962 F.2d 169 (2nd Cir. 1992), 1057, Finkel v. Stratton Corp.

Docket Nº:1057, Docket 91-9252.
Citation:962 F.2d 169
Party Name:Paul FINKEL, Paul Magnuson, Glenn Yarnis, and Harvey Watkins, Individually and as Representatives of all persons similarly situated, Plaintiffs-Appellants, v. The STRATTON CORPORATION, a Vermont Corporation; Moore & Munger, Inc., a Delaware Corporation, Stig Albertsson, Lovick Suddath, David A. Rosow, Sherman T. Van Esselstyn, Victor C. Braun, Jr.,
Case Date:April 20, 1992
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 169

962 F.2d 169 (2nd Cir. 1992)

Paul FINKEL, Paul Magnuson, Glenn Yarnis, and Harvey

Watkins, Individually and as Representatives of

all persons similarly situated,

Plaintiffs-Appellants,

v.

The STRATTON CORPORATION, a Vermont Corporation; Moore &

Munger, Inc., a Delaware Corporation, Stig Albertsson,

Lovick Suddath, David A. Rosow, Sherman T. Van Esselstyn,

Victor C. Braun, Jr., Henry L. Levkoff, Wayne G. Granquist,

Robert H. Kelso, and Dowmar Securities Inc., a New York

Corporation, Defendants-Appellees.

No. 1057, Docket 91-9252.

United States Court of Appeals, Second Circuit

April 20, 1992

Argued March 10, 1992.

Page 170

Kenneth J. Wilbur, New York City (Shanley & Fisher, P.C., of counsel), for plaintiffs-appellants.

Jeremy Dworkin, South Londonderry, Vt. (Richard J. Wiener, Cadwalader, Wickersham & Taft, New York City, George Brooks, Montpelier, Vt., Gregory S. Mertz, Burlington, Vt., of counsel), for defendants-appellees.

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

WALKER, Circuit Judge:

Plaintiffs Paul Finkel, Paul Magnuson, Glenn Yarnis, and Harvey Watkins appeal from the dismissal of their purported federal securities law class action. Plaintiffs alleged below that the Stratton Corporation ("StratCorp"), along with the individual officers and directors of StratCorp, Moore & Munger, Inc., StratCorp's parent company, and Dowmar Securities, Inc., ("Dowmar"), StratCorp's investment adviser (collectively, "Stratton") made false and misleading statements in connection with the sale of units in "The Stratton Mountain Village Lodge", a development located at the Stratton Mountain ski resort. Plaintiffs brought suit pursuant to §§ 11, 12(2) and 17(a) of the Securities Act of 1933 (" '33 Act"), 15 U.S.C. §§ 77k, 77l (2) and 77q(a); § 10(b) of the Securities Exchange Act of 1934 (" '34 Act"), 15 U.S.C. § 78j(b); the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. § 1961 et seq.; and a host of state statutory and common law rules.

On defendants' motion, the district court dismissed plaintiffs' claims. The court held that the § 11 and § 12(2) claims were time barred, and that no private right of action exists under § 17(a). The court also concluded that plaintiffs' § 10(b) and RICO claims were inadequate because plaintiffs had not pled fraud with particularity. The district court granted plaintiffs leave to replead the § 10(b) and RICO claims, but plaintiffs failed to do so. Finally, the court declined to exercise pendent jurisdiction over plaintiffs' state law claims. This appeal

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from the dismissal of the § 11, § 12(2) and § 17(a) claims followed.

Background

Plaintiffs sued on their own behalf and as representatives of the approximately 70 individuals who acquired the 91 condominium units designated as "Phase I" of the Village Lodge. The parties agree that the units, sold subject to a mandatory management agreement under which Stratton contracted to operate the units collectively as lodging accommodations, constitute securities within the meaning of the federal securities laws. See United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852-53, 95 S.Ct. 2051, 2060-61, 44 L.Ed.2d 621 (1975).

Stratton filed with the Securities and Exchange Commission (SEC) a registration statement and prospectus, dated June 21, 1984, describing the development in great detail. Stratton planned to build and sell the lodge units in two phases. Phase I consisted of the 91 units at issue here. In Phase II, Stratton planned to offer an additional 83 units. The prospectus represented that these lodge units would form an integral part of an "inter-related resort village" called Stratton Mountain Village, to contain, in addition to the condominium units, a 16-18,000 square foot conference center. The prospectus acknowledged quite clearly that the conference center might never be built:

Though future development of facilities at Stratton Mountain is master planned or being planned for municipal approval, such future development is neither financed or approved by the appropriate public authorities, but neither Stratcorp nor any of its affiliates make any representation or commitment as to the construction or availability of any recreational, commercial, or other facilities at Stratton Mountain or Bromley Ski Area beyond those already in place or under construction, and purchase of a condominium security offered hereby should not be made in reliance on any facility not already in place or under construction at Stratton Mountain and Bromley. Registrant has no reason to believe that all necessary consents, permits and approvals will not be received. The foregoing is set forth herein not as a promise of future facilities but rather to inform a prospective investor of Stratcorp's plans and intentions.

Lack of Meeting Facilities. The Lodge will have no facilities for meeting or conference business until the Conference Center is built nearby. No assurance can be given that the conference center ever will be built and certainly, at present, financing for such center is not available. (emphasis added).

Despite these impressive disclaimers, the plaintiffs contend that they purchased their units in the expectation of reaping profits from customers attracted by the forthcoming conference center.

The prospectus also detailed the terms of the offering. Potential purchasers would initially deposit with Dowmar an amount up to 10% of the purchase price. An investor could withdraw that downpayment without penalty at any time until "all 91 units in Phase I have been subscribed." Once Phase I was fully subscribed, Dowmar would request each investor to increase her deposit to a full 10% of the purchase price. Upon depositing the full 10%, the investor lost the ability to withdraw from the offering and became obligated for the remaining 90% of the purchase price. The prospectus provided that if a purchaser attempted to renege after the cancellation rights terminated, Stratton would be entitled to damages equal to "the down payment plus such additional damages that StratCorp can establish in any action or suit."

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