Securities — § 15(a)(1) of ’34 Act Affords Private Right of Action — Rescission Available under § 29(b) to Stranger to Contract — Privity Inferrable from Cross-References to Other Contracts to Which Plaintiff Was Party

Landegger v. Cohen, 2013 U.S. Dist. LEXIS 159734 (D. Colo. Nov. 7, 2013):

The crux of Plaintiff's claim is predicated on the unregistered broker status of Defendants Cohen and Young, respectively. Because of this status, Plaintiff contends that the securities' contracts entered into with Defendants were unlawful under Section 15(a)(1) of the Exchange Act. Plaintiff further contends that the contracts should be made void pursuant to Section 29(b).

Arising from Plaintiff's claim are issues of first impression within the Tenth Circuit. They can be summarized as follows:

First, whether Plaintiffs can assert an implied private cause of action under Section 15(a)(1) and Section 29(b) of the Exchange Act.

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A. Whether Plaintiffs Can Assert an Implied Private Cause of Action Under Section 15(a)(1) and Section 29(b) of the Exchange Act

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The Supreme Court's most recent treatment of the private cause of action issue can be found in Sandoval, 532 U.S. 275, 121 S. Ct. 1511, 149 L. Ed. 2d 517. It is the most restrictive approach announced by the Court to date.  The issue before the Court was whether an implied cause of action existed to enforce the regulations enacted under Title VI of the Civil Rights Act of 1964. Title VI prohibits racial discrimination by recipients of federal funds. Although Title VI had traditionally required discriminatory intent, the Department of Justice ("DOJ") enacted regulations under Title VI that prohibited recipients of federal funds from engaging in practices that have a racially discriminatory impact. The Court reviewed these regulations, coupled with the statute that, pre-Sandoval, had been interpreted by every court of appeals as providing for a private cause of action to enforce the DOJ's regulations.

Notwithstanding this,   the Court's majority rejected the opinion of every circuit court to address this issue, finding that Title VI did not provide for a civil cause of action because there was simply nothing in the text or structure of the statute to support the creation of a private right. See 532 U.S. 275, 121 S. Ct. 1511, 149 L. Ed. 2d 517 (stating "[w]e therefore begin (and find that we can end) our search for Congress's intent with the text and structure of Title VI.") The majority further reasoned that: "Like substantive federal law itself, private rights of action to enforce federal law must be created by Congress. The judicial task is to interpret the statute Congress has passed to determine whether it displays an intent to create not just a private right but also a private remedy." 532 U.S. at 286. In affirming this textualist approach, the majority further stated (1) that the approach in Borak had been "abandoned" and (2) that the approach in Curran — which looked to contemporary legal context — had only been applied in handful of "implied-right-of-action cases" and did not hold "dispositive weight" in determination of the Congressional intent.  532 U.S. at 287. With respect to (2), the majority declared that application of "contemporary legal context" may only "buttress a "conclusion supported by the text and structure" of the statute. Id. The majority concluded that "[contemporary] legal context matters only to the extent it clarifies text." Id. (emphasis added).

Finally, in re-calibrating the approach relevant to implied causes of action, the majority in Sandoval relied heavily on the Touche decision to buttress its reasoning — a case which was cited no less than four times throughout Justice Scalia's opinion. Given the endorsement of the Touche holding by Sandoval, and the subsequent citation of same by the Tenth Circuit, the Court finds the Touche decision useful in disposition of the present case, especially given that is one which similarly  addressed provisions in the Exchange Act.

5. The State of the Law: Summary of the Interpretive Process

To summarize, the Sandoval decision resoundingly affirmed Touche. 532 U.S. at 286 (stating, "private rights of action to enforce federal law must be created by Congress"). In accordance with Sandoval, the judicial task is to "interpret the statute to determine whether it displays an intent to create not just a private right, but also a private remedy." Id. Such intent must be drawn from the "text and structure" of the statute to determine whether "rights-creating language" exists. Id. at 288. And to determine whether such language exists, Touche provides that district courts are to look to the whether the statute (1) grants "private rights to any identifiable class" and (2) "proscribes conduct as unlawful." 442 U.S. at 568. These are but examples of "rights-creating language"; though given the strong endorsement of Touche in Sandoval, these examples provide helpful clues as to whether Congress intended that a private cause of action be implied. If there is no "rights-creating language", Sandoval makes clear that the interpretive process ends there. Sandoval 532 U.S. at 288.

