You are viewing a free summary from Descrybe.ai. For citation and good law / bad law checking, legal issue analysis, and other advanced tools, explore our Legal Research Toolkit — not free, but close.

Buford White Lumber Co. v. Octagon Properties

Citations: 740 F. Supp. 1553; 1989 U.S. Dist. LEXIS 16931; 1989 WL 222454Docket: CIV 88-1829-R

Court: District Court, W.D. Oklahoma; May 11, 1989; Federal District Court

EnglishEspañolSimplified EnglishEspañol Fácil
Plaintiffs, Buford White Lumber Company Profit Sharing and Savings Plan, filed an Amended Complaint against Defendant Andrews Davis Legg Bixler Milsten Murrah, Inc., alleging violations of federal and state securities laws. The Plaintiffs claim that the Defendant prepared misleading prospectuses and offering documents for the sale of limited partnerships and stock in Octagon Properties, Ltd., which were intended for potential investors. Specifically, they allege that a stock offering document from February 1986 contained false statements about Octagon's financial condition. Plaintiffs assert that the Defendant either knew or should have known about these inaccuracies but failed to verify the information or include independent financial data.

The Plaintiffs argue that the Defendant had a legal obligation to ensure the truthfulness of the statements in the offering documents and to register the securities, which they claim were neglected. They contend that had the Defendant exercised due diligence, they would not have made their investments, thus avoiding their financial losses. The Plaintiffs also assert that the Defendant acted with recklessness or intentional misconduct concerning the misstatements. They further claim reliance on the Defendant's misrepresentations, which resulted in damages. 

In response, the Defendant seeks to dismiss the claims under Sections 12(1) and 12(2) of the Securities Act of 1933, arguing that the Plaintiffs have not adequately alleged that the Defendant "sold" or "solicited" the sale of securities, referencing the precedent set by Pinter v. Dahl.

The United States Supreme Court in Pinter v. Dahl established that primary liability under Section 12(1) of the Securities Act of 1933 is restricted to individuals or entities that either pass title to a security for value or solicit the purchase of a security with a financial motive. The plaintiffs argue that while the Pinter decision focuses on Section 12(1), its reasoning is also relevant to Section 12(2), as both sections deal with "offer" and "sell" of securities using similar definitions. The court considers the plaintiffs' claims that the defendant offered and sold securities in violation of these sections. The plaintiffs assert that the defendant, as a seller, was a substantial factor in facilitating sales and prepared offering documents for a stock offering, benefiting financially from the transaction. However, the court determines that merely preparing an offering document does not constitute solicitation or active participation in sales, as the law firm would not typically be viewed as the seller by the buyer. The court concludes that the law firm’s actions only meet a "but for" causation standard and do not equate to the solicitation required under the definitions provided in Pinter.

A law firm that prepares an offering memorandum does not establish a seller-purchaser relationship with a plaintiff purchaser under Section 12, as defined by the Supreme Court. The "purchase from" requirement emphasizes the defendant's direct relationship with the purchaser, while the substantial-factor test assesses the defendant's involvement in the transaction. This means that a law firm's role, limited to assisting or soliciting without direct contact with purchasers, does not qualify it as a statutory seller liable under Section 12(1). 

Regarding statutes of limitations, the defendant argues that the plaintiffs’ claims under Sections 12(1) and 12(2) are time-barred due to the applicable one-year and two-year limitations, as the securities sales occurred in early 1986 and the suit was not filed until September 20, 1988. The defendant contends that the plaintiffs’ claims do not meet the requirements for tolling the statute of limitations. The court must assess whether the plaintiffs properly alleged a violation of Section 12(1) within the one-year limit preceding the lawsuit filing date. The plaintiffs reference an offering of unregistered securities from February 1986 as the basis for their claims, but this is beyond the one-year limit, and the offering memorandum dated February 28, 1986, confirms that these claims are barred by the statute of limitations.

Plaintiffs' claims regarding violations of securities laws are challenged on the grounds of insufficient allegations regarding the timing of sales or deliveries, which are necessary to determine compliance with the one-year statute of limitations under Section 12(2). Plaintiffs have asserted that they were unaware of relevant events until 1987 or 1988, which they argue prevented earlier discovery. The court finds this assertion minimally sufficient to meet the pleading requirements for the statute of limitations. 

