William J. Martínez, United States District Judge.
This matter is before the Court on Defendants Howard Cohen, Dennis Young, Aspen Pacific Capital, Inc., and Aspen Pacific Group, Inc.'s ("Defendants") Motion for Summary Judgment ("Motion"). (ECF No. 115.) Plaintiffs George Landegger and the Whittemore Collection, Ltd. have filed a Response (ECF No. 116); and Defendants a Reply.
For the reasons set forth below, the Court denies Defendants' Motion with respect to Plaintiff's claim brought pursuant to Securities Exchange Act of 1934 (the "Exchange Act") 15 U.S.C. §§ 78 et seq.
Summary judgment is warranted under Federal Rule of Civil Procedure 56 "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is "material" if under the relevant substantive law it is essential to proper disposition of the claim. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir.2001). An issue is "genuine" if the evidence is such that it might lead a reasonable jury to return a verdict for the nonmoving party. Allen v. Muskogee, 119 F.3d 837, 839 (10th Cir.1997).
In analyzing a motion for summary judgment, a court must view the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir.1998) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). A court must resolve factual ambiguities against the moving party, thus favoring the right to a trial. Houston v. Nat'l Gen. Ins. Co., 817 F.2d 83, 85 (10th Cir.1987).
Although a court must construe the facts in the light most favorable to the plaintiff as the nonmoving party, "a plaintiff's version of the facts must find support in the record." Thomson v. Salt Lake Cnty., 584 F.3d 1304, 1312 (10th Cir.2009).
The contracts involved in this securities case are complex; the law equally so. The schematic appended to this Order is illustrative. ("Exhibit A"). The core of the dispute centers on Plaintiff's purchase of securities in a transaction that was brokered by Defendants Cohen and Young. Plaintiff purchased the securities in a second round of capital raising for a company called KSpace, LLC, a California limited liability company ("KSpace").
Plaintiff's Amended Complaint alleges that — contrary to federal law and Nevada law — Defendants were not registered and violated the relevant statutes by entering into securities transactions with Plaintiff. (See generally, ECF No. 47 at 1-2.) Plaintiff contends that, under Nevada and federal statutes, he is entitled to the "consideration paid" for the securities to Defendants Cohen and Young. (Id. at 10.)
Additionally, because Defendant Cohen conducted his brokering activities through Defendants Aspen Pacific Capital, Inc ("AP Capital") and/or Aspen Pacific Group, Inc ("AP Group"), Plaintiff alleges that he is entitled to recovery from these entities as well. (ECF No. 47 at 2.)
The Court notes that it has previously denied summary judgment with respect to the Nevada law claim (also known as the "State Claim"). (ECF No. 121.) The instant Order solely deals with the claim brought under the Exchange Act (the "Federal Claim") and the issues relevant to same.
For purposes of Defendants' Motion, the following facts are viewed in the light most favorable to the nonmoving party:
KSpace was formed by two California doctors, Robert Heller and Adam Bazih. The doctors had invented a medical device which they patented and sought to bring to market through capital funding. (ECF No. 98-1 at 10-11.) In February, 2010, KSpace engaged Defendant AP Capital to raise capital and to provide other services to KSpace. (Id.)
At all relevant times, Defendant Cohen was the President and 100% shareholder
To raise capital for KSpace, the Defendants utilized a structure involving a newly formed single-purpose entity referred to as an "investment vehicle." (Id. 12-13.) New investors would purchase membership interests in the "investment vehicle", which in turn would purchase membership interests in KSpace. (ECF No. 100-35.) The first investment vehicle formed was Aspen KSpace, LLC, a Nevada limited liability company ("AKS-I"). AKS-I was managed by Aspen Pacific Asset Management, LLC ("APAM"), through its Manager, Defendant AP Group, and Defendant Cohen was President of same. (ECF No. 98-9.)
On February 9, 2010, AKS-I purchased approximately 37% of the membership interests in KSpace for $1,590,000. (Id. at 10.) AKS-I also agreed to lend KSpace an additional $410,000, for a total of $2 million in new capital for KSpace. (ECF No. 98-10; ECF No. 98-11.) As a part of the AKS-I transaction, Defendant AP Group received a 20% interest in AKS-I, forming part of the consideration for raising capital for the company, KSpace. (ECF No. 98-3 at 30,33-34.) Between February and June, 2010, Cohen and Young raised $2 million for KSpace from 15 separate investors in AKS-I, excluding Cohen's and Young's investments through their investment entities H & L Cohen, LLC and Young Investments, LLC. (ECF No. 98-12.)
