Becherer v. Merrill Lynch

• Decision Date: 24 November 1992
• Docket Number: Civ. A. No. 89-72502.
• Parties: Richard C. BECHERER, Lawrence Milton Richard, Robert A. Horvath and Shirley L. Horvath, and Henry V. Denolf and Joann L. Denolf, individually, and on behalf of all others similarly situated, Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Can-American Corporation, Can-American Realty Corporation, Shelter Seagate Corporation, Garrett G. Carlson, Graham C. Lount, Arni Thorsteinson, Frank Lavin, Martin Cicco, Laventhol & Horwath, Dominion Financial & Investment Corp., n/k/a Trustbank Mortgage Center, Inc., M.A. Mortenson Company, Winsor/Faricy Architects, Inc., and Midwest Title Guaranty Company of Florida, Defendants.
• Court: U.S. District Court — Western District of Michigan

799 F. Supp. 755

Richard C. BECHERER, Lawrence Milton Richard, Robert A. Horvath and Shirley L. Horvath, and Henry V. Denolf and Joann L. Denolf, individually, and on behalf of all others similarly situated, Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Can-American Corporation, Can-American Realty Corporation, Shelter Seagate Corporation, Garrett G. Carlson, Graham C. Lount, Arni Thorsteinson, Frank Lavin, Martin Cicco, Laventhol & Horwath, Dominion Financial & Investment Corp., n/k/a Trustbank Mortgage Center, Inc., M.A. Mortenson Company, Winsor/Faricy Architects, Inc., and Midwest Title Guaranty Company of Florida, Defendants.

Civ. A. No. 89-72502.

United States District Court, E.D. Michigan, S.D.

August 7, 1992.

Amendment Filed November 24, 1992.

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Bruce E. Gerstein, Garwin, Bronzaft, Gerstein & Fisher, New York City, Eugene A. Spector, Spector & Roseman, P.C., Philadelphia, Pa., and Elwood S. Simon, Elwood S. Simon & Associates, Bloomfield Hills, Mich., for plaintiffs.

Steve Gaskins, Cosgrove, Flynn, Gaskins & Haskell, Mary Yeager, Faegre & Benson, Sam Kaplan, Kaplan, Strangis & Kaplan, Minneapolis, Minn., and Jon B. Gandelot, Gandelot & Dickson, P.C., Detroit, Mich., for SSG.

Thomas G. McNeill, Dickinson, Wright, Moon, VanDusen & Freeman, Detroit, Mich., for Mortenson.

Jonathan T. Walton, Jr., Clark, Klein & Beaumont, Detroit, Mich., for Trustbank.

Douglas G. Graham, Butzel Long, P.C., Detroit, Mich., for Merrill Lynch.

Melissa Horne, Kerr, Russell and Weber, Detroit, Mich., for Winsor/Faricy.

Frank W. Brochert, Plunkett & Cooney, Detroit, Mich., for Midwest Title.

Mark T. Boonstra, Miller, Canfield, Paddock & Stone, Detroit, Mich. and Howard O. Godnick, Schulte Roth & Zabel, New York City, for Registry Hotel Corp.

Susan LaCava, Madison, Wis., for Assoc. of Unit Owners.

                                              INDEX OF OPINION
                Section                                                                         Page
                   I.  Background .............................................................  760
                  II.  Breach of Contract Claim Against SSG ...................................  761
                       A.  Findings of Fact ...................................................  762
                       B.  Conclusions of Law .................................................  765
                       C.  Summary ............................................................  767
                 III.  Fraud Claims Against Merrill Lynch and SSG .............................  767
                       A.  Complete v. Substantially Complete Fraud Claim .....................  768
                       B.  Purchase v. Lease Fraud Claim ......................................  769
                       C.  Rule 10b-9 and 15c2-4 Fraud Claims .................................  769
                       D.  Land Sales Act Claim ...............................................  770
                  IV.  Contract Claims Against Merrill Lynch ..................................  771
                   V.  Claims Against Trustbank Mortgage Center ...............................  772
                       A.  Contract Claims ....................................................  772
                       B.  Tort Claims ........................................................  772
                       C.  The D'Oench Duhme Doctrine ................................  773
                  VI.  Claims Against Mortenson and Winsor/Faricy .............................  775
                 VII.  Midwest Title ..........................................................  775
                VIII.  Damages Resulting From Breach of FFE Agreement .........................  776
                       A.  The Measure of Damages .............................................  776
                           1. Plaintiff Class' Position .......................................  776
                           2. Defendants' Position ............................................  776
                       B.  Out-of-Pocket Damages ..............................................  777
                

