Opposition Brief — Murphey Favre, Inc. v. Lynn

No. 95-995

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

MURPHEY FAVRE, INC.,

WASHINGTON MUTUAL SAVINGS BANK,

GREGORY ONDRAK, JAMES ROYAN and

DOUGLAS SPRINGER,

Petitioners,

v.

PAUL M. LYNN, on behalf of himself and

all similarly situated person, and THE DISTRICT

COURT OF THE FOURTH JUDICIAL DISTRICT OF

THE SATE OF MONTANA, IN AND FOR THE

COUNTY OF MISSOULA, THE HONORABLE

JOHN S. HENSON, PRESIDING JUDGE,

Respondents

ON PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF THE STATE OF MONTANA

BRIEF IN OPPOSITION

DONALD V. SNAVELY CHRIS R. YOUTZ

SNAVELY LAW FIRM SIRIANNI & YOUTZ

210 North Higgins Avenue 1700 Westlake Center

Suite 234 1601 Fifth Avenue

Missoula, Montana 59802 Seattle, Washington98 101

(406) 721-8899 (206) 223-0303

Attorneys for Paul M. Lynn

(1)

QUESTIONS PRESENTED FOR REVIEW

Respondent PAUL M. LYNN ("Respondent")

respectfully submits that the questions presented for

review, as phrased by Petitioners, are inaccurate. The

correct questions for review are:

1. Is a state court's determination in a class

action that it has personal jurisdiction over nonresident

absent class members binding upon the resident state court

of those absent class members where they did not

participate, either personally or through an authorized

representative, in the proceedings in the nonresident state

court?

Zz May absent, nonresident class members

collaterally attack the jurisdiction of a distant forum over

them in the courts of their state of residence where they

did not participate, either personally or through an

authorized representative, in the proceedings in the

nonresident forum?

VI.

(11)

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW i

TABLE OF CONTENTS ii

TABLE OF AUTHORITIES iil

STATEMENT OF CASE |

SUMMARY OF ARGUMENT 11

ARGUMENT

A. The Montana Courts Did Not Rule

Upon Any Jurisdictional Issues 14

B. The Absent Montana Class Members

Are Not Attacking Jurisdiction Of

The Washington Court Twice 21

C. The Jurisdictional Issues May Become

Moot As A Result Of Further

Proceedings In The State Courts 23

D. Petitioners Will Not Suffer Any

Prejudice As A Result Of Defending

This Case Through Final Judgment 25

CONCLUSION 27

(iii)

TABLE OF AUTHORITIES

Page

Cases:

Coopers & Lybrand v. Livesay, 437 U.S. 463 (1978) 15

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975) 16-20

Durfee v. Duke, 375 U.S. 106 (1963) 11, 21, 22, 23, 27

Fisher v. District Court of the 16th Judicial

District of Montana, 424 U.S. 382 (1976) 15, 16

Hansberry v. Lee, 311 U.S. 32 (1940) 4

Hellerstein v. Mr. Steak, Inc., 531 F.2d 470 (10th Cir.

1976), cert. denied, 429 U.S. 823 (1976) 17

Merrion v. Jicarilla Apache Tribe, 455 U.S. 130 (1982) 16

Phillips Petroleum Co. v. Shutts,

472 U.S. 797 (1985) 4, 6, 7, 9, 20, 21, 22

Underwriters Nat. Assurance Co. v. North Carolina

Life Etc. Ins. Guaranty Assn., 455 U.S. 691 (1982) 23

Williamson County Regional Planning Commission

v. Hamilton Bank, 473 U.S. 172 (1985) 25

Statutes:

A. Federal

28 United States Code Section 1257 14

B. Montana

Montana Code Annotated §§ 27-1-220 and 221

Montana Code Annotated $§ 30-10-101 ef seg.

Montana Code Annotated $§ 30-14-101 ef seq.

Montana Code Annotated § 30-14-133

WN — Ww

Rules:

Rule 1(b)(2), Montana Rules of Appellate Civil Procedure 15

]

STATEMENT OF THE CASE

Petitioners have selectively cited the record below,

and ignored important facts from the record, in their

Petition for a Writ of Certiorari dated December 21, 1995

("Petition"). This section will clarify the factual record.

The action ("Montana Action") from which the

Petition arises is a class action suit for securities fraud

brought under the Montana Securities Act (Montana Code

Annotated Sections 30-10-101 ef seg.) and Montana

common law. Petitioners are the stock brokerage firm and

individual brokers who, in 1986 through 1989, marketed

from their offices in Montana corporate bonds

("Homestead Bonds") issued by Homestead Savings, a

federal savings and loan association of Millbrae,

California. Petitioners promoted the Homestead Bonds as

conservative, investment grade securities, suitable for

elderly and fiduciary investors seeking a fixed rate of

return with minimal risk. Washington Mutual Savings

Bank ("Washington Mutual"), the parent corporation of

Murphey Favre, joined in this marketing scheme by

circulating in Montana financial reports which evaluated

the Homestead Bonds as a secure, conservative

investment. (Appendix 201a-202a)!

1. Ali references to the Appendix are to the separate Appendix

submitted with the Petition, except for Item R of the Appendix. Appendix R

is an excerpt of Respondent's brief filed in the Montane trial court in opposition

to Petitioners’ motion to vacate that Court's order requiring notice to be sent to

the Montana investors. Appendix R is attached at the end of this brief. It has

been numbered consecutively (pages 196a-206a) with the pages in the

separate Appendix submitted with the Petition.

2

Numerous Montana clients of Petitioners, including

between 150 and 200 retired persons, trusts, and pension

plans, invested in the Homestead Bonds pursuant to the

recommendation of Petitioners. The bonds payed interest

until the Spring of 1991. After unsuccessful efforts to

reorganize its affairs under the supervision of the Federal

Office of Thrift Supervision, the federal regulators

assumed control over Homestead Savings in October,

1994. The Homestead Bonds became valueless at that

point.

Respondent Lynn, who invested funds from his

1.R.A. account in the Homestead Bonds, filed on February

11, 1993 the Montana Action as a class action on behalf

of all Montana Homestead Bond purchasers. In July,

1993, seventeen additional Montana Homestead Bond

investors joined in the Montana Action as individual

plaintiffs, consenting to their representation by

Respondent on the class action claims, and also asserting

individual damage claims based upon the Montana

Consumer Protection Act (Montana Code Annotated

Sections 30-14-101 ef seq.).’

