Lewis v. Fresne ( 2001 )


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  •                           UNITED STATES COURT OF APPEALS
    FOR THE FIFTH CIRCUIT
    No. 99-20389
    MICHAEL P. LEWIS,
    Plaintiff-Appellant
    versus
    DAVID M. FRESNE; ET AL
    Defendants
    LOWELL FARKAS; ROBERT A. YOUNG; ROSENFELD,
    BERNSTEIN & TANNENHAUSER LLP; ERIC P. ROSENFELD
    Defendants-Appellees
    Appeal from the United States District Court
    for the Southern District of Texas
    May 14, 2001
    Before GARWOOD, HALL,1 and BARKSDALE, Circuit Judges.
    CYNTHIA HOLCOMB HALL, Circuit Judge:
    This case requires us to determine whether the Securities Act
    of 1933 (“the 1933 Act”) applies to a 90-day “bridge” loan and
    whether a single phone call and the mailing of allegedly fraudulent
    information can be sufficient to establish personal jurisdiction
    over non-resident defendants.              Plaintiff alleges violations of the
    1933       Act     and   Texas    state   law.     The   district   court   granted
    defendants’ motion to dismiss, holding that the plaintiff failed to
    1
    Circuit Judge of the Ninth Circuit, sitting by designation.
    state a claim under the 1933 Act and that the evidence was
    insufficient     to     establish   personal   jurisdiction   over   the
    defendants.    We agree with the district court as to the reach of
    the 1933 Act, but we find that sufficient minimum contacts exist as
    to all but one of the appellees and reverse the district court’s
    dismissal as to the state law claims.
    I. Facts and Proceedings Below
    Appellant Michael Lewis was a customer of the Bear Stearns
    brokerage house from April 1992 to April 1996.         David Fresne was
    his stockbroker.       In 1995, Fresne tried to convince Lewis to buy
    stock through a private placement in Mad Martha’s Ice Cream, Inc.
    (“Mad Martha’s”), a Delaware corporation with business locations in
    Massachusetts. Fresne sent Lewis a private placement memorandum on
    a Mad Martha’s stock offering, but Lewis refused to buy.
    Lewis did agree to Fresne’s second suggestion: making a 90-day
    “bridge loan” to Mad Martha’s pending the closing of a private
    placement of the company’s stock.         In June 1995, Lewis loaned
    $650,000 to Mad Martha’s.      In return, Lewis received a promissory
    note for $650,000 (the “Note”), which was never repaid, and a
    pledge of 615,675 shares of Mad Martha’s stock, which became
    worthless when Mad Martha’s filed for bankruptcy eight months
    later.   The Note was supposedly secured by, among other things, a
    first lien on the assets of a Mad Martha’s store in Nantucket,
    Massachusetts.    It was to bear interest at a rate of 15 percent per
    2
    annum, or $97,500, and that amount was not tied to the performance
    of Mad Martha’s stock.
    Lewis claims that the defendants misrepresented the facts
    surrounding    the   Nantucket   store    when   he    agreed   to   loan   the
    $650,000. Apparently, the former president of Mad Martha’s, Thomas
    Quinn, entered into the lease for Mad Martha’s Nantucket store in
    his own name instead of Mad Martha’s.        Even after he was removed by
    the board of directors, Quinn continued to retain possession of the
    Nantucket store and operate it as if it were his own store and not
    Mad Martha’s.   Mad Martha’s unsuccessfully filed suit in an effort
    to regain control of the Nantucket store.             Lewis alleges that the
    defendants sent him letters and documents falsely stating that Mad
    Martha’s was providing him with a first lien on the Nantucket store
    when they knew that Quinn was the store’s true owner.
    The efforts to sell Mad Martha’s stock in a private placement
    failed.   On February 27, 1996, Mad Martha’s filed for bankruptcy.
    Lewis filed a complaint in Texas state court alleging breach of
    fiduciary duty (by Fresne), securities fraud under the Texas
    Securities Act, violations of the Securities Act of 1933, common
    law fraud, and civil conspiracy.         The case was then removed to the
    United States district court for the Southern District of Texas.
    In an August 14, 1996 order, the district court denied Lewis’s
    motion to remand the case to state court and dismissed several
    defendants from the case on the basis that personal jurisdiction
    was lacking.     This appeal only concerns those defendants: Eric
    3
    Rosenfeld; Lowell Farkas; Eric Young; and Rosenfeld, Bernstein &
    Tannenhauser, LLP.2
    In an October 6, 1997 opinion, the district court reaffirmed
    that: 1) Lewis failed to state a claim under the 1933 Act; and 2)
    the evidence was insufficient to establish personal jurisdiction
    over the defendants in this appeal.       The district court denied
    Lewis’s request to file an amended complaint alleging violations of
    the Securities Act of 1934.    Meanwhile, Lewis eventually settled
    with the defendants that had not been dismissed in the August 14
    order, including Fresne. Following his settlement with Fresne (the
    last remaining non-dismissed defendant), Lewis submitted an agreed
    final judgment that was approved by the court on April 19, 1999.
    Lewis then filed a motion for a new trial as to the defendants
    dismissed in the August 14, 1996 order.   He attached to this motion