In addressing the violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5, the defendant contends that it had no duty to disclose misrepresentations by Octagon Properties to the Plaintiffs, relying on case law that states silence cannot be fraudulent without such a duty. The defendant cites that professionals, including law firms, typically do not have a duty to disclose client fraud. However, Plaintiffs argue that the defendant had various duties due to its legal representation of the limited partnerships in which they were involved. They base this on state statutes granting limited partners the same rights as general partners to access truthful information about the partnership and a California case establishing that general partners are joint clients of their law firm. The court will evaluate these asserted duties further.

Plaintiffs argue that an attorney's duty extends beyond the fiduciary to also encompass the employee beneficiaries of an employee benefit plan, supported by various case law. They reference cases indicating that attorneys for unincorporated associations represent all members and that trustees’ attorneys owe obligations to trust beneficiaries. In contrast, Defendant contends that an attorney representing a partnership does not inherently represent individual partners or investors, citing cases from other jurisdictions and Oklahoma's Rules of Professional Conduct. Defendant emphasizes that a specific case supports the notion that attorneys for partnerships do not owe duties to limited partners. Furthermore, Defendant asserts that a California case cited by Plaintiffs lacks persuasive value due to its unpublished status and clarifies that its role was as counsel to Octagon Properties, Ltd. in a corporate capacity, not as counsel to the partnerships. Thus, any assumption of dual representation in a potential conflict of interest scenario is deemed unjustified. The Offering Memorandum also advises offerees to consult their advisors, reinforcing Defendant’s position. Additionally, while the Uniform Limited Partnership Act provides limited partners with certain informational rights, the court finds that it does not create duties for attorneys representing general partners, as imposing such duties could threaten attorney-client privilege and hinder legal advice in conflicting interest situations.

Even if the statute were interpreted to impose a duty on attorneys to provide limited partners the same information as general partners, this would not benefit the Plaintiffs. The Offering Memorandum indicates that Octagon Properties, Ltd. did not provide any financial condition information to anyone, as the financial statements included were unaudited and solely the responsibility of Octagon. The Exchange Values were based solely on Octagon's estimates without independent appraisals. 

Plaintiffs claim that Oklahoma law establishes a special duty for attorneys in securities matters, independent of privity or a direct attorney-client relationship, citing Bradford Securities Processing Services, Inc. v. Plaza Bank and Trust, which recognized a common law cause of action for negligent misrepresentation in cases where an attorney's opinion would foreseeably be relied upon by others. However, the facts of Bradford differ significantly, as that case involved a signed opinion letter from the attorney, making reliance foreseeable. 

In contrast, the claim against the Defendant centers on omissions rather than misrepresentations. Oklahoma law, as per the Restatement (Second) of Torts, differentiates between misrepresentation and nondisclosure, requiring a duty for nondisclosure claims. The Defendant argues that no such duty existed here, as an ordinarily prudent attorney would not foresee that the Plaintiffs would rely on them for disclosures regarding Octagon’s omissions, especially given the explicit disclaimers in the Offering Memorandum stating the need for Offerees to consult their own legal and financial advisors. The Memorandum emphasized that the financial statements were Octagon's responsibility and advised Offerees to conduct their own reviews before proceeding with any exchanges.

The financial statements of OCTAGON dated September 30, 1985, are unaudited and do not meet the requirements of Regulation S-X under the Securities Act of 1933. There is no assurance that these statements align with generally accepted accounting principles. Given these disclaimers and the limited role of the Defendant in relation to the offering memorandum, it is legally unforeseeable that potential purchasers, including Plaintiffs, would rely on the Defendant's failure to disclose any inaccuracies in OCTAGON's financial statements as an indication of their accuracy. The Offering Memorandum explicitly states that the financial statements are the sole responsibility of OCTAGON. Consequently, the Defendant could not anticipate that individuals in the Plaintiffs' position would expect disclosure of misrepresentations or omissions in these statements.