One month after the Montana Action was filed, a

group of Homestead Bond investors from the State of

Washington filed a similar class action suit ("Washington

Action") in a Washington State Court in Seattle,

2. Montana is a Federal Rules state and allows liberal joinder

of claims. The eighteen individual plaintiffs joined in the Montana Action for

purpose of asserting any individual claims arising out of the Homestead Bond

marketing scheme after the class action claims were resolved. The Montana

Consumer Protection Act claim is such an individual claim.

a =r

EEE

3

Washington. While the two class actions both arose out of

the marketing of Homestead Bonds, the claims raised in

the two suits were not the same.

The Washington Action asserted claims under

Washington law only, while the Montana Action asserted

claims only under Montana law. Important for the present

purposes, Washington law is much less favorable to

defrauded securities purchasers than is Montana law.

Washington does not allow punitive damages in any case,

but Montana does allow punitive damages on common law

fraud claims (Montana Code Annotated Sections 27-1-220

and 221). Noteworthy, there was significant evidence of

fraudulent misconduct (such as alteration of client records

to hide fraudulent activity and admitted misrepresentations

of the market price of the bonds) in the Montana

transactions which would support a punitive damage

award. Further, tne Washington Consumer Protection Act

caps recoverable damages at $10,000 each plaintiff , while

the Montana Consumer Protection Act has no cap and

allows each plaintiff to recover three times her or his

actual damages (Montana Code Annotated Section 30-14-

133). (Appendix 202a-205a)

The Montana investors thus stood to gain far more

in terms of monetary relief in the Montana Action (which

was pending in the state of their residence) as their

investments ran from $10,000 to $100,000 each. The

liability case of the Montana investors under Montana law

was also much stronger than that of the Washington

4

investors under Washington law.’ For these reasons,

joinder of the claims of the Montana investors and

Washington investors in one class action suit presented a

significant problem as to how any settlement proceeds

would be allocated among the various claimants.‘

The two class actions moved through pretrial

proceedings for the first year, with the understanding that

the claims of the Montana investors would be resolved in

the Montana Action and the claims of the Washington

investors would be resolved in the Washington Action. In

the Spring of 1994, settlement negotiations were held in

the Washington Action without notice to or involvement

of Respondent Lynn or his counsel. Those negotiations

resulted in a settlement of the Washington Action, but

upon condition that the Washington class would be

3. It is undisputed that the Washington Court applied

Washington law to determine the rights of the Montana investors. This in itself

was a Violation of this Court's mandate in Phillips Petroleum Co. v. Shutts,

472 U.S. 797, 818-19 (1985) that the substantive law of the state of residence

of the absent class members must normally be applied to determine their rights.

4. Class counsel in the Washington Action refused to recognize

this problem because he was motivated to obtain an attorneys’ fee of $3.6

million from the Washington Action. (Appendix 16a) If separate subclasses

of state investors were created in the Washington Action, independent counsel

would have to be appointed to represent the conflicting interests of these

subclasses with regard to allocation of the settlement proceeds. See Hansberry

v. Lee, 311 U.S. 32 (1940). This would inevitably require allocation of any

attorneys’ fees awarded to the class counsel. This is but another ground upon

which the absent Montana class members could subsequently attack the

jurisdiction of the Washington Court over them before the Montana Court. See

generally, Appendix 197a-201a.

I eineieaaaiaeiaiaaaiinaaiiiel

5

expanded to include all Homestead Bond investors,

including the Montana investors, who were already named

as class members in the Mortana Action.

After reaching this settlement, class counsel in the

Washington Action approached Respondent Lynn,

requesting that the Montana class members be included as

part of the settlement of the Washington Action.

Respondent Lynn agreed to do so if the claims of the

Montana investors were treated separately, by creating

subclasses of Montana and Washington investors, for

purpose of allocating the settlement proceeds among the

class. This would enable the Montana investors to argue

that they were entitled to a larger pro rata portion of the

Washington settlement fund. Washington class counsel

refused to treat the two groups of investors separately, so

non-judicial efforts to include the Montana investors in the

Washington settlement failed. (Appendix 200a)

Washington class counsel then elected to seek court

approval of the Washington settlement, including the

Montana investors as part of the Washington Action.

After learning of this, Respondent Lynn (1) filed a motion

in the Montana Action seeking court approval to send

notice to the Montana investors advising them of their

right to join in the Montana Action as opposed to the

Washington Action, and (2) filed an "opt out" election on

behalf of all Montana investors in the Washington Action

(Appendix 77a-78a)

The Montana Court ruled on Respondent Lynn's

motion to notify the Montana investors on December 5,

6

1994, ten days before the Washington Court considered

the fairness of the settlement of the Washingion Action.

At that time the Montana Court ruled that notice should be

sent to all Montana investors of their option to join in the

Montana Action or to join in the settlement of the

Washington Action.’ (Appendix 135a-137a) Rather than

comply with the Montana Court's order requiring notice to

be sent to the Montana investors, Petitioners moved to

vacate that order and pressed forward to obtain a favorable

ruling from the Washington court on the enforceability of

that settlement against the Montana investors without any

notice to them of their option to join in the Montana

Action. (Appendix 52a)

Petitioners were ultimately successful in the "race

to judgment." Before the Montana Court could rule on

their motion to vacate the order requiring notice to the

Montana investors, Petitioners convinced the Washington

Court to include the Montana investors in the Washington

settlement, without creating subclasses of state investors.

(Appendix 24a) The Washington Court did not, however,

give Petitioners everything they wanted.

The Washington Court first ruled that Respondent

5. Importantly, the notice sent to the class members in the

Washington Action did mot advise the Montana investors of the pendency of the

Montana Action or of their option to join in a similar lawsuit in their home

state. Rather, the notice gave the impression that the only option available to

the Montana investors was to join in the Washington settlement or file an

individual suit on their own behalf. This Court has noted the inefficacy of the

later option to small securities investors. See Phillips Petroleum Co v. Shutts,

472 U.S. 797, 812-13 (1985).

eres ELL

ee

LINGLE EGR) 2

7

Lynn did not have standing to “opt out" the Montana

investors from the Washington settlement, and that he did

not have standing to challenge the jurisdiction of the

Washington Court on behalf of the absent Montana

investors. (Appendix 25a) This ruling was essential to

sustaining jurisdiction over the Montana investors because,

as held by this Court in Phillips Petroleum Co. v. Shutts,

472 U.S. 797, 812 (1985), Due Process requires that

absent class members be allowed the opportunity to "opt

out" of the class action. Because Respondent Lynn had

filed “opt out" requests in the Washington Action on

behalf of all absent Afontana Homestead Bond investors

(Appendix 77a-78a), if he had standing to file those "opt

out" elections, the jurisdictional issue would have been

conclusively resolved against Petitioners at tliat point.

