985 [final
closing], the investors and Surety could be left in an unacceptable position.
Thus, it recommended a change in procedure:
[I]f closing on the project takes place before the minimum of 146 Units are sold,
the Managing General Partner is required to put funds in escrow (or furnish an
irrevocable letter of credit) to guarantee that on January 24, 1985, the Managing
General Partner will be able to satisfy its obligation to purchase the remaining
Units.
It added that "[t]he existing procedure completely undermines that concept of requiring a
minimum number of Units to be sold before closing can take place".
8
The Memo opined: "If an investor were told this fact (instead of having to make the
calculations for himself), his view of the economic risks of the investment might change. Once
again, however, this potentially unfavorable information is effectively buried in the PPM".
disclaimer language providing that Home and Graham "have not made any investigation ... as to the
merits ... and make no representation nor express any opinion with respect thereto, ...", along with
an explicit acknowledgement that investment decisions were made without reliance on the surety
(Home) or its agent (Graham). In addition, the supplement emphasized the investors' unconditional
obligation to Home under the indemnity agreement. It did not, however, incorporate a number of
the other changes suggested in the Duane Memo.
During the latter part of 1984, 40 of the Courtside units remained unsold, with the offering
period scheduled to end on January 24, 1985. Four Louisiana general partnerships (E-C One, E-C
Two, E-C Three and E-C Four) were formed to purchase the unsold units. Hibernia loaned the funds
to each E-C partnership, requiring the Equity principals to become E-C partners and requiring each
non-Equity partner in the E-C partnerships to execute a solidary continuing guarantee of the entire
Hibernia loan. Home agreed to act as surety for the Hibernia loan. The formation of the E-C
partnerships was disclosed in the second supplement to the PPM, issued on January 18, 1985.9
Subsequent to the expiration of the offering on January 24, 1985, Courtside experienced
financial problems and ultimately declared bankruptcy. Because Courtside failed to meet its financial
obligations, the banks called the investors' notes. The investors (limited partners) defaulted, thus
obligating Home to make payments under the term s of each bond. Home, in turn, looked to the
investors for a full accounting, pursuant to the indemnity agreements.
In September 1986, over 40 Courtside investors brought suit against, inter alia, Equity,
Home, and Graham. The complaint was amended several times, resulting in a third supplemental and
9
The second supplement provided in part:
Under the terms of the Memorandum, the Managing General Partner must
purchase on January 24, 1985 all unsold Units up to the minimum offering amount
(146 Units). In order to purchase such Units, it is anticipated that Affiliates of the
Managing General Partner will form four general partnerships to purchase the
unsold Units which are anticipated to aggregate 40. These general partnerships
will be formed specifically to purchase 10 Units each in the Partnership. It is
anticipated that Hibernia will lend to each of the general partnerships sufficient
funds to enable the general partnerships to pay the cash portion of the purchase
price of the Units plus the first three year installments under the First and Second
Installment Notes. Thereafter, the general partnership will be required to pay the
installments due on the First and Second Installment Notes.
amended complaint filed in March 1987. The investors made claims under, inter alia, violations of
§§ 12(2) and 15 of the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1933 Act); §§ 20(a) and
10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1934 Act), along with
Rule 10b-5; the Louisiana Blue Sky Law, La.Rev.Stat.Ann. § 51:701 et seq.; and state law
(Louisiana) for fraud and negligent misrepresentation. They sought damages and rescission. Home
counterclaimed for enforcement of the indemnity agreements.10
As noted earlier, the suits were based on the contention that Equity induced plaintiffs'
investments through misrepresentations and omissions in the PPM, and misleading oral presentations.
Specifically, they maintained that Equity, inter alia, misrepresented its financial health; the condition,
location, occupancy, tenancy and fair market value of the property; and the soundness of the
investment (i.e. "virtually risk free").
After over four years of discovery and pre-trial motions, Equity, as well as other defendants,
announced settlement. (All defendants ultimately settled, except for the Gerald Teel Company,
Hibernia, Home, and Graham.) That day, the court granted judgment on Home and Graham's motion
to reconsider its earlier denial of summary judgment on the remaining issues,11 thereby disposing of
plaintiffs' case and granting Home's claims for enforcement of the indemnity agreements. The court
issued written reasons approximately four months later (January 1990).
Over the next two years, the parties disputed issues of costs, interest, attorney's fees, and
amounts due Home. Therefore, final judgment was not entered until January 1992. Ten days later,
plaintiffs moved for a new trial. Upon denying plaintiffs' motions to file a supplemental memorandum
raising a new theory of liability, and for reconsideration of same, the court denied plaintiffs' motion
10
Separate actions by two other groups of investors, along with a separate action by Home,
were consolidated with the original action.
11
The motion sought reconsideration of the denial of judgment as to the state law negligence
claim, as well as to resolve legal issues regarding the enforceability of the indemnity agreements.
The court had previously granted judgment for Home and Graham on the remainder of plaintiffs'
claims.
for a new trial. Since then, all but five of the plaintiffs have settled.12
II.
Appellants challenge the district court's disposition of the summary judgment motions, and
also assert error based on the court's post-judgment rulings.
A. Summary Judgment
We review a summary judgment de novo. E.g., Degan v. Ford Motor Co., 869 F.2d 889,
892 (5th Cir.1989). It may be granted if there is "no genuine issue as to any material fact and ... the
moving party is entitled to a judgment as a matter of law". Fed.R.Civ.P. 56(c). "[T]he substantive
law will identify which facts are material". Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248, 106
S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986).
The movant has the initial burden of demonstrating the absence of material fact issues.
Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.1992), cert. denied, --- U.S. ----, 113 S. Ct. 82,
121 L. Ed. 2d 46 (1992). To avoid summary judgment, the nonmovant must adduce evidence which
creates a material fact issue concerning each of the essential elements of its case for which it will bear
the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S. Ct. 2548,
2552-53, 91 L. Ed. 2d 265 (1986). "[A] dispute about a material fact is "genuine' ... if the evidence
is such that a reasonable jury could return a verdict for the nonmoving party". Anderson, 477 U.S.
at 248, 106 S.Ct. at 2510. We resolve all factual inferences in favor of the nonmovant. Degan, 869
F.2d at 892. Needless to say, unsubstantiated assertions are not competent summary judgment
evidence. Celotex Corp., 477 U.S. at 324, 106 S.Ct. at 2553.
