Aquino v. Trupin

• Citation: 833 F. Supp. 336
• Decision Date: 22 September 1993
• Docket Number: No. 89 Civ. 7645 (RWS).,89 Civ. 7645 (RWS).
• Parties: David AQUINO, et al., Plaintiffs, v. Barry H. TRUPIN, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

833 F. Supp. 336

David AQUINO, et al., Plaintiffs, v. Barry H. TRUPIN, et al., Defendants.

No. 89 Civ. 7645 (RWS).

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

September 22, 1993.

COPYRIGHT MATERIAL OMITTED

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

McDonough Marcus Cohn & Tretter, P.C. (Diane K. Kanca, of counsel), New York City, for defendant Stuart Becker & Co.

OPINION

SWEET, District Judge.

Defendants Stuart Becker and Stuart Becker & Co., P.C. (collectively "SBC") have moved to dismiss all claims in the Third Amended Complaint pursuant to Rules 12(b)(6) and 9(b), F.R.Civ.P. For the reasons given below, the motion is granted.

The Parties

The Plaintiffs in this action and in its companion actions, Morin v. Trupin and Alberti v. Trupin, are investors in limited partnerships organized and offered by Barry Trupin ("Trupin") and companies controlled by him, particularly Rothschild Realty. Familiarity with the underlying disputes and principal parties in these actions is assumed. See, e.g., Ahmed v. Trupin, 781 F.Supp. 1017 (S.D.N.Y.1992); Ahmed v. Trupin, 809 F.Supp. 1100 (S.D.N.Y.1993); Morin v. Trupin, 711 F.Supp. 97 (S.D.N.Y.1989) (filed April 13, 1989); Morin v. Trupin, 728 F.Supp. 952 (S.D.N.Y.1989) (filed December 13, 1989); Morin v. Trupin, 738 F.Supp. 98 (S.D.N.Y.1990) (filed May 4, 1990); Morin v. Trupin, 747 F.Supp. 1051 (S.D.N.Y.1990) (filed September 29, 1990); Morin v. Trupin, 778 F.Supp. 711 (S.D.N.Y.1991) (filed November 18, 1991); and Morin v. Trupin, 799 F.Supp. 342 (S.D.N.Y.1992) (filed July 28, 1992). The plaintiffs in Aquino are represented by different counsel, but the underlying substantive claims are essentially the same as in Morin and Alberti.

The Aquino action, originally filed on November 16, 1989 under the caption Ahmed v. Trupin, concerns interests in Sarasota Plaza Associates ("Sarasota Associates"), a limited partnership organized under the laws of New York, and in a series of interlocking real estate partnerships organized under the laws of Florida.

Defendants the Rothschild Group consist of companies and limited partnerships allegedly controlled by Trupin, including Rothschild Registry International, Inc., Rothschild Reserve International, and RRI Realty Corporation. Defendants also alleged to be controlled by Trupin include Tru Management Corp., a Delaware corporation with its principal place of business in Florida and North American Associates ("North American"), a New York limited partnership.

SBC is a New York corporation which served as accountants for the Sarasota Associates and had served as accountants for at least three other Trupin-controlled limited partnership syndications, all offered in 1984 and structured in the same fashion as the partnership syndications at issue here.

Prior Proceedings

The original complaint in Aquino was filed November 16, 1989, under the caption Ahmed v. Trupin.¹ Certain defendants' motions to dismiss for failure to plead fraud with particularity were granted twice, on January 9, 1992, and January 7, 1993. On March 8, 1993, this Court reinstated plaintiffs whose securities fraud claims had expired due to the retroactive effect of Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), and the Third Amended Complaint was filed.

The plaintiffs have alleged six claims for relief in the Third Amended Complaint: violations of Section 10(b) of the 1934 Securities Exchange Act (15 U.S.C. § 78(j)(b)) against all defendants, the aiding and abetting of such violations against SBC, three counts under the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. § 1964)(a)-(d)) (RICO), one count of civil theft under Florida law, and a common-law claim for breach of fiduciary duty. SBC has moved again to dismiss the complaint against it for failure to plead the securities fraud claims with particularity.

All of these allegations are based on the claim that SBC knew that the financial projections and promised tax benefits offered by Sarasota Associates were false because SBC knew that prior tax shelters offered by Trupin had been disallowed by the I.R.S. They have imputed knowledge of these prior audits to SBC by alleging that an employee of SBC, Jeffrey Zukoff ("Zukoff"), had previously been employed by Cornick, Garber & Sandler, accountants for the Rothschild Group, and in the course of his work there had prepared financial statements which had disclosed prior I.R.S. audits of Trupin-organized partnerships. Based on this information, the Plaintiffs have alleged that SBC knew that the tax benefits promised by the limited partnerships were likely not to be realized, and accordingly that the projections of tax losses and future income prepared by SBC were false and misleading.

