The opinion
IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE FILED
March 31, 2000
Cecil Crowson, Jr.
Appellate Court Clerk
JOHN CONSTANTINE, III, et al, ) No. E1999-01575-COA-R3-CV
)
Plaintiffs/Appellants, )
)
v. ) Appeal As Of Right From
) HAMILTON COUNTY
MILLER INDUSTRIES, INC., et al, ) CHANCERY COURT
)
Defendants/Appellees. ) W. FRANK BROWN, III, CHANCELLOR
Ward Crutchfield and J.William Pope, Chattanooga, Tennessee, William S. Lerach, Jan M.
Adler, William S. Dato, and Randall J. Baron, San Diego, California, George Barrett and
Douglas Johnston, Nashville, Tennessee, Gordon Ball, Knoxville, Tennessee, and H.Sullivan
Bunch, Signal Mountain, Tennessee for the Appellants, John Constantine, III, Harvey Frank, and
Thomas J. Johnson.
John C. Harrison, Chattanooga, Tennessee, Oscar N. Persons, Rebecca M. Lamberth, and John
H. Goselin, II, Atlanta, Georgia for the Appellees, Miller Industries, Inc., William G. Miller, and
Adam L. Dunayer.
AFFIRMED SWINEY, J.
OPINION
This is an appeal of the dismissal of a securities fraud suit seeking class action
certification against Defendants Miller Industries, Inc. (“Miller Industries”), William G. Miller
(“Miller”), and Adam L. Dunayer (“Dunayer”). Plaintiffs, individuals who purchased stock in Miller
Industries, sought relief for alleged misrepresentations made by Defendants in the course of a public
stock offering. Although unable to show common law reliance on the statements asserted as the
basis for their damages, Plaintiffs argued to the Trial Court that reliance is not required to state a
cause of action under T.C.A. § 48-2-122(c), the statute which establishes a private cause of action
for violation of T.C.A. § 48-2-121, the securities fraud statute. Citing a previous decision of this
Court construing the predecessor statute requiring plaintiffs to show common law reliance for a
private cause of action for securities fraud, the Trial Court dismissed the suit for failure to state a
claim for which relief could be granted. On appeal, Plaintiffs asserted, among other things, error by
the Trial Court in requiring reliance for a private cause of action under T.C.A. § 48-2-121 and § 48-
2-122(c), and argue in the alternative that Tennessee should adopt the federal “fraud on the market”
theory, which does not require direct reliance to maintain a cause of action for certain securities law
claims. For the reasons set forth below, we affirm the Trial Court’s dismissal of Plaintiffs’ cause
of action.
BACKGROUND
Defendant Miller Industries, a Tennessee corporation with its principal place of
business in Ooltewah, Tennessee, was formed in 1990 through the consolidation of two towing
equipment manufacturers, Holmes International and Challenger Wrecker. Defendant Miller was
named in Plaintiffs’ suit as the Chairman and CEO of Miller Industries. Defendant Dunayer was
initially an outside accountant for Miller Industries, and became Vice President, Treasurer, and CFO
of Miller Industries in 1996. Plaintiffs, who purchased stock in Miller Industries between December
12, 1996 and September 5, 1997, brought suit alleging violation of the Tennessee Securities Act of
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1980, seeking class action certification for persons who acquired common stock in Miller Industries
between October 15, 1996 and September 11, 1997.
This suit was originally brought by Plaintiff John Constantine III on October 2, 1997,
seeking class action certification. On December 22, 1997, an Amended Complaint was filed, adding
Plaintiffs Harvey Frank and Thomas J. Johnson, and substituting typographical corrections for
certain wording in the original Complaint. On January 2, 1998, Defendants filed a Motion to
Dismiss the First Amended Complaint, asserting that Plaintiffs failed to state a claim upon which
relief can be granted under T.R.C.P. Rule 12.02, with an alternative Motion to stay proceedings
pending resolution of a companion case then pending in the Federal District Court in Georgia. On
May 11, 1998, Chancellor R. Vann Owens granted Defendants’ Motion to Dismiss in a detailed,
articulate fourteen-page Memorandum Opinion and Order, holding that Plaintiffs failed to allege
fraud with sufficient particularity under T.R.C.P. Rule 9.02, and denied Plaintiffs’ claims for relief
under the federal securities law “fraud on the market” theory. On September 28, 1998, Plaintiffs
filed their Second Amended Complaint by leave of Chancellor Owens under T.R.C.P. Rule 15.01,
asserting claims under the Tennessee Securities Act of 1980. Plaintiffs alleged that statements made
in conjunction with a public offering of common stock, in SEC filings and related materials, created
a cause of action under T.C.A. § 48-2-122(c), the statute which establishes a private cause of action
for violation of T.C.A. § 48-2-121, the securities fraud statute. Plaintiffs also sought in the Second
Amended Complaint to add Bear, Stearns & Company, Inc. as an additional party defendant, which
the Trial Court denied.