1. Controlling Person
Sections 15 of the 1933 Act13 and 20 of the 1934 Act14 impose liability on "controlling
12
The appellants are: (1) D.L. Bradke; (2) Eugene M. Parrish; (3) David Sibley; (4) Louis R.
Koerner; and (5) Elizabeth Turnbull.
13
Under the 1933 Act:
Every person who, by or through stock ownership, agency, or otherwise, or who,
pursuant to or in connection with an agreement or understanding with one or more
other persons by or through stock ownership, agency, or otherwise, controls any
person liable under sections [11 or 12], shall also be liable jointly and severally
persons" for securities violations committed by those under their control. Appellants maintain that
material fact issues remain concerning Home and Graham's liability as "controlling persons". As
discussed infra, we have no ruling by the district court of an underlying securities violation and thus
assume a violation for purposes of our analysis.
The parties disagree on the elements for a prima facie case under §§ 15 and 20.15
Specifically, appellants take issue with Home and Graham's assertion, based on G.A. Thompson &
Co., Inc. v. Partridge, 636 F.2d 945 (5th Cir.1981), and Schlifke v. Seafirst Corp., 866 F.2d 935, 949
(7th Cir.1989), that this circuit has adopted the two part test of Metge v. Baehler, 762 F.2d 621 (8th
Cir.1985), cert. denied, Metge v. Bankers Trust Co., 474 U.S. 1057, 106 S. Ct. 798, 88 L. Ed. 2d 774
(1986).
In Thompson, our court held that an officer and director, who owned 247 of the company,
and was apparently involved in the day-to-day coordination of loan gathering,16 had the "requisite
power to directly or indirectly control or influence corporate policy", and, thus, was a controlling
party. 636 F.2d at 958. In so doing, our court rejected the contention that actual participation in the
with and to the same extent as such controlled person to any person to whom such
controlled person is liable....
15 U.S.C. § 77o.
14
The 1934 Act states:
Every person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such controlled person to any
person to whom such controlled person is liable....
15 U.S.C. § 78t (a).
15
The control person sections of both acts are interpreted the same, at least with respect to the
definition of "controlling person", G.A. Thompson & Co. v. Partridge, 636 F.2d 945, 958 & n. 22
(5th Cir.1981).
The term "control' ... means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise.
17 C.F.R. § 230.405(f) (quoted in Id. at 957-58).
16
The corporation marketed mortgage loans. Id. at 949.
transaction underlying the violation was a prerequisite for a prima facie case, noting that "[l]ack of
participation and good faith constitute an affirmative defense". Id. At the same time, it noted that
our precedent was "ambiguous on whether "effective day-to-day control' is required", and, without
deciding the issue, noted that the evidence established sufficient day-to-day control. Id. at 958 n. 24.
In Metge, the Eighth Circuit subsequently established a two-prong test for a prima facie case
for controlling person liability: (1) "that the defendant [ ] actually participated in (i.e. exercised
control over) the operations of the corporation in general"; and (2) "that the defendant possessed the
power to control the specific transaction or activity upon which the primary violation is predicated,
but [plaintiff] need not prove that this later power was exercised". 762 F.2d at 631 (internal
quotations omitted) (emphasis in original).17 The court cited Thompson only as support for its
rejection of a " "culpable participation' requirement, which requires a showing that [the defendant]
actually participated in the alleged violation". Id. at 631.
It is clear that Thompson did not definitively address prong one of the Metge test, i.e. a
required showing that the defendant exercised control over the general operations of the wrongdoer;
nor did it adopt the two prong Metge test, as urged by appellees in reliance on the Seventh Circuit's
opinion in Schlifke, 866 F.2d at 949; and, conversely, Metge did not cite Thompson as support for
its formulation of prong one (only, as stated supra, as support for prong two).
Thus, the law is somewhat more unsettled as to prong one than Home and Graham would
have it. Our decision in Dennis v. General Imaging, Inc., 918 F.2d 496 (5th Cir.1990), however,
provides some guidance on that narrow ground. There we adopted a district court opinion, which
interpreted Thompson as requiring a plaintiff, for a prima facie case, to show "actual power or
influence over the controlled person".18 Id. at 509.
17
The court found that evidence of, inter alia, a lender's 187 ownership of the borrower's
stock, and proxy on a controlling interest of the borrower's subsidiary, did not establish actual
control over the operations of the corporation in general; but, at most, demonstrated the potential
for influence over some business decisions. Id. at 631-32.
18
We note that Dennis does not accurately reflect our rejection in Thompson of a "culpable
participation" requirement. 918 F.2d at 509. We need not resolve this inconsistency, because our
holding turns on appellants' failure to establish Home and Graham's power to control Equity.
Dennis is consistent with Metge to the extent that both require a separate showing of control
over the controlled entity (Equity); but appellants insist that our circuit only requires that they show
Home and Graham's power to control Equity, not the actual exercise of that power. We need not
presently analyze the above distinction because, even assuming that only the former applies, a
reasonable jury could not so find based on the record before us.
According to the affidavits of John MacGregor (assistant vice president of Home), and Glick
(Graham), neither Home nor Graham nor their respective employees and representatives were
stockholders, directors, officers, employees, or partners of Equity; they did not attend its board or
committee meetings; they were not involved in decisions by Equity to purchase properties for
syndications to investors; they were not involved in operations of properties purchased by Equity or
its affiliates; and they were not ot herwise involved in the general operations of Equity, including
business, financial and marketing plans.
Appellants fail to contradict these statements with evidence of Home and Graham's power to
control the general affairs of Equity. Graham's involvement with the issuance of financial guarantee
bonds for other Equity projects,19 and correspondence reflecting that Equity kept Graham informed
of the status of the Courtside offering, as well as others, does not indicate that Graham had such
power, even assuming its participation in such discussions.
Appellants' remaining evidence is less persuasive, as it narrowly relates to Home and Graham's
involvement in the Courtside transaction.20 Although appellants make much of Home and Graham's
influence over the formation of the E-C partnerships, see infra, and the statement in an internal
Graham memo (dated March 6, 1986) from Thomas Pine to Glick that, "[w]ithout Home, Courtside
wouldn't have been done", this evidence is not probative of Home and Graham's influence beyond the
Courtside transaction. Accordingly, summary judgment on this claim was proper.
