defendants as aiders and abettors for payments made before they
acquired their interests in GWU.
For similar reasons, the court also rejects plaintiffs'
argument that defendants are liable as co-conspirators for acts
committed before they acquired their interest in GWU. Again,
plaintiffs cite only criminal cases to support this theory of
liability. And, as defendants aptly point out, in criminal law,
the very act of conspiracy alone is condemned and punishable as
a criminal offense. However, no independent cause of action
exists under the securities laws relied on by plaintiffs for
civil conspiracy; plaintiffs must prove either direct primary
liability or liability as an aider and abettor. A causation
element is incorporated into both of these theories of civil
liability so that a victim may be compensated only for injuries
caused by a defendant. To hold these defendants liable under
plaintiffs' conspiracy theory would violate fundamental
concepts of civil law by imposing liability for injuries not
caused by them. The court therefore rejects plaintiffs'
conspiracy theory as a basis for holding the moving defendants
liable for acts performed by others or payments made before
they acquired their respective interests in GWU.
After the issues discussed above were fully briefed and
presented to the court, the plaintiffs in the Adair v. Hunt
case, 79 C 4206, requested and were granted leave to file an
amicus brief on the issues raised in defendants' motion.*fn2
In their memoranda, the Adair plaintiffs assert an additional
basis for holding the moving defendants liable for acts or
payments made before they acquired their interests in GWU. They
contend that these defendants "lulled" the plaintiffs through
misrepresentations and deception after they assumed control of
GWU, and, on the basis of this lulling activity, are fully
liable as primary wrongdoers for all damages incurred by the
Kaliski and Adair plaintiffs.
As factual support for this theory, the Adair plaintiffs
describe at length evidence they contend demonstrates that the
Hunts had knowledge of the alleged fraud but failed to
communicate this knowledge to the plaintiffs, and instead
covered up the fraud and lulled plaintiffs into not asserting
their rights. As legal support for their "lulling" theory, the
Adair plaintiffs rely on a number of cases in which the
defendants, having perpetrated an original fraud, were also
held liable for lulling activities occurring after the original
fraudulent transaction. See, e.g., Peoria Union Stockyards Co.
v. Penn Mutual Life Ins. Co., 698 F.2d 320, 326 (7th Cir.
1983); SEC v. Holschuh, 694 F.2d 130, 142-44 (7th Cir. 1982);
U.S. v. Shelton, 669 F.2d 446, 458 (7th Cir. 1982); Hoglund
v. Covington County Bank [1977 Transfer Binder] Fed.Sec.L.Rep.
(CCH) ¶ 95,910 (M.D.Ala. 1977), affirmed on rehearing, [1977
Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 96,003 (M.D.Ala. 1973).
These cases do not support the proposition that a defendant
involved in later lulling activities can be held primarily
responsible for the acts of other parties who committed the
original acts of fraud, when there was no connection between
the defendants and the original defrauders at the time the
original fraudulent acts were committed. No support for such
sweeping civil liability has been cited or found, and, as
discussed above with respect to the plaintiffs' aiding and
abetting and conspiracy theories, to uphold the plaintiffs'
theory would impose liability when there is no causal link
between the acts of the defendants and the injuries actually
The cases cited by the Adair plaintiffs do, however, provide
some support for plaintiffs' assertion that the moving
defendants can be held primarily liable for damages incurred as
a direct result of their lulling activities, i.e., for payments
received after they assumed control of GWU, learned of the
alleged fraud, and took action to perpetuate the fraud to
induce continuation of payments by plaintiffs for their own
benefit. In Peoria Union, the
plaintiff purchased a pension plan from defendant Penn Mutual
under which the plaintiff was required to make annual
contributions. The plaintiff alleged that Penn Mutual had made
misrepresentations in connection with the original purchase of
the plan and in yearly deposit fund summaries. The court
rejected Penn Mutual's statute of limitations defense, finding
that the misleading statements and omissions in the annual
summaries prevented the plaintiff from becoming aware of the
fraud and therefore tolled the statute of limitations. The
court then stated:
These "lulling activities" would be actionable as part of the
original sale of the group deposit administration's annuity
even if that sale had otherwise been complete in 1971, see SEC
v. Holschuh, 694 F.2d 130, 143-44 (7th Cir. 1982), but in fact
the contract called for periodic contributions and was
therefore a continuing contract. To keep these contributions
coming through fraud was fraud in connection with the
continuing sale of a security.
698 F.2d at 326.
Although the above-quoted language is dicta, it indicates that
lulling activities which induce the continuation of installment
payments is primary fraud actionable under the securities acts.
As noted above, the same defendant in Peoria Union who
perpetrated the original fraud through the "sale" of the
annuity also performed the lulling activities. However, this
distinction does not affect the conclusion that, under the
language quoted above and basic principles of fairness, the
defendants could be held primarily liable for fraud resulting
from their own knowledge and actions after they acquired
control of GWU. If the defendants' acts after they assumed
control of GWU constitute fraud from which they profited, and
as a result of this fraud, the plaintiffs were directly injured
by being induced to continue payments on the land contracts,
the defendants' acts would be the proximate cause of the
plaintiffs' injuries. Defendants could then fairly be held
liable for these acts. The court therefore concludes that,
although the moving defendants cannot be liable by virtue of
the alleged "lulling" activities for the acts of others before
they acquired their respective interests in GWU, they may be
held liable for these lulling activities to the extent they
fraudulently induced continuation of payments by the plaintiffs
after they gained control of GWU.
