Opinion
Civil No. 00-972-JO
December 14, 2001
Dennis V. Messoline, Salem, OR, Paul R. J. Connolly, CONNOLLY DOYLE, LLP, Salem, OR, Attorneys for Plaintiffs.
James R. Simon, Ignacio, CA, Patti Plunkett, Valley Chapel Lane, Dallas, TX, Richard J. Tucker, McKinney, TX, Defendants Pro Se.
OPINION AND ORDER
Plaintiffs brought this action against pro se defendants James Simon, Patti Plunkett, and Richard Tucker, alleging, among others, claims for violation of Oregon Securities Law. Following the court's partial grant of plaintiffs' motions for summary judgment, the remaining issues were set for a court trial.
In earlier proceedings, the court dismissed a fourth defendant, Margaret Lombardo, for lack of personal jurisdiction.
The plaintiffs in this case fall into one or both of two categories: (1) the "trust plaintiffs," investors in First Fidelity Acceptance Corporation ("FFAC") Auto Receivables Trust 2 certificates, who brought claims against defendant Tucker; and (2) the "loan plaintiffs," investors in FFAC loan portfolios, who brought claims against defendants Simon and Plunkett. After the final pretrial conference, the loan plaintiffs settled their claims. Additionally, pro se plaintiff Dennis Dunn voluntarily dismissed his claims against all defendants. Ultimately, the case proceeded to trial solely on the trust plaintiffs' claims against defendant Tucker.
Early in the trial, Tucker voluntarily dismissed his counterclaims against Dunn.
At trial, trust plaintiffs pursued two claims against Tucker: (1) control person liability in the sale of unregistered securities; and (2) control person liability in the sale of securities through a misstatement or omission of material fact. Tucker, in turn, asserted a statute of limitations affirmative defense.
The case was tried to the court on November 13-14, 2001. Having considered the testimony, documentary evidence, and arguments, and based on my earlier rulings on summary judgment, for the reasons set forth below I find in favor of plaintiffs and against Tucker.
FINDINGS AND CONCLUSIONS ON PARTIAL SUMMARY JUDGMENT
In my opinion on the trust plaintiffs' motion for summary judgment against Tucker, I made the following rulings:
Battig v. Simon, et al, Case No. CV 00-972-JO (Opinion and Order, June 20, 2001).
1. Oregon law governs this securities action.
2. The Trust 2 certificates are "securities" within the meaning of ORS 59.015(19)(a).
3. The seller of the Trust 2 certificates was FFAC Auto Receivables Corporation ("FFAC-ARC"). FFAC was the sole shareholder of and controlled FFAC-ARC.
4. Tucker was Chairman and CEO of FFAC, and therefore sufficiently controlled FFAC-ARC or otherwise participated or aided in the sale of the Trust 2 certificates to bear potential liability as a "control person" under ORS 59.115(3).
The above rulings constitute the "law of the case" and will not be revisited at this juncture.
Much of Tucker's argument at trial challenged these earlier rulings.
ADDITIONAL FINDINGS OF FACT
1. Plaintiffs Burr and Jean Battig, Lyle and Sherlee Cave, Garey and Joanne Cosentino, Earl and Mary Edmonds, Margery Hoffman, Clare Hoffman, Bernard and Debbie Jueden, Frank and Laura Long, Dean Maddox, Danforth Martin, Leland Ramos, Mildred Schmidt ("RMS Farms, Inc."), Jack and Leah Spitzmesser, Shirley Tripp, Russell and Aleen Wilson, and Donald and Carole Whigham each invested in FFAC Auto Receivables Trust 2 certificates.2. FFAC-ARC offered the Trust 2 certificates for sale in Oregon pursuant to a Private Placement Memorandum ("PPM") dated June 5, 1996.
3. As established by the evidence, plaintiffs invested the following amounts in Trust 2 certificates:
Tucker did not dispute these amounts at trial.