19
Glick testified that he had reviewed roughly a dozen PPM's for other Equity projects in his
capacity as agent or broker.
20
Appellants point to Home and Graham's influence over the execution and contents of certain
financing documents; their request to approve documents relating to the transaction, including
the PPM (which contained exculpatory language requested by Home); and memoranda from
Glick to Equity, discussed supra, regarding suggested changes to the PPM.
2. Aider and Abettor
Appellants maintain that fact issues remain concerning Home and Graham's liability under §
10(b) of the 1934 Act21 and Rule 10b-5.22 Those who aid and abet securities fraud are subject to Rule
10b-5 liability; but, we have emphasized recently that this "added layer of liability ... is particularly
problematic.... We should be exacting in determining whether aider and abettor liability can be
demonstrated". Akin v. Q-L Invest., Inc., 959 F.2d 521, 525 (5th Cir.1992).
To establish liability, the plaintiff must show (1) that the primary party committed a securities
violation; (2) that the aider and abettor had "general awareness" of its role in the violation; and (3)
that the aider and abettor knowingly rendered "substantial assistance" in furtherance of it. Abell v.
Potomac Ins. Co., 858 F.2d 1104, 1126 (5th Cir.1988) (internal quotations omitted), vacated, Fryar
v. Abell, 492 U.S. 914, 109 S. Ct. 3236, 106 L. Ed. 2d 584 (1989).23
21
Section 10(b) provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce or of the mails, or of any facility of any
national security exchange—
(b) To use or employ, in connection with the purchase or sale of any
security ... any manipulative or deceptive device or contrivance....
15 U.S.C. § 78j(b).
22
Rule 10b-5 provides:
It shall be unlawful for any person, directly or indirectly ...
(a) to employ any device, scheme, or artifice to defraud,
(b) to make any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statement made, in light of the circumstances under
which they were made, not misleading or
(c) to engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5 (1992).
23
Although Abell has been vacated, it remains authoritative on the non-RICO issues. First
Nat. Bank of Commerce v. Monco Agency, Inc., 911 F.2d 1053, 1061 n. 15 (5th Cir.1990).
For the first element, we again assume underlying securities fraud. See notes 27 and 28,
infra. Underlying the other two elements—"general awareness" and "knowing substantial
assistance"—is a single scienter requirement that varies o n a sliding scale from "recklessness" to
"conscious intent". Abell, 858 F.2d at 1126-27. The plaintiff must show conscious intent, unless
there is some special duty of disclosure, or evidence that the assistance to the violator was unusual
in character and degree. Akin, 959 F.2d at 526, 531.24 In the latter two instances, a recklessness
standard applies.25 Id.
Throughout the district court proceedings, appellants maintained that Equity violated § 10
and Rule 10b-5 by inducing appellants to invest in Courtside through oral and written
misrepresentations.26 Their aiding and abetting allegations were based on Home and Graham's
continued participation in the Courtside transaction despite their receipt of the Duane Memo, which,
according to appellants, provided a blueprint of Equity's fraud.
The district court concluded that the summary judgment record lacked probative evidence of
Home and Graham's "subst antial assistance" in the alleged violations,27 relying primarily on its
findings that they did not owe appellants a duty of disclosure, and that the activities described were
24
This court has often reiterated that, "[i]f the evidence shows no more than transactions
constituting the daily grist of the mill, we would be loathe to find 10b-5 liability without clear
proof of intent to violate the securities law". See, e.g., Abell, 858 F.2d at 1126 (quoting
Woodward v. Metro Bank, 522 F.2d 84, 97 (5th Cir.1975)).
25
Our court defined "recklessness" in Broad v. Rockwell International Corp., 642 F.2d 929,
961-62 (5th Cir.1981), cert. denied, 454 U.S. 965, 102 S. Ct. 506, 70 L. Ed. 2d 380 (1981):
Severe recklessness is limited to those highly unreasonable omissions or
misrepresentations that involve not merely simple or even inexcusable negligence,
but an extreme departure from the standards of ordinary care, and that present a
danger of misleading buyers or sellers which is either known to the defendant or is
so obvious that the defendant must have been aware of it.
As noted in Akin, 959 F.2d at 526 n. 2, although we used the modifier "severe", our
definition of recklessness is the same as applied by other circuits.
26
As discussed infra, subsequent to final judgment, appellants attempted to recharacterize the
primary violation (adding Rule 10b-9).
27
Contrary to appellants' assertions, the district court did not find genuine issues of material
fact concerning the existence of a primary securities violation; rather, noting appellants'
settlement with Equity, it merely assumed so to abbreviate its analysis.
simply "grist of the mill". We agree, and stress that appellants also failed to meet the scienter
requirement underlying the latter two elements of the prima facie case.28
First, we address appellants' assertion that Home and Graham had a duty to disclose the
contents of the Duane Memo. They urge, inter alia, that this duty of disclosure arises from Home's
status as their surety. Home and Graham counter by stating that generally, a surety has no legal duty
of disclosure. As our court noted in Akin, the "theory" of liability based on a special duty of
disclosure is "mushy and difficult to apply", as the source and scope of such a duty is not based on
any textual provision of the securities laws, but "appears to be a specie of federal common law". 959
F.2d at 526. We thus refrain from specifically defining the disclosure obligations of a surety and its
agent; rather, applying relevant factors annunciated by our court in First Virginia Bankshares v.
Benson, 559 F.2d 1307 (5th Cir.1977), cert. denied, Walter E. Heller & Co. v. First Virginia
Bankshares, 435 U.S. 952, 98 S. Ct. 1580, 55 L. Ed. 2d 802 (1978), and applied by other circuits, see
Arthur Young & Co. v. Reves, 937 F.2d 1310, 1330 (8th Cir.1991), cert. denied Reves v. Ernst &
Young, --- U.S. ----, 112 S. Ct. 1165, 117 L. Ed. 2d 411 (1992); Jett v. Sunderman, 840 F.2d 1487,
1493 (9th Cir.1988); Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir.1986), cert.
denied, 480 U.S. 946, 107 S. Ct. 1604, 94 L. Ed. 2d 790 (1987),29 we conclude that Home and Graham
did not have such a duty.