The $2 million that Cohen and Young raised through the first investment vehicle (AKS-I) turned out to be insufficient to finish development of KSpace's product. (ECF No. 98-4 at 168.) In September, 2010, KSpace authorized Cohen and Young to raise an additional $1 million, which later occurred through Plaintiff's investments. (Id.)
For purposes of Plaintiff's investments, Defendant Cohen formed a second "investment vehicle", Aspen KSpace II, LLC ("AKS-II"). (ECF No. 98-13.) Similar to AKS-I, this second investment vehicle was run through its manager, Defendant AP Group, which in turn was managed by Defendant Cohen. (ECF No. 115-1 at 8.)
On November 22, 2010, the closing of the AKS-II financing transaction occurred, involving 21 separate instruments executed variously by Plaintiffs, KSpace and its members, AKS-I and its members, AKS-II and its members, AP Capital, and AP Group. (ECF No. 98-14.)
The AKS-II closing documents included the following:
(a) Subscription Agreements between Plaintiffs and AKS-II, under which Plaintiffs Landegger and Whittemore jointly paid $1 million for 80% of the membership interests in AKS-II (ECF No. 115-1; ECF No. 115-2.);
(b) Operating Agreement of AKS-II between and among Plaintiffs and AP Group, in which AP Group acquired the remaining 20% interest in AKS-II (ECF No. 98-15);
(c) Preferred Membership Interest Purchase Agreement between KSpace and AKS-II, under which AKS-II agreed to purchase an 18.7% membership interest in KSpace for $795,000 (ECF No. 98-16);
(d) Amended and Restated Secured Note made by KSpace in favor of AKS-I and AKS-II in the amount of $615,000, in consideration of $205,000 newly loaned to KSpace by AKS-II and $410,000 previously loaned by AKS-I (ECF No. 98-17);
(e) Amended and Restated Security Agreement between and among Kspace,
(f) Participation Agreement and Assignment of Participation Interest between ASK-I and AKS-II, defining their relationship as co-lenders to KSpace (ECF No. 98-19);
(g) Action by Written Consent of the Manager of AKS-II (APAM, through its Manager, AP Group) and Members of AKS-II (Plaintiffs and AP Group), consenting to the financing transaction documents (ECF No. 98-21);
(h) Second Amended and Restated Operating Agreement of KSpace, signed by the members of KSpace to accommodate the new issue of KSpace membership interest to AKS-II (ECF No. 98-22);
(i) Action by Written Consent of the Management Committee and Members of KSpace, signed by KSpace and its members to consent to the AKS-II financing transaction documents (ECF No. 98-23); and
(j) Amended and Restated Consulting Agreement between KSpace and AP Capital, providing for increased fees to be paid by KSpace to AP Capital. (ECF No. 98-24).
According to Dr. Bazih, founder of KSpace, the Amended and Restated Consulting Agreement between KSpace and AP Capital was "believed" to have been executed as an integral part of the November 22, 2010, AKS-II transaction. (ECF No. 98-1 at 83.) Moreover, the appended schematic illustrates key aspects of the KSpace transactions, including the contracts between the investment vehicles, KSpace, some Defendant entities and Plaintiffs Landegger and the Whittemore Collection Ltd. (See Exhibit A.)
The Court has relied upon this schematic as a reference point in the disposition of Defendant's Motion. It is hardly, though, a model of clarity. To this point, the Court notes that supplemental briefing was recently sought in this case to update the case law that may have evolved since Defendants' Motion was originally filed in late December 2012. (ECF No. 113.) The Court also afforded Defendants an opportunity to provide the Court with its own schematic. Defendants declined this invitation, which only reinforces the difficulty in conceptualizing the contractual relationships at issue in this suit and disputed issues of material fact going to the privity issues addressed later.