Defendants filed their second Motion to Dismiss on November 9, 1998, again
asserting that Plaintiffs failed to plead fraud with particularity under T.R.C.P. Rule 9.02 and failed
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to state a claim for which relief could be granted under T.R.C.P. Rule 12.02. Defendants argued in
their Memorandum of Law in support of the Motion to Dismiss that Plaintiffs “fraud on the market”
theory was inapplicable to the Tennessee Securities Act of 1980, that Plaintiffs failed to allege the
requisite scienter under common law fraud on the part of Defendants, and that Plaintiffs failed to
aver fraudulent acts on the part of Defendants with sufficient particularity. After additional briefs
were filed and argument of counsel for the parties was heard, the Trial Court, with Chancellor W.
Frank Brown III presiding, dismissed the suit by Memorandum Opinion and Order filed March 11,
1999. After examining and applying relevant case law, the Trial Court found that Plaintiffs failed
to allege fraud with sufficient particularity, failed to establish the common law fraud elements of
reliance and scienter, and found that Tennessee has not adopted the federal securities law “fraud on
the market” theory through either legislative enactment or case law. In declining to adopt the “fraud
on the market” theory, the Trial Court noted that Dismissal of this suit does not mean that Plaintiffs
are left without a potential remedy.
In equity, there is no wrong without a remedy. But here, if there is a wrong, there is
not only a remedy but another lawsuit involving Miller Industries, Inc. There is a
class action pending in the United States District Court in Georgia wherein this same
theory is being argued. This trial court does not believe that it should be the one to
make such a distinct change in Tennessee law by the adoption of a fraud-on-the-
market theory as a substitute for reliance. Such a change should be made by the
Supreme Court of Tennessee or the Court of Appeals if our Legislature does not
make the change.
It is from this Order of the Trial Court dismissing the cause of action with prejudice that Plaintiffs
have appealed.
DISCUSSION
Plaintiffs have posed two issues for review in the form of four questions:
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1. a. In addition to alleging that the price paid for a security was affected by the
defendants’ false or misleading statements, does the express private right of action
created by T.C.A. § 48-2-122(c) require that the plaintiff plead actual reliance on the
misstatements?
b. If actual reliance is required, is reliance presumed under the “fraud on the market”
theory if the plaintiff alleges that the defendants’ material misstatements were
communicated to the market and affected the market price paid by plaintiff?
2. a. To state a cause of action under T.C.A. § 48-2-122, is a plaintiff required to
allege that defendants made knowingly false or misleading statements despite the
express statutory requirement that defendants prove they “did not know, and in the
exercise of reasonable care could not have known” that their statements were false
or misleading?
b. If allegations of knowing falsity are required, must facts supporting defendant’s
knowledge be pleaded with particularity despite the statement in Tenn. R. Civ. P.
9.02 that “knowledge . . . may be averred generally”?
Defendants argue that Plaintiffs have misstated the issues for review, and assert that the proper issues
center upon whether Plaintiffs’ Second Amended Complaint fails to state a claim upon which relief
can be granted. After extensive review of the record of the Trial Court, the parties’ briefs, oral
arguments, and supporting materials submitted on appeal by the parties, the dispositive issue at the
core of this appeal is whether reliance by Plaintiffs upon the alleged acts or conduct attributed to
Defendants as being violative of T.C.A. § 48-2-121 is required for a suit brought pursuant to T.C.A.
§ 48-2-122(c).
The issues on review pose questions of statutory construction, which are subject to
de novo review.
Construction of a statute is a question of law which we review de novo, with no
presumption of correctness. The role of the Court in construing statutes is to ascertain
and give effect to legislative intent. Legislative intent is to be ascertained whenever
possible from the natural and ordinary meaning of the language used, without forced
or subtle construction that would limit or extend the meaning of the language.
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Myint v. Allstate Ins. Co., 970 S.W.2d 920, 924 (Tenn. 1998).
The statutes at issue were originally adopted as part of the Tennessee Securities Act
of 1980. T.C.A.§ 48-2-121 creates the cause of action for security fraud or misrepresentation.
(a) It is unlawful for any person, in connection with the offer, sale or purchase of any
security in this state, directly or indirectly, to:
(1) Employ any device, scheme, or artifice to defraud;
(2) Make any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in the light of the circumstances
under which they are made, not misleading; or
(3) Engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person.
