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Kingsley Capital Management, LLC v. Sly

United States District Court, Ninth Circuit

August 2, 2013

Kingsley Capital Management, LLC, et al., Plaintiffs,
Brian Nelson Sly, et al., Defendants.


NEIL V. WAKE, District Judge.

Before the Court are Plaintiffs' Motion for Summary Judgment (Doc. 369), Defendants' Motion for Summary Judgment or Alternatively for Partial Summary Judgment (Doc. 371), the Responses, and the Replies. For the following reasons, Plaintiffs' Motion will be denied and Defendants' Motion will be granted in part.

I. Background

Plaintiff Kingsley Capital Management is an Arizona limited liability company controlled by Dr. Bruce Kingsley, an Arizona resident. Plaintiff Bruce Paine Kingsley MD IRA Rollover is a trust for which Kingsley is the trustee. Kingsley himself is not a plaintiff, but at all times relevant to this action, Plaintiffs acted at Kingsley's direction. For the purposes of this order, there is no need to distinguish between Plaintiffs' actions and Kingsley's actions. The Court's use of "Kingsley" below therefore refers to actions taken by Bruce Kingsley himself, as well as the actions he caused Plaintiffs to take. Similarly, Defendants Brian Sly and Company and Brian Sly and Company, Inc. are entities controlled by Defendant Brian Sly. The Court therefore uses "Sly" below to refer to actions taken by Brian Sly himself, as well as the actions he caused the other Defendants to take.

Kingsley and Sly were friends long before the events that led to this lawsuit. In large part because of that friendship, Sly began pitching certain investments to Kingsley in 2005. One such investment involved an air filter company. Kingsley did not invest, and the air filter company apparently failed.

In early 2008, Sly and Kingsley began to have conversations about another investment opportunity, this one involving professional employer organizations (PEOs) and staffing businesses. This investment took the form of membership interests in certain limited liability companies. Many of these LLCs changed their names during the course of relevant events, but most of them had names related to the words air or oxygen. Distinguishing between the various LLCs is not important for purposes of this order, and the Court will therefore generically refer to the PEO business involved and the LLCs that effectuated it as "AIR."

Sly and other AIR investors (who, like Sly, invested indirectly through trusts or business arrangements) had acquired a worker's compensation insurance company and wanted to expand its operation. Expanding its business, however, required increased funds to hold as insurance reserves that would support AIR's business operations. The parties dispute who initiated the conversations surrounding investment in AIR and the way in which Kingsley became familiar with AIR, but those facts are largely immaterial for the purposes of this Order. It is undisputed that at some point, Kingsley became interested in investing in AIR and that he attended an AIR investor meeting in March 2008. At that meeting, and subsequently, Sly and Kingsley discussed the AIR business model.

The main actor behind AIR, and Sly's business partner in AIR and in other investments, was Wilbur Anthony Huff. Huff controlled most of AIR's activities and played an active role in managing its investments. Kingsley also became familiar with Charles J. Antonucci, who was the President of Park Avenue Bank, where AIR held its funds.

Sly was AIR's secretary, and performed administrative tasks for the company. Sly prepared three documents titled "Risk Disclosures" for AIR, one in February 2008, one in May 2008, and one in July 2008 (the Risk Disclosures). The Risk Disclosures contained text that said the documents were produced only for "Accredited Investors" who were interested in AIR. At some point, Sly gave Kingsley the Risk Disclosures as part of Kingsley's consideration of the investment. In the Risk Disclosures, Sly made a number of assertions about the nature of the AIR investment and about his business relationship with Huff. The parties vehemently dispute the extent to which Sly disclosed the risks involved in investing in AIR and the extent to which Huff had a history of unsavory business practices. Those disputes are at the heart of these Motions, but the particular details of each dispute are not relevant to the Court's Order and so are omitted here.

Following the March 2008 AIR investor meeting, Kingsley and Sly met several times to discuss the AIR investment and, in the process, reviewed the Risk Disclosures and discussed Kingsley's concerns about the investment. Kingsley carefully read the Risk Disclosures and discussed their contents with Sly in those meetings. Kingsley also began a process of due diligence in March 2008 to investigate the risks of an AIR investment.

After a meeting with Sly in May 2008, Kingsley decided not to invest in AIR despite Sly's promptings. Kingsley then began to investigate other investment opportunities. After one of those other opportunities fell through, however, Kingsley began to think again about investing in AIR. To resolve his concerns about the AIR business model and the risk involved in investing, Kingsley began to talk directly to Huff about new ways to structure the investment in May 2008.

