Lawrence v. Cohn, Docket No. 02-7642.

Citation325 F.3d 141
Decision Date28 March 2003
Docket NumberDocket No. 02-7642.
PartiesAlice LAWRENCE, individually, and on behalf of the Estate of Sylvan Lawrence, including the Residuary Trust; Suzanne Lawrence, individually, and on behalf of the Estate of Sylvan Lawrence, including the Residuary Trust; Richard Lawrence; Marta Jo Lawrence, individually, and on behalf of the Estate of Sylvan Lawrence, including the Residuary Trust, Plaintiffs-Appellants, v. Seymour COHN, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Steven Mallis, Graubard Miller (C. Daniel Chill, Elaine M. Reich, and Nancy R. Sills, on the brief), New York, NY, for Plaintiffs-Appellants.

Daniel P. Waxman, Bryan Cave LLP (Mark Jon Sugarman and Erin M. Naftali, on the brief), New York, NY, for Defendant-Appellee.

Before: WALKER, Chief Judge, OAKES and CARDAMONE, Circuit Judges.

JOHN M. WALKER, JR., Chief Judge.

In this case, denominated a securities fraud action, plaintiffs-appellants Alice Lawrence, Suzanne Lawrence, Richard Lawrence, and Marta Jo Lawrence, individually and on behalf of the Estate of Sylvan Lawrence (collectively, the "plaintiffs" or the "Estate"), ask this court to plumb the vagaries of New York law concerning estates and fiduciary relationships, an area ordinarily within the sole purview of state courts, to determine the nature and extent of plaintiffs' legal entitlement to purchase additional shares in a partnership. Plaintiffs contend that inasmuch as they were legally entitled to purchase all of the available shares under both New York's common law and the partnership agreement, their release of this right in a settlement agreement in alleged reliance on misrepresentations concerning the financial prospects of the partnership satisfied the requirements of securities fraud under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), (the "Exchange Act").

We conclude that because the common law rights asserted by plaintiffs are not contractual and, in any event, are conjectural and uncertain in scope, they do not fall within the Exchange Act's definition of "security" as required to bring a claim for damages based on securities fraud. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). We further conclude, as did the district court, that plaintiffs did not have a contractual right to purchase all of the shares at issue. Accordingly, their purported release of that right pursuant to the settlement agreement they entered into with defendant did not constitute the "sale" of a "security." Finally, we reject plaintiffs' assertion that their actual purchase of half of the additional partnership shares satisfies the "in connection with" requirement of Section 10(b), as enunciated in Superintendent of Ins. v. Bankers Life and Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), because there was no causal connection between that purchase and the alleged fraud. Because plaintiffs have failed to state a claim for securities fraud, we affirm the May 2, 2002, judgment of the United States District Court for the Southern District (Charles S. Haight, Jr., District Judge) granting summary judgment in favor of defendant-appellee Seymour Cohn and dismissing the complaint.

BACKGROUND
I. Facts

The facts of this case have been provided in detail in the district court's published opinions, familiarity with which is assumed. See, e.g., Lawrence v. Cohn, 197 F.Supp.2d 16 (S.D.N.Y.2002) ("Lawrence IV"); Lawrence v. Cohn, 932 F.Supp. 564 (S.D.N.Y.1996) ("Lawrence III"); Lawrence v. Cohn, 816 F.Supp. 191 (S.D.N.Y. 1993) ("Lawrence II"); Lawrence v. Cohn, 778 F.Supp. 678 (S.D.N.Y.1991) ("Lawrence I"). Accordingly, we recite only those facts relevant to this appeal.

The decedent, Sylvan Lawrence ("Sylvan"), and defendant Cohn were brothers who had a longstanding oral partnership through which they engaged in various real estate ventures over the years. In 1968, following several months of negotiations and drafts, they entered into a limited partnership (the "LP") with Jack Aron and several of his family members and business associates (the "Aron Group") for the purpose of purchasing property at 95 Wall Street and constructing a building there for lease or sale. The limited partnership agreement (the "LPA") designated Sylvan and Cohn as the "General Partner" — in the singular — with ownership of 60% of the LP, while the Aron Group, designated the "Limited Partners," owned, in the aggregate, 40% (the "Aron Group Interest").

