United States Court of Appeals,
Fifth Circuit.
No. 93-1423.
BANC ONE CAPITAL PARTNERS CORPORATION, et al., Plaintiffs-
Appellants, Cross-Appellants,
v.
Richard K. KNEIPPER and Jones, Day, Reavis & Pogue, Defendants-
Appellees, Cross-Appellants.
Nov. 3, 1995.
Appeals from the United States District Court For the Northern
District of Texas.
Before SMITH and EMILIO M. GARZA, Circuit Judges, and BERRIGAN,
District Judge.*
EMILIO M. GARZA, Circuit Judge:
A group of disgruntled investors filed this suit for
securities fraud arising out of the defendants' failed efforts to
successfully capitalize FilmDallas, Inc. ("FilmDallas"), a
Dallas-based movie production company. After a five-week trial,
the jury returned a verdict against the plaintiff investors on
their federal and Texas state securities fraud claims, but in favor
of the plaintiffs on their claim of civil conspiracy. The jury
also found that two of the investors were in pari delicto with the
defendants.
The district court disregarded the jury's civil conspiracy
verdict and entered a "take nothing" judgment in favor of the
defendants, reasoning that there was no "wrongdoing" upon which a
*
District Judge of the Eastern District of Louisiana,
sitting by designation.
1
finding of civil conspiracy could be based. The plaintiffs appeal
from this judgment and from the district court's grant of summary
judgment on their claims for professional negligence and legal
malpractice. The defendants appeal from the district court's
denial of their summary judgment motion in which they asserted the
defense of res judicata. We reverse in part, affirm in part and
remand for new trial.
I
The defendant Richard K. Kneipper was chairman of the Board of
Directors and an officer in FilmDallas when the private offering of
securities in FilmDallas was made. He was also a partner in the
defendant law firm Jones, Day, Reavis & Pogue ("Jones Day"), which
served as counsel to FilmDallas for the offering.
Kneipper and Sam Grogg,1 a film industry veteran, had formed
FilmDallas in 1986 to participate in a joint enterprise agreement
with New World Company Pictures, Inc. ("New World"), an independent
film producer and distributor. FilmDallas and New World together
would own FilmDallas Pictures, Inc. ("FilmDallas Pictures"), which
was to produce and distribute films and would be managed by
FilmDallas. Under the joint venture agreement, FilmDallas and New
World were each required to contribute to the capitalization of the
venture.
Because the resources of Kneipper and Grogg fell short of the
1
Grogg was named as a defendant in the original complaint,
but the plaintiffs later voluntarily dismissed him from the suit.
While evidence of Grogg's involvement in the alleged fraudulent
activity was presented at trial, the only two defendants in this
case are Kneipper and Jones Day.
2
needed contribution, they decided to fund FilmDallas' portion
through the private offering in FilmDallas. Kneipper and Jones Day
prepared a private offering memorandum which detailed the proposal.
According to the terms of that memorandum, the proposed offering
was on an "all or none" basis: if a minimum of $7.5 million was
not raised and deposited in escrow by December 15, 1986, all the
money would be returned to the investors.
MVenture/Banc One was the first plaintiff to invest when its
board approved a $1 million investment in November 1986, based on
a draft of the private offering memorandum. By December,
FilmDallas Pictures was already up and operating on loans from New
World and contributions from Kneipper and Grogg. At this point,
the private offering had not received the required $7.5 million
commitment, and Kneipper and Grogg were forced to negotiate an
extension on the deadline set forth in the private offering
memorandum and an extension on the joint venture deadline with New
World.
In early 1987, the plaintiffs C.A. Rundell, William R.
Johnson, James A. Bancroft and Thomas and Luanne Tierney also
agreed to invest. FilmDallas, however, was still far short of the
mark required under the terms of the private offering memorandum.
Kneipper was pursuing a $1.2 million investment from a Swiss
investor, Geoffrey Jurick, who owned an office building in Dallas,
but by early March 1987 there was still no final agreement. After
consenting to a series of extensions, the investors eventually
issued an ultimatum that they would withdraw unless the offering
3
was by March 18, 1987.
The claims of fraud and conspiracy are based on Kneipper and
Grogg's responses to the concerns of the investors during the early
months of 1987. The gist of the fraud was defendants' alleged
failure to disclose material information at the time it became
known to them. The substance and significance of the information
was not seriously disputed at trial. Instead, the trial focused on
when the information became known to the defendants. The
plaintiffs claimed that the misrepresentations and omissions
occurred at a time when they could have withdrawn their
investments, while the defendants contended that the information
became known at a later date when they no longer owed a duty to
disclose.
The first material misrepresentation involved defendants'
failure to disclose a rent escrow agreement on Jurick's Dallas
property, which effectively reduced his net contribution by
approximately $500,000. The second involved multiple
representations made in order to induce the investors to agree to
lower the private offering minimum to $7 million. For example,
Kneipper and Grogg represented that New World, out of enthusiasm
for the joint venture, had agreed to invest up to $500,000 in the
FilmDallas private offering, in addition to its one-half
contribution to FilmDallas Pictures. In actuality, New World
required the two of them to personally sign a repurchase agreement
4
for the FilmDallas stock.2
After FilmDallas represented to the investors that final
commitments for the $7 million had been reached as of March 18,
1987, the "closing" or "pre-closing," as it was variously referred
to at trial, took place that day in a meeting at the offices of
Jones Day. In connection with the closing, Jones Day issued an
opinion letter stating that all of FilmDallas' material contracts
and agreements had been disclosed. On April 21, 1987, all of the
signed subscriptions had been received and the escrow agent finally
released the funds. FilmDallas subsequently failed, and the
plaintiffs lost their entire investment.