****
(c) It is unlawful for any person to make or cause to be made, in any document filed
with the commissioner or in any proceeding under this part, any untrue statement of
a material fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they are made, not
misleading.
T.C.A. § 48-2-121.
The private right of action asserted by Plaintiffs is created by T.C.A. § 48-2-122(c).
Any person who willfully engages in any act or conduct which violates § 48-2-121
shall be liable to any other person (not knowing that any such conduct constituted a
violation of § 48-2-121) who purchases or sells any security at a price which was
affected by the act or conduct for the damages sustained as a result of such act or
conduct unless the person sued shall prove that the person sued acted in good faith
and did not know, and in the exercise of reasonable care could not have known, that
such act or conduct violated § 48-2-121.
T.C.A. § 48-2-122(c)(1).
T.C.A. § 48-2-122(c) does not create a new and independent cause of action, but
instead merely establishes standing to bring a private cause of action for violation of T.C.A. §
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48-2-121. Without a violation of T.C.A. § 48-2-121, there is no cause of action to be brought under
T.C.A. § 48-2-122(c). The ten-page Memorandum Opinion and Order of the Trial Court addressing
the Motion to Dismiss Plaintiffs’ Second Amended Complaint is particularly thorough and erudite
in addressing the issues argued by Plaintiffs as forming their foundation for reversal on appeal. The
Trial Court found that Plaintiffs failed to state a claim under which relief could be granted for failing
to aver reliance upon the representations of Defendants, in that common law reliance is required to
bring a civil cause of action under T.C.A. § 48-2-122 for violation of T.C.A.§ 48-2-121. To support
this finding, the Trial Court cites Diversified Equities, Inc. v. Warren, 567 S.W. 2d 171 (Tenn. Ct.
App. 1976), overruled on other grounds by V.L. Nicholson Co. v. Transcon Inv. & Fin. Ltd., Inc.,
595 S.W.2d 474 (Tenn. 1980).
This Court in Diversified Equities examined T.C.A. § 48-1644, the predecessor
statute to T.C.A. §§ 48-2-121 and 48-2-122. Drawing analogy to federal securities law, this Court
held that common law reliance must be proved to maintain a civil cause of action under that statute.
In plaintiffs' first assignment of error, they contend that . . . common law reliance is
not an element of a fraudulent practice under T.C.A. § 48-1644. We have found no reported cases constru
The language of T.C.A. § 48-1644 is similar to the language of Rule 10b-5,
promulgated by the S.E.C. under s 10(b) of the Securities and Exchange Act of 1934.
We have reviewed the federal case law interpreting Rule 10b-5 and conclude that
when a material misrepresentation is made, reliance upon that misrepresentation must
be proven to recover under Rule 10b-5. Reliance is established when one proves that
the misrepresentation is a substantial factor in determining the plaintiff's course of
conduct.
The substantial factor test adopted by the federal courts is the same reliance test used
in the common law misrepresentation action.
Diversified Equities, 567 S.W.2d at 174.
Plaintiffs attempt to find a path around this Court’s holding in Diversified Equities
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by relying upon State v. Brewer, 932 S.W. 2d 1 (Tenn. Crim. App. 1996). This reliance is
misplaced. The burdens are different for a private cause of action using T.C.A. § 48-2-122, and for
a criminal enforcement action under T.C.A. §§ 48-2-121 by law enforcement authorities.
Cases from other jurisdictions have uniformly illustrated that the requirements of
proof in private actions and criminal cases are not identical. For example, in Kramas
v. Security Gas & Oil, Inc., which involved a private action concerning violations of
federal securities laws, the United States Court of Appeals for the Ninth Circuit
stated: "Prosecutions and enforcement actions involve interests and procedures
different from those involved in private damage suits. The Government is not
'required to prove that anyone was defrauded or that any investor sustained loss,' ...
but such proof is essential to recovery by a private investor."
State v. Brewer, 932 S.W.2d at 16-17 (emphasis added).
As noted by the Trial Court, we are cited to, and find from our own research, no other
cases construing the revised version of the statutes at issue. However, the language of the Tennessee
Securities Act of 1980 continues to closely follow federal securities law Rule 10b-5. See Ockerman
v. May Zima & Co., 27 F.3d 1151, 1155 (6th Cir. 1994). Therefore, the analysis and holding in
Diversified Equities remains valid. Reliance must be established by the plaintiff to maintain a Rule
10b-5 action under federal law. Ockerman, 27 F. 3d at 1158. Had the Tennessee Legislature chosen
to do so, reliance could have been addressed in the enactment of the Tennessee Securities Act of
1980, or in the subsequent revisions to the statutes at issue. The holding in Diversified Investments
that common law reliance is a requirement to bringing a private cause of action for securities fraud
or misrepresentation had been the law in Tennessee for four years at the time of the enactment of the
1980 Act. “[T]he Legislature is presumed to have knowledge of its prior enactments and to know
the state of the law at the time it passes legislation.” Wilson v. Johnson County, 879 S.W.2d 807, 810
(Tenn. 1994).