Importantly, this "standing" ruling had the effect of

eliminating the absent Montana investors from any further

participation in the Washington Action, including the

proceedings to determine the jurisdiction of the

Washington Court over them and the proceedings to

determine the fairness of the Washington settlement with

respect to the Montana investors’ claims. When the

Washington Court ruled that Respondent Lynn did not

have "standing" to represent the Montana investors in the

Washington Action, it necessarily followed that

Respondent Lynn did not have authority to take any

further action in the Washington Action on behalf of the

absent Montana investors.°

The Washington Court next considered sua sponte |

whether it had jurisdiction to include the Montana

investors in the Washington Action. (Appendix 25a, 140a-

141a) It ruled that it did have jurisdiction over the

Montana investors who expressly “opted in" the

Washington Action, and that Respondent Lynn and the |

other Montana investors who had joined in the Montana

Action had validly "opted out" of the Washington Action.

Significantly, the Washington Court further ruled that the

question of its jurisdiction over the remaining Montana

investors who had done nothing--that is, had joined neither

the Montana Action nor the Washington Action--would be

determined by another court in which the settlement was

sought to be enforced against them. (Appendix 141a) So

the Washington Court merely ruled that it had personal

jurisdiction over those Montana investors who had

expressly elected to join in the Washington Action.

Petitioners’ then pending motion to vacate the |

Montana Court order requiring notice to be sent to the

Montana investors of their option to join in the Montana |

Action (as opposed to participating in the Washington

settlement) was heard approximately three weeks after the

Washington Court ruled that the Washington settlement

6. Respondent Lynn himself, and the seventeen other

individual Montana investors who had joined in the Montana Action, had

already “opted out” of the Washington Action by valid “opt out" requests.

(Appendix 18a) So it is undisputed that the claims of Respondent Lynn and

these other individuals will be tried in the Montana Action, regardless of any

ruling on the jurisdictional issues involved in this Petition.

9

was enforceable against the Montana investors who had

not "opted out” of that case. In the order in question on the

instant Petition, the Montana Court denied Petitioners’

motion to vacate the order requiring notice to the Montana

investors, certified the Montana Action as a class action,

and again ordered that the Montana investors be notified

of their option to join either in the Montana Action or in

the Washington Action. (Appendix 6a-10a)

The Montana Court was obviously perturbed at the

concerted efforts of Petitioners to prevent the Montana

investors from making an intelligent choice as to which

action they desired to join. The Montana Court, in

denying Petitioners’ motion to vacate the order requiring

notice to the Montana investors, discussed the effect of the

Washington Court's order binding the Montana investors

to the Washington settlement as follows:

"In Phillips Petroleum Co. v. Shutts, (1985) 472

U.S. 797, 811-12, the U.S. Supreme Court

determined that due process requires several

conditions to be satisfied before a distant state

forum may subject non-resident class members to

[a] judgment entered in a class action. A key

provision is that the class members be notified of

their rights. This Court has attempted to ensure

that the Montana purchasers be apprised of the

Montana action, thereby allowing them a choice.

They have not beens otified, through no fault of

Plaintiffs’ counsel, aad this in itself may be

sufficient to invalidate the Washington Court's

exercise of jurisdiction over the Montana bond

10

purchasers. Further, the Court has been witness to

a deluge of documents, which have tended to

obfuscate and delay rather than enlighten and

expedite these proceedings. For these reasons, the

Court feels that notification is still a relevant and

proper procedure." (Appendix 6a-7a) [Emphasis

added]

So the Montana Court did not, as stated by

Petitioners, rule that the Washington Court judgment was

not binding on the Montana investors. Rather, it merely

reaffirmed its prior order, made prior to the Washington

Court's jurisdictional ruling, that the Montana investors

should be first given notice of all options available to them

before deciding in which action they desired to participate.

This was important because, under the Washington

settlement, those Montana investors who did nothing

(neither “opted in" nor "opted out” of the Washington

Action) would be barred from seeking any relief from

Petitioners, yet they would receive no settlement monies

from the Washington settlement. (Appendix 9a, 15a [see

footnote 1)).

11

SUMMARY OF ARGUMENT

This reply will establish that the Petition should be

denied for four reasons.

First, the Montana Courts have not made any

"final" ruling on any jurisdictional or class certification

issue. The Montana Courts have not refused to afford

"full faith and credit" to the Washington judgment. They

have not yet reached that issue. The Montana trial court

has merely required that notice be sent to the Montana

investors so that they can decide whether to remain as part

of the Washington settlement, or to join in the Montana

Action and then subsequently challenge the enforcement

of the Washington judgment against them. The Montana

Supreme Court declined to review that interlocutory order

at this time because Petitioners had an adequate remedy by

appeal from any final judgment entered in the case. This

case is not yet ripe for review by certiorari.

Second, there is no issue in this case, as claimed by

Petitioners, of two jurisdictional attacks by Respondent

Lynn in violation of this Court's holding in Durfee v.

Duke, 275 U.S. 106 (1963). The Washington Court

denied Respondent Lynn "standing" to represent the

Montana investors in the Washington Action. So any

action he took in that case could not bind or affect the

absent Montana investors. Indeed, the Washington Court

itself recognized that it was considering the jurisdictional

issues sua sponte, without participation by any of the

absent Montana investors. The Washington Court even

went so far as to hold that its jurisdiction over absent

12

Montana investors who had not expressly elected to

participate in the Washington Action would have to be

decided by another court on anoiher day. Any subsequent

attack by the absent Montana investors on the Washington

judgment will be the first time that they lave ever had their

day in court on any jurisdictional issue.

Third, the issues presented by the Petition may well

become moot as a result of subsequent proceedings in the

Montana trial court. After the absent Montana investors

receive notice of the Montana Action, they will be

presented with two options. They may elect to remain as

participants in the Washington settlement, in which event

they will be excluded from participation in the Montana

Action. That would moot any jurisdictional issue

presented by the Petition. On the other hand, they might

elect to participate in the Montana Action. If they do so,

then proceedings will be held in the Montana Action to

determine if they are bound by the release of claims in the

Washington judgment. The Montana Court might decide

that they are so bound, in which event the jurisdictional

issue presented by the Petition would again be moot. Only

if the Montana Court decides that the Montana investors

electing to participate in the Montana Action are not

bound by the Washington judgment will there exist the

conflicting jurisdictional determinations which Petitioners

bemoan. This is simply not the time to review

jurisdictional issues which may or may not arise.

Fourth, Petitioners are not presented with the

prospect of defending a duplicitous lawsuit as they claim.

