IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
October 3, 2007
No. 06-30632 Charles R. Fulbruge III
Clerk
SUDO PROPERTIES, INC; HOUMA SPORTS ENTERTAINMENT, LLC
Plaintiffs - Appellants
v.
TERREBONNE PARISH CONSOLIDATED GOVERNMENT
Defendant - Appellee
Appeals from the United States District Court
for the Eastern District of Louisiana
Before HIGGINBOTHAM, WIENER, and CLEMENT, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
Sudo Properties, Inc. (“Sudo”) and Houma Sports Entertainment, LLC
(“Houma Sports”) appeal the district court’s grant of summary judgment to the
Terrebonne Parish Consolidated Government (“Parish”). For the following
reasons, we REVERSE and REMAND for trial.
I. FACTS AND PROCEEDINGS
From 2000 until 2004, Linda McCarthy was the director of the Houma
Terrebonne Civic Center, which the Parish owned and operated. During her
tenure, the civic center incurred annual losses of about one million dollars, and
the Parish President repeatedly pushed McCarthy to bring in new revenue to the
center to help reduce its debt.
No. 06-30632
One of McCarthy’s ideas for reducing the deficit was to entice an indoor
football team to the civic center. McCarthy set up Houma Sports to own and
operate the team, which ultimately became known as the Bayou Bucks. In
November 2001, McCarthy approached two local businessmen, Gordon Dove and
Neil Suard, about investing in Houma Sports. Dove and Suard were doing
business as Sudo. McCarthy prepared pro forma statements projecting income
and expenses for Houma Sports. McCarthy predicted, in what she characterized
as “the least optimistic estimate,” an annual net profit of $142,346 for the team.
McCarthy told Suard that the team would play at the civic center. She also
informed Suard that, as director of the civic center, she had been able to
negotiate a favorable three-year lease for Houma Sports.
In January 2002, Sudo purchased a one-third share in Houma Sports. The
original members of Houma Sports were Sudo, the Houma Terrebonne Civic
Center Development Corporation (“HTCCDC”), and Carolyn Schiver, president
of the National Indoor Football League, each of which owned a one-third share.
McCarthy controlled HTCCDC. When Sudo invested in the team, Suard
believed that having HTCCDC as a fellow member was “a big, big plus.”
During the first few months of its existence, McCarthy operated Houma
Sports. She negotiated various contracts for advertising, as well as the contract
with the team’s general manager, Travis Carrell, on behalf of Houma Sports. On
January 22, 2002, McCarthy faxed to Suard an amended projection of revenues
and expenses that showed an increase in profit over her original projection.
McCarthy’s new projected annual net profit was $182,559, based on projected
revenues of approximately $678,000 and projected expenses of $474,000. In
February 2002, McCarthy approached Suard and suggested that he buy
HTCCDC’s one-third interest in Houma Sports. At that time, McCarthy told
Suard that the team was doing great, but that the civic center wanted to
concentrate on scheduling Broadway plays there. As Suard testified:
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No. 06-30632
And my next question was “Okay, how are we doing financially?”
She said, “Very great. Sponsorship is going great. The ticket sales
are going great. We just want to get out and concentrate on
Broadway.” I said, “Okay. How much you want to sell out?” She
said, “Just give us back whatever we have up.”
Sudo purchased HTCCDC’s one-third interest in March 2002. At some
point in 2002, Carolyn Schiver forfeited her interest in the team when she failed
to make required capital contributions to Houma Sports. Sudo then became the
sole investor in Houma Sports. In April 2002, Suard became the sole owner of
Sudo when he purchased his partner Dove’s ownership interest.
After Suard took control of Houma Sports in March 2002, he “started
getting all the bills.” He testified, “[I]t was unbelievable how bad it was.” He
explained that “we did a settlement with the Civic Center probably sixty days
after I bought the team, and I saw that it was going to be trouble.” Suard
testified that he realized that actual expenses for 2002 would be much higher
than those projected by McCarthy and that the business “was wide open,
downhill, losing money, getting ready to lose a lot more.” For example, in
reference to advertising contracts, he testified
Nobody knew what was going on but Linda. . . . The expenses, the
two contracts you talked about, she set us out twenty-five thousand
for advertising. She already spent a hundred. No football had been
kicked yet. This thing was in trouble, and she knew it. She said,
“No problem, No problem.” That’s what the deal was.
