Michael GRASSMUECK, Bankruptcy Trustee for the estates of W.J. Hoyt Sons Management Co., Ltd. and W.J. Hoyt Sons Ranches, MLP, Appellant, v. THE AMERICAN SHORTHORN ASSOCIATION, a Nebraska corporation; Dr. Roger E. Hunsley, an individual, Appellees.
No. 04-2019
United States Court of Appeals, Eighth Circuit
March 31, 2005
402 F.3d 833
Submitted: Dec. 17, 2004.
James L. Beckmann, argued, Lincoln, NE, for appellant.
Robert J. Becker, argued, Omaha, NE, for appellee.
Before WOLLMAN, MAGILL, and COLLOTON, Circuit Judges.
COLLOTON, Circuit Judge.
I.
This lawsuit arises out of a complex scheme of investments that are alleged to have been administered in a fraudulent manner. Walter J. Hoyt III (“Hoyt“) was the primary figure in a partnership with his brothers called “Hoyt & Sons Ranches.” The family partnership raised cattle located for the most part in Nevada, Oregon, and California. It also actively sought investors in its cattle-raising operations until its dissolution in the late 1980s, when it was succeeded in relevant part by two other Hoyt-owned entities, W.J. Hoyt Sons Management Co., Ltd., and W.J. Hoyt Sons Ranches, MLP (together with Hoyt & Sons Ranches, the “Hoyt Entities“).
The investments marketed by the Hoyt Entities were structured sо that investors would become partners in one or more investment partnerships. These partnerships purchased cattle from the Hoyt Entities. The investment partnerships paid for the cattle by assuming notes owed to the Hoyt Entities in a face value amount equal to the price of the cattle. Investors became partners by assuming portions of these notes. Investors were to pay only interest on the investment partnership notes fоr five years, while claiming depreciation deductions on the cattle for tax purposes. The Hoyt Entities represented that the cattle sold in this manner to the investment partnerships were purebred shorthorn cattle. The Hoyt Entities attracted large amounts of investment, allegedly in excess of $100,000,000, from thousands of investors over a decade.
There were several problems with the investments represented by the partner-
The Hoyt Entities entered Chapter 7 bankruptcy proceedings on February 24, 1997. The Trustee filed a Complaint for Substantive Consolidation against the investment partnerships in September 1998, and the bankruptcy court granted the consolidation in November 1998. The bases alleged for consolidation were that the investment partnership assets and funds were intermingled with those of the Hoyt Entities, and that the investment partnerships and the Hoyt Entities were dominated by the same management. (J.A. at 821, 840-41). The investment partnerships, moreover, shared locations and employees with the Hoyt Entities and suffered from inadequate record-keeping. (Id. at 839).
According to the Trustee, the investment partnerships lacked indеpendent substance: partners were moved repeatedly “from one partnership to another without the partner‘s knowledge,” sometimes even “into partnerships that had previously been terminated.” (Id. at 842). Investors who purchased cattle in an individual capacity were erroneously placed into investment partnerships. (Id.). As a result of inadequate documentation, ownership of the notes assumed by the investment partnerships wаs “[u]ncertain.” (Id. at 821, 844).
The Trustee sued the ASA and Dr. Hunsley on November 3, 2000, alleging that they had breached their duties of care to the investment partnerships. The ASA, according to the Trustee, disregarded its protocols for certifying and registering shorthorn cattle as purebred, thus resulting in the certification and registration of cattle that were not purebred. Dr. Hunsley, as an officer of the ASA, was involved in the alleged negligent certification and registration procedures. He also acted as an expert witness for the Hoyt Entities in Tax Court proceedings. The Trustee alleges that the ASA‘s involvement “gave an aura of legitimacy to the entire Hoyt scheme,” and that the ASA aided “the Hoyts by failing to exercise reasonable care in the performance of their registration and certification obligations to the detriment of the . . . [p]artnerships.” (Id. at 755).
II.
