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January 7, 1992

FRANK M. OCKERMAN, individually and on behalf of all others similarly situated,
MAY ZIMA & CO., et al.

The opinion of the court was delivered by: JOHN T. NIXON


 Pending before the Court in the above styled action is defendant May Zima & Co.'s (May Zima) motion for summary judgment on the issues of plaintiffs' fraud created the market theory, plaintiffs' aiding and abetting and conspiracy theories as applied to May Zima, and the statute of limitations issue.


 After substantial discovery, the facts pertinent to the resolution of the issues today viewed in a light most favorable to the non-movant plaintiffs are as follows.

 This securities fraud class action arises out of the issuance of $ 5,500,000.00 City of Bowling Green, Kentucky, First Mortgage Revenue Bonds, Series 1983, on August 4, 1983, the proceeds of which were intended to acquire, construct and equip a retirement village *fn1" in Bowling Green Kentucky. From the proceeds of the bonds, the promoters succeeded in substantially building and furnishing the project. Soon thereafter, however, the project failed. The retirement center never opened for business and never received one deposit. The indenture trustee declared the project in default in July of 1985, and the partnership that owned the project filed for bankruptcy on August 30, 1985. In January of 1989, the project was sold for $ 1,350,000.00. As of this date the bondholders have recouped only $ 485,382.11 of their original $ 5,500,000.00.

 Defendant May Zima was the feasibility consultant for the project. It prepared the Financial Feasibility Study in which it concluded that the data and assumptions upon which the success of the project was predicated were reasonable and that the project would most likely succeed. Prior to the Bowling Green project, May Zima had provided several health care facilities with auditing, accounting, management consulting and feasibility study services. From the deposition testimony, however, it appears that many of the May Zima employees who worked on the project had little or no experience with retirement facilities and the employees who had such experience provided little input into the Bowling Green feasibility study. May Zima's handling of the Bowling Green feasibility study also lacked proper oversight or direction.

 The two chief promoters of the Bowling Green project were Thomas Hunter and Bryson Hill. Hunter had worked as a health educator for the Tennessee Department of Public Health, for the Metro Health Department, for the Middle Tennessee Health Planning Agency,and as a consultant for hospitals and nursing homes. Hill had been president and part owner of Hill Guthrie Properties which owned and managed twenty nursing homes in Alabama, Georgia, South Carolina and Florida. Hunter and Hill were also collaborators in the development of two retirement centers begun shortly before the Bowling Green project in the towns Hendersonville and Jackson, Tennessee.

 The Hendersonville and Jackson projects were substantially identical to the initial plans for the Bowling Green project. At the time of the Bowling Green offering, the Hendersonville and Jackson projects were in trouble. Though these projects were not scheduled to open until after the Bowling Green offering, construction delays and marketing failures plagued the projects even at this stage. For instance, several of the consultants on the projects had indicated to the promoters that pre-opening marketing would be key to their success. The Hendersonville project had only received two deposits as of the day before the Bowling Green opening. The defendants failed to disclose any of the related projects' problems to the Bowling Green investors.

 In the literature surrounding the Bowling Green offering, Hill was presented as the "money man" in the deal and his companies First American Management Co. and First American Marketing Co. were to participate as the management and marketing firms for the project. What was not disclosed was Hill's questionable financial status at the time of the offering. Hill had sold the nursing home company for a substantial profit but received from the buyer not cash, but a long term promissory note. Though Hill's assets were substantial, his commitments of working capital and guarantees to other retirement facilities in which he was involved far outstripped his assets and thereby gravely undermined his purported ability to provide working capital and marketing funds for the Bowling Green project. In 1984, only a year after the bond offering, Hill filed for bankruptcy.

 Other shortcomings of the plans for the Bowling Green project included the occupancy projections and the rental rates. As the plans for the project developed, the promoters continued to raise both based upon the funds necessary to cover the project's debt service rather than the economic circumstances. The promoters and May Zima raised the projected occupancy in the first year from sixty-six percent to seventy percent despite the fact that the Jackson and Hendersonville projects had failed to attract pre-opening subscriptions. The promoters made this projection notwithstanding the fact that May Zima was unable to cite a retirement facility that had reached seventy percent occupancy in its first year. The monthly rental rates, as originally planned by Hunter and Hill, were to be $ 580 for a studio, $ 630 for a studio deluxe, and $ 790 for a two bedroom. According to May Zima's research and fieldwork, less than two percent of all apartments in the Bowling Green area charged more than $ 300 per month and the high rental rates were going to be the greatest obstacle in marketing the facility. Nevertheless, in order to meet the financing demands, the promoters raised the monthly rental rates as disclosed in the final offering circular to $ 800 per person for a four person semi-private room, $ 850 for an efficiency, $ 900 for a one bedroom, and $ 975 for a two bedroom. The offering circular indicated that apartments could provide competition for the retirement village units, but failed to disclose the vast difference in rental rates between apartments and the units at the Bowling Green project. Prospective residents at the Hendersonville project complained of the high rental rates at that facility prior to the Bowling Green bond offering. In addition, financing demands caused the promoters, contrary to their wishes, to charge entry fees at all three facilities even before the rent payments began. Even with these glaring obstacles to marketing, the promoters proceeded with the Bowling Green project.

