Adler v. Berg Harmon Associates

• Decision Date: 29 March 1993
• Docket Number: No. 89 Civ. 8114 (WCC).,89 Civ. 8114 (WCC).
• Parties: Edward ADLER, et al., Plaintiffs, v. BERG HARMON ASSOCIATES, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

816 F. Supp. 919

Edward ADLER, et al., Plaintiffs, v. BERG HARMON ASSOCIATES, et al., Defendants.

No. 89 Civ. 8114 (WCC).

United States District Court, S.D. New York.

March 29, 1993.

COPYRIGHT MATERIAL OMITTED

Beigel & Sandler, New York City (Bijan Amini, Alexander T. Moore, of counsel), for plaintiffs.

Skadden, Arps, Slate, Meagher & Flom, New York City (William P. Frank, Steven Kronengold, Peretz Bronstein, of counsel), for Primerica Corp., Berg Enterprises, Inc. and Kenneth Berg.

Jacobs Persinger & Parker, New York City (I. Michael Bayda, of counsel), for Harmon Envicon Associates, f/k/a Berg Harmon Associates, Harmon Associates, Robert T. Harmon, Charles N. Loccisano and Southern Ventures, Inc., f/k/a Berg Ventures, Inc.

OPINION AND ORDER

WILLIAM C. CONNOR, District Judge.

Plaintiffs Edward Adler, et al bring this action against Harmon Envicon Assoc., f/k/a Berg Harmon Assoc.; Harmon Assoc.; Robert T. Harmon; Charles N. Loccisano; and Southern Ventures, Inc., f/k/a Berg Ventures, Inc. (the Harmon defendants) and Primerica Corp.; Breg Enterprises, Inc.; and Kenneth Berg (the Berg defendants) for violations of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 promulgated thereunder; Racketeering and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.; and for common law fraud, negligence, and breach of fiduciary duty. The action is presently before the Court on defendants' motion to dismiss and, in the alternative, for summary judgment.

PROCEDURAL HISTORY AND BACKGROUND

The original complaint in this action was filed on December 7, 1989. On June 20, 1991, two Supreme Court decisions created a uniform, retroactive 1- and 3-year limitations period for actions brought under § 10(b) of the Securities and Exchange Act. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991) (establishing the period of limitations); James B. Beam Distilling Co. v. Georgia, ___ U.S. ___, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991) (applying Lampf retroactively). As a result, plaintiffs amended their complaint deleting the § 10(b) claim except to the extent that it served as a predicate for the RICO action. Defendants then filed a motion to dismiss under Rules 9(b) and 12(b)(6), Fed.R.Civ.P. The motion was granted with leave to refile by an opinion and order of this Court dated April 7, 1992. Meanwhile, Congress amended the Securities and Exchange Act of 1934 by enacting § 27A which modified the retroactive effect of Lampf. Pursuant to this amendment, plaintiffs were permitted to reinstate their § 10(b) claims by an opinion and order of this Court dated April 27, 1992. The action is now before the Court on defendants' second motion to dismiss or, in the alternative, defendants' motion for summary judgment.

We assume familiarity with our two prior decisions and therefore give only a brief summary of the underlying transaction. In the early 1980's Berg Harmon, a joint venture between Harmon Assoc. and Berg Ventures, Inc., syndicated and promoted the sale of limited partnership interests in 50 real estate tax shelters. The partnership units were marketed to a limited number of investors through the use of private placement memoranda (PPM). The investments lost most of their value in the late 1980's. The investor-plaintiffs claim that the decline was due to the inevitable collapse of defendants' pyramid or "Ponzi" scheme which was fraudulently concealed in the PPMs.

Plaintiffs claim to have been defrauded in four ways. First, by false assertions in the PPMs that the properties which the partnerships purchased had sufficient rental revenues to cover their current operating expenses and primary debt service. Compl. ¶ 11(a), 13. Second, by failure of the PPMs to disclose the fact that the affiliate hired to manage the properties, for a percentage of the rental revenue, actually performed no management services. Compl. ¶ 11(b). Third, by defendants' failure to disclose commissions that were paid to their purchasing representatives. Compl. ¶ 11(c). Finally, by defendants' failure to disclose loans, made by the general partners to the partnership, to cover operating deficits on each property. Compl. ¶ 12.

DISCUSSION

There are two distinct motions made by defendants in this case. All defendants move to dismiss the complaint under Rule 9(b) and 12(b)(6) or, in the alternative, for summary judgment. The basis of this motion is that the alleged misstatements and omissions do not support a claim for securities fraud. Since this motion, if granted, would dispose of the entire case, we address it first. The Berg defendants, while joining their codefendants' motion, also move to dismiss the complaint under Rule 9(b) for its failure sufficiently to allege their connection to the fraudulent conduct and the RICO enterprise.

