Donohoe v. Consolidated Operating & Production Corporation

30 F.3d 907 (7th Cir. 1994)

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Nature of the Case

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Facts

Donohoe (Ps) and 53 others brought suit against Consolidated Operating & Production Corporation (COPCO) and its principals and shareholders: Jack Nortman, Morando Berrettini, Dennis Bridges and two companies that Bridges owned and operated on claims that Ds fraudulently lured them into investing in a project to drill oil wells on land, which Ds fully knew there wasn't any oil to be found. From the facts, it appears that Bridges defrauded everyone. Bridges declared bankruptcy and any judgments against him or his companies have little value. Nortman, Berrettini and COPCO ae the remaining defendants. Ps' amended complaint offered various theories of liability, primarily violation of the anti-fraud and registration requirements of the federal securities laws, together with RICO and state law theories. It was established that Nortman and Berrettini had conducted a thorough check of Bridges’s background. As the district court noted in originally concluding that Ds lacked bad faith, Ds conducted an extensive check into Bridges' background, set up an escrow system to check the disbursement of money into Ona's bank account and regularly checked up on Bridges' work. Ds were required to rely heavily on Bridges' superior technical expertise. And, there is no suggestion in the record that Ds had any reason to believe that the sources to whom they looked in evaluating Bridges would prove unreliable. Ds invested a large amount of their own energies and funds (more than $100,000) in the project, making it fairly clear that their actions taken with respect to the undertaking were in good faith, as that term is commonly understood. The lower court found there was no evidence of either recklessness or intent to defraud (bad faith) and granted summary judgment in favor of Ds on most of the claims. Ps appealed, and the appeals court observed that the lower court failed to address the argument that Nortman and Berrettini may have 'controlled' Bridges, and thus be liable for his malfeasance under a 'control person' theory. The court remanded the matter to the district court for its consideration of this question. The court had not addressed the control person theory the first time, the court said, because no such allegation had been made in the complaint. Ps alleged that Nortman and Berrettini controlled COPCO, but Ps never claimed Nortman and Berrettini controlled Bridges. The district court, therefore, concluded that our decision to remand the case was, 'clearly erroneous.' The court then noted that a defendant's good faith is an affirmative defense to a claim of control person liability. It held that Ds made out an affirmative defense on the control person theory. It, therefore, granted summary judgment on the control person liability theory and again dismissed the action with prejudice. Ps again appealed.