Plaintiff Alexis Scharff appeals from a judgment entered for defendant Edward Vaisbort after the trial court granted his motion for summary judgment against plaintiffs claims for breach of contract, professional
As to each of her claims, plaintiff separately assigns error to the trial court’s decision to grant summary judgment. We reject without written discussion plaintiffs assignment regarding her breach of contract claim. As to her negligence and securities claims, we address several issues: first, whether there was evidence from which a reasonable juror could find that plaintiff had a lawyer-client relationship with defendant; second, whether plaintiffs securities claim was barred by the statute of limitations; and, third, whether plaintiffs note could constitute a security. For the reasons below, we reverse and remand on plaintiffs securities fraud claim, and otherwise affirm.
I. FACTS
“We take the following facts from the summary judgment record, viewing the facts and all reasonable inferences that may be drawn from them in the light most favorable to plaintiff, as the nonmoving party.” Oregon Steel Mills, Inc. v. Coopers & Lybrand, LLP,
Beginning in the 1990s, plaintiff, Seharff, and Elizabeth Lahn made a series of private loans to Dorn-Platz Properties, a California-based dеvelopment corporation (hereafter “Dorn-Platz” or “borrower”). An investment broker working on behalf of Dorn-Platz had approached lenders to put together the transactions. In addition to participating as a lender, Seharff acted as an agent for plaintiff and Lahn by negotiating and closing the loans. Seharff “reviewed and made recommendations as to the making of the loans,” held power of attorney, and “maintained all the documents and records” for plaintiff. Plaintiff did not independently review documents to ensure that the loans were secured because she relied solely on her brother’s judgment. Defendant prepared loan documents and represented the group of lenders in some of the transactions with Dorn-Platz.
In November 2003, loans from plaintiff and other lenders to Dorn-Platz were coming due. The borrowers’ broker encouraged plaintiff and the other lenders to roll over their outstanding loans into new loans to Dorn-Platz.
In January 2004, Seharff, on behalf of plaintiff, signed an “Inter Creditor Agreement” for her rollover loan to Dorn-Platz. The collateral for the loan was described as a note “that was originally given to CHUO Bank and Trust by * * * [Mr. Platz],” an interest in the Round, and real property
In October 2004, the lenders received another memorandum from the broker urging yet another loan rollover with Dorn-Platz. The broker stated that, “[b]asically, the partners are ‘splitting the sheets.’” The broker declared, “If you want out, we need to know right away. If you want to add money we need to know right away. Peter Scharff is putting in $100,000 more. *** Our attorney, [defendant], will do the documents. This must close before Christmas.” A loan summary prepared in December described the new loan arrangement as a “Rollover/Recast” of the January 2004 loan.
In January 2005, plaintiff and defendant exchanged email communications in which defendant provided plaintiff with a new “Inter Creditor Agreement” for the proposed rollover/recast loan to Dorn-Platz. Defendant explained in an email to plaintiff that “[t]he Inter Creditor Agreement is intended to permit Mr. Scharff to execute the necessary-documents to originate the proposed loan and subsequent to funding act as the lead participant in connection with any enforcement issues.” Defendant stated, “You are encouraged to seek independent counsel to review these and any documents in connection with this matter. Please remember, as it is expressly stated in the Inter Creditor Agreement, we are representing Mr. Scharff in the transaction.” (Emphasis added.) In that email chain with plaintiff, plaintiff referred to other counsel of her own but wrote that her attorney had not “assigned the original loan to [her] trust.” As part of the transaction-related documents, defendant offered to revise the power of attorney forms to involve Scharff as to plaintiffs trust and to provide an acknowledgement form for plaintiffs trust. Doing so, he explained, would avoid the trouble of revising and redistributing the Inter Creditor Agreement to all of the lenders. Defendant provided plaintiff with the forms granting Scharff powers of attorney and requested that plaintiff notarize and return them.
Plaintiff, Scharff, and Lahn all signed the second “Inter Creditor Agreement” reflecting the new loan summary for the rollover/recast loan and, for the second time,
“12. Waiver of Potential or Actual Conflict. Each of the Parties understands and expressly agrees that [defendant] has represented Scharff9 in connection with this transaction and the preparation of certain documents including this Agreement. The Parties further agree that [defendant], acting solely as counsel for Scharff, shall prepare documents related to the Loan, that [defendant’s] firm shall continue solely to represent Scharff in connection with the Loan, and that to the extent such representation creates any potential or actual confliсt of interest, Scharff and the Parties hereby waive such conflict of interest.
