Opinion
NO. 2016 CA 1298
04-12-2017
TRANS PACIFIC INTERACTIVE, INC. v. U.S. TELEMETRY CORPORATION; U.S. TELEMETRY NETWORK, INC.; U.S. TELEMETRY-BAKERSFIELD, LLC; DATEX SPECTRUM, LLC; THOMAS L. SIEBERT; K. STEVEN ROBERTS; ROBERT S. MILLER; DON M. CLARKE; JAMES K. GABLE; CHARLES M. BRUCE; JOHN J. BROUSSARD; HENRY (HANK) MILLS; CLAY M. ALLEN; AND STEPHEN D. GAVIN
FREDRICK R. TULLEY EUGENE R. GROVES KATIA DESROULEAUX BOWMAN VINCENT V. TUMMINELLO, III BATON ROUGE, LA ATTORNEYS FOR PLAINTIFF-APPELLANT TRANS PACIFIC INTERACTIVE, INC. H. ALSTON JOHNSON III MICHAEL D. HUNT JANE R. GOLDSMITH BATON ROUGE, LA AND BRUCE A. ERICSON SAN FRANCISCO, CA ATTORNEYS FOR DEFENDANT-APPELLEE JAMES K. GABLE
NOT DESIGNATED FOR PUBLICATION Appealed from the 19th Judicial District Court in and for the Parish of East Baton Rouge, Louisiana
Trial Court No. C507714
Honorable William A. Morvant, Judge FREDRICK R. TULLEY
EUGENE R. GROVES
KATIA DESROULEAUX BOWMAN
VINCENT V. TUMMINELLO, III
BATON ROUGE, LA ATTORNEYS FOR
PLAINTIFF-APPELLANT
TRANS PACIFIC INTERACTIVE, INC. H. ALSTON JOHNSON III
MICHAEL D. HUNT
JANE R. GOLDSMITH
BATON ROUGE, LA
AND
BRUCE A. ERICSON
SAN FRANCISCO, CA ATTORNEYS FOR
DEFENDANT-APPELLEE
JAMES K. GABLE BEFORE: PETTIGREW AND McDONALD, JJ. AND CALLOWAY, J., Pro Tem. PETTIGREW, J.
Judge Curtis A. Calloway, retired, is serving as judge pro tempore by special appointment of the Louisiana Supreme Court.
Plaintiff/appellant Trans Pacific Interactive (TPI) challenges the trial court's July 7, 2016 judgment granting the motion for summary judgment filed by defendant, James K. Gable, dismissing Gable from the suit. The judgment was certified as final by the trial court, noting there was no just reason for delay, and is now before us on appeal.
SUMMARY OF THE LITIGATION
This matter arises out of a lengthy and protracted litigation, which has been the subject of four prior appeals. The essential allegation underlying TPI's claims is that it was misled and induced by multiple defendants into agreeing to an exchange in which TPI gave up valuable property -- a Federal Communications Commission (FCC) license and a 50 percent ownership interest in a joint venture to exploit U.S. Telemetry Corporation's (USTC's) wireless technology in and around Bakersfield, California -- in exchange for shares of common stock in USTC that TPI now claims were, in fact, worthless, unbeknownst to TPI due to many of the defendants' alleged acts of misrepresentation, fraud, and breaches of contractual duties.
Trans Pacific Interactive, Inc. v. U.S. Telemetry Corporation, 2016-0119 (La. App. 1 Cir. 9/16/16); Trans Pacific Interactive, Inc. v. U.S. Telemetry Corporation, 2010-0507 (La. App. 1 Cir. 12/29/10), 2010 WL 5545406 (unpublished), writ granted, 2011-0205 (La. 4/8/11), 61 So.3d 672, writ grant recalled as improvidently granted, 2011-0205 (La. 9/23/11), 74 So.3d 210 (per curiam); Trans Pacific Interactive, Inc. v. U.S. Telemetry Corporation, 2010-0507 (La. 1 Cir. 12/29/10) (unpublished) 57 So.3d 608 (Table), writ denied, 74 So.3d 210 (La. 9/23/11); and Trans Pacific Interactive, Inc. v. U.S. Telemetry Corporation, 2008-2174 (La. App. 1 Cir. 5/8/2009) (unpublished) 9 So.3d 355 (Table).
