Aries Realty, Inc. v. AGS Columbia Associates

• Decision Date: 29 November 1990
• Docket Number: No. 86 Civ. 5561 (WCC).,86 Civ. 5561 (WCC).
• Parties: ARIES REALTY, INC., as assignee, Plaintiff, v. AGS COLUMBIA ASSOCIATES, AGS Properties, Albert G. Schmerge, III, Defendants.
• Court: U.S. District Court — Southern District of New York

751 F. Supp. 444

ARIES REALTY, INC., as assignee, Plaintiff, v. AGS COLUMBIA ASSOCIATES, AGS Properties, Albert G. Schmerge, III, Defendants.

No. 86 Civ. 5561 (WCC).

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

November 21, 1990.

As Amended November 29, 1990.

COPYRIGHT MATERIAL OMITTED

Raichle, Banning, Weiss & Stephens, Buffalo, N.Y., for plaintiff; Arnold Weiss, of counsel.

Eaton & Van Winkle, New York City, for defendants; Peter J. Schmerge and Louis L. Benza, of counsel.

OPINION AND ORDER

WILLIAM C. CONNER, District Judge.

Plaintiff Aries Realty, Inc. ("Aries"), as assignee, brings this claim for damages, pursuant to the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") (collectively, the "Securities Laws"), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), against defendants AGS Columbia Associates, AGS Properties, and Albert G. Schmerge, III in connection with the sale in 1983 of limited partnership interests relating to a project known as New South Square Apartments in Columbia, South Carolina. This action is presently before the Court on defendants' motion for summary judgment pursuant to Rule 56(c) and for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure.

Background

In 1978, AGS Columbia Associates ("Columbia"), a South Carolina limited partnership of which Albert G. Schmerge, III ("Schmerge") is one of the general partners, purchased a garden apartment project located in Columbia, South Carolina (the "Apartments"). In 1982, former plaintiff Berkeley Columbia Associates ("Berkeley"), a limited partnership with its principal place of business in South Carolina, made Columbia an offer to acquire the Apartments through its affiliate Berkeley Square Realty Associates, Inc. ("Berkeley Square"). Defendants contend that the parties consummated the sale by executing a Purchase Agreement on April 28, 1983 (the "Agreement") after memorializing a preliminary agreement for the sale of the Apartments in a letter dated June 28, 1982. Plaintiff contends that it only executed a letter of intent as a result of negotiations with Defendants' affiliate broker.

Under the alleged Agreement, Berkeley Square was given "the right, subject to the First Mortgagee's approval, to simultaneously resell the property to a partnership (general or limited) in which an affiliate of Berkeley Square Realty Associates, Inc. is a general partner." Defendants' Exhibit A at 3. The Agreement provided that the Prudential Insurance Company of America ("Prudential"), which held a first mortgage on the Apartments, would have to consent to the transaction, and gave Berkeley the right to terminate the Agreement if Prudential requested a fee in excess of $2,500. Prudential eventually consented to the transfer for a fee of $250,000, which, except for the first $2,500 which the Agreement required Columbia to pay, Berkeley voluntarily elected to pay.

The Agreement also contained a disclaimer of warranties which referred to a "problem" with the pipes in the Apartments:

Purchaser acknowledges that it has inspected the Property, is acquainted with the problem relating to pipes, and is otherwise acquainted with its condition (including, but not limited to, problems relating to pipes which have been breaking periodically) and shall take title "as is" in its present condition and subject to reasonable use, wear, tear and natural deterioration between the date hereof and the Closing Date ... Seller has made no representations or warranties as to the condition of the Property or any financial or other information relating thereto, except as explicitly set forth herein. Defendants' Exhibit B at 31-32.

At about the same time, Berkeley prepared and distributed a private placement memorandum (the "Memorandum"). The Memorandum offered up to 35 limited partnership units for $86,000 each. The offering was conditioned upon the sale of the Apartments to Berkeley.