“13. Review by Independent Counsel. Each of the undersigned is and has hereby been advised to obtain separate and independent legal and business [advice] from their own lawyers, accountants and advisors concerning this Agreement and all transactions contemplated herein or in connection with the Loan, and the signers hereof have done so or have deliberately and independently refrained from doing so.”
(Emphases added.)
The loan eventually closed in June 2005. The trust deed was never recorded as to the three commercial lots that had been promised as collateral “after closing,” leaving the lenders’ loans unsecured by any real property. By that time, plaintiff had loaned $400,000 to Dorn-Platz, and Lahn had loaned $500,000. In January 2008, Dorn-Platz began to miss payments and to issue checks to the lenders drawn on insufficient funds. In Deсember 2009, the lenders were informed that their loans were unsecured and that Dorn-Platz was unable to repay them.
Plaintiff filed a complaint alleging, among other things, that defendant had negligently represented her in relation to the 2005 loan agreement. Plaintiff specified numerous failures, including failures to investigate, failures to advise, failures to provide copies of communications, and failures to disclose. She also alleged that defendant had violated Oregon’s securities law. She alleged violations of ORS 59.135(1), (2), and (3) by materially aiding in making untrue statements when circulating false loan summaries, failing to disclose several circumstances, and failing to disclose that the trust deed for real property was not obtained as part of the transaction. Plaintiff declared that she did not realize that Dorn-Platz had defaulted on its development contract with the City of Beaverton in 2004 until after she had signеd the 2005 Inter Creditor Agreement, and she declared that she did not realize that her loan was not secured by real property until December 2009.
Defendant moved for summary judgment, contending, among other things, that (1) defendant did not represent plaintiff on the 2005 loans, (2) the professional negligence and security claims were time barred, and (3) the 2005 loan did not involve a security.
As to defendant’s first argument, plaintiff responded that a question of material fact remained as to whether defendant continued to represent her on the 2005 loan. She contended that the Inter Creditor Agreement and defendant’s email were not dispositive on that issue. As to any statute of limitations, plaintiff relied on belated discovery of the claims. As for defendant’s third argument, plaintiff responded that the transaction constituted a security. She argued that, “whether a particular note is a security
The trial court granted defendant’s motion for summary judgment as to all of plaintiffs claims. The court did not explain the bases for its rulings.
II. PROFESSIONAL NEGLIGENCE CLAIM
On appeal, plaintiff first assigns error to summary judgment against the malpractice claim, arguing that a rational factfinder could determine that defendant and plaintiff had a lawyer-client relationship at the time of plaintiffs 2005 rollover/recast loan to Dorn-Platz. That determination, she suggests, is supported by a number of circumstances. Plaintiff points to email communications with defendant, in which she wrote that her trust, not she herself, should be the lender. Defendant had offered to insert appropriate language into the power of attorney document (in which Scharff would execute documents on her behalf) and to send plaintiff “a very brief document adopting, for [her] trust.” She notes that the title officer for the 2004 and 2005 loans declared that defendant had acted as the lenders’ counsel in those transactions.
Defendant argued that he was not plaintiffs lawyer on the 2005 loans, defendant relying on the Inter Creditor Agreement and his email to plaintiff. Both encouraged plaintiff to seek independent counsel and stated that he was representing only her brother, Scharff.
“[A]n attorney ordinarily is nоt liable to those outside of the attorney-client relationship because there is no obligation to protect anyone outside of the attorney-client relationship from economic losses.” Roberts v. Fearey,
A lawyer-client relationship need not arise from an explicit contract but rather “may be inferred from the circumstances and
“a putative client’s subjective, uncommunicated intention or expectation [of a lawyer-client relationship] must be accompanied by evidence of objective facts on which a reasonable person would rely as supporting existence of that intent; by evidence placing the lawyer on notice that the putative client had that intent; by evidence that the lawyer shared the client’s subjective intention to form the relationship; or by evidence that the lawyer acted in a way that would induce a reasonable person in the client’s position to rely on the lawyer’s professional advice.”
Id. at 770. Even when the putative client has a subjective belief that a relationship has been established, “the putative client’s subjective belief must be accompanied by evidence that the lawyer understood or should have understood that the relationship existed.” Wyllie,
Two attorney discipline cases illustrate those concepts.
In In re Robertson,
In this case, we conclude that the trial court did not err in determining, as a
It is true that defendant provided forms to assign plaintiffs interest in the loan to her trust. The offer of those documents, however, came within the same email chain and shortly after his warning that he did not represent plaintiff for the purposes of the 2005 transaction. Further, those documents were consistent with defendant’s representation of Scharff and preparation of the documents culminating in the Inter Creditor Agreement, which required approval of all the lenders, including plaintiff. In those circumstances, plaintiffs subjective belief that defendant acted as her lawyer in the transaction is not accompanied by evidence from which a reasonable factfinder could conclude that the belief was objectively reasonable.
