Hardin County Sav. Bank v. City of Brainerd

602 F.Supp.2d 1012

HARDIN COUNTY SAVINGS BANK, Walworth State Bank, Eitzen State Bank, Northern National Bank, Kindred State Bank and First National Bank, Plaintiffs, v. CITY OF BRAINERD, Housing and Redevelopment Authority of the City of Brainerd, Margaret Tiplady, Alona Miller, Doug Grout, Dougherty & Company, LLC, John MacDonald, Thomas Wilder, and James H. Bedard, Inc., Defendants.

No. 08-CV-38-LRR.

United States District Court, N.D. Iowa, Cedar Rapids Division.

September 18, 2008.

Deborah M. Tharnish, Stanley J. Thompson, Tara Z. Hall, Davis Brown Koehn Shors & Roberts, Des Moines, IA, for Plaintiffs.

Larry D. Espel, Pamela L. Vanderwiel, Greene Espel, PLLP, Christopher A. Grgurich, Kim Margaret Ruckdaschel-Haley, Lindquist & Vennum, PLLP, Joseph W. Anthony, Shannon M. Awsumb, Steven M. Phillips, Anthony Ostlund Baer Louwagie & Ross P.A., Minneapolis, MN, Thomas H. Walton, Nyemaster Goode Voigts West Hansell & O'Brien, PC, David Wayne Nelmark, Edward M. Mansfield, Belin, Lamson, McCormick, Zumbach & Flynn, Des Moines, IA, Matthew S. Carstens, Timothy J. Hill, Bradley & Riley, PC, Stephen J. Holtman, Simmons Perrine PLC, Cedar Rapids, IA, Michael T. Feichtinger, Quinlivan & Hughes, PA, St. Cloud, MN, for Defendants.

ORDER

LINDA R. READE, Chief Judge.

TABLE OF CONTENTS
I. INTRODUCTION .........................................................1014
II. RELEVANT PROCEDURAL BACKGROUND .......................................1014
III. SUBJECT-MATTER JURISDICTION .........................................1015
IV. FACTS ................................................................1015
    A. Parties ...........................................................1015
       1. Plaintiffs .....................................................1015
       2. Defendants .....................................................1015
    B. Development Plans .................................................1016
    C. Bonds .............................................................1016
    D. Appraisal .........................................................1016

E. Study .............................................................1017
    F. Memorandum and Mortgage ...........................................1017
    G. Purchase of Bonds .................................................1018
    H. Project ...........................................................1018
    I. 2007 Appraisal ....................................................1018
    J. Default ...........................................................1018
V. ARGUMENTS .............................................................1019
VI. ANALYSIS .............................................................1019
    A Failure to State a Claim: Legal Standard ...........................1020
    B. Loss Causation ....................................................1020
       1. Applicable standard ............................................1021
       2. Application of Schaaf and Dura .................................1022
       3. Plaintiffs' Resistance .........................................1023
    C. Miscellaneous Arguments as to Federal Securities Claims ...........1024
    D. Supplemental Subject-Matter Jurisdiction ..........................1025
    E. Miscellaneous Motions .............................................1025
VII. CONCLUSION ..........................................................1025

I. INTRODUCTION

The matters before the court are: (1) "Motion to Dismiss by Defendant City of Brainerd, or in the Alternative, for Change of Venue" ("City's Motion") (docket no. 34); (2) "Defendant Bedard's Motion to Dismiss or in the Alternative for Transfer of Venue" ("Bedard's Motion") (docket no. 36); (3) "Defendants Dougherty & Company LLC, John MacDonald and Thomas Wilder's Motion (1) To Transfer Venue and (2) To Dismiss Plaintiffs' Claims" ("Dougherty's Motion") (docket no. 37); and (4) "Defendants Brainerd Housing and Redevelopment Authority, Alma Miller, Margaret Tiplady and Doug Grout's Motion to Dismiss — and Joinder in other Defendants' Motions" ("Authority's Motion") (docket no. 38) (collectively, "Motions").

