Andrews v. Fitzgerald

• Decision Date: 07 June 1993
• Docket Number: No. C-89-649-G.,C-89-649-G.
• Citation: 823 F. Supp. 356
• Court: U.S. District Court — Middle District of North Carolina
• Parties: C. Mitchell ANDREWS, et al. v. Robert E. FITZGERALD, Jr., et al.

823 F. Supp. 356

C. Mitchell ANDREWS, et al. v. Robert E. FITZGERALD, Jr., et al.

No. C-89-649-G.

United States District Court, M.D. North Carolina, Greensboro Division.

June 7, 1993.

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Arthur A. Vreeland, Kenneth L. Jones, Lisa J. Reed, Greensboro, NC, for plaintiffs.

House & Blanco, PA, Steve M. Pharr, William F. Maready, Urs R. Gsteiger, Winston-Salem, NC, Adams, Kleemeirer, Hagan, Hannah & Fouts, Greensboro, NC, for defendants.

Lawrence Culler, pro se.

John E. Adams, pro se.

MEMORANDUM OPINION

TILLEY, District Judge.

C. Mitchell Andrews, et al., Plaintiffs (referred to collectively as "Andrews"), filed a complaint against Robert E. Fitzgerald, et al., Defendants (collectively referred to as "Fitzgerald") alleging violations of three federal statutes?€”the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. ?? 1961 et seq.; ? 12(2) of the Securities Act of 1933, 15 U.S.C. ? 77l; and ? 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. ? 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5, which was promulgated thereunder. In addition, Plaintiffs' complaint alleges several state law claims under the North Carolina Securities Act, the Florida Securities and Investor Protection Act, and additional claims under North Carolina law, including actual fraud, constructive fraud, negligent misrepresentation, and unfair and deceptive trade practices.

Two groups of defendants have filed dispositive motions which are now ripe for review. Defendants Robert E. Fitzgerald, Jr., Thomas E. Barrier, Quinter Inc., Lexington Financial Corp., and Cavalier Management Co., Inc. (collectively referred to as "Fitzgerald" or "Fitzgerald defendants") have filed a motion for summary judgment under Rule 56(b) of the Federal Rules of Civil Procedure. A second group of defendants, Oren J. Heffner and Kensington Park West Investment Corporation ("Heffner" and "KPWIC"), have filed a motion to dismiss under Rule 12(b)(6), or in the alternative, a motion for summary judgment under Rule 56(b).

The Court has carefully considered the arguments by the parties under the standard for summary judgment. For the reasons hereafter stated, Defendants' motions will be GRANTED IN PART and DENIED IN PART.

I. FACTUAL BACKGROUND

This litigation arises out of Plaintiffs' investments, and subsequent losses, in a limited partnership known as the Kensington Park West Associates ("KPWA," the "Partnership", or "Project"). A brief overview of the parties involved and structure of the Partnership will be discussed below. Because of the complexity of this case, additional facts will be set forth as necessary.

KPWA, a North Carolina limited partnership, was formed by Defendants in 1985 to acquire an apartment complex in Raleigh, convert the apartments to condominiums, and sell the condominiums as tax shelter investments. The Partnership was structured as follows: Berne Corporation served as the managing general partner (35% interest), Kensington Park West Investment Corporation ("KPWIC") was a general partner (15% interest), and each of the plaintiffs was a limited partner (50% interest). Berne Corporation, like defendants Quinter Corporation and Lexington Financial Corporation, was controlled by Fitzgerald who served as President of each corporation and owned a majority of each corporation's stock during the times relevant to this lawsuit. These three corporations controlled by Fitzgerald were often collectively referred to as the Quinter Financial Group, although there was never any formal organization between them.¹ Defendants Barrier and Culler acted as Vice Presidents of the corporations. Defendants Oren Heffner, John Adams, and Gaither S. Walser served as the sole officers, directors, and shareholders of the general partner KPWIC.

One hundred limited partner investment units in the Partnership were offered to a restricted number of qualified investors, including the plaintiffs. A qualified investor was one who met certain investor suitability standards, such as having a sufficient networth, having adequate taxable income to realize the full economic benefit of any tax losses in the Project, and having the sophistication and experience necessary to appreciate the risky nature of the investment. (Confidential Offering Memorandum, p. 1-2). Participation in the Partnership was offered to investors through a written Confidential Offering Memorandum (COM). The securities were not registered under federal or state securities laws, but were issued in reliance upon exemption from such registration. The investors in the Partnership were residents of the states of Florida and North Carolina.