II
The investors contend that the charge given to the jury on
the securities fraud claims was defective in several respects. We
address the one contention that is central to the dispute at trial
regarding when information became known to the FilmDallas officers.
The investors assert that the district court erred by giving an
incorrect instruction on "materiality"3 in the context of an "all
2
The rent escrow agreement between FilmDallas and Jurick was
finalized in writing on April, 10, 1987. The written agreement
by Kneipper and Grogg to repurchase the New World stock was dated
May 8, 1987. Plaintiffs alleged, however, that these agreements
were in fact reached well in advance of the writings.
3
One of the elements of a securities fraud claim is a
material misrepresentation or omission by the defendant.
Stephenson v. Paine, Webber, Jackson & Curtis, Inc., 839 F.2d
1095 (5th Cir.), cert. denied, 488 U.S. 926, 109 S.Ct. 310, 102
L.Ed.2d 328 (1988); Gant v. State, 814 S.W.2d 444
(Tex.App.—Austin 1991, no writ). In a Section 10(b) claim, "[A]n
omitted fact is material if there is a substantial likelihood
that a reasonable shareholder would consider it important in
deciding how to vote." TSC Industries, Inc. v. Northway, Inc.,
5
or nothing" offering of securities.
While great latitude is shown the trial court in fashioning
jury instructions, we will review them to determine whether they
accurately and completely state the law. "[A] trial court has a
duty to instruct the jurors, fully and correctly, on the applicable
law of the case." Horton v. Buhrke, 926 F.2d 456, 460 (5th
Cir.1991); see also EEOC v. Manville Sales Corp., 27 F.3d 1089,
1096 (5th Cir.1994) (upholding charge only if it does not mislead,
prejudice, or confuse jury), cert. denied, --- U.S. ----, 115 S.Ct.
1252, 131 L.Ed.2d 133 (1995); FDIC v. Wheat, 970 F.2d 124, 130
(5th Cir.1992) ("Appellate review looks to whether the instruction
accurately states the law, and does not mislead the jury.").
The district court gave the following instruction on
"materiality" in conjunction with the federal and Texas state
securities fraud claims:
For each plaintiff, the date on which the materiality of a
fact is to be determined is the date when that plaintiff
committed to purchase his FilmDallas securities. Materiality
is not determined as of any later date, such as, for example,
the formal closing date. To determine whether a violation
occurred, you are to look at the date or dates when each
plaintiff committed himself to invest in FilmDallas. After
such date, disclosure of later-learned information is not
required, because the investment decision has already been
made.
This instruction was derived from Radiation Dynamics, Inc. v.
426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed. 757, 766 (1976).
The issue of whether a fact is material as a matter of law will
also turn on, as discussed below, whether the defendant has a
duty to disclose.
6
Goldmuntz, 464 F.2d 876 (2d Cir.1972).4 The investors contend that
this instruction is erroneous in the context of an "all or none"
securities offering because it does not acknowledge that their
"commitment" was contingent in nature.
We have previously examined the issue of an ongoing duty to
disclose in the context of a contingent commitment. See Stier v.
Smith, 473 F.2d 1205 (5th Cir.1973). The plaintiff investor in
Stier had made the negotiation of his check tendered for payment of
the stock contingent on the defendant making a successful public
offering. Id. at 1209. The plaintiff claimed the defendant owed
a continuing duty to disclose material information concerning the
public offering until it was completed. We agreed, holding that
whether or not the sale was finalized with the tender was
irrelevant where the sale was subject to the condition that the
public offering occur and the defendant knew the plaintiff was
relying on the success of the public offering. Id. at 1209-10.
An "all or none" offering involves a similarly contingent
commitment by the investor. If the offering minimum is not raised
and deposited in escrow by a given date, all the money previously
"committed" will be returned to the investors.5 This type of
4
See id. at 890 (" "Commitment' is a simple and direct way
of designating the point at which, in the classical contractual
sense there was a meeting of the minds of the parties; it marks
the point at which the parties obligated themselves to perform
what they had agreed to perform even if the formal performance of
their agreement is to be after a lapse of time.").
5
Rule 10b-9(a) under the Securities and Exchange Act
provides:
(a) It shall constitute a manipulative or
7
offering was designed to protect the investor in a number of ways.