Legal precedent indicates that third parties can only sue attorneys if they can demonstrate that specific legal documents prepared represent the attorney's explicit legal opinion for the plaintiff's benefit. This reflects an evolving legal standard influenced by Section 552 of the Restatement (Second) of Torts. Additionally, the Plaintiffs' claims regarding an attorney's ethical obligation not to knowingly make false statements do not establish an affirmative duty to disclose inaccuracies by others. The attorney's duty includes exercising due diligence but does not grant them the authority to facilitate the circulation of known false statements merely because they were provided by a client. The Plaintiffs also reference a duty for attorneys to conduct reasonable investigations to identify and rectify misleading materials, as noted in case law.

The BarChris case focused on the civil liability of defendants under Section 11(a) of the Securities Act of 1933 for an allegedly false registration statement. The court examined whether the underwriters' and a director's counsel conducted reasonable investigations to support their affirmative defense against liability, as outlined in 15 U.S.C. 77k(b)(3). However, the plaintiffs did not assert a Section 11 violation, rendering any attorney duties under this section irrelevant to their claims. Relevant case law, including Ernst v. Hochfelder and Dirks v. S.E.C., emphasized that duties of disclosure necessary for liability under Section 10(b) arise from fiduciary relationships outside securities law.

The excerpt also referenced SEC v. Frank, which involved an attorney's potential liability for aiding and abetting fraud, but noted that the court's statements were considered dictum and focused on the attorney's role rather than a duty to disclose. Furthermore, the excerpt indicated that the prior standard allowing claims based on a failure to exercise due care in discovering fraud has changed post-Aaron v. S.E.C.

In the Felts case, the court found that an attorney had a special duty of investigation and disclosure due to foreseeability that purchasers would rely on his expertise. However, in the current case, the defendant did not sign or certify the Offering Memorandum or financial statements, nor did he evaluate their accuracy, leading to the conclusion that he did not voluntarily assume any special duty. As a result, it was legally unforeseeable that plaintiffs would rely on the defendant's inaction as an assertion of accuracy. The Felts case also established that the attorney was liable as an aider and abettor and participant in violations of securities laws and common law fraud.

The court declined to address whether the attorney had a duty to disclose information that would impose primary liability for failing to reveal the issuer's fraud. After reviewing relevant case law, the court concluded that an attorney for an issuer does not have a special duty of disclosure to securities purchasers unless they prepare a legal document or opinion letter explicitly representing their legal opinion for the benefit of the purchasers. 

The defendant argued that the plaintiffs failed to demonstrate both loss causation and transaction causation, citing that many alleged misdeeds occurred before the exchange offering, thereby causing losses prior to the plaintiffs' involvement. The defendant pointed out that the specific misdeeds noted by the plaintiffs happened after May 1986, the last date for the plaintiffs to accept the exchange offer, indicating that any resulting losses occurred after the plaintiffs' purchase. Thus, the defendant contended it could not disclose events that had not yet happened.

To establish loss causation, plaintiffs must show the defendant's fraudulent actions are linked to the economic harm or decline in investment value. The defendant maintained that nondisclosure of earlier fund diversions could not have caused plaintiffs' losses from subsequent diversions, which were supervening events. However, the plaintiffs did allege fund diversions prior to the Offering Memorandum, suggesting that their financial statements did not adequately disclose these issues.

Plaintiffs allege that if Defendant had ensured the accuracy and completeness of the information provided, they would not have invested in Octagon Properties nor incurred losses. The Court finds that it cannot dismiss the case based solely on the pleadings, as Plaintiffs might be able to establish both transaction causation and loss causation despite not detailing how the omissions affected their investment loss. The Court notes that neither it nor the Tenth Circuit requires explicit factual pleading for these causations; however, if the facts conclusively negated either causation, dismissal would be warranted.

Regarding reliance, Defendant argues that the language in the Offering Memorandum, which disclosed the unaudited status of financial statements and the limited role of Defendant, negates Plaintiffs' reasonable reliance on any alleged omissions. In omission cases, reliance is generally presumed but can be rebutted if evidence shows no actual reliance or that reliance was unreasonable. The Court concurs with Defendant, suggesting that, based on the Offering Memorandum’s disclosures, any reliance by Plaintiffs on Defendant's duty to disclose inaccuracies was unreasonable as a matter of law.

