Becherer v. Merrill Lynch, Pierce, Fenner & Smith

• Decision Date: 17 December 1992
• Docket Number: No. 89-CV-72502.,89-CV-72502.
• Citation: 809 F. Supp. 1259
• Parties: Richard C. BECHERER, Lawrence Milton Richard, Robert A. Horvath and Shirley L. Horvath, and Henry V. Denolf and Joann L. Denolf, individually, and on Behalf of all others similarly situated, Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Can-American Corporation, Can-American Realty Corporation, Shelter Seagate Corporation, Garrett G. Carlson, Graham C. Lount, Arni Thorsteinson, Frank Lavin, Martin Cicco, Laventhol & Horwath, Dominion Financial & Investment Corp., n/k/a Trustbank Mortgage Center, Inc., M.A. Mortenson Company, Winsor/Faricy Architects, Inc., and Midwest Title Guarantee Company of Florida, Defendants.
• Court: U.S. District Court — Western District of Michigan

809 F. Supp. 1259

Richard C. BECHERER, Lawrence Milton Richard, Robert A. Horvath and Shirley L. Horvath, and Henry V. Denolf and Joann L. Denolf, individually, and on Behalf of all others similarly situated, Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Can-American Corporation, Can-American Realty Corporation, Shelter Seagate Corporation, Garrett G. Carlson, Graham C. Lount, Arni Thorsteinson, Frank Lavin, Martin Cicco, Laventhol & Horwath, Dominion Financial & Investment Corp., n/k/a Trustbank Mortgage Center, Inc., M.A. Mortenson Company, Winsor/Faricy Architects, Inc., and Midwest Title Guarantee Company of Florida, Defendants.

No. 89-CV-72502.

United States District Court, E.D. Michigan, S.D.

November 24, 1992.

Amended Order and Injunction December 17, 1992.

COPYRIGHT MATERIAL OMITTED

Thomas R. Grady, Grady & Associates, Naples, FL, Bruce E. Gerstein, Garwin, Bronzaft, Gerstein & Fisher, New York City, Eugene A. Spector, Spector & Roseman, P.C., Philadelphia, PA, and Elwood S. Simon, Elwood S. Simon & Associates, Bloomfield Hills, MI, for plaintiffs.

Steve Gaskins, Cosgrove, Flynn, Gaskins & Haskell, Mary Yeager, Faegre & Benson, Sam Kaplan, Kaplan, Strangis & Kaplan, Minneapolis, MN, and Jon B. Gandelot, Gandelot & Dickson, P.C., Detriot, MI, for SSG.

Thomas G. McNeill, Dickinson, Wright, Moon, VanDusen & Freeman, Detroit, MI, for Mortenson.

Jonathan T. Walton, Jr., Clark, Klein & Beaumont, Detroit, MI, for Trustbank.

Douglas G. Graham, Butzel Long, P.C., Detroit, MI, for Merrill Lynch.

Melissa Horne, Kerr, Russell and Weber, Detroit, MI, for Winsor/Faricy.

Frank W. Brochert, Plunkett & Cooney, Detroit, MI, for Midwest Title.

Mark T. Boonstra, Miller, Canfield, Paddock & Stone, Detroit, MI and Howard O. Godnick, Schulte Roth & Zabel, New York City, for Registry Hotel Corp.

Susan LaCava, Madison, WI, for Assoc. of Unit Owners.

Carl H. von Ende, Miller, Canfield, Paddock & Stone, Detroit, MI, for defendants.

OPINION AND ORDER

FEIKENS, District Judge.

This Opinion holds that a group of 298 investors who purchased unit interests in a 474-room resort hotel ("The Registry Hotel") in Naples, Florida (and who began a lawsuit in this court entitled "Richard C. Becherer, Lawrence Milton Richard, Robert A. Horvath and Shirley L. Horvath, and Henry V. Denolf and Joann L. Denolf, individually, and on behalf of all others similarly situated, Plaintiffs,") are bound by the doctrines of res judicata and collateral estoppel to the findings of fact and conclusions of law in my Opinion of August 7, 1992, 799 F.Supp. 755, and the resulting Order and Judgment, for the following reasons:

1. All investors in The Registry Hotel, including Florida plaintiffs, are parties in this case and are represented through named plaintiffs and their counsel;

2. All parties in the several hearings held before me on the motions for summary judgment or dismissal of plaintiffs' fraud claims proceeded on the basis that my decisions would bind all investors.

3. All investors are in privity with the named plaintiffs.

A history of this case is in order. I refer to that section of the first five pages of my Opinion of August 7, 1992 entitled "Background", which I restate here: "This case began with a lengthy complaint containing sixteen counts. It alleged that a group of 298 investors, who asked to be designated as a class, purchased unit interests in a 474-room resort hotel (The Registry Hotel), herein referred to as the hotel, to be located on Pelican Bay in Naples, Florida, for a total price of $89,225,500. Named as defendants are a group, referred to herein as the developer, Can-American Corporation, Can-American Realty Corporation, Shelter Seagate Corporation, Garrett G. Carlson, Graham C. Lount, and Arni Thorsteinson. Also named as defendants are Merrill Lynch, Pierce, Fenner & Smith, Inc.; Frank Lavin; Martin Cicco; Laventhol & Horwath, certified public accountants retained by the developer; Dominion Financial & Investment Corporation; M.A. Mortenson Company; and Winsor/Faricy Architects, Inc.