We first examine the parties "relative access to the information to be disclosed". First
Virginia Bankshares, 559 F.2d at 1314. To be sure, the summary judgment record reflects that
Home and Graham were privy to additional information due to their involvement with the issuance
of the bonds, and from Graham's prior dealings with Equity; however, as stated, the standard is
"relative access to the information to be disclosed ". Id. (emphasis added). Because appellants
28
As stated, we also assume that fact issues remain concerning Equity's violation of Rule 10b-
5. Home and Graham did not challenge appellants' evidence on this element (except with respect
to those who allegedly failed to read the PPM); and, as discussed, we do not have the benefit of a
district court ruling.
29
Of course, First Virginia Bankshares is also precedent for the Eleventh Circuit, because it
was decided before October 1, 1981. See Bonner v. Prichard, 661 F.2d 1206, 1209 (11th
Cir.1981) (en banc).
neglect to demonstrate that such access supplied Home and Graham with superior knowledge of the
allegedly misleading aspects of the PPM,30 this factor does not weigh in their favor.31
We next examine the benefit derived from the sale of securities. Home and Graham received
a premium of $257,060 for bonding a risk of almost $5 million. Given the risk of loss, this factor only
slightly supports a duty to disclose.
As for the third factor, "the defendant's awareness o f plaintiff's reliance on defendant in
making its investment decisions", id., appellants once again misconstrue their burden. They must set
forth evidence that they relied on Home and Graham in making their investment decisions, not that
they relied on misrepresentations in the PPM. There is no evidence that potential investors viewed
Home and Graham's involvement as approval of the merits of the investment, or otherwise relied on
Home and Graham, much less evidence that Home and Graham were "generally aware" of such
reliance. Rather, Home's identity as surety was not revealed until the first supplement to the PPM,
which also contained a disclaimer specifically included to prevent such reliance.32 Needless to say,
this factor does not support a duty to disclose.
30
By contrast, Glick stated by affidavit:
None of the information that affiant received from the Equity Group or its
securities counsel during the course of his activities described herein, whether oral
or written, and whether received prior or subsequent to affiant's receipt of the
PPM, in any way contradicted any of the information in the PPM.
31
The Duane Memo lacks probative value, as it was based solely on the PPM, see supra, which
was received by each appellant.
32
The supplement stated:
THE SURETY AND ITS AGENT HAVE NOT MADE ANY INVESTIGATION
OR DETERMINATION AS TO THE MERITS, OR RISKS, FINANCIAL OR
OTHERWISE, OF THE LIMITED PARTNERSHIP INVESTMENT AND
MAKE NO REPRESENTATION NOR EXPRESS ANY OPINION WITH
RESPECT THERETO,....
IN EXECUTING THE INVESTOR APPLICATION, EACH INVESTOR
ACKNOWLEDGES THAT SUCH INVESTOR HAS INDEPENDENTLY, AND
WITHOUT RELIANCE ON THE SURETY, MADE SUCH INVESTIGATION
AND INQUIRIES AS THE INVESTOR DEEMED NECESSARY AND
PRUDENT TO REACH A REASONABLE INVESTMENT DECISION WITH
RESPECT TO THE LIMITED PARTNERSHIP INVESTMENT.
Finally, we can quickly dispose of the fourth factor, "the defendant's role in initiating the
purchase or sale", id., as it is undisputed that neither Home nor Graham had contact with investors
regarding their investment decisions. In sum, we conclude from our analysis of the above factors that
Home and Graham did not owe appellants a duty of disclosure.
Appellants next maintain that even if Home and Graham lacked a duty to disclose, their
participation in the formation of the E-C partnerships constituted "substantial assistance", unusual in
scope and degree; thus, they need not prove conscious intent, only recklessness. Once again, we
disagree.
Although there is evidence that Home and Graham were included in discussions regarding the
possible failure to fully subscribe Courtside by the closing date, we agree with the district court that
there is no evidence that their role extended beyond that of a surety and bonding agent. Rather, the
only evidence of involvement by Home and Graham was their refusal to bond the remaining 40 units
under one partnership, and subsequent agreement to bond the units under four partnerships (the E-C
partnerships); decisions central to their designated function. We thus consider the above assistance,
even if substantial, see Insurance Co. of North America v. Dealy, 911 F.2d 1096, 1101 (5th Cir.1990)
("the routine extension of a loan does not amount to substantial assistance"), to be merely "grist of
the mill".33
33
The remainder of appellants' evidence on this issue is equally deficient. Namely, they urge
that a reasonable jury could conclude that Home and Graham's activities were not simply "grist of
the mill" in view of Graham's prior involvement with Equity, and the earlier discussed 1985
internal memorandum from Graham's Pine to Glick stating, inter alia, "Reaction to The Home
Insurance Company—positives & negatives compared to A.I.G. etc. Anything that he doesn't
like? Without Home, Courtside wouldn't have been done".
As for the former, we conclude that the summary judgment evidence of Graham's
involvement as bonding agent for other Equity projects, see supra note 19, does not create
the inference of particularly substantial or unusual assistance. Our finding to the contrary
in Akin, 959 F.2d at 531, is distinguishable. Suffice it to say, the scope and degree of
involvement by the defendant/accountant in Akin was far greater than that before us.
As for the latter, the above-quoted statement is perhaps probative evidence of
Home's substantial assistance, but it is not sufficient evidence from which a jury could
conclude that such assistance was unusual. Interpreting the statement, Pine explained that
Home was critical to the closing, and more helpful than A.I.G. (National Union Insurance
Company) due to its ability to efficiently process the multitude of documents. Of course,
contrary inferences are possible, including that urged by appellants; however, such an
Because appellants failed to establish either a duty of disclosure or atypical assistance, they
must provide evidence of conscious intent, rather than recklessness. (In considering whether they
meet this burden, we assume, without deciding, that Home and Graham's involvement constituted
substantial assistance.) The reco rd is devoid of such evidence; thus, summary judgment is
appropriate. See, e.g., Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1449 (5th Cir.1993) (internal
quotations omitted) ("Summary judgment, to be sure, may be appropriate, even in cases where elusive
concepts such as motive or intent are at issue, ... if the nonmoving party rests merely upon conclusory
allegations, improbable inferences, and unsupported speculation.").
