Cohen v. Goodfriend

• Decision Date: 31 March 1986
• Docket Number: No. CV-85-2021.,CV-85-2021.
• Citation: 642 F. Supp. 95
• Parties: Arthur COHEN, Plaintiff, v. Irwin E. GOODFRIEND, et alia, Defendants.
• Court: U.S. District Court — Eastern District of New York

642 F. Supp. 95

Arthur COHEN, Plaintiff, v. Irwin E. GOODFRIEND, et alia, Defendants.

No. CV-85-2021.

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

March 31, 1986.

Sheber, Pomerantz, Slotnik & Hamburg by Sol Slotnik, New York City, for plaintiff.

Ferber, Greilsheimer & Chan by Robert Chan, New York City, for defendants Goodfriend, Borden and Goodfriend & Borden, P.C.

MEMORANDUM AND ORDER

SIFTON, District Judge.

This is an action alleging various statutory and common law causes of action arising out of the acquisition by Valley View Enterprises, a partnership consisting of plaintiff, defendant Goodfriend, defendant Borden, and Bernard Friedman, in 1980 of a restaurant and land in Warwick, New York. Jurisdiction is based on section 22(a) of the Securities Act of 1933, as amended (the "Securities Act"), 15 U.S.C. § 77v(a); section 27 of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"); and principles of pendent jurisdiction. This matter is now before the Court on the motion of defendants Goodfriend, Borden, and the accounting firm of Goodfriend & Borden for an order:

(1) dismissing plaintiff's first, second, and third counts pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted,

(2) dismissing plaintiff's third, fourth, ninth, and eleventh counts pursuant to Rule 12(b)(1) for lack of subject matter jurisdiction,

(3) dismissing plaintiff's first through fourth counts pursuant to Rule 9(b) for failure to plead fraud with the required particularity,

(4) dismissing plaintiff's ninth and tenth counts pursuant to Rule 12(b)(6) on the grounds that they are barred by the statute of limitations,

(5) striking paragraphs (a)(2) and (a)(3) of plaintiff's demand for relief pursuant to Rule 12(b)(6) on the ground that there is no basis in law for granting such relief, and

(6) for such other and further relief, including a decision dismissing the complaint under Rule 56(b), as may seem just and proper.

The following statement of the facts of this case is derived from plaintiff's complaint and his affidavit submitted in response to this motion.

In 1980, defendants Goodfriend, Borden, and Goodfriend & Borden, an accounting partnership, became plaintiff's personal accountants, as well as the accountants for plaintiff's business, Columbia Equipment Inc. ("Columbia"). In November 1980, defendants advised plaintiff that Columbia had earned substantial gross income for its fiscal year ending in November 1980 and recommended that it would be economically beneficial for Columbia to incur additional expenses as "salary" for plaintiff, which Columbia could deduct from its taxes as a business deduction. Plaintiff accepted the recommendation.

Defendants also advised plaintiff that he should invest in a tax "shelter" to minimize the tax impact of the additional salary he would receive from Columbia. Apparently in pursuit of this objective, defendants advised plaintiff to purchase a limited partnership interest in a partnership to be formed and known as Valley View Enterprises (the "partnership"). The partnership was to be formed for the purpose of purchasing a restaurant for $700,000. According to plaintiff, the defendants represented to him that he would be a limited partner in the partnership, that he would own 49% of the partnership in return for his investment of $62,500, that his personal liability would be limited to his investment of $62,500, and that the investment would generate certain tax benefits in the form of ordinary tax deductions and investment credits, which would enable Cohen to save $27,440 in 1980, $26,132 in 1981, $18,605 in 1982, $13,677 in 1983, and $11,623.05 in 1984. In addition to plaintiff's allegations of oral representations, Exhibit A to plaintiff's affidavit in opposition to defendants' motions, is a letter to plaintiff from defendant Goodfriend dated November 9, 1981, reconfirming that plaintiff is held harmless with respect to any liability on a mortgage of $600,000 owed Indian Valley Management Inc. by Valley View Enterprises. The letter states: "This liability is solely the responsibility of Irwin Goodfriend and Steven Borden. Your total liability in this deal is the $62,500."