"The all-or-nothing provision serves not only to ensure that the
issuing firm has sufficient funds to complete its project, but also
to give investors some reasonable indication that they are paying
a fair market price for their investment." Svalberg v. SEC, 876
F.2d 181, 183 (D.C.Cir.1989). The sellers cannot avoid the
requirements of this provision by fraudulently creating the
impression that the minimum has been met. See C.E. Carlson, Inc.
v. SEC, 859 F.2d 1429, 1434 (10th Cir.1988) ("Once the part or none
representation has been made, it may not be circumvented by
deception device or contrivance, as used in section
10(b) of the Act, for any person, directly or
indirectly, in connection with the offer or sale of any
security, to make any representation:
(1) To the effect that the security is being
offered or sold on an "all or none" basis, unless the
security is part of an offering or distribution being
made on the condition that all or a specified amount of
the consideration paid for such security will be
promptly refunded to the purchaser unless (i) all of
the securities being offered are sold at a specified
price within a specified time, and (ii) the total
amount due to the seller is received by him by a
specified date; or
(2) To the effect that the security is being
offered or sold on any other basis whereby all or part
of the consideration paid for any such security will be
refunded to the purchaser if all or some of the
securities are not sold, unless the security is part of
an offering or distribution being made on the condition
that all or a specified part of the consideration paid
for such security will be promptly refunded to the
purchaser unless (i) a specified number of units of the
security are sold at a specified price within a
specified time, and (ii) the total amount due to the
seller is received by him by a specified date.
17 C.F.R. § 240.10b-9(a).
8
transactions primarily designed to create the appearance of a
successful offering in order to avoid the refund feature of the
offering.").6
Therefore, relying on Stier, we hold that the seller in an
"all or none" offering does have a continuing duty to inform
investors of facts which affect contingent events after their
initial commitment to invest. See Stier, 473 F.2d at 1209
(investors should have been informed that corporation was using
part of the proceeds of the "public offering" to purchase its own
shares); see also SEC v. National Student Marketing Corp., 457
F.Supp. 682, 704 (D.D.C.1978) ("It is not some magical incantation
of "commitment' that sets the point at which disclosure is no
longer mandated, but rather the nature of the commitment."). As
applied to the all or none offering by FilmDallas, the district
court's materiality charge given on the federal and state
securities claims was erroneous.
This error, however, does not require retrial if, based on
the entire record, the challenged instruction could not have
affected the outcome of the case. FDIC v. Mijalis, 15 F.3d 1314,
1318 (5th Cir.1994). Reversal is appropriate whenever the charge
"as a whole leaves us with substantial and ineradicable doubt
6
See also SEC v. Coven, 581 F.2d 1020, 1028-29 (2d Cir.1978)
(holding that the failure to comply with terms of escrow
agreement and the closing prior to the bona fide sale of the
minimum number of shares plainly operated as a fraud upon the
public); A.J. White & Co. v. SEC, 556 F.2d 619, 622-23 (1st
Cir.) (holding that it was fraudulent where the minimum amount
was raised through short-term bank loans rather than bona fide
sales to investors), cert. denied, 434 U.S. 969, 98 S.Ct. 516, 54
L.Ed.2d 457 (1977).
9
whether the jury has been properly guided in its deliberations."
Bender v. Brumley, 1 F.3d 271, 276 (5th Cir.1993); Bommarito v.
Penrod Drilling Corp., 929 F.2d 186, 189 (5th Cir.1991); Treadaway
v. Society Anonyme Louis-Dreyfus, 894 F.2d 161, 167-68 (5th
Cir.1990).
In this case, the erroneous materiality charge allowed the
defendants to argue that the investors had made their "commitments
to purchase" well prior to the closing date and breaking of escrow.
For example, the jury would have had to conclude that MVenture/Banc
One made its commitment to purchase when the board approved the
investment in November 1986. Therefore, because of the
instruction, even if the jury believed the allegations of
misrepresentations and omissions in early 1987 regarding whether
the offering minimum had been reached, they would have been forced
to disregard this evidence as immaterial. According to the jury
charge, the defendants had no ongoing duty to inform the investors
once they made their "commitment to purchase." For these reasons,
we believe that there is a substantial and ineradicable doubt
whether the jury has been properly guided in its deliberations.
Because it could have affected the outcome of the case, we remand
for new trial.7
7
The investors allege two additional claims of error. They
contend that the district court committed plain error in its jury
charge by inserting a requirement of privity into the claim of
aider and abetter liability under Texas law. They also contend
that the court erred by omitting their requested instruction on
control person liability. Because we have already determined
that the erroneous instruction on "materiality" requires that we
remand the securities fraud claims for a new trial, we do not
need to reach these issues.
10
III
The investors also contend that the district court erred by
disregarding the jury's verdict in favor of plaintiffs on the claim
of civil conspiracy because of the findings in favor of the
defendants on the "substantive" federal and state securities
claims. The investors assert that the district court erred as a
matter of law, as there was substantial evidence to support the
jury's finding on the civil conspiracy claim.
The district court charged the jury on civil conspiracy as
follows:
Plaintiffs' next claim is that the defendants conspired
to violate the law at plaintiffs' expense. In order to find
that the defendants engaged in a civil conspiracy with respect
to conduct surrounding the FilmDallas, Inc. securities
offering, a Plaintiff must prove by a preponderance of the
evidence that:
(1) two or more persons;
(2) had an object to be accomplished;
(3) that there was a meeting of the minds on the subject
or course of action;
(4) that there was one or more unlawful acts; and
(5) that the Plaintiff was damaged as a proximate result
thereof.