III. STATUTE OF LIMITATIONS
Before addressing the merits of plaintiffs securities law claim, we must address defendant’s argument that the claim should fail because it was barred by the statute of limitations. ORS 59.115(6); ORS 59.137(6)(b).
Defendant contends that the statute of limitations had run because plaintiff did not file her complaint until May 2010, but, “by January 2008, plaintiff knew Dorn-Platz had missed or made tardy payments” and that, by “April 2008, the payments stopped altogether.” Given that, defendant contends that plaintiffs claim “accrued no later than April 2008.” Plaintiff contends, on the other hand, that the limitations period did not begin to run until December 2009, because it was not until then that plaintiff knew or reasonably should have known that she had suffered harm as a result of defendant’s alleged securities violation.
Although defendant points to the time that plaintiff knеw that Dorn-Platz experienced financial difficulty, the timeliness of plaintiffs
IV. SECURITIES LAW CLAIM
Our concern lies with summary judgment on plaintiffs securities law claim. Plaintiffs complaint alleged that defendant was a person who participated or materially aided in the sale of a security “by fraud or deceit” in violation of the Oregon Securities Law set out in ORS chapter 59. ORS 59.115; ORS 59.135.
The focus of the parties’ dispute concerns whether plaintiffs 2005 loan to Dorn-Platz, in exchange for a promissory note, constitutes a security for the purpose of Oregon’s securities law. Plaintiff asserts that it “could be a security either as a ‘note’ or an ‘investment contract.’” ORS 59.015(19)(a) (defining “security”). Defendant insists that the trial court did not err because the transaction was a commercial loan rather than a security. See Mace Neufeld Productions v. Orion Pictures Corp., 860 F2d 944, 947 (9th Cir 1988) (“ordinary, individually negotiated privatе commercial loan transactions” do not involve the purchase or sale of securities). Accordingly, viewing the underlying facts in the light most favorable to plaintiff, we consider whether defendant was entitled to judgment as a matter of law on the ground that the 2005 loan transaction did not involve a security.
In Badger v. Paulson Investment Co., Inc.,
“ORS 59.115 is an offspring of federal security laws and regulations going back to the 1930s. *** In situations involving Oregon laws in large measure drawn from a federal counterpart, it is appropriate to look for guidance to federal court decisions interpreting similar federal laws, even though those decisions do not bind us.”
See also Computer Concepts, Inc. v. Brandt,
The Reves test requires a court to evaluate “(1) the motivation for entering the transaction; (2) the plan of distribution; (3) the reasonable expectations of the investing public; and (4) whether there are any risk-reducing factors that would make application of the securities laws unnecessary.” Battig,
“Under Reves, the analysis begins with a rebut-table presumption that a note is a security *** unless it falls into certain judicially created categories of financial instruments that obviously are not securities or if the note in question bears a ‘family resemblance’ to notes in those categories.” McNabb v. SEC,
McNabb, a case decided by the Ninth Circuit, guides the application of the Reves test here.
“Between February 1994 and May 1995, McNabb borrowed approximately $690,000 from six customers in exchange for ten promissory notes. The notes had fixed rates of interest ranging from eleven to seventeen percent, interest was to be paid monthly, and payment of the principal was due on or before specific dates, which ranged from seventeen months to approximately six years.”
Id. at 1129. McNabb used the customers’ loans “to reorganize his business operations,
McNabb sought review before the Securities and Exchange Commission (SEC), arguing, among other things, that the promissory notes were not securities. He contended that the promissory notes were not “notes” in the sense of securities because they resembled a “bank ‘character’ loan” or a “commercial loan,” both of which fall outside the scope of a “security.” Id. at 1131. The SEC concluded that the promissory notes were securities and sustained the sanctions imposed against McNabb. McNabb sought judicial review of the SEC’s adverse order. Id. at 1130.
On review, the court recognized that the promissory notes resembled neither a bank-character loan nor a commercial loan to maintain business operations. The court observed that it would not “add an additional category of financial instruments to the list of non-securities.” Id. at 1131. To reach its decision, the court applied the Reves four-factor test.