A Chapter 7 bankruptcy trustee is required to “collect and reduce to money the property of the estate for which the trustee serves.”
A trustee‘s ability to assert causes of action on behalf of the bankrupt estate is subject to any equitable or legal defenses that could have been raised against the debtor. 5 Collier on Bankruptcy, supra, ¶ 541.08, at 541-46. In particular, the equitable defense of in pari delicto is available in an action by a bankruptcy trustee against anоther party if the defense could have been raised against the debtor. See Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 355-56, 358 (3d Cir.2001); 5
Whether in pari delicto may be asserted by a third party against a wrongdoer‘s partner turns on the relationship between the partners, which is a question of state law. In re Newman, 875 F.2d 668, 670 (8th Cir.1989). The district сourt deemed it unnecessary to resolve which state law applies to this dispute, and we observe that all States whose laws might govern this action3 have adopted the Uniform Partnership Act (“UPA“) in relevant part.
Summary judgment is appropriate if, viewing the facts in the light most favor- able to the non-moving party, there is no genuine issue of material fact to be resolved.
The district court held that Hoyt‘s fraud was chargeable to the investment partnerships. The court acknowledged that, under the UPA, the normal rule imputing knowledge from one partnеr to the partnership does not apply when the partner in question is acting fraudulently. This is known as the “adverse interest exception” to the imputation rules. The refusal to impute knowledge to the principal of an agent who is acting adversely to the principal is an acknowledgment that the usual legal fiction of complete agent-principal communication is unjustified where the agent is acting adversely. Martin Marietta Corp. v. Gould, Inc., 70 F.3d 768, 773 (4th Cir.1995). Section 102(f) of the UPA, which еxpresses this adverse interest exception, reads as follows:
A partner‘s knowledge, notice, or receipt of notification of a fact relating to the partnership is effective immediately as knowledge by, notice to, or receipt of a notification by the partnership, except in the case of a fraud on the partnership
committed by or with the consent of that partner.
Id. (emphasis added).
The district court concluded that the adverse interest exception was qualified in these circumstances by the “sole actor” doctrine.5 The sole actor doctrine provides that “where the principal and agent are one and the same,” the agent‘s knowledge is imputed to the principal despite the fact that the agent is acting adversely to the principal. Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822, 827 (2d Cir.1997). Where the principal and agent are alter egos, there is no reason to apply an adverse interest exception to the normal rules imputing the agent‘s knowledge to the principal, because “the party that should have been informed [of the fraudulent conduct] was the agent itself albeit in its capacity as principal.” Id. In this case, the district court reasoned that the investment partnerships were mere alter egos of Hoyt during the period in which he defrauded investors, and that Hoyt‘s knowledge was properly imputed to the partnerships. (Add. at 14).
The Trustee advancеs two primary arguments why the district court was wrong. First, he argues that the sole actor doctrine should not have been applied because it contravenes the plain language of section 102(f) of the UPA, and because it is not established in the law of any of the States whose law might govern this dispute. Second, the Trustee maintains that even if the doctrine applies, Hoyt was not a sole actor with respect to the investment partnerships.
A.
We disаgree with the Trustee‘s first contention. It is true that the plain language of the UPA codifies the adverse interest exception and does not expressly mention the sole actor doctrine. Section 104 of the UPA, however, provides that “the principles of law and equity” are to “supplement” the UPA “[u]nless displaced by particular provisions.” UPA § 104(a). These principles of law and equity include “the law of agency,” as well as the law relative to fraud and “other common law validating and invalidating causes.” UPA § 104 cmt.6 The sole actor doctrine is an established principle of agency law, see 3 Am.Jur.2d, Agency § 281 (2004), and it therefore applies under the UPA unless displaced by a particular provision.