                Section                                                                         Page
                  IX.  Conclusion .............................................................  777
                   X.  Orders .................................................................  778
                          .   Furniture, Fixtures and Equipment Lease Claim
                          .   Breach of Contract Claims on Closing of Sale
                          .   Merrill Lynch's Motions To Dismiss Complaints
                          .   Frank Lavin's Motion To Dismiss Complaints
                          .   Martin Cicco's Motion To Dismiss Complaints
                          .   Shelter Seagate Group's Motion For Summary Judgment on Fraud
                                Claims
                          .   Trustbank's Motion For Summary Judgment
                          .   Mortenson's Motion For Stay Pending and Directing Arbitration
                          .   Winsor/Faricy's Motion For Stay Pending and Directing Arbitration
                          .   Midwest Title's Motion To Be Dropped As Misjoined Party
                          .   Plaintiff Class' Motion To Join Midwest Title As Defendant
                          .   Plaintiff Class' Cross-Motion For Summary Judgment As To First
                                Amended Complaint
                  XI.   Appendices
                          .   A—Transcript of April 23, 1990 Hearing
                          .   B—Opinion/Order of November 20, 1990
                          .   C—Order of March 15, 1991
                          .   D—Transcript of May 7, 1991 Hearing
                

OPINION

FEIKENS, District Judge.

I. Background

This case began with a lengthy complaint containing sixteen counts. It alleged that a group of 298 investors, who asked to be designated as a class, purchased unit interests in a 474-room resort hotel (The Registry Hotel), herein referred to as "the hotel," to be located on Pelican Bay in Naples, Florida, for a total price of $89,225,500. Named as defendants are a group, referred to herein as "the developer," Can-American Corporation, Can-American Realty Corporation, Shelter Seagate Corporation, Garrett G. Carlson, Graham C. Lount, and Arni Thorsteinson. Also named as defendants are Merrill Lynch, Pierce, Fenner & Smith, Inc.; Frank Lavin; Martin Cicco; Laventhol & Horwath, certified public accountants retained by the developer; Dominion Financial & Investment Corporation; M.A. Mortenson Company; and Winsor/Faricy Architects, Inc.

The counts captioned in the complaint are:

1. Violation of the Exchange Act, § 10(b) and Rule 10b-5;

2. Violations of the Exchange Act, § 20;

3. Violations of the Securities Act, § 12(2);

4. Violation of the Securities Act, § 15;

5. Fraudulent and negligent misrepresentation;

6. Violation of the Land Sales Act;

7. Aiding and abetting/conspiracy;

8. Violation of RICO;

9. Violation of Florida's RICO statute;

10. Breach of fiduciary duty (against named defendants);

11. Breach of fiduciary duty (against named defendants);

12. Breach of fiduciary duty (against named defendants);

13. Malpractice/negligence;

14. Respondeat superior;

15. Breach of warranty; and

16. Breach of contract.

In managing this case, I concluded that there was a strong need for the adoption of special procedures, since the case involved complex issues, multiple parties, and difficult legal questions (Fed.R.Civ.P. 16(c)(10)).

The complaint was filed on August 21, 1989, and there followed a blizzard of motions and briefs. Between August 21, 1989 and April 23, 1990, the date on which the court was able finally to schedule a Rule 16 conference, there were ninety docket entries, comprised of discovery motions, Rule 12 and 56 motions, and supporting and response briefs.

Clearly, Rule 16 had to be vigorously applied.

A pretrial conference held on April 23, 1990 began this process. With close questioning of parties' counsel, it appeared that the complaint was bottomed on allegations of fraud and breach of contract. Three occurrences of fraud were alleged:

1. That the Private Placement Memorandum (the "PPM"), which disclosed that the W.B. Johnson Company was interested in erecting a hotel on Pelican Bay, did not say that that hotel was a Ritz-Carlton;

2. That the PPM stated that the hotel was to be furnished with approximately $13.5 million of furniture, fixtures and equipment; and that defendants, or some of them, rather than perform that contractual undertaking, leased the furniture, fixtures and equipment placed in the hotel and thereby burdened the hotel with lease payments; and

3. That fraud surrounded the October 31, 1986 closing date, when the hotel was to be "substantially completed."

That status conference on April 23, 1990, as the record amply demonstrates (see Appendix A), compacted the prolix allegations of fraud in the complaint to three manageable areas and, on May 15, 1990, a detailed order managing initial discovery was entered.

In motion hearings, these three occurrences were then addressed.

In an Opinion and Order dated November 20, 1990, I granted a motion for summary judgment on plaintiffs' first fraud claim. I found no fraud in the claim that the investors were not notified that another hotel to be built on Pelican Bay would be a Ritz-Carlton hotel. That Opinion, and the resulting Order, sets forth the reasons for the grant of summary judgment and is attached hereto as Appendix B.

On March 15, 1991, I entered an Order for an expedited trial. I determined that the remaining two issues of alleged fraud could be tried as breach of contract claims against the developer Shelter Seagate, Can-American Corporation, Can-American Realty Corporation, and the individual defendants Carlson, Lount and Thorsteinson (referred to collectively as "the Shelter Seagate Group", or as "SSG", or as "the developer"). In that Order I also certified a plaintiff class (attached hereto as Appendix C). Jury trial was waived.

On the second claimed issue of fraud, reformed into a breach of contract claim, i.e., the decision by the developer-defendants to lease furniture, fixtures and equipment for the hotel rather than to purchase them, resulted, following a full hearing, in a grant of partial summary judgment in favor of the plaintiff class and against the developer-defendants. That ruling was made on May 7, 1991. A transcript...