Since the court has rejected all the bases proffered by
plaintiffs for holding these defendants liable for acts
committed or payments made before they acquired their
respective interests in GWU, summary judgment is appropriate on
plaintiffs' securities claims to the extent they allege
injuries arising before November, 1974 with respect to the
Hunts, and before February, 1978 with respect to HIRCO.
Accordingly, the court hereby grants summary judgment in favor
of the moving defendants on all the claims under the securities
acts of the Kaliskis and Carole Kovich, and on the claims under
the securities acts of the Housers against N.B. Hunt and W.H.
Hunt for payments made prior to November, 1974, and against
HIRCO for payments made prior to February, 1978.
Interstate Land Sales Full Disclosure Act
Defendants also seek summary judgment on all of plaintiffs'
claims under the ILSFDA. The ILSFDA was enacted on October 1,
1968, but did not become effective until April 28, 1969, almost
three months after the last land sales contract entered by any
of the plaintiffs in this case was signed. Defendants contend
that the Act should not be given retroactive effect, and that
it is therefore inapplicable to the plaintiffs' contracts.
Defendants rely on Davis v. Rio Rancho Estates, Inc.,
401 F. Supp. 1045 (S.D.N.Y. 1975). In Davis, the court examined the
ILSFDA and its legislative history, and determined that, since
there is no indication of a legislative intent that the Act
apply retroactively, it should not be given retroactive effect.
The court therefore held the Act inapplicable to a real estate
sales contract entered before the effective date of the act,
even though the
contract called for installment payments for a substantial
period of time later than the effective date of the Act. The
court reasoned that, upon execution of an installment land
contract, equitable title vests immediately in the purchaser,
and the agreement is binding and complete at that time. 401
F. Supp. at 1048. The court therefore refused to apply the Act
despite the fact that continuing payments were required under
the contract after the effective date of the Act.
Defendants assert that, under Davis, since plaintiffs' sales
contracts were executed before the ILSFDA was effective, the
act is inapplicable to their claims. This court concurs in the
reasoning and general conclusion of the Davis court that the
Act was not intended to be given retroactive effect. As
plaintiffs assert, however, a later decision distinguished
Davis on the basis that the plaintiff in Davis did not
allege continuing misrepresentations and omissions after the
effective date of the Act. Husted v. Amrep. Corporation,
429 F. Supp. 298 (S.D.N.Y. 1977). Although the Husted court did
not specifically address the retroactivity issue presently
before this court, its analysis is relevant.
The plaintiffs in Husted sued the sellers of undeveloped land
for, among other things, misrepresentations made to induce
continued payments under the installment land sales contracts.
The court noted that § 1703(a)(2)(B) of the ILSFDA,
15 U.S.C. § 1703(a)(2)(B), makes it unlawful "in selling or leasing . . .
to obtain money or property" by means of misrepresentations on
which the purchaser relies. The court concluded that, in light
of the remedial purpose of the entire ILSFDA, and the common
practice of selling undeveloped land by conditional sales
contracts in which the seller retains a substantial incentive
to induce continued payments, a defendant can be held liable
under § 1703(a)(2)(B) for making misrepresentations to
purchasers to induce continuing payments and additional
purchases. 429 F.2d at 308.
This court agrees that § 1703(a)(2)(B) applies to this type of
misrepresentations made after an installment contract is
entered to induce continued payments under the contract.
Although the act cannot be given retroactive effect to cover
any alleged misrepresentations made to induce plaintiffs in
this case to execute their contracts, to hold defendants liable
for any misrepresentations made by them after the effective
date of the act to induce continuation of payments does not
apply the act retroactively. The plaintiffs' allegations of
misrepresentations made by defendants to induce continued
payments may therefore be actionable under the act. The court
therefore cannot dismiss all of plaintiffs' claims under the
ILSFDA as requested by defendants.
However, nothing in the ILSFDA and no theory espoused by
plaintiffs supports imposition of liability on defendants under
the act for alleged fraud committed by others with whom the
defendants had no connection until after they purchased their
respective interests in GWU. Defendants are therefore entitled
to judgment on plaintiffs' claims under the ILSFDA for all
payments made before November, 1974 with respect to N.B. Hunt
and W.B. Hunt, and for all payments made before February, 1978
with respect to HIRCO.
Since the Kaliskis and Carole Kovich made all payments under
their contracts prior to November, 1974, the moving defendants
are entitled to summary judgment on all of their claims under
the ISFDA. In addition, N.B. Hunt and W.H. Hunt are entitled to
summary judgment for claims of the Housers under the ILSFDA for
payments made prior to November, 1974, and HIRCO is entitled to
summary judgment for all claims of the Housers under the ILSFDA
for all payments made prior to February, 1978.
Accordingly, summary judgment is granted in favor of all moving
defendants on the claims of the Kaliskis and Carole Kovich
under the securities acts and the ILSFDA. Summary judgment is
granted in favor of N.B. Hunt and W.H. Hunt on all
claims of the Housers under the securities acts and the ILSFDA
for payments made prior to November, 1974. Summary judgment is
granted in favor of HIRCO on all claims of the Housers under
the securities acts and the ILSFDA for payments made prior to