883 F.2d 1023
NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.
Edward B. BURR, Benjamin F. Brooks; Kay Burr; Butler Bros.
Insurance Agency, Inc.; Fisher Contracting Co.; Robert
Goldwater, Sr., Jean L. Grace, Randell R. Grace, Catherine
Greengard, Daniel Greengard, Phil Hanson, Fred Knowels,
Anthony Martori, Arthur J. Martori, Edward Martori, Lois Sue
Martori, Ruth Martori, Sherry Martori, Steven Martori,
Robert E. Rhue, Jane Rosenbaum, et al., Plaintiffs-Appellees,
INLAND DRILLING CO., INC., Barry Peacock, Technical Mgt,
Inc., Edward B. Vallone, II, John T. White, Young Smith &
Peacock Inc., Andrew A. Levy, individually and on behalf of
marital community, W. Randolph Wheeler, individually and on
behalf of marital community, Defendants-Appellants.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted June 26, 1989.
Decided Aug. 21, 1989.
Before JAMES R. BROWNING, PREGERSON and DAVID R. THOMPSON, Circuit Judges.
Defendants Inland Drilling Company ("Inland"), Andrew A. Levy ("Levy") and W. Randolph Wheeler ("Wheeler") appeal the district court's grant of summary judgment in favor of plaintiffs on their rescission claim under Ariz.Rev.Stat. Sec. 44-1991 (Count 7). Defendants present three issues on appeal: (1) whether the district court erred in determining that no genuine issue of material fact existed regarding alleged misrepresentations and omissions of fact in the offering memorandum; (2) whether the district court erred in concluding that defendants had waived their statute of limitations defense; and (3) whether the district court erred in awarding the remedy of rescission. We have jurisdiction under Sec. 1291 and we affirm.
Defendants Levy and Wheeler were general partners of Canyon Gas and Oil 1979-3 ("1979-3"), an Arizona limited partnership, which offered tax shelter limited partnership interests to plaintiffs between December 1, 1979 and December 27, 1979. Prior to the formation of 1979-3, the accounting firm Peat, Marwick, Mitchell & Company ("PMM") was retained to prepare certified financial statements for Buckeye Petroleum Company ("Buckeye"), another general partner of 1979-3. Inland Drilling Company was a subsidiary of Buckeye. In February 1979, an officer of Buckeye told PMM that he believed Buckeye and its affiliates were experiencing serious financial difficulties, and were commingling funds. In response to PMM's inquiries, Levy admitted that funds were being commingled. He also admitted that outside counsel was conducting an internal investigation regarding the alleged misuse of funds, an allegation he denied. PMM stated it wanted the commingling and the internal investigation disclosed to investors. Levy took the position that no disclosure to the limited partners was required but he agreed to retain outside counsel to render an opinion regarding disclosure of the commingling of funds.
Buckeye initiated the 1979-3 offering on December 1, 1979 without a disclosure statement regarding the commingling of funds. Later when Buckeye's outside counsel concluded that they would not be able to render an opinion that disclosure of the commingling was not necessary, PMM insisted that Buckeye disclose the commingling to the 1979-3 investors. Levy refused to do so. As a result, on December 26, 1979, PMM resigned.
After PMM's resignation, Buckeye retained Alexander Grant & Company ("Alexander") to perform a certified audit for 1979. Alexander issued certified statements on October 31, 1980. The statements showed an accumulated deficit of $214,974, including a current year's loss of $166,311. In addition, the statements indicated a working capital deficit at December 31, 1979 of $14,673.731. Alexander's notes to the financial statements stated that Buckeye's ability to continue as a going concern depended on the success of future operations and obtaining additional debt or equity capital and upon liquidating certain assets. Furthermore, these notes disclosed that Inland was returning some of the money advanced to it by Buckeye, which used a portion of the funds to purchase oil and gas properties for its own account. In December 1983, one of Buckeye's creditors filed an involuntary bankruptcy petition against Buckeye under Chapter 11 of the Bankruptcy Act. This was subsequently converted into a Chapter 7 proceeding.
Plaintiffs filed their complaint on February 28, 1984. They alleged various federal and Arizona securities violations, including claims under 15 U.S.C. Sec. 77(1 )(2) (civil liabilities arising in connection with prospectuses and communications) (Count 2) and Ariz.Rev.Stat. Sec. 44-1991 (fraud in the purchase or sale of securities) (Count 7). Plaintiffs filed a motion for partial summary judgment on Counts 2 and 7. Defendants responded by moving for summary judgment on the federal claim (Count 2) based on the statute of limitations. The district court granted defendants' motion on Count 2. Defendants did not mention the statute of limitations as a defense to Count 7. Thus, when the district court ruled on plaintiffs' motion for summary judgment on Count 7, it concluded that the defendants' statute of limitations defense had been waived. The district court further determined that there were misrepresentations and omissions in the Offering Memorandum, beyond dispute of any genuine issue of material fact, gave summary judgment to the plaintiffs, and awarded them the remedy of rescission.