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A few days before oral argument, Plaintiffs submitted a copy of Wakefield v. Crawley,
6 S.W. 3d 442 (Tenn. 1999), with a letter declaring that the case is relevant to the issues on appeal
as to the “revised interpretation of a statute following a legislative amendment . . ..” However, our
reading of the Wakefield opinion does not support Plaintiffs’ position that reliance is no longer a
requirement to bringing a private cause of action under T.C.A. § 48-2-122 for a violation of T.C.A.
§ 48-2-121. In Wakefield the Supreme Court noted the language contained in the Official Comments
to the UCC, and discussed the appropriate context for looking to the Official Comments to a
statutory enactment in determining legislative intent in the enactment. “While not controlling
authority, the Official Comments to the UCC provide guidance in construing statutory language and
offer assistance in discerning the intent of the legislature in adopting the statutory scheme.”
Wakefield, 6 S.W.3d at 447. The Wakefield decision is not on point with the issues on appeal for
multiple reasons, with the most obvious reason being there are no official comments to the statutes
at issue. Additionally, the citations and discussion in Wakefield are quite specific to the UCC, and
do not readily apply in a more general fashion outside the scope of the issues addressed by the
Supreme Court. Also, the Official Comments quoted in Wakefield are exceedingly specific to the
issue of legislative intent.
In enacting the 1995 amendments, the General Assembly stated that
[t]he provisions of this act are intended to be a clarification of existing law
with respect to the definition of a ‘security’ under Article 8 of the Tennessee
Uniform Commercial Code, particularly in the context of perfection of a
security interest in stock or other investment instruments by possession of the
instrument. The intent is to remove any uncertainty created by language of
the Tennessee Supreme Court in the case Blasingame v. American Materials,
Inc., 654 S.W.2d 659 (Tenn. 1983).
The General Assembly apparently sought to put an end to the “uncertainty” created
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by the Blasingame decision by expressly including the stock of closely-held
corporations in the definition of a security.
Wakefield, 6 S.W.3d at 448.
Rather than supporting Plaintiffs’ argument, the Wakefield opinion serves to corroborate the
previously-discussed appellate rule that the legislature is presumed to have had knowledge of the
statutory enactments prior to the Tennessee Securities Act of 1980, and to have known the state of
the law as to this Court’s holding in Diversified Investments that common law reliance is a
prerequisite to bringing a private cause of action under the prior statute. See Wilson, 879 S.W.2d 810.
This observation provides additional support for our holding that actual reliance continues to be a
requirement for maintaining a private cause of action under T.C.A. § 48-2-122(c) for a violation of
T.C.A. § 48-2-121, and that the Legislature has declined to adopt a “fraud on the market” theory in
the enactment of and subsequent revisions to the Tennessee Securities Act of 1980. The creation
of a new cause of action as requested by Plaintiffs, “fraud on the market,” is a step best left to the
Legislature or Tennessee Supreme Court rather than with this Court.
The Trial Court, in both Orders dismissing Plaintiffs’ Complaints below, found the
Plaintiffs failed to plead actual reliance by Plaintiffs on the representations of Defendants. We find
no error in this finding by the Trial Court. Therefore, our holding that common law reliance by
Plaintiffs remains a prerequisite to bringing a private cause of action under T.C.A. § 48-2-122(c) for
a violation of T.C.A. § 48-2-121 is dispostive of this appeal. We affirm the Order of the Trial Court
on appeal dismissing this suit with prejudice. The questions posed by Plaintiffs relating to the issue
of scienter under T.C.A. § 48-2-122 are therefore rendered moot, and not addressed in this Opinion.
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CONCLUSION
The Judgment of the Trial Court is affirmed, and this matter remanded for further
proceedings, if any, as may be required, consistent with this Opinion, and for collection of the costs
below. Costs of this appeal are taxed to the Appellants, John Constantine, III, Harvey Frank, and
Thomas J. Johnson.
__________________________________________
D. MICHAEL SWINEY, J.
CONCUR:
___________________________________
HERSCHEL P. FRANKS, J.
___________________________________
CHARLES D. SUSANO, JR., J.
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