UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA DEANNE R. ERICKSON, on behalf of ) herself and all others similarly ) situated, ) No. C-96 2934 MHP ) Plaintiff, ) OPINION ) v. ) ) WHEATLEY VENTURES, INC., et al., ) ) Defendants. ) _________________________________) Plaintiff Deanne R. Erickson, trustee of the Kaufman Family 1981 Trust, dated October 21, 1981, brought this action on behalf of herself and all others similarly situated against defendants Wheatley Ventures, Inc., et al. ("Wheatley"), Montgomery Realty Company-80, et al. ("Fox") and Northern Trust Bank of California, N.A. ("Northern Trust") alleging (1) four causes of action for failure to comply with the disclosure requirements for tender offers under Section 14(d) of the Williams Act, Securities Exchange Act of 1934 (the "1934 Act"), as amended, 15 U.S.C. § 78(n), and Regulation 14D, 17 C.F.R. § 240.14d-1 to § 240.14d-101 promulgated thereunder, and (2) 1 ------------------------------------------------------------------------ violation of Section 315(c) of the Trust Indenture Act of 1939 (the "Trust Indenture Act"), 15 U.S.C. § 77ooo(c), and a trust indenture (the Indenture") qualified under the Trust Indenture Act. Now before the court are the following: (1) Wheatley's motion to dismiss the first and second claims for relief under Section 14(d)(1) for failure to state a claim on which relief may be granted; (2) Fox's motion to dismiss the third and fourth claims for relief under Section 14(d)(4) for failure to state a claim on which relief may be granted; and (3) Northern Trust's motion to stay all claims against it under the Trust Indenture Act and the Indenture qualified thereunder, based on the Colorado River abstention doctrine. Having considered the parties' arguments and submissions, and for the following reasons set forth below, the court enters the following memorandum and order. BACKGROUND1 Northern Trust is the trustee under the Indenture governing the terms and provisions of nonrecourse promissory notes (the "Notes") issued by Preferred Properties Fund-80 (the "Partnership"), the target of the challenged tender offer. Wheatley, a Georgia corporation, acquired the Notes from the plaintiff class (the "Noteholders") in the challenged tender offer. Fox represents the management of the Partnership in this 2 ------------------------------------------------------------------------ action, including Montgomery Realty Company-80, a California limited partnership and the general partner of the Partnership. On August 17, 1995, Erickson and her mother brought a related action, on behalf of themselves and all others similarly situated, which is currently pending in Santa Clara County Superior Court (the "State Action").2 The defendants in the State Action are the same as the defendants in this action. Erickson claims that this action is brought as the result of facts discovered by her undersigned attorneys in April 1996 in the State Action. These facts relate to a proposed amendment filed with the Securities Exchange Commission (the "SEC") by the Partnership, seeking to de-register the outstanding Notes as securities under Section 12(g) of the 1934 Act, 15 U.S.C. § 781(g)(1). The Partnership issued the Notes under the Indenture, dated January 31, 1980, and registered the Notes as Section 12(g) securities in 1981. The Partnership sold the Notes to the public in 1980, at the same time that it sold its limited partnership interests to the public. In addition to repayment of principal and interest, the Noteholders were also entitled to residual proceeds from the sale of the Partnership's properties (the "residual interest").3 Erickson does not allege that the Notes conferred any voting or other participatory rights other than the right to remove the trustee and to nominate a successor under the Indenture.4 The Partnership defaulted on the Notes in April 1989 and 3 ------------------------------------------------------------------------ made no payments of principal or interest since that date. As early as 1988, the Partnership concluded that the Noteholders would not receive any residual interest, and repeatedly expressed this opinion in reports to the Noteholders. On August 20, 1993 Wheatley made a tender offer for the outstanding Notes. In July 1993, prior to commencement of the tender offer and pursuant to Wheatley's request, Northern Trust amended the Indenture to separate the residual interest from the Notes, and the Partnership filed the proposed amendment with the SEC. On August 6, 1993 the SEC returned comments inquiring into the Partnership's reasons for separating the residual interest from the Notes. The Partnership did not respond to the comments but withdrew