Andreo v. FRIEDLANDER, GAINES, COHEN, ETC.

• Decision Date: 12 May 1987
• Docket Number: No. H-85-551 Civil.,H-85-551 Civil.
• Citation: 660 F. Supp. 1362
• Court: U.S. District Court — District of Connecticut
• Parties: Loren J. ANDREO, et al. v. FRIEDLANDER, GAINES, COHEN, ROSENTHAL & ROSENBERG, et al.

660 F. Supp. 1362

Loren J. ANDREO, et al. v. FRIEDLANDER, GAINES, COHEN, ROSENTHAL & ROSENBERG, et al.

No. H-85-551 Civil.

United States District Court, D. Connecticut.

May 12, 1987.

COPYRIGHT MATERIAL OMITTED

Howard Rosenfield, Plainville, Conn., for plaintiffs.

Dennis M. Laccavole, Arnold Bai, Bridgeport, Conn., Deborah S. Freeman, Joseph Skelley, Jr., Joel J. Rottner and Carl F. Yeich, Skelley, Clifford, Vinkels, Williams & Rottner, Hartford, Conn., Warren Kaps, Hackensack, N.J., for defendants.

RULING ON MOTIONS FOR SUMMARY JUDGMENT, FOR JUDGMENT ON THE PLEADINGS AND TO DISMISS THE COMPLAINT

BLUMENFELD, Senior District Judge.

This case arises out of transactions relating to the private placement of various limited partnership interests in satellite communication facilities. There are 67 plaintiffs who purchased interests in one or more of three limited partnerships. The defendants, who were involved in the transactions in various different ways, are a law firm, two public accounting firms, a lawyer/promoter, two named corporations, and unknown defendants designated as "John Does 1-25" and "XYZ Corporations 1-25." The plaintiffs claim that the defendants were part of a scheme to defraud them, violating the federal securities laws, 15 U.S.C. §§ 77l, 77q, and 78j, the federal racketeering statute (RICO), 18 U.S.C. §§ 1961 et seq., and state statutes and common law.

Defendants Peat, Marwick & Mitchell ("Peat Marwick") and Zarrow, Zarrow & Klein moved to dismiss the original complaint on a variety of grounds. In a ruling dated April 28, 1986, this court granted that motion and gave plaintiffs leave to amend the complaint within 30 days. On May 28, 1986, plaintiffs filed an amended complaint.

Defendant Peat Marwick subsequently moved to dismiss the amended complaint on a variety of grounds including failure to plead fraud with the amount of particularity required by Rule 9(b), lack of a private right of action under section 17(a), and failure to state a claim under RICO. That motion was granted on December 23, 1986. See Andreo v. Friedlander, Gaines, Cohen, Rosenthal & Rosenberg, 651 F.Supp. 877 (D.Conn.1986).

Defendant Friedlander, Gaines, Cohen, Rosenthal & Rosenberg ("Friedlander Gaines") has moved for summary judgment, for judgment on the pleadings, and for dismissal of the complaint on a number of grounds, including failure to plead fraud with particularity, failure to state a claim under the securities laws and RICO, failure to comply with the statute of limitations, and failure to state a claim under either of two different state law theories. Although that motion was filed before the complaint was amended, counsel for the defendant has asked that it be applied to the amended complaint. Oral argument on the motion was heard on January 20, 1987.

Allegations

The plaintiffs claim that the defendants engaged in a scheme to defraud them through three limited partnerships: Star Link Associates ("Star Link"), Sky Link Associates ("Sky Link") and Galactic Link Associates ("Galactic"). The purpose of these limited partnerships was to build and operate ground station links for satellite communications. The partnerships were organized by Benjamin Rabin, who was assisted in various ways by the other defendants.

Although the amended complaint contains many general and conclusory allegations as to the unlawful conduct of the defendants, it is far more particular than the original complaint. It spells out some specifics as to the role of the various defendants in the allegedly fraudulent scheme. Under the heading "Role of Friedlander Gaines," plaintiffs allege that Friedlander Gaines drafted the offering memoranda and tax opinions for each of the three limited partnerships. Amended Complaint ¶¶ 41-46. They also allege that these documents used grossly erroneous financial projections and were substantial factors in the sale of the limited partnership interests to plaintiffs. Id. ¶ 47.

Other specific allegations about the role of Friedlander Gaines are scattered throughout the complaint. There are allegations that Friedlander Gaines represented in the offering memoranda that the debt assumption and conversion agreements were solely for tax purposes, id. ¶ 35; that it recklessly failed to inquire about and disclose numerous irregularities in the documents and transactions relating to each of the three limited partnerships, id. ¶¶ 61-63; that it knowingly or recklessly failed to disclose that the partnerships would have revenue shortfalls, id. ¶ 65a; and that it knowingly or recklessly failed to make inquiries about business experience and capitalization and about the source, nature or independence of appraisals, which inquiries would have exposed the scheme to defraud, id. ¶ 65b.