By June 2002, the expenses for assistant coaches for five months were
$6,600 more than the annual projection of $10,000. The actual costs of training
and medical supplies were $61,350 by June 2002, although McCarthy had
projected only $5,000 for the year. By August 2002, the team’s annual expenses
exceeded McCarthy’s projections by over $200,000. The team lost $400,000 in
its first year, in stark contrast to McCarthy’s “least optimistic” projections of
over $140,000 in profit. During the three-year term of the lease negotiated by
McCarthy, Sudo lost over $900,000 from its investment in Houma Sports.
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No. 06-30632
Although McCarthy told Suard that her motivations for selling HTCCDC’s
interest in the team had nothing to do with its financial condition, she revealed
the true reason to HTCCDC’s Board of Directors at its April 23, 2002 meeting
— to get HTCCDC out of a money-losing deal that she had never intended for it
to stay in. At the meeting, McCarthy stated, “I think I talked to everybody here,
we decided to sell and get rid of the football team while we have a chance before
the costs . . . Gordy Dove and Neil Suard want to take over the whole team.” She
went on to explain why HTCCDC needed to be involved in the first place: “[I]t
helped me get Gordy and Neil to the table because I told them that y’all
[HTCCDC’s Board of Directors] were 1/3 owners, so they were like, ooh, now
we’ve got the support of them.”
For unknown reasons, the transcript of that meeting was edited, so the
plaintiffs did not learn of McCarthy’s statements until they acquired a taped
recording of the meeting through an open records request that Suard made in
response to misleading information that the Terrebonne Parish Council gave
him. In early 2004, Suard initiated discussions in an attempt to renegotiate the
lease to obtain more favorable terms for Houma Sports. In the course of those
negotiations, representatives of the Terrebonne Parish Council incorrectly told
Suard that he, not McCarthy, had negotiated the lease, implying that he was
responsible for its provisions, however unfavorable. In order to determine how
the original contract was negotiated, Suard made a request under Louisiana’s
Public Records Act for the recorded transcripts of HTCCDC meetings. In
response, he received a taped recording of the April 23, 2002 meeting.
When he listened to the tape,1 Suard heard McCarthy’s remarks to
HTCCDC’s Board of Directors as it considered a vote to approve the sale of its
one-third interest in Houma Sports. Suard learned for the first time that the
1
The record does not state exactly when Suard heard the tape, but it is undisputed that
he heard it within a year of filing suit.
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No. 06-30632
Parish had intentionally misled him into investing into the team because it
desperately needed a tenant at the civic center. The written minutes of the April
23, 2002 meeting had been edited and did not reflect the true discussions
reflected on the tape. The tape of the actual meeting disclosed that, pursuant to
a directive from the Parish President, McCarthy lied to Suard in order to obtain
an investor with “deep pockets” so that the civic center would have a three-year
tenant to offset its losses.
According to Suard, before he listened to the tape, he thought he had
merely made a bad investment. He testified,
[U]ntil I listened to the tape and I started looking at exactly what
was going on, it was a hustle. Then, everything changed. There
was no write-off now. You know, I got duped, and it wasn’t by
accident. It was—I’m going to call it premeditated, it was setup,
and it was just no ifs ands and buts about it. So, everything
change[d].
Sudo and Houma Sports filed suit against the Parish on September 10,
2004, less than one year from the date that Suard listened to the tape, but more
than two-and-a-half years after he began receiving the bills for Houma Sports.
Sudo asserted claims under federal and state securities law, violations of the
Racketeer Influenced and Corrupt Organizations Act (“RICO”), the Louisiana
Unfair Trade Practice and Consumer Protection Act, and the Louisiana Blue
Skies Act, and state claims for negligence and fraud. Houma Sports asserted a
single claim for breach of contract. Plaintiffs claim damages exceeding $1
million.
The Parish succeeded in having the RICO claim dismissed. It then filed
a motion for summary judgment for the remaining claims, asserting that the
claims were time-barred by the applicable statutes of limitations and
prescriptive periods. The district court found that Suard had sufficient notice
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No. 06-30632
to trigger the relevant periods as of June 2002, rendering Sudo’s claims time-
barred.2 Sudo and Houma Sports appeal this judgment.
