Allstate Life Insurance Company v. Robert W. Baird & Co. Inc., et al.

Filing 1200

IT IS HEREBY ORDERED, that the Stipulation Regarding Non-Party Bondholders (Doc. 1142 , revised as Doc. 1144-1) is GRANTED, APPROVED AND ENTERED. FURTHER ORDERED that the claims of the Non-Allstate Plaintiff Bondholders against Defendants Prescott V alley Entertainment Center, LLC, Global Entertainment Corp., Richard Kozubak and James Treliving are DISMISSED WITHOUT PREJUDICE. FURTHER ORDERED that Defendants' Motion to Establish That Allstate Has the Burden to Prove Loss Causation and Damag es for the Implied Rescissionary Damages Remedy 1162 is DENIED WITHOUT PREJUDICE. FURTHER ORDERED that The Global Defendants' request for a jury trial (Doc. 1163 ) is DENIED. IT IS FURTHER ORDERED that Allstate's Motion for Trial to the Court (Doc. 1161 ) is GRANTED. Signed by Judge G Murray Snow on 6/20/2014. (KMG)

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 Lead Case No. CV-09-08162-PCT-GMS In Re: Allstate Life Insurance Company Litigation 11 Consolidated with: No. CV-09-8174-PCT-GMS ORDER 12 13 14 15 Pending before the Court are questions regarding the Plaintiffs’ election of 16 remedies, whether rescission is available against non-selling Defendants (Docs. 1145, 17 1149 and 1150), and whether to remand certain claims against Defendants who have not 18 agreed via the Stipulation (Doc. 1142) to be bound as to all Plaintiffs by the outcome of 19 the Allstate trial. Also pending before the Court are: (1) Allstate’s Motion for Trial to the 20 Court (Doc. 1161), (2) Global Entertainment Corporation’s, Richard Kozuback’s, and W. 21 James Treliving’s Brief in Support of Their Jury Trial Demand (Doc. 1163), and (3) 22 Underwriters’ Motion to Establish That Allstate Has the Burden to Prove Loss Causation 23 and Damages for the Implied Rescissionary Damages Remedy (Doc. 1162). The Court 24 will address each of these issues in this Omnibus Order. 25 I. Plaintiffs’ Election of Remedies 26 The only claims remaining in this matter are state law securities fraud claims 27 under the Arizona Securities Act (“ASA”). (Doc. 1005 ¶ 5; Doc. 978 at 2.) Because the 28 complete diversity requirement is not met by the parties, and because the claims do not 1 arise under the laws of the United States, the Court’s only appropriate exercise of 2 jurisdiction in this matter is supplemental jurisdiction. 3 jurisdiction over the remaining state law claims “is a responsibility that district courts are 4 duty-bound to take seriously.” Acri v. Varian Associates, Inc., 114 F.3d 999, 1001 5 supplemented, 121 F.3d 714 (9th Cir. 1997). The Supreme Court has stated and the 6 Ninth Circuit affirmed “that in the usual case in which all federal-law claims are 7 eliminated before trial, the balance of factors . . . will point toward declining to exercise 8 jurisdiction over the remaining state-law claims.” Id. (quoting Carnegie–Mellon Univ. v. 9 Cohill, 484 U.S. 343, 350 n. 7 (1988)). However, when the federal question claim 10 underlying jurisdiction is defeated on the merits, “the district court nevertheless may in 11 its discretion retain supplemental jurisdiction over the state law claims” 12 Versicherungs A.G. v. Schenker Int'l Inc., 344 F.3d 931, 936, amended and superseded 13 on denial of reh'g, 350 F.3d 916 (9th Cir. 2003). Discretion to exercise supplemental 14 jurisdiction should be informed by the values of “economy, convenience, fairness, and 15 comity.” Acri, 114 F.3d at 1001. The decision to exercise Albingia 16 The present case involves one primary Plaintiff bondholder, Allstate, along with 17 133 additional bondholders approved for trial (“Non-Allstate Plaintiff Bondholders”) 18 (See Doc. 1085) against twelve separate Defendants. In this case to date, the Court has 19 made multiple rulings covering hundreds of pages. Remanding this case to state court 20 would require a new court to become familiar with the parties, factual background, 21 procedural history, and the legal issues. 