FACTUAL BACKGROUND
In July 1994, at a public auction, TPI paid the FCC $450,000.00 for an Interactive Video and Data Services license (IVDS) to utilize the wireless radio bandwidth between 218 and 219 Megahertz (MHz) in and around Bakersfield, California (the Bakersfield license). At the time of the FCC auction, the technology available to use the license was inadequate. Later, in 1999, USTC obtained numerous other IVDS licenses throughout the country, in an effort to develop a national network.
TPI is owned by three individuals: Laura Monahan, Cynthia Carter, and Michael Morrison. Monahan and Carter each own 45 percent of the company, and Morrison owns the remaining 10 percent. Morrison is an attorney licensed to practice law in Nevada and has represented himself as an attorney for TPI since June 2000.
Since the early 1980s, Stephen D. Gavin (who was then a member of the law firm Besozzi, Gavin, and Craven, in Washington, DC), represented TPI's principals, Laura Monahan and Cynthia Carter, with respect to all the FCC broadcast and business interests. As such, Gavin represented TPI in connection with the Bakersfield license from the date of purchase forward. On July 29, 1994, Gavin's law firm entered into a Representation Agreement with TPI to specifically formalize its "ongoing representation" of TPI in connection with the Bakersfield license on FCC related matters. The agreement also specified other contractual terms (i.e., charges, billing, etc.), none of which are at issue herein. The record reflects, by way of email from Patton Boggs to TPI, dated April 24, 2002, that the representation ceased, and TPI's account with Patton Boggs was closed.
In April 1996, Besozzi, Gavin, and Craven merged with Patton Boggs, which continued to provide legal representation to TPI.
In 1998 and 1999, USTC began working with Axonn Corporation (Axonn), a New Orleans, Louisiana company, to convert remote telemetry monitoring technology, previously developed by Axonn for other radio spectra, for use by USTC. Anticipating its use of the 218-219 MHz spectrum at relatively little cost, USTC signed an agreement with Axonn for the exclusive use of the Axonn technology. Due to USTC's exclusive relationship with Axonn, licensees such as TPI were barred from contracting with Axonn except through USTC.
In 1999, USTC, through its wholly-owned subsidiary, defendant U.S. Telemetry Network, Inc. (USTN), entered into contracts known as System Development Agreements (SDAs) with 126 IVDS license holders throughout the country, including TPI. TPI executed an original SDA on July 12, 1999, with Adtel, Inc., a predecessor of USTC, and subsequently signed a revised SDA with USTN, effective May 23, 2000. The SDA provided that TPI agreed to assign its license to a market-specific entity or "MSE" (the market being the geographic market covered by the license), in exchange for a 50 percent ownership interest in the MSE. USTC agreed to assign to the MSE the exclusive rights to employ its telecommunications technology in the Bakersfield market, and USTC or USTN would own the other 50 percent of the MSE. Although the license holder and USTN would share ownership of the MSE, the MSE would be a new subsidiary of USTN that would be controlled by USTN, which had the authority to appoint a majority of the MSE's board. It was further anticipated that in return for receiving control of TPI's license, USTN would provide access to the Axonn technology that would allegedly provide commercial applications for radio bandwidths covered by the license. The SDA anticipated a "merging event" at some point in the future, in which all of the MSEs would eventually be merged into a single company, with the ownership thereof determined by the formulas set forth in the SDAs.
In February 2000, USTN formed a limited liability company, U.S. Telemetry/Bakersfield, LLC. (UST/B). TPI contends it had no knowledge of the formation of this company until July 13, 2001, and alleges the failure to inform is a violation of the SDA.
In 2001, Texaco Development Corporation (Texaco) operated two of the largest oil fields in the country in Bakersfield. Texaco estimated that USTC's wireless technology could save it $2.7 million per year in operating costs in the Bakersfield oil fields alone. Texaco began negotiations with USTC to invest in USTC in exchange for the ownership of preferred stock, and entered into a Subscription Agreement with USTC that gave Texaco the control and power to direct the management and policies of USTC. (According to TPI, it wasn't until May 18, 2001, that Monahan of TPI learned from John Broussard of Datex Spectrum, LLC (Datex), a company that had also executed a SDA with USTC/USTN, of Texaco's impending investment in USTC and of Texaco's plan to build out in Bakersfield.) In June 2001, Texaco invested $5 million in USTC preferred stock and obtained an option to invest an additional $5 million in USTC common stock, with the first $1 million earmarked to build out USTC infrastructure to serve Texaco, nonexclusively, in Bakersfield. Texaco also agreed to pay for the equipment needed to test USTC's technology in Texaco's Bakersfield oil fields. On June 3, 2001, the Chairman of the Board of USTC informed Monahan of Texaco's involvement with USTC and that Texaco had chosen the Bakersfield market to deploy the USTC technology.
