Ahmed v. Trupin

• Decision Date: 05 January 1993
• Docket Number: No. 89 Civ. 7645 (RWS).,89 Civ. 7645 (RWS).
• Parties: Khalid F. AHMED, et al., Plaintiffs, v. Barry H. TRUPIN, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

809 F. Supp. 1100

Khalid F. AHMED, et al., Plaintiffs, v. Barry H. TRUPIN, et al., Defendants.

No. 89 Civ. 7645 (RWS).

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

January 5, 1993.

COPYRIGHT MATERIAL OMITTED

O'Donnell, Fox & Gartner, P.C., New York City, for plaintiffs; William G. O'Donnell, of counsel.

McDonough Marcus Cohn & Tretter, P.C., New York City, for defendant Stuart Becker & Co.; Diane K. Kanca, Eugene H. Goldberg, of counsel.

Eisenberg Honig Fogler & Davis, New York City, for defendant Eisenberg Honig & Fogler; Steven C. Bagwin, of counsel.

OPINION

SWEET, District Judge.

Defendant Stuart Becker & Co., P.C. (the "Becker Defendants") has moved to dismiss the plaintiffs' Second Amended Complaint for failure to plead fraud with particularity pursuant to Federal Rules of Civil Procedure, Rule 9(b) and for failure to state a claim upon which relief may be granted pursuant to Federal Rules of Civil Procedure, Rule 12(b)(6). Defendant Eisenberg, Honig & Fogler ("Eisenberg Honig") has also moved to dismiss on the same grounds and adds claims for dismissal under Federal Rules of Civil Procedure, Rules 56 and 12(b)(1), and a claim for sanctions under Federal Rules of Civil Procedure, Rule 11. For the following reasons, the motions to dismiss are granted. Eisenberg Honig's motion for summary judgment and sanctions pursuant to Federal Rules of Civil Procedure, Rules 56 and 11, are denied.

THE PARTIES

The underlying disputes and principal parties that are the subject of this and related actions are recounted in the prior opinions of this Court, familiarity with which is presumed. See, e.g., Morin v. Trupin, 799 F.Supp. 342 (S.D.N.Y.1992) (decided July 28, 1992); Ahmed v. Trupin, 781 F.Supp. 1017 (S.D.N.Y.1992) (decided January 9, 1992); Morin v. Trupin, 778 F.Supp. 711 (S.D.N.Y.1991) (decided November 18, 1991); Morin v. Trupin, 747 F.Supp. 1051 (S.D.N.Y.1990) (decided September 29, 1990); Morin v. Trupin, 738 F.Supp. 98 (S.D.N.Y.1990) (decided May 3, 1990). In this particular case, there are 123 plaintiffs. One, the Sarasota Plaza Defense Fund, Inc., is a not-for-profit corporation organized under the laws of Florida; the rest are individual investors in the limited partnerships (which offered assorted interests in commercial real estate, the "Sarasota Property," located in Sarasota, Florida) that are the subject of these actions.

Barry Trupin ("Trupin"), together with other corporations (the "Rothschild Group") and individuals associated with him, is alleged to have induced the plaintiffs into investing in these partnerships by misrepresenting the soundness of the investment properties and to have syndicated the interests as part of a fraudulent conspiracy designed to obtain funds from the investing public.

Stuart Becker & Co. (the "Becker Defendants" or "Becker") is an accounting firm and New York professional corporation retained to provide financial forecasts for and to conduct audits of the Sarasota Plaza Associates.

Eisenberg Honig is a law firm and New York professional corporation retained to prepare the Sarasota Plaza Associated private placement memorandum, a tax opinion, and an opinion on the legality of the limited partnership units.

PRIOR PROCEEDINGS

The Ahmed complaint was filed on November 16, 1989. The plaintiffs voluntarily withdrew with leave to replead their complaint after the court dismissed the complaint in the related underlying action of Morin v. Trupin, 747 F.Supp. 1051 (S.D.N.Y.1990) on September 29, 1990. The Amended Complaint was filed on April 4, 1991. Defendants Becker's and Eisenberg Honig's motion to dismiss the Ahmed plaintiffs' Amended Complaint was granted by this Court on January 9, 1992 (Ahmed v. Trupin, 781 F.Supp. 1017 (S.D.N.Y.1992), with leave to replead. The Ahmed plaintiffs then served their Second Amended Complaint on March 10, 1992. The Becker Defendants moved to dismiss the plaintiffs' claims against them on May 29th, 1992 and Eisenberg Honig moved to dismiss the claims against them on June 3rd, 1992.

