O'BRIEN v. National Property Analysts Partners

• Decision Date: 10 August 1989
• Docket Number: No. 88 Civ. 4135 (PKL).,88 Civ. 4135 (PKL).
• Citation: 719 F. Supp. 222
• Parties: James O'BRIEN, et al., Plaintiffs, v. NATIONAL PROPERTY ANALYSTS PARTNERS, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

719 F. Supp. 222

James O'BRIEN, et al., Plaintiffs, v. NATIONAL PROPERTY ANALYSTS PARTNERS, et al., Defendants.

No. 88 Civ. 4135 (PKL).

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

August 10, 1989.

COPYRIGHT MATERIAL OMITTED

Beigel & Sandler, New York City (Lewis S. Sandler, Herbert Beigel, Leigh R. Lasky, of counsel), Much, Shelist, Freed, Denenberg, Ament & Eiger, P.C., Chicago, Ill. (Michael J. Freed, Kenneth A. Wexler, of counsel), Chertow & Miller, Chicago, Ill. (Marvin A. Miller, Patrick E. Cafferty, of counsel), for plaintiffs.

Kaplan Kilsheimer & Foley, New York City, for defendant Howard Jackson Associates.

Debevoise & Plimpton, New York City (Mary Jo White, David W. Rivkin, Edwin G. Schallert, of counsel), Rodman W. Benedict, Associate Gen. Counsel, New York City, for defendant Price Waterhouse.

ORDER & OPINION

LEISURE, District Judge:

Plaintiffs have brought this action against more than sixty named and unnamed defendants, claiming that their investments relating to four limited partnerships organized and sponsored by the NPA Defendants¹ were induced by allegedly fraudulent misrepresentations and omissions in connection with private placement memoranda used in the sale of partnership interests. Plaintiffs have alleged causes of action under the federal securities laws, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and state law against the partnerships, their sponsors and managers, the general partners of the partnerships, the mortgage holders of partnership properties, a professional appraiser, and an accounting firm.

The Court approved a settlement agreement between the plaintiff class and the Settling Defendants² at a hearing held on July 27, 1989. At that time, the Court granted plaintiffs' oral motion to file a Second Amended Complaint.³ Defendants Price Waterhouse ("Price") and Howard Jackson Associates, Inc., ("Jackson") were not parties to the settlement.

The action is currently before the Court on the motion of Price Waterhouse and Jackson to dismiss the First Amended Complaint pursuant to Rules 9(b) and 12 of the Federal Rules of Civil Procedure. The Court will deem these motions to dismiss as against the Second Amended Complaint (the "Complaint").

FACTUAL BACKGROUND

Plaintiffs are investors in four different limited partnerships organized, sponsored and managed by the NPA Defendants. The limited partnerships in this case are involved with the acquisition and operation of shopping center real estate properties. Interests in the partnerships were sold by certain of the NPA Defendants beginning in 1979, through the use of private placement memoranda (the "Memoranda"),⁴ that contained investment information including real estate appraisals by defendant Jackson and accounting projections by Price Waterhouse.

Plaintiffs allege they relied on the Memoranda in investing in the limited partnerships. Specifically, plaintiffs assert that they were led to believe, inter alia, that the prices the partnership paid for the properties equalled the value of the properties as represented by Jackson, and that there was at least a possibility of profit to the limited partnerships, and ultimately to the limited partners. Additionally, defendants allegedly knew that plaintiffs would not be entitled to tax benefits.

DISCUSSION

1. Rule 9(b): Failure to Plead Fraud with Particularity

In a motion to dismiss a complaint for failure to plead fraud with particularity as required by Rule 9(b),⁵ plaintiffs' allegations must be taken as true. See, e.g., Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir. 1986). Fed.R.Civ.P. 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Pleadings of fraud must thus specify the time, place, speaker, and sometimes even the content of the alleged misrepresentation. Id. at 54. The complaint's fraud allegations must be specific enough to allow the defendant "a reasonable opportunity to answer the complaint" and must give "adequate information" to allow the defendant "to frame a response." Ross v. A.H. Robins Co., 607 F.2d 545, 557-58 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). Rule 9(b) must be read in conjunction with Rule 8(a), which requires a plaintiff to plead only a short, plain statement of the grounds upon which he is entitled to relief. Ross v. A.H. Robins Co., 607 F.2d 545, 557 n. 20 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980).

