Watkins Dev., LLC v. Hosemann

214 So.3d 1050

WATKINS DEVELOPMENT, LLC and David Watkins, Sr.

v.C. Delbert HOSEMANN, Jr., in his official capacity as Mississippi Secretary of State

NO. 2014–CT–01657–SCT

Supreme Court of Mississippi.

March 2, 2017

ATTORNEY FOR APPELLANTS: J. BRAD PIGOTT

ATTORNEYS FOR APPELLEE: OFFICE OF THE ATTORNEY GENERAL BY: DOUGLAS T. MIRACLE, JAMES W. SMITH, JR., JAMES ASHLEY OGDEN, TYLER ARTHUR ROYALS

EN BANC.

ON WRIT OF CERTIORARI

DICKINSON, PRESIDING JUSTICE, FOR THE COURT:

¶ 1. The Mississippi Secretary of State found that David Watkins and Watkins Development, LLC, committed four securities-fraud violations in connection with revenue bonds sold to finance a renovation project at the Metrocenter mall in Jackson. Watkins appealed and the chancery court vacated one count but affirmed the other three. The Court of Appeals then affirmed the Secretary on all four counts.

¶ 2. We granted certiorari and now reverse the Court of Appeals in part because the Secretary failed to cross-appeal the chancellor's decision to vacate Count I. That said, we affirm, as did the chancellor and Court of Appeals, the Secretary's findings on the other three counts.

FACTS AND PROCEDURAL HISTORY

¶ 3. David Watkins agreed to renovate the Belk building at the Metrocenter Mall into office space for the City of Jackson. In August 2010, Watkins formed Retro Metro, LLC, to run the Metrocenter project. On February 21, 2011, Retro Metro entered into an agreement with David Watkins Development, LLC—Watkins's development company—which provided that Retro Metro would pay Watkins Development a flat fee of $500,000 and a mobilization fee of 25% of the Metrocenter project cost.

¶ 4. To finance the project, the Mississippi Business Finance Corporation (MBFC) had bond counsel prepare a private placement memorandum ("PPM"). On April 5, 2011, MBFC issued taxable revenue bonds pursuant to the PPM to finance the project. Duncan Williams, an investment banking firm, purchased all the bonds. The MBFC placed $4,875,000 in proceeds in a construction account with Bankplus under a trust indenture. Retro Metro entered a loan agreement with the MBFC which loaned Retro Metro the proceeds to finance the Metrocenter project.

¶ 5. The PPM, which Watkins helped to prepare, represented that the bond proceeds would be used to finance the Metrocenter project. Similar language appeared in the loan agreement and in the bond purchase contract. The documents also represented that Watkins had disclosed all related financial agreements. But the development agreement between Retro Metro and Watkins Development was not disclosed, and the PPM did not disclose that any portion of the bond proceeds would be diverted to another project.

¶ 6. Work proceeded on the project and, by June 2, 2011, Retro Metro had made three requisitions from the construction account. Each requisition stated the funds were withdrawn to pay construction costs. The requisitions never referenced any debt owed to Watkins Development.

¶ 7. On June 8, 2011, six days after receiving $800,000 from the construction account, Watkins wired $587,084.34 from Retro Metro's checking account to a real estate attorney in Meridian. This was related to a contract between the City of Meridian and Meridian Law Enforcement Center, LLC, which Watkins had formed in April 2011 to renovate an existing property into a police station. The funds were used to purchase the real estate for the Meridian police station.

¶ 8. Later, in April 2012 after Watkins had defaulted on a payment under the loan agreement, the Secretary of State's office initiated administrative procedures against Watkins which culminated in a finding that Watkins had committed four violations of Mississippi Code Section 75–71–501.

¶ 9. First, the Secretary found that Watkins had violated Section 75–71–501(2) when he had failed to disclose the development agreement between Retro Metro and Watkins Development in the PPM or loan agreement ("Count I"). Second, the Secretary found that Watkins had violated Section 75–71–501(1) when he had failed to disclose in the PPM, loan documents, or requisition requests, that bond proceeds would be used for the Meridian project ("Count II"). Third, the Secretary found that the same conduct giving rise to Count II also violated Section 75–71–501(2) ("Count III"). Finally, the Secretary found that Watkins had violated Section 75–71–501(3) when he had used the bond proceeds to purchase the Meridian property ("Count IV"). The Secretary imposed a $25,000 fine for each of Counts I, III, and IV, but no fine for Count II. The Secretary also ordered Watkins to repay the $587,084.34 plus interest, and $18,047.39 toward the costs of the administrative proceeding.