Name Investment
Battig, Burr and Jean $39,962
Cave, Lyle and Sherlee $29,866
Cosentino, Garey and Joanne $20,000
Edmonds, Earl and Mary $15,000
Hoffman, Clare $50,000
Hoffman, Margery $50,000
Jueden, Bernard and Debbie $50,000
Long, Frank and Laura $35,000
Martin, Danforth $47,726
Maddox, Dean $15,312
Ramos, Leland $46,531
RMS Farms, Inc. $15,000
Spitzmesser, Jack and Leah $30,000
Tripp, Shirley $39,344
Whigham, Donald and Carole $50,000
Wilson, Russell and Aleen $73,087
Total: $606,828
4. The PPM (Plaintiffs' Exh. 9) represents that the Trust 2 certificates were exempt from registration under applicable provisions of federal and state securities laws, including Oregon Securities Law. See Exh. 9, pp. 1, 11. The PPM contains the following "NOTICE TO OREGON RESIDENTS":
THESE SECURITIES ARE BEING OFFERED IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE OREGON SECURITIES ACT PROVIDED BY SECTION 59.035 OF SAID ACT. * * *.
Exh. 9, p. 11.
5. FFAC-ARC sold Trust 2 certificates to more than 35 non-accredited investors between June 1996 and March 1998. Subscription receipts for all sales to all Trust 2 investors during this period totaled $7,319,786.52. Plaintiffs' Exh. 14.
"Accredited investor" is defined in 17 C.F.R. § 230.501(a).
6. FFAC-ARC sold FFAC Auto Receivables Corporation Trust 3 certificates to more than 35 non-accredited investors between October 1996 and February 1998. Subscription receipts for sales to Trust 3 investors during this period exceeded $9 million. Plaintiffs' Exh. 16.
7. The PPM contains, among others, the following representations:
a. Each Trust 2 certificate would bear interest at the rate of the prime rate plus 3 1/4 percent (in 1996, 11.50 percent) per annum, payable monthly.
b. Each Trust 2 certificateholder would be repaid 100 percent of the principle amount of his or her certificates 90 days after delivery of written demand to the seller.
c. Investors would not pay any commissions on purchases of Trust 2 certificates. The seller reserved the right to pay commissions of up to five percent to "selected brokers," defined as "licensed broker-dealers or other entities exempt from broker-dealer registration * * *." Exh. 9, p. 2.
d. The proceeds from sale of the Trust 2 certificates would be invested in "Floor Plan Contracts and Autoloans together with related Participatory Interests in pools of Autoloans and Cash Reserves." Exh. 9, p. 17.
e. The Trustee appointed for the FFAC Auto Receivables Trust 2 would "[m]aintain Trust bank account to receive from [FFAC] the interest and principal due Certificateholders." Exh. 9, p. 18.
f. The proceeds of sale of the Trust 2 certificates, estimated to be $10 million, would be used "only for the purposes indicated" and
At all times, the Trust will have investments and cash with an aggregate value in excess of the aggregate balance of the Certificates.
[FFAC] will invest the proceeds of this Certificate Offering on behalf of the Trust, which will have the following assets:
• Autoloans
• Participatory Interests in pools of Autoloans
• Floor Plan Contracts
• Cash reserves
• Proceeds of all insurance policies
• Clean certificates of title to the floor-planned vehicles
• Currently-dated Dealer checks to repay the full amount of the Floor Plan Contracts within 45 days
• Guarantee Fee * * *
• Cash awaiting investment in the aforementioned assets
None of the assets of the Trust created are available to [FFAC] or to any other subsidiaries of [FFAC] without first paying the Trust the balance of its investment in such assets.
Exh. 9, pp. 23-24.
g. The PPM further represents that
[FFAC] has incurred insignificant losses of Autoloan principal to date. [FFAC's] risk mitigation strategies are likely to continue to minimize ongoing Autoloan Floor Plan Contract losses of principal.
Exh. 9, p. 35.
8. The PPM contained untrue statements or omissions of fact necessary to make the statements made not misleading, including but not limited to the following:
a. The trustee did not maintain control of the assets and collateral of Trust 2 (Exh. 9, p. 18); rather, the evidence demonstrates that FFAC and Tucker exercised significant control over Trust 2 assets and collateral (see, e.g., Plaintiffs' Exhs. 13, 17, 18, 19, 22A);
b. Trust 2 never held assets and cash with an "aggregate value in excess of the aggregate balance" of the Trust 2 certificates, as represented in the PPM (Exh. 9, pp. 17, 23);
c. Proceeds of the sale of Trust 2 certificates were not used "only for the purposes" set forth in the PPM (Exh. 9, pp. 17, 23-24), but were used for a variety of unauthorized purposes, including the daily operating expenses of FFAC;
d. Trust 2 assets and cash were available to and utilized by FFAC in violation of the representation that assets would not be available to FFAC "without first paying the Trust the balance of its investment in such assets" (Exh. 9, p. 24);
e. Trust 2 assets and cash were not kept in a separate trust account but were commingled with Trust 3 assets and cash (Exh. 9, pp. 18, 23-24; see Plaintiffs' Exh. 13);
Trust plaintiffs assert that the PPM contained additional untrue statements, see Plaintiffs' Trial Memorandum, p. 7(f)-(j), which the evidence also supports but which will not be separately discussed.