A. Summary Judgment
A district court's decision to grant summary judgment is reviewed de novo, "in the light most favorable to the nonmoving party, to determine whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law." Ashton v. Cory, 780 F.2d 816, 818 (9th Cir.1986).
In Count 7, plaintiffs alleged that Inland and its parent company, Buckeye, violated Ariz.Rev.Stat. Sec. 44-1991 in that they: (1) failed to divulge material information about their insolvency in the 1979-3 limited partnership and the Private Offering Memorandum was silent as to this fact; and (2) misappropriated partnership funds. The plaintiffs based their rescission claim on the fact that the 1979-3 Private Offering Memorandum did not contain adverse financial data which was disclosed by the audited financial statements which were put out following the private offering.
The applicable Arizona statute provides in pertinent part:
It is fraudulent practice and unlawful for a person, in connection with a transaction ... involving an offer to sell or buy securities, or a sale or purchase of securities ... directly or indirectly to do any of the following:
1. Employ any device, scheme or artifice to defraud.
2. Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.
3. Engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit.
Ariz.Rev.Stat. Sec. 44-1991. Arizona case law establishes that neither scienter, State v. Gunnison, 127 Ariz. 110, 113, 619 P.2d 604, 607 (1980), nor reliance, Trimble v. American Sav. Life Ins. Co., 152 Ariz. 548, 552, 733 P.2d 1131, 1135 (Ct.App.1986), are necessary elements of proof to find liability under section 44-1991.
Defendants contend that Levy and Wheeler, as general partners, each had a net worth in excess of $500,000 and that this information was included in the 1979-3 Memorandum. In addition, defendants maintain that Buckeye was meeting all of its obligations and that all of the 1979-3 wells had been drilled. They contend the district court erred in granting plaintiffs' motion for summary judgment because the financial information omitted from the Offering Memorandum was not material and, in any event, questions about materiality of nondisclosure of Buckeye's financial condition and commingling of funds should have been left to a jury.
Defendants rely on Caravan Mobile Home Sales, Inc. v. Lehman Bros. Kuhn Loeb, Inc., 769 F.2d 561 (9th Cir.1985). In Caravan, trustees of two employees trusts brought suit against a stockbrokerage over losses sustained on Nucorp securities. They claimed that the defendants failed to disclose material information about Nucorp prior to Caravan's purchases. The district court granted the defendants' motion for summary judgment, holding that there were no triable issues of fact. Id. at 563. On appeal, plaintiffs maintained that summary judgment is normally inappropriate for determining materiality of undisclosed information. Id. at 564. We agreed, and stated that a "district court should not take the case from the jury ... unless reasonable minds could not differ on the determination of the materiality of the withheld information." Id. at 565 (citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976)). Nevertheless, we affirmed the summary judgment because the plaintiffs had failed to provide sufficient evidence to support their claim that the defendants knew of the undisclosed financial problems at the time Caravan purchased the securities and "because reasonable minds would not disagree" that the information was not material. Id. at 565-67.
Defendants' reliance on Caravan is misguided. Caravan involved the question of whether the brokerage could determine from information available to it that the issuer was having financial difficulty. Here, the defendants were the general partners of the limited partnership and were clearly aware of the financial condition of Buckeye and Inland. The financial condition was vital to the success of the limited partnership. If Buckeye could not continue to operate, the partnership's viability was in jeopardy. As to the materiality of this information, we have previously stated that information regarding the financial condition of a company is inherently material. "[T]he materiality of information relating to the financial condition, solvency and profitability [of an enterprise] is not subject to serious challenge." Securities & Exch. Comm'n v. Murphy, 626 F.2d 633, 653 (9th Cir.1980).
With respect to misappropriation of funds, plaintiffs contend that funds raised in the 1979-3 offering were used to meet the obligations of prior offerings and that Inland had advanced funds to Buckeye out of turnkey drilling funds.1 As support for these statements, plaintiffs rely on documents they obtained by subpoena from PMM.2 The defendants maintain that these allegations of misappropriation, which are based on PMM records, are hearsay, citing Rossi v. Trans World Airlines, Inc., 507 F.2d 404, 406 (9th Cir.1974) (party's own affidavit in support of fraud and corruption claim contained inadmissible hearsay), and that some of the documents were inadmissible under Fed.R.Evid. 407 because they addressed misappropriation in subsequent disclosures in a later offering.
The district court, however, did not consider the issue of whether the defendants had misappropriated partnership funds. The court focused on the Private Offering Memorandum and concluded that it contained "numerous material misrepresentations and omissions of fact." (Docket No. 294). The district court had ample evidence to so conclude. The audited financial statements prepared by Alexander Grant & Company clearly showed that Buckeye was in serious financial condition, the contents of the Offering Memorandum itself were sufficient to support the district court's conclusion, and the challenged documents were authenticated by Levy and Wheeler at deposition.
We conclude that the district court did not err in determining that there were no genuine issues of material fact regarding the clear misrepresentations and omissions in the Offering Memorandum. Summary judgment was appropriately granted on Count 7.