I. The Motion by All Defendants to Dismiss or for Summary Judgment

Summary judgment is granted only when, after drawing all reasonable inferences in favor of the party opposing the motion, no reasonable trier of fact could find for the nonmoving party. Lund's, Inc. v. Chemical Bank, 870 F.2d 840, 844 (2d Cir.1989).¹ A summary judgment is not appropriate where material factual matters are in dispute. National Union Fire Ins. Co. v. Turtur, 892 F.2d 199, 203 (2d Cir.1989). However, if one party puts forth evidence on an issue, the other party can not avoid summary judgment by resting solely on contentions in its pleadings. 56(e), Fed.R.Civ.P.²

A. The Securities Fraud Claim

In order to prevail on a claim for securities fraud under § 10(b) and Rule 10b-5 5 plaintiffs must show that defendants made material misstatements or omissions with scienter, and that plaintiffs relied on the misrepresentations and suffered a loss caused thereby. Burke v. Jacoby, 981 F.2d 1372, 1378 (2d Cir.1992). Plaintiffs' third amended complaint alleges four misstatements or omissions in the PPM which form the basis of the securities fraud claim. Defendants have failed to demonstrate that the first alleged misstatement could not support plaintiffs' claim. Thus, the motion to dismiss is denied.³ However, plaintiffs' three other fraud allegations do not support their claim, and are therefore dismissed.

1. The Undisclosed Operating Deficit

The PPMs stated that the rent on each property was sufficient to pay its current normal operating expenses and to meet the debt service on the first mortgage. L.T. PPM at 26; C.C. PPM at 32; F.H. PPM at 27. The complaint alleges that in fact all the properties were experiencing operating deficits and that the deficits in the Tree Lake, Friendly Hills, and Country Club Apartments were $100,000, $1,200,000, and $900,000 respectively. Compl. ¶¶ 11(a), 13. Plaintiffs claim that defendants made these statements knowing them to be untrue; that plaintiffs relied on these statements; and that the operating losses ultimately made their securities worthless.

Defendants argue that these statements in the PPMs were not materially false or misleading. Defendants assert plaintiffs' calculations fail to account for lump sum interest payments and repair expenses which the "Projections" sections of the PPMs assumed would be paid out of the proceeds of the offer. Defendants purport to correct for these assumptions and to show that two properties had no deficit and another had a deficit much smaller than that claimed by plaintiffs.⁴

There are three reasons why defendants' argument is insufficient to support this motion to dismiss. First, the PPMs represented that the present rents were sufficient to cover operation costs and first mortgage debt service, while defendants' argument is based to a large degree on predictions of future rents. Defendants present no evidence that these figures represent the actual rents and expenses at the time the statements were made, and the fact that these figures appear in the "Projections" portion of the PPMs suggests that they are not actual financial data. Second, even if these calculations were made from actual financial figures, defendants' own calculations show a deficit, albeit much smaller than that claimed by plaintiff, in one of the properties. Finally, defendants only make the calculations as to three of the forty-one limited partnerships at issue. Although our prior decision accepted these PPMs as representative of all those at issue, only the generalized representations, common to all the PPMs, were at issue at that time.⁵ Defendants' own analysis shows that the rents, expenses, debt service, and the assumptions used to calculate a deficit differed from property to property. We will not dismiss a complaint which alleges that there were material misstatements in forty-one PPMs on defendants' analysis of only three. Thus, defendants' motion to dismiss the complaint as to the first alleged misstatement is denied.

2. The Undisclosed Failure of the Managing Affiliate to Actually Manage the Properties

The second misstatement or omission alleged in the complaint concerns a statement in the PPMs that an affiliate of the general partner, First Realty Management Consultants (First Realty), had been retained to manage the property for a fixed percentage of the rental receipts. In addition, the PPMs state that the managing agent may be reimbursed for certain expenses including the salary paid to First Realty's area manager. T.L. PPM at 52; F.H. PPM at 57; C.C. PPM at 62. The complaint alleges that this representation was misleading because the PPMs failed to disclose that the managing affiliate performed no function other than hiring professional management for which an additional expense was charged to each property. Compl. ¶ 11(b). However, the undisputed affidavit and documents submitted by the parties demonstrate that this assertion is without merit. The affidavit of defendant, Charles N. Loccisano, indicates that First Realty had staffed headquarters in New Jersey and maintained a...