These elements have been recognized by this Court and the Texas
Supreme Court. See Meineke Discount Mufflers v. Jaynes, 999 F.2d
120, 125 (5th Cir.1993); Massey v. Armco Steel Co., 652 S.W.2d
932, 934 (Tex.1983); see also Bernstein v. Portland Sav. & Loan,
850 S.W.2d 694, 705 (Tex.App.—Corpus Christi 1993, no writ); Times
Herald Printing v. A.H. Belo Corp., 820 S.W.2d 206, 216
(Tex.App.—Houston [14th Dist.] 1991, no writ).
11
Under Texas law, civil conspiracy is defined as a combination
of two or more persons to accomplish an unlawful purpose or to
accomplish a lawful purpose by unlawful means. Fenslage v.
Dawkins, 629 F.2d 1107, 1110 (5th Cir.1980); Triplex
Communications, Inc. v. Riley, 900 S.W.2d 716, 719 (Tex.1995);
Great National Life Insurance Co. v. Chapa, 377 S.W.2d 632, 635
(Tex.1964). In order for liability to attach, "there must be an
unlawful, overt act in furtherance of the conspiracy." Massey, 652
S.W.2d at 934 (holding that plaintiff did not state a cause of
action for civil conspiracy where none of the overt acts alleged
were unlawful); International Bankers Life Ins. v. Holloway, 368
S.W.2d 567, 581 (Tex.1963) (civil conspiracy "consists of acts
which would have been actionable against the conspirators
individually").
In its Final Judgment, the district court entered a "take
nothing" judgment8 against the investors on the grounds that:
[I]n order for a finding of civil conspiracy to be properly
supported, a defendant must have been found liable for an
unlawful act separate and independent from a conspiracy. The
jury specifically found that neither Jones, Day nor Richard K.
Kneipper committed securities fraud under either the federal
8
Rule 50(a) states:
If during a trial by jury a party has been fully heard
on an issue and there is no legally sufficient
evidentiary basis for a reasonable jury to find for
that party on that issue, the court may determine the
issue against that party and may grant a motion for
judgment as a matter of law against that party with
respect to a claim or defense that cannot under the
controlling law be maintained or defeated without a
favorable finding on that issue.
Fed.R.Civ.P. 50(a).
12
or state securities laws. There was therefore no "unlawful
act" that could support a finding of civil conspiracy, and
defendants are therefore entitled to judgment....
Inasmuch as the district court's judgment may reflect a belief that
a finding of civil conspiracy is dependent on a separate finding of
liability on a substantive count, the court was in error. A
finding of civil conspiracy does require, however, that the
plaintiff be able to plead and prove "one or more wrongful, overt
acts" in furtherance of the conspiracy that would have been
actionable against the conspirators individually. Massey, 652
S.W.2d at 934; Selig v. BMW of North America, Inc., 832 S.W.2d 95
(Tex.App.—Houston [14th Dist.] 1992, writ dism'd w.o.j.).9
Therefore, even if the plaintiff does not bring a separate cause of
action for the underlying wrongful conduct, he must be able to
prove the elements of the wrongful conduct. See Selig, 832 S.W.2d
at 95 (civil conspiracy claim precluded where plaintiffs were
collaterally estopped from relitigating central issue of false
testimony); Kale v. Palmer, 791 S.W.2d 628, 633 (Tex.App.—Beaumont
1990, writ denied) (holding that civil conspiracy claim did not lie
where plaintiffs had failed to plead special damages as required
under Texas law in an action for defamation based on oral
statements).10
9
See also Metzger v. Sebek, 892 S.W.2d 20, 44
(Tex.App.—Houston [1st Dist.] 1994, writ denied) (directed
verdict against plaintiff proper where record does not reflect
any unlawful, overt acts in furtherance of the conspiracy).
10
The requirement that plaintiff plead and prove one or more
unlawful, overt acts also follows from the fact that "the gist of
a civil conspiracy is the damage resulting from commission of a
wrong which injures another, and not the conspiracy itself."
13
In this case, the only "unlawful acts" submitted for the
jury's consideration were the federal and Texas state securities
fraud claims.11 There is simply no evidence in the record that any
other unlawful acts were pleaded and proven at trial. Therefore,
if the jury had been properly charged with the securities fraud
claims, the district court would have been correct in concluding
that there was no basis for sustaining the civil conspiracy verdict
in light of the jury's finding against the investors on these
claims. However, because we have determined that the jury
instruction on "materiality" was erroneous, we also remand the
investors' civil conspiracy claim. If properly instructed on the
securities fraud claims upon retrial, the jury may find that there
was a securities law violation and thereby provide the necessary
basis for sustaining a new civil conspiracy verdict.
In addition, we believe that the jury instruction on civil
conspiracy was defective because it is overly broad. "[A] general
jury verdict [is] valid [only] so long as it was legally
Schlumberger Well Surveying Corp. v. Nortex Oil & Gas Corp., 435
S.W.2d 854, 856 (Tex.1968); accord Ross v. Arkwright Mutual Ins.
Co., 892 S.W.2d 119, 132 (Tex.App.—Houston [14th Dist.] 1994, no
writ); Nautical Landings Marina v. First Nat'l, 791 S.W.2d 293,
299-300 (Tex.App.—Corpus Christi 1990, writ denied); see also
Weakly v. East, 900 S.W.2d 755, 759 (Tex.App.—Corpus Christi
1995, no writ) ("A civil conspiracy requires ... one or more
overt, unlawful acts committed in furtherance of the conspiracy
which results in damages."); Adolph Coors Co. v. Rodriguez, 780
S.W.2d 477, 487 (Tex.App.—Corpus Christi 1989, writ denied)
(civil conspiracy judgment reversed where "neither party to the
alleged agreement took any unlawful, overt acts against [the
plaintiff] causing damages as a proximate result").