    a statement from Fresne who claimed that he had been acting as an
    intermediary between Lewis and Rosenfeld.       The district court
    denied the motion citing the prejudice to the defendants (who had
    been out of the case for three years) and the lack of probative
    value in Fresne’s statement.
    II. Standard of Review
    2
    Lewis’s petition also stated a claim against Robert
    Bernstein and Robert Tannenhauser in their individual capacities.
    Along with the other defendants in this case, they were dismissed
    for lack of personal jurisdiction. This Court dismissed the appeal
    against Tannenhauser and Bernstein in a January 13, 2000 order.
    4
    This court reviews both the district court’s denial of Lewis’s
    motion to remand the case back to state court and its dismissal for
    want of personal jurisdiction de novo.       See Frank v. Bear Stearns
    & Co., 
    128 F.3d 919
    , 921 (5th Cir. 1997) (motion to remand); Jobe
    v. ATR Mktg., Inc., 
    87 F.3d 751
    , 753 (5th Cir. 1996) (dismissal for
    want of personal jurisdiction).         When a trial court rules on a
    motion to dismiss for lack of personal jurisdiction without holding
    an evidentiary hearing, as the trial court did in this case, it
    must resolve any factual conflicts in favor of the plaintiff.          See
    Stripling v. Jordan Production Co., 
    234 F.3d 863
    , 869 (5th Cir.
    2000).
    The district court’s denial of leave to amend the complaint is
    reviewed   for   abuse   of   discretion.    See   Patterson   v.   P.H.P.
    Healthcare Corp., 
    90 F.3d 927
    (5th Cir. 1996).
    III. Failure to State a Claim Under the 1933 Securities Act
    The 1933 Act states: “No case arising under this title and
    brought in any State court of competent jurisdiction shall be
    removed to any court of the United States.”        15 U.S.C. § 77v.    The
    district court acknowledged this language, but explained that in
    limited circumstances the defendant may pierce the pleadings to
    show that claims otherwise not removable have been pled solely to
    prevent removal.    In its August 14 order, the district court held
    that the Note was not a “security,” and, therefore, Lewis did not
    have a valid claim under the 1933 Act.      In its subsequent opinion,
    5
    the district court explained that Lewis also failed to state a
    claim because Lewis only sued under § 12 of the 1933 Act and that
    portion of the 1933 Act does not apply to non-public transactions.
    The burden is on the defendants to show that Lewis’s federal
    Securities   Act   claim    is   baseless.    This   is    a   heavy   burden.
    Defendants “must show that there is no possibility that plaintiff
    would be able to establish a cause of action.”            Lackey v. Atlantic
    Richfield Co., 
    990 F.2d 202
    , 207 (5th Cir. 1993).           All questions of
    fact and any ambiguities in the current controlling substantive law
    must be resolved in the plaintiff’s favor.                 See Burchett v.
    Cargill, Inc., 
    48 F.3d 173
    , 176 (5th Cir. 1995).
    We decline to address the issue of whether the Note was a
    “security” under the 1933 Act because we agree with the district
    court that this was a private transaction.                For his 1933 Act
    claims, Lewis alleged only violations of § 12(1), § 12(2), and
    derivative liability under § 15.3         (These correspond to 15 U.S.C.
    §§ 77l(1), 77l(2), and 77o in the U.S. Code.)                  Section 12(1)
    provides liability or recission for the offer or sale of a security
    without a registration statement.         Section 12(2) imposes liability
    on any person who “offers or sells a security . . . by means of a
    prospectus   or    oral    communication,    which   includes     an    untrue
    statement of a material fact or omits to state a material fact.”
    3
    Section 15 of the 1933 Act imposes derivative liability on
    “controlling persons” for violations of § 12. Without a violation
    of § 12, there is no claim under § 15.
    6
    Section 12 of the 1933 Act does not apply to private transactions.
    See Gustafson v. Alloyd Co., 
    513 U.S. 561
    , 584 (1995).           In
    Gustafson, the Supreme Court analyzed the legislative history of
    the 1933 Act to determine that Congress meant for § 12 to apply
    only to public offerings.4
    The evidence shows that this was a private transaction. Lewis
    only agreed to make the loan after receiving and rejecting a
    private placement memorandum.   He entered the deal through his own
    private broker.   The $650,000 was designed to keep Mad Martha’s
    running until a private placement sale of stock could be completed.
    See Whirlpool Financial Corp. v. GN Holdings, Inc., 
    67 F.3d 605
    ,
    609 n.2 (7th Cir. 1995) (holding that § 12 did not apply to a
    transaction involving a private placement memorandum); Vannest &
    Sage, Rutty & Co., 
    960 F. Supp. 651
    , 654-55 (W.D.N.Y. 1997) (same).
    Lewis contends that the district court ignored the “public”
    aspects of his transaction.     He cites to a decision from the
    Southern District of New York that allowed a plaintiff to sue under
    § 12 even though his purchase of stock was made pursuant to a
    private placement memorandum.    See Fisk v. Superannuities, Inc.,
    