BACKGROUND

The Ahmed plaintiffs, like the plaintiffs in the related actions of Morin v. Trupin and Alberti v. Trupin, are investors in limited partnership interests in the Sarasota properties, commercial real estate run by one of the companies in Trupin's Rothschild Group. The Second Amended Complaint, like its predecessors, alleges that Trupin falsely inflated the values of the Sarasota Properties by selling them between companies controlled by him but ostensibly independent, with a mark-up in price with each sale. It also alleges that Trupin and his companies had a history of offering tax shelters whose tax deductions were disallowed by the I.R.S., that the tax benefits being offered to sweeten the Sarasota deal were equally likely to be disallowed by the I.R.S., and that the accountants, the Becker defendants, and the law firm Eisenberg Honig knew or recklessly refused to learn that this material information was being omitted from the documents offering the limited partnerships. The Second Amended Complaint (hereinafter "Complaint") makes the same allegations as the first two complaints filed by Plaintiffs against the professionals: that both the Becker defendants and Eisenberg Honig knowingly helped to prepare misleading partnership offering materials in connection with the limited partnerships.

Plaintiffs have alleged securities fraud violations under Section 10(b) of the 1934 Securities and Exchange Act (15 U.S.C. § 78j) on the part of all defendants, aiding and abetting the securities law violations and professional negligence on the part of the Becker defendants and Eisenberg Honig, a pattern of racketeering activity under RICO with the securities violations as the predicate acts, and a variety of state law claims, including civil theft and breach of fiduciary duty, on the part of the Rothschild Group.

DISCUSSION

The Applicable Limitations Periods

Defendants maintain that the securities claims of the plaintiffs who reside and who purchased their interests in the Third, Seventh, and Second Circuits are time-barred. Plaintiffs maintain that the claims of none of the plaintiffs are barred, based on allegations that all plaintiffs have standing to allege the state-law claims and that defendants' behavior has tolled the statute of limitations.

1. Statute of Limitations for Professional Negligence

This Court analyzed the statute of limitations applicable to the actions here in a previous opinion (Ahmed v. Trupin, 781 F.Supp. 1017 (S.D.N.Y.1992)) and concluded that the actions of those plaintiffs who resided in the Third Circuit were barred. However, the Second Amended Complaint still includes the claims of all plaintiffs, including those who reside in the Third Circuit, and offers this rationale in Plaintiff's Memorandum of Law:

All of the plaintiffs' claims for professional negligence against Eisenberg Honig and Becker have been timely commenced ... Under New York law the Court of Appeals has held that the six-year statute of limitations governs a malpractice action for damages to property or pecuniary interests.... Here, it is undisputed that Eisenberg Honig were the attorneys for the Sarasota limited partnership. Implicit in that relationship was an obligation to exercise due care in the preparation of the Private Placement Memoranda.... Moreover.... where (as here) an accountant continues its professional relationship with the client, the running of the statute will be prolonged, or tolled, until the accountant ceases rendering professional services to the client.

Professional negligence requires a professional duty. Since the investors were not in privity nor in a relationship close enough to substitute for privity with the Becker Defendants or Eisenberg Honig, they do not have standing to bring a claim of professional negligence. Further, even if the plaintiffs' claims otherwise survived, the statute would not be tolled here because the plaintiffs relied upon the misrepresentations only at the time they purchased their interests in the partnerships; misrepresentations thereafter, whether part of a continuing relationship or not, could not have damaged the plaintiffs. Since the parties seem to agree that the New York law applies, the Court will analyze the claims in light of New York law.

a. Accountants' Liability

Plaintiffs' state-law claims for professional negligence and breach of fiduciary duty fail because, under New York law, the professional defendants owed the plaintiffs no fiduciary duty and therefore cannot be liable to them for negligence. A limited exception to this (the "Credit Alliance Test", from its exposition in Credit Alliance v. Arthur Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985)) applies to accountants, but Plaintiffs' claims do not come within this exception according to the facts as alleged by the Plaintiffs.

Judge Cardozo held that an accounting firm owes a duty of due care only to those in privity of contract with it or to those whose use of its services was known to all parties as the sole "end and aim of the transaction," Ultramares Corp. v. Touche, 255 N.Y. 170, 183, 174 N.E. 441, 446 (1931). In Ultramares, the accounting firm had prepared 32 copies, each certified as "original" of a balance sheet for a client which the accounting firm knew the client would exhibit to third parties as a basis for financial dealings. Cardozo concluded that "a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class." Id. at 179, 174 N.E. at 444. This requirement of privity with the accountants has been relaxed only for a limited exception in favor of a fixed, defined group:

The accountant must have been aware that a limited partner would necessarily rely on or make use of the audit and tax returns of the partnership, or at

...