Ackerman v. Schwartz

• Decision Date: 29 December 1989
• Docket Number: No. S85-705.,S85-705.
• Parties: Jerry ACKERMAN, et al., Plaintiffs, v. Howard SCHWARTZ, et al., Defendants.
• Court: U.S. District Court — Northern District of Indiana

733 F. Supp. 1231

Jerry ACKERMAN, et al., Plaintiffs, v. Howard SCHWARTZ, et al., Defendants.

No. S85-705.

United States District Court, N.D. Indiana, South Bend Division.

December 29, 1989.

COPYRIGHT MATERIAL OMITTED

Robert W. Mysliwiec, South Bend, Ind., for plaintiffs.

William J. Reinke, Paul E. Becher and Ernest J. Szarwark, South Bend, Ind., for defendants.

MEMORANDUM AND ORDER

MILLER, District Judge.

On August 30, 1983, attorney Howard Schwartz wrote an opinion letter concerning a leasing program purportedly involving the production of ethanol. The leasing program collapsed due, at least in part, to its principals' criminal conduct. Nearly one hundred persons who invested in that program, and who claim to have relied upon the opinion letter in doing so, seek to hold Mr. Schwartz and his law firm liable under federal securities and racketeering laws, Indiana securities and racketeering laws, and Indiana's common law.

The cause is before the court on the defendants' motion for partial summary judgment under Fed.R.Civ.P. 56. In responding to the defendants' motion, the plaintiffs have submitted the affidavit of Glen Scolnik, an attorney whose opinion the plaintiffs offer as expert testimony in support of their attorney malpractice and federal securities claims; the defendants' motion to strike that affidavit also pends before the court. Resolution of these motions has been delayed by the necessity to review briefs in excess of 225 pages, as well as two volumes of exhibits directed to the defendants' multiple attacks upon the plaintiffs' five independent theories, and several sub-theories, of liability. The court has completed that review and, after thorough consideration, concludes that the motion to strike should be denied and the summary judgment motion should be granted.

A party seeking summary judgment must demonstrate that no genuine issue of fact exists for trial and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(e); Indiana Grocery, Inc. v. Super Valu Stores, Inc., 864 F.2d 1409, 1412 (7th Cir.1989). Should that showing be made in a case in which the motion's opponent would bear the burden at trial on the matter that forms the basis of the motion, the opponent must come forth with evidence to show what facts are in actual dispute. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Zayre Corp. v. S.M. & R. Co., Inc., 882 F.2d 1145 (7th Cir.1989); Herman v. City of Chicago, 870 F.2d 400, 404 (7th Cir. 1989). A genuine factual issue exists only when there is sufficient evidence for a jury to return a verdict for the motion's opponent. Gomez v. Chody, 867 F.2d 395 (7th Cir.1989); Valley Liquors, Inc. v. Renfield Importers, Ltd., 822 F.2d 656 (7th Cir.), cert. denied 484 U.S. 977, 108 S.Ct. 488, 98 L.Ed.2d 486 (1987). Summary judgment should be granted if no reasonable jury could return a verdict for the motion's opponent. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Schroeder v. Copley Newspaper, 879 F.2d 266, 269 (7th Cir.1989); Wolf v. City of Fitchburg, 870 F.2d 1327, 1330 (7th Cir.1989).

The parties cannot rest on mere allegations in the pleadings, Zayre Corp. v. S.M. & R. Co., Inc., 882 F.2d 1145, 1148 (7th Cir.1989); Smart v. State Farm Ins. Co., 868 F.2d 929, 931 (7th Cir.1989), or upon conclusory allegations in affidavits. Palucki v. Sears, Roebuck & Co., 879 F.2d 1568, 1572 (7th Cir.1989). The court must draw any permissible inferences from the materials before it in favor of the non-moving party, Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Vachet v. Central Newspapers, Inc., 816 F.2d 313 (7th Cir.1987), as long as the inferences are reasonable. Spring v. Sheboygan Area School District, 865 F.2d 883, 886 (7th Cir.1989); Mays v. Chicago Sun-Times, 865 F.2d 134, 136 (7th Cir.1989). The non-moving party must show that the disputed fact is material, or outcome-determinative, under applicable law. Local 1545, United Mine Workers v. Inland Steel Coal Co., 876 F.2d 1288, 1293 (7th Cir.1989).

With these standards in mind, the court turns to the facts disclosed by the parties' submissions, drawing all reasonable inferences in favor of the plaintiffs, the non-moving parties.