    927 F. Supp. 718
    (S.D.N.Y. 1996).    The plaintiff in Fisk, however,
    alleged in his complaint that he had purchased 50,000 shares out of
    4
    Although the Gustafson case was brought under § 12(2) and
    not § 12(1), the language of the majority opinion encompasses all
    of § 12. See, e.g., 
    id. at 581
    (“The House Report thus states with
    clarity and specific reference to § 12 that § 12 liability is
    imposed only as to a document soliciting the public.”).
    7
    an offering of up to 4 million shares of common stock.         
    Id. at 722.
    In contrast, Lewis’s complaint contends that his 615,676 shares
    were represented to be 29% of the outstanding shares of stock.
    Thus, Lewis’s purchase involved a major stake in Mad Martha’s while
    the plaintiff in Fisk only bought himself a relatively small stake
    in   the   company.   Two    of   the   criteria   for   determining   if   a
    transaction is public are the size of the offering and the number
    of offerees.    See Koehler v. Pulvers, 
    614 F. Supp. 829
    , 842 (S.D.
    Cal. 1985).    Accordingly, Lewis fails to state a claim under the
    1933 Act because the transaction at issue was a private one that is
    not governed by § 12.5      We affirm the district court’s decision to
    deny Lewis’s motion for remand and to dismiss his 1933 Act claims.
    IV. Personal Jurisdiction
    In addition to his claim under the 1933 Act, Lewis alleges
    claims under the Texas Securities Act and common law. The district
    court dismissed these claims        for lack of personal jurisdiction
    against the defendants.
    5
    Lewis also contends that a pledge of stock is an offer or
    sale of a security covered by § 12.       He cites this circuit’s
    decision in Haralson v. E.F. Hutton Group, Inc., 
    919 F.2d 1014
    (5th
    Cir. 1991). The Haralson court held that a plaintiff could assert
    a claim under § 12(2) even if the transaction at issue was an
    isolated one made pursuant to a private offer. The 1991 Haralson
    decision is not persuasive, however, because it has been overruled
    by the Supreme Court’s 1995 decision in Gustafson.
    8
    The burden is on Lewis to establish the district court’s
    jurisdiction over non-residents.                 None of the defendants are
    residents of Texas.          Obtaining personal jurisdiction over a non-
    resident is constitutionally permissible if: 1) the non-resident
    purposely availed himself of the benefits and protections of the
    forum state by establishing minimum contacts with the state; and 2)
    the exercise of jurisdiction does not offend “traditional notions
    of fair play and substantial justice.”                 Wien Air Alaska, Inc. v.
    Brandt, 
    195 F.3d 208
    , 211 (5th Cir. 1999).                  There are two types of
    “minimum contacts”: those that give rise to specific personal
    jurisdiction    and     those    that     give       rise   to   general     personal
    jurisdiction.       General jurisdiction attaches when the defendant’s
    contacts with the forum state are “continuous and systematic.”
    Wilson v. Belin, 
    20 F.3d 644
    , 647 (5th Cir. 1994).                  Lewis does not
    argue that any of the defendants had continuous contacts with
    Texas.     Instead,     he     contends       that    specific    jurisdiction     is
    warranted because the defendants’ contacts with Texas “arise from,
    or are directly related to, the cause of action.”                   
    Id. Fresne and
    Rosenfeld were co-chairs of Mad Martha’s board of
    directors.      In     his    petition,       Lewis    alleges    that     Rosenfeld
    participated in a telephone conversation between himself and Fresne
    that was designed to convince Lewis to make the $650,000 loan.
    Lewis contends that Rosenfeld failed to correct allegedly false
    statements made by Fresne during that phone call. He also contends
    that    Rosenfeld     prepared    and     sent       loan   documents      and   stock
    9
    certificates    to    him    in     Texas     that     contained   fraudulent
    misstatements   regarding     the    Nantucket       store.   Similarly,    the
    petition alleges that Farkas, Mad Martha’s president, signed and
    sent security agreements to Lewis in Texas that fraudulently
    represented that Lewis would receive a first lien on the Nantucket
    store as security for his loan.
    We   believe    that   this    is    sufficient    evidence   of   minimum
    contacts to justify personal jurisdiction.                A single act by a
    defendant can be enough to confer personal jurisdiction if that act
    gives rise to the claim being asserted.                 See Brown v. Flowers
    Indus., 
    688 F.2d 328
    , 332-33 (5th Cir. 1982) (holding that a single
    telephone call initiated by the defendant was sufficient to confer
    personal jurisdiction).       There have been other cases where mere
    communications or negotiations with a resident of the forum state
    were not enough to subject non-resident defendants to the forum
    state’s jurisdiction.       See, e.g., Aviles v. Kunkle, 
    978 F.2d 201
    ,
    205 (5th Cir. 1992) (per curiam) (one telephone call and one letter
    not enough to confer personal jurisdiction).6            These cases did not,
    6
    Farkas contends that he is immune from suit under the
    “fiduciary shield” doctrine because all of his allegedly fraudulent
    acts were performed when he was acting as a corporate officer of
    Mad Martha’s. This is not a case where plaintiff’s claim rests on
    nothing more than Farkas’s status as a corporate officer. Instead,
    Lewis contends that Farkas deliberately misled him so that Mad
    Martha’s and Farkas would get the money needed to keep Mad Martha’s
    afloat until the private placement.      Therefore, the fiduciary
    shield doctrine should not apply. “[T]he shield is removed if the
    individual’s personal interests motivate his actions . . . .”
    Darovec Marketing Group, Inc. v. Bio-Genics, Inc., 
    42 F. Supp. 2d 810
    , 819 (N.D. Ill. 1999).
    10
    however, involve an intentional tort.        Lewis contends that all of
    the defendants intentionally defrauded him by lying about the
    ownership of the Nantucket Mad Martha’s store.              Recently, this
    Court explained that “[w]hen the actual content of communications
    with a forum gives rise to intentional tort causes of action, this
    alone constitutes purposeful availment.”       Wien Air Alaska, Inc. v.
    Brandt, 
    195 F.3d 208
    , 213 (5th Cir. 1999).      The “actual content” of
    Rosenfeld’s and Farkas’s communications to Lewis shows purposeful
    availment of the benefits and protections of Texas law.                   See
    Collins v. Gospocentric Records, 
    2001 WL 194985
    , *2 (N.D. Tex.,
    Feb. 22, 2001) (citing Wien for proposition that communications to
    plaintiff in Texas giving rise to intentional tort are sufficient
    to satisfy minimum contacts standard).
    Moreover, we find minimum contacts between Rosenfeld’s law
    firm, Rosenfeld, Bernstein & Tannenhauser LLP, and the forum state.
    “[A] partner’s actions may be imputed to the partnership for the
    purpose of establishing minimum contacts . . . .”          Sher v. Johnson,
    