II. RELEVANT PROCEDURAL BACKGROUND

On April 18, 2008, Plaintiffs Hardin County Savings Bank, Walworth State Bank, Eitzen State Bank, Northern National Bank, Kindred State Bank and First National Bank filed a Complaint (docket no. 1) against Housing and Redevelopment Authority of the City of Brainerd (the "Authority"), Alona Miller,¹ Margaret Tiplady, Doug Grout, the City of Brainerd (the "City"), Dougherty & Company, LLC ("Dougherty"), John MacDonald, Thomas Wilder, and James H. Bedard, Inc. ("Bedard"). The Complaint alleges three categories of claims: (1) securities fraud in violation of 15 U.S.C. § 78j(b) against the Authority, Dougherty, MacDonald, Wilder and Bedard (Counts I, XIII, XVI and XXI); (2) control person securities fraud in violation of 15 U.S.C. § 78t against the City, Tiplady, Miller and Grout (Counts VI and IX); and (3) various state-law claims against Defendants, including violations of Iowa and Minnesota² securities laws (Counts II, III, IV, V, VII, VIII, X, XI, XII, XVII, XVIII, XIX, XX, XXII, XXIII and XXIV).³

On June 23, 2008, Defendants filed the Motions. On July 10, 2008, Plaintiffs filed an omnibus resistance to the Motions ("Resistance") (docket no. 49). On July 18, 2008, the Authority, Tiplady, Miller and Grout filed a Reply (docket no. 53). On July 21, 2008, the City filed a Reply (docket no. 54), Dougherty, MacDonald and Wilder filed a Reply (docket no. 55) and Bedard filed a Reply (docket no. 56). All parties requested oral argument on the Motions. Pursuant to Local Rule 7.c, the court finds the Motions do not necessitate oral argument and, accordingly, denies the parties' requests for the same. The court finds the Motions fully submitted and ready for decision.

III. SUBJECT-MATTER JURISDICTION

The court finds that it has federal question jurisdiction over Plaintiffs' securities claims. See 28 U.S.C. § 1331 ("The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States"). The court may exercise supplemental jurisdiction over Plaintiffs' remaining state law claims because they are so related to the claims over which the court has federal question jurisdiction that they form part of the same case or controversy. See 28 U.S.C. § 1367(a) ("[T]he district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy[.]").

IV. FACTS⁴

A. Parties

1. Plaintiffs

Plaintiffs are a group of banks that purchased the securities at issue in the instant action. Hardin County Savings Bank is an Iowa corporation with its principal place of business in Eldora, Iowa. Walworth State Bank is a Wisconsin bank with its principal place of business in Walworth, Wisconsin. Eitzen State Bank is a Minnesota bank with its principal place of business in Caledonia, Minnesota. Northern National Bank is a Minnesota bank with its principal place of business in Baxter, Minnesota. Kindred State Bank is a North Dakota bank with its principal place of business in Kindred, North Dakota. First National Bank is a Minnesota bank with its principal place of business in Wadena, Minnesota.

2. Defendants

The City is a municipality organized under the laws of Minnesota. The Authority is a municipal entity created by the City. The Authority and the City are distinct and separate entities. The Authority is empowered to transact business in the City. The City appoints the Authority's directors. Tiplady and Miller are directors of the Authority and citizens of Minnesota. Grout is the Executive Director of the Authority and is a citizen of Minnesota. Dougherty is a Delaware corporation with its principal place of business in Minneapolis, Minnesota. MacDonald and Wilder are "registered representatives" employed by Dougherty and are citizens of Minnesota. Complaint at ¶¶ 17 & 18. Bedard is a Minnesota corporation with its principal place of business in Brainerd, Minnesota.

B. Development Plans

In 2002, a developer sought to develop approximately forty acres of real estate in the City into single-family homes. The developer approached the City about obtaining tax incremental financing ("TIF") for 86 of the 96 lots in the development. "TIF is a method of financing public or private improvements that are needed to serve a new development." Id. at ¶ 27. The developer sought a total of $806,000 in TIF benefits. The City established a TIF district for this developer, but only for 20 single-family homes.

C. Bonds

On August 25, 2003, the City approved a resolution authorizing the issuance of General Obligation Improvement Bonds ("G.O. Bonds"), which included $1,085,000 for improvements for the developer's project ("Project"). The City's meeting minutes reflect the City's funds would pay for the G.O. Bonds, but ultimately, the developer — not the City's taxpayers — would pay for the improvements to the Project. Although the City approved a resolution authorizing the issuance of the G.O. Bonds, it did not at that time issue the G.O. Bonds.

The Authority later assumed the Project from the developer. The Authority planned to issue taxable revenue bonds ("Bonds") to acquire and improve the real estate. "Taxable revenue bonds are commonly sold by municipal entities, such as [the Authority], to the public to finance private projects that serve public needs." Complaint at ¶ 35. Later, the issuing municipality entity repays these funds through "a dedicated revenue stream from the issuer's project financed with the proceeds of the bond." Id.

In preparation for issuance of the Bonds, the Authority retained Dougherty as an underwriter. An underwriter, usually an investment banking firm, "provides financial advice with respect to the bond issue"...