A lender's status as a "major lender" or the standard terms of a loan agreement are insufficient to establish the control that is required to establish controlling person liability. See Wright v. Schock, 571 F. Supp. 642, 664 (N.D. Cal. 1983) (banks and title companies which provided various routine services to mortgage broker engaged in marketing of promissory notes secured by deeds of trust on real property were not liable as controlling persons).
As evidence of control, plaintiffs argue that, under the terms of the loan, GEPT had the right to approve leases, set rental rates, input management contract decisions, control secondary financing, acquire a 50% interest in the partnership, and control the use of the Partnership's Reserve Account. However, such terms in a loan agreement, by themselves, do not sufficiently demonstrate elements of control. It is uncontroverted that these terms are standard loan terms in the industry rather than attempts by GEPT to exert control over the Winthrop Defendants. Accordingly, under Wright, these standard loan terms are insufficient to establish control. Furthermore, these facts do not show that GEPT had control over Winthrop at the time of the offering. Rather, at most they may evidence elements of future control. Thus, as a matter of law, plaintiffs have not shown that the GE Defendants had control over the Winthrop Defendants.
Additionally, a controlling person is not liable if it can be shown that it "acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. § 78t(a). See, Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575 (9th Cir. 1990). Even if plaintiffs had established control, GEPT's good faith creates a defense to liability. GEPT contends that it was unaware of and had no involvement in the offering, while the only evidence presented by plaintiffs that GEPT was involved in the fraud is the investor questionnaire. As discussed above, the questionnaire is insufficient evidence to create a liability, and thus there is no evidence that GEPT directly or indirectly induced the acts constituting the violation.
Defendants are therefore entitled to summary judgement on the issue of control person liability.
(3) Aider and Abettor Liability.
In order to prove "aider and abettor" liability, plaintiffs must prove the following:
(1) the existence of an independent primary wrong;
(2) actual knowledge by the alleged aider and abettor of the wrong and of his role in furthering it; and
(3) substantial assistance in the wrong.
Jett v. Sunderman, 840 F.2d 1487, 1495 (9th Cir. 1988).
Assuming that there is an independent primary wrong, plaintiffs must first show that the GE Defendants had actual knowledge of the alleged underlying fraud. In this case, the GE Defendants had no knowledge of the alleged fraud; GEPT was unaware of any misrepresentations in the offering materials, was not concerned with the structure of the partnership, and did not review or approve the offering materials containing the alleged misrepresentations.
Plaintiffs attempt to show that GEPT had actual knowledge of the fraud through evidence that GEPT was aware that an offering would take place and that it received projections from Winthrop in connection with the loan application. However, this evidence in no way proves that GEPT knew that the projections were to become a part of the offering materials nor does it show that GEPT saw the offering materials or was aware of what was in the offering materials. See Wright v. Schock, 571 F. Supp. 642, 655-56 (N.D.Cal. 1983) (bank reviewed financial statements and tax returns in connection with making loans to an alleged perpetrator of fraud and court found no actual knowledge of fraud). Thus, plaintiffs have failed to present specific facts to show that the GE Defendants had actual knowledge of the alleged fraud.
Even if plaintiffs were able to show actual knowledge, plaintiffs must also show that the GE Defendants substantially assisted the fraud. To establish substantial assistance, the plaintiff must prove either (1) significant and active, as well as knowing participation in the wrong; or (2) silence combined with a duty to disclose which arises from "knowing assistance of or participation in a fraudulent scheme." Harmsen v. Smith, 693 F.2d 932, 944 (9th Cir. 1982).
In the instant case, the evidence is uncontroverted that GEPT did not actively participate in the fraud. Although plaintiffs attempt to show that GEPT played a role in the project, the evidence in no way shows that GEPT participated in the fraud. The only actions taken by GEPT were loans and related "ministerial" tasks. The mere advancement of loans and performance of ministerial tasks in relation to the loans does not constitute substantial assistance for aider and abettor liability. See Wright, 571 F. Supp. at 663 (court found no substantial assistance for performance of ministerial tasks in relation to loans, absent clear proof of intent to aid the fraud). Plaintiff has failed to offer clear proof of an intent of GEPT to aid the fraud, and therefore, the GE Defendants did not substantially assist the fraud.
The plaintiffs also attempt to show that the GE Defendants were an active participant through evidence that GEPT's name was on the offering materials. However, this evidence is insufficient to establish active participation. In Wright, the court found no liability for a lender whose name appeared on the offering materials of the primary violator where there was no evidence of actual knowledge of and intent to benefit from the fraud. Wright, 571 F. Supp. at 663. In this case, plaintiffs have failed to offer evidence that GEPT had actual knowledge of or intent to benefit from the fraud and have thus failed to establish active participation.
Since plaintiffs are unable to show that the GE Defendants were an active participant, aider and abettor liability can only be premised on silence. In order to establish substantial assistance based on silence, plaintiffs must show that GEPT had a duty to disclose arising from a "knowing assistance of or participation in the fraudulent scheme." Harmsen v. Smith, 693 F.2d at 944. Since plaintiffs have failed to offer sufficient evidence demonstrating that GEPT knew of and participated in the fraud, plaintiffs are unable to show liability based on silence.
Thus, the GE Defendants are entitled to summary judgement on the issue of aider and abettor liability.
b. Common Law Fraud.
A claim for common law fraud in California requires a plaintiff to prove that the defendant made a false representation, with knowledge of its falsity, intending to induce reliance thereon, and that the plaintiff actually and reasonably relied on the representation, thereby suffering damages. See Crocker-Citizens National Bank v. Control Metals Corp., 566 F.2d 631, 636 (9th Cir. 1977). In the securities fraud context, where the defendant does not make any actual misrepresentation to the plaintiff, he cannot be liable for common law fraud as a matter of law. See In re Gap Stores Securities Litigation, 457 F. Supp. 1135, 1143 (N.D. Cal. 1978).
As discussed above, the GE Defendants made no actual misrepresentations to the plaintiffs. It is uncontroverted that the GE Defendants were not involved in the preparation or dissemination of the offering materials. No representative of GE was present at sales meetings or promotions of the limited partnership. Additionally, no representative of GE ever communicated with any of the plaintiffs prior to the investment. Thus, as a matter of law, plaintiffs are unable to prove common law fraud and the GE Defendants are therefore entitled to summary judgement on this issue.
In accordance with the foregoing discussion IT IS HEREBY ORDERED THAT:
1. The Winthrop Defendants' and Peat Marwick's Motions for Summary Judgement are GRANTED;
2. The Winthrop Defendants' and Peat Marwick's Motions to Dismiss the pendant claims are GRANTED; and
3. The GE Defendants' Motion for Summary Judgement is GRANTED.
IT IS SO ORDERED.