11
Although the investors requested instructions on statutory
and common law fraud, neither of these issues was submitted to
the jury.
14
supportable on one of the submitted grounds." Griffin v. United
States, 502 U.S. 46, 49, 112 S.Ct. 466, 469, 116 L.Ed.2d 371 (1991)
(emphasis added). Thus, we have reversed and granted a new trial
when the charge "failed to present [a] critical issue,"12
incorrectly explained the applicable law,13 allowed the jury to make
findings on issues outside those on which pretrial order and charge
allowed proof,14 or failed to resolve a critical underlying question
of fact.15 In each of these cases, we concluded that the charge as
a whole was "insufficient to resolve the remaining factual issues."
Tex-Goober Co. v. Los Angeles Nut House, Inc., 803 F.2d 1358, 1362
(5th Cir.1986).
This case suffers the same flaws for which we have reversed
and granted new trials. The civil conspiracy instruction fails to
12
Turnage v. General Elec. Co., 953 F.2d 206, 212 (5th
Cir.1992); see also Barton's Disposal Serv., Inc. v. Tiger
Corp., 886 F.2d 1430, 1436-37 (5th Cir.1989) (reversing charge
that did not present critical issue of fact to the jury, even
though verdict implied legally sufficient alternate findings).
13
See Horton, 926 F.2d at 461 (reversing charge that
confused several theories of recovery); Bode v. Pan Am. World
Airways, Inc., 786 F.2d 669, 672 (5th Cir.1986) (reversing charge
that "did not adequately inform the jury of the [pertinent state]
law").
14
See Gibraltar Sav. v. LDBrinkman Corp., 860 F.2d 1275,
1299-1300 (5th Cir.1988) (rejecting request to uphold verdict if
it was "a logical and probable decision on the issue as
submitted," because court could not say "that the jury was
clearly not misled"), cert. denied, 490 U.S. 1091, 109 S.Ct.
2432, 104 L.Ed.2d 988 (1989); see also In re Air Crash Disaster
at New Orleans, 795 F.2d 1230, 1235-36 (5th Cir.1986) (reversing
charge that "masked" extent to which jury made permissible or
impermissible findings).
15
Tex-Goober Co. v. Los Angeles Nut House, Inc., 803 F.2d
1358, 1362 (5th Cir.1986).
15
limit the jury solely to "unlawful acts" pleaded, proven and
submitted—the federal and state securities violations. Other than
defining the securities violations, the charge failed to define any
other unlawful acts. Accordingly, the jury was left without a
definition of "unlawful acts" and may have based their civil
conspiracy finding on acts with which they disagreed, whether
unlawful or not. Even if we were to conclude that the evidence is
sufficient to sustain a correct charge of securities fraud, as an
appellate court we cannot supply the missing jury findings on these
claims.16 For these reasons, we believe that there is a "
"substantial and ineradicable doubt whether the jury has been
properly guided in its deliberations' " on this issue as well.
F.D.I.C. v. Mijalis, 15 F.3d 1314, 1318 (5th Cir.1994) (quoting
16
"We afford trial judges wide latitude in fashioning jury
instructions and ignore technical imperfections," Bender v.
Brumley, 1 F.3d 271, 276 (5th Cir.1993); accord P & L
Contractors, Inc. v. American Norit Co., 5 F.3d 133, 137-38 (5th
Cir.1993), and, as an appellate court, we review the
effectiveness of the trial court's charge for abuse of discretion
only. Barton's Disposal Serv., Inc., 886 F.2d at 1435; cf. P &
L Contractors, Inc., 5 F.3d at 138 ("The district court is in the
best position to analyze the jury's intentions and thus is
charged, in the first instance, with the obligation of giving
effect to those intentions in light of the surrounding
circumstances." (emphasis added)).
Indeed, because the defendants objected to the
overbreadth of the instruction for its failure to define
"unlawful acts," even the district court may not have had
the authority to make a finding on that issue. See MBank
Fort Worth v. Trans Meridian, Inc., 820 F.2d 716, 723-24
(5th Cir.1987) (allowing court to make finding under Rule
49(a) only if submission of issue to jury not requested);
Taherzadeh v. Clements, 781 F.2d 1093, 1098 (5th Cir.1986)
("If objection is made for failure to submit an issue, the
district judge has no authority to make an express finding
under Rule 49(a) concerning that same issue.").
16
Bender v. Brumley, 1 F.3d 271, 276-77 (5th Cir.1993)); accord
Bommarito v. Penrod Drilling Corp., 929 F.2d 186, 189 (5th
Cir.1991).