Regardless of this Court's disposition of the Petition, the

13

claims of the eighteen individual Montana investors who

"opted out" of the Washington Action and joined in the

Montana Action will be tried in the Montana Action. At

worst, Petitioners will be faced with the prospect of

additional damages being awarded in the Montana Action

by reason of the inclusion of additional claimants in the

case. Any jurisdictional issues still present after trial can

be easily, and more appropriately, resolved on appeal

from an adverse judgment.’ On the other hand, if this

Court rules upon the jurisdictional issues now, it will do so

without the absent Montana investors ever having their day

in court on those issues. At least for those Montana

investors who received nothing from the Washington

settlement, they would be denied the opportunity to

participate in the benefits of the Montana Action. Yet they

would receive nothing in exchange for the release of their

claims by a distant state court in a lawsuit in which they

were effectively unrepresented.’

For these reasons, the Petition should be denied and

the Montana Action allowed to proceed to a final

resolution of all issues.

yf Indeed, if Respondents and the other individual plaintiffs are

not successful on the merits of their claims against Petitioners, there will be no

adverse judgment against Petitioners. This is yet another reason for

, establishing that the issues presented by the Petition may become moot and that

they are not yet ripe for resolution by this Court.

8. Washington class counsel refused to allow the creation of

subclasses by state investors in the Washington Action, and was thus in a

position of representing class members with conflicting interests. This in itself

rendered his representation of the Montana class members inadequate, requiring

the Washington judgment to be set aside. See footnote 4, supra.

|

14

ARGUMENT

A. The Montana Courts Did Not Rule Upon Any

Jurisdictional Issues

Contrary to Petitioners’ assertion (Petition 11-13),

the Montana Courts did not rule upon any jurisdictional

issues. The Order in question (Appendix 7a) specifically

states that the failure of the plaintiffs in the Washington

Action to notify the Montana investors of their option to

join in the Montana Action may be sufficient to deprive

the Washington Court of jurisdiction over them. It does

not hold that the Washington Court did not have

jurisdiction over the Montana investors.

Further, this Order goes on to merely require that

the Montana investors be given notice of the Montana

Action so that they are afforded the option of deciding in

which case they desire to participate. (Appendix 7a) Only

after the absent Montana class members make this choice

could any jurisdictional issues conceivably be involved in

this case. Until this choice is made, no jurisdictional issue

could be decided by the Montana Courts.

Petitioners seek certiorari under the jurisdiction

granted this Court by 28 U.S.C. § 1257, which provides,

in part: “Final judgments or decrees rendered by the

highest court of a State in which a decision could be had,

may be reviewed by the Supreme Court ...” There is no

"final" judgment here on any issues, let alone on the

jurisdictional issues claimed by Petitioner.

15

In these proceedings, Petitioners seek review of the

trial court’s order certifying a class of Montana purchasers

of Homestead bonds. Because an order certifying a class

is not appealable of right in Montana [Rule 1(b)(2),

Montana Rules of Appellate Civil Procedure] — as is true

in the federal courts — Petitioners sought interlocutory

review through a writ of supervisory control from the

Montana Supreme Court. The Montana Supreme Court,

however, did not address the merits of the class

certification. Instead, the Montana Supreme Court held

that Petitioners failed to show that they would be

sufficiently prejudiced by having the Montana Supreme

Court review the class certification order through the

normal appellate process once a final judgment was

entered in the trial court. (Appendix 2a)

Similarly, it would be inappropriate for this Court

to grant certiorari to review the trial court’s order granting

class certification. As this Court has concluded that

orders denying class certification in the federal system are

not appealable as final orders, it is inappropriate to treat

class certification issues pertaining to state litigation as

final orders subject to Supreme Court review. See

Coopers & Lybrand v. Livesay, 437 U.S. 463 (1978).

The only case cited by Petitioners to support their

claim of jurisdiction is Fisher v. District Court of the

16th Judicial District of Montana, 424 U.S. 382 (1976).

In Fisher, the trial court concluded that it lacked

jurisdiction over an adoption proceeding involving tribal

members living on a reservation. The Montana Supreme

Court considered the merits of that decision and reversed

Ai lala

16

the trial court, holding that Montana courts had

jurisdiction over the adoption proceeding. 424 U.S. at

385. This Court held that the tribal court had exclusive

jurisdiction over the adoption proceedings. 424 U.S. at

389. Because the highest court in the state had finally

decided the federal issue, it was appropriate for this Court

to accept certiorari. Moreover, Fisher involved the

strong federal policy prohibitting state interference with

the exclusive jurisdiction of tribal courts over tribal

members. See Merrion v. Jicarilla Apache Tribe, 455

U.S. 130, 102 S.Ct. 894, 918 (1982).

In the case at hand, however, the highest court of

Montana has not spoken to the merits of the jurisdictional

issues. but will do so later. Moreover, there are no strong

federal policy considerations present here, such as

protecting tribes from interference with their inherent

sovereign authority. Fisher is not apposite to the instant

situation.

This Court has determined that there are four

limited circumstances under 28 U.S.C. § 1257 where this

Court may review decisions by a state’s highest court even

though further proceedings remain in the state system.

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975).

The first category are cases where there are further

proceedings yet to occur, but where for one reason or

another the determination of the federal issue is conclusive

or the outcome of further proceedings preordained. In

these circumstances, because the case is for all practical

purposes concluded, the judgment of the state court on the

17

federal issue is deemed final. Cox, 420 U.S. at 479.

In the present case, a final decision on the claimed

federal issue is neither conclusive nor is the outcome of

further proceedings preordained. Class certification orders

are always subject to change through final judgment. As

one Court has noted:

"{A]n order of a trial court which merely grants a

request that an action proceed as a class action * *

* * is not a final decision. Hellerstein v. Mr.

Steak, Inc., 531 F.2d 470, 472 (10th Cir. 1976),

cert. denied, 429 U.S. 823 (1976).

Further, the jurisdictional issues presented by the

Petitioners have yet to be considered by either Montana

Court. If, after the trial court has finally resolved all class

issues, including whether the absent Montana class

members are bound by the Washington judgment, the

Montana Supreme Court concludes that the Petitioners are

correct, then it can reverse or vacate the portion of

the judgment awarding those investors relief. Thus, the

outcome of further proceedings in the Montana courts is

hardly “preordained.”

The second circumstance under which interlocutory

orders may be deemed final is when “the federal issue,

finally decided by the highest court in the State, will

survive and require a decision regardless of the outcome of

future state court proceedings.” Cox, 420 U.S. at 480. As

discussed above, the federal issues have not been decided

at all by either of the Montana courts, let alone "finally"

a

18

decided. And it is entirely possible that this jurisdictional

issues will become moot as a result of further proceedings

in the trial court. See pages 23-25, infra. In short, the

federal issues may disappear as a result of future

proceedings in the Montana Courts, so this exception is

inapplicable.