Application of the sole actor doctrine to the UPA‘s adverse interest rule is also consistent with established rules of statutory interpretation. Statutory codifiсations of common law rules are often subject to implicit exceptions that were recognized at common law. See Sabbath v. United States, 391 U.S. 585, 591 n. 8, 88 S. Ct. 1755, 20 L. Ed. 2d 828 (1968) (stating that “there is little reason why” common law exceptions to announcement and entry rules would not also apply to the statutory embodiment of those rules, “since they existed at common law, of which the statute is a codification“); Hatley v. Stafford, 284 Or. 523, 588 P.2d 603, 605 n. 1 (1978) (implying common law exceptions to the statutory parol evidence rule where the statute was “a codification of the common law parol evidence rule“); People v. Maddox, 46 Cal. 2d 301, 294 P.2d 6, 9 (1956) (holding that a statutory codification of the common law “may reasonably be interpreted as limited by . . . common law rules” even though the common law rules are not mentioned in the statute); Cram v. Chicago, B & Q R.R. Co., 84 Neb. 607, 122 N.W. 31, 33 (1909) (“It is also a truism that: When statutes are made there are some things which are exempted and foreprized out of the provisions thereof, by the law of reason, though not expressly mentioned. Thus, things for necessity‘s sake, or to prevent a failure of justice, are excepted out of statutes.“) (internal quotation omitted). Section 102(f) is, in relevant part, a codification of the common law adverse interest rule, see Restatement (Second) Agency § 282 (1958), to which the sole actor doctrine was a common law exception. None of the common law exceptions to the adverse interest rule are mentioned in section 102(f), and there is no indication that the drafters of the UPA‘s general “Knowledge and Notice” provision wished to eliminate them. We therefore believe that the adverse interest rule in statutory form remains subject to the sole actor doctrine, as it did at common law.7
The Trustee‘s argument that the district court erred by applying the sole actor exception because none of the States involvеd has embraced the doctrine is similarly unpersuasive. While it may be true that the sole actor exception is not well-developed in the law of the States that potentially governs this action, that does not mean that the courts of those States would decline to apply the exception if faced with these facts. If the path that a
In formulating our prediction, the approach taken by other jurisdictions is relevant. The sole actor doctrine is an agency law principle well-established at common law. See Munroe v. Harriman, 85 F.2d 493, 496 (2d Cir.1936) (“[T]here is substantial authority in support of the ‘sole actor’ doctrine.“).8 Principles of agency law, moreover, are incorporated into the UPA in all of the relevant States. See
California and Oregon have applied the sole actor doctrine. Nat‘l Bank of San Mateo v. Whitney, 40 Cal. App. 276, 180 P. 845, 848-49 (1919); Saratoga Inv. Co. v. Kern, 76 Or. 243, 148 P. 1125, 1127-28 (1915). There is no indicatiоn that Nebraska or Nevada would apply the established principles of agency law any differently. See Rose v. Gisi, 139 Neb. 593, 298 N.W. 333, 337 (1941) (citing the Restatement (Second) of Agency and Massachusetts case law for a “generally accepted rule” regarding principal liability); Hunter Mining Labs., Inc. v. Mgmt. Assistance, Inc., 104 Nev. 568, 763 P.2d 350, 352 (1988) (citing the Restatement (Second) of Agency and Maryland, Illinois, Virginia, Florida, and California case law regarding the scope of control required to establish an agency relationshiр); see also Allard v. Arthur Andersen & Co., 924 F. Supp. 488, 495 (S.D.N.Y.1996) (refusing to apply adverse interest exception to the imputation of knowledge where the agent acts both for himself and for his principal because “there is no reason to believe that a Michigan court would depart from the New York and Restatement rule” to the same effect). Accordingly, we believe that under the law of any of the jurisdictions that might govern this action, the sole actor doctrine would apply as an exception to the adverse interest rule stated in Section 102(f) of the UPA.
B.