II. STANDARD OF REVIEW
The district court’s grant of summary judgment is reviewed de novo. Shell
Offshore Inc. v. Babbitt, 238 F.3d 622, 627 (5th Cir. 2001). The court applies the
same standard as the district court. Davidson v. Veneman, 317 F.3d 503, 508
(5th Cir. 2003). The district court’s grant of “[s]ummary judgment is appropriate
if the record shows ‘that there is no genuine issue as to any material fact and the
moving party is entitled to judgment as a matter of law.’” Shell Offshore, 238
F.3d at 627 (quoting FED. R. CIV. P. 56(c)).
III. ANALYSIS
A. Claims under the Securities Acts
Sudo brought claims against the Parish under both the 1933 and 1934
Securities Acts. Claims under the 1933 Act must be brought “within one year
after the discovery of the untrue statement or the omission, or after such
discovery should have been made by the exercise of reasonable diligence.” 15
U.S.C. § 77m. Claims under the 1934 Act “involv[ing] a claim of fraud, deceit,
manipulation, or contrivance . . . may be brought not later than the earlier
of—(1) 2 years after the discovery of the facts constituting the violation; or (2) 5
years after such violation.” 28 U.S.C. § 1658(b). For claims under both acts,
“[t]he controlling date for purposes of the running of the respective statutes of
limitations is when a purchaser of securities knew—or in the exercise of
reasonable diligence, should have known—of the alleged wrongdoing.” Topalian
v. Ehrman, 954 F.2d 1125, 1133 (5th Cir. 1992). This standard is generally
referred to as “inquiry notice,” and it applies “when a reasonable investor of
ordinary intelligence would have discovered the information and recognized it
2
The district court also dismissed Houma Sports’s pendent contract claim without
prejudice.
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No. 06-30632
as a storm warning.” DeBenedictis v. Merrill Lynch & Co., Inc., 492 F.3d 209,
216 (3d Cir. 2007); see also Margolies v. Deason, 464 F.3d 547, 553 (5th Cir.
2006). The “fact-intensive inquiry” of what constitutes inquiry notice “is
typically appropriate for consideration by a jury.” Margolies, 464 F.3d at 553.
The district court determined that Suard had inquiry notice of the fraud
that gave rise to his claims as of June 2002, because of the dramatic
discrepancies between the projected and actual expenses for that year. See
Whirlpool Fin. Corp. v. GN Holdings, Inc., 67 F.3d 605, 610 (7th Cir. 1995)
(“[D]ramatic discrepancies between the very precise projections made by the
defendants and the actual results . . . were sufficient to give . . . inquiry notice.”).
We do not find the information Suard possessed at that time to have placed him
on inquiry notice as a matter of law. To begin, McCarthy’s representations to
Suard before selling him the one-third share in Houma Sports were that the
team was “doing great . . . very great. Sponsorship is going great. The ticket
sales are going great.” There was considerable truth to this statement—both
sponsorship and ticket sales were close to the numbers McCarthy projected.
Suard, therefore, received mixed information about the accuracy of McCarthy’s
projections.
Moreover, when McCarthy met with Suard to discuss the possibility that
he might buy HTCCDC’s share of Houma Sports, McCarthy told him that the
reason she wanted to sell was so she could concentrate on bringing Broadway-
style musicals to the Civic Center. Suard never received any information
contradicting this assertion until he heard the recording of the April 23, 2002
meeting. As of June 2002, the only fact Suard knew for certain was that
McCarthy’s projections for the expenses for running the Bayou Bucks were
wrong by a wide margin. He had no information that would lead him to suspect
that she had deliberately misstated the projections or saddled him with a failing
business for some ulterior purpose. Nor did he possess information that could
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No. 06-30632
not be resolved with McCarthy’s assertions about the team without an inference
that she deliberately misled him. As Suard argued to the district court, based
on the knowledge he had at the time, he reasonably inferred that he had simply
“made a bad business decision.”