Defendants engaged defendant Schwartz, an attorney, to prepare all of the legal papers pertaining to the transaction. However, instead of preparing a limited partnership agreement, Schwartz prepared a certificate of general partnership, which plaintiff signed and returned. Plaintiff claims that he was unaware that he was becoming a general partner instead of a limited partner when he signed the document. The certificate, a copy of which is attached as Exhibit A to defendants' motion, does not specify that it is a general partnership agreement.

In connection with the foregoing transactions, plaintiff claims that the defendants deliberately or recklessly failed to disclose to plaintiff the following information:

(1) that no formal appraisals of the property located at Valley View had been made,

(2) that no mortgage or other documents were ever filed to protect the partnership's interest in the property and that the partnership never made any payments to protect its interests in the purchase of the property,

(3) that the $700,000 purchase price for the property represented an increase of $340,000 over a purchase price for the property which had been negotiated by the same defendants with others less than a year before the transaction in which Cohen invested,

(4) that the estimates regarding the value of the property and the purchase price to be paid therefor were arbitrary and inflated without any economic justification;

(5) that the agreements entered into between Valley View and the seller of the property were not the result of "arms length" negotiations, but were artificial and arbitrary estimates prepared solely for the purposes of generating dubious tax deductions;

(6) that the assets located on the property were not economically viable as a business;

(7) that in order to complete the purchase of the property, the partnership would be required to spend an additional $600,000 and that the failure to provide those funds would entail the forfeiture of the partnership's interest and possible exposure of Cohen to individual liability thereon;

(8) that the same parties, or related entities and individuals, were acting as the seller and buyer of the property; and

(9) that defendant Schwartz, representing all of the parties in the transaction including the seller of the property, the partnership, Cohen, and others, had a conflict of interest.

Defendants prepared plaintiff's federal tax returns for the years 1980, 1981, and 1982. Plaintiff alleges that defendants provided him with false and misleading information regarding the partnership for use in these returns. The IRS audited plaintiff's returns for 1980 and 1981 and determined that the deductions taken on those returns relating to the investment in the partnership were improper and that the values for the property used by defendants in preparation of those returns were overstated. Plaintiff claims that defendants' allegedly fraudulent actions caused plaintiff to suffer a tax liability in excess of $80,000 and also resulted in the partnership being unable to meet its financial obligations. As a consequence, the partnership property was foreclosed, and plaintiff lost all rights to that property.

Defendants contend that: (1) plaintiff's first, second and third causes of action, each of which allege violations of federal or state securities laws, should be dismissed on the ground that no "security" is involved; (2) plaintiff's ninth and tenth causes of action, which allege accounting malpractice and negligence, are barred by the statute of limitations; (3) plaintiff's first, second, third, and fourth causes of action fail to allege fraud with sufficient particularity; (4) plaintiff's state causes of action should be dismissed since plaintiff's federal claims fail; (5) there is no basis in law for the imposition of a constructive trust or attachment of defendants' assets.

FIRST, SECOND & THIRD CAUSES OF ACTION

Defendants' motion to dismiss the first, second, and third causes of action is denied.

A necessary predicate for plaintiff's first three claims is the purchase or sale of a security. Defendants contend that plaintiff's acquisition of a 49% interest in the partnership does not constitute the purchase of a security.

Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1), defines a "security" as follows:

"The term `security' means any note, stock, bond debenture, evidence of indebtedness, certificate of interest or participation in any profit—sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group of index of securities (including any interest therein or based on the value thereof), or any put, call straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a `security' or any certificate or interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing."

The Securities Exchange Act defines the term "security" in a similar manner, and the courts have viewed the definitions under the two statutes as virtually identical. See, e.g., Teherepnin v. Knight, 389 U.S. 332, 335-36, 88 S.Ct. 548, 552-53, 19 L.Ed.2d 564 (1967).

The question presented in this motion is whether plaintiff's interest in the partnership constitutes an "investment...