With apparently good intentions, Graham forwarded the Duane Memo to Equity, and
suggested that Equity incorporate its counsel's suggestions. Home and Graham's continued
participation, despite Equity's failure to adopt some of the suggestions, does not signal their intent
to further the fraudulent scheme.34 As we stated in Abell, 858 F.2d at 1128, "[a]roused suspicions
... do not constitute actual awareness of one's role in a fraudulent scheme. Moreover, to prove plainly
inference is not sufficient to create a material fact issue.
34
In fact, in addition to appellants' evidence not creating a material fact issue on conscious
intent, we question whether it even establishes recklessness. Although the language in the Duane
Memo alerts Home and Graham to deficiencies in the PPM, it does not imply that they were
"highly unreasonable"; nor does correspondence between Glick and Equity indicate that it was so
construed. Rather, Glick requested Equity's "cooperation" in adopting Duane Morris's
suggestions, noting that "[f]rom past experience we have found that obtaining another viewpoint
on our clients' Memorandums has often resulted in some worthwhile improvement, both from a
legal and marketing standpoint". (Emphasis added.) Without expressing any opinion as to the
merits of Duane Morris's assessment, or discomfort with the adequacy of the Duane Memo, Glick
concluded: "I hope these comments will be helpful to you and that they will provide additional
comfort to The Home Insurance Company in conjunction with the issuance of its bond".
(Emphasis added.)
In addition, Glick testified that the supplemental PPM sufficiently addressed the
concerns of Home and Graham. Finally, in late December, 1984, Home and Graham
received an opinion letter from counsel for Courtside stating that
[n]othing has come to our attention, after inquiry, which would lead us to
believe that the Memorandum (except for the financial statements and other
financial and statistical data and the projections included therein, as to
which we do not express any belief), on the date of the Memorandum,
contained any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
that an alleged abettor intended to violate the securities laws, plaintiffs must prove more than that the
abettor recklessly ignored danger signals".
Likewise, Home and Graham's receipt of a reasonable premium for participation in the
transaction does not supply a motive. We agree with the Second Circuit that "almost any entity
playing a role in a securities transaction will have some economic motivation for doing so". National
Union Fire Insurance Co. v. Turtur, 892 F.2d 199, 207 (2nd Cir.1989).35
In sum, in view of the lack of evidence of intent, the district court properly disposed of
appellants' aiding and abetting claim.36
3. Fraud and Negligent Misrepresentation
Appellants maintain Home and Graham's failure to disclose misrepresentations and material
omissions in the PPM, brought to their attention through the Duane Memo, constitutes negligent
misrepresentation under Louisiana law.37 To prevail, Louisiana requires proof of actual reliance.
Abell, 858 F.2d at 1131 (applying Louisiana law).38 Upon reviewing the summary judgment record,
we agree with the district court that there is no evidence of reliance on those aspects of the PPM
specifically discussed in the Duane Memo.39
35
Appellants also point to Home and Graham's motive to close the deal once involved as
surety; however, because appellants did not contend in the district court that the formation of the
E-C partnerships was fraudulent, or that Home and Graham had knowledge of same, this motive,
standing alone, carries little weight.
36
Appellants' claims under the Louisiana Blue Sky Law were also properly dismissed, because
it is undisputed that Home and Graham were not sellers of securities as defined by § 12(2) of the
1933 Act. Abell, 858 F.2d at 1130-31.
37
It is undisputed that Louisiana law applies in this diversity case. Except as to the issue of
duty, discussed infra, appellants waived their fraud claim by failing to properly brief the issue.
See infra note 50.
38
Negligent misrepresentation is encompassed within the broad language of articles 2315 and
2316 of the Louisiana Civil Code. Devore v. Hobart Mfg. Co., 367 So. 2d 836, 839 (La.1979).
In order to recover, the plaintiff must show (1) a legal duty to supply correct information; (2)
breach; and (3) damages resulting from justifiable reliance on the misrepresentation. Commercial
Nat. Bank v. Audubon Meadow Part., 566 So. 2d 1136, 1139 (La.App. 2d Cir.1990).
39
Of the five appellants: (1) Koerner could not recall reading the PPM and provided no
pertinent testimony regarding reliance; (2) Parrish possibly read parts of the PPM, but could not
recall any specifics nor did he provide pertinent testimony as to factors influencing his investment
decision; (3) Sibley skimmed the PPM, "not really" relying on its contents but instead relying on
In fact, on appeal, appellants do not challenge the court's finding on reliance;40 rather, for
both fraud and negligent misrepresentation, they focus solely on the erroneous proposition that duty
of care is a complex issue of fact not suitable for summary judgment. See Commercial Nat. Bank,
566 So. 2d at 1140 (stating that the existence of a duty is a question of law); see also Hibernia Nat.
Bank v. Carner, 997 F.2d 94, 98 (5th Cir.1993) ("it is insufficient for the nonmovant to argue in the
abstract that the legal theory involved in the case encompasses factual questions"). Needless to say,
this assertion of error is wholly without merit.
4. Indemnity Agreements
Appellants maintain that fact issues remain concerning the enforceability of their indemnity
agreements.41 Relying on National Union Fire Insurance Co. v. Turtur, 892 F.2d 199 (2d
Cir.1989),42 they urge that where a surety receives an indemnity agreement from the investor in return
oral representations that the project was "low risk" and catered to professionals (which are both
inconsistent with the PPM); and (4) Turnbull did not read the PPM, and in fact would not have
invested had she done so; instead, she relied on her accountant who focused on tax projections;
although he read the PPM, there is no evidence of actual reliance on specific misrepresentations
or material omissions in it, except for references to the stated fair market value contained in Teel's
appraisal, which is irrelevant given the district court's conclusion (in support of summary
judgment for Teel) that appellants failed to show that the appraisal was misleading.
Of course, Home and Graham are not responsible for oral misrepresentations
inconsistent with, or not pertinent to, aspects of the PPM discussed in the Duane Memo,
as appellants' action against them is based on appellees' failure to correct or otherwise
disclose misleading information referenced in the Duane Memo, and their continued
participation in the Courtside transaction despite their knowledge of same.