TPI then hired Van Mayhall, legal counsel for Datex, which was in negotiations with USTC on a new SDA, as additional counsel for TPI, for the limited purpose of helping TPI review the revised SDA. On June 12, 2001, Mayhall informed TPI that it was operating on an outdated SDA. However, when Datex became interested in a "roll-up" (exchanging its license for stock in USTC) and became involved in attempting to persuade TPI to exchange its license for stock in USTC, a conflict of interest arose, and on September 13, 2011, Mayhall resigned as counsel for TPI.
On June 20, 2001, the FCC granted an Experimental Special Temporary Authorization Permit to allow USTC and Texaco to test equipment in TPI's Bakersfield market, without TPI's knowledge or consent. TPI alleged that the permit application was filed by K. Steven Roberts, on behalf of USTC, and signed by TPI's attorney, Gavin, who had been TPI's counsel for FCC-related matters since TPI acquired the license in 1994, without TPI's knowledge or consent. TPI contends that, despite the fact that Gavin was representing it, he never informed TPI of the FCC transfer application.
Ultimately, TPI entered into an Act of Exchange Agreement with defendant Datex on December 1, 2001. Datex was the owner of numerous IVDS licenses subject to SDAs with USTC/USTN, and was also a major stockholder of USTC. The Exchange Agreement between TPI and Datex provided for the transfer of TPI's rights under the SDA, including its IVDS license, to Datex in exchange for 14,360 shares of USTC stock from USTC and 14,360 shares of USTC stock from Datex, together with $28,000.00 in cash, representing a reimbursement for an earlier installment payment TPI made to the FCC for the Bakersfield license.
According to TPI, this exchange resulted in TPI no longer owning its FCC license or its 50 percent ownership interest in the MSE formed to develop the Bakersfield market; no longer having any right to the revenues that might have been generated from the arrangement with Texaco; and finally, being left with worthless stock in USTC. TPI contends the following misrepresentations were made by Datex and USTC/USTN in order to induce it to sign the exchange agreement: (1) USTC owned 100 percent control of the IVDS markets in New York City, Los Angeles, Boston, and Detroit; (2) that USTC was well-financed and had sufficient capital to execute its business plan; and (3) USTC had acquired 126,059,591 POPs and committed to invest or raise an additional total of $50 million to build and support its national network.
The valuation of the IVDS licenses was primarily based on the population potentially to be reached by use of the radio bandwidth in the license, known as "Points of Presence" or "POPs".
However, TPI alleged that USTC, USTN, and Datex all knew, despite the foregoing representations, that: (1) USTC did not have 100 percent control of New York City, Los Angeles, Boston, and Detroit IVDS markets; (2) USTC did not have ownership of "anywhere near" the 126,059,591 POPs, such that TPI's stock share was significantly and arbitrarily diluted; (3) USTC's financial condition was so disastrous with little or no ability to raise additional funds that it had discussed bankruptcy; and (4) USTC planned, and did, relinquish numerous, significant, and valuable IVDS licenses representing millions of POPs back to the FCC.
PROCEDURAL HISTORY
On May 15, 2003, TPI filed suit in the 19th Judicial District Court naming as defendants four corporations, USTC, USTN, UST/B, Datex, and ten individuals. Nine of the ten individually named defendants were alleged to be officers, directors, or outside counsel for the four named corporate defendants. Among these named defendants, was James K. Gable, who was a director of USTC. TPI concedes that the only allegation alleged at this point against Gable is liability under La. R.S. 51:714(B) of Louisiana's "Blue Sky" Laws.
The present appeal arises from a motion for summary judgment filed by Gable asserting various reasons why he should be dismissed. Most notably, was the argument Gable was not a "control" person according to La. R.S. 51:714(B). On June 20, 2016, following argument on the motion for summary judgment, the trial court found Gable's motion for summary judgment had merit and granted the motion. A judgment was signed, on July 7, 2016, in conformity with the trial court's ruling, designating the ruling as a final appealable judgment. This timely appeal by TPI follows.
