Professional Documents
Culture Documents
United States Court of Appeals, Tenth Circuit
United States Court of Appeals, Tenth Circuit
2d 342
S.Ct. 2505, 91 L.Ed.2d 202 (1986), we have reviewed the record, exhibits, and
briefs and conclude no factual dispute cognizable within federal securities law
is present to permit plaintiffs' proceeding to trial on this issue. We therefore
affirm the order of the district court.
I.
2
This litigation surfaced in the aftermath of the insolvency of Penn Square Bank
(Penn Square) in Oklahoma City, Oklahoma. Windon Third Oil and Gas
Drilling Partnership, Windon Fourth Oil and Gas Drilling Partnership, and
Windon Fifth Oil and Gas Drilling Partnership (Windon collectively or
plaintiffs/appellants) are Pennsylvania limited partnerships which were formed
to acquire fractional interests in oil and gas leases for wells in Oklahoma,
Kansas, and Texas. Windon retained Clifford Resources, Inc. (C.R.I.), whose
president, Hal Clifford, had previously supervised the exploration,
development, and operation of Windon partnership wells.1 Pursuant to the
terms of the partnership plans, the partnership entities executed agreements
with Penn Square in which individual limited partners borrowed the capital to
purchase an interest in a unit of the limited partnership. Each loan agreement
apparently contained an interest reserve clause earmarking 20% of the principal
of each note for payment of interest due. When Penn Square was declared
insolvent, the Federal Deposit Insurance Corporation (FDIC) and Deposit
Insurance National Bank (DINB),2 appointed receivers of the failed bank, took
over the notes and declared them in default for nonpayment of interest allegedly
in disregard of the terms of the original loan agreements.
Mr. Snipes and P.M.M. again moved for summary judgment, contending
plaintiffs had failed to allege facts to satisfy the elements of a Rule 10b-5 claim;
and, absent federal jurisdiction, they further sought dismissal of the state claim
for lack of subject matter jurisdiction. Appellees resubmitted Mr. Snipes'
original affidavit which averred he received a personal call from a man whose
name he did not remember and generally denied he had made each of the
representations Windon attributed to him. Windon resisted the motion,
countering with Mr. Olson's second affidavit, exhibits, a newspaper clipping,
and responses to interrogatories.
In granting summary judgment in favor of P.M.M. and Mr. Snipes, the court
characterized Mr. Snipes' statements and opinions as "at most tangential" to
Windon's investment decision and ultimately too remote from the subject oil
and gas investments to be material within the meaning of Rule 10b-5 as set
forth in Zobrist v. Coal-X, Inc., 708 F.2d 1511 (10th Cir.1983). Nor, in the
court's assessment, did Windon demonstrate justifiable reliance in light of the
remoteness of the statements and the disclaimers and caveats in the Windon
Third investment memorandum. The court found no fiduciary relationship
existed between Messrs. Snipes and Olson to permit an inference of reliance or,
alternatively, to support a separate element of a 10b-5 claim. The underlying
claim thus negated, the court rejected as insufficient Windon's factual
allegations of Mr. Snipes' and P.M.M.'s knowing participation with Penn
Square to support Windon's claim for aiding and abetting liability. With no
independent basis for federal jurisdiction, the court then dismissed Windon's
In this appeal, Windon urges the district court erred in mischaracterizing this
case, focusing only on the misrepresentation rather than on the nondisclosures.
Windon contends the court's inability to find material misrepresentations in the
offering memorandum underscores the essential nondisclosure of C.R.I.'s
financial condition of which it now complains. Windon insists Mr. Snipes'
alleged nondisclosures and misrepresentations are material in painting a picture
of a financially stable C.R.I. This misrepresentation, Windon alleges, led to the
selection of C.R.I. as operator, which, in practical terms, becomes the key to a
successful drilling program. In support of its position, Windon cites Affiliated
Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d
741 (1972), which held that in "failure to disclose" cases, positive proof of
reliance is not a prerequisite to recovery. Id. at 153. Appellant asks us to apply
the proper standard for summary judgment in securities cases, particularly in
the light of the wholly contradictory affidavits and evidence of business
interlocks between Penn Square, C.R.I., Mr. Snipes, and P.M.M.
While the debate over summary judgment continues,6 the Supreme Court has
recently addressed the issues of the movant's burden in summary judgment in
Celotex Corp. v. Catrett, --- U.S. ----, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986),
and the applicable standard of proof in Anderson v. Liberty Lobby, Inc., --U.S. ----, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Our review is guided by these
discussions. In Celotex, the Court clarified that interpretation of Rule 56(c) in
Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142
(1970), which placed the burden on "the moving party ... to show initially the
absence of a genuine issue concerning any material fact." Id. at 159, 90 S.Ct. at
1609. The Third Circuit had construed this language to require the moving
party to "support its motion with affidavits or other similar materials negating
the opponent's claim." Celotex, 106 S.Ct. at 2533. Reversing the court of
appeals, the Court concluded, "We do not think the Adickes language ... should
be construed to mean that the burden is on the party moving for summary
judgment to produce evidence of the absence of a genuine issue of material
fact, even with regard to an issue on which the nonmoving party bears the
burden of proof." Id. at 2554. Instead, the movant's burden under Rule 56 is
circumscribed by an initial showing of the absence of evidence to support the
nonmoving party's case. Id. The movant must identify those portions of "the
pleadings, depositions, answers to interrogatories and admissions on file,
together with affidavits if any" to demonstrate the absence of a genuine issue of
material fact. Fed.R.Civ.P. 56(c).7 Celotex requires no more. The moving
party's burden cannot be enhanced to require his proof of a negative; that is, not
only is there no evidence in the record, but plaintiff's evidence need not be
disproved.