40
In their motion for summary judgment, Home and Graham specifically pointed to appellants'
failure to allege actual reliance in support of the state law claims of fraud and negligent
misrepresentation. In response, appellants failed to point to specific evidence of reliance; nor did
they do so in their motion for a new trial, despite the district court's finding. And, as stated, they
fail to assert error on appeal. As a result, our review of the record is without assistance from
those with the burden of proof.
41
As stated supra, the investors sought rescission of the agreements; Home counterclaimed for
their enforcement. The district court granted summary judgment in favor of Home on the
rescission action and subsequently granted it on Home's counterclaim. On appeal, appellants
focus on the latter.
42
In Turtur, National Union issued a bond in exchange for the investor's execution of an
indemnification agreement, which was attached to the PPM. The Second Circuit held that, if the
indemnification agreement and the subscription agreement are considered under New York law as
interdependent, "a fraudulent inducement as to one of the contracts might [ ], in at least some
situations, excuse performance by the defrauded party of the other contract". Id. at 204
for bonding the investor's obligations, and the separate subscription and indemnity agreements are
executed contemporaneously, fraudulent inducement in the subscription agreement renders the
indemnity agreement likewise fraudulently induced and thus unenforceable. Finding no basis for the
foregoing proposition under federal or Louisiana law,43 we reject it.
In Dealy, we held that an indemnity agreement is unenforceable due to fraud in the
subscription agreement where the surety was "a party to the fraud [as an aider or abettor] or a
coconspirator in it". 911 F.2d at 1100.44 We thus apply the reasoning of Dealy, and conclude that
because appellants have failed to produce more than a scintilla of evidence of Home and Graham's
involvement in the alleged fraud, see supra, federal law does not provide a defense.
Our analysis of Louisiana law produces the same result. Even if we construe the indemnity
and subscription agreements as interdependent,45 we conclude that appellants, at a minimum, must
meet the requirements of La.Civ.Code.Ann. art 1956, which provides: "Fraud committed by a third
person vitiates the consent of a contracting party if the other party knew or should have known of
the fraud".46 Cf. Breaux v. Equity Group, 1989 WL 1764 *2, 1989 U.S.Dist. LEXIS 235 *5
(emphasis added). The Second Circuit reversed the grant of summary judgment because fact
issues remained on the interdependency vel non of the agreements. Id. at 205.
43
It has been agreed in the district court and on appeal that the indemnity agreements should be
construed under Louisiana law.
44
There, an investment bond insurer brought suit against the insured, an investor in a limited
partnership. Like the case at bar, the investor paid partly in cash and partly in the form of a
promissory note payable to the partnership. The partnership in turn secured a loan with the
investor's note, which the surety bonded in return for an indemnity agreement executed by the
investor. Subsequent to the investor's default, the surety brought suit against the investor to
enforce the indemnity agreement. In defense, the investor asserted that the indemnification
agreements were contracts related to a securities fraud and thus unenforceable. Id. at 1098, 1100.
45
We emphasize that we are assuming, for purposes of our discussion, that the agreements
should be considered interdependent under Louisiana law. Compare General Ins. Co. v. Fort
Lauderdale Partnership, 740 F. Supp. 1483, 1488 (W.D.Wash.1990) (distinguishing Turtur and
concluding, that, under Washington law, the indemnification agreement was independent).
46
Turtur is not necessarily inconsistent. There the court concluded that appellants had raised a
fact issue as to whether the bond insurer was "a party to any fraud or illegality affecting the
[Notes]". 892 F.2d at 205; see Bruce v. Martin, 1993 WL 148904, ** 10, 11, 1993
U.S.Dist.LEXIS 5776, ** 32, 33 (S.D.N.Y. April 28, 1993) (restricting Turtur to "a situation
where the fraud in the inducement of the subscription agreements ... was the same fraud to which
(E.D.La.1989).
To satisfy article 1956, appellants must not only show that a reasonable jury could find the
requisite knowledge based on the Duane Memo (and subsequent insertion of exculpatory language
in the PPM), but, also, that error resulting from the alleged misrepresentations and material omissions
contained in the PPM, and referenced in the Duane Memo, "substantially influenced that consent".
La.Civ.Code.Ann. art. 1955. Because the summary judgment record is lacking on evidence of
reliance, see supra note 39, appellants' fraud defense fails. See In re J.M.P., 528 So. 2d 1002, 1010
(La.1988) (stating that to vitiate consent on the ground of fraud, "the party who asserts that the
obligation is null must prove some type of causal relationship between his consent and the vice that
influenced it").47
Appellants next assert that even if the indemnity agreement is independent, rather than
interdependent, and thus unaffected by fraud in the inducement of the subscription agreement, it does
not obligate them to indemnify Home. A contract of indemnity is construed in accordance with the
general rules governing contract interpretation—"[w]hen the words of a contract are clear,
unambiguous, and lead to no absurd consequences, the contract is interpreted by the court as a
matter of law." Carter v. BRMAP, 591 So. 2d 1184, 1188 (La.App. 1st Cir.1991) (emphasis in
original). "Agreements to indemnify are strictly construed and the party seeking to enforce such an
agreement bears the burden of proof." Liem v. Austin Power, Inc., 569 So. 2d 601, 608 (La.App. 2d
Cir.1990).
The indemnity agreement provides:
The [investor] will protect, indemnify, and save harmless [Home] from and against any and
all liability, loss, costs, damages, fees of attorneys, and other expenses which [Home] may
sustain or incur under or in connection with the Bonds hereunder, or in connection with this
Agreement, for:
the surety was alleged to be a party").
47
We also reject appellants' attempt to nullify the indemnity agreement based on the "failure of
cause". "Cause is the reason why a party obligates himself". La.Civ.Code.Ann. art. 1967.
According to appellants, "[i]f the partnership agreement is extinguished by fraud, the cause for the
indemnity contract no longer exists". This, of course, cannot be; otherwise, the validity of all
such indemnity agreements would unconditionally hinge on the validity of the separate
subscription agreement.
.....