The third category includes cases where the federal

claim has been finally decided, with further proceedings

on the merits in the state courts to come, but in which later

review of the federal issue cannot be had, whatever the

ultimate outcome of the case. Cax, 420 U.S. at 481. Here,

Petitioners still have the right to have the class certification

issues — including any related federal jurisdictional issues

— reviewed as a matter of right by the Montana Supreme

Court. Indeed, the Montana trial court might yet rule

favorably to Petitioners on the jurisdictional issues.

Review of the jurisdictional issues on appeal from a final

judgment is not only available here, but is the preferred

course in light of the possibility that further orders may

moot the need for ultimate review of these issues.

The final category permitting review of

interlocutory rulings is for cases where the federal issue

has been finally decided in the state courts, with further

proceedings pending in which the parties seeking review

here might prevail on the merits on non-federal grounds,

but where reversal of the state court on the federal issue

would be preclusive of any further litigation in the state

court. In this circumstance, if a refusal immediately to

review the state court decision might seriously erode

federal policy, this Court has entertained and decided the

a a a a

19

federal issue, which itself has been finally determined by

the state courts for purposes of the state litigation. Cox,

420 U.S. at 482-83.

Once again, however, the Montana State Supreme

Court has not decided the merits of the class certification

issues. Additionally, neither the Montana trial court nor

the Montana Supreme Court has decided the merits of any

of the federal jurisdictional issues. The Montana Supreme

Court has only decided that these issues should be

reviewed on an appeal of right when the trial court enters

its final judgment.

In Cox, this Court noted that the state court’s

judgment in that case was “plainly final on the federal

issue and is not subject to further review in the state

courts.” 420 U.S. at 485. This Court also expressed

concern that, if the petitioners in that case prevailed on

different grounds at the trial court, a published decision of

the Georgia State Supreme Court, holding that a civil

action for publishing the name of a rape victim may

proceed despite the First and Fourteenth Amendments to

the Constitution, would remain unreviewed by this Court

and could “leave the press in Georgia operating in the

shadow of the civil and criminal sanctions of a rule of law

and a statute the constitutionality of which is in serious

doubt ...” 420 U.S. at 486.

In this case there are no similar concerns. Other

than claiming that trying the case as a class action (instead

of simply on behalf of 18 plaintiffs) will raise the

complexity of the case, and suggesting that class actions

i a a icin aaa

20

as a whole are frivolous (a questionable assertion at best),

Petitioners have made no argument that there is a strong

federal policy to be supported by grant of certiorari to

deal with a small portion of this case. There are no

published decisions implicating any federal policies, let

alone those underlying the freedom of press concerns

involved in Cox. There is no final determination of any

federal issue here as was true in Cox.

The procedures followed by this Court in reaching

its decision in Philips Petroleum Co. v. Shutts, supra,

demonstrate the appropriate disposition of this case. In

Shutts, a class was certified in Kansas state court that

included class members from all 50 states. The order

certifying the class raised issues of the state court’s

jurisdiction over non-resident absent class members, and

mandamus was sought from the Kansas Supreme Court to

decertify the class, which was denied. Philips Petroleum

v. Duckworth, No. 82-54608 (Kan. June 28, 1982).

Review was sought of the denial of the mandamus

petition, and this Court denied certiorari. 459 U.S. 1103

(1983). See Shutts, 472 U.S.at 801.

Following a trial on the merits, the Kansas Supreme

Court decided the merits of the class certification issues,

holding that the trial court had jurisdiction over non-

resident absent class members, and that Kansas law should

apply to all claims. 472 U.S. at 803. This Court held on

appeal from this final judgment that, under the facts of that

case, the Kansas court had jurisdiction over the absent

class members, but reversed the holding that Kansas law

was applicable to all of the claims. 472 U.S. at 823. This

21

Court should follow the procedure used in Shutts to

review — if necessary — the class certification issues in

this case which may remain once a finai, appealable

judgment has been entered.

B. The Absent Montana Class Members Are Not

Attacking Jurisdiction of the Washington Court Twice

Petitioners contend that Respondent Lynn is

directly attacking the jurisdiction of the Washington Court

twice, in violation of this Court's ruling in Durfee v. Duke,

375 U.S. 106 (1963). (Petition 13-18) Petitioners’

argument ignores the very rulings made by the Washington

Court under whicn they seek shelter.

The Washington Court specifically ruled that

Respondent Lynn did not have "standing" to represent the

absent Montana class members in the Washington Action.

(Appendix 25a) This case does not involve the rights of

Mr. Lynn to attack the Washington judgment. It is

undisputed that he validly "opted out" of the Washington

Action, and that the Washington Court did not have

jurisdiction over his claims. (Appendix 18a) See Shutts,

472 U.S. at 812. What is at issue is the jurisdiction of the

Washington Court over the absent Montana class

members, who never appeared in the Washington Action

because of the Washington Court's decision denying

standing to Mr. Lynn to represent them.

Durfee involved two attacks, direct and collateral,

against the jurisdiction of the judgment rendering court,

22

both brought by the identical party. Durfee, 375 U.S. at

110. That has not happened here. The absent Montana

class members have never had their day in court to

challenge the jurisdiction of the Washington Court over

them. Indeed, the Washington Court itself recognized this

and held that it would not consider whether it had

jurisdiction over those absent Montana class members who

had neither "opted in" nor "opted out” of the Washington

Action, for “that argument will be for another day."

(Appendix, 141a)

The essential underpining of Durfee, and of the

claims raised by Petitioners in this proceeding, is that the

issue of the jurisdiction of the first forum have been "fully

and fairly litigated by the parties and finally determined in

the [forum] courts..." Durfee, 375 U.S. ai 116. There

was no “full and fair litigation" of the Washington Court's

jurisdiction over the absent Montana class members in that

Court by the only parties adversely affected by that

decision--the absent Montana class members. At most,

the Washington Court (as it expressly recognized)

considered the issue sua sponte. And the only argument

it received was from parties who were uniformly interested

in sustaining that judgment, Petitioners to obtain releases

of their claims and Washington class counsel to obtain a

$3.6 million attorney's fee. See footnote 4, supra.

The only "full faith and credit" principle applicable

to this case is the cardinal rule noted by this Court in

Shutts, 472 U.S. at 805: "[A] judgment issued without

proper personal jurisdiction over an absent party is not

entitled to full faith and credit elsewhere and thus has no

—

23

res judicata effect as to that party." The absent party is

always entitled to collaterally attack the judgment because

he did not have the opportunity to "fully and fairly litigate”

the jurisdiction of the distant forum over him in that

forum. Because Respondent Lynn did not have standing

to represent the absent Montana investors in the

Washington action, his limited participation in that action

can not bind them. There is no double jurisdictional attack

here as was present in Durfee.’