the proposed amendment. The SEC comments and the Partnership's letter withdrawing the proposed amendment were not a matter of public record at the time the State Action was filed. Erickson alleges that the purpose of the proposed amendment was to enable Wheatley and Fox to avoid compliance with Section 14(d) and Regulation 14D, applicable to tender offers for equity securities registered pursuant to Section 12. Compliance would have required Wheatley and Fox to disclose information about the purpose of the tender offer. Erickson claims that the tender offer was a mechanism used to facilitate Wheatley's negotiations with Fox over the acquisition and control of Montgomery Realty Company, the general partner of the Partnership. As to the Notes acquired 4 ------------------------------------------------------------------------ pursuant to the tender offer, the Partnership was only required to repay Wheatley the amounts Wheatley paid for the Notes, plus costs and expenses, reducing the amount of indebtedness owed to the Noteholders by approximately $4,700,000 and enabling the Partnership to fully discharge subordinate insider debt.5 Erickson claims that Wheatley and Fox proceeded with the tender offer in violation of Section 14(d) and Regulation 14D, and that the Notes would have been redeemed in full in March 1994 if the tender offer had not been consummated. The pending State Action includes two causes of action against Northern Trust for failing to properly investigate and oppose the tender offer in violation of the Trust Indenture Act and the Indenture qualified thereunder. Erickson filed this action on August 16, 1996 on behalf of the Noteholders, in excess of 1,000, who held outstanding Notes of the Partnership as of August 20, 1993 and who sold their outstanding Notes to Wheatley pursuant to the challenged tender offer. This action includes allegations identical to those brought against Northern Trust in the State Action, but Erickson claims that the present allegations are entirely predicated upon Wheatley and Fox's Section 14(d) violations. LEGAL STANDARD A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley v. 5 ------------------------------------------------------------------------ Gibson, 355 U.S. 41, 45-46 (1957); Fidelity Financial Corp. v. Federal Home Loan Bank of San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064 (1987). All material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). Although the court is generally confined to consideration of the allegations in the pleadings, when the complaint is accompanied by attached documents, such documents are deemed part of the complaint and may be considered in evaluating the merits of a Rule 12(b)(6) motion. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987), cert. denied sub. nom. Wyoming Community Dev. Auth. v. Durning, 484 U.S. 944 (1987). DISCUSSION I. Wheatley's Motion to Dismiss the First and Second Claims For Relief Under Section 14(d)(1) Wheatley makes three arguments in support of its motion to dismiss the first and second claims for relief under Section 14(d)(1) and incorporates Fox's motion to dismiss the third and fourth claims for relief under Section 14(d)(4).6 Wheatley argues that the same rationale applies to both sections of the Williams Act underlying Erickson's claims for relief. First, Wheatley contends that the provisions of the Williams Act upon which Erickson relies apply only to "equity securities," and do not include non-voting debt instruments such as the Notes. Second, Wheatley contends that Erickson fails to allege that any 6 ------------------------------------------------------------------------ violation of Section 14(d)(1) caused her harm. Finally, Wheatley contends that even if Erickson could bring a private cause of action under Section 14(d)(1), it is time barred under the statute of limitations period governing federal securities claims. II. Fox's Motion to Dismiss the Third and Fourth Claims For Relief Under Section 14(d)(4) Fox makes five arguments in support of its motion to dismiss the third and fourth claims for relief under Section 14(d)(4). In addition to Wheatley's arguments, Fox contends that Section 14(d)(4) does not create a private right of action for damages. Fox also contends that securities laws do not recognize Erickson's distinction between a reckless and "willful violation" of Section 14(d)(4), eliminating Erickson's fourth claim for relief. In response to both Wheatley's motion to dismiss and Fox's motion to dismiss, Erickson contends that Wheatley's tender offer was made for "equity securities" within the meaning of Section 14(d) of the Williams Act. Erickson further responds that she has standing to bring a private cause of action for damages against Wheatley for violation of Section 14(d)(1) and against Fox for violation of Section 14(d)(4). Next, Erickson argues that causation is a question of fact to be resolved at trial and not on a motion to dismiss. Additionally, Erickson maintains that her claims are not time barred under the statute of limitations period governing federal securities claims. 