SBC has moved to dismiss on two grounds: first, that the plaintiffs have not actually alleged that Zukoff was employed by SBC on or before the actual date of the Sarasota offerings, and second, that the Plaintiffs have not pleaded loss causation since the Plaintiff have not alleged that the promised tax benefits were not realized.

The Facts

On a motion to dismiss, all of the factual allegations in a complaint are accepted as true, and all allegations must be considered in the light most favorable to the movant. Weiss v. Wittcoff, 966 F.2d 109, 112 (2d Cir. 1992). The facts below, therefore, are taken from the plaintiffs' complaint and do not represent factual findings by the Court.

Sarasota Associates offered interests in an office building referred to as the "United First Federal Plaza" (the "Property") through private placement memoranda dated September 18, 1984. The general partner in Sarasota Associates was Sarasota Management Corp., ("SMC"), a New York corporation with its principal place of business in New York City.

Three Florida limited partnerships known as Rothschild Realty Partners 118, Rothschild Realty Partners 119, and Rothschild Realty Partners 119M (the "118-119 Investor Partnerships") packaged different interests in commercial real estate among the partnerships, including interests in Sarasota Plaza Associates, which otherwise were structured precisely the same way. Limited partnership interests in the 118-119 Investor Partnerships were offered through three private placement memoranda dated May 10, 1985.

The Aquino plaintiffs purchased their interests in the Sarasota Plaza Associates and the 118-119 Investor Partnerships from July 1984 through October, 1985. The Plaintiffs characterize the 118-119 Investor Partnerships as "basically a repackaged version of 60 units in the Sarasota Plaza Associates." Although interests in the 118-119 Investor Partnerships were offered in 1985 and 1986 for $150,000 per unit, and interests in Sarasota Associates were offered in 1984 and 1985 for $97,928.00 per unit, upon subscription investors were required to pay only $6,000 for the Investor Partnership interests and $1,834 for the Sarasota interests in cash. The balance was to be paid pursuant to promissory notes made out by the investors in the limited partnerships.

Sarasota Associates was structured so that debt payments on the two mortgages on the Property were passed directly through the partnerships to each limited partner via a wrap-around mortgage. For each limited partner to achieve the promised tax benefits, the entity holding the wrap-around mortgage had to be perceived as "unaffiliated" by the Internal Revenue Service and the wraparound mortgage itself had to be treated as the result of arms'-length negotiation.

The Private Placement Memoranda ("PPM") represented that the Property had initially been purchased by SMC for $22,500,000, that the Property had been sold to an unaffiliated entity, North American, and that it had been sold back to Sarasota Associates subject to a wraparound mortgage for $18,500,000 (the "First Federal Purchase Money Note"), which had been duly negotiated at arms'-length so that the limited partners could deduct all interest payments. SBC prepared financial forecasts and projections expressly based upon this information which were included in the Sarasota Associates PPM.

The plaintiffs allege that the true purchase price of the Property paid by the first Trupin entity to buy it was $15,200,000, and the fair market value at the time of the offering was at least $7.3 million less than the value set forth in the PPM. The PPM also concealed the affiliated status of North American, which was managed by a friend of and directly controlled by Trupin. A plaintiff who held interests in Sarasota Associates could lawfully deduct only interest payments on the first two mortgages on the Property, not at the higher rate of 18.875% provided for in the wrap-around mortgage.

The plaintiffs have also alleged that Barry Trupin converted Sarasota Associates partnership funds to his own account from June 1985 to December 1986, in the total sum of $3,304,850, and that he wired $1,218,000 from the proceeds of a new mortgage on the Property directly to a personal bank account on December 31, 1986. However, such post-offering acts cannot implicate SBC, which is charged only with aiding and abetting the frauds practiced on the plaintiffs through misleading or omitted statements in the PPM.

Banks holding the original mortgage and the Metro North mortgage instituted foreclosure actions on the Property in June and July of 1988. Sarasota Associates subsequently filed for protection from its creditors under Chapter 11. The plaintiffs allege they had no notice of the material misrepresentations in the PPM until January, 1989, when Sarasota Management Corp. was removed as the general partner of Sarasota Associates and the plaintiffs had access to the books and records of the partnership. The Bankruptcy Court entered a default judgment of $16,967,555.25 against Rothschild Registry Properties Corp., Rothschild Registry, and Sarasota...