Additionally, and to clarify the language of the statute--so to discern Congressional intent--Sandoval permits a district court look to the "contemporary legal context" in which the statute was enacted. Id. But the majority did restrict its usage. Context may only buttress a "conclusion independently supported by the text of the statute." Id. Context cannot be relied upon as the first tool in the interpretive tool box. It is secondary indicia of Congressional intent. The weight afforded to context is thus less than that afforded to the statutory language itself. 532 U.S. at 292 (stating "legal context matters only to the extent it clarifies text.")

6. Parties' Argument   and Application of Interpretive Principles to the Instant Case

The battle lines drawn over interpretation are primarily directed at Section 15(a)(1) and Section 29(b). The Parties have competing interpretations of how these provisions should be construed--and whether, inter alia, the provisions give rise to a private cause of action as a matter of law. Plaintiff contends that Defendants have violated Section 15(a)(1) of the Exchange Act. That section provides that it is unlawful for a broker to induce the sale of securities unless registered. Section 29(b) affords relief for violations of Section 15(a)(1) in the form of rescission. Plaintiff's preferred interpretation is that these provisions give rise to an implied private cause of action.

Defendants counter. They contend that neither of the sections afford Plaintiff any form of private action. Rather, Defendants' preferred construction is that any action based on Section 15(a)(1) and Section 29 must be brought by the Securities and Exchange Commission ("SEC" or "Commission"). (ECF No. 115 at 12-13.) Defendants rely heavily on Sheldon v. Vermonty, 204 F.R.D. 679 (D. Kan. 2001).

For the reasons stated below, the Court adopts Plaintiff's  preferred construction. The reason is four-fold.

First, Section 15(a)(1) provides 'rights-creating language' that discerns Congressional intent in favor of Plaintiff's position. The Court finds that such language gives rise to a private cause of action under the Exchange Act. Specifically, Section 15(a)(1) provides that "it shall be unlawful for any broker. . . . to effect . . . the purchase or sale of, any security . . . unless such broker is registered." The Court finds that this text provides clear evidence of Congressional intent to support Plaintiff's private cause of action against Defendants under the Exchange Act. It does so because Section 15(a)(1) proscribes certain conduct as "unlawful"--i.e., it is unlawful for brokers to engage in the sales of securities when they are unregistered. It is rights-creating language since it allows a plaintiff to sue for violations of a broker's unlawful conduct connected with the sale of securities contracts. Cf. Touche 442 U.S. at 568 (finding that "the statute by its terms, grants no private rights to any identifiable class and proscribes no conduct as unlawful. . . [a]t least in such a case as this, the inquiry ends there. . . and the question whether Congress intended to create a private right of action, [is] answered in the negative.")

Because Section 15(a)(1) expressly states that unregistered brokering is   unlawful, the Court finds that this language provides one of the best clues that the section affords a private cause of action reflecting Congressional intent. Put simply: the absence of this language in Touche cut against the plaintiff in that case; it follows that the existence of this language, in this case, cuts the other way. Relatedly, Section 15(a)'s language also narrows and identifies a class of plaintiffs for this putative cause of action--i.e., a class of plaintiffs who purchase securities from unregistered brokers. Touche, 442 U.S. at 568. The language does not connote a torts-based theory of relief--which was rejected in Touche; rather, the language creates relief based on   contract, making the class of plaintiffs more defined and significantly mitigating any floodgates concerns that typically arise in a tort-based context. Id.

Footnote 13.     The Court observes that while the methodology applied in Borak, 377 U.S. at 426 is no longer good law, the Court ultimately found that violation of §14(a) of the Exchange Act afforded a private cause of action; a section that makes it "unlawful for a person to solicit proxies in violation of rules prescribed by the Securities and Exchange Commission." (emphasis added). Given that §14 used "rights-creating" language that was identified in Touche, it would follow that Supreme Court would have come to the same result had that same section be adjudicated under the more restrictive approach in Sandoval (which adopted Touche).