On the issue of aiding and abetting, Defendant asserts that Plaintiffs inadequately pleaded the first and third elements of this claim under Section 10(b) of the Securities Exchange Act of 1934, focusing primarily on the second element. The Court acknowledges that the deficiencies pointed out by Defendant pertain mainly to these elements of the aiding and abetting claim.

Defendant argues that Plaintiffs' allegations are insufficient, claiming they do not establish the necessary elements or meet the specificity required by Rule 9(b) of the Federal Rules of Civil Procedure. The Tenth Circuit permits liability for aiding and abetting fraud through silence or inaction, depending on whether such behavior was intended to assist the primary fraud. Courts generally require that this assistance be intentional or demonstrate a "high conscious intent." Plaintiffs allege that Defendant acted with either knowledge of or reckless disregard for misstatements in financial statements, suggesting a high level of intent, particularly given the disproportionate compensation received by Defendant relative to their inquiry. The Court finds that Plaintiffs have not failed to plead sufficient facts to support their claims.

Regarding the statute of limitations, Defendant contends that Plaintiffs have not sufficiently alleged compliance with Oklahoma's two-year statute applicable to Section 10(b) actions, particularly failing to detail the discovery of the alleged fraud. The Court rejects this argument, asserting that Plaintiffs have adequately alleged compliance.

On the issue of Section 17(a) of the 1933 Securities Act, Defendant claims it does not create a private right of action. Even if it does, Defendant maintains that Plaintiffs have not adequately stated a claim under this section, pointing out that the language limits liability to offerors and sellers, which parallels their failure to state a claim under Section 12(2).

The plaintiffs have not sufficiently alleged that the Defendant qualifies as a seller or offeror under the definition established in *Pinter v. Dahl*. The court has previously indicated that it will not recognize a private cause of action under Section 17(a) of the Securities Act of 1933, as noted in *Citizens State Bank v. FDIC* and *Farlow v. Peat, Marwick, Mitchell & Co.*, although there is a lack of consensus among judges in the district, with some cases like *Richey v. Westinghouse Credit Corp.* and *Geller v. Prudential Bache Securities, Inc.* acknowledging such a cause of action. The Tenth Circuit has not definitively addressed this issue but has expressed doubt about the existence of a private right of action, while the Supreme Court has refrained from making a ruling on it in multiple cases. Most circuit courts that have ruled on this matter now agree that no private right of action exists under Section 17(a), with exceptions noted in prior decisions. The Second Circuit has recognized a private cause of action but may be open to reassessing this stance. Given the prevailing consensus against such a right of action and the reasoning in the Ninth Circuit's analysis, the court reaffirms that no private cause of action exists under Section 17(a). Furthermore, even if the Tenth Circuit were to allow such a right, the plaintiffs' claims would fail as Section 17(a) pertains only to those who offer or sell securities.

Definitions of "offer" and "sell" in Section 17(a) align with those in Section 12 of the Securities Act, as per 15 U.S.C. 77b(3). Consequently, the Supreme Court's interpretation in Pinter v. Dahl is applicable to alleged violations of Section 17(a). Plaintiffs did not provide sufficient facts to classify Defendant as an offeror or seller under Section 17(a).

In the context of the Oklahoma Securities Act claims, Plaintiffs failed to specify which provisions they are invoking, leading Defendant to argue that Plaintiffs did not allege facts demonstrating that Defendant sold or solicited securities. This argument pertains to primary liability under Section 408(a)(1) or (2) of the Oklahoma Securities Act (Okla.Stat. title 71). The Court concurs that the definitions of "offer" and "sell" in the Oklahoma Securities Act mirror those in the Securities Act of 1933, and the Oklahoma Act is intended to align with federal regulations. Thus, it is likely that the Oklahoma Supreme Court would restrict primary liability under Section 408(a) to the same class of defendants defined in Pinter v. Dahl, resulting in the same deficiencies in Plaintiffs' claims against Defendant under both Section 12 and Section 408(a).