The following provisions from the Exchange Act are relevant to the instant Motion. Specifically, Section 15(a)(1) of the Exchange Act, provides:
The crux of Plaintiff's claim is predicated on the unregistered broker status of Defendants Cohen and Young, respectively. Because of this status, Plaintiff contends that the securities' contracts entered into with Defendants were unlawful under Section 15(a)(1) of the Exchange Act. Plaintiff further contends that the contracts should be made void pursuant to Section 29(b).
Arising from Plaintiff's claim are issues of first impression within the Tenth Circuit.
Because Plaintiff has conceded the third issue, the Court does not address it in any significant way other than to say that Plaintiff will be prevented from pressing that argument at trial.
A private right of action is the "right of an individual to bring suit to remedy or prevent an injury that results from another party's actual or threatened violation of a legal requirement."
The methodology applied by the federal courts in determining the existence vel non of an implied cause of action has shifted in recent times.
The Court begins its review with examination of J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). The issue in Borak was whether a shareholder had a private cause of action for damages for violation of § 14(a) of the Exchange Act; a section that makes it "unlawful for a person to solicit proxies in violation of rules prescribed by the Securities and Exchange Commission." Id. (emphasis added). Finding that the SEC did not have enough time to examine every proxy statement for false and misleading statements, the Supreme Court stated that private enforcement is a "necessary supplement" to the SEC's efforts to protect investors. Id. at 432-33, 84 S.Ct. 1555. This, the Supreme Court said, was to conform with and effectuate the broader purposes of the Exchange Act — i.e., "the protection of investors" engaged in the buying and sale of interstate securities. But as recently pointed out in Wisniewski, 510 F.3d at 297, at no point did the Borak Court purport to "discern Congress's intent regarding a private right of action as opposed to Congress's general purposes in enacting the statute." As such, the Borak approach is viewed as the least restrictive approach in determining whether a private
Eleven years after Borak, in Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), the Supreme Court shifted its approach in attempting to discern the existence of a private cause of action where the relevant statute was silent on the matter. In making this determination, the Supreme Court described the criteria to be applied by the lower courts as follows: "First, is the plaintiff `one of the class for whose especial benefit the statute was enacted' — that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the states, so that it would be inappropriate to infer a cause of action based solely on federal law?" Id.
In applying the criteria, the Supreme Court found a private civil cause of action did not exist under a criminal statute prohibiting corporations from making contributions to presidential campaigns. Id. Importantly to our analysis here, notwithstanding the shift in approach the Court employed in Cort, the four-factor test enunciated in that decision has itself since been `chipped away' with subsequent decisions altering the test virtually beyond recognition.
In Touche, the Supreme Court addressed whether § 17(a) of the Exchange Act afforded a private right of action against a broker who did not submit periodic reports to enable the relevant authorities to perform their regulatory functions. The plaintiff argued that because the defendant-broker failed in this duty, this gave rise to damages on a tort-based theory of liability. In rejecting that theory, the Supreme Court declared that the task of the court was "limited solely to whether Congress intended to create the private right of action." Touche, 442 U.S. at 568, 99 S.Ct. 2479. In finding that the section did not evince a Congressional intent to create a private right of action, Justice Rehnquist stated:
The Supreme Court held in the negative on the question before us because the text and structure of the statute did not protect
The High Court's next case on this issue, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982), is also relevant to disposition of Defendants' Motion. Here, the Supreme Court implied a private cause of action under the Commodities Futures Trading Commission Act ("Commodities Act"), after Congress amended the Commodities Act in 1974. The Court reasoned that it was "simply assumed the remedy was available" and that Congress's failure to eliminate the statutory provisions from the previous act — which afforded a private cause of action — only justified the maintenance of the enforcement scheme under the amended Act. See Curran, 456 U.S. at 377, 102 S.Ct. 1825. Congress's failure to eliminate the private cause of action in the amended Commodities Act reflected "the intent of Congress" to maintain a private cause of action. Id.
Tellingly, and relevant to the present case, the majority held that a court's "evaluation of congressional action must take into account [the] contemporary legal context." Id. The relevant context in Curran was one where courts had previously recognized a private cause of action under the previous statute. It was this context that clarified Congressional intent to allow for private rights of action under the Commodities Act.