The counts captioned in the complaint are:

1. Violation of the Exchange Act, § 10(B) and Rule 10b-5;

2. Violations of the Exchange Act, § 20;

3. Violations of the Securities Act, § 12(2);

4. Violation of the Securities Act, § 15;

5. Fraudulent and negligent misrepresentation;

6. Violation of the Land Sales Act;

7. Aiding and abetting/conspiracy;

8. Violation of RICO;

9. Violation of Florida's RICO statute;

10. Breach of fiduciary duty (against named defendants);

11. Breach of fiduciary duty (against named defendants);

12. Breach of fiduciary duty (against named defendants);

13. Malpractice/negligence;

14. Respondeat superior;

15. Breach of warranty; and

16. Breach of contract.

In managing this case, I concluded that there was a strong need for the adoption of special procedures, since the case involved complex issues, multiple parties, and difficult legal questions (Fed.R.Civ.P. 16(c)(10)).

The complaint was filed on August 21, 1989, and there followed a blizzard of motions and briefs. Between August 21, 1989 and April 23, 1990, the date on which I was able finally to schedule a Rule 16 conference, there were ninety docket entries, comprised of discovery motions, Rule 12 and 56 motions, and supporting and response briefs.

Clearly, Rule 16 had to be vigorously applied.

A pretrial conference held on April 23, 1990 began this process. With close questioning of parties' counsel, it appeared that the complaint was bottomed on allegations of fraud and breach of contract. Three occurrences of fraud were alleged:

1. That the Private Placement Memorandum (the "PPM"), which disclosed that the W.B. Johnson Company was interested in erecting a hotel on Pelican Bay, did not say that hotel was a Ritz-Carlton;

2. That the PPM stated that the hotel was to be furnished with approximately $13.5 million of furniture, fixtures and equipment; and that defendants, or some of them, rather than perform that contractual undertaking, leased the furniture, fixtures and equipment placed in the hotel and thereby burdened the hotel with lease payments; and

3. That fraud surrounded the October 30, 1986 closing date, when the hotel was to be "substantially completed."

That status conference on April 23, 1990, as the record amply demonstrates, compacted the prolix allegations of fraud in the complaint to three manageable areas and, on May 15, 1990, a detailed order managing initial discovery was entered.

In motion hearings, these three occurrences were then addressed.

In an Opinion and Order dated November 20, 1990, I granted a motion for summary judgment on plaintiffs' first fraud claim. I found no fraud in the claim that the investors were not notified that another hotel to be built on Pelican Bay would be a Ritz-Carlton hotel.

On March 15, 1991, I entered an Order for an expedited trial. I determined that the remaining two issues of alleged fraud could be tried as breach of contract claims against the developer Shelter Seagate, Can-American Corporation, Can-American Realty Corporation, and the individual defendants Carlson, Lount and Thorsteinson (referred to collectively as "the Shelter Seagate Group", or as "SSG", or as "the developer"). In that Order I also certified a plaintiff class. Jury trial was waived.

On the second claimed issue of fraud, reformed into a breach of contract claim, i.e., the decision by the developer-defendants to lease furniture, fixtures and equipment for the hotel rather than to purchase them, resulted, following a full hearing, in a grant of partial summary judgment in favor of the plaintiff class and against the developer-defendants. That ruling was made on May 7, 1991. I reserved for a future hearing a determination of the remedy for that breach.¹

I held a bench trial on plaintiffs' contract claims against the SSG defendants in May 1991. After the trial on the contract claims against the SSG defendants, all parties to the lawsuit began negotiating a global settlement. At this point the parties asked me to stay closing arguments on trial issues, on the various trial motions, and on motions for dismissal and for summary judgment then pending. I had earlier granted a motion for summary judgment on the claimed breach of contract regarding the leasing of furniture, fixtures, and equipment for the hotel and I likewise deferred taking testimony on the matter of damages caused by that breach. The 298 investors are represented by the law firms of Elwood S. Simon & Associates of Bloomfield Hills, Michigan; Garwin, Bronzaft, Gerstein & Fisher of New York City; and Spector & Roseman of Philadelphia. Settlement negotiations were protracted and, in fact, took the better part of the year 1991 and two months into 1992, when, in February, the parties reported to the court that all claims in the case, those set forth in the original Complaint and the First Amended Complaint, were settled.

The Stipulation Of Settlement, at page 1, described the plaintiffs as:

All persons and entities (the "Unit Owners") who were (i) original purchasers of hotel interests in The Registry Hotel at Pelican Bay, Naples, Florida (The "Registry Hotel") at the October 31, 1986 closing, and (ii) their direct or indirect successors or assigns who are currently Unit Owners....

I certified this class for the purposes of settlement on February 14, 1992 and that Order is incorporated herein by reference and made a part hereof. (See Appendix 1). I directed that notice be sent to all parties and, notably, to the 298 investors who began this lawsuit.

Shortly thereafter, I received a letter from plaintiffs' counsel Elwood Simon. In that letter Simon informed me that an attorney, Thomas R. Grady, of Naples, Florida had contacted him and requested that he not communicate with certain of the class members who were now Grady's clients. Simon's letter included copies of letters dated March 9 and 10, 1992, from Grady, who purported to represent...