Berk v. Ascott Inv. Corp.

Decision Date06 March 1991
Docket NumberCiv. A. No. 88-9000.
Citation759 F. Supp. 245
PartiesSteven BERK, Gerhard Carl, Lawrence Miller, Joseph A. Startare, Allan H. Gordon, Gerald Esner, Carl Reinhart, E. David First, and Holzhaur Tile Company, Inc., and Charles Fox, individually and on behalf of a class v. ASCOTT INVESTMENT CORPORATION, Michael J. Asbell, Philip S. Cottone, M. Brad Ingerman, Laventhol & Horwath, Whitestone Savings, F.A., Fireman's Insurance Company of Newark, New Jersey.
CourtU.S. District Court — Eastern District of Pennsylvania

COPYRIGHT MATERIAL OMITTED

William M. Lashner, Lashner, Victor & Maschmeyer, Robert M. Greenbaum, Philadelphia, Pa., for plaintiff.

Paul F.X. Gallagher, Philadelphia, Pa., Louis G. Corsi, Stephen V. Kovarik, Susan C. Zuckerman, Siff, Rosen & Parker, P.C., New York City, for Whitestone Savings, F.A.

Ira Silverstein, Philadelphia, Pa., for Firemen's Ins. Co. of Newark, New Jersey.

Louis G. Corsi, Siff, Rosen & Parker, P.C., New York City, for Resolution Trust Corp. No. 27.

Daniel E. Bacine, Barrack, Rodos & Bacine, Philadelphia, Pa., for Ascott Inv. Corp., Michael J. Asbell, Philip S. Cottone, Brad M. Ingerman.

Kevin Norris, Philadelphia, Pa., for Laventhal & Horwath.

MEMORANDUM AND ORDER

VAN ANTWERPEN, District Judge.

(1.) Background

The plaintiffs have brought the instant case under the following statutes: sections 12 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77l, 77o, 77q(a); sections 10(b) and 20 of the Securities Exchange Act of 1934 and SEC Rule 10b-5, 15 U.S.C. §§ 78j(b) and 78t, 17 C.F.R. § 240.10b-5; The Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962; and state laws pertaining to securities. Plaintiffs also allege a common law breach of fiduciary duty.

The plaintiffs seek to represent a class of people and entities who invested in an entity known as "Orlando Investors, L.P.", a limited partnership (hereinafter "Orlando Investors"), which was formed for the purpose of providing investment opportunities and tax benefits to its partners in the purchase of a property known as the Pacesetter Apartments in Orlando, Florida. Defendant Ascott Investment Corporation owns and operates various types of real estate projects and is a general partner of Orlando Investors. Defendants Cottone, Asbell and Ingerman are shareholders and officers of Ascott Investment Corporation. Defendant Laventhol and Horwath,1 is a certified public accounting firm, which is alleged to have performed a review of the financial forecasts of management of Orlando Investors, which review was included in the offering material submitted to the plaintiffs. Defendant Whitestone Savings, F.A. is a bank which allegedly made a secured loan to Orlando Investors, which the partnership used to finance the limited partners' capital contributions. As security for that loan, Whitestone Savings received an assignment of the investors' recourse notes, which were supported by a surety bond in Whitestone's favor to protect Whitestone in the event of an investor's nonpayment. The complaint further alleges that defendant Firemen's Insurance Company of Newark, New Jersey issued the surety bonds to the defendant Whitestone Savings, obligee on behalf of the plaintiffs-limited partners in Orlando Investors.

In March, 1988, Orlando Investors filed for protection from its creditors under Chapter 11 of the Bankruptcy Code. Several months thereafter, the plaintiffs brought this suit. Presently before the court are the defendants' Motions to Dismiss2 or in the Alternative, for Summary Judgment. We shall address these challenges — with the exception of those raised by Laventhol and Horwath who are currently under the protection of the Bankruptcy Code — in the opinion which follows.

Before tackling these challenges, however, we must first decide whether to consider the defendants' motions as motions to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6), or as motions for summary judgment, pursuant to Fed.R.Civ.P. 56. For a number of reasons, we believe that, at this point in the progress of this litigation, it would be preferable to treat the defendants' motions as motions to dismiss, pursuant to Fed.R. Civ.P. 12(b)(6).