B. Waiver of Statute of Limitations
The district court determined that the defendants had waived their statute of limitations defense as to Count 7 because they failed to raise it in their pleadings or in response to plaintiffs' motion for summary judgment. (Docket No. 294). The question whether an affirmative defense has been waived involves an interpretation of a rule of civil procedure; it is a question of law which we review de novo. Harbeson v. Parke Davis, Inc., 746 F.2d 517, 520 (9th Cir.1984).
The applicable statute of limitations is found in Ariz.Rev.Stat. Sec. 44-2004 which provides in pertinent part:
B. No civil action shall be brought under this article to enforce any liability ... unless brought within two years after discovery of the fraudulent practice upon which the liability is founded, or after such discovery should have been made by the exercise of reasonable diligence.
Ariz.Rev.Stat. Sec. 44-2004. Since state law provides the substantive rule of decision, we apply Arizona law to determine who bears the burden of proof as to the statute of limitations. See Palmer v. Hoffman, 318 U.S. 109, 117 (1943). Rule 8(d) of the Arizona Rules of Civil Procedure provides that a statute of limitations defense is an affirmative defense.3 Under Arizona law, the burden of proof as to an affirmative defense is on the defendant. Kerwin v. Bank of Douglas, 93 Ariz. 269, 273, 379 P.2d 978, 981 (1963).
Defendants contend that the district court erred in ruling that they had waived this defense. They rely on Celotex Corp. v. Catrett, 477 U.S. 317 (1986). But Celotex is of no help to them. In Celotex, plaintiffs filed a wrongful death action based on alleged exposure to asbestos. The district court granted defendant's motion for summary judgment. Id. at 320. The court of appeals reversed, holding that summary judgment was precluded absent a showing of evidence which would negate plaintiff's claims. Id. at 321. The United States Supreme Court reversed, holding that the responsibility for raising a factual dispute falls on the party who bears the burden of proof. Id. at 322-23. Here, the defendants bore the burden of proof of their statute of limitations defense. It was their obligation to raise this defense as an issue in response to the plaintiffs' motion for summary judgment. They failed to do so. Thus, the district court did not err in concluding that the statute of limitations defense had been waived.
C. Tender of Limited Partnership Interests
Defendants next contend that the district court abused its discretion in granting plaintiffs rescission on Count 7 because plaintiffs failed to tender their limited partnerships units to defendants in accordance with Arizona law. Authority for rescission of a securities sale under Arizona law is found in section 44-2001 which provides in pertinent part:
A sale or contract for sale of any securities to any purchaser ... is voidable at the election of the purchaser, who may bring an action in a court of competent jurisdiction to recover the consideration paid for the securities ... upon tender of the securities purchased or the contract made, or for damages if he no longer owns the securities.
Ariz.Rev.Stat. Sec. 44-2001. Defendants claim that although plaintiffs have offered to tender their investments, there has been no deposit of the investment certificates with the court or the defendants. Defendants also contend that plaintiffs did not seek rescission within a reasonable period of time. See Wean Water, Inc. v. Sta-Rite Industries, Inc., 141 Ariz. 315, 317, 686 P.2d 1285, 1287 (Ct.App.1984) (court rejected rescission because of continued acceptance of benefits and failure to notify of intention to rescind within a reasonable period of time). Furthermore, they argue that "[w]hat is a reasonable time is a question of fact for the trier of fact unless the facts are such that only one inference could be derived therefrom in which case it would become a question of law." Mahurin v. Schmeck, 95 Ariz. 333, 340, 390 P.2d 576, 580 (1964).
We have examined the allegations of the plaintiffs' complaint and conclude they are sufficient to effect a tender. "Where a purchaser seeks rescission of an unlawful sale of securities, the general view is that tender to the issuer or to the court at the commencement of the action is sufficient." Rose v. Dobras, 128 Ariz. 209, 214, 624 P.2d 887, 892 (Ct.App.1981). Furthermore, since rescission was sought in the complaint and there is no evidence that plaintiffs delayed electing rescission to see if avoidance or affirmance would be more profitable, it was sought within a reasonable period of time. Id.4
We conclude that the district court did not err in granting plaintiffs the remedy of rescission.
D. Plaintiffs' Request for Attorney Fees
Under Arizona law an award of attorney fees in this case is permissive and discretionary. Autenreith v. Norville, 127 Ariz. 442, 444, 622 P.2d 1, 3 (1980); Earven v. Smith, 127 Ariz. 354, 358, 621 P.2d 41, 45 (Ct.App.1980). We have carefully considered the plaintiffs' request for attorney fees, and conclude that fees should not be awarded in this case. Accordingly, the request for attorney fees is denied.
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3
Turnkey contracts are agreements to drill to a certain depth or formation in exchange for a fixed fee
These documents were originally obtained in connection with a parallel case involving Buckeye. (Breunig v. Buckeye Petroleum Company, No. CIV 83-2410)
The language of the Arizona rule is identical to Rule 8(c) of the Federal Rules of Civil Procedure. Thus, applying federal or state law yields the same result
Defendants also raise the question whether plaintiffs still own their investments because of various settlements reached between plaintiffs and other defendants. However, the district court's judgment awarded the partnership interests to the defendants and they are entitled to them providing they honor the judgment. See Fed.R.Civ.P. 70