On June 28, 1983, Berkeley acquired title to the Apartments in accordance with the Agreement. Berkeley executed a purchase money wrap-around mortgage in favor of Columbia in the face amount of $6,250,000, and paid its obligations under the mortgage from June 1983 through April 1986. By January 1986, however, Berkeley reported that the financial condition of the Berkeley Square Apartments had continued to deteriorate. Berkeley also informed Columbia of numerous operational difficulties experienced at the Apartments. One of the problems it mentioned was that earlier that year a significant cold spell caused a substantial amount of plumbing pipes to burst in the apartments with concomitant flooding conditions. Defendants' Exhibit C at 1-2. Berkeley requested mortgage deferrals totalling $315,000. The parties' attempt to reach an agreement concerning the mortgage payments failed, and in June 1986, Berkeley indicated that it would not pay its May and June 1986 mortgage installments or required debt service. The mortgage was accelerated on June 24, 1986.

Berkeley commenced an action on July 9, 1986 in the South Carolina Court of Common Pleas, alleging that Columbia misrepresented the extent of the plumbing problem and that it was entitled to rescission and damages under state law. The next day, July 10, 1986, Columbia filed a foreclosure action against Berkeley in the same court. Berkeley's answer to the foreclosure complaint interposed a counterclaim which incorporated by reference the claims of Berkeley's own suit.

After filing its answer in the foreclosure action, Berkeley then transferred the Apartments to DFB Corporation ("DFB"), a corporation controlled and owned, at least in part, by former plaintiff Lanny A. Horwitz ("Horwitz"), which soon after filed a Chapter 11 bankruptcy petition in the Southern District of New York. In the original action against Columbia, Horwitz purported to represent a class of investors to whom limited partnership interests in the Apartments were sold immediately after Berkeley's purchase of the Apartments from Columbia. The class action allegations were abandoned in February 1989 and, with the Court's permission, an amended complaint was served.

The DFB bankruptcy case was transferred to the Southern District of South Carolina, and the Bankruptcy Judge there lifted the automatic stay of the state foreclosure action. The foreclosure action and counterclaims incorporating the claims of Berkeley's state court fraud suit were ultimately tried together in the South Carolina Court of Common Pleas before the Master in Equity for Richland County. After a five-day trial, the Court, on August 21, 1987, held that Berkeley "failed to establish any of the elements of fraud," and ordered a foreclosure and sale on December 29, 1987. AGS Columbia Associates v. Berkeley Columbia Associates, No. 87-CP-40-2123, slip. op. at 3 & 9 (C.P. Richland County, S.C. Dec. 29, 1987). That decision was affirmed by opinion of the South Carolina Circuit Court, Fifth Judicial District, on December 29, 1987.

This action was commenced on July 16, 1986. Aries is the assignee of, and successor in interest to, DFB, which was the assignee of, and successor in interest to, Berkeley and its partners with respect to all of their rights and actions and claims against defendants herein. Berkeley, Horwitz, and the two other limited partners of Berkeley are no longer plaintiffs in this action. Relief is sought under the Securities Laws and RICO. The amended complaint also added a claim of relief for "fraudulent conspiracy." On this motion, defendants contend that (1) the Securities Laws are inapplicable; and (2) there was no fraud, and therefore no violation of RICO. Defendants further argue that the judgment of the South Carolina State Court dismissing plaintiff's allegations of fraud against defendants bars plaintiff from relitigating those allegations before this Court.

Discussion

Standard for Summary Judgment

A party seeking summary judgment must demonstrate that "there is no genuine issue as to any material fact." Fed.R. Civ.P. 56(c); Knight v. U.S. Fire Insurance Company, 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987). "When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). It must establish that there is a "genuine issue for trial." Id. at 587, 106 S.Ct. at 1356. "In considering the motion, the court's responsibility is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Knight, 804 F.2d at 11. The inquiry under a motion for summary judgment is thus the same as that under a motion for directed verdict: "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986). Because this Court concludes, as a matter of law, that the doctrines of collateral estoppel and res judicata bar relitigation of plaintiff's claims, summary judgment may be granted without reaching the merits of those claims.

Defendants' Argument

The common central premise of plaintiff's claims now before the Court is that defendants misrepresented the facts concerning the nature of the plumbing and flooding problems at the Apartment and their ability to obtain the consent of the first mortgagee for the estimated fee. In bringing their motion, defendants argue that plaintiff's allegations are the same as those Berkeley unsuccessfully litigated in South Carolina state court and that plaintiff, as assignee of the claims,...