(c) all demands, liabilities, losses, charges and expenses of every kind, which [Home] may
become liable to pay or have paid by reason of or in consequence of the execution by [Home]
of the Bonds in favor of the [investor].
The referenced bonds provide that "[a] default occurs regardless of whether the Principal for any
reason shall have no legal obligation to discharge his, her or its obligations under the Notes to the
Obligee or the Permitted Assignee whichever holds the Note(s) which are guaranteed in part by the
Surety ". (Emphasis in original.) In the same paragraph, Home waives its defenses to payment.48
In view of this language, we conclude that the indemnity agreement encompasses fraud;
however, even if we accept appellants' assertion that the contract is ambiguous and thus look outside
the contract to discern the parties' intent, appellants nonetheless fail to create a material fact issue.
The first supplement to the PPM evidences Home's intent that the indemnity agreement impose an
unconditional obligation on the investors.49 Appellants, on the other hand, did not adduce evidence
demonstrating their intent. Accordingly, uncontradicted evidence establishes that the indemnity
agreements do not provide a defense to enforceability. See Carter, 591 So. 2d at 1192 (granting
summary judgment where nonmovant failed to raise a genuine issue of material fact as to the
contract's proper interpretation).
We summarily dismiss appellants remaining two bases for nullifying their obligations.50 First,
48
The bonds provide: "Surety waives for the benefit of the Permitted Assignee only all
defenses of any kind either Surety or any Principal might have with respect to any or all Note(s)
or the obligation to pay any or all Note(s) up to the Sub-Limit of Liability applicable on each
Note or the Limit of Liability as defined herein ". (Emphasis in original.)
49
It states:
Because each investor's obligation to the Surety under the Indemnification and
Security Agreement is unconditional, the result may be that the investor will be
obligated to make payments to the Partnership or a financial institution even
though it may have a claim against the lender of the Term Debt or the Partnership.
The essence of the Financial Guarantee Bond is that each investor's obligation to
make payments on the Installment Notes are absolute and may not be avoided or
postponed for any reason.
50
In addition, we refuse to consider those issues that were not raised in district court ("the
abuse of rights doctrine"), or properly briefed on appeal (La.Civ.Code Ann. art. 1759 and 1772).
See Jernigan v. Collins, 980 F.2d 292, 297 n. 1 (5th Cir.1992) (issues waived if presented for the
first time on appeal), cert. denied, --- U.S. ----, 113 S. Ct. 2977, 125 L. Ed. 2d 675 (1993); United
appellants' reliance on codal suretyship arguments is misplaced. They seek to nullify the indemnity
agreements, not their obligation to Home arising from Home's issuance of the bonds.51 As stated in
Commercial Union Ins. Co. v. Melikyan, 430 So. 2d 1217, 1221 (La.App. 1st Cir.1983), a contract
on indemnity is different from a contract on suretyship:
The contract of indemnity forms the law between the parties and must be interpreted
according to its own terms and conditions.... [I]n an indemnity contract, the principal and
indemnitors can be bound to the surety in any manner they elect in consideration of the surety
issuing the bond covering the principal obligation.52
Second, we reject appellants' attempt to void the indemnity agreements pursuant to § 29(b)
of the 1934 Act, 15 U.S.C. § 78cc(b).53 The indemnity agreements, standing alone, were not made
or performed in violation of the securities laws.54 See, Regional Properties, Inc., 678 F.2d at 561 n.
16.
In sum, appellants failed to establish a material fact issue regarding the enforceability of the
indemnity agreements. Accordingly, in view of their plain meaning, we conclude, as a matter of law,
that investors are obligated to Home, and thus affirm the summary judgment. In so doing, we
complete our review of the summary judgment, and turn to appellants' contentions concerning the
district court's post-judgment rulings.
B. Post-Judgment Rulings
Appellants object to the rulings on their attempt to rely on a newly raised legal theory as a
Paperworkers Int'l Union v. Champion Int'l Corp., 908 F.2d 1252, 1255 (5th Cir.1990) (same
regarding issues raised for the first time in a reply brief).
51
Pursuant to La.Civ.Code Ann. art. 3052, a surety who has paid the debt of a principal/debtor
has a right of indemnification from the debtor, subject to certain restrictions.
52
See also Liem, 569 So. 2d at 608 (reiterating that the indemnity contract "forms the law
between the parties," and noting that "[t]he purpose of an indemnity agreement is to allocate the
risk inherent in the activity between the parties to the contract").
53
Under § 29(b), an innocent party may avoid a contract if (1) the contract was made or
performed in violation of the securities laws; (2) the plaintiff is in contractual privity with the
defendant; and (3) the plaintiff is in the class of persons the statute was designed to protect.
Regional Properties, Inc. v. Financial & Real Estate Consulting Co., 678 F.2d 552, 559 (5th
Cir.1982).
54
As stated supra, they maintain that the fraudulently induced subscription agreements
rendered the indemnity agreements unenforceable.
basis for reconsideration of the summary judgment. Judgment was entered on January 31, 1992. Ten
days later (February 10), appellants moved for a new trial (Fed.R.Civ.P. 59), reiterating arguments
presented in their pre-judgment motions.
A month later (March 9), appellant-investor Turnbull enrolled new counsel, who, on March
27, filed a motion for leave to file a supplemental memorandum in support of the February 10 motion.
The supporting memorandum, adopted by the other plaintiff-investors, asserted for the first time that
Home and Graham had aided and abetted Equity in violation of Rule 10b-9, issued under § 10(b) of
the 1934 Act.55 The court denied the motion for leave to supplement, stating that "[t]he issues raised
in this supplemental memo have never been presented before". Turnbull requested reconsideration.
On April 1, the parties argued the merits of the original (February 10) motion for a new trial.
In addition, Turnbull urged that the court consider the Rule 10b-9 theory presented in the
supplemental memorandum (which the court had not allowed to be filed), and gave a brief overview
of the applicable law. The court agreed with Home and Graham that Rule 10b-9 had not been raised
in six years of litigation, and thus refused to consider the new theory/issue. The court also denied the
motion for a new trial.
55
Rule 10b-9 states in pertinent part:
It shall constitute a manipulative or deception device or contrivance, as used in
section 10(b) of the Act, for any person, directly or indirectly, in connection with
the offer or sale of any security, to make any representation:
.....