7 ------------------------------------------------------------------------ Finally, Erickson argues that her second and fourth claims for relief based on a "willful violation" of Section 14(d)(1) and Section 14(d)(4) are appropriate in light of the Private Securities Litigation Reform Act of 1995, Pub. Law No. 104-67, 109 Stat. 737 (1995). A. "Equity Securities" Within the Meaning of Section 14(d) of the Williams Act Erickson contends that Wheatley and Fox violated Section 14(d) of the Williams Act, which applies to tender offers for more than 5% of "any class of equity security which is registered pursuant to Section 12 [of the 1934 Act]." Therefore, the threshold inquiry is whether the tender offer was made for "equity securities" under Section 12. If the Notes are not "equity securities," Section 14(d) does not apply. See E.H.I. of Florida, Inc. v. Ins. Co. of North America, 652 F.2d 310, 313 (3rd Cir. 1981) (finding that Sections 14(a) and 14(d) do not apply to long-term fixed interest rate bonds which are not required to be registered as "equity securities" under Section 12). Erickson argues that because the tendered Notes were registered pursuant to Section 12(g) of the 1934 Act, the Notes were by definition an "equity security" within the meaning of Section 12 and Section 14(d) of the Williams Act. Erickson is correct that Section 12(g) requires the registration of certain "equity securities." See 15 U.S.C. § 781(g)(1). However, a security does not become an "equity security" through Section 8 ------------------------------------------------------------------------ 12(g) registration. As Wheatley and Fox point out, the term "equity security" is independently defined in Section 3(a)(11) of the 1934 Act, 15 U.S.C. § 78c(11), to include "any stock or similar security; or any security convertible, with or without consideration, into such a security . . ." (emphasis added).7 Central to this definition is the concept of an ownership interest, "to be distinguished from obligations such as notes or bonds which are not equities and represent no ownership interest." United States v. Evans, 375 F.2d 730, 731 (9th Cir. 1967). In E.H.I. of Florida, cited by Erickson in her opposition, the court found that long-term fixed interest rate bonds were not "equity securities" but rather debt because the bondholders were only entitled to a fixed rate of interest, and did "not share in the profits or losses of the corporation." 652 F.2d at 314.8 The court also found that the bonds' status as debt instruments was not altered "simply because a part of their collateral [was] a lien on all the tangible property" of the corporation. Id. The bondholders were still exposed to minimal risks and received a fixed rate of interest. Id. Similarly, the Notes at issue here do not provide the Noteholders with an ownership interest in the Partnership necessary to meet the definition of "equity security" under Section 3(a)(11). The residual interest feature does not change the Notes' status as debt instruments. Under the terms of the Notes, the Noteholders were exposed to minimal risks and received a fixed rate of interest. Erickson herself states that 9 ------------------------------------------------------------------------ the Partnership repeatedly informed the Noteholders that they would not receive residual interest on the Notes. In the context of the Williams Act, courts have recognized that the term "equity security" refers to the definition in Section 3(a)(11).9 See, e.g., Board of Trade v. SEC, 677 F.2d 1137, 1158 (7th Cir.), judgment vacated as moot, 459 U.S. 1026 (1982).10 This definition is consistent with the overall purpose of the Williams Act, which was intended to regulate "tender offers and large purchases of stock that may affect control of the corresponding corporation." Id.; see also Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 22 (1977). This regulation necessarily focuses on individuals who "seek control of shares in order to effectuate changes in a corporation." Calvary Holdings, Inc. v. Chandler, 948 F.2d 59, 62 (1st Cir. 1991); see also SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 948 (9th Cir. 1985) (citations ommitted [sic]); Wellman v. Dickinson, 682 F.2d 355, 365 (2d Cir. 1982), cert. denied, 460 U.S. 1069 (1983); GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir. 1971), cert. denied, 406 U.S. 910 (1972); Bath Indus., Inc. v. Blot, 427 F.2d 97, 102 (7th Cir. 1970). Therefore, the Williams Act defines "beneficial ownership" to include the power to vote, the ability to direct a vote and the power to dispose of stock. Rule 13d-3(1)(a), 17 C.F.R. § 240.13d-3(1)(a). Erickson does not allege that the Notes conferred similar voting or other participatory rights on the Noteholders or even the potential to convert to or acquire rights that would enable them 10 ------------------------------------------------------------------------ to control or influence the Partnership. Accordingly, the Notes at issue are not "equity securities" as defined under Section 3(a)(11) and Section 14(d) of the Williams Act; likewise registration under Section 12 is not required and Section 14(d) does not apply. The sole purpose of the Williams Act is the protection of investors who are confronted by cash tender offers for their "equity securities." See Piper, 430 U.S. at 34. The court finds that the Noteholders are not part of a class of investors intended to benefit from the protections of the Williams Act. B. Private Cause of Action For Damages Under Section 14(d)(1) and Section 14(d)(4) of the Williams Act The parties expend considerable effort arguing over whether Erickson has standing to bring a private cause of action for damages against Wheatley for violation of Section 14(d)(1) and against Fox for violation of Section 14(d)(4) of the Williams Act. As Wheatley and Fox point out, Section 14(d) does not by its language create a private cause of action for damages. See Liberty Nat'l Ins. Holding Co. v. Charter Co., 734 F.2d 545, 567 (11th Cir. 1984). The existence of and limits on the right to bring a private cause of action are of judicial origin. Id. Therefore, Erickson must establish that Congress intended to provide for the private remedy which she asks the court to imply, or "at least that it is consistent with the legislative scheme." In re Washington Pub. Power Supply Sys. Sec. Litig., 823 F.2d 1349, 1353 (9th Cir. 1987). 11 ------------------------------------------------------------------------ In Cort v. Ash, 422 U.S. 66 (1975), the Court identified four "relevant" factors in determining whether a private remedy is implicit in a statute not expressly providing one. The first factor is whether the plaintiff "is one of the class for whose especial benefit the statute was enacted." Id. at 78 (quoting Texas & Pacific R. Co. v. Rigsby, 241 U.S. 33, 39 (1916)). For the reasons discussed above, the court has concluded that the Noteholders were not intended beneficiaries of the Williams Act. Therefore, it would be inconsistent with the underlying purposes of the legislative scheme to imply a private remedy for the Noteholders, and the court declines to do so. See Piper, 430 U.S. at 34-37 (finding that Congress did not contemplate a private cause of action for damages by a tender offeror who was "not an intended beneficiary of the Williams Act, and surely . . . not one for whose especial benefit the statute was enacted") (quoting Cort, 422 U.S. at 78). In view of the fact that plaintiffs are not able to meet the first factor of the Cort analysis, the court need not address the remaining factors nor compare the different provisions of the Williams Act upon which Erickson relies. The court concludes that Erickson does not have standing to bring a private cause of action under Section 14(d)(1) and Section 14(d)(4). The court does not reach the remaining questions of causation, the appropriate statute of limitations period or the issue of intent. 12 ------------------------------------------------------------------------ III. Northern Trust's Motion to Stay In opposing Northern Trust's motion to stay, Erickson argues that her claims for relief against Northern Trust under the Trust Indenture Act and the Indenture qualified thereunder are entirely predicated upon Wheatley and Fox's Section 14(d) violations. Therefore, based on the court's dismissal of Erickson's Section 14(d) claims for relief against Wheatley and Fox, the court declines to exercise federal jurisdiction over Erickson's remaining claims against Northern Trust, and need not consider Northern Trust's motion to stay and the application of the Colorado River abstention doctrine. CONCLUSION For the foregoing reasons, the court hereby GRANTS the defendants' motions to dismiss the federal claims with prejudice, but without prejudice as to any state law claims that the plaintiff may have. Since the federal claims are dismissed and there is no diversity jurisdiction, the court lacks supplemental jurisdiction over the state law claims. Therefore, the complaint is dismissed in its entirety. IT IS SO ORDERED. The clerk shall close the file. /s/ Dated: Jan 31, 1997 ____________________________ MARILYN HALL PATEL United States District Judge 13 ------------------------------------------------------------------------ ENDNOTES 1. Unless otherwise indicated, the following facts are taken from the plaintiff's complaint and undisputed portions of the record. 