 

Second, Sandoval mandates more than just a private right--there must also be Congressional intent to create a private remedy. Here, evidence of a private remedy can be found in Section 29(b). That section provides that "every contract made in violation of this chapter . . . shall be void." (emphasis added). And because Section 15(a)(1) falls within the chapter that triggers relief under Section 29(b), it follows that the Sandoval requirement that there be textual and structural support for both a personal right and a private remedy is satisfied. Cf. Boswell, Inc., 361 F.3d at 1267 (stating that the court's task "is to determine whether the [statute] displays an intent to create both a right and a remedy in favor of plaintiff.")

 

As such, because Sandoval's methodology yields a result in favor of Plaintiff's preferred construction, this alone is enough to end the debate since the text and structure evidences Congressional intent that a private cause of action exists pursuant to Section 15(a)(1) and Section 29(b), respectively. See Sandoval, 532 U.S. at 286 (stating that the "interpretive inquiry begins with the text and structure of the statute").

The third reason supporting Plaintiff's preferred construction is based on context. It serves to reinforce the result against Defendants' purported construction.

To supplement the text and structure of a statute, Sandoval said that a court could look to "contemporary legal context" to discern Congressional intent provided such context acts in tandem with the statutory language. See 532 U.S. at 292. Specifically, Sandoval stated that context may buttress a "conclusion independently supported by the text and structure of the statute." Id. The text must speak first, however. Here, Plaintiff contends that the legal context, at the time of amendment to the Exchange Act in 1975, also supports Plaintiff's preferred construction. Id. As Plaintiff points out that prior to 1975 a private cause of action had been recognized by some courts under Section 15: see Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 368 n.1 (1st Cir. 1973), Davis v. Avco Corp., 371 F. Supp. 782, 789 (N.D. Ohio 1974), and Opper v. Hancock Securities Corp., 367 F.2d 157, 158 (2nd Cir. 1966).

Because of these cases, Plaintiff contends that the contemporary legal context allows this Court to more readily infer Congressional intent supporting a private cause of action since Congress's failure to expressly eliminate the private cause of action in the amended Act reflected the intent of Congress to maintain a private cause of action under the statute, post-1975. See Curran, 456 U.S. at 377.

Footnote 15.     While Curran was also cited several times by the majority, the Court only did so to criticize the holding, stating that "Curran's reliance on congressional inaction [to determine Congressional intent . . . deserves little weight in the interpretive process." 532 U.S. at 293. Notwithstanding this, the majority did not goes as far as rejecting Curran's approach altogether (as it did with Borak). This tends to suggest that Curran remains good law in clarifying Congressional intent provided that such intent is first drawn from the text and structure of the statute.

This argument holds merit. In light of the referenced pre-1975 case law--coupled with the intention drawn from the text and structure of the statute as addressed above--the Court agrees with Plaintiff's preferred construction. The Court finds that the legal context, at the time of the amendment to the Exchange Act, supports the contention that it was Congress's intent to provide for a private cause of action, because there is nothing in the express language of Section 15(a)(1) to disavow this interpretation, particularly given the pre-existing case law that supported  its existence. This view, however, is qualified to the extent the Court has afforded less weight to context than that afforded to the text and structure of the statute. This is what Sandoval mandates. But, provided such context is not inconsistent with the text, as here, context can serve to buttress the text and structure of the statute to better demonstrate Congressional intent giving rise to a private cause of action. The Court finds as much. See Sandoval, 532 U.S. at 287-292.

Footnote 16.     It is worth noting that the Sandoval and Curran cases work together to fortify the Court's adoption of Plaintiff's statutory construction--a construction that recognizes the existence of a private cause of action under Section 15(a)(1) and Section 29(b) of the Exchange Act. Indeed, the construction that the Court adopts follows a line of other cases where private causes of action have previously been recognized which further support the conclusion drawn in this case. See Curran 456 U.S. at 377 n. 100 (stating that "[i]t is just as much 'judicial legislation' for a court to withdraw a remedy which Congress expected to be continued as to improvise one that Congress never had in mind"); Cannon, 441 U.S. at 696-99;  [*39] Huddleston, 459 U.S. 375, 387, 103 S. Ct. 683, 74 L. Ed. 2d 548 (recognizing a private cause of action pursuant to Section 10(b) of the 1934 Act and Rule 10b-5 because courts had done so for 35 years before amendment to the Exchange Act); Sonnenfeld, 100 F.3d at 747 (citing Curran and holding that an implied right of action under § 10(b) existed against municipality and stating that "had Congress intended there be no private cause of action against municipalities, it expressly would have stated such an exemption); see also Bradford C. Mank, Legal Context: Reading Statutes in Light of Prevailing Legal Precedent, 34 Ariz. St. L.J. 815 (2002) (providing detailed analysis of this case and the line of cases that have addressed private causes of action).