f. FFAC was in serious financial trouble in 1996 and was experiencing significant losses. No audited financial reports were available after the third quarter of 1996; according to the testimony of James Simon, the preparation of financial reports ceased because Tucker was concerned that if certain information was revealed, it would impede FFAC's ability to raise money to purchase auto loans; and
g. The testimony of Patti Plunkett also revealed that the autoloan warehouse program, which was a significant feature of the Trust 2 investment program (see Exh. 9, p. 36), had faltered as early as 1995 and that the program had few performing loans.
9. The misrepresentations and omissions set forth above were material in that there is a substantial likelihood that a reasonable shareholder would consider them important in deciding whether to invest. Everts v. Holtmann, 64 Or. App. 145, 151, 667 P.2d 1028 (1983). Significantly, the evidence establishes that the above misrepresentations and omissions were important to the trust plaintiffs' decisions to invest.
10. Trust plaintiffs did not know and could not reasonably have discovered more than two years before filing their complaint that the PPM contained the misrepresentations and omissions of fact set forth above.
11. Tucker has not shown that he did not know, and in the exercise of reasonable care could not have known, of the above misrepresentations and omissions. To the contrary, it appears that Tucker, FFAC's president and CEO until April 1998, was fully knowledgeable about FFAC's financial condition and business activities, including FFAC's unauthorized use of Trust 2 assets for purposes other than those set forth in the PPM.
12. Plaintiffs' Exh. 47, which Tucker did not controvert at trial, and trust plaintiffs' affidavits establish that as of November 10, 2001, the amounts owed to trust plaintiffs, including unpaid principal and interest less amounts received in an earlier settlement, are as follows:
Name Total Unpaid
Battig, Burr and Jean $60,493.00
Cave, Lyle and Sherlee $32,298.00
Cosentino, Garey and Joanne $21,629.08
Edmonds, Earl and Mary $15,000.00
For some reason, the amount currently owed to trust plaintiffs Earl and Mary Edmonds was omitted from Exhibit 47. The evidence establishes that they invested $15,000, and that figure has been included in the total amount owing as shown in paragraph 14.
Hoffman, Clare $54,072.71
Hoffman, Margery $54,072.71
Jueden, Bernard and Debbie $75,688.16
Long, Frank and Laura $37,850.90
Maddox, Dean $32,178.74
Martin, Danforth $58,097.71
RMS Farms, Inc. $22,706.45
Spitzmesser, Jack and Leah $32,433.63
Tripp, Shirley $42,548.74
Whigham, Donald and Carole $61,854.27
Wilson, Russell and Aleen $79,040.25
Total: $741,401.27
CONCLUSIONS OF LAW
1. Jurisdiction
This court has subject matter jurisdiction over trust plaintiffs' claims on the basis of diversity of citizenship pursuant to 28 U.S.C. § 1332. The amount in controversy exceeds $75,000. This court has personal jurisdiction over Tucker.
2. Trust Plaintiffs' Claim for Control Person Liability in the Sale of Unregistered Securities
As stated above, the Trust 2 certificates are securities. Under ORS 59.055, it is unlawful for any person to offer or sell any unregistered security in Oregon unless (1) the security is exempt from registration under ORS 59.025; (2) the sale is exempt under ORS 59.035; or (3) the security is "a federal covered security for which a notice has been filed and fees have been paid under ORS 59.049." ORS 59.055(3). Liability for violation of the registration requirements of Oregon law is imposed under ORS 59.115, which provides that
A person who sells a security is liable as provided in subsection (2) of this section to a purchaser of the security if the person:
(a) Sells a security, other than a federal covered security, in violation of the Oregon Securities Law * * *.
