Case Information
*1 Bеfore BYE and SMITH, Circuit Judges, and SCHILTZ, District Judge. [1]
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BYE, Circuit Judge.
Ben Doud sued Toy Box Development Company, LLC (Toy Box) alleging Toy Box breached an investment agreement with him by releasing escrow funds to itself before securing the necessary capital required by the agreement. Doud also claimed *2 Toy Box's conduct violated various federal and state securities laws, and breached fiduciary duties owed to him. The district court granted partial summary judgment [2]
to Doud, and then entered a final judgment in Doud's favor after the parties resolved the issue of damages and Doud dismissed his remaining claims. Toy Box now appeals the district court's grant of summary judgment. We affirm.
I
Toy Box is a limited liability company organized in December 2007 for the purpose of operating storage facility sales businesses. In early 2008, Toy Box distributed an Offering Circular to potential investors, including Doud. The investment offer contained an "all or nothing" clause which provided that any funds received from investors would be held in escrow, and not released to Toy Box, unless a minimum of $500,000 in capital was deposited by December 31, 2008. If Toy Box did not raise minimum amount of capital by the deadline, the investment offer would terminate and Toy Box would return the unused funds to investors.
Doud agreed to invest in the venture. In April 2008, he executed a subscription agreement and sent Toy Box a check for $100,000. In June 2008, Toy Box amended its offering by lowering the minimum capital requirement from $500,000 to $350,000. Doud agreed to the amendment.
By July 11, 2008, Toy Box had raised $200,000 in capital, which included the $100,000 invested by Doud. Despite not having reached the $350,000 minimum required by the amended offering, one of Toy Box's managers authorized the release of the escrow funds to Toy Box. Three days later, Toy Box represented to investors *3 that it had "achieved its threshold funding level and exited escrow with $425,000 in place."
In 2011, Toy Box suffered substantial financial losses, which it contends were the result of the 2008 economic crisis. Doud lost his $100,000 investment. In July 2012, Doud filed suit against Toy Box alleging the company breached the investment agreement by releasing the escrow funds before raising the minimum amount of capital required by the offering. Doud also alleged Toy Box's conduct violated § 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)), and Rules 10b-5 (17 C.F.R. § 240.10b-5) and 10b-9 (17 C.F.R. § 240.10b-9) of the Federal Securities Exchange Commission (SEC), as well аs Section 502.509(2) of the Iowa Uniform Securities Act.
In answers to interrogatories filed in the litigation, Toy Box admitted it released the escrow funds to itself before receiving the minimum amount of capital required by its offering. Doud moved for summary judgment. The district court granted the motion in part аnd denied it in part. The district court found Toy Box had breached its agreement with Doud by releasing funds held in escrow before reaching the minimum threshold of funding required by the investment offering. The district court further found Toy Box's conduct violated both Rules 10b-5 and 10b-9 of the Securities Exchange Act, specifically determining Doud had established the scienter required to find violations of the SEC's rules. The district court also rejected Toy Box's defense that it had broken escrow in good faith upon the advice of counsel. Finally, the district court found Toy Box's conduct violated the Iowа Uniform Securities Act. The district court left the issue of damages for a trial, and denied summary judgment on Doud's claim for breach of fiduciary duties.
Following the grant of partial summary judgment, Doud asked the district court to set his damages at $100,000 on the claims for which summary judgment had been granted. The distriсt court entered an order granting Doud's request. After Doud *4 dismissed his remaining claims, the district court entered a final judgment in Doud's favor. Toy Box then filed this timely appeal.
II
We review the district court's grant of summary judgment de novo. Loomis v.
Wing Enters., Inc.,
Rule 10b-9 states in relevant part:
It shall constitute a manipulative or deception device or contrivance, as used in section 10(b) of the Act, for any person, directly or indirectly, in connection with the offer or sale of any security, to make any representation [t]o the effect that the security is being offered or sold on an "all-or-none" basis, unless the security is part of an offering or distribution being made on the condition that all or a specified amount of the consideration paid for such security will be promptly refunded to the purchaser unless (i) all of the securities being offered are sold at a specified price within a specified time, and (ii) the total amount due to the seller is received by him by a specified date[.]
17 C.F.R. § 240.10b-9 (internal footnote omitted).
The SEC adopted Rule 10b-9 to "ensure that those who invest in a venture
under the condition that it will not go forward unless adequately capitalized are not
at risk of losing their investment if the condition is not met." In re Nat'l P'ship Invs.
Corp., S.E.C. Release No. 7425,
Here, it is undisputed Toy Box's initial and amended offerings contained "all
or nothing" provisions, and Toy Box represented the offerings as an "all or nothing"
transaction. Toy Box and its managers admitted they broke escrow before receiving
$350,000 in investor funds. Finally, after breaking escrow, Toy Box misrepresented
to investors that it had reached the minimum capital required by its offering. This
evidence is sufficient to show Toy Box violated Rule 10b-9, and acted with the
necessary scienter in doing so. See In re Nat'l P'ship Invs. Corp.