Rule 9(b) is designed to provide a defendant with fair notice of a plaintiff's claim in order to enable a defendant to prepare a defense, protect defendant's reputation or goodwill from harm, and reduce the number of strike suits. DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir.1987). Rule 9(b) is satisfied if the complaint sets forth:

(1) precisely what statements were made in what documents or oral representations or what omissions were made, and

(2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making same),

(3) the content of such statements and the manner in which they misled the plaintiff, and

(4) what the defendants "obtained as a consequence of the fraud."

Conan Properties, Inc. v. Mattel, Inc., 619 F.Supp. 1167, 1172 (S.D.N.Y.1985) (quoting Todd v. Oppenheimer & Co., 78 F.R.D. 415, 420-21 (S.D.N.Y.1978)); See also Crystal v. Foy, 562 F.Supp. 422, 425 (S.D.N.Y. 1983).

Where there are multiple defendants, the complaint must disclose the specific nature of each defendant's participation in the alleged fraud. DiVittorio, supra, 822 F.2d at 1247. Furthermore, the allegations of fraud cannot ordinarily be based on information and belief. Luce, supra, 802 F.2d at 54; Leslie v. Minson, 679 F.Supp. 280, 282 (S.D.N.Y.1988). This pleading restriction may be relaxed, however, where the matter is peculiarly within the knowledge of the defendant. DiVittorio, supra, 822 F.2d 1247. When pleading on information and belief is appropriate, plaintiffs are required to include a statement of facts upon which the allegations of fraud are based. Stern v. Leucadia National Corp., 844 F.2d 997, 1004 (2d Cir.), cert. denied, ___ U.S. ___, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988).

Similarly, while Rule 9(b) allows "conditions of mind" to be averred generally, plaintiffs must at least present those circumstances that provide a "minimal factual basis" for the allegations of scienter. See, e.g., Connecticut National Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987). In other words, Rule 9(b) requires that the complaint allege specific facts which support any conclusory allegations that the misstatements complained of were intentionally fraudulent. As Judge Newman has explained:

Although Rule 9(b) provides that intent and "other condition of mind" may be averred generally, plaintiffs must nonetheless provide some factual basis for conclusory allegations of intent. These allegations must give rise to a "strong inference" that the defendants possessed the requisite fraudulent intent.

A common method for establishing a strong inference of scienter is to allege facts showing a motive for committing fraud and a clear opportunity for doing so. Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater.

Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir.1987) (citations omitted), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988).

In the present case, defendants contend that plaintiffs' securities law claims, RICO claims and common law fraud claims lack the specificity required by Rule 9(b).

A. The Securities Claims

The Court begins by noting that the Complaint is characterized by the type of vague, conclusory allegations that Rule 9(b) was designed to discourage.⁶ Plaintiffs have clearly failed to meet the requirements of Rule 9(b). Most notably, the Complaint fails adequately to allege a fraudulent scheme, and to apprise defendants Price Waterhouse and Jackson of their alleged role in the fraud; and fails specifically to plead facts to support an inference of fraudulent intent, a necessary element of plaintiffs' fraud claims.⁷ The Court will address the sufficiency of the pleadings, under Rule 9(b), against Price Waterhouse and Jackson separately. However, the noted deficiencies in adequately alleging a fraudulent scheme apply to both defendants regardless of the particular subsection in which the discussion appears.

i. Price Waterhouse

The Court turns first to plaintiffs allegations of securities fraud against Price Waterhouse. Price Waterhouse is alleged to have participated in the scheme by preparing reports on financial projections for the partnerships, which were included in the Memoranda. Complaint ¶ 37. Price Waterhouse contends that the Complaint fails to inform it of the fraudulent conduct in which it purportedly participated, and fails to establish a fraudulent scheme or scienter.

The Complaint divides the defendants into the following categories. The NPA Defendants are divided into the "Sponsor Defendants," Complaint ¶ 12, and the "General Partner and Limited Partnership Defendants." Complaint ¶ 13. The remaining defendants into the following groups: (1) "Wrap Holder Defendants," Complaint ¶ 14; (2) "Accounting Defendants," Complaint ¶ 15; and (3) "Appraiser Defendants." Complaint ¶ 16. Thereafter, the complaint abandons these distinctions, using instead undifferentiated references to the "Defendants."

Plaintiffs contend that the Complaint is sufficient because it specifies that the misrepresentations and omissions occurred in the offering materials in which Price Waterhouse's financial projections appeared. Complaint ¶ 37-38. Plaintiffs claim this general...