First, no discovery has yet been taken in the instant case, which is based upon alleged violations of state and federal securities laws, the RICO statute and common law causes of action. As the court stated in Allen Organ Co. v. North American Rockwell Corp., 363 F.Supp. 1117 (E.D.Pa. 1973):

The Courts have held that summary procedures should be used sparingly in complex anti-trust and securities litigation where motive and intent play leading roles and the proof is largely in the hands of the defendants. See Fortner Enterprises v. United States Steel Corp., 394 U.S. 495, 500, 89 S.Ct. 1252 1257 22 L.Ed.2d 495 (1969) (Antitrust); Poller v. Columbia Broadcasting, 368 U.S. 464, 473, 82 S.Ct. 486 491 7 L.Ed.2d 458 (1962) (Antitrust); Schoenbaum v. Firstbrook, 405 F.2d 215, 218 (2d Cir.1968) (Securities); Kubik v. Goldfield, 479 F.2d 472, p. 477 n. 10 (3d Cir.1973) (Securities). In the instant case, we have before us a series of sophisticated contractual undertakings and complex allegations of fraud, conspiracy and contractual breaches. Under these circumstances, we agree with the cases cited by plaintiff to the extent that disposition under the summary judgment procedures of F.R.Civ.P. 56 would be inappropriate at this time, especially absent discovery on the part of the plaintiff....

Id. at 1124.

We believe that this is a sensible approach and that an opportunity for adequate discovery should be provided before the court entertains a motion for summary judgment in the case at bar.

Second, although many of the defendants have appended documents to their briefs, none of them have attached affidavits attesting to the authenticity of these documents. Such proof is necessary in order to present this documentation properly in a motion for summary judgment. Nolla Morell v. Riefkohl, 651 F.Supp. 134, 140 (D.Puerto Rico 1986) (in considering motion for summary judgment, court excluded, under Fed.R.Civ.P. 56(e) and Fed.R.Evid. 901, documents filed by defendants unaccompanied by affidavits attesting to their validity).

If ever we are to consider a motion for summary judgment in the instant case, we would prefer to do so with properly authenticated documents and a full record compiled after an appropriate period of discovery. We shall, therefore, treat the defendants' motions as motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6).

Having decided to entertain only the defendants' motions to dismiss, we next must decide whether Ascott Investment Corporation, and its officers and shareholders, Michael J. Asbell, Philip S. Cottone, and M. Brad Ingerman (the "Ascott defendants"), are correct in arguing that the contents of a certain Offering Memorandum put forward by them may be considered by the court. In the amended complaint, the plaintiffs allege that the Ascott defendants made written misrepresentations not only in the Offering Memorandum, dated September 3, 1985, with its attached exhibits, but also in other documents, viz.: the Amended and Restated Agreement of Limited Partnership; the Orlando Investors, L.P. Brochure; and correspondence. (Amended Complaint, ¶ 40). The Offering Memorandum is, thus, only one out of a number of documents where misrepresentations were allegedly made. No one has appended copies of these other documents to any briefs and they are not presently before the court.

Moreover, the copy of the Offering Memorandum that is before the court was attached to the defendants' brief. It, therefore, stands as a separate, unauthenticated document. In general, such a document would not be considered by the court. If, however, a document is incorporated by reference into a complaint, it may be considered. Goldman v. Belden, 754 F.2d 1059, 1065-1066 (2d Cir.1985). "Limited quotation does not constitute incorporation by reference." Id. at 1066. In the case at bar, the paragraph that pertains to the Offering Memorandum (Amended Complaint, ¶ 41(a)-(k)) merely summarizes the representations allegedly made therein. No direct quotation is made. We do not believe that the Offering Memorandum has been actually incorporated by reference.

It is true that when a plaintiff has admitted the authenticity of a document proffered by a defendant, a court may consider that document in ruling on a motion under Fed.R.Civ.P. 12(b)(6). Bechtel Corp. v. Local 215, Laborers' International Union of North America, AFL-CIO, 405 F.Supp. 370, 377 n. 1 (M.D.Pa.1975), modified on other grounds, 544 F.2d 1207 (3d Cir.1976). In the instant case, the plaintiffs have objected to the court's consideration of the Offering Memorandum on the grounds discussed above. When they address the defendants' reference to the contents of the Offering Memorandum, they do so only upon the contingency that the court should find the Offering Memorandum incorporated by reference into the complaint. We have not so found. Even if we were to take the plaintiffs' discussion of the defendants' references to the Offering Memorandum as a tacit acknowledgement of that document's authenticity, we would still be confronted with the allegations in the complaint that misrepresentations were made elsewhere as well. We, therefore, do not find that consideration of the Offering Memorandum at this point in the litigation will help to resolve the motion to dismiss.

Fed.R.Civ.P. 12(b)(6) allows a court to dismiss "for failure to state a claim upon which relief can be granted." The criteria which a court must use in deciding a motion to dismiss under Fed.R.Civ.P. 12(b)(6) are clear. "In reviewing a motion to dismiss a complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6), all allegations in the complaint and all reasonable inferences that can be drawn therefrom must be accepted as true and viewed in the light most favorable to the non-moving party. Wisniewski...

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