Toy Box acknowledges that it knew it had not received $350,000 in actual
funds, but contends it did not violate Rule 10b-9 because it had more than $350,000
in subscriptions at the time it broke escrow. But Rule 10b-9 requires sellers to have
actually received the funds prior to breaking escrow; it is not enough for the seller
*6
merely to have commitments to buy the security being sold. See Proposal to Adopt
Rule 10b-9 Under the Securities Exchange Act of 1934, S.E.C. Release No. 6864,
In addition, the additional subscriptions which would have vaulted Toy Box
over the $350,000 minimum even if the funds had been received were not bona fide
investments because either the Toy Box defendants themselves or their spouses or
parents had рledged the additional funding. Rule 10b-9 was specifically designed to
prohibit situations where, like here, investments are pledged through non-bona fide
nominee accounts to create the appearance that the minimum amount of capital
required by an offering has been reached. See In re: Requirements of Rules 10b-9
and 15c2-4, S.E.C. Release No. 11532, 1975 WL 163128 at *1 (July 11, 1975)
("[U]nder Rule 10b-9, an offering may not be considered 'sold' . . . unless all the
securities required to be placed
are sold in bona fide transactions and are fully paid
for
. It is clearly contrary to the intent and purpose of the rule to declare an offering
all sold . . . on the basis of non-bona fide sales designed to create the appearance of
a successful completion of the offering, such as purchases by the issuer through
nominee accounts or purchases by persons whom the issuer has agreed to guаrantee
against loss." (emphasis added)); see also In re Nat'l P'ship,
Based on this record, the district court properly determined the investment offer was an "all or nothing" agreement under Rule 10b-9, and that Toy Box violated Rule 10b-9 by breаking escrow without having received $350,000 in bona fide investments.
Moving next to Doud's Rule 10b-5 claim, the evidence he marshaled to prove
Toy Box violated Rule 10b-9 also suffices to show Toy Box violated Rule 10b-5's
more general prohibition against securities fraud and misrepresentations. Sеe Abbott
v. Equity Grp., Inc.,
(1) that the defendant sold a security; (2) that the defendant used a misleading or untrue material fact or omission in making that sаle; (3) that the purchaser did not know the statement or omission was untrue or misleading; and (4) had the purchaser exercised reasonable care [he] would not have uncovered the falsity of the material misstatement or omission.
Addendum at 61.
Toy Box contended in the district court that Dоud failed to show evidence of
scienter. In response, Doud argued in the district court and now on appeal that the
Iowa Uniform Securities Act uses language identical to language found in Section 17
of the Federal Securities Act of 1933 and that – unlike claims under Rules 10b-5 and
10b-9 – proof of scienter is not required under Section 17 of the 1933 Act. See
Aaron,
We have already addressed and rejected Toy Box's contention that Doud failed to prove scienter for purposes of his Rule 10b-9 and 10b-5 claims. This renders irrelevant Toy Box's sole challenge to the district court's grant of summary judgment on Doud's state security law claim. Doud proved the necessary scienter even if we is made, not mislеading, the purchaser not knowing the untruth or omission and the seller not sustaining the burden of proof that the seller did not know and, in the exercise of reasonable care, could not have known of the untruth or omission.
Iowa Code § 502.509(2).
assumed the Iowa Uniform Securities Act required proof of sciеnter. As a consequence, we need not address at this time whether the Iowa Uniform Securities Act requires proof of scienter.
Finally, Toy Box contends the district court erred in granting summary
judgment on Doud's breach of contract claim. To prove his breach of contraсt claim,
Doud was required to show: "(1) the existence of a contract; (2) the terms and
conditions of the contract; (3) that [he] has performed all the terms and conditions
required under the contract; (4) the defendant's breach of the contract in some
particular way; and (5) that [he] has suffered damages as a result of the breach."
Molo Oil Co. v. River City Ford Truck Sales, Inc.,
III
We affirm the judgment of the district court.
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Notes
[1] The Honorable Patrick J. Schiltz, United States District Judge for the District of Minnesota, sitting by designation.
[2] The Honorable John A. Jarvey, Chief Judge, United States District Court for the Southern District of Iowa.
[3] On appeal, Toy Box does not claim as a defense that it broke escrow in good faith upon the advice оf counsel, so we need not address that issue.
[4] More specifically, the relevant section of the Iowa Uniform Securities Act provides: A person is liable to the purchaser if the person sells a security in violation of section 502.301 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 statement made, in light of the circumstances under which it