    911 F.2d 1357
    , 1366 (9th Cir. 1990).
    We also conclude that maintenance of this action against
    Rosenfeld, Farkas, and Rosenfeld, Bernstein & Tannenhauser, LLP in
    Texas   will   not   offend   traditional   notions   of    fair   play   and
    substantial justice. Texas has a significant interest in providing
    a forum for this action because the injured party, Lewis, is a
    Texas resident.      See Wien 
    Air, 195 F.3d at 215
    ; Holt Oil & Gas
    Corp. v. Harvey, 
    801 F.2d 773
    , 779-80 (5th Cir. 1986).
    11
    We agree with the district court, however, that there is
    insufficient evidence of minimum contacts between defendant Young
    and the forum state.      Young was the president and sole shareholder
    of Vineyard Shops, Ltd. (“VSL”).         In 1993, he sold the Mad Martha’s
    Ice Cream Stores to Mad Martha’s in return for a down payment and
    a note for the balance of the purchase price.            Mad Martha’s still
    owed VSL money when Lewis made his loan in 1995.              Neither VSL nor
    Young   was   a   party   to    the   transaction   between   Lewis   and   Mad
    Martha’s.     Lewis’s only allegation against Young is that he signed
    a letter that was forwarded to him in Texas stating that VSL’s lien
    on the Nantucket store was being assigned to Lewis.             Young neither
    prepared the letter nor sent it to Lewis.              This conduct is not
    enough for Young to reasonably anticipate that he would be haled
    into court in Texas.       See World-Wide Volkswagen Corp. v. Woodson,
    
