Motion To Dismiss. Pacific Continental Bank And Century Bank s Motion to Dismiss Plaintiffs Second Amended Complaint

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1 Motion To Dismiss 1 Pacific Continental Bank And Century Bank s Motion to Dismiss Plaintiffs Second Amended Complaint Cox v. Holcomb Family Limited Partnership Case No Hon. Youlee Yim You October 28, 2015

2 Summary of Argument No Participation or Material Aid in a Sale of Berjac Securities No ORS 59115(1)(a) Cause of Action for Violation of ORS (2) Inadequate pleading of scienter as required for ORS (1)-(3) Violations No Specific Sales Identified in Complaint Alternative: Request to Make More Definite and Certain 2

3 ORS (3) Claim Elements In order for plaintiffs to assert a valid claim against Pacific Continental under ORS (3) must allege the following elements to prove the claim: (1) Berjac sold a security to the plaintiff, AND (2) the sale by Berjac to the plaintiff was made: 3 (a) in violation of ORS (1) (b) in violation of ORS (3); OR (c) by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, the plaintiff not knowing of the untruth or omission; AND (3) Pacific Continental participated or materially aided in the sale by Berjac to the plaintiffs.

4 No Participation or Material Aid in a SALE 4 Plaintiffs Argument: No requirement of participation or material aid in a SALE Only need participation in the MEANS or SCHEME The important thing is to evaluate the means... [leading to sales], and then evaluate... participation or material aid in those means [or scheme]. Ps Brief, p (3): Every person who participates or materially aids in the SALE is also liable. Plaintiffs: Every person who participates or materially aids in the MEANS OR SCHEME is also liable.

5 Scheme Liability Addressed Elsewhere Control Persons Liability under (3): Every person who directly or indirectly CONTROLS a seller is liable Participation in SALE not required Control persons face SCHEME liability Participants/Material Aiders No scheme liability under (3) Scheme liability under common law for aiding and abetting a fraud or fraudulent scheme There is liability for participation in a scheme just not under (3) 5

6 No Participation or Material Aid in a SALE Allegations concerning Pacific Continental and Century Bank, paras 14 & 15 of the SAC: 6 No action or involvement at all by PCB or Century in connection with any Sale of Berjac securities No tie of loans and lines of credit to any Sale of securities Pacific Continental is not even alleged to have loaned money directly to Berjac Plaintiffs rely entirely on Scheme liability not participation in a Sale

7 No Participation or Material Aid in a SALE National Century Case Three Key Points In re National Century Financial Enterprises, 846 F.Supp.2d 828 (S.D. Ohio 2012) National Century undisputed that it committed massive fraud 7 Credit Suisse (CS) provided lines of credit to National Century CS agreed to purchase the loan of another bank when that bank declined to renew its loan to National Century Oregon plaintiff no contact with CS nor did it review any materials prepared by CS in making its purchase of National Century notes CS was sued for participant liability and aiding and abetting fraud

8 National Century Case Point One No participant liability under (3) 8 CS was too far removed to have aided in or participated in a sale (3) is limited to those who participate in or materially aid the sale and does not encompass all who assist in the overall fraud. Id. at 908. Summary judgment granted for CS did not participate in sale

9 National Century Case Point Two CS supplied MetLife directly with a PPM 9 MetLife produced evidence that Credit Suisse materially aided the sale by directly communicating information for that particular note issuance to MetLife. Id. at 909. Summary judgment denied to CS it did participate in the sale Open market aspect was irrelevant

10 National Century Case Point Three Oregon plaintiff asserted aiding and abetting fraud against CS 10 Oregon plaintiff established Credit Suisse s actual knowledge and substantial participation in the scheme. Id. at 916. Summary judgment denied to CS participation actionable under common law of aiding and abetting fraud Confirming SCHEME liability just not under (3) SALE liability Why does this make sense? Participation in a SALE more direct connection required - lower burden of proof Participation in a SCHEME less direct connection required - higher burden of proof

11 Plaintiffs Cases All Required Participation in the SALE Gonia v. EI Hagen Co Non-seller visited prospective purchasers with a rep of the seller re sale Adamson v. Lang Non-seller s loan specifically to facilitate the sale Black & Co. v. Nova-Tech, Inc. Lawyer prepared legal papers to complete sale Adams v. American Western Securities, Inc. Lawyer prepared docs for sale and filed documents to register securities 11

12 Plaintiffs Cases All Required Participation in the SALE Ainslie v. First Interstate Bank Non-seller participated in sale by holding and distributing proceeds in escrow Prince v. Brydon Lawyer prepared offering statement for sale of securities and legal documents necessary to create the entity for which the securities were sold McDonough v. Jones Defendant authorized seller, in connection with sale of securities, to make specific reps re financial condition, validity and safety of notes Ainslie v. Spoylar Lawyer prepared docs and was deeply involved in sale 12

13 Practical Effects of Participant Liability for MEANS or SCHEME and not SALE 13 No Oregon court has found participant liability based only on participation in a SCHEME and not a SALE Under Plaintiffs framework: Must a bank undertake extensive due diligence to extend LOC? Not just on borrower but on all of borrower s businesses, contacts, relationships, investors, etc. How does borrower finance business? Does borrower issue securities? Racehorses? Salmon Ranches? Are securities registered or exempt? Are investors all accredited? Interview all investors? What representations were/are made to each investor? How does Bank evaluate all of this?