2. Dorthy M. Kaufman, et al. v. Northern Trust Bank of California, N.A., et al., Case No. CV 751777. 3. The Notes bore interest at the rate of 10% per annum, payable on the Notes quarterly, with the principal amount due and payable on June 30, 1994. Interest not paid was added to the principal and compounded at the rate of 10% per annum. The Notes were secured by deeds of trust and other security instruments on each of the real properties owned by the Partnership. The Noteholders were entitled to residual interest after a payment of certain preferential returns to the limited and general partners of the Partnership. The Notes could be redeemed prior to June 30, 1994. 4. See Plaintiff's Objection to the Fox Defendants' Request for Judicial Notice at 2. Erickson also contends that under the terms of the Indenture, the trustee had the power to oust the general partner and to manage the Partnership. Id. The complaint does not include these contentions and they are disputed by the parties. See Fox Defendants' Reply in Support of Request for Judicial Notice at 8. Nevertheless, they do not affect the court's findings. 5. Wheatley offered $75 in cash per $333.86 of the outstanding principal of the Notes and nothing for the accrued but unpaid interest on the Notes. The tender offer did not include the residual interest on the Notes. 6. The discussion of Fox's motion to dismiss also applies to Wheatley's motion to dismiss and addresses Erickson's response to both Wheatley and Fox. 7. Section 3(a)(11) defines an equity security as any stock or similar security; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security which the Commission shall deem to be of a similar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security. 15 U.S.C. § 78c(11). 14 ------------------------------------------------------------------------ The SEC has extended the definition of equity security to include any stock or similar security, certificate of interest or participation in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or certificate of deposit for an equity security, limited partnership interest, interest in a joint venture, or certificate of interest in a business trust . . . . 17 C.F.R. § 240.3a 11-1 (1980). 8. In E.H.I. of Florida, the court also noted that "[t]raditionally, the SEC has recognized that Congress intended to limit the definition of equity securities to speculative stocks and to exclude long-term bonds." 652 F.2d at 314. 9. Sections 14(d)(1) and 14(d)(4) do not themselves provide a definition of "equity security." Section 14(d)(1) applies to tender offers for any class of "equity security" which is registered pursuant to Section 12 of and provides in part: It shall be unlawful for any person . . . to make a tender offer for, or a request or invitation for tenders of, any class of any equity security which is registered pursuant to section 781 [Section 12] of this title . . . if, after consummation thereof, such person would, directly or indirectly, be the beneficial owner of more than 5 per centum of such class, unless at the time copies of the offer or request or invitation are first published or sent or given to security holders, such person has filed with the Commission a statement containing such information specified in section 78m(d) [Section 13(d)] of this title, and such additional information as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78(n). Section 14(d)(4) provides: Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request an invitation for tenders shall be made in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Id. (emphasis added). 15 ------------------------------------------------------------------------ 10. In Board of Trade, the court also cautioned that using a "literal approach" to defining a security is misplaced. 677 F.2d at 1159 (quoting United Housing Foundation v. Forman, 421 U.S. 837, 849 (1975)). The court emphasized that "one must apply a test in terms of the purposes of the Federal Acts . . . ." Id. (quoting Teamsters v. Daniel, 439 U.S. 551, 559 (1979)). 16 ------------------------------------------------------------------------ Securities Class Action U.S.D.C. Robert Crown Stanford Clearinghouse N.D. Cal. Law Library Law School director@securities.stanford.edu 9 Apr 1997