DISCUSSION
Summary judgment is subject to de novo review on appeal, using the same standards applicable to the trial court's determination of the issues. Berard v. L-3 Communications Vertex Aerospace, LLC, 2009-1202 (La. App. 1 Cir. 2/12/10), 35 So.3d 334, 339-340, writ denied, 2010-0715 (La. 6/4/10), 38 So.3d 302. The summary judgment procedure is expressly favored in the law and is designed to secure the just, speedy, and inexpensive determination of non-domestic civil actions. La.Code Civ. P. art. 966(A)(2). Its purpose is to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial. Hines v. Garrett, 2004-0806 (La. 6/25/04), 876 So.2d 764, 769 (per curiam).
In ruling on a motion for summary judgment, the judge's role is not to evaluate the weight of the evidence or to determine the truth of the matter, but instead to determine whether there is a genuine issue of triable fact. Hines, 876 So.2d at 765. Despite the legislative mandate that summary judgments are now favored, factual inferences reasonably drawn from the evidence must be construed in favor of the party opposing the motion, and all doubt must be resolved in the opponent's favor. Willis v. Medders, 2000-2507 (La. 12/8/00), 775 So.2d 1049, 1050 (per curiam).
APPLICABLE LAW
TPI states that its sole cause of action against Gable is that Gable, as a member of the USTC Board of Directors, is liable as a "control person" under La. R.S. 51:714(B). Secondary liability as a control person under La. R.S. 51:714(B) would arise if USTC is found to be a statutory seller of the securities at issue under La. R.S. 51:712 and 714(A). However, for the limited purposes of reviewing the propriety of the ruling on Gable's motion for summary judgment, we can presume USTC was a statutory seller. That presumption leads us to the dispositive issue on review, which is whether there is a material issue of fact regarding Gable's status as a "control person" within the definition of the Louisiana "Blue Sky" Laws, which could subsequently trigger derivative liability on his part later in the litigation.
Louisiana Revised Statutes 51:714(B) provides:
B. Every person who directly or indirectly controls a person liable under Subsection A of this Section, every general partner, executive officer, or director of such person liable under Subsection A of this Section, every person occupying a similar status or performing similar functions, and every dealer or salesman who participates in any material way in the sale is liable jointly and severally with and to the same extent as the person liable under Subsection A of this Section unless the person whose liability arises under this Subsection sustains the burden of proof that he did not know and in the exercise of reasonable care could not have known of the existence of the facts by reason of which liability is alleged to exist. There is contribution as in the case of contract among several persons so liable.
La. R.S. 51:714(A) provides:
Any person who violates R.S. 51:712(A) shall be liable to the person buying such security, and such buyer may sue in any court to recover the consideration paid in cash or, if such consideration was not paid in cash, the fair value thereof at the time such consideration was paid for the security with interest thereon from the date of payment down to the date of repayment as computed in R.S. 51:714(C)(1), less the amount of any income received thereon, together with all taxable court costs and reasonable attorney's fees, upon the tender, where practicable, of the security at any time before the entry of judgment, or for damages if he no longer owns the security. Damages are the amount which equals the difference between the fair value of the consideration the buyer gave for the security and the fair value of the security at the time the buyer disposed of it, plus interest thereon from the date of payment to the date of repayment as computed in R.S. 51:714(C)(2).
Control, controlling, controlled by, and under common control with, are defined in La. R.S. 51:702(4), as 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.
In determining when a defendant "controls" a primary violator of Section 712, federal law is instructive. The Fifth Circuit has construed the similar federal provisions regarding a control person in Section 15 of the Securities Act of 1933, 15 U.S.C. Section 77o, and Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sect. 78(t(a)); See Paul F. Newton & Co. v. Tex. Commerce Bank, 630 F.2d 1111, 1115 (5th Cir. 1980). Control person liability does not require participation in the fraudulent transaction. But a plaintiff must at least show that the defendant had an ability to control the specific transaction or activity upon which the primary violation is based. Heck v. Triche, 775 F.3d 265 (5th Cir. 2014) (and authority cited therein). Status or standing as a member of a board of directors alone is insufficient to establish control person liability. Dennis v. General Imaging, Inc., 918 F.2d 496 (5th Cir. 1990).