22 remaining state law claims of the Non-Allstate Plaintiff Bondholders would depend on a 23 fact finder’s resolution of individual facts pertaining to each Non-Allstate Plaintiff 24 Bondholder’s claim. It would thus take the Court an enormous amount of time to try a 25 case based on state law, for which there is no diversity jurisdiction and over which it only 26 has, at best, supplemental jurisdiction. 1 On the other hand, however, each of the 27 1 28 As an example of the impracticality of having all Plaintiffs simultaneously pursue their claims at trial, Wells Fargo, as Trustee for the Non-Allstate Plaintiff -2- 1 To avoid the expense and time involved in trying not only the primary 2 bondholder’s case, but the case of each of the individual bondholders, most of the parties 3 have entered a Stipulation which, with some exceptions, agrees to try the facts pertaining 4 only to the Allstate Plaintiff’s claims, and to resolve the claims of the Non-Allstate 5 Plaintiff Bondholders depending upon the findings of fact and other resolutions resulting 6 from the Allstate Plaintiff’s claims. (Docs. 1142, 1144.) The Stipulation binds all Non- 7 Allstate Plaintiff Bondholders, which it defines as “all holders of the Industrial 8 Development Authority of the County of Yavapai Convention Center Facilities Excise 9 Tax Revenue Bonds, Series 2005 (Taxable)” who still have A.R.S. § 44-1991(A)(2) 10 claims, except for Allstate itself. (Doc. 1144-1 ¶ 2.) 11 The Stipulation was joined by Defendants Robert W. Baird & Co., Incorporated 12 (“Baird”), Southwest Securities, Inc., successor in interest to M.L. Stern & Co., LLC 13 (“Stern”), Edward D. Jones & Co., L.P. d/b/a Edward Jones (“Jones,” and together with 14 Baird and Stern, the “Underwriters”), Stinson Morrison Hecker LLP, TL Hocking & 15 Associates, LLC, and Thomas Hocking and Counterclaimant/Third-Party Plaintiff Town 16 of Prescott Valley (“The Town”) (Doc. 1142).2 Later, Defendants Fain Signature Group, 17 LLC and Prescott Valley Signature Entertainment, LLC also gave notice of their election 18 to join and participate in the Stipulation. (Doc. 1160.) That leaves four Defendants who 19 have not joined the Stipulation: Prescott Valley Entertainment Center, LLC, Global 20 21 22 23 24 25 26 27 28 Bondholders, submitted a list of 150 witnesses that it would need to call in order to litigate the claims of Non-Allstate Plaintiff Bondholders. (Doc. 978 at 8-13.) This was despite the fact that Non-Allstate Plaintiff Bondholders were pursuing virtually the same claims against the same Defendants as Allstate. (Id.) 2 A report by Wells Fargo filed three days after the Stipulation informed the court that some of the parties’ that had previously expressed interest in the Stipulation had withdrawn in light of the Court’s comments. (Doc. 1143.) It thus noted that “the Stipulation regarding Wells Fargo’s claims filed on Friday December 20, 2013 is solely between Wells Fargo, Allstate, the Underwriters, Stinson Morrison and the Hocking Defendants.” (Doc. 1143 at 2.). This list by Wells Fargo omits The Town as a stipulating party, even though The Town was listed as a stipulating party on the original Stipulation. (Doc. 1142 at 2.) This appears to be an inadvertent omission by Wells Fargo since in both the amended Stipulation (Doc. 1144-1) filed the same day as the Wells Fargo report, and a later report regarding the status of the Stipulation (Doc. 1165) Prescott Valley is listed as one of the stipulating parties. (See 1144-1 at 3.) -3- 1 Entertainment Corp., Richard Kozuback and James Treliving (the “Non-Stipulating 2 Defendants”). (Doc. 1165.) 3 To pursue “economy, convenience, fairness, and comity,” Acri, 114 F.3d at 1001, 4 with respect to the stipulating parties, the Court will exercise supplemental jurisdiction 5 over the subject matter of the claims in the Stipulation only. Accordingly, the Court 6 accepts and enters of record the Stipulation between the stipulating parties, and dismisses, 7 without prejudice, the Non-Allstate Bondholders’ claims against Defendants Global 8 Entertainment Corp., Prescott Valley Entertainment Center, LLC, James Treliving and 9 Richard Kozuback. 