There is no dispute that the Trust 2 certificates were not registered. The PPM states that the Trust 2 certificates are exempt from registration under Regulation D and section 4(2) of the Securities Act of 1933, 15 U.S.C. § 77a et seq, and corresponding state law concerning registration. As relevant here, however, the exemption under Regulation D is available only where "[t]here are no more than or the issuer reasonably believes that there are no more than 35" non-accredited investors. See 17 C.F.R. § 230.506(b)(2), 230.501(a); 230.501(e)(1)(iv). In this case, sales of Trust 2 certificates to non-accredited investors far exceeded 35.
17 C.F.R. § 230.501-.508.
Moreover, in calculating the number of non-accredited investors, sales of the same or similar class of Regulation D securities during the same time frame must be counted. 17 C.F.R. § 230.502(a). The evidence established that the FFAC-ARC Trust 3 program was substantially similar to the Trust 2 program, that the timing of the sales substantially overlapped, and sales of Trust 3 certificates to non-accredited investors far exceeded 35.
I conclude that the sale of Trust 2 certificates was not exempt under Regulation D. No other exemption is claimed, and none appears applicable. Consequently, I conclude that FFAC-ARC violated Oregon Securities Law by selling unregistered securities.
Under ORS 59.115(3), "every person" is liable to the same extent as a seller of securities if he or she either directly or indirectly controls the seller, participates in the sale, or materially aids the sale. For purposes of Oregon Securities Law, "control" means "the possession, directly or indirectly, 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." ORS 59.015(2). The power to control, whether or not the power is exercised, is the crucial factor in determining whether a person controls a seller. See, e.g., Castle v. Ritacco, 142 Or. App. 89, 96, 919 P.2d 1196 (1996).
I already found that Tucker bears potential liability as a control person. The evidence presented at trial confirms that finding. FFAC was FFAC-ARC's sole shareholder and therefore controlled FFAC-ARC. Tucker not only possessed the power to control FFAC (and, therefore, FFAC-ARC), but he exercised that control. Based on my finding that Tucker is a control person and on my conclusion that FFAC-ARC is liable for the sale of unregistered securities, I conclude that Tucker is liable, pursuant to ORS 59.115(3), to the trust plaintiffs for the sale of unregistered securities. The scope of Tucker's liability and trust plaintiffs' remedy are addressed below.
2. Trust Plaintiffs' Claim for Control Person Liability in the Sale of Securities by Means of Untrue Statements or Omissions
Based on the findings of fact, set forth above, that the PPM contained untrue statements and omissions of facts that were material to the trust plaintiffs' investment decisions, I also conclude that Tucker is liable as a control person under ORS 59.115(1)(b) and (3). Tucker has not sustained his burden of proof that "[he] did not know, and in the exercise of reasonable care could not have known, of the untruth or omission." ORS 59.115(1)(b).
The scope of Tucker's liability and trust plaintiffs' remedy under this claim also are addressed below.
3. Tucker's Affirmative Defense of Statute of Limitations
Tucker did not testify at trial. The majority of his arguments to the court reiterated his theory, which I had already evaluated and rejected on summary judgment, that the Trust 2 certificates were not securities. Tucker did, however, raise one affirmative defense — statute of limitations — that bears discussion.
ORS 59.115(6) provides that
no action or suit may be commenced under this section more than three years after the sale. An action under this section for a violation of subsection (1)(b) of this section * * * may be commenced within three years after the sale or two years after the person bringing the action discovered or should have discovered the facts on which the action is based, whichever is later. Failure to commence an action on a timely basis is an affirmative defense.
Plaintiffs filed the complaint in this action in Marion County Circuit Court on or about June 12, 2000. On July 14, 2000, defendant Lombardo, joined by defendant Simon, removed the action to this court. The removal petition represents that Lombardo and Simon had been served with summons within 30 days of removal, a representation that was not challenged by any party. Consequently, I find that this action was commenced on June 12, 2000. See ORS 12.020.
Trust plaintiffs seem to assume that the complaint was filed on May 23, 1998. The copy of the complaint that is attached to the notice of removal is not date stamped, but then-counsel Dennis Dunn signed it on June 12, 2000. Consequently, for purposes of the present discussion, the court presumes that this action was commenced on June 12, 2000. The evidence shows that certain trust plaintiffs, specifically RMS Farms, Inc., Leland Ramos, Bernard and Debbie Jueden, and Dean Maddox purchased their investments on or after June 12, 1997, within the three-year limitation period. See Plaintiffs' Exh. 14, p. 3. Those trust plaintiffs' claims unquestionably are timely.