IV
The investors MVenture/Banc One and Rundell challenge the
sufficiency of the evidence to sustain the jury's finding that they
were in pari delicto17 with the defendants. Thomas v. Hoffman-
LaRoche, Inc., 949 F.2d 806 (5th Cir.), cert. denied, 504 U.S. 956,
112 S.Ct. 2304, 119 L.Ed.2d 226 (1992); Boeing Co. v. Shipman, 411
F.2d 365 (5th Cir.1969) (en banc) (applying a substantial evidence
test). The jury answered "yes" to Question No. 7, "Have the
defendants proved by a preponderance of the evidence that the
plaintiffs [MVenture/Banc One and Rundell] were in pari delicto in
connection with any alleged wrongdoing for which plaintiffs seek
damages?"18
17
This common law defense "derives from the Latin, in pari
delicto potior est conditio defendentis: "In a case of equal or
mutual fault ... the position of the [defending] party ... is the
better one.' " Bateman Eichler, Hill Richards, Inc. v. Berner,
472 U.S. 299, 306, 105 S.Ct. 2622, 2626, 86 L.Ed.2d 215 (1985)
(quoting Black's Law Dictionary 711 (5th ed. 1979)).
18
The district court gave the following instruction on the
in pari delicto defense:
"In pari delicto" means "in equal fault." A plaintiff
is in pari delicto where, as a direct result of his own
actions, the plaintiff bears at least substantially
equal responsibility for the wrongdoing for which he
now seeks damages. A party is also in pari delicto
where he is an active participant in a fraudulent or
deceptive scheme or an illegal contract.
The investors objected to this instruction at trial on the
grounds that it did not require that the plaintiff have
participated in the frauds about which they complained.
17
The Supreme Court has held that the in pari delicto defense
may operate as a bar to private causes of action for damages under
the federal securities laws. Bateman Eichler, Hill Richards, Inc.
v. Berner, 472 U.S. 299, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985).
The Court held that an action "may be barred on the grounds of the
plaintiff's own culpability only where (1) as a direct result of
his own actions, the plaintiff bears at least substantially equal
responsibility for the violations he seeks to redress, and (2)
preclusion of suit would not significantly interfere with the
effective enforcement of the securities laws and protection of the
investing public." Id. at 310-11, 105 S.Ct. at 2629. The Bateman
Eichler test requires that the plaintiff "be an active, voluntary
participant in the unlawful activity that is the subject of the
suit." Pinter v. Dahl, 486 U.S. 622, 636, 108 S.Ct. 2063, 2072,
100 L.Ed.2d 658 (1988).
The test under Texas law for determining whether the in pari
delicto defense applies does not appear to be contrary. See Lewis
v. Davis, 145 Tex. 468, 199 S.W.2d 146 (1947) (stating that the
rule's application is a matter of public policy). One test relied
on by Texas courts "is whether the plaintiff requires any aid from
the illegal transaction to establish his case." Id. 199 S.W.2d at
151; see also Plumlee v. Paddock, 832 S.W.2d 757, 759
(Tex.App.—Fort Worth 1992, writ denied) ("[C]ourts have required
parties who wish to recover on an illegal contract prove their case
without reliance on their own illegal act."). "[I]n determining
whether plaintiff requires aid from the illegal transaction to
18
establish his case," it is "necessary to bear in mind the rule that
if a party can show a complete cause of action without being
obliged to prove his own illegal act, although said illegal act may
appear incidentally and may be important in explanation of other
facts in the case, he may recover." Norman v. B.V. Christie & Co.,
363 S.W.2d 175, 177-78 (Tex.Civ.App.—Houston 1962, writ ref'd
n.r.e.).
Upon review of the record, we cannot conclude that the
evidence, if viewed in the light most favorable to the defendants,
would be insufficient as a matter of law to sustain a jury finding
of in pari delicto. Nevertheless, because we find that the
district court's erroneous jury charge on the substantive counts of
securities fraud and civil conspiracy mandates that we remand these
issues for retrial, we must also remand the issue of whether
MVenture/Banc One and Rundell were in pari delicto with the
defendants in this case. The defense of in pari delicto clearly
requires that the jury be properly instructed on the scope of the
underlying illegal actions being alleged before it can determine
whether the two investors bear "at least substantially equal
responsibility" for the illegal actions, or whether the investors
can prove the cause of action without also having to prove their
own illegal acts. It is not enough for the jury to conclude that
the investors were active participants in some wrongdoing with the
defendants.19 Rather, the wrongdoing must be the same wrongdoing
19
We also believe that there is a risk in this case that the
jury was misled by the last part of the district court's in pari
delicto instruction: "A party is also in pari delicto where he
19
for which the investors are seeking to recover damages. Therefore,
the jury instructions on this issue as a whole failed to adequately
guide the jury in their deliberations. See, e.g., Stine v.
Marathon Oil Co., 976 F.2d 254, 261 (5th Cir.1992) (reversing and
remanding for new trial with proper jury instructions).
V
Finally, we must address appeals from two separate motions for
summary judgment. The investors appeal the district court's grant
of summary judgment in favor of defendants Kneipper and Jones Day
on the issue of professional negligence and legal malpractice. The
defendants appeal the district court's denial of their motion for
summary judgment asserting the defense of res judicata.
This court reviews summary judgment de novo. Alexander v.