Cc. The Jurisdictional Issues May Become Moot As

A Result Of Further Proceedings In The State Courts

The Montana trial court merely ordered that notice

be sent to the absent Montana class members of their right

to participate in the Montana Action. (Appendix 6a-7a)

After notice is sent, the absent Montana investors will

have two options. Those who participated in the

Washington settlement may elect to stay with that

settlement, in which event they will “opt out" of the

Montana Action. No jurisdictional issue would be

presented for these class members as they would have

9. The case of Underwriters National Assurance Co. v. North

Carolina Life and Accident and Health Ins. Guaranty Assn., 455 U.S. 691

(1982), cited by Petitioners (Petition 14, 15, 18), is also distinguishable on this

basis. In Underwriters National, the identical party sought to challenge the

jurisdiction of the first forum, where it had directly participated in the

proceedings before the first forum. The only additional issue present was its

failure to raise certain jurisdictional arguments before the first forum.

However, that was immaterial in light of the established rule of “res judicata”

law that a judgment binds a party not only on issues actually litigated, but also

on issues which could have been litigated. 455 U.S. at 708-10.

24

voluntarily waived their right to challenge the Washington

judgment.

The other option would be to participate in the

Montana Action. For this potential group of Montana

investors, subsequent proceedings would be held in the

Montana Action to determine if they are bound by the

release of claims in the Washington judgment. These

investors would then be able to raise all of their

jurisdictional challenges to the Washington judgment.

And importantly, Petitioners would be entitled to assert

that they are bound by that judgment, because of "full

faith and credit" principles or any other reasons available

to them.

With respect to this latter group of investors, the

Montana Courts might decide that they are bound by the

releases contained in the Washington judgment. In this

event the jurisdictional issue presented by the Petition

would again disappear. Only if the Montana trial court

rules that the Montana investors electing to participate in

the Montana Action are not bound by the Washington

judgment, and the Montana Supreme subsequently affirms

that ruling on appeal, will there exist the conflicting

jurisdictional determinations about which Petitioners

complain.

As is evident from this scenario, several events may

occur in the Montana Courts to moot the jurisdictional

issues presented by the Petition. It is axiomatic that where

further action in state proceedings could render any federal

constitutional issues moot, the case is not ripe for

25

consideration by this Court. See Williamson County

Regional Planning Commission v. Hamilton Bank, 473

U.S. 172 (1985). Such is the situation here. No "full faith

and credit" issues may arise depending on future

proceedings in the Montana Courts.

D. Petitioners Will Not Suffer Any Prejudice As A

Result Of Defending This Case Through Final Judgment

Petitioners final argument is that they will be

prejudiced by being forced to defend a meritless class

action. (Petition 21-27) This is a "red herring".

Whether or not this Court accepts jurisdiction of the

Petition, and regardless of its ruling on the "full faith and

credit" issues, the Montana Action will proceed forward

to judgment on the claims of the eighteen individual

Montana investors who "opted out" of the Washington

Action and joined in the Montana Action. The same

liability and damage issues will be tried in the Montana

Action even if this Court were to rule that the Washington

judgment bars the claims of all Montana investors

excepting only the claims of these eighteen individual

investors. The only additional burden interjected in the

case by denying review at this time is that Petitioners

could be exposed to larger damages, depending on the

rulings of the Montana Courts on the binding effect of the

Washington judgment on the absent Montana class

members. This is not the type of prejudice which warrants

immediate review by this Court.

26

On the other hand, review of the "full faith and

credit" issues now will clearly prejudice the absent

Montana investors who have never had their day in court.

None of these investors has ever been provided the

opportunity to argue that the Washington Court should not

have exercised jurisdiction over their claims. The only

argument attempted to be made on their behalves was not

considered by the Washington Court because of its ruling

that Respondent Lynn did not have “standing” to represent

them. And the other parties to the Washington Action who

were heard on this issue both had interests directly

conflicting with those of the Montana investors.

Petitioners desired to sustain jurisdiction over their claims

in order to obtain binding releases of those claims.

Further, Washington class counsel was blinded by the

glare of a $3.6 million attorney's fee when he argued that

the Washington Court had jurisdiction over their claims.

See footnote 4, supra.

The absent Montana investors should be allowed to

express their own opinions as to the action in which they

wish to resolve their claims. The Montana trial court has

so ruled, and noted the tenacity with which Petitioners

have attempted to deny them this choice. (Appendix 6a-

7a) Allowing them this opportunity will also create an

adequate factual record, through the efforts of truly

adversarial parties, which will enable this Court (if

necessary) to intelligently consider the merits of the

jurisdictional issues. Review at this time will accomplish

little, if anything, for Petitioners, but most assuredly will

deny the absent Montana investors their day in court and

burden this Court with an incomplete factual record.

27

CONCLUSION

The Order of the Montana Court does not finally

adjudicate any jurisdictional issues, and is not ripe for

review at this time, because the Montana Courts have not

made any final jurisdictional rulings. Second, the Order

does not constitute a second adjudication of jurisdictional

issues as prohibited by Durfee v. Duke, but the first time

the absent class members would even have the opportunity

to attack the jurisdiction of the Washington Court. Third,

the Order may become moot as a result of subsequent

proceedings in the trial court, including elections by the

absent Montana class members to remain as participants

under the Washington settlement. Finally, there is no

prejudice to Petitioners by delaying consideration of any

jurisdictional issues until after final judgment as they will

in any event have to defend through trial the claims of the

eighteen individual plaintiffs in the Montana Action.

For these reasons, Respondent Lynn respectfully

requests this Court to deny the Petition.

Respectfully submitted,

DONALD V. SNAVELY CHRIS R. YOUTZ

SNAVELY LAW FIRM SIRIANNI & YOUTZ

210 North Higgins Avenue 1700 Westlake Center

Suite 234 1601 Fifth Avenue

Missoula, Montana 59802 Seattle, Washington98 101

(406) 721-8899 (206) 223-0303

Attorneys for Respondent Paul M. Lynn

January 30, 1996

196a

APPENDIX R

FILED 12/28/94

DONALD V. SNAVELY

SNAVELY LAW OFFICES

201 West Main, Suite 310

Missoula, Montana 59802

Telephone: (406) 728-4310

-and-

CHRIS R. YOUTZ

SIRIANNI & YOUTZ

1700 Westlake Center

Seattle, Washington 98101-1625

Attorneys for Plaintiffs

MONTANA FOURTH JUDICIAL DISTRICT COURT

MISSOULA COUNTY

PAUL M. LYNN, on behalf of all =) DEPT. NO. 2 (HENSON)

similarly situated persons, )

) Cause No. 77454

Class Plaintiff, )

-VS- )

)

