In re Integrated Resources Real Estate
| Decision Date | 04 April 1994 |
| Docket Number | MDL No. 897. Misc. No. 21-61 (RWS). |
| Citation | 850 F. Supp. 1105 |
| Parties | In re INTEGRATED RESOURCES REAL ESTATE LIMITED PARTNERSHIPS SECURITIES LITIGATION. |
| Court | U.S. District Court — Southern District of New York |
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Anderson Kill Olick & Oshinsky, P.C., New York City, for defendants as noted herein; Steven M. Pesner, Robert H. Pees, David M. Zensky, of counsel.
Beigel & Sandler, New York City, for plaintiffs as noted herein; Elizabeth Toll, Marilyn Neiman, Alexander T. Moore, of counsel.
Camhy Karlinsky & Stein, New York City, for defendants as noted herein; Kenneth A. Lapatine, Mark H. Budoff, of counsel.
Carter, Ledyard & Milburn, New York City, for defendant Landauer Associates; Beth D. Jacob, Jonathan F. Mack, of counsel.
Martin Mushkin, New York City, for plaintiffs as noted herein.
Townley & Updike, New York City, for defendants as noted herein; Jonathan M. Herman, of counsel.
Waite, Schneider, Bayless & Chesley Co., L.P.A., Cincinnati, OH, for plaintiffs in Ellingson v. Kanzar Assocs.; Stanley M. Chesley, Terrence L. Goodman, of counsel.
Bower & Gardner, New York City, for defendant Appraisal Group Intl.; Barry G. Saretsky, of counsel.
D'Amato & Lynch, New York City, for defendants Dreyer & Traub; Sharon McClosky, of counsel.
Gilbert Segall & Young, New York City, for defendant Anchor National Life Ins.; Jeffrey L. Livingston, Anthony J. Harwood, of counsel.
Dreyer & Traub, New York City, for defendants Rosenberg & Rosenberg; Hannah Flamenbaum, of counsel.
The Judicial Panel on Multidistrict Litigation ("MDL") consolidated and transferred to this Court on October 10, 1991, a number of actions arising out of the demise of partnerships affiliated with Integrated Resources, Inc. ("Integrated"), which filed for relief under Chapter 11 of the bankruptcy code, 11 U.S.C. ?? 101, et seq., in 1990. See In re Integrated Resources, Inc., 135 B.R. 746, 748 (Bankr.S.D.N.Y.1992), aff'd, In re Integrated Resources, Inc., 147 B.R. 650 (S.D.N.Y.1992). Pursuant to pretrial orders, the Defendants have moved to dismiss the complaints as set forth below ("Global Motion III"). The motions in the main are granted as described below.
Since the transfer of the original actions, several others have been filed in the Southern District of New York or transferred by the Multidistrict Panel to this Court and consolidated with these proceedings ("Later Filed Actions"). There are presently pending 38 actions.
In general, the Plaintiffs in each of these actions bought limited partnership interests in ventures sponsored by Integrated or an entity associated with Integrated. The ventures were investment vehicles which bought, owned, operated, and leased residential and commercial real estate and equipment. The offer and sale of these interests was conducted in compliance with the requirements of Regulation D ("Reg. D"), Rules 501-08, 17 C.F.R. 230.501-.508, of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. ?? 77a, et seq., thereby exempting the transactions from the registration requirements of the 1933 Act. Since these transactions are not registered with the Securities and Exchange Commission (the "SEC"), the 1933 Act limits purchasers to those who qualify as "accredited investors."
To qualify as a Reg. D accredited investor, a "natural person" must have "an individual net worth, or joint net worth with that person's spouse, at the time of his or her purchase in excess of $1,000,000" or:
had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
Rule 501(a)(5) & (6). A trust qualifies for accredited-investor status if it has "total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person ...," Rule 501(a)(7), to wit, one who "has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment ...," Rule 506(b)(2)(ii).