U.S., 44 F.3d 328, 330 (5th Cir.1995); Ackerman v. F.D.I.C., 973
F.2d 1221, 1223 (5th Cir.1992). We review a district court's grant
of summary judgment by applying the same standard employed by the
district court in ruling on the motion. Alexander, 44 F.3d at 330;
Samaad v. City of Dallas, 940 F.2d 925, 937 (5th Cir.1991). A
summary judgment is appropriate when no genuine issue of material
fact exists and the moving party is entitled to judgment as a
matter of law. FED.R.CIV.P. 56; Celotex Corp. v. Catrett, 477 U.S.
is an active participant in a fraudulent or deceptive scheme or
an illegal contract." On the basis of this instruction, the jury
may have improperly considered evidence that subsequent to the
offering the two investors participated in the sale of interim
notes and percentages of FilmDallas when they had knowledge about
the allegedly fraudulent activity. Unless these subsequent
activities were a part of the underlying illegal activity, or
were a necessary part of the two investors' proof, they were not
relevant to a finding of in pari delicto.
20
317, 323-25, 106 S.Ct. 2548, 2552-54, 91 L.Ed.2d 265 (1986). In
determining whether a genuine issue of material fact exists, the
evidence and inferences must be viewed in the light most favorable
to the nonmoving party. Taylor v. Gregg, 36 F.3d 453, 455 (5th
Cir.1994). The dispute about a material fact is "genuine" if the
evidence could lead a reasonable jury to find for the nonmoving
party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106
S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).
A
The investors make two general assertions in support of their
professional negligence and legal malpractice claims against
Kneipper and Jones Day. First, the investors argue that Jones Day,
and Kneipper as a partner of the law firm, entered into a "limited"
attorney-client relationship with the investors by agreeing to
represent them for the purpose of issuing an opinion letter in
connection with the FilmDallas securities offering. Alternatively,
the investors claim that Jones Day and/or Kneipper had a duty to
advise them that their interests were not being represented in a
situation where they were reasonably led to believe otherwise.
In order to establish liability for professional negligence
or legal malpractice, the investors must show the existence of a
duty owed to them by Jones Day and/or Kneipper, a breach of that
duty, and damages arising from the breach. Yaklin v. Glusing,
Sharpe & Krueger, 875 S.W.2d 380, 383 (Tex.App.—Corpus Christi
1994, no writ). Under Texas law, there is no attorney-client
relationship absent a showing of privity of contract, and an
21
attorney owes no professional duty to a third party or non-client.
Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex.App.—Texarkana 1989,
writ denied); First Mun. Leasing Corp. v. Blakenship, Potts,
Aikman, Hagin and Stewart, 648 S.W.2d 410, 413 (Tex.App.—Dallas
1983, writ ref'd n.r.e.); F.D.I.C. v. Howse, 802 F.Supp. 1554,
1563 (S.D.Tex.1992). The attorney-client relationship is viewed as
a contractual relationship in which the attorney agrees to render
professional services on behalf of the client. Yaklin, 875 S.W.2d
at 383; Parker, 772 S.W.2d at 156. The attorney-client
relationship can be formed by explicit agreement of the parties or
may arise by implication from the parties' actions. Yaklin, 875
S.W.2d at 383; Parker, 772 S.W.2d at 156.
In the present case, the investors argue first that Jones Day
and/or Kneipper manifested their intent to create a limited
attorney-client relationship by voluntarily issuing the opinion
letter in connection with the FilmDallas securities offering.
Although the attorney-client relationship can be implied, courts
will not readily impute the contractual relationship absent a
sufficient showing of intent. See Parker, 772 S.W.2d at 156
(holding that husband's attorneys did not have attorney-client
relationship with wife even though the wife met with attorneys and
signed documents in their offices).20 We do not believe that the
20
See also Dickey v. Jansen, 731 S.W.2d 581, 582
(Tex.App.—Houston [1st Dist.] 1987, writ ref'd n.r.e.)
(concluding that testamentary beneficiaries could not maintain a
cause of action against attorney who negligently drafted will due
to lack of privity); F.D.I.C. v. Howse, 802 F.Supp. at 1563
(finding that a lack of privity prevented bank directors from
obtaining indemnity from the law firm which had handled the
22
opinion letter issued by Jones Day and/or Kneipper evidences an
intention to form an attorney-client relationship. Cf. First Mun.
Leasing Corp., 648 S.W.2d at 413 (concluding that law firm which
issued opinion letter regarding the validity of a contract owed no
duty to a third-party corporation due to lack of privity).
The investors next argue that the final paragraph of the
opinion letter indicated that Jones Day was rendering professional
services directly to the individual investors:
This opinion is furnished by us, as counsel for the company,
to you, solely for your benefit, and we are not hereby
assuming any professional responsibility to any other person
whatsoever.
Despite the investors' arguments,21 however, we read this paragraph
to name Jones Day as counsel for FilmDallas solely, disclaiming any
professional responsibility for any other persons, including the
investors. Although unartfully drafted, the opinion letter does
not manifest an intent to create an attorney-client relationship.
To the contrary, the disclaimer is an obvious attempt to avoid an
inadvertent creation of such a relationship.
We hold as a matter of law that a reasonable jury could not
find that the parties manifested an intent to create an
attorney-client relationship. Therefore, the investors' first
argument cannot sustain a cause of action for professional
bank's affairs).
21
The investors also argue that this case is distinguishable
because the opinion letter was addressed directly to the
individual investors. We find no significance in this
distinction, however, and do not believe that it supplies any
additional showing of intent to form an attorney-client
relationship.