Finally, Defendants rely on Sheldon for the proposition that private cause of action under Section 15(a)(1) has not been recognized since the amendment of the Exchange Act in 1975. 204 F.R.D. 679. Defendants contend that this Court should follow that opinion. But fatal flaws exist in Sheldon's reasoning. For instance, there is no reference to Sandoval anywhere in the opinion. On the contrary, there are at least four references to the Cort decision; a decision that has been virtually altered beyond recognition from a four-factor test to a one factor analysis: Congressional intent. Moreover, nowhere in Sheldon opinion did that court seriously examine the application of Curran--i.e., an approach that allows for analysis of contemporary legal context to help clarify Congressional intent as a basis for implying a private cause of action. Instead, it was simply ignored and reliance was placed on Cort and cases citing same, even though there were Supreme Court cases in the late 1970s, post-Cort, that cut away at its persuasiveness. This has been addressed earlier.

The Court finds that both Sandoval and Curran are directly relevant to the analysis in the present suit. The fact that they were both absent in the abbreviated analysis in Sheldon dilutes any persuasive value of that opinion in this district. Indeed, because Sheldon cites neither case, this Court affords the decision minimal (if any) weight in disposition of Defendants' Motion.

In sum, the Court finds that Congress has adequately evinced--through the text and structure of the relevant statutory language--its intent to afford a private cause of action pursuant to Section 15(a)(1). As a matter of law, therefore,  the Court finds that Defendants' motion should be denied to the extent that it relates to the first issue--i.e., whether Plaintiff may pursue a private cause of action against Defendants.

B. Whether Plaintiffs are in Privity with Defendants and Can Obtain Rescission under Section 29(b) of the Exchange Act

The second issue addresses whether privity of contract is required to maintain relief pursuant to Section 29(b) of the Exchange Act. In deciding this issue, the Court notes in advance that Plaintiff has certain built-in advantages in the context of summary judgment. Plaintiff need not prove that privity exists at this juncture; Plaintiff need only establish that there is a genuine dispute as to material facts going to the privity issue. It is because the burden only extends this far (at this juncture) that Plaintiff is aided in rebutting Defendants' Motion for Summary Judgment. See Allen, 119 F.3d at 839; Adler, 144 F.3d at 670 (stating that in analyzing a motion for summary judgment, a court must view the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party); Houston, 817 F.2d at 85 (stating that court must resolve factual ambiguities against the moving party, thus favoring the right to a trial).

1. Parties' Arguments and Analysis 

To prevail under Section 29(b), a plaintiff must show: "(1) the contract involved a 'prohibited transaction;' (2) he is in contractual privity with the defendant; and (3) he is 'in the class of persons the Act was designed to protect.'" Reg'l Props., Inc. v. Fin. & Real Estate Consulting Co., 678 F.2d 552, 559 (5th Cir. 1982); Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 205 (3d Cir. 2006); see also Heck v. Buhler, 2010 U.S. Dist. LEXIS 31012, 2010 WL 1293752, at *7 (M.D. La. Mar. 3, 2010).

Footnote 17.   The real battleground in this case is over element (2). The other elements were not put into dispute.   ***

  In addressing element (2), courts have used a broad brush and asked whether a name-defendant is a "stranger to the contract." Natkin v. Exchange Nat'l Bank of Chicago, 342 F.2d 675 (7th Cir. 1965).

Defendants contend that even if Plaintiff has a claim under Section 15(a)(1), he cannot claim relief in the form of rescission because Plaintiff cannot establish privity of contract. (ECF No. 115 at 3.) Plaintiff counters. At a minimum, Plaintiff argues that privity exists with respect to Defendant AP Group, and that a more flexible theory of privity should extend to the remaining Defendants because these Defendants cannot be said to be strangers to the securities contracts surrounding Plaintiff's investments. (ECF No. 116 at 41) (stating that the "citadel of privity" surrounding section 29(b) should not be followed "blindly"). Specifically, Plaintiff contends that the contracts "are mere strands in a complex web of interrelation agreements that form a single transaction" that satisfy the privity requirement for the purposes of obtaining the relief sought pursuant to Section 29(b) of the Exchange Act. (Id. at 2.)