On the heels of Curran came Herman & MacLean v. Huddleston, 459 U.S. 375, 387, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). There, the Supreme Court affirmed the existence of an implied private cause of action based on § 10(b) of the Exchange Act. Specifically, the Supreme Court said: "a private right of action under Section 10(b) of the 1934 Act and Rule 10b-5 has been consistently recognized for more than 35 years. The existence of this implied remedy is simply beyond peradventure." Id. at 381, 103 S.Ct. 683. Citing Curran, and in construing the statute, it was further stated that "Congress's decision to leave Section 10(b) intact [from the previous statute] suggests that Congress ratified the cumulative nature of the Section 10(b) action." Id. at 386, 103 S.Ct. 683.
The Curran and Huddleston cases share in common the fact that the Court was continuing to imply previously existing causes of action, rather than creating new ones. Indeed, in the period in which the Commodities Act and the Exchange Act were amended, the Supreme Court was guided by the Borak decision; a decision that provided the least restrictive approach in allowing implied private causes of action. This provided further legal context that allowed the majority in Curran (and Huddleston) to more readily infer Congressional intent from the amended statutes in each case because Congress expected that the courts would to follow the Borak approach. This view was reinforced by the Supreme Court's earlier decision in Cannon, where it was stated, as a general proposition, that it is reasonable to presume that Congress is aware of judicial precedent before enacting statutes, and that it is appropriate for courts to consider such contextual evidence for purposes of construing a statute. Cannon 441 U.S. at 677, 99 S.Ct. 1946 (stating, "it is always appropriate to assume that our elected representatives, like other citizens, know the law" at the time of making amendments to existing statutes).
The Supreme Court's most recent treatment of the private cause of action issue can be found in Sandoval, 532 U.S. 275, 121 S.Ct. 1511, 149 L.Ed.2d 517. It is the most restrictive approach announced by the Court to date. The issue before the Court was whether an implied cause of action existed to enforce the regulations enacted under Title VI of the Civil Rights Act of 1964. Title VI prohibits racial discrimination by recipients of federal funds. Although Title VI had traditionally required discriminatory intent, the Department of Justice ("DOJ") enacted regulations under Title VI that prohibited recipients of federal funds from engaging in practices that have a racially discriminatory impact. The Court reviewed these regulations, coupled with the statute that, pre-Sandoval, had been interpreted
Notwithstanding this, the Court's majority rejected the opinion of every circuit court
Finally, in re-calibrating the approach relevant to implied causes of action, the majority in Sandoval relied heavily on the Touche decision to buttress its reasoning — a case which was cited no less than four times throughout Justice Scalia's opinion. Given the endorsement of the Touche holding by Sandoval, and the subsequent citation of same by the Tenth Circuit, the Court finds the Touche decision useful in disposition of the present case, especially given that is one which similarly addressed provisions in the Exchange Act.
To summarize, the Sandoval decision resoundingly affirmed Touche. 532 U.S. at 286, 121 S.Ct. 1511 (stating, "private rights of action to enforce federal law must be created by Congress"). In accordance with Sandoval, the judicial task is to "interpret the statute to determine whether it displays an intent to create not just a private right, but also a private remedy." Id. Such intent must be drawn from the "text and structure" of the statute to determine whether "rights-creating language" exists. Id. at 288, 121 S.Ct. 1511. And to determine whether such language exists, Touche provides that district courts are to look to the whether the statute (1) grants "private rights to any identifiable class" and (2) "proscribes conduct as unlawful." 442 U.S. at 568, 99 S.Ct. 2479. These are but examples of "rights-creating language"; though given the strong endorsement of Touche in Sandoval, these examples provide helpful clues as to whether Congress intended that a private cause of action be implied. If there is no "rights-creating language", Sandoval makes clear that the interpretive process ends there. Sandoval 532 U.S. at 288, 121 S.Ct. 1511.
Additionally, and to clarify the language of the statute — so to discern Congressional intent — Sandoval permits a district court look to the "contemporary legal context" in which the statute was enacted. Id. But the majority did restrict its usage. Context may only buttress a "conclusion independently supported by the text of the statute." Id. Context cannot be relied upon as the first tool in the interpretive tool box. It is secondary indicia of Congressional intent. The weight afforded to context is thus less than that afforded to the statutory language itself. 532 U.S. at 292, 121 S.Ct. 1511 (stating "legal context matters only to the extent it clarifies text.")
