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)

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-