Defendant also contends that Plaintiffs failed to comply with the two-year statute of limitations for Section 408(a)(2) claims, arguing that Plaintiffs must detail the circumstances of their fraud discovery and their investigative diligence. However, no relevant Oklahoma or federal case law supports the strict pleading standard suggested by Defendant.

Regarding secondary liability, Defendant argues that Plaintiffs' claims under Section 408(b) are deficient for the same reasons as their federal aider and abettor claims. However, since Plaintiffs adequately pleaded a claim for aiding and abetting a violation of Section 10(b), and given that conscious intent or recklessness is not required for liability under Section 408(a)(2) or (b), Defendant's argument is dismissed.

Finally, Defendant asserts that Plaintiffs' common law fraud claims are deficient for the same reasons stated in their previous arguments.

10(b) claims are deemed deficient for failing to meet Rule 9(b) standards, lacking allegations of a duty to disclose, and inadequately pleading causation and reliance. Plaintiffs assert they have sufficiently alleged actual or constructive fraud as defined under Oklahoma statutes. However, constructive fraud requires a fiduciary or confidential duty, which Plaintiffs have not established. Even if such a duty existed, Defendant's nondisclosure could not have misled Plaintiffs, as their reliance is rebutted by the Offering Memorandum, which clarifies that Defendant's silence does not imply endorsement of the financial statements. Actual fraud necessitates reliance on misrepresentation, which must be justifiable. The Oklahoma Supreme Court emphasizes that representations must be such that the injured party had a right to rely on them. Consequently, the lack of reliance negates both the 10(b) claim and the deceit claim, as the court does not address the latter due to Defendant's omission.

In terms of legal malpractice, Defendant claims Plaintiffs have not stated a valid claim, as Oklahoma law requires a breach of professional duty owed to a client. However, a negligence claim can exist for third parties if the attorney knows their opinion will be relied upon, as established in Oklahoma case law. Despite this, the Offering Memorandum indicates that Defendant did not provide an opinion on Octagon Properties, Ltd.'s financial statements and merely stated its limited role, undermining any potential claim for malpractice.

Plaintiffs could not reasonably rely on Defendant's silence regarding the financial statements' accuracy as a representation of Octagon Properties, Ltd. VII's financial condition. The Court concurred with Defendant's assertion that no fiduciary relationship existed between Plaintiffs and Defendant, referencing precedent that indicates no specific public duty is imposed on attorneys by securities laws. Consequently, the Court granted Defendant's motion to dismiss Plaintiffs' claims, including those for violations of various sections of the Securities Act of 1933, the Securities Exchange Act of 1934, the Oklahoma Securities Act, actual and constructive fraud, legal malpractice, and breach of fiduciary duty. However, the motion to dismiss claims related to secondary liability for violations of the Securities Exchange Act and the Oklahoma Securities Act, as well as for the tort of deceit, was denied. Dismissal was ordered without prejudice, allowing Plaintiffs 15 days to amend their complaint to address deficiencies. Failure to amend or unavailing amendments will result in claims being dismissed with prejudice. The Court noted that some cited cases were not officially published, and emphasized that no statutory duty existed for the Defendant to disclose omissions in financial statements.

Holders of limited partnership interests in Octagon Properties, Ltd. faced a requirement to exchange their interests for common stock while also purchasing additional shares for cash. This situation raises concerns about nondisclosure of prior diversions that may have already diminished the value of partnership interests, potentially leading to further losses upon exchange and purchase. 

To establish a claim for aider and abettor liability under Section 10(b), three elements must be proven: 1) a primary violation of Section 10(b) by another party; 2) knowledge of this violation by the alleged aider and abettor; and 3) substantial assistance provided by the aider and abettor. Previous court rulings emphasize the necessity for particularity in pleading claims for secondary liability related to securities laws. 

The defendant acknowledges that an individual without a duty to disclose may still be liable as an aider or abettor if their actions demonstrate "high conscious intent." However, the defendant contends that to meet the requirements of Rule 9(b), it must be shown that the alleged abettor had knowledge of the primary violators' actions and intended to further their fraudulent scheme. Lack of knowledge serves as an affirmative defense under Oklahoma law, as outlined in the Uniform Securities Act.