 Other obstacles to marketing consisted of the deficient amenities and services that the prospective residents of the Bowling Green facility would receive for their high rental rates. The offering circular boasted that the facility would provide, in addition to living quarters, a central dining room, kitchen, laundry, exercise room, whirlpool, swimming pool with dressing rooms, a library, and a day room. At additional cost, three meals a day were available, with special meals and dietary programs, as well as weekly housekeeping, commercial laundry services, and transportation to churches, shopping, local doctors' offices, clinics and community recreational facilities. Also, a twenty-four hour emergency call system from all bedrooms and baths monitored by a staff person was available. This description of the Bowling Green facility as it appeared in the offering circular on its face, however, gave a roseate picture of the services and amenities that were actually to be provided.

 The rooms sizes were to be as follows: 630 square feet for four people in the semi-private units, 380 square feet for the efficiencies, 529 square feet for the one bedrooms, and 698 square feet for two bedrooms. The consultants on the project knew that these sizes resembled a nursing home and were too small for a retirement village. Similar to the occupancy projections and rental rates, the building's inadequateness stemmed from financing concerns. In deposition testimony, the architect of the Bowling Green facility indicated that the promoters gave him a budget within which he was to design the retirement village instead of asking him what the necessary funding would be to build a proper facility.

 Differences between the law in Kentucky, the site of the Bowling Green project, and the law in Tennessee, the site of the Hendersonville and Jackson projects, caused the promoters to curtail the Bowling Green facility's nursing service. Originally, the promoters desired to provide the facility's residents with a nurse on location. Kentucky law, however, unlike Tennessee law, permits nurses on location only at facilities that obtain a certificate of need. The Bowling Green project had not. In the offering circular, May Zima and the promoters omitted the fact that they cut out the nursing service shortly before the bond offering. Such a service was important to the viability of a facility that was to charge monthly rental rates in excess of $ 800 in an area where rental rates rarely exceeded $ 300.

 Similarly, although Hunter wished each living unit to have a full kitchen, the bond counsel opined that, if the units had kitchens, the bonds would not qualify for tax-exempt status under the Internal Revenue Code. Therefore, the final plans for the project provided only two hot-plate burners and an under the counter refrigerator in only some of the units. Again, the promoters comprised marketability for compliance with the applicable law without reassessing the overall feasibility of the project.

 Further, the promoters purchased more land than was necessary for the Bowling Green project. Although the Hendersonville and Jackson projects had been built upon approximately seven or eight acres, the Bowling Green project bought nineteen acres. The promoters intended that condominiums or independent living units be built upon the excess land in the future, but did not disclose this to the investors.

 Plaintiff Ockerman filed this action on October 15, 1985 alleging, among other things, that the defendants conduct surrounding the sale of the Bowling Green bonds was in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.


 In light of the facts viewed most favorably toward plaintiffs, as described above, defendant May Zima contends that it is entitled to summary judgment on the issues of plaintiffs' fraud created the market theory, plaintiffs' aiding and abetting and conspiracy theories as applied to May Zima, and the issue of the statute of limitations. Plaintiffs argue that material issues of fact exist with respect to each of these issues.

 A. Summary Judgment Standard

 Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment may be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c).

 In Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986), the Supreme Court explained a district court's function in ruling upon a motion for summary judgment:

By it's very terms, [the Rule 56(c)] standard provides that the mere existence of some alleged actual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.
As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted. . . .
More important for present purposes, summary judgment will not lie if the dispute about a material fact is "genuine," that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. 477 U.S. at 247-8, 106 S. Ct. at 2510. (emphasis in original) (citations omitted).

 It is likewise true that "in ruling on a motion for summary judgment, the court must construe the evidence in its most favorable light in favor of party the opposing the motion and against the movant. Further, the papers supporting the movant are closely scrutinized, whereas the opponent's are indulgently treated. It has been stated that: 'The purpose of the hearing on the motion for such a judgment is not to resolve factual issues. It is to determine whether there is any genuine issue of ...

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