The purpose of these requirements is to facilitate and expedite specially designed offerings, while at the same time offsetting the danger posed by the lack of SEC scrutiny of the offer and sale by precluding those from participating in the offering who are inexperienced purchasers of securities and unable to afford professional advice regarding the merits and risks of purchasing the offered securities. Each of the investors in the Integrated partnerships was required to represent in writing that he or she qualified for Reg. D accredited-investor status and met the additional financial criteria set forth in the "Who May Invest" section of the confidential private placement memorandum ("PPM") issued for each partnership.1
The investors were also warned in the respective partnership PPMs of various financial risks involved with each partnership investment. The following statement from the first paragraph of the Clovine Associates Limited Partnership PPM is typical:
The tax consequences of an investment in the Partnership, the absence of Cash Flow from such investment for at least the first four years of the operation of the Partnership and the illiquidity of such investment make the purchase of Interests suitable only for investors who have substantial net worth and substantial taxable income, and an Interest should be purchased only as a long-term investment.
Additionally, each PPM contained a section entitled "Risk Factors," in which the various risk factors of the investment were set forth, including, for example, restrictions on transferability and the possible lack of a market for the investment interests; the possible unavailability of tax benefits and changes in the tax law; risks arising from the terms and conditions of purchase money notes, mortgages, and leases; the possible inability to refinance the project; the possible lack of available sources of funds for the operating partnership; risks arising from leveraged financing and the ownership of the specific property; the possible inability to sell the project; and the possible adverse effects of technological developments in competing equipment.
The limited partnerships were highly leveraged, and the Plaintiffs allege they were promised considerable tax savings through debt financing and, after the initial debt was paid off, considerable profits from rental income from the buildings and equipment. The Plaintiffs further allege that the investments had no prospects for success from their inception and served no other economic purpose than to provide the Defendants with millions of dollars of profit in sales proceeds, fees, and other commissions.
In each of the pending actions, different configurations of corporations and corporate officers are named as Defendants. However, the four most significant corporate defendants are briefly described below.
Defendant Integrated Resources, Inc. ("Integrated") organized hundreds of limited partnerships and investment funds.2
Defendant Integrated Resources Equity Corporation ("IREC"), a Delaware corporation with its principal place of business in New York, New York, is a wholly-owned subsidiary of Integrated and acted as the participating broker-dealer which sold many of the plaintiffs their limited partnership interests.
Defendant Resources Funding Corporation ("RFC"), a wholly-owned subsidiary of Integrated, was the entity through which many of the limited partnerships acquired their operating interests in the various limited partnerships.
Defendant Integrated Financial Inc., a corporation organized under the laws of the State of Delaware, was a wholly-owned subsidiary of Integrated and sold limited partnership interests to many of the Plaintiffs.
On February 3, 1992, this Court entered a "Pre-Trial Order No. 1" ("Pre-Trial Order") which, among other things, established an initial motion and discovery schedule for all actions subject to the MDL Order. The Pre-Trial Order created four separate global motion categories relating to the pending cases: (1) statutes of limitations governing the federal securities claims ("Global Motion I"), (2) the legal sufficiency of the federal securities claims ("Global Motion II"), (3) the legal sufficiency of the federal RICO claims ("Global Motion III"), and (4) all Global Motion I, II, III motions applicable to the Later Filed Actions ("Global Motion IV"). The Pre-Trial Order also consolidated the briefing and hearing schedules for Global Motions I and II and Global Motions III and IV.
Additionally, the Pre-Trial Order stayed the production of documents to the Plaintiffs by various parties pending the disposition of the Global Motions.3 The Pre-Trial Order also stayed the depositions of parties, except as to the Plaintiffs' deposition of Landauer Associates, Inc., in Clovine/Ellingson, pending the disposition of the Global Motions and the completion of document discovery.
On January 8, 1993, this Court decided Global Motions I and II. See In re Integrated Resources Real Estate Ltd. Partnerships Sec. Litig., 815 F.Supp. 620 (S.D.N.Y.1993) ("Global I" and/or "Global II"). On July 20, 1993, the parties filed with this Court a stipulated order dismissing the RICO claims in 13 of the original 14 actions subject to Global Motions I and II.
Thus, at this stage, Global Motion III, which seeks to dismiss the RICO claims, applies only to the following actions:
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