I also find that Tucker, Simon, Lombardo, and Plunkett were "united in interest" such that service on one defendant commenced this action as to all codefendants. ORS 12.020(1).
With respect to the remaining trust plaintiffs' claims under ORS 59.115(1)(b), Tucker bears the burden of proving that they discovered or should have discovered the facts on which their claims are based no later than June 12, 1998. ORS 59.115(6). To meet that burden, Tucker must demonstrate not only that the trust plaintiffs had sufficient knowledge to call for an inquiry, but that a reasonably diligent inquiry would disclose the securities violation. Loewen v. Galligan, 130 Or. App. 222, 236, 882 P.2d 104 (1994). The evidence Tucker presented on this issue at trial primarily consisted of a letter from Margaret Lombardo addressed to "Certificate Holder" dated April 28, 1998, in which she reports her opinion that
— FFAC is in default on its principal payments and it appears that future principal and/or interest payments may be at risk;
— The collateral set forth by the private placement memorandum as security for you[r] investment is deficient and possibly non-existent;
— Trust funds may have been commingled and impermissibly used for expenditures unrelated to acquiring assets for the Trust; and
— In summary, it appears from my limited review that there has been mismanagement by FFAC.
Defendant's Exh. 326.
Tucker was unable to establish at trial which, if any, trust plaintiffs received a copy of Lombardo's letter. Even assuming, however, that one or more of the trust plaintiffs received the letter and assuming further that the letter conveyed sufficient reason to call for an inquiry, Tucker's evidence failed to establish, by a preponderance of the evidence, that a reasonably diligent inquiry by the trust plaintiffs would have disclosed to them the facts on which this action is based. Even Simon, an FFAC insider, testified that he did not obtain financial records or other evidence of securities violations until July 1998.
The trust plaintiffs who testified during trial did not appear to be, in any respect, the type of sophisticated investors who would be put on inquiry by Lombardo's letter, assuming any of them received a copy.
In summary, Tucker failed to prove that trust plaintiffs discovered or should have discovered the facts giving rise to their claims more than two years before this action was commenced. I note, however, that the two-year "discovery rule" applies only to violations of "subsection (1)(b) of this section," but not to violations of subsection (1)(a). ORS 59.115(6); see generally Anderson v. Carden, 146 Or. App. 675, 934 P.2d 562 (1997) (discussing former ORS 59.115(6)). Trust plaintiffs do not contend otherwise. Thus, some, but not all, of the trust plaintiffs' claims for the sale of unregistered securities are time-barred. Because, however, the remedy for both violations is identical, that some of the trust plaintiffs' claims for sale of unregistered securities are time-barred does not affect the ultimate outcome at this juncture.
As noted supra, trust plaintiffs RMS Farms, Inc., Leland Ramos, Bernard and Debbie Jueden, and Dean Maddox made their investments within the three-years limitations period.
The distinction between the time limitations applicable to subsection 1(a) and subsection (1)(b) claims would become significant, of course, if this court's decision concerning trust plaintiffs' section (1)(b) claims were to be set aside on any appeal.
4. Trust Plaintiffs' Remedy
As applicable in this case, the remedy for violations of ORS 59.115(1)(a) and (1)(b) is set forth in ORS 59.115(2)(a). Under that section, upon "tender of the security", trust plaintiffs are entitled to recover the consideration paid for the security, interest at the rate provided in the security, less any amount received on the security, together with their reasonable attorney fees. ORS 59.115(2)(a) and (10).
There is no evidence to suggest that any trust plaintiff "no longer owns the security"; consequently, the provisions of ORS 59.115(2)(b) do not appear to be applicable.
The court is unable to ascertain from the record whether trust plaintiffs have tendered their securities. Tender of the securities may, however, "be made at any time before entry of judgment." ORS 59.115(5). Consequently, I hereby order trust plaintiffs to prepare and submit, within 14 days of the date of this opinion, a form of judgment consistent with the remedies available under ORS 59.115(2)(a), together with evidence that they have, in fact, tendered their securities.
CONCLUSION
Trust plaintiffs are the prevailing parties in their claims against defendant Tucker to the extent set forth in this opinion. Trust plaintiffs shall, within 14 days, submit evidence of tender of the securities together with an appropriate form of judgment that is consistent with the court's rulings set forth above.
IT IS SO ORDERED.