MURPHEY FAVRE, INC., et al, —)

)

Defendants. )

) PLAINTIFFS' BRIEF

) IN OPPOSITION TO

PAUL M. LYNN, an individual, )DEFENDANTS'

MARGARET E. MANDELL and )MOTION TO

197a

KIRK G. COMISKEY, et al, ) VACATE ORDER

) ALLOWING

Individual |) COMMUNICATION

Plaintiffs, ) WITH MONTANA

-Vvs- ) BOND PURCHASERS

)

MURPHEY FAVRE, INC., a ) [EXCERPT]

corporation; )

et al, )

)

Defendants. )

Plaintiffs respectfully submit the following

Memorandum in Opposition to Murphey Favre's Motion

to Vacate Order Allowing Communication with Montana

Bond Purchasers ("Motion to Vacate") filed on December

8, 1994:

eseeee8¢444%

4 W ict of Montana

Purchasers and Washington Purchasers, Thereby

Rendering Their Representation by One Counsel a Denial

of Due Process

Shutts held that a constitutional requirement to

sustaining jurisdiction over nonresident plaintiffs in a class

action is that "the named plaintiff at all times adequately

represent the interests of the absent class members,” citing

Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115 (1940). In

Hansberry, the U.S. Supreme Court voided, on collateral

198a

attack, a class judgment which purported to bar the claims

of property owners which had been adjudicated in an

action where the members of the class had conflicting

interests, but were represented by one party and counsel.'

The Court held that "[b]ecause of the dual and potentially

conflicting interests of those who were putative parties” to

the class, their representation by one class representative

denied them “due process" of law and rendered the

resulting judgment void.

Subsequent cases have applied the Hansberry rule

to void class actions settlements where "the members of

[the] class have antagonistic or conflicting interests" with

respect to the terms of the settlement, and are represented

by one party. See, e.g. Secretary of Labor v.

Fitzsimmons, 805 F.2d 682, 697-98 (7th Cir. 1987) [class

included all members of union pension plan; one group of

class favored liberalization of pension benefit rules, which

would expand the class, while members of the other group

were pursuing claims for asset mismanagement; because

every dollar allocated to the benefit liberalization group

would reduce by one dollar that available for the asset

mismanagement group, the court found "an obvious

conflict of interest" between the two groups which

rendered their representation by one party constitutionally

defective]; Hooks v. General Finance Corporation, 652

F.2d 651, 652 (6th Cir. 1981) [class action for violation of

1. The class in Hansberry included all property owners whose

properties were subject to a restrictive covenant. Some of the class members

wanted to enforce the covenant, while others did not. The Court held that these

“dual and potentially conflicting interests” prohibited their representation by one

party, thereby voiding the judgment as a violation of the Due Process Clause.

199a

Truth in Lending Act; class representative sought full

statutory award for himself ($1,000) even though class

members would be restricted to pro rata share of recovery

(which could be less than $1,000); because of potentially

conflicting positions on allocation of damage or settlement

award, class representative precluded from maintaining

class action on behalf of group]; Albertson's, Inc. v.

Amalgamated Sugar Co., 503 F.2d 459, 463-64 (10th Cir.

1974) [members of plaintiff class included competitors

who might disparately benefit from a judgment declaring

certain pricing methods of defendant to be unlawful; class

certification denied; the court noted that "this requirement

of adequate representation must be stringently applied

because members of the class are bourid unless they

affirmatively exercise their option to be excluded, even

though they may not be actually aware of the proceedings"

(Emphasis added)]; Phillips v. Klassen, 502 F.2d 362,

366-67 (D.C.Cir. 1974) ["Class members whose interests

are antagonistic in fact to, or even ‘potentially conflicting’

with, the interests of the ostensibly representative parties

cannot be bound, consistent with the requirements of due

process, to an adjudication in their name"; where class

members may potentially have divergent views as to the

conduct of the action, representation by one class member

denies all due process of law; existence of "opt out” right

does not cure problem]. |

In this case, the class in the Washington Class

Action included both Washington and Montana bond

purchasers. The Montana purchasers believed that their

claims were more valuable because of the more liberal

Montana damage laws and the stronger evidence of fraud

in the Montana case. Accordingly, the Montana

200a

purchasers felt that a larger pro rata share of the settlement

proceeds should be attributed to their claims, as compared

to that allocated to the claims of the Washington

purchasers. Despite this obvious conflict of interest, only

one party [Washington purchasers] and one attorney [who

represented the Washington purchasers] represented the

interests of all. Separate and independent attorneys should

have represented each group in the settlement negotiations.

Further compounding this conflict was the ruling of

the Washington Court that counsel for Mr. Lynn did not

have standing to challenge the settlement on behalf of any

of the Montana purchasers. The Washington Court

permitted Washington counsel alone to argue the fairness

of the settlement for Montana purchasers. (Youtz

Affidavit, § 11; Supp Hall Affidavit, Exhibit B, page 7)

Not only did this attorney stand to gain significantly from

approval of the settlement as structured (his firm was

awarded $3,600,000 in attorneys’ fees--Supp Hall

Affidavit, Exh B, p. 5), but he presented a distorted and

inaccurate presentation of Montana law to the Washington

Court which ignored the rulings of this Court. (Snavely

Affidavit, Exhibit G; see discussion, pp. 20-23, infra)

Independent Montana counsel who could vigorously

present the position of the Montana purchasers that they

were entitled to a larger pro rata share of the settlement

proceeds should have been appointed.

The inherent conflict of interest between the

Montana and Washington purchasers with respect to the

allocation of the Washington settlement proceeds rendered

their representation by one party constitutionally defective.

The interests of the Montana purchasers were not

"adequately represented", thus voiding the Washington

20la

judgment as a denial of "due process" for the Montana

bond purchasers. Shutts, supra, 472 U.S. 812, 105 S.Ct.

2974.

(5) The Washington Court Considered the Benefits of the

Settlement Under a Biased Presentation of Montana Law

Thereby Denying "Due Process” to the Montana Class

Members

Shutts finally teaches that the Due Process clause

requires the court in a class action to apply the substantive

law of the state of residence of the nonresident plaintiffs

in. determining their rights. Shutts, 472 U.S. 821-22, 105

S.Ct. 2979. The forum court may only apply its own law

to the claims of the nonresident plaintiffs if that state has

"significant contact[s] or significant aggregation of

contacts’ to the claims asserted by each member of the

plaintiff class, contacts ‘creating state interests’, in order to

ensure that the choice of [forum] law is not arbitrary or

unfair." Id. The fact that the defendant owned property

and conducted substantial business in the forum was not

controlling. Shutts, 472 U.S. 819-20, 105 S.Ct. 2978.