The approach summarized above is drawn directly from the Sandoval and Touche decisions. It is an approach that will be applied by this Court, in this case, with respect to the relevant provisions in the Exchange Act. See Boswell v. Skywest Airlines, Inc., 361 F.3d 1263, 1267 (10th Cir.2004); Southwest Air Ambulance, Inc. v. City of Las Cruces, 268 F.3d 1162, 1169 (10th Cir.2001); Sonnenfeld, 100 F.3d at 747; see Bradford C. Mank, Legal Context: Reading Statutes in Light of Prevailing Legal Precedent, 34 Ariz. St. L.J. 815, 835-36 (2002).
The battle lines drawn over interpretation are primarily directed at Section 15(a)(1) and Section 29(b). The Parties have competing interpretations of how these provisions should be construed — and whether, inter alia, the provisions give rise to a private cause of action as a matter of law.
Plaintiff contends that Defendants have violated Section 15(a)(1) of the Exchange Act. That section provides that it is unlawful for a broker to induce the sale of securities unless registered. Section 29(b) affords relief for violations of Section 15(a)(1) in the form of rescission. Plaintiff's preferred interpretation is that these provisions give rise to an implied private cause of action.
Defendants counter. They contend that neither of the sections afford Plaintiff any form of private action. Rather, Defendants' preferred construction is that any action based on Section 15(a)(1) and Section 29 must be brought by the Securities and Exchange Commission ("SEC" or "Commission"). (ECF No. 115 at 12-13.)
For the reasons stated below, the Court adopts Plaintiff's preferred construction. The reason is four-fold.
First, Section 15(a)(1) provides `rights-creating language' that discerns Congressional intent in favor of Plaintiff's position. The Court finds that such language gives rise to a private cause of action under the Exchange Act. Specifically, Section 15(a)(1) provides that "it shall be unlawful for any broker .... to effect ... the purchase or sale of, any security ... unless such broker is registered." The Court finds that this text provides clear evidence of Congressional intent to support Plaintiff's private cause of action against Defendants under the Exchange Act. It does so because Section 15(a)(1) proscribes certain conduct as "unlawful" — i.e., it is unlawful for brokers to engage in the sales of securities when they are unregistered. It is rights-creating language since it allows a plaintiff to sue for violations of a broker's unlawful conduct connected with the sale of securities contracts. Cf. Touche, 442 U.S. at 568, 99 S.Ct. 2479 (finding that "the statute by its terms, grants no private rights to any identifiable class and proscribes no conduct as unlawful ... [a]t least in such a case as this, the inquiry ends there ... and the question whether Congress intended to create a private right of action, [is] answered in the negative.")
Because Section 15(a)(1) expressly states that unregistered brokering is unlawful, the Court finds that this language provides one of the best clues that the section affords a private cause of action reflecting Congressional intent. Put simply: the absence of this language in Touche cut against the plaintiff in that case; it follows that the existence of this language, in this case, cuts the other way.
Second, Sandoval mandates more than just a private right — there must also be Congressional intent to create a private remedy. Here, evidence of a private remedy can be found in Section 29(b). That section provides that "every contract made in violation of this chapter ... shall be void." (emphasis added). And because Section 15(a)(1) falls within the chapter that triggers relief under Section 29(b), it follows that the Sandoval requirement that there be textual and structural support for both a personal right and a private remedy is satisfied. Cf. Boswell, Inc., 361 F.3d at 1267 (stating that the court's task "is to determine whether the [statute] displays an intent to create both a right and a remedy in favor of plaintiff.")
The third reason supporting Plaintiff's preferred construction is based on context. It serves to reinforce the result against Defendants' purported construction.
To supplement the text and structure of a statute, Sandoval said that a court could look to "contemporary legal context" to discern Congressional intent provided such context acts in tandem with the statutory language. See 532 U.S. at 292, 121 S.Ct. 1511. Specifically, Sandoval stated that context may buttress a "conclusion independently supported by the text and structure of the statute." Id. The text must speak first, however. Here, Plaintiff contends that the legal context, at the time of amendment to the Exchange Act in 1975, also supports Plaintiff's preferred construction. Id. As Plaintiff points out that prior to 1975 a private cause of action had been recognized by some courts under Section 15: see Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 368 n. 1 (1st Cir.1973), Davis v. Avco Corp., 371 F.Supp. 782, 789 (N.D.Ohio 1974), and Opper v. Hancock Securities Corp., 367 F.2d 157, 158 (2nd Cir.1966).