(2) to the effect that the security is being offered or sold on any other basis
whereby all or part of the consideration paid for any such security will be refunded
to the purchaser if all or some of the securities are not sold, unless the security is
part of an offering or distribution being made on the condition that all or a
specified part of the consideration paid for such security will be promptly refunded
to the purchaser unless (i) a specified number of units of the security are sold at a
specified price within a specified time, and (ii) the total amount due to the seller is
received by him by a specified date.
17 C.F.R. § 240.10b-9 (1992) (emphasis in original). "Once the part or none
representation has been made, it may not be circumvented by transactions primarily
designed to create the appearance of a successful offering in order to avoid the refund
feature of the offering". C.E. Carlson, Inc. v. S.E.C., 859 F.2d 1429, 1434 (10th
Cir.1988).
Appellants do not dispute the district court's disposition of their motion for a new trial;
rather, they object to its refusal to consider Turnbull's supplemental memorandum. For starters, they
contend that simply by raising § 10(b) early on, they put in issue any and all rules adopted pursuant
to it. Obviously, this contention is totally without merit. It goes without saying that, in order to be
properly raised, an issue must be more specifically framed than as appellants claim. Otherwise, the
court, not the parties, would be charged with deciding which claims should be pursued.
Appellants also use more specific approaches to attempt to save this new issue. "[A] trial
court may in the exercise of its sound discretion allow a tardy amendment stating an additional
ground for a new trial." Dotson v. Clark Equipment Co., 805 F.2d 1225, 1228 (5th Cir.1986)
(emphasis in original). The district court certainly did not abuse its discretion, considering the basis
for the motion, the length of delay, and the lack of explanation for not having timely raised the issue.
First, we agree with the district court that the Rule 10b-9 theory is "new". (In fact, at the
April 1 hearing, Turnbull's counsel admitted that a new theory was being presented: "I suggest that
all the facts are before the Court, have been before the Court, and this is simply another theory."
(Emphasis added.)) As is apparent from Turnbull's post-judgment efforts and brief on appeal,
appellants' theory requires the assertion of legal issues not previously raised;56 the introduction of
additional evidence;57 and the analysis of a different law.58
56
As appellants point out, Rule 10b-9 is often coterminous with Rule 10b-5; see Carlson, 859
F.2d at 1434 (stating Rule 10b-5 proscribes conduct violative of Rule 10b-9); however, the
reverse is less often true. Here, for example, appellants' Rule 10b-5 theory was not based on
misrepresentations surrounding the alleged "part-or-none offering". Accordingly, among the
issues discussed at length by appellants for the first time were (1) whether Courtside was a
part-or-none offering; (2) whether investor funds were used by Equity without first meeting the
minimum offering amount; and (3) whether the minimum offering amount was reached through
non-bona fide purchases.
Appellants' assertion that these arguments were raised previously is not supported
by the record. Evidence of the formation of the E-C partnerships was used primarily to
establish Home and Graham's involvement with Equity, not to establish that formation of
those partnerships contravened the terms of the offering in violation of § 10 and Rule 10b-
5.
57
After the district court's refusal to reopen the case, Turnbull filed a motion requesting that
her supplemental memorandum (with attached deposition excerpts and exhibits) be included in the
record for appeal purposes, which the court denied, stating: "Mrs. Turnbull's request and her
reasons for that request are in the record. That, the court permitted". Turnbull then filed a
The court was under no obligation to permit appellants to interject a new legal theory, without
explanation, after they had failed to do so during three years of discovery, two additional years
between the court's granting summary judgment and entering judgment, and almost two months
following that entry. See Allied Bank-West, N.A. v. Stein, 996 F.2d 111, 115 (5th Cir.1993) (internal
quotations omitted) ("[m]otions for new trial cannot be used to argue a case under a new legal
theory"); Simon v. United States, 891 F.2d 1154, 1159 (5th Cir.1990) (stating same with respect to
a motion to alter or amend);59 see also Russ v. International Paper Co., 943 F.2d 589, 593 (5th
Cir.1991) (denying Rule 59(e) motion for reconsideration because plaintiff did not explain his failure
to submit evidentiary materials prior to judgment).60 As stated, the district court did not abuse its
discretion.
III.
second motion to supplement the record with approximately 150 pages of deposition excerpts
relating to her Rule 10b-9 theory. The court, referring to Topalian v. Ehrman, 954 F.2d 1125
(5th Cir.1992), again denied her attempt to include materials in the appellate record that were not
before the district court, stating: "I think they don't belong here. I didn't consider them. There
was a new issue that your client is attempting to inject in this record at this late date and I'm just
going to not rule in your favor".
Even if the court abused its discretion in refusing to allow Turnbull to supplement
the record for appeal, any error is harmless, because our review is limited to the record
before the district court when it ruled. See Topalian, 954 F.2d at 1131-32 n. 10 ("This
court's inquiry is limited to the summary judgment record before the trial court: the
parties cannot add exhibits, depositions, or affidavits to support their positions on
appeal."). For the same reason, we refuse to consider that evidence as it appears in
Turnbull's record excerpts.
58
In fact, this circuit has not yet determined whether Rule 10b-9 provides a private cause of
action, and, if so, whether that encompasses a claim based on allegations of aiding and abetting.
See Bormann v. Applied Vision Systems, Inc., 800 F. Supp. 800, 806 (D.Minn.1992) (concluding
private action exists under Rule 10b-9); accord Beaumont v. American Can Co., 797 F.2d 79, 84
(2d Cir.1986) (questioning existence of private remedy for violations of Rules 10b-6 and 10b-13).
59
Of course, in keeping with the district court's "considerable discretion" in deciding whether
to reopen a case, we do not read these cases to imply that it lacks discretion to consider a new
legal theory on a post-judgment motion. See United States use of American Bank v. C.I.T.
Const., Inc., 944 F.2d 253, 259 n. 8 (5th Cir.1991) ("district court possesses the discretion to
consider a claim raised for the first time in a posttrial motion").
60
It follows that the court did not abuse its discretion by refusing to review the merits of the
supplemental memorandum. Once the court considered the above factors, it was under no
obligation to do so.
For the foregoing reasons, the judgment of the district court is
AFFIRMED.