Rather, the expectation of the parties, based upon their

residence and the situs where the subject contracts were

made, was important. Shutts, 472 U.S. 822, 105 S.Ct.

2980. In Shutts, this required the law of the plaintiffs’

residence to be applied.

In this case, Washington has no _ contacts

whatsoever with the sales of Homestead Bonds to

Montana purchasers. All Montana transactions were

consummated in Montana, with Montana residents,

202a

through the Defendants’ offices and agents located in

Montana. The only "Washington" connection for the

transactions at issue in this case is the fact that the

Defendants’ home offices are located there. Because the

Defendants chose to reap the benefits of Montana business

in Montana, they must have their liabilities resulting from

that business adjudicated under Montana law.

The Washington Court was presented with a biased

and inaccurate presentation of Montana law by

Washington attorneys who sought to gain $3,600,000 in

fees from a ruling that Montana law was not more

favorable than Washington law. Attached as Exhibit "G"

to the Snavely Affidavit is a copy of the memorandum

submitted to the Washington Court which contained the

argument of Washington counsel as to the relative merits

of Washington and Montana law. The following is a

comparison of Montana law as represented by Washington

counsel [indicated by "WAI", "WA2", etc}’ with the

actual status of Montana law [indicated by "MT1", "MT2",

etc] as previously determined by this Court or otherwise

cited:

WAI. Washington "fraud" statute of limitation is 3

years, which is more liberal than Montana 2 year statute.

Montana statute likely ran on Montana purchasers because

of SEC filing in 1991 and drop in price by 1991.

Wash.Brief, pp. 2-3.

2. These items appeared in a table in original brief. Because

table would not fit within margin requirements of this brief, table has been

edited to appear as below. Substance of information is unchanged from

original brief filed in state court.

iii

203a

MT1. Montana "fraud" statute of limitation did not

commence until Homestead was declared insolvent (Nov.

1992) because Montana purchasers were not damaged

until then. SEC Report not sufficient to provoke

“discovery” by Montana purchasers. 2/16/94 Order, pp. 5-

6.

WA2. Montana court ruled that "significant issues

exist as to whether the Montana court has personal

jurisdiction over Washington Mutual as a defendant."

Wash. Brief, p. 4, Il. 2-4.

MT2. Plaintiff's Complaint does not clearly state a

claim for relief against Washington Mutual, so Motion for

More Definite Statement granted. 2/16/94 Order, pp. 10-

11. Plaintiffs cured defect by filing Second Amended |

Complaint on 4/4/94. See Second Amended Complaint, {J |

4, 7, 8, 28, 29, 42. This Court has not ruled upon, or made |

any indication of its position on, Washington Mutual's |

motion to dismiss for lack of personal jurisdiction.

WAS3. Treble damage claims under Montana

Consumer Protection Act are likely to be time barred

because of applicable two year statute of limitations [MCA

§27-2-211(1)(c)]. Further, Montana CPA claims can not

be asserted in a class action, which would likely preclude

their assertion by Montana purchasers. Wash. Brief, pp.

4-5. This argument was made to counter the admitted fact

that the Washington CPA allows a maximum recovery of

$10,000, while the Montana CPA has no such limit,

allowing recovery of three times actual damages. (See

Entriken v. Motor Coach Federal Credit Union, 256 Mont.

204a

85, 93-94, 845 P.2d 93, 98 (1992))

MT3. Absent a specific limitation period in statute

creating remedy, general rule is that longest pertinent

limitation period is applied. Because statutory claim based

on securities transaction is essentially contractual in

nature, 8 year contract limitation period applies to CPA

statutory claim based on securities transaction. Two year

limit in MCA §27-2-211(1)(c) is not applicable. Thiel v.

Taurus Drilling, Ltd. 1980-II, 218 Mont. 201, 212-13, 710

P.2d 33, 40 (1985). Montana CPA has no specific

limitation period, thus longer contract limit (8 years) is

applicable. Further, Montana CPA claims may be joined

in class action suit and damages awarded as part of

individual relief. State ex rel Boyne USA, Inc. v. District

Court, 228 Mont. 314, 316, 742 P.2d 464, 465 (1987).

WA4. Although Washington does not allow

recovery of punitive damages in any circumstance, and

Montana allows punitive damages in common law "fraud"

cases, punitive damages are not recoverable in Montana in

a class action. Wash. Brief, pp. 5-6. Further, the evidence

in the Washington case did not reveal sufficiently

egregious conduct to warrant an award of punitive

damages. Wash. Brief, p. 8.

MT4. Punitive damages are recoverable in a class

action. State ex rel Boyne USA, Inc. v. District Court, 228

Mont. 314, 316, 742 P.2d 464, 465 (1987); Cecil v. Allied

Stores Corp., 162 Mont. 491, 493, 513 P.2d 704, 705.

There is significant evidence of fraudulent activity in the

Montana transactions, including the regular fraudulent

ee

205a

alteration of client account records and account

agreements to "cover up" the misrepresentations made

during the initial bond sales. Damaging admissions were

made by the Defendants in the Montana case. (Snavely

Affidavit, J 7)

WAS. Montana law requires "scienter"--an intent

by the defendant to deceive the securities purchaser--in

order to establish a securities fraud claim. Montana law

also requires “loss causation"--not only that plaintiffs

relied on the misrepresentations but also that the

defendant's conduct affected the value of the security--in

order to establish a securities fraud claim. Wash.Brief, pp.

9-10.

MTS. "Scienter" is not required to establish a

securities fraud claim. A negligent misrepresentation is

sufficient, even if the defendant believed his statements to

be true. Brown v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 197 Mont. 1, 11-12, 640 P.2d 453, 458-59 (1982).

Montana law only requires "proximate causation” in a

securities fraud case, which is established where Plaintiff's

reliance on the misrepresentation and his resulting loss of

investment was reasonably foreseeable by the Defendants.

Kitchen Krafters, Inc. v. Eastside Bank of Montana, 242

Mont. 155, 169-70, 789 P.2d P.2d 567, 575 (1990);

2/16/94 Order, p. 7; Second Amended Complaint, { 30.

The foregoing comparison establishes _ that

Plaintiffs’ counsel in the Washington Class Action

presented a totally distorted and inaccurate picture of

Montana law to the Washington Court. The effect of his

206a

argument was to apply Washington law, or some hybrid

mix of Montana and Washington law, to the Court's

consideration of the fairness of the Washington settlement.

Shutts teaches that application of any law other than that

of Montana to consideration of the fairness of the

Washington settlement for Montana purchasers 1S

prohibited. For this additional reason, the Washington

judgment violates the "due process" rights of the Montana

purchasers. That judgment may thus not be recognized for

any purpose by this Court.