Because of these cases, Plaintiff contends that the contemporary legal context allows this Court to more readily infer Congressional intent supporting a private cause of action since Congress's failure to expressly eliminate the private cause of action in the amended Act reflected the intent of Congress to maintain a private cause of action under the statute, post-1975.
This argument holds merit. In light of the referenced pre-1975 case law — coupled with the intention drawn from the text and structure of the statute as addressed above — the Court agrees with Plaintiff's preferred construction. The Court finds that the legal context, at the time of the amendment to the Exchange Act, supports the contention that it was Congress's intent to provide for a private cause of action, because there is nothing in the express language of Section 15(a)(1) to disavow this interpretation, particularly given the pre-existing case law that supported its existence. This view, however, is qualified to the extent the Court has afforded less weight to context than that afforded to the text and structure of the statute. This is what Sandoval mandates. But, provided such context is not inconsistent
Finally, Defendants rely on Sheldon for the proposition that private cause of action under Section 15(a)(1) has not been recognized since the amendment of the Exchange Act in 1975. 204 F.R.D. 679. Defendants contend that this Court should follow that opinion. But fatal flaws exist in Sheldon's reasoning. For instance, there is no reference to Sandoval anywhere in the opinion. On the contrary, there are at least four references to the Cort decision; a decision that has been virtually altered beyond recognition from a four-factor test to a one factor analysis: Congressional intent. Moreover, nowhere in Sheldon opinion did that court seriously examine the application of Curran — i.e., an approach that allows for analysis of contemporary legal context to help clarify Congressional intent as a basis for implying a private cause of action. Instead, it was simply ignored and reliance was placed on Cort and cases citing same, even though there were Supreme Court cases in the late 1970s, post-Cort, that cut away at its persuasiveness. This has been addressed earlier.
The Court finds that both Sandoval and Curran are directly relevant to the analysis in the present suit. The fact that they were both absent in the abbreviated analysis in Sheldon dilutes any persuasive value of that opinion in this district. Indeed, because Sheldon cites neither case, this Court affords the decision minimal (if any) weight in disposition of Defendants' Motion.
In sum, the Court finds that Congress has adequately evinced — through the text and structure of the relevant statutory language — its intent to afford a private cause of action pursuant to Section 15(a)(1). As a matter of law, therefore, the Court finds that Defendants' motion should be denied to the extent that it relates to the first issue — i.e., whether Plaintiff may pursue a private cause of action against Defendants.
The second issue addresses whether privity of contract is required to maintain relief pursuant to Section 29(b) of the Exchange Act. In deciding this issue, the
To prevail under Section 29(b), a plaintiff must show: "(1) the contract involved a `prohibited transaction;' (2) he is in contractual privity with the defendant; and (3) he is `in the class of persons the Act was designed to protect.'" Reg'l Props., Inc. v. Fin. & Real Estate Consulting Co., 678 F.2d 552, 559 (5th Cir.1982); Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 205 (3d Cir.2006); see also Heck v. Buhler, 2010 WL 1293752, at *7 (M.D.La. Mar. 3, 2010).
Defendants contend that even if Plaintiff has a claim under Section 15(a)(1), he cannot claim relief in the form of rescission because Plaintiff cannot establish privity of contract. (ECF No. 115 at 3.) Plaintiff counters. At a minimum, Plaintiff argues that privity exists with respect to Defendant AP Group, and that a more flexible theory of privity should extend to the remaining Defendants because these Defendants cannot be said to be strangers to the securities contracts surrounding Plaintiff's investments. (ECF No. 116 at 41) (stating that the "citadel of privity" surrounding section 29(b) should not be followed "blindly"). Specifically, Plaintiff contends that the contracts "are mere strands in a complex web of interrelation agreements that form a single transaction" that satisfy the privity requirement for the purposes of obtaining the relief sought pursuant to Section 29(b) of the Exchange Act. (Id. at 2.)