14 Key Decision for Court: Participation in a SCHEME or a SALE 14 Plaintiffs: Every person who participates or materially aids in the SCHEME is also liable. ORS (3): Every person who participates or materially aids in the SALE is also liable.

15 ORS (1)(a) No Cause of Action for ORS Key Points Legislature s clear intent to provide for (1) & (3) violations through (1)(b) Legislature s clear intent to remove (2) from (1)(b) s good faith defense would be irrelevant Statutory Construction unaddressed by plaintiffs Oregon v. Marsh (II) violations require scienter If (1)(a) allows a cause of action, scienter must be required 15

16 Legislature Initially Allows Violations to be Brought Through New (1)(c) In 2003, SB 609 was signed into law. Added (1)(c) (1) A person who offers or sells a security is liable as provided in subsection (2) of this section to a purchaser of the security if the person:... (b) Offers or sells a security by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading (the buyer not knowing of the untruth or omission), and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission; or (c) Offers or sells a security in violation of ORS (1), (2) or (3). 16

17 Legislature Amends and Clarifies in Two Ways Later in 2003, was amended again (1) A person [who offers or sells a security] is liable as provided in subsection (2) of this section to a purchaser of [the] a security if the person: (b) [Offers or] Sells or successfully solicits the sale of a security in violation of ORS (1) or (3) or by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading (the buyer not knowing of the untruth or omission), and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.[; or] [(c) Offers or sells a security in violation of ORS (1), (2) or (3).]

18 Legislature Amends and Clarifies in Two Ways One: (1) & (3) actionable through (1)(b): Sells or successfully solicits the sale of a security in violation of ORS (1) or (3) 18 Two: (2) language remains in (1)(b) but continues to allow a good faith defense: Sells or successfully solicits the sale of a security... by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading... and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission

19 59.115(1)(b) s Good Faith Defense Would be Irrelevant Both (1)(b) and (2) prohibit untrue statements or omissions of material fact 19 Good faith provision prohibits strict liability for innocent misrepresentations If plaintiffs could avoid the good faith defense by proceeding under (1)(a) (1)(b) would be irrelevant

20 59.115(1)(b) Would be Irrelevant 20 Accepting plaintiffs position, (1)(b) is irrelevant If all violations are actionable under (1)(a), why ever proceed under (1)(b)? Accepting plaintiffs position would create strict liability beyond (1)(b) Or Ct App recognizes this cannot be the case: When holding that a violation of ORS (2) requires scienter, the Court in Marsh II said: [W]e are not aware of anything in the legislative history of that suggests that the legislature intended to create a kind of strict liability that encompasses innocent misstatements, thereby expanding a seller s liability for misstatements beyond what is contemplated in ORS (1)(b).

21 Two Conclusions (1) & (3) violations are only actionable through (1)(b) (2) violations, actionable through similar language in (1)(b), allow for a good faith defense

22 Scienter What Are the Issues Presented? Scienter required for actions of participants? No, not an issue raised by defendants Defendants have good faith defense, (3) 22 Scienter required for violations of ? Yes, Oregon v Marsh (II) is clear:... the legislature understood violations of all three provisions to refer to similar types of conduct involving scienter.... the legislature intended a violation of ORS (1), (2) or (3) to refer to conduct that was committed with scienter.... If (1)(a) provides a cause of action for violations of , scienter must be required

23 Why is Scienter Important? Plaintiffs cannot plead facts supporting scienter 23 Plaintiffs allegations of scienter are conclusory and often merely recite the language of the elements of the claim

24 Alternative: Make More Definite and Certain Plaintiffs need to specifically allege: 24 Each specific sale of securities The misrepresentation or fraud in connection with each sale Including scienter The participation of PCB in each specific sale of securities, not scheme

25 Issues for the Court to Decide Did PCB participate or materially aid in the SALE of securities? Do ORS violations require proof of scienter? Does ORS (1)(a) provide a claim for violations of ? Have plaintiffs adequately plead facts showing scienter? 25 Have plaintiffs plead facts showing specific sales, misreps and participation in sales by PCB?

26 Issues for the Court to Decide Did PCB participate or materially aid in the SALE of securities? -No, case dismissed. Do ORS violations require proof of scienter? 26 -Yes, must plead specifically. Does ORS (1)(a) provide a claim for violations of ? -No, but if yes, then must replead as above.

27 Issues for the Court to Decide Have plaintiffs adequately plead facts showing scienter? 27 -No, plaintiffs must replead. Have plaintiffs plead facts showing specific sales, misreps and participation in sales by PCB? -No, plaintiffs must replead.