    444 U.S. 286
    , 296 (1980).
    V. Leave to Amend
    The district court rejected Lewis’s motion for leave to file
    an amended complaint.          Lewis sought to assert an additional claim
    under § 10(b) of the Securities Exchange Act of 1934 (“the 1934
    Act”) and to allege additional facts learned during discovery.
    Leave to amend “shall be freely given when justice so requires.”
    F.R.C.P. 15(a).     The district court denied Lewis’s motion because
    12
    it   was     “untimely     and   would      unduly   prejudice     Defendants,
    particularly those who were dismissed . . . in 1996.”7
    Federal Rule of Civil Procedure 15(a) allows a plaintiff to
    file one amended complaint as a matter of right when the defendants
    have not filed a responsive pleading.           Although the appellees have
    filed motions to dismiss, “[t]his court follows the prevailing view
    that a motion to dismiss is not a responsive pleading.”               Whitaker
    v. City of Houston, 
    963 F.2d 831
    , 834-35 (5th Cir. 1992).
    The    Whitaker court explained that the Fifth Circuit had
    adopted the Eleventh Circuit’s approach to reviewing motions for
    leave to amend a complaint after a dismissal. Under this approach,
    “a plaintiff is allowed to amend under Rule 15(a) with leave of the
    court–but not as of course–if the district court dismissed only the
    plaintiff’s complaint, not his or her action.”              
    Id. at 835.
        In
    August     1996,   the   district   court    dismissed   Lewis’s    complaint.
    According to Whitaker, Lewis cannot amend his complaint as a matter
    of right; he should only be granted leave to amend if the district
    court’s decision to deny such leave was an abuse of discretion.
    7
    The district court also denied Lewis’s motion to file an
    amended complaint because it held that the Note was not a
    “security” under the 1934 Act. Leave to amend does not need to be
    granted when the amended complaint would not withstand a motion to
    dismiss for failure to state a claim.       See Siray v. Lamson &
    Sessions Co., 
    948 F.2d 1037
    , 1042 (5th Cir. 1991). Because we hold
    that the district court’s decision was justified by Lewis’s undue
    delay in requesting leave to amend, we need not address whether the
    Note constitutes a “security” under the 1934 Act.
    13
    Undue delay justifies a district court’s decision to deny
    leave to amend.      See Las Vegas Ice & Cold Storage Co. v. Far West
    Bank, 
    893 F.2d 1182
    , 1185 (10th Cir. 1990). Lewis waited more than
    one year     after   the    district    court   had    dismissed    the   various
    defendants    for    lack   of   personal     jurisdiction.        He   offers   no
    explanation for his failure to include a claim under the 1934 Act
    in his original complaint.          Therefore, we hold that there was no
    abuse of discretion.
    CONCLUSION
    The decision of the district court is affirmed in part and
    reversed in part.      Plaintiff failed to state a claim under the 1933
    Act.    Plaintiff did establish that defendants Rosenfeld, Farkas,
    and Rosenfeld, Bernstein & Tannenhauser, LLP had sufficient minimum
    contacts with the state of Texas.            Accordingly, the district court
    has personal jurisdiction to hear plaintiff’s state law claims
    against these three defendants.          We agree with the district court
    that there is insufficient evidence for it to assert personal
    jurisdiction    over    defendant      Young.     It   was   not   an   abuse    of
    discretion for the district court to refuse to permit Lewis to
    amend his complaint.         The parties shall bear their own costs on
    appeal.
    14
    