First, as to the motivation for entering the transaction, the court explained that “a note is likely to be a security ‘if the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate.’” Id. at 1131 (quoting Reves,
The second factor required the court “to examine the plan of distribution of the note to determine whether the note ‘is an instrument in which there is common trading for speculation or investment.’” McNabb,
Third, as to whether the promissory notes were reasonably perceived by the investing public as securities, the court explained that a court “must consider whether a reasonable member of the investing public would consider these notes as investments, ‘even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not “securities” as used in that transaction.’ ”
Fourth, as to whеther there were adequate risk-reducing factors, the court considered whether there was “an alternate regulatory scheme that would ‘significantly reduce [] the risk of the instrument’ to the lender, ‘thereby rendering application of the Securities Acts unnecessary.’” McNabb,
We apply the Reves test in this case, keeping in mind that generally only notes issued in an investment context are securities governed by securities law whereas notes
We consider each of the factors in turn. As to the motivations for a buyer and seller to enter the transaction, the first factor favors a determination that the note is a security. As noted in McNabb, “a note is likely to be a security 'if the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate.’” Id. at 1131 (quoting Reves,
Similar to McNabb, the note had a relatively high fixed rate of interest — 12 percent — and the interest was to be paid monthly to the lenders with payment of the principal due on or before a specified date. See
As to the plan of distribution, this second factor in itself does not indicate a security. This factor requires the court “to examine the plаn of distribution of the note to determine whether the note ‘is an instrument in which there is common trading for speculation or investment.’” McNabb,
As to the reasonable expectations of the investing public, this third factor favors a determination that the note is a security. In considering this factor, we must “look to a reasonable investor, not the specific individuals in question.” McNabb,
As to whether there were any risk-reducing factors that would make application of the securities laws unnecessary, this fourth factor strongly favors a view that the note is a security. When a loan is collateralized, this factor will likely disfavor a determination that a note is a security. “ [T]he absence of collateralization increases the risk of a loan because, in case of default, the lender or investor often has limited recourse to recoup the investment.” Wallenbrock,
Defendant argues that the loan in this case was collateralized, because the Inter Creditor Agreement provided for an assignment of Dorn-Platz’s minority partnership interest and contribution to The Round. We disagree. The Inter Creditor Agreement expressly called for the release of the collateral in the 2004 loan — the Chuo note and Dorn-Platz’s real properties. Further, the agreement allowed loans to issue without contemporaneously recorded collateral in the three commercial lots. Viewed in the light most favorable to plaintiff, Dorn-Platz’s contribution to The Round and its partnership interest was, for all intents and purposes, illusory because the lenders had no way of reaching any Dorn-Platz assets. Viewed in that light, a factfinder could reasonably determine that, if all of the lenders sought to withdraw their loans rather than roll those funds over into the new 2005 rollover/recast loan, Dorn-Platz would not have had the liquidity to pay off the existing loans in full. See Wallenbrook,
In sum, the circumstances of this case differ significantly from a single, negotiated, collateralized commercial loan between private parties. Cf. Reves,
V. CONCLUSION
The trial court correctly granted defendant’s motion for summary judgment as to the claim for professional liability but erred in granting the motion as to the claim for a potential violation of Oregon securities law. On the latter claim, questions of fact remain for trial.
Reversed and remanded on securities fraud claim; otherwise affirmed.
Notes
Alexis Scharff appears individually and as trustee of the Alexis G. Scharff revocable trust, an entity that is also a party to this appeal. Elizabeth Lahn wаs also a plaintiff, but her interests were subsequently assigned to plaintiff Scharff. For ease of reference, we refer only to “plaintiff.” Plaintiff named several defendants in her complaint, but only Vaisbort is a respondent on appeal. Accordingly, we refer only to “defendant.”
When representing lenders in Oregon, defendant worked with local counsel, Goldstein. Plaintiff alleged claims against Goldstein in her complaint, but he is not a party to this appeal.
Lenders were regularly encouraged to roll over their loans into new loans to Dorn-Platz. Plaintiff testified that the majority of her loans to Dorn-Platz “rolled into another loan.”
Hereinafter, that note is referred to as “the Chuo note.” The Chuo note had a collateral value of $1,500,000.
The parties do not dispute that defendant represented plaintiff on that 2004 rollover loan to Dorn-Platz.
The loan “overview” provided in the loan summary states:
“The partners in The Round, [Dorn-Platz] and LB Beavertоn, LLC (Lehman Brothers), are ‘splitting the sheets’. [Dorn-Platz] will get the North Site, everything North of the Light Rail Line. They will acquire it with $11,000,000 to $11,500,000 in secured debt, which will include $500,000 to $1,000,000 interest reserve. At closing, the partnership will have a total capital account of $6,000,000, which will include +$2,000,000 cash.”
