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Campen v. Greenamyer

filed: August 5, 1991.

SALLY M. CAMPEN; ANNE V. FINN; CHRISTOPHER JESSEN; WAYNE JETT, ET AL. PLAINTIFFS-APPELLEES,
v.
DARRYL G. GREENAMYER; GREENAMYER ENGINEERING & TECHNOLOGY, INC. DEFENDANTS-THIRD-PARTY-PLAINTIFFS-APPELLANTS V. DEVELOPAK, INC., THIRD-PARTY-DEFENDANT-APPELLEE; SALLY M. CAMPEN; ANNE V. FINN; CHRISTOPHER JESSEN; WAYNE JETT, ET AL. PLAINTIFFS-APPELLEES, AND DEVELOPAK, INC. THIRD-PARTY-DEFENDANT V. EDWIN G. HUBERT DEFENDANT-APPELLANT AND DARRYL G. GREENAMYER; GREENAMYER ENGINEERING & TECHNOLOGY, INC. DEFENDANTS-THIRD-PARTY-PLAINTIFFS



Appeal from the United States District Court for the Central District of California; Dickran M. Tevrizian, District Judge, Presiding; D.C. No. CV-87-3631-DT.

Hug, Canby, and Wiggins, Circuit Judges.

MEMORANDUM

Edwin G. Hubert, Darryl G. Greenamyer and Greenamyer Engineering & Technology ("GE&T") appeal the judgment entered following a jury verdict against them in this Rule 10b-5 securities fraud, common law fraud and negligent misrepresentation case. The jury awarded eleven investor-plaintiffs compensatory and punitive damages totalling $4,015,000. Greenamyer and GE&T also appeal the verdicts awarding damages to Developak Corporation. The appellants argue that the district court erred in denying their motions for JNOV or, in the alternative, for a new trial. Because we agree that the district court erred in admitting certain highly prejudicial evidence against the appellants, we reverse the judgment in favor of the investors and remand for a new trial. We affirm the judgment in favor of Developak.

BACKGROUND

A. Campen et al. v. Hubert, Greenamyer and GE&T

Eleven individual investors in Fin-Tech Limited Partnership brought this suit against Hubert, the attorney who prepared the Private Placement Memorandum ("PPM") and served as Fin-Tech's general partner, Greenamyer, the president and co-owner of Greenamyer Engineering & Technology ("GE&T"), and GE&T, the company with which Fin-Tech contracted to carry out the research and development project for a price of $2.1 million. The suit, alleging violations of Rule 10b-5 and common law fraud and negligent misrepresentation, was based on a subcontract entered into between GE&T and Developak Corporation calling for Developak to perform at least some (the appellees contend all) of the work GE&T originally contracted to do. The appellees allege that this subcontract was negotiated before Fin-Tech was fully-subscribed, that its existence was a material fact that the appellants had a duty to disclose, and that because of this nondisclosure, the appellants earned an illicit profit of nearly one million dollars.

The jury returned a general verdict in favor of the plaintiffs, and awarded compensatory damages totalling $765,500, and punitive damages against Hubert in the amount of $750,000, against Greenamyer in the amount of $1,500,000, and against GE&T in the amount of $1,000,000. The district court denied motions by each appellant for JNOV and, in the alternative, for a new trial. We review the denial of a motion for a new trial for an abuse of discretion. Hard v. Burlington Northern R.R., 812 F.2d 482, 483 (9th Cir. 1987).

1. PRIOR BAD ACT EVIDENCE

At trial, the district court admitted, over the appellants' objections, Exhibits 57 and 58, which were the Findings of Fact and Conclusions of Law and the Judgment in an adversarial bankruptcy proceeding called In re Mediscan Research, Inc. Paragraph 9 of Exhibit 57 was blown up, shown to the jury, and read by one of the plaintiffs; it states in part:

The failure to disclose these material facts is a violation of Section 12(2) . . . and Section 10(b) . . ., and makes the [note] hereafter unenforceable and void based on the violations of federal securities law and the fraud and concealment by American Principals, Mr. Hubert, Mr. Greenamyer and GE&T.

By way of limiting instruction, the judge read Federal Rule of Evidence 404(b) to the jury, and stated that "Exhibits 57 and 58 are admitted for limited purpose only." RT 5-19-89 at 57-58. We review the admission of evidence under Rule 404(b) for an abuse of discretion. United States v. Brown, 880 F.2d 1012, 1014 (9th Cir. 1989).

In order for evidence to be admissible under this Rule, the judge must determine both that it is relevant to a material, non-character issue, Huddleston v. United States, 485 U.S. 681, 686 (1988), and that, under Rule 403, its probative value is not substantially outweighed by its prejudicial effect. Id. at 691; United States v. Marsh, 894 F.2d 1035, 1038 (9th Cir. 1989), cert. denied, 110 S. Ct. 1143 (1990). While the judge did not perform the requisite balancing test on the record, our own review of the trial transcript persuades us that the prejudicial value of this evidence so far outweighs its probative value that it was an abuse of discretion to admit it.

First, Greenamyer and Hubert were not even parties to the Mediscan proceeding. As far as we can tell, the "factual finding" indicating that they were guilty of securities fraud was a gratuitous recital that had nothing to do with the outcome of that dispute. Moreover, there was absolutely no evidence introduced in the Fin-Tech trial to prove or even to hint that the prior fraud actually occurred, or that Hubert and Greenamyer were in any way involved in it. See Huddleston, 485 U.S. at 689 ("similar act evidence is relevant only if the jury can reasonably conclude that the act occurred and that the defendant was the actor"). Combined with the inflammatory manner in which the appellees' counsel used the evidence, and the lack of a meaningful limiting instruction, we have no trouble concluding that its admission was an abuse of discretion. And because we cannot say with confidence that it is more probable than not that the error did not affect the verdict, this error was not harmless. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986). Accordingly, the district court abused its discretion by denying the motions for a new trial; the judgments in favor of the investor-appellees must be reversed, and the matter remanded for a new trial.

The appellants raise numerous other issues on appeal. While we do not base our decision to reverse the judgments on these other issues, we will discuss those that may be ...


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