10
Anderson v. Liberty Lobby, Inc., 106 S.Ct. at 2505, addressed the issue of the
quantum of evidence necessary to withstand summary judgment in an action for
libel. To make this determination, a trial court must look to the substantive law
in order to identify which facts are relevant "since materiality is only a criterion
for evaluating the evidentiary underpinnings of those disputes." Id. at 2510.
Since the evidence of the nonmoving party is deemed true and all reasonable
inferences are drawn in his favor, the nonmoving party "need only present
evidence from which a jury might return a verdict in his favor." Id. at 2514.
Further, determinations of credibility, weighing the evidence, and the drawing
of legitimate inferences from the facts remain in the preserve of the jury. Thus,
when the finder of fact decides a motion for summary judgment based on the
lack of proof of a material fact, the judge must ask, reasoned the Anderson
court, whether a "fair-minded jury" could return a verdict for the plaintiff on
the evidence presented.
11
We, thus, premise our review of the district court's granting summary judgment
on this rubric. Windon's factual allegations must be scrutinized to determine
whether inferences deriving from and cognizable within securities law are
permissible.
III.
12
Section 10(b) of the 1934 Exchange Act, 15 U.S.C. Sec. 78j(b), prohibits the
use "in connection with the purchase or sale of any security ... [of] any
manipulative or deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe." The SEC promulgated Rule
10b-5 which provides in part:
13
It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange,
14
....
15
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading....
16
17
When we apply the facts as alleged to the Rule, we recognize appellees initially
have the burden to establish there is no genuine issue concerning a material fact
to permit summary judgment as a matter of law. A genuine issue "must be
predicated on a viable legal theory." Spectrum Financial Companies v.
Marconsult, Inc., 608 F.2d 377, 380 (9th Cir.1979), cert. denied, 446 U.S. 936,
100 S.Ct. 2153, 64 L.Ed.2d 788 (1980) (citation omitted). Mr. Snipes and
P.M.M. must show, taking all of Windon's allegations as true and resolving all
inferences in Windon's favor, that Windon has failed to provide any evidence to
establish an essential element of Rule 10b-5. Appellees need not disprove
Windon's claim but only establish that the factual allegations have no legal
significance and, thus, fail to satisfy the statutory requisites.
18
Windon alleged that Mr. Snipes and P.M.M. failed to disclose material
information and misrepresented information about C.R.I.'s financial stability
before the creation of the limited partnerships that would have affected the
amount a limited partner paid for his investment. For example, Windon alleged
that Mr. Snipes had completed an audit of C.R.I. prior to his conversation with
Mr. Olson. The audit found in C.R.I.'s file revealed a cash flow deficit in
contrast to Mr. Snipes' alleged statement about a positive cash flow. Since we
take these allegations as true, we next must determine how they establish an
element of the substantive terrain of Rule 10b-5. In other words, to have legal
significance, the allegation must be material, made in connection with the
purchase or sale of a security, and be one on which Windon reasonably relied.
19
merely because one party has an ability to acquire information. Id. at 231, n. 14,
100 S.Ct. at 1116, n. 14. Without a duty to disclose, silence cannot be made
fraudulent.
20
Consequently, for Windon to premise liability on Mr. Snipes and P.M.M. for
their alleged failure to disclose, Windon must provide facts which demonstrate
that a relationship of trust and confidence existed between the parties. That
relationship may be preexisting (allegations of prior dealings) or arise upon the
facts and circumstances of the information communicated (allegations that an
agency or other fiduciary relationship was created). These allegations would
permit an inference that Mr. Snipes had a duty to disclose fully to Mr. Olson.
Absent these assertions, the substantive body of securities law must limit the
range of permissible inferences we may entertain to decide Windon has met its
initial burden of persuasion.
21
Although Chiarella involved the issue of insider liability, the Court there
unequivocally rejected the proposition that all participants in market
transactions are under a general duty to disclose material, nonpublic
information. "Formulation of such a broad duty ... departs radically from the
established doctrine that duty arises from a specific relationship between two
parties...." Windon fails to allege any relationship, and the record raises no
inference of a relationship between Mr. Olson and Mr. Snipes which would
provide a basis for a conclusion that Mr. Olson reasonably relied on his
conversation with Mr. Snipes. To insinuate more into the Snipes-Olson
communication would transform Rule 10b-5 into a general liability statute. The
Congressional history belies this reading. See Chiarella, 445 U.S. at 226, 100
S.Ct. at 1113.
22
23
Rule 56 must be applied not only to assure a party asserting claims and defenses
adequately based in fact that those claims and defenses will be tried to a jury,
but also to assure those opposing such claims and defenses that they will be
spared undue litigation when no triable issue exists. Celotex, 106 S.Ct. at 2555.
We therefore affirm the order of the district court and remand the action for
Honorable Wesley E. Brown, Senior United States District Judge for the
District of Kansas, sitting by designation
The DINB is a new bank created to assume and distribute Penn Square's
insured deposits
Originally, Windon 81A Oil and Gas Drilling Partnership joined in the
complaint. On June 2, 1981, Windon 81A dismissed all of its claims, leaving
the three limited partnerships and most of their individual limited partners in
the action
For clarity, the individual limited partners are included in the collective
"Windon" designation
The Court looked to the language of Rule 56(c) referring to affidavits "if any "
and sections (a) and (b) of Rule 56 indicating that claimants and defendants
may move for summary judgment "with or without supporting affidavits " to
Windon does state almost in passing that C.R.I. referred Mr. Olson to Mr.
Snipes. Absent other facts in the record, the law cannot engraft the alleged
relationship between Mr. Snipes and C.R.I. onto the brief telephone encounter
between Mr. Snipes and Mr. Olson