This case centers on a dispute between Sylvan's successors in interest and Cohn concerning their relative rights with respect to the Aron Group's sale of the Aron Group Interest after Sylvan's death. Paragraph 8 of the LPA is entitled "Assignability of Partnership Interest." Section b of that paragraph provides, in pertinent part:

In the event that any one or more of the Limited Partners (hereinafter called "Offering Limited Partner") shall receive and wish to accept a bona fide offer for the purchase of his interest in the partnership (hereinafter called the "Outside Offer"), the Limited Partner shall promptly notify the other Limited Partners thereof giving [them a right of first refusal] to purchase the interest of the Limited Partner on the same terms as the Outside Offer in the proportion [of] their respective interests .... If the Limited Partners [do not exercise their right to purchase then] the Offering Limited Partner shall advise the General Partner of the Outside Offer, giving to the General Partner [a right of first refusal] to purchase the interest of the Offering Limited Partner at the same price and terms as contained in the Outside Offer ....

Joint App. at 151-52 (emphasis added). Paragraph 8(b) goes on to provide that if neither the other limited partners nor the general partner exercises their rights of first refusal, the "Offering Limited Partner" is free to accept the "Outside Offer."

Paragraph 8(c) provides, in pertinent part:

In the event the General Partner shall receive and wish to accept a bona fide offer for the purchase of its interest in the partnership (hereinafter called the "Outside Offer"), then the General Partner shall inform the Limited Partners of the Outside Offer and shall offer to sell its interest ... to the Limited Partners or any of them .... The Limited Partners may purchase such interest in the proportion that their respective interests in the partnership bears to the total interests of the Limited Partners ....

Joint App. at 154-55 (emphasis added).

Thus, at the time the LPA was executed, any member of the Aron Group receiving an "offer" to sell his interest in the LP would first have to offer it proportionately to the other members of the Aron Group. If none of them chose to purchase the interest, then the selling Aron Group member would have to offer it to the General Partner (i.e., Sylvan and Cohn) before selling it to an outside third party. By contrast, the corresponding provision applicable to the General Partner, ¶ 8(c), does not establish a right of first refusal as between Sylvan and Cohn. Rather, the General Partner is, as elsewhere in the LPA, referred to in the singular, and the only right of first refusal that is triggered by an "Outside Offer" to the General Partner is a right of first refusal among the Limited Partners.

Paragraph 9 of the LPA, entitled "Termination of the Partnership," provides, in part, that if one of the Limited Partners dies, the partnership will continue with the Limited Partner's heirs succeeding to his right to distributions and obligations for losses, but that the successor will not become a "Limited Partner." The day before the LPA was to be signed, the attorney representing the Aron Group, who had acted as the primary draftsman of the agreement, sent a final draft to Cohn and Sylvan's attorney, noting that he had "added a provision [to ¶ 9] about continuance of the partnership if one of the general partners dies." This new provision stated that if either Cohn or Sylvan retired, became incompetent, or died,

[t]he retired General Partner or the legal representative of the deceased or incompetent General Partner shall be and become a Limited Partner and the share of such retired Partner or of such representatives in the profits [and] losses ... shall be 30%. The interest of the remaining General Partner shall thereafter be 30%.

Joint App. at 158-59. This provision contains the only reference to individual interests held by Sylvan and Cohn as distinct from their collective identity as the General Partner.

In 1981, shortly before Sylvan's death from a protracted illness, the brothers reduced their longstanding oral partnership to a written partnership agreement. Although this agreement specified the nature of the partnership as 50-50, and encompassed approximately 85 properties owned by the brothers, it did not encompass the LPA, perhaps because that partnership was one of the rare ventures that included individuals other than Cohn and Sylvan.

Sylvan died in 1981 and Cohn became the executor and trustee of his estate and residuary trust (collectively, the "Estate") in accordance with the terms of Sylvan's will. In addition to bestowing upon Cohn broad discretionary powers in the management and disposition of the Estate, Sylvan's will expressly provided that "[t]he powers granted by this Article shall not be affected or impaired by the fact that my Executor or Trustee may be a part owner of the property involved or a partner or managing partner of one or more partnerships which own the property or business involved."

During Sylvan's illness, Cohn and Jack Aron had begun negotiating the possible sale of the Aron Group Interest. Lawrence IV, 197 F.Supp.2d at 31-32. That deal was realized in March of 1983, when Cohn purchased the entire Aron Group interest as nominee for himself, for the Estate,...

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