In addition, plaintiffs also allege on information and belief that Friedlander Gaines failed to disclose that the limited partnership certificate for Sky Link was never filed, and that it had obtained information which demonstrated that its opinion letter relied upon by plaintiffs was wrong, id. ¶ 65c.

The final set of allegations specific to Friedlander Gaines are contained in a breach of contract count. There, plaintiffs allege that they were intended third-party beneficiaries of a contract between Rabin and Friedlander Gaines, and that Friedlander Gaines breached the contract by failing to file a limited partnership certificate for Sky Link and/or failing to inform plaintiffs that such a certificate had not been filed, as well as by other unspecified actions. Id. ¶¶ 102-106.

Discussion

Although this motion has been brought as a motion for summary judgment, for judgment on the pleadings and to dismiss the complaint, it will be treated as a motion for judgment on the pleadings. Summary judgment under Fed.R.Civ.P. 56 would be inappropriate because discovery in this case was stayed pending resolution of the various motions to dismiss. See In re G. & A. Books, Inc., 770 F.2d 288, 295 (2d Cir. 1985) (party opposing motion converted to a motion for summary judgment should be given reasonable opportunity to meet facts outside the pleadings), cert. denied, ___ U.S. ___, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986); see also Fed.R.Civ.P. 56(f).¹ Treating this motion as a motion to dismiss under Fed.R.Civ.P. 12(b) is also inappropriate because it would be untimely. Such a motion is to be filed before a defendant answers the complaint, Fed.R.Civ.P. 12(b), but Friedlander Gaines filed this motion after its answer. However, after the pleadings have been closed the defense of failure to state a claim may still be raised under Rule 12(h)(2) on a motion for judgment on the pleadings.

The standards which apply to a motion authorized by Rule 12(h)(2) raising the defense of failure to state a claim are the same as the standards which apply to a Rule 12(b)(6) motion. Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 353 F.Supp. 264, 268 (S.D.N.Y.1972), aff'd on other grounds, 495 F.2d 228 (2d Cir.1974); 5 C. Wright & A. Miller, Federal Practice and Procedure § 1367, at 688 (1969). Thus, grounds for dismissing a complaint under Rule 12(b)(6) are grounds to enter judgment on the pleadings under Rule 12(h)(2) and Rule 12(c). In addition, all allegations that are properly pleaded must be treated as if they were true and must be construed in favor of the nonmovant. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 231 (2d Cir. 1974); 5 C. Wright & A. Miller, supra, § 1368, at 690.

The court will first consider the sufficiency of the securities claims against Friedlander Gaines, followed by an examination of the RICO claims, the statute of limitation arguments, and the state law claims.

I. Sufficiency of Fraud Allegations Under Section 10(b) of the 1934 Act

A. Standards

The thrust of plaintiffs' claim against Friedlander Gaines is that it aided and abetted Rabin and his associates in the allegedly fraudulent scheme. The elements for an aiding and abetting claim under section 10(b) of the 1934 Act are (1) that there be a primary fraud, (2) that the aider and abettor have "knowledge" of the fraud, and (3) that aider and abettor provide "substantial assistance" to the achievement of the primary fraud. IIT, An Int'l Inv. Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir.1980) (Friendly, J.); see also Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 119 (2d Cir.1982). The knowledge element of aiding and abetting may be satisfied by reckless disregard of the truth in some circumstances. See Decker, 681 F.2d at 119; IIT, 619 F.2d at 923.

These elements must be pleaded with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure.² Andreo, 651 F.Supp. at 880; In re Cincinnati Gas & Elec. Sec. Litig., 594 F.Supp. 233, 237 (S.D.Ohio 1984); see also Decker, 681 F.2d at 119; IIT, 619 F.2d at 922-27. Thus, the amended complaint must plead the circumstances giving rise to the plaintiffs' aiding and abetting claim. Andreo, 651 F.Supp. at 880; Fed.R.Civ.P. 9(b). To properly plead the knowledge element of aiding and abetting, the pleaded circumstances must include the "events which plaintiffs assert give rise to a strong inference that the defendants had knowledge." Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir.1979); accord Decker, 681 F.2d at 115 (2d Cir.1982); see also Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir.1987).

B. Application of the Standards

The amended complaint is specific enough to meet the particularity requirements of Rule 9(b). It is undisputed that the amended complaint sets forth a claim for primary fraud against Rabin and his immediate associates with sufficient particularity. This primary fraud allegedly was substantially assisted by Friedlander Gaines' inclusion of false information and/or omission of material information from drafts of offering memoranda and tax opinions. Plaintiffs have spelled out these omissions in detail,³ and have alleged that they were both...