¶ 10. Watkins appealed to the Chancery Court for the First Judicial District of Hinds County, which vacated Count I but affirmed Counts II, III, and IV. Watkins then appealed the chancellor's decision, and we assigned the case to the Court of Appeals. The Secretary did not cross-appeal the chancellor's ruling on Count I. The Court of Appeals affirmed the Secretary and the chancellor on Counts II, III, and IV.¹ The Court of Appeals reversed the chancellor's decision on Count I and affirmed the Secretary on that Count, even though that issue was not appealed.² Watkins then filed a petition for writ of certiorari, which we granted.

ANALYSIS

I. The Court of Appeals erred by addressing a portion of the chancellor's order that the Secretary failed to cross-appeal.

¶ 11. The chancellor reversed the Secretary's finding under Count I, that Watkins had violated Section 75–71–501(2) when he had failed to disclose the development agreement between Retro Metro and Watkins Development in the PPM and loan agreement, and the Secretary did not raise that issue on appeal. Watkins argues that the Court of Appeals erred by addressingthat issue, and by reversing the chancellor's decision. We agree.

¶ 12. Watkins's notice of appeal specifically stated that he appealed the chancellor's decision "to the extent that such Opinion and Order affirms and does not reverse the Final Order entered against such Petitioners by the Respondent Secretary of State." The Secretary filed no cross-appeal. Then, in his brief before the Court of Appeals, the Secretary stated "[t]he Secretary did not appeal the Chancellor's findings with respect to the Development Agreement and thus, the issue is moot for purposes of this appeal." Even in his response to the petition for certiorari, the Secretary "takes no position" as to whether the Court of Appeals properly raised this issue sua sponte.

¶ 13. In Dunn v. Dunn , this Court held that "an appellee should not be required to file a cross-appeal unless he or she is aggrieved by the trial court's judgment."³ There, we quoted a Court of Appeals decision stating "that ‘[i]n order for the appellee to gain reversal of any part of the decision of a trial court about which the appellant brings no complaint, the appellee is required to file a cross-appeal.’ "⁴ We also noted a Michigan Court of Appeals decision which "held, ‘[g]enerally, the failure to file a cross appeal precludes the appellee from raising an issue not raised by appellant.’ "⁵

¶ 14. Here, under Dunn , the Court of Appeals erred by addressing the portion of the chancellor's ruling that was not appealed. So we reverse the Court of Appeals's ruling as to Count I, and reinstate the chancellor's decision reversing the Secretary's finding on that count.

II. The Secretary's other findings were supported by substantial evidence.

¶ 15. When we review a " ‘decision by a chancery or circuit court concerning an agency action, [we apply] the same standard of review that the lower courts are bound to follow.’ "⁶ We may reverse the Secretary's decision "only if it ‘(1) was unsupported by substantial evidence; (2) was arbitrary and capricious; (3) was beyond the power of the administrative agency to make; or (4) violated the complaining party's statutory or constitutional right.’ "⁷ Further, the Secretary's factual findings, "if supported by competent material and substantial evidence, are conclusive."⁸ That said, as always, we review questions of statutory interpretation de novo.⁹

¶ 16. Mississippi Code Section 75–71–501 states:

It is unlawful for a person, in connection with the offer, sale, or purchase of a security, directly or indirectly:

(1) To employ a device, scheme, or artifice to defraud;(2) To make an untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(3) To engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.¹⁰

Section 75–51–501's three subsections set forth distinct acts that constitute securities fraud. All three, however, are subject to the overarching requirement that they occur "in connection with the offer, sale, or purchase of a security." This Court has not had occasion to expound on the "in connection with" requirement. But, in Harrington v. Office of the Mississippi Secretary of State , we recognized that we will look to federal cases interpreting similarly worded federal securities statutes for guidance.¹¹

¶ 17. The United States Supreme Court's decision in Securities and Exchange Commission v. Zanford provides a thorough discussion of the "in connection with" requirement.¹² There, the SEC alleged "that a stockbroker violated both § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U.S.C. § 78j(b), and the SEC's Rule 10b–5, by selling his customer's securities and using the proceeds for his own benefit without the customer's knowledge or consent."¹³ In the appeal from a federal district court's grant of summary judgment, the United States Supreme Court considered "whether the alleged fraudulent conduct was ‘in connection with the purchase or sale of any security’ within the meaning of the statute and the...