The alleged fraudulent conduct in the present case is the purported pattern of misrepresentations and omissions that led to TPI entering into the December 2001 Act of Exchange Agreement with Datex, whereby it received shares of stock in USTC, in exchange for its FCC license over the wireless band in Bakersfield, California.
In reviewing the evidence in support of Gable's motion for summary judgment, we find that Gable became a member of the USTC Board of Directors in mid-June 2001, and then resigned effective December 13, 2001. Gable had been appointed to the USTC Board of Directors pursuant to an agreement with USTC whereby Gable's employer, Texaco, purchased stock in USTC, thereby allowing it to place a representative on the USTC Board. Gable resigned in mid-December 2001, because Texaco was being bought by Chevron, which had a policy of not allowing its employees to serve on boards of companies in which Chevron had a minority financial interest.
Included in the exhibits supporting Gable's motion for summary judgment is an email dated October 16, 2001, from K. Steven Roberts, as in-house counsel for USTC, to Laura Monahan, president of TPI. Through this email, Roberts informs Monahan that the issue of the transfer of TPI's license under the SDA (the act that is now at the heart of this litigation) was under Roberts' "direct control and supervision." According to the evidence supporting Gable's motion, by an email dated November 8, 2001, Monahan stated that she was requested to not contact USTC Board members regarding the negotiations of the SDA, and by an email of October 25, 2001, K. Steven Roberts requested that USTC Board members not communicate with Monahan. In deposition, Gable also testified that around this same time period in the Fall of 2001, prior to the completion of the Act of Exchange Agreement at issue, he, as a member of the USTC Board, was told by Stephen Gavin, as external counsel for USTC, to cease any communications with Monahan.
Further, the evidence Gable introduced in support of his motion for summary judgment reflects that Gable did not participate in any negotiations or in drafting any document or portion thereof regarding the Exchange Agreement. According to Gable, he was doubtful he even saw the Datex-TPI Exchange Agreement.
After reviewing the record, we find there is no material issue of fact that although Gable was a Board member of USTC, he was specifically informed that issues relating to the transfer of TPI's FCC license were under the direct control and supervision of Roberts and Gavin, and that Gable was informed not to communicate with Monahan regarding such issues. There is no evidence that Gable failed to abide by these directions.
Under the facts as established in the motion for summary judgment, we cannot say there is any outstanding issue of material fact regarding whether Gable possessed the requisite "control" over the actors involved in the alleged fraudulent act to trigger any derivative liability under La. R.S. 51:714(B).
This court notes that much time and effort was spent by the parties asserting and defending whether Gable knew of or in the exercise of reasonable care could have known of a number of alleged untruths or omissions. The trial court even based its ruling granting the summary judgment on its finding that Gable did not know and could not have known of these alleged untruths or omissions. However, we find that a close reading of La. R.S. 51:714(B) does not require this court to reach those issues because the threshold requirement of derivative liability under Section 714(B) is to determine whether the defendant, Gable, was a "control person" within the meaning of the applicable law. Our review indicates although Gable was a Board member at the time this Exchange Agreement was executed, the evidence indicates the control of the information and role of USTC was handled by Gavin and Roberts. Under such a scenario, we find Gable cannot be considered to have been a "control person" that would allow him to be found liable in the event liability of others is ultimately determined under La. R.S. 51:714(A).
TPI's allegations that it was entitled to a prospectus from USTC; that Gable had an obligation to inform TPI about USTC's financial position vis a vis the FCC debt; and the potential that Texaco would ultimately test the wireless equipment in Midland, Texas, thus negating any need to use TPI's Bakersfield license are all issues that are reached only if there is a finding that Gable was a "control person." Only if Gable is found to be a "control person" do the issues of whether he knew or could have known of any alleged misrepresentations with respect to these issues require examination by this court. We note the trial court examined these issues; however, the trial court did not make a finding that Gable was a "control person" per La. R.S. 51:714(B). --------
Accordingly, we find the trial court properly granted Gable's motion for summary judgment, dismissing him as a defendant from this litigation, with prejudice. Costs of this appeal are assessed to the plaintiff, Trans Pacific Interactive, Inc.