I. FACTS

For purpose of the partial summary judgment motion, the plaintiffs are individuals who invested in an equipment leasing program, devised by Gary VanWaeyenberghe and Carl Leibowitz, which was designed to be a "year-end" tax shelter for the year 1983. The investment proved to be worthless for reasons the parties dispute. In addition to the loss of their initial investment, many of the plaintiffs were assessed penalties and interest by the Internal Revenue Service for unpaid taxes and overvaluation of the equipment. The defendants are attorney Howard K. Schwartz and his law firm, Bassey, Selesko & Couzens, P.C., who prepared an opinion letter concerning the program.

A. The Leasing Program

The leasing program involved at least four corporate entities:

1. Multi-Equipment Leasing Corporation ("MEL") was set up to act as the principal lessor and was incorporated on August 18, 1983 in the State of Indiana. Although VanWaeyenberghe and/or Leibowitz actually controlled MEL, Robert Milligan was recruited to act as its nominal president, sole stockholder, and director. All business and financial affairs, however, were conducted or directed by VanWaeyenberghe or Leibowitz.

2. S & H Manufacturing Company, Inc. ("S & H Manufacturing") was chosen as the ultimate manufacturer of the equipment. Larry Slabaugh owned and operated S & H Manufacturing, which was engaged in the manufacture of farm equipment before August, 1983.

3. Good-Wrench Industries, Inc. ("Goodwrench") was the third corporate entity involved in the program. To protect the integrity of S & H Manufacturing, Mr. Slabaugh established Goodwrench to act as a general contractor. Goodwrench was incorporated on August 15, 1983 with Larry Slabaugh as its president and sole stockholder. There were no other employees and no assets beyond the initial $1,000.00 minimum capitalization requirement.

4. Organized Producers Energy Corporation ("OPEC") was the final link, supplied by VanWaeyenberghe and Leibowitz, who served as officers. OPEC purportedly was in the business of constructing, acquiring, and managing the operation of ethanol plants. From the inception of MEL, OPEC was intended to act as the ultimate sublessee of the ethanol equipment, although the investors purportedly had the option of subleasing their unit of equipment to any ethanol manufacturer.

The leasing program was designed to work as follows: each investor would make an initial investment of $10,000.00 which would constitute "prepaid rent" for each unit of equipment for a period of five years. MEL, acting as the lessor, would order the equipment from Goodwrench, which, in turn, would subcontract the manufacturing work to S & H Manufacturing at a cost to Goodwrench of approximately $5,000.00 per unit. For each unit actually produced, Mr. Slabaugh tacked on a 5% "sales commission" and invoiced it through another of his business entities, Slabaugh Sales & Service. Goodwrench then would sell the units of equipment to MEL at the greatly inflated price of $100,000.00 per unit, 10% of which was to be paid in cash as a down payment, with the balance of $90,000.00 represented by a full-recourse, fourteen year promissory note from MEL to Goodwrench.

Upon receipt of the equipment, MEL would deliver it to OPEC, the intended sublessee, for incorporation into an ethanol manufacturing facility. In return for their investment, investors were to receive a percentage of the profits from the ethanol manufacturing operation, a 100% write-off of their initial investment in the form of an ordinary and necessary business expense deduction when the $10,000.00 rental payment was prorated over the lease's term, and an investment and energy tax credit for the year 1983 in the total amount of $20,000.00 based on the purchase price paid by MEL ($100,000.00).

B. The Opinion Letter

VanWaeyenberghe and Leibowitz needed an attorney's opinion letter to market the 1983 leasing program effectively. They turned to defendant Howard Schwartz, an attorney and social acquaintance of Leibowitz. Mr. Leibowitz first contacted Mr. Schwartz about drafting the opinion for MEL in July, 1983. A formal agreement was reached in late August, 1983 by which VanWaeyenberghe and Leibowitz retained the defendant law firm and Mr. Schwartz, a partner in the firm, to prepare the opinion, outlining the federal tax aspects of the lease transaction. Mr. Schwartz and his firm received a fee of $5,000.00 for their services.

Although Mr. Schwartz was principally responsible for the letter and signed it on the firm's behalf, Robert Clemente, an associate with the firm, actually drafted the letter under Mr. Schwartz's direction and supervision. Mr. Clemente attests that all of the letter's factual representations came from Mr. Schwartz and an undisclosed party, and that in response to his repeated inquiries regarding the need for verification of the representations, Mr. Schwartz indicated that the facts either had been, or would be, verified by him personally. Mr. Schwartz disagrees; he maintains that it was Clemente's responsibility to comply with whatever "due diligence" requirements were applicable in drafting the letter.

The opinion letter was issued on August 30, 1983 and was addressed to MEL's Board of Directors. It contained no limitation with respect to dissemination and did not identify the source of the factual representations contained therein, but indicated that the representations had been assumed to be true and accurate and included a disclaimer to the effect that the defendants had made no attempt to verify the various representations independently. The defendants, however, expressly...