3 10 II. Rescission Remedy Availability Against Non-Selling Defendants And Burden 11 of Proof 12 After filing the Stipulation (Doc. 1142), Allstate filed a Notice of Election of 13 Remedies with Authority (Doc. 1145) stating that it has elected the remedy of rescission, 14 or, alternatively, rescissory damages (also “rescissionary” damages). 15 At common law, rescission, or the unwinding of a transaction, is traditionally only 16 available against a party to the transaction. However, the ASA specifies that, with some 17 explicit exceptions, rescission is available against anyone who participated in or induced 18 the fraudulent sale, and under Section 44-2001, the sale is voidable at the election of the 19 purchaser. 20 purchase solely by reason of having acted in the ordinary course of that person's 21 professional capacity in connection with that sale or purchase.” Ariz. Rev. Stat. Ann. § 22 44-2003(A). Nowhere in the ASA is there any bar on seeking the rescission remedy 23 against non-seller defendants. 24 The only exception is for defendants who “participated in any sale or Arizona courts have consistently rejected the argument that privity is required for 25 3 26 27 28 Wells Fargo has stated that it already has a lawsuit pending against the NonStipulating Defendants in a stayed action: Wells Fargo Bank, N.A. v. Robert W. Baird & Co., Inc. et al., Maricopa County Superior Court Case No. CV2009-030148. (Doc. 1143 at 3.). Because Allstate’s claims against the Non-Stipulating Defendants remain, the Non-Stipulating Defendants themselves are not dismissed from this action, only the claims of the Non-Allstate Plaintiff Bondholders against them. -4- 1 a party to rescind a sale under the ASA. Trump v. Badet, 84 Ariz. 319, 322, 327 P.2d 2 1001, 1004 (1958) (affirming judgment under ASA for rescission against all defendants 3 even those who “received none of the consideration” and were “not a party to the sale”); 4 State v. Superior Court of Maricopa Cnty., 123 Ariz. 324, 331, 599 P.2d 777, 784 (1979) 5 (noting that despite the usual privity requirement for rescission, A.R.S. § 44-2001 6 “clearly fixes the liability of . . . any dealer, salesman or agent, who made, participated in 7 or induced the unlawful sale or purchase.”); Grand v. Nacchio (Grand III), 225 Ariz. 8 171, 174, 236 P.3d 398, 401 (2010) (stating that rescissory remedy applies “to those other 9 than the seller of the securities” except for the one exception of someone “having acted in 10 the ordinary course of that person's professional capacity in connection with that sale or 11 purchase.”).4 12 Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 35, 945 P.2d 317, 346 (Ct. 13 App. 1996) (Though rescissory damages are not available against non-principals for 14 common law negligent misrepresentation claim, they are permitted under ASA statutory 15 cause of action.). Rescissory damages are also available against non-selling defendants. 16 As the Court has previously noted, Defendants may present evidence on the 17 equitable defense that the statutory rescission remedy is unavailable. Such a defense may 18 be available due to alleged harm caused to the bonds by Plaintiffs, making it impossible 19 to restore the parties to the status quo. In such a case, if the Plaintiffs have nevertheless 20 established that some or all of the Defendants are liable under the statute, the Court will 21 be obliged to fashion a remedy in rescissory damages. 