Document Info

Docket Number: 99-20389

Filed Date: 5/29/2001

Precedential Status: Precedential

Modified Date: 12/21/2014

Authorities (22)

las-vegas-ice-and-cold-storage-company-a-nevada-corporation-doing-business , 893 F.2d 1182 ( 1990 )

Thomas W. Wilson v. David W. Belin and G. Robert Blakey , 20 F.3d 644 ( 1994 )

Robert S. Frank v. Bear Stearns & Co. , 128 F.3d 919 ( 1997 )

Jobe v. ATR Marketing, Inc. , 87 F.3d 751 ( 1996 )

David Burchett and Cheryl Burchett v. Cargill, Inc., ... , 48 F.3d 173 ( 1995 )

Matias Aviles v. Donald Kunkle, D/b/a, Kunkle Farms, and ... , 978 F.3d 201 ( 1992 )

Claude Whitaker v. City of Houston, Texas , 963 F.2d 831 ( 1992 )

Holt Oil & Gas Corporation and Faywin Investments, Pty. Ltd.... , 801 F.2d 773 ( 1986 )

Donna Patterson Nicholas Brown, and Michael L. Adams v. P.H.... , 90 F.3d 927 ( 1996 )

Wien Air Alaska, Inc. v. Brandt , 195 F.3d 208 ( 1999 )

pete-harding-brown-and-motts-inc-of-mississippi-v-flowers-industries , 688 F.2d 328 ( 1982 )

fed-sec-l-rep-p-95739-14-ucc-repserv2d-336-jb-haralson , 919 F.2d 1014 ( 1991 )

j-r-stripling-rosson-exploration-company-william-g-bowen-brookhaven-pump , 234 F.3d 863 ( 2000 )

sherry-lackey-william-daughtry-jr-and-the-estate-of-william-daughtry , 990 F.2d 202 ( 1993 )

Vannest v. Sage, Rutty & Co., Inc. , 960 F. Supp. 651 ( 1997 )

fed-sec-l-rep-p-98918-whirlpool-financial-corporation-v-gn-holdings , 67 F.3d 605 ( 1995 )

seymour-sher-jessica-faith-sher-v-paul-b-johnson-dba-johnson-paniello , 911 F.2d 1357 ( 1990 )

Fisk v. Superannuities, Inc. , 927 F. Supp. 718 ( 1996 )

Koehler v. Pulvers , 614 F. Supp. 829 ( 1985 )

Darovec Marketing Group, Inc. v. Bio-Genics, Inc. , 42 F. Supp. 2d 810 ( 1999 )

View All Authorities »