In the agreement, Dorn-Platz took 43 unsold condominiums, and 25,000 square feet of retail space, approximately half of which was leased and occupied by retailers at that time. There were three additional lots on the site approved for commercial development. However, Dorn-Platz had not yet found a tenant or started any construction on those lots.
Plaintiff alleged that the lenders were unaware that they had never received the Chuo notes following the first rollover loan in 2004 and were unaware that defendant was representing other investors with an adverse interest in those notes.
In the meantime, Dorn-Platz expеrienced financial difficulty in developing The Round on schedule and became involved in a development dispute with the City of Beaverton. The city ultimately made a claim against a $500,000 performance bond posted by Dorn-Platz. Plaintiff alleged that she was unaware of those financial circumstances.
Thirteen separate lenders from Oregon and California were included in the Inter Creditor Agreement for the 2005 rollover/recast loan.
In the agreement, “Scharff is identified as Peter Scharff.
Ultimately, secured lenders foreclosed upon Dorn-Platz’s property. Plaintiffs loan to Dorn-Platz effectively became uncollectable.
Plaintiff refers to the fact that defendant had directed the title officer to close the loan.
Defendant does not dispute that he had a lawyer-client relationship with plaintiff with regard to the first, 2004 rollover loan or that he represented plaintiff in the later, unrelated loan after 2005.
We recognize that this is a professional liability case, not a discipline case, but neither party has suggested any reason — and we are aware of none — that the analysis of an attorney-client relationship would be different in the negligence context. But see Crimson Trace Corp.,
Although plaintiff argued before the trial court that defendant indirectly-represented her because he represented her agent Scharff, we do not understand plaintiff to develop that argument on appeal. We express no opinion on that matter.
Both parties cite the latter statute on appeal, but in either case, the difference is immaterial; the limitation is the same. ORS 59.115(6) provides:
“Except as otherwise provided in this subsection, no action or suit may be commenced under this section more than three years after the sale. An action under this section for a violation of subsection (l)(b) of this section or ORS 59.135 may be commenced within three years after the sale or two years after the person bringing the action discovered or should have discovered the facts on which the action is based, whichever is later. Failure to commence an action on a timely basis is an affirmative defense.”
Similarly, ORS 59.137(6) provides:
“An action or suit may be commenced under this section within the later of:
“(a) Three years after the date of the purchase or sale of a security to which the action or suit relates; or
“(b) Two years after the person bringing the action or suit discovered or should have discovered the facts on which the action or suit is based.”
ORS 59.135 “merely establishes a stаndard of conduct for claims pursued under ORS 59.115, ORS 59.137, and ORS 59.255.” State Treasurer v. Marsh & McLennan Companies, Inc.,
ORS 59.135 provides, in part:
“It is unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security or the conduct of a securities business or for any person who receives any consideration from another person primarily for advising the other person as to the value of securities or their purchase or sale, whether through the issuance of analyses or reports or otherwise:
“(1) To employ any device, scheme or artifice to defraud;
“(2) To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; [or]
“(3) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person!.]”
ORS 59.115 provides, in part:
“(1) A person is liable as provided in subsection (2) of this section tо a purchaser of a security if the person:
«* * ‡ * ¡H
“(b) Sells or successfully solicits the sale of a security in violation of ORS 59.135(1) or (3) 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 statements made, in light of the circumstances under which they are made not misleading (the buyer not knowing of the untruth or omission), and who does not sustain the burden of proof that the person did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.
«* * * * *
“(3) Every person who *** participates or materially aids in the sale is also liable jointly and severally with and to the same extent as the seller, unless the nonseller sustains the burden of proof that the nonseller did not know, and, in the exercise of reasonable care, could not have known, of the existence of facts on which the liability is based. Any рerson held liable under this section shall be entitled to contribution from those jointly and severally liable with that person.”
Although the trial court did not articulate the bases on which it granted summary judgment on the securities law claim, it is possible that the court agreed with defendant’s argument that the 2005 loan transaction did not involve a security. Thus, we address the merits of that argument.
The four-factor test in Reves is often referred to as the “family resemblance test.” For convenience, we refer simply to the “Reves test.”
A party’s subjective belief (i.e., a party’s individually held belief that a transaction is a security) is not considered relevant to this factor. See McNabb,
Before the trial court, defendant contended that, even assuming that the note could he deemed a security he could not be found to have “materially aided” in fraud, deceit, or misleading. We do not understand defendant to reassert or develop that argument on appeal as a basis upon which to affirm the trial court.