22 Alchemix Corp., CV-07-00929-PHX-GMS, 2013 WL 4511971, at *11 (D. Ariz. Aug. 28, 23 2013). This remedy, while similar to a damages remedy outlined by the ASA, is not 24 identical to it. Under the statute, a Plaintiff may seek damages if he “no longer owns the Strategic Diversity, Inc. v. 25 4 26 27 28 These cases are contrasted with language from a previous case pointed out by Defendants stating that “rescission is primarily a remedy between principals.” Strategic Diversity, CV-07-00929-PHX-GMS, 2013 WL 4511971, at *10 (quoting Restatement (Second) of Agency § 348 (1958)). This reasoning based on common law principles does not apply here. As the cases above show, Arizona courts have consistently held that the ASA remedy that resembles common law rescission is available against non-principals. -5- 1 securities.” A.R.S. § 44-2001(A). When a Plaintiff seeks such damages, he must 2 establish loss causation. Grand v. Nacchio (Grand I), 214 Ariz. 9, 27, 147 P.3d 763, 781 3 (App. 2006). Nevertheless, when the Plaintiffs still own the securities, as they do here, 4 and thus, are capable of physically tendering them, the statute does not require the 5 Plaintiff to prove loss causation, but obliges the defendant to affirmatively prove that the 6 decrease in the security’s value was caused by something other than its misrepresentation 7 or omission. A.R.S. § 44-1991(B). 8 Nevertheless, if the Court concludes that the Plaintiffs have so damaged the bonds 9 that rescission is impossible, yet also concludes that the Plaintiffs have stated a claim 10 under § 1991(A) (2) as to some or all of the Defendants, the Court would, of necessity, be 11 obliged to allocate the relative harms caused by the relative parties to determine if an 12 award of rescissory damages was appropriate, and, if so, in what amount. It is possible, 13 that in that process, the Court would determine that Plaintiffs should bear the burden of 14 proving proximate causation or at least bear the consequences to some extent of the 15 inability to ascertain the monetary value of such harm. 16 provided under Arizona law. “We conclude that whether a plaintiff seeking rescissory 17 damages must show proximate cause depends on the equitable considerations discussed 18 above.” Grand I, 214 Ariz. at 28, 147 P.3d at 781 (Ct. App. 2006). Such equitable latitude is 19 Nevertheless, to the extent that the Defendants request the Court to make that 20 determination prior to trial, such a determination is too bound up in contested facts to be 21 possible at the pretrial stage. Thus, Defendants Motion to Establish That Allstate Has the 22 Burden to Prove Loss Causation and Damages for the Implied Rescissionary Damages 23 Remedy (Doc. 1162) is denied without prejudice. 24 III. Jury Trial 25 Both Allstate and the Town (as counterclaimant) properly demanded a jury trial in 26 their initial Complaints and subsequent amendments. (See, e.g., Doc. 1; Doc. 464; Doc. 27 95.) Allstate has recently reversed course and explicitly requested a trial to the Court. 28 (Doc. 1160.) The Town has not joined any of the parties’ recent briefs in support of -6- 1 either a bench trial (Docs. 1161, 1164) or a jury trial (1163, 1170). However, at the Final 2 Pretrial Conference held on January 17, 2014, the Town explicitly opted out of their jury 3 trial request. (Doc. 1157, at 97: 23–25) (“If the Court’s going to have a court trial, we 4 will – as the plaintiff on the counterclaim, we will submit to a court trial on the claim.”) 5 That leaves Defendants Global Entertainment Corporation, Richard Kozuback, and W. 6 James Treliving (Global Defendants) as the only parties advocating for a jury trial. (Doc. 7 1163.) 8 The Global Defendants argue that they are statutorily entitled a jury trial based on 9 the ASA. However, as is well settled, “the right to a jury trial in the federal courts is to 10 be determined as a matter of federal law in diversity as well as other actions.” Simler v. 11 Conner, 372 U.S. 221, 222 (1963) (emphasis added). Even where a state law would grant 12 a right to a jury trial, a federal court hearing a case arising from that state law is not 13 bound under Erie to grant a jury trial. Herron v. S. Pac. Co., 283 U.S. 91 (1931) (holding 14 that an Arizona state constitution provision requiring that certain issues go before a jury 15 was not binding on a federal court sitting within the state). 