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Hogle v. Smestad

United States District Court, D. Arizona

February 12, 2014

Frank Matthew Hogle; Charlene Anne Hogle; Harold Bruce Hogle, Jr.; and Kimberly Rae Hogle, Appellants,
v.
Gary Smestad; Big Sky South; Douglas Sill; Sharon Sill; Papadeas Revocable Living Trust; Erika Papadeas; Nathan Papadeas; Peter Warbalow; Wesley Keeley; Marshall Jones; Walter Malone; Ann Voelker; Roscoe Enterprises LLC; and Cedar 1 LLC, Appellees.

ORDER

G. MURRAY SNOW, District Judge.

Frank, Charlene, Harold and Kimberly Hogle ("The Hogles" or alternatively "Appellants") appeal a grant of summary judgment entered against them by the U.S. Bankruptcy Court of the District of Arizona in the amount of $1, 600, 000.00. The judgment determines that no material questions of fact exist, that appellants are liable for multiple violations of the Arizona state securities fraud statute (A.R.S. § 44-1991), and that the judgment amount is non-dischargeable in bankruptcy. For the reasons set forth below, that judgment is vacated and the case is remanded to the bankruptcy court for further action consistent with this opinion.

BACKGROUND

The bankruptcy court entered the appealed judgment in favor of the Plaintiffs as a result of the Plaintiff's investment in a medical imaging company started by the Hogles called True Imaging LLC ("True Imaging"). True Imaging was to receive patients as referrals from a network of physicians and insurance companies. ( Id. )

The Hogles sought to raise $8, 000, 000 in equity financing for True Imaging through "Accredited Investors, " meaning investors that had a net worth of over $1, 000, 000 and an annual income of over $200, 000. (Doc. 10 at 6.) With such investors, the Hogles could rely on the private placement exemption from securities registration requirements. ( Id. ) The Hogles prepared a Private Placement Memorandum ("PPM"), dated May 1, 2007, which was shared with potential investors, including Plaintiffs. ( Id. ) The PPM was later supplemented on July 12, 2007 (the "PPM Supplement"). (Doc. 10 at 11.) In connection with the securities offering the Hogles also produced a three-page document entitled "The Opportunity" ("Business Opportunity Document") (BK Adversary Proceeding 2:11-ap-01205-SSC ("BK Record"), Doc. 29-5) and an executive summary for True Imaging ("Executive Summary") (BK Record, Doc. 29-6. The Hogles also met personally with all the investors or their representatives. (Doc 10 at 11.) The Hogles raised only $2, 647, 390 of the eight million dollars they sought to raise. (Doc. 10 at 6.) Plaintiffs contributed $1, 600, 000 of that amount. (Doc. 10 at 4.)

True Imaging had multiple ties with the Hogles personally, and with a company solely owned by the Hogles called Hogle Brothers, LLC ("HB LLC"). True Imaging was managed by HB LLC, which in turn hired a third party to manage the company. (Doc. 10 at 4.) True Imaging also operated out of a building owned by HB LLC and paid rent to HB LLC. ( Id. ) Matt Hogle initially planned to occupy the other half of the building as a location for his chiropractic practice. ( Id. ) HB LLC financed the building which was secured in part by the Hogles' personal guarantees. (Doc. 10 at 5.)

HB LLC also financed the acquisition of imaging equipment for True Imaging through loans guaranteed by both HB LLC and the Hogles, personally. ( Id. ) HB LLC financed an MRI machine, CT machine, mammography machine, and other equipment. In addition, True Imaging desired, but never actually obtained, an MRgFUS machine, used for cancer detection, because of insufficient financing. The MRgFUS machine was priced somewhere between $2, 000, 000 (Doc 10 at 5) and $3, 200, 000 (BK Record, Doc. 29-6 at 4).

True Imaging earned gross revenues of $283, 368 in 2008, (Doc. 10 at 4.), and $751, 323 in 2009. ( Id. ) However, these sums were insufficient to cover both its operating costs and debt service. ( Id. ) Thus, an equipment lender commenced collection actions and True Imaging was forced to cease operations. ( Id. ) HB LLC lost the real estate it owned and the Hogles took out individual Chapter 7 Bankruptcies. ( Id. ) The bankruptcy court, after both parties agreed to submit to its jurisdiction for the case (BK Record, Doc. 54), granted summary judgment in favor of the Plaintiffs based on what it determined to be seven material omissions or representations either made by the Hogles personally or found in the offering documents that the Court found to violate the requirements of the Arizona Securities Act. A.R.S. § 44-1991. (Doc. 1.) The bases of the bankruptcy court's grant of summary judgment are the following:

1. The failure to disclose Matt Hogle's disciplinary history with the Board of Chiropractors.
2. The failure to disclose the Hogles' lack of experience in managing a medical imaging center.
3. The failure to disclose that HB LLC would charge True Imaging rent of $18, 000 per month.
4. That True Imaging either already had the MRgFUS, or had the ability to acquire the MRgFUS.
5. That True Imaging would purchase medical imaging equipment, place the purchasing of medical equipment first in a list of intended use of investors' proceeds, and make clear that the purchase of medical imaging equipment was central to the business objectives of True Imaging.
6. That Plaintiffs' funds would be held in a segregated account and would not be accessed until True Imaging either purchased medical equipment or entered into a lease.
7. That True Imaging had separate legal counsel when actually the attorney who authored the PPM represented the Hogles in their individual capacity.

Because a finding of merely one violation of A.R.S. § 44-1991 is sufficient for a finding of non-dischargability under 11 U.S.C. § 523(a)(19), the Court will address each of these findings in turn.

LEGAL STANDARD

A bankruptcy court's order granting summary judgment is reviewed on appeal de novo. Barboza v. New Form, Inc., 545 F.3d 702, 707 (9th Cir. 2008). Summary judgment should be affirmed only when no genuine issue of material fact exists. Id. An issue of fact "is genuine' only if there is a sufficient evidentiary basis on which a reasonable fact finder could find for the nonmoving party, and a dispute is material' only if it could affect the outcome of the suit under governing law." Id. Thus, if there is sufficient evidentiary basis in the record upon which a reasonable finder of fact could find for the Defendants under the governing law, summary judgment is improper. Celotex Corp. v. Catrett, 477 U.S. 317, 331 n.2, (1986).

It is a violation of A.R.S. § 44-1991 to "[m]ake any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading" in the sale of a security. ( Id. ) However, "there is no duty to disclose information simply because it is material. Instead, an omission is actionable only if it affirmatively creates an impression of a statement of affairs that differs in a material way from the one that actually exists." Allstate L.I. Co. v. Robert W. Baird, et al., 756 F.Supp.2d 1113, 1130 (D. Ariz. 2010). Thus, "the plaintiff must explain how (an) alleged omitted fact negates the truth of or renders misleading statements actually made" Id. (citations omitted).

Interpretation of A.R.S. § 44-1991 is not identical to federal securities laws, though the Supreme Court of Arizona has stated that "for consistent application of the law" they "will follow the reasoning" of federal courts "in interpreting sections of our statutes which are identical or similar to federal securities statutes." State v. Gunnison, 127 Ariz. 110, 113, 618 P.2d 604, 607 (1980). For our purposes, "Section 44-1991(A) is almost identical to the antifraud ...


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