In reading the following facts in favor of the non-moving party, the Court
Of these agreements, the Operating Agreement is worth closer attention. It puts in dispute Defendants' contention that no privity exists between Plaintiff and any of the Defendant entities because the Operating Agreement specifically binds both Plaintiff and Defendant AP Group with respect to units in AKS-II. (ECF No. 98-15 at 18-33.) It also outlines how the units will be managed, what voting rights members will have with respect units bought, how members and units may be added. (Id. at 18-33.) In Schedule A, the Operating Agreement references the cash contributions
In light of this evidence, the Court finds that Plaintiff has discharged his burden for the purposes of summary judgment in going beyond the pleadings and setting forth "specific facts that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant." See Adler, 144 F.3d at 671. Thus, because of this evidence, the Court finds that there is a genuine dispute of fact as to whether Plaintiff is in privity of contract with Defendant AP Group so to deny Defendant's Motion for Summary Judgment. See In re Gas Reclamation, Inc. Securities Litigation, 733 F.Supp. 713, 719-20 (S.D.N.Y.1990); see also Salamon v. Teleplus Enterprises, Inc., 2008 WL 2277094, *6 (D.N.J.2008).
The question whether the other named-Defendants are in privity of contract with Plaintiff is a much closer call.
Plaintiff cites case law from contexts outside Section 29(b) that provide support his position. Plaintiff contends that there is enough in these cases for his privity theory to proceed to jury for further factual development to determine whether privity exists.
Here, and based on the above cases combined with the evidence in the record, the Court finds that Plaintiff's argument has merit. Specifically, because there is evidence in the record that Defendant AP Group signed contracts with Plaintiff which cross-references contracts with other Parties in the Schedules of that agreement, the Court finds that privity could exist with further factual development in the course of a jury trial. To add to this, Defendant Cohen's signature exists on many of these contracts, and that tends to show that a reasonable juror might may make factual determinations which support a finding of privity with respect to the remaining Defendants. What reinforces this view is the web of contracts that were all signed on the very same day (November 22, 2010) by the Parties as depicted in Exhibit A of this Order. Indeed, this schematic is one that gives rise to an inference that Parties' intended that the contracts (or at least some of them) be read together as a single transaction.
The Court holds that this evidence — and inferences that arise therefrom — suggest that the Federal Claim is anything but clear-cut. Indeed, the claim will hinge on the interdependence of the 21 instruments dated November 22, 2010 (and possibly earlier contracts). The Parties' intent underlying these instruments will in turn depend on questions of disputed fact. And because intent is a factual determination, the Court has little choice but to allow Plaintiff's Federal Claim to proceed to trial and deny Defendants' Motion for Summary Judgment.
Given the novel nature of Plaintiff's privity theory, the Parties are to file preliminary jury instructions in advance of when such filings would typically become due under the Court's Practice Standards.
The Court notes that the Parties will have a right to amend these jury instructions for `good cause' closer to the trial date should settlement in this action not be reached.
The third issue for the Court was whether Plaintiff could claim damages under Section 29(b) of the Exchange Act. But because Plaintiff conceded the third issue in its initial responsive briefing, the Court does not address it in any significant way other than to say that Plaintiff will be prevented from pressing that argument at trial. (ECF No. 94 at 31.) While Plaintiff withdrew the original concession from previous briefing in ECF No. 116, the Court disregards this turnabout. The purpose of the supplemental briefing was strictly limited. Contrary to Plaintiff's view, it did not include further briefing on the money damages issue. (ECF No. 113 at 1) (stating the "Parties should refile their briefing with relevant case law (if any) on: (a) the privity issue, and (b) the private cause of action issue, as those issues are defined in Defendants' Motion"). Having conceded a position at his own volition in ECF No. 94, without any foul-play by Defendants, the Court finds it highly prejudicial to now permit renewal of the damages issue with trial soon approaching.
Based on the foregoing, the Court ORDERS as follows:
The Court notes that this evidence and cross-referencing of contracts in November 2010 with those in February 2010 involving multiple Defendant-entities only creates further disputed facts related to the Parties intent as to whether the contracts constituted a single transaction or not.