Through his discussions with Huff, Kingsley devised a new structure for investment in AIR that he believed would minimize the risk of the investment. In exchange for his purchase of 1, 750, 000 "preferred units" of AIR, at a price of $1 per unit, Kingsley negotiated a series of collateral guarantees from Huff. First, Huff agreed to provide put options backing Kingsley's investments by which a separate entity Huff controlled, SDH realty, would agree to purchase the entire amount of Kingsley's investment in AIR if Kingsley invoked the options (the Put Options).

If for some reason Huff did not purchase all of Kingsley's units of AIR at the price Kingsley paid, Kingsley negotiated a second level of security through letters of credit. Huff agreed to provide the letters of credit at Park Avenue Bank (the Letters of Credit) such that if Kingsley invoked the Put Options and Huff refused to pay the full purchase amount, Kingsley would be able to draw the full amount from the Letters of Credit he believed to be backed by funds at Park Avenue Bank. Further, Huff agreed that River Falls, the entity that issued all payment checks to AIR investors, would pay Kingsley, through Kingsley Consulting LLC, an annual salary of $175, 000 salary to perform consulting work related to the PEO business.

Kingsley negotiated all of these additional terms directly with Huff. With these additional terms agreed to, Kingsley decided to invest in AIR and sent $1, 750, 000 to an account owned by AIR at Park Avenue Bank in exchange for 1, 750, 000 preferred units of AIR backed by the additional guarantees from Huff (the AIR transaction). Sly did not know about all of the aspects of the AIR transaction. Kingsley specifically directed Huff not to inform Sly about the Put Options and the Letters of Credit. Kingsley also specifically instructed Huff's accountant on how to respond to inquiries from Sly without revealing the full nature of the transaction by omitting certain terms.

Not long after investing in AIR, Kingsley began to fear he would lose his investment. He learned, for instance, that Antonucci's Park Avenue Bank was not well-capitalized and that Huff allegedly intended to invest $5 million to shore it up. Antonucci later left Park Avenue Bank, which failed, and Antonucci has since pleaded guilty to bank fraud.[1] The bank's failure doomed the Letters of Credit. Soon thereafter, the entire AIR operation began to unravel as it became clear that the underlying investment scheme was fraudulent and consisted only of Huff's hot air. Huff was later indicted for thirteen counts of wire, bank, and tax fraud, bank robbery, and other fraudulent activities involving AIR and Park Avenue Bank.[2] AIR deflated, and this lawsuit followed.

II. Legal Standard

A party moving for summary judgment must demonstrate that there is no genuine issue as to any material fact in order to be entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). A material fact is one that might affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The movant has the burden of showing the absence of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

However, once the movant meets the requirements of Rule 56 by showing there is an absence of evidence to support the non-moving party's case, the burden shifts to the party resisting the motion. The party opposing summary judgment must then "set forth specific facts showing that there is a genuine issue for trial, " and may not rest upon the pleadings. Anderson, 477 U.S. at 256. As a result, the opposing party may not simply describe a fact as disputed to defeat summary judgment; rather, the nonmoving party must produce sufficient evidence in their favor for a jury to return a verdict for that party. Id. at 249.

At the summary judgment stage, the nonmoving party's evidence is presumed true, and all inferences from the evidence are drawn in the light most favorable to the non-moving party. Rohr v. Salt River Project Agric. Imp. & Power Dist., 555 F.3d 850, 864 (9th Cir. 2009). As a result, a court does not make credibility determinations or weigh conflicting evidence at this stage. Porter v. California Dep't of Corr., 419 F.3d 885, 891 (9th Cir. 2005). However, the Ninth Circuit has refused to find a "genuine issue" where the only evidence presented is "uncorroborated and self-serving" testimony. Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002) (citing Kennedy v. Applause, Inc., 90 F.3d 1477, 1481 (9th Cir. 1996)).

III. Analysis

The threshold issue presented in these cross motions for summary judgment is whether Plaintiffs' AIR transaction constitutes a security at all. In order to make out a claim under Arizona securities laws, investors must demonstrate that promoters' alleged misconduct occurred in connection with the purchase or sale of a "security." Defendants contend that they are entitled to summary judgment on all of Plaintiff's claims under the Arizona Securities Act because Plaintiffs' AIR transactions were not "securities" as a matter of law.

A. Composition of Plaintiffs' AIR transaction

The focus of a court's inquiry should be "on what the purchasers were offered or promised" by evaluating "the character of the instrument or transaction offered on what the purchasers were led to expect." Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir. 2009) (citations and internal quotation marks omitted).

Kingsley understood the transaction he was agreeing to make to be an investment in AIR, collateralized by the Put Options from SDH Realty, in turn secured by the Letters of Credit from Park Avenue Bank, along with the consulting agreement. (Doc. 373-1 at 288.) For the purposes of this Motion, then, the transaction that must be characterized is the entire transaction, including the Put Options, Letters of Credit, and the consulting ...

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