16 The Federal Rules of Civil Procedure provide that a right to a jury trial exists in 17 federal court when either granted by the Seventh Amendment or by federal statute. Fed. 18 R. Civ. P. 38. No relevant federal statute has granted the right to a jury trial here. 19 Additionally, the Seventh Amendment grants a jury trial only in actions at law, not 20 actions in equity. McCullough v. Dairy Queen, Inc., 194 F. Supp. 686, 687 (E.D. Pa. 21 1961) (“It is settled law that . . . the traditional distinction between legal and equitable 22 actions must be referred to in order to determine a party's right to a jury trial.”). 23 Generally, an action for money damages was “the traditional form of relief offered in the 24 courts of law.” Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 25 570 (1990). 26 Plaintiffs in this action have opted for the remedy of rescission or rescissory 27 damages in this action. (Doc. 1145.) “Rescission is an equitable remedy, however, for 28 which no right to a jury exists.” Dollar Sys., Inc. v. Avcar Leasing Sys., Inc., 890 F.2d -7- 1 165, 170 (9th Cir. 1989). As this Court has previously stated, if rescission is not 2 available, due to impossibility or impracticality, then the Court will try to approximate 3 the rescission remedy through rescissory damages. (Doc. 948 at 82–85). Rescissory 4 damages may be used under the ASA “when rescission, though appropriate, is impossible 5 or infeasible (as when the buyer has sold the property to a third party).” Grand I, 214 6 Ariz. at 19, 147 P.3d at 773 (quoting Standard Chartered, 190 Ariz. at 34, 945 P.2d at 7 345.) If liability is established to some or all Defendants and rescission is unavailable 8 and rescissory damages are required to be calculated, this is still, in essence, an equitable 9 remedy. Grand I, 214 Ariz. at 27, 147 P.3d at 781 (“Rescissory damages are intended to 10 be the financial equivalent of the traditional rescission remedy, and such damages are 11 available when tender is ‘impossible or infeasible,’” a determination that should be based 12 on “equitable considerations”); Strategic Diversity, CV-07-00929-PHX-GMS, 2013 WL 13 4511971, at *5 (parties may be “entitled to the equitable remedy of rescissionary 14 damages”); Teamsters, 494 U.S. at 570 (money damages are to be characterized as 15 equitable where they are restitutionary). Thus, because Allstate has elected rescission, or 16 alternatively, rescissory damages, Allstate’s claims against Defendants are claims in 17 equity for which there is no entitlement to a jury trial under the Seventh Amendment.5 18 In light of the forgoing, therefore, 19 IT IS HEREBY ORDERED, that the Stipulation Regarding Non-Party 20 Bondholders (Doc. 1142, revised as Doc. 1144-1) is GRANTED, APPROVED AND 21 ENTERED. 22 IT IS FURTHER ORDERED that the claims of the Non-Allstate Plaintiff 23 Bondholders against Defendants Prescott Valley Entertainment Center, LLC, Global 24 Entertainment Corp., Richard Kozubak and James Treliving are DISMISSED 25 WITHOUT PREJUDICE. 26 27 28 5 The Global Defendants have not joined the Town in its counterclaim against Allstate and Wells Fargo and thus are not entitled to assert a right to a jury trial based on those claims. -8- 1 IT IS FURTHER ORDERED that Defendants’ Motion to Establish That Allstate 2 Has the Burden to Prove Loss Causation and Damages for the Implied Rescissionary 3 Damages Remedy (1162) is DENIED WITHOUT PREJUDICE. 4 5 6 7 8 IT IS FURTHER ORDERED that The Global Defendants’ request for a jury trial (Doc. 1163) is DENIED. IT IS FURTHER ORDERED that Allstate’s Motion for Trial to the Court (Doc. 1161) is GRANTED. Dated this 20th day of June, 2014. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -9-

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