Suard’s situation was different from that of the investors in McGill v. Goff,
who were told that the property purchased via a joint venture would be bought
out “quickly,” or within a year of their investment, made the investment, and
then received a copy of the joint venture agreement stating only a “desire” to sell
the property within five years. 17 F.3d 729, 733 & n.6 (5th Cir. 1994), overruled
on other grounds by Kansa Reinsurance Co. v. Congressional Mortgage Corp., 20
F.3d 1362, 1373–74 (5th Cir. 1994). Suard could have easily interpreted the
disjunction between McCarthy’s projections and reality to be the fault of her poor
judgment; in contrast, McGill featured a seller of the investment who had
complete control over the amount of time the investment was to be held so any
conflicting statements in the written agreement served as an obvious indictment
of his integrity. In McGill, the “terms of the agreement,” as written, reflected a
completely different understanding from what had been orally represented
before the investment. Id. at 733; see also Martinez Tapia v. Chase Manhattan
Bank, 149 F.3d 404, 409–10 (5th Cir. 1998) (“A written statement available to
the victims of fraud that reveals that a fraud has been committed furnishes
constructive or inquiry notice of the fraud.”).
Nor does Suard’s level of notice parallel that in Jensen v. Snellings, 841
F.2d 600 (5th Cir. 1988). In Jensen, we noted that “[i]nvestors are not free to
ignore ‘storm warnings’ which would alert a reasonable investor to the
possibility of fraudulent statements or omissions in his securities transaction.”
Id. at 607. The plaintiffs received “on-going assurances of profits or, at most,
minimal losses,” from the defendant during the course of their investment in a
cattle-feeding plan, but knew by April 1979 that they had lost approximately
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$290,000. Id. They also had been told by the president of the financial services
company that managed the investment that the defendant “had woven a ‘fairy
tale’ and ‘gouged’ them, [and he was a] ‘scalawag’” who should be disbarred. Id.
at 607–08. We held that this information was sufficient to constitute “storm
warnings,” such that the plaintiffs ought to have investigated further, and,
therefore, their claims filed in September 1981 were prescribed. Id. at 608. In
this case, Suard was never told by anyone that McCarthy was dishonest,
disreputable, or otherwise acting inappropriately. Again, as of the summer of
2002, Suard only knew that McCarthy’s predictions regarding the Bayou Bucks’
expenses had been grossly incorrect. This was not sufficient to create notice
inquiry as a matter of law. See Breen v. Centex Corp., 695 F.2d 907, 912 (5th Cir.
1983) (holding that failure to reach earnings levels was not sufficient, by itself,
to put the plaintiff on notice inquiry, as “[a] myriad of valid business reasons
could have caused” this problem). It was not until Suard heard the tape of the
April 23, 2002 meeting in 2004 that he had any indication that McCarthy had
misled him. The district court thus erred when it dismissed Sudo’s claims under
the Securities Acts.
B. Claims under state law
Sudo’s claim under Louisiana’s Blue Skies Law is governed by a
prescriptive period of two years. LA. REV. STAT. 51:714C(1). Sudo’s other
Louisiana tort claims have a prescriptive period of one year. LA. CIV. CODE art.
3492. A prescriptive period begins to run when the injured party has
constructive knowledge of the facts that would entitle him to bring a suit.
Campo v. Correa, 828 So. 2d 502, 510 (La. 2002). Information or knowledge that
ought to excite attention and put the alleged victim on guard is sufficient to start
the running of prescription. Id. at 510–11. For the same reasons articulated
above, we find that Suard did not have sufficient information to be entitled to
bring a suit prior to 2004. Had he sued based on the facts known to him in the
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summer of 2002, he would have been unable to prevail because he lacked any
evidence that McCarthy willfully deceived him. The prescriptive period for these
claims thus did not begin to run until he heard the tape of the April 23, 2002
meeting in 2004. Suard filed this lawsuit on September 10, 2004; therefore, the
claims are not time-barred.
C. Houma Sports’s claim
Because the district court erroneously dismissed Sudo’s federal claims, it,
therefore, also erroneously dismissed Houma Sports’s pendent state law claim.
See Corwin v. Marney, Orton Invs., 843 F.2d 194, 200 (5th Cir. 1988). We thus
reverse this dismissal as well.
IV. CONCLUSION
For the foregoing reasons we REVERSE the dismissal of Sudo’s claims and
REMAND the case to the district court.
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