23
negligence or legal malpractice. See Parker, 772 S.W.2d at 156;
First Mun. Leasing Corp., 648 S.W.2d at 413.
The investors also claim that Jones Day and/or Kneipper had
a duty to inform them that they were not being represented because
the circumstances would have led reasonable investors to believe
otherwise. Texas courts have held that certain circumstances may
give rise to a "duty to disclose." Kotzur v. Kelly, 791 S.W.2d
254, 258 (Tex.App.—Corpus Christi 1990, no writ) ("[A]n attorney
may be held negligent when he fails to advise a party that he is
not representing them on a case when the circumstances lead the
party to believe that the attorney is representing them.");
Parker, 772 S.W.2d at 157 ("This duty to so advise would arise if
the factfinder determined that the attorneys were aware or should
have been aware that their conduct would have led a reasonable
person to believe that she was being represented by the
attorneys."). After reviewing the record, we find that the
evidence in this case is also insufficient as a matter of law to
establish that Jones Day and/or Kneipper had a "duty to disclose."
Moreover, even if such a duty did exist, we believe that the
disclaimer in the opinion letter was sufficient to alert the
investors to the fact that their interests were not being
represented by Jones Day and/or Kneipper.
B
Kneipper and Jones Day appeal from the district court's
denial of their motion for summary judgment, which asserted that
the plaintiffs (except for MVenture) were estopped from asserting
24
any claims against defendants by a release contained in the plan of
reorganization entered in FilmDallas's bankruptcy case. The
investors argue that defendants waived the defense of res judicata
by failing to plead it affirmatively as required by FED.R.CIV.P.
8(c). We agree.
Res judicata is an affirmative defense which is considered
waived if not specifically pleaded in the answer or an amended
answer permitted under FED.R.CIV.P. 15(a). Mozingo v. Correct Mfg.
Corp., 752 F.2d 168, 172 (5th Cir.1985); Morgan Guaranty Trust Co.
of New York v. Blum, 649 F.2d 342, 344-45 (5th Cir.1981); Henry v.
First Nat'l Bank of Clarksdale, 595 F.2d 291, 298 (5th Cir.1979),
cert. denied, 444 U.S. 1074, 100 S.Ct. 1020, 62 L.Ed.2d 756 (1980).
Concurrent with their motion for summary judgment, the defendants
filed a motion for leave to amend their answer, which the district
court also denied. A district court has some discretion "to allow
late amendment to press a defense when no prejudice would result to
the other party, and the ends of justice so require." Mozingo, 752
F.2d at 172. We review the district court's denial of such a
motion for abuse of discretion. Morgan Guaranty Trust Co. of New
York, 649 F.2d at 345.
As the investors point out, the defendants did not attempt to
amend their answer until approximately ten months after the
deadline to amend in the securities fraud case and almost three
years after the bankruptcy plan was confirmed. Moreover, the
bankruptcy release was not something the defendants could not have
discovered and asserted earlier. See Pope v. MCI
25
Telecommunications Corp., 937 F.2d 258 (5th Cir.1991) (affirming
denial of leave to amend where claim could have been asserted years
earlier), cert. denied, 504 U.S. 916, 112 S.Ct. 1956, 118 L.Ed.2d
558 (1992). Therefore, we conclude that the district court
followed the law and did not abuse its discretion in denying
defendants' motions.
VI
For the foregoing reasons, we AFFIRM the district court's
rulings on the two motions for summary judgment; we REVERSE the
judgment of the district court in favor of the defendants, and
REMAND for a new trial on the federal and Texas state securities
fraud claims and on the civil conspiracy claim.
BERRIGAN, District Judge, concurring in part and dissenting in
part:
I join the majority in affirming the grant of summary judgment
on the professional negligence claim and in affirming the denial of
summary judgment on the estoppel issue. I also join the majority
in finding that the jury was given an erroneous instruction
regarding "materiality" as to the securities fraud claims,
necessitating a new trial on these claims. I disagree with the
majority in one respect. I think that the jury's verdict on the
civil conspiracy claim should be upheld.
"If there is an evidentiary basis upon which the verdict can
be supported, the jury's determinations will be left undisturbed,
even where there is substantial contradictory evidence that could
have supported an opposite verdict." Gibraltar Savings v. LD
Brinkman Corp., 860 F.2d 1275, 1297 (5th Cir.1988), cert. denied,
26
490 U.S. 1091, 109 S.Ct. 2432, 104 L.Ed.2d 988 (1989). The record
reflects that the only fraud claimed by the plaintiffs and
subjected to proof at trial still supports the finding of civil
conspiracy even though it occurred at a time which would have made
it "immaterial" for purposes of the erroneous securities jury
charge.
The majority acknowledges that the verdict on civil conspiracy
derived from a jury instruction which has been widely approved.
The jury cannot be misled by a charge which so accurately
summarizes the prevailing jurisprudence. Because civil conspiracy
is a distinct claim which does not require materiality, the jury
was able to consider the "unlawful acts" which were the entire
focus of the five-week trial. The necessary retrial of the
securities claims should not mandate retrial of the civil
conspiracy claim. With the civil conspiracy claim left
undisturbed, the jury's in pari delicto finding would also be
maintained.
27