Each investment unit consisted of (1) a $1,500.00 equity investment in the Partnership, and (2) a loan to the Partnership totalling $40,000.00. Under the terms of the Partnership Agreement and offering materials, the loan could be made in either one lump sum at closing (December 30, 1985), or in installments ($15,000.00 on December 30, 1985; $7,500.00 on November 1, 1986; $7,500.00 on November 1, 1987; and $10,000.00 on November 1, 1988). Investors choosing the installment method were required to sign a non-interest-bearing Promissory Note promising to pay the remaining $25,000.00 in post-closing loan installments to the Partnership. In addition, such investors had to provide a letter of credit acceptable to Lexington Savings Bank securing the payment of such installments. In return for the $40,000.00 loan to the Partnership, each investor-plaintiff received an interest-bearing Promissory Note from the Partnership, guaranteed by Berne Corporation (the managing partner).²

In addition to making an equity contribution and loans to the Partnership, each of the plaintiff-investors was required to purchase a package of three or four condominiums in the Project per limited partner unit. (Partnership Agreement, p. 7.) (COM, p. 10.) This condominium purchase requirement provided the tax shelter component to Plaintiffs' investments in the Partnership. The limited partners could purchase the condominiums for a down payment of $100.00 per condominium unit upon execution of a standard form condominium unit purchase contract (Purchase Contract). The contract provided financing of the purchase with a 30-year amortization schedule, monthly payments to the Partnership, and an option for the Partnership to call for payment of the outstanding balance of the purchase price 30 days prior to the seventh anniversary of the closing date. The sales of the condominium units to the limited partners were without recourse, meaning that a purchaser could stop paying on his purchase contract at any time without incurring liability to the Partnership. Furthermore, a limited partner could sell his condominium units at any time. (COM, p. 5).

The Partnership Agreement provided that a limited partner could withdraw from the Partnership at any time. In such a case, the limited partner would receive back her $1,500.00 capital contribution, and, if she chose the installment loan option, would be relieved of her obligation to make any further loan payments to the Partnership under the Installment Note. Furthermore, each limited partner granted to the Partnership an option to reacquire her interest in the limited partnership under certain conditions. Under the terms of the option, if the Partnership reacquired any of the condominium units from the limited partner at any time (due to a default under the Purchase Contract or otherwise), then the Partnership would have 30 days to purchase the limited partner's interest by paying the limited partner her $1,500.00 capital contribution. In such a reacquisition, a limited partner who had chosen the installment loan option would also be relieved from making any further installments under the Installment Note.

Generally, the condominium units were rented to the public. The rents from these units were pooled, and the owners were then credited with rentals received based upon occupancy levels. Each month, the general partners mailed several items to the investor-plaintiffs. First, they mailed a "cash flow statement" which described the Partnership's cash flow for the previous month. Second, they supplied a monthly reminder notice, which set forth the amount of "deficit payment" needed to be paid by the condominium owner to cover the costs of operations not covered by the rents received. Third, they sent a check from the Partnership representing the interest payment on the Promissory Notes given by the Partnership at closing. Fourth, if possible, they mailed a check from the Partnership representing each limited partner's pro rata distribution of "excess" cash not needed by the Partnership. Any profits realized by the Partnership were to be split 50% to the general partners (the defendants) and 50% to the limited partners (the plaintiffs). Less frequently, usually on a quarterly basis, each investor also received a newsletter from the Partnership describing in general terms the operational results of the Partnership.

The limited partnership was formed and the apartment complex was acquired by the Partnership and converted to condominiums December 30, 1985. Several problems soon developed in the operation of the Partnership, including a low occupancy rate at the complex worsened by an oversupply of apartment housing and the generally poor real estate market in Raleigh. Furthermore, Congress passed the Tax Reform Act of 1986 which limited (ultimately eliminating) the tax-shelter benefits of passive real estate investments, thus drastically reducing the attractiveness of plaintiffs' investments.³ Several investors abrogated their condominium purchase contracts, without recourse from the Partnership. After the Partnership failed to meet its debt obligations, several investors declared their Promissory Notes from the Partnership to be in default and brought a successful...