The Trustee‘s second argument, that Hoyt was not a sole actor with respect to the investment partnerships, also fails. As discussed above, a sole actor relationship is found when “the principal and agent are one and the same.” In re Mediators, Inc., 105 F.3d at 827. Here, the investment partnerships lacked independent identities. The Trustee conceded in connection with his motion for summary judgment that the investment partnerships “were entities of convenience and not separate business units.” (J.A. at 835). He also acknowledged that “[t]he Hoyt cattle investment operation was run by Walter J. Hoyt III as a unified business,” and that “[a]ll entities were used as instrumentalities by Walter J. Hoyt III in an attempt to gain tax advantages for himself and his investors.” (Id. at 845). The Trustee admitted in interrogatory answers, moreover, that “there is no way to identify any of the individual [investment] [p]artnerships.” Instead, there was a single entity which commingled all assets and liabilities of the
Hoyt‘s actions here were indistinguishable from those of the investment partnerships. Hoyt was made general partner of all of the investment partnerships, thereby assuming the role of principal as well as an agent. See Goehring v. Superior Court, 62 Cal. App. 4th 894, 73 Cal. Rptr. 2d 105, 112 (1998) (“[g]eneral partners are both agents and principals of the partnership“). The Trustee contends that Hoyt was not “one and the samе with the partnerships” because “each partnership was made up of a number of general partners.” (Appellant‘s Brief at 28). The Trustee has stated in the district court, however, that “[t]he investor partners played no part in the management of their . . . [p]artnerships or the other Hoyt [E]ntities.” (J.A. at 840). In addition, Hoyt received a power of attorney from each investor, thus enabling him to act on the investor‘s behalf with respect to the investment partnerships, and giving Hoyt singular domination over the partnerships. (Id.). Indeed, according to the Trustee‘s own allegations, Hoyt dominated both the investment partnerships and the Hoyt Entities. (J.A. at 821). No similar facts are alleged with respect to the investors.
The Trustee argues that Hoyt was not the “sole representative” of the investment partnerships because a Hoyt Entity employee, Marketing Director Donna Schnitker, also dealt with the ASA. The ASA and Hunsley do nоt dispute the allegation that Schnitker dealt with the ASA on behalf of Hoyt. This is not a material fact, however, because the sole actor doctrine does not require that the agent whose knowledge is to be imputed literally act alone; the doctrine still applies if the “sole actor” uses subordinates in perpetrating a fraud. See Munroe, 85 F.2d at 496 (imputing bank president‘s knowledge of fraud to the bank under the sole actor rule despite the involvement of other bank employees). The central inquiry in the sole actor context is whether the agent committing fraud is also the principal that should have been informed. In re Mediators, Inc., 105 F.3d at 827. There is no allegation here that Schnitker was a partner in or a principal of the investment partnerships. In fact, the only evidence in the record indicates that Schnitker “had nothing to do with the investor partnerships,” (J.A. at 726, 731), and worked only as an employee of one of the Hoyt Entities. (Id. at 708-11).
The Trustee argues finally that the sole actor doctrine cannot be asserted by the ASA because it was “not acting in good faith.” (Appellant‘s Br. at 29). It is true that the sole actor exception “may not be invoked where third persons use the agent to further their own frauds upon the principal.” Bland v. Allstate Ins. Co., 944 S.W.2d 372, 376 (Tenn. App. 1996) (internal quotation omitted). The Trustee does not allege, however, that the ASA or Dr. Hunsley used Hoyt to further their own frauds upon the investors. The amended complaint expressly disclaims any fraud on the part of the ASA or Dr. Hunsley, and restricts its allegations to mere negligence. (J.A. at 755) (the “ASA and Hunsley . . . did not themselves have fraudulent intent“).
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The undisputed facts show that the investment partnerships established by Hoyt were not independent entities, but existed in form only and were indistinguishable from Hoyt. As a result, the sole actor doctrine applies, and Hoyt‘s fraud is imputed to the investment partnerships. Because the partnerships are deemed to have participated in Hoyt‘s wrongdoing, the Trustee is barred by the doctrine of in pari delicto from pursuing this negligence