May 22, 2022

Volume XII, Number 142

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May 20, 2022

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Why Privity Matters

In 2011, I posed the following question: Is Privity Required Or Not Required Under Section 25500?  Section 25500 of the California Corporations Code provides the remedy for violations of Section 25400 which declares unlawful a variety of manipulative actions involving securities.  See also More On Privity And Section 25500

A recent ruling by Judge Maxine M. Chesney illustrates why privity is important when bringing suit under the California Corporate Securities Law.  Baltequera Inc. v. Bell-Carter Foods, LLC, 2022 U.S. Dist. LEXIS 81054.

The case was brought by three plaintiffs - Baltequera, Dcoop and Olives Way.  Only Baltequera signed the agreement to purchase membership interests.  Dcoop and Olives Way allegedly supplied Baltequera with the funds to make the purchase.  The plaintiffs alleged, among other things, violations of both Section 25400 and Section 25401, which declares unlawful untrue statements or omissions of material facts in the purchase or sale of securities.   In ruling on the defendants' motion to dismiss, Judge Chesney explained:

With respect to § 25401, the Court agrees. In particular, although, as plaintiffs point out, the Corporate Securities Act is "modeled" after provisions of federal securities statutes, seePeople v. Simon, 9 Cal. 4th 493, 509-10 (1995),the California Supreme Court has expressly held a private cause of action for a violation of § 25401 can only be brought by a person in "privity of contract" with the defendant, seeMirkin v. Wasserman, 5 Cal. 4th 1082, 1104 (1993).  As plaintiffs acknowledge, the relevant contract here, namely, the Purchase Agreement, is signed only by Baltequera.  Consequently, as neither Dcoop nor Olives Way entered into a contract to invest in Bell-Carter Foods, Dcoop and Olives Way lack statutory standing to bring a claim under § 25401.

With respect to § 25400, however, the California Supreme Court has held privity of contract is not "require[d]." See id.  Consequently, Dcoop and Olives Way's claim under § 25400 is not barred by the absence of a contract between them and Bell-Carter Foods.

Privity can also be a hurdle for plaintiffs in federal securities law claims.  For example, the U.S. Supreme Court in Pinter v. Dahl held "At the very least, however, the language of § 12(1) contemplates a buyer-seller relationship not unlike traditional contractual privity. Pinter v. Dahl, 486 U.S. 622, 642, 108 S. Ct. 2063, 2076, 100 L. Ed. 2d 658, 679 (1988).

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 133
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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