Footnote 18.   Plaintiff should note that this Court will not eviscerate the privity requirement as it serves an important connection in ensuring that the Section 15(a)(1)-Section 29(b) private cause of action is not indeterminate. The Court has addressed this earlier in the Order; but to summarize here, a privity  requirement is important to mitigate against any floodgates concerns because contract theory does much to narrow the class of potential applicants to such a claim. Therefore, Plaintiff (nor the Court) cannot go so far as to reject the privity requirement because doing so would tend to weaken the reasoning that supports the private cause of action analysis in Section III.A at 20-22 (stating that the language in Section 15(a)(1) "creates relief based on contract, making the class of plaintiffs more defined and significantly mitigating any floodgates concerns that typically arise in a tort-based context").

a. Privity with Respect to Defendant AP Group

In reading the following facts in favor of the non-moving party, the Court finds that there is enough disputed facts, at least at this juncture, to allow the Federal Claim to proceed to trial against Defendant AP Group. ***

b. Privity with Respect to the Remaining Defendants

The question whether the other named-Defendants are in privity of contract with Plaintiff is a much closer call. In essence, Plaintiff's privity theory as applied to the remaining Defendants is dependent upon a flexible approach to the doctrine. Plaintiff contends (1) that privity can drawn from the interrelated nature of the contracts, and (2) because of the interrelated nature of the contracts, Plaintiff is not a "stranger to any contractual relationship with Defendants" and that privity exists. (ECF No.116 at 43)

Plaintiff cites case law from contexts outside Section 29(b) that provide support his position. Plaintiff contends that there is enough in these cases for his privity theory to proceed to jury for further factual development to determine whether privity exists. See Bailey v. Hannibal & St. Joseph R.R. Co., 84 U.S. 96, 108, 21 L. Ed. 611 (1872) (stating in a securities case in the Nineteenth Century that "it is well-settled law that several writings executed between the same parties substantially at the same time and relating to the same subject-matter may be read together as forming parts of one transaction"); ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir. 1995) (holding that a dispute arising out of an agreement that lacked an arbitration clause was still subject to arbitration based on the broad arbitration provision contained in other agreements relating to the same joint venture); Safer v. Nelson Financial Group, Inc., 422 F.3d 289, 296 (5th Cir. 2005) (stating that "[i]n determining whether two agreements are related, 'it is well-settled that several writings executed by the same parties substantially at the same time and relating to the same subject-matter may be read together as forming the parts of one transaction").)

Footnote 20.   See, e.g., BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 72-73 (Colo. 2004) ("The policies underlying the application of the economic loss rule to commercial parties are unaffected by the absence of a one-to-one contract relationship. Contractual duties arise just as surely from networks of interrelated contracts as from two-party agreements"); Farmers Group, Inc. v. Trimble, 768 P.2d 1243, 1247 (Colo. App. 1988) (stating that "[u]nder these circumstances, strict adherence to the general rule that liability for bad faith breach may be imposed only against a party to an insurance contract would permit Farmers to shield itself from liability through the device of a management company and would deny defendant recovery from the party primarily responsible for his damages"); see also Richard A. Lord, Williston on Contracts § 30:26 (4th ed. 1999) ("[I]nstruments executed at the same time, by the same contracting parties, for the same purpose, and in the course of the same transaction will be considered and construed together as one contract or instrument, even though they do not in terms refer to each other.")

Here, and based on the above cases combined with the evidence in the record, the Court finds that Plaintiff's argument has merit. Specifically, because there is evidence in the record that Defendant AP Group signed contracts with Plaintiff which cross-references contracts with other Parties in the Schedules of that agreement, the Court finds that privity could exist with further factual development in the course of a jury trial. To add to this, Defendant Cohen's signature exists on many of these contracts, and that tends to show that a reasonable juror might may make factual determinations which support a finding of privity with respect to the remaining Defendants. What reinforces this view is the web of contracts that were all signed on the very same day (November 22, 2010) by the Parties as depicted in Exhibit A of this Order. Indeed, this schematic is one that gives rise to an inference that Parties' intended that the contracts (or at least some of them) be read together as a single transaction. Adler, 144 F.3d at 670 (stating that a court must view the evidence and all  reasonable inferences therefrom in the light most favorable to the nonmoving party).

 

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