Corwin v. Marney, Orton Investments

• Decision Date: 30 April 1986
• Docket Number: No. 85-2401,85-2401
• Citation: 788 F.2d 1063
• Parties: Blue Sky L. Rep. P 72,384, Fed. Sec. L. Rep. P 92,734 Charles T. CORWIN, D.D.S., et al., Plaintiffs-Appellants, v. MARNEY, ORTON INVESTMENTS, a General Partnership, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1063

788 F.2d 1063

Blue Sky L. Rep. P 72,384, Fed. Sec. L. Rep. P 92,734

Charles T. CORWIN, D.D.S., et al., Plaintiffs-Appellants, v. MARNEY, ORTON INVESTMENTS, a General Partnership, et al Defendants-Appellees.

No. 85-2401.

United States Court of Appeals, Fifth Circuit.

April 30, 1986.

Michael "Mickey" S. Tomasic, Houston, Tex., for plaintiffs-appellants.

Larry R. Veselka, Vinson & Elkins, David L. Burgert, Houston, Tex., for Marney, Orton Investments.

Porter & Clements, John A. Irvine, Gregory A. Bolzle, Houston, Tex., for Sidney Orton.

Barry Alan Brown, Goldberg, Kusin & Brown, Houston, Tex., for Venita Vancaspel & Co.

Appeal from the United States District Court for the Southern District of Texas.

Before JOLLY, and HILL, Circuit Judges, and HUNTER, ^* District Judge.

ROBERT MADDEN HILL, Circuit Judge:

Plaintiff investors lost money in a Houston office building project and sued pursuant to federal securities laws and the Racketeer Influenced and Corrupt Organizations (RICO) Act, 18 U.S.C. Secs. 1961-68. The district court properly dismissed most of the securities claims on statute of limitations grounds, but the court erred in dismissing plaintiffs' claim under Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1985), because a fact issue existed as to whether limitations had run. We also reverse the district court's dismissal of the RICO claim because the dismissal was based on the absence of an alleged racketeering injury, a requirement recently rejected by the Supreme Court. Finally, we reverse the dismissal of the pendent state claims.

I. FACTS

Because the district court dismissed this case at a preliminary stage, our initial concern is how we should treat unresolved factual matters. Although the court disposed of the case on defendants' motions to dismiss for failure to state a claim, the court's acceptance of matters outside the pleadings makes such motions more properly treated as ones for summary judgment. See Fed.R.Civ.P. 12(b); 5 C. Wright & A. Miller, Federal Practice and Procedure Sec. 1366 (1969). On reviewing a summary judgment order, "we must view the evidence and any inferences to be drawn therefrom in the light most favorable to the party moved against to determine whether any genuine issue of material fact exists and whether the party seeking summary disposition is entitled to judgment as a matter of law." Prinzi v. Keydril Co., 738 F.2d 707, 709 (5th Cir.1984). For the purposes of this appeal, we therefore relate the following facts in a light most favorable to plaintiffs.

Marney, Orton Investments, a general partnership composed of Ronald D. Marney and Sidney Orton, prepared a lengthy set of documents entitled "Confidential Private Offering Memorandum" to be sent to several individuals in Texas. The offering memorandum, dated November 1, 1980, offered investment opportunities in twenty-one units of a limited partnership known as Woodway III Office Building, Ltd. ("the building partnership"). The general partner in the building partnership was Marney, Orton Investments. Each limited partnership unit was priced at $60,000. Marney, Orton Investments formed the building partnership to own, develop, and operate a professional office building on a certain tract of land on Woodway Drive in Houston. Another limited partnership, Woodway III, Ltd. ("the land partnership") contributed this tract to the building partnership in exchange for nine other limited partnership units in the building partnership.

Charles T. Corwin and six others received this offering memorandum and each decided to invest. The six investors other than Corwin received information and advice from Venita VanCaspel, principal owner and chief executive officer of VanCaspel & Company, Inc., who promoted these investments and received commissions on funds invested. Each of the seven investors purchased one unit of the building partnership in December 1980, paying $30,000 in cash and signing a note for another $30,000 payable in November 1981. Each investor paid his note when due. Marney, Orton Investments made two "cash calls" of approximately $17,000 each in 1983 and 1984 and each of the investors responded. Thus each investor made a total investment of about $94,000.

After the building was completed Corwin became dissatisfied and hired an accountant, James R. Ferrel, to review the records of the building partnership. Ferrel's review began on May 2, 1984, and halted on July 31, 1984, when he was denied further access to records. Ferrel's partial investigation concluded that the land partnership's true equity in the contributed property was not fully disclosed by the offering memorandum. Ferrel also found that various construction and finishing costs were higher than stated in the offering memorandum and that various instances of managerial malfeasance had occurred, including undisclosed rent concessions to certain tenants and undisclosed payments to certain entities related to Marney, Orton Investments. Corwin also discovered that VanCaspel owned a substantial portion of the land partnership at the time she was promoting investment in the building partnership.

Corwin and the six other investors filed suit in federal district court on September 4, 1984. Named as defendants were Marney, Orton Investments, the estate of Ronald D. Marney (who had since died in a light plane crash), Suzanne M. Marney (his widow), MOH, Inc., and Marney Properties, Inc. (two Texas corporations originally owned by Marney and Orton that sold interests in the building partnership and managed its property), Sidney Orton [collectively "the Marney/Orton defendants"], VanCaspel and VanCaspel and Company, Inc. [collectively "the VanCaspel defendants"]. The complaint charged the defendants with violations of the Securities Act of 1933, sections 5(a), (c) [15 U.S.C. Sec. 77e(a), (c) ], Sec. 12(2) [15 U.S.C. Sec. 77l (2) ], and Sec. 17(a) [15 U.S.C. Sec. 77q(a) ]. The complaint also charged violations of the Securities Exchange Act of 1934, sections 10(b) [15 U.S.C. Sec. 78j(b) ] and 20(a) [15 U.S.C. Sec. 78t(a) ] and Rule 10b-5. A RICO claim was included, with alleged predicate acts being federal and state securities law violations, federal mail fraud, and various Texas criminal statutes. Finally, various state law claims were alleged, among them alleged violations of Texas securities laws, breach of contract, breach of fiduciary relationship, misrepresentation and common law fraud, statutory real estate fraud, malpractice, and conversion. Attached to the complaint were several affidavits from the investors and Ferrel.

The Marney/Orton defendants and the VanCaspel defendants each filed motions to dismiss, both arguing that the investors' claims were barred by the applicable statutes of limitations. The defendants also argued, inter alia, that the investors had failed to state a claim. The investors' response included a further claim that the VanCaspel defendants violated the Investment Advisors Act of 1940, 15 U.S.C. Secs. 80b-1 to 80b-21. In April 1985 the investors received a "cash call" letter from Suzanne Marney requesting an additional $16,667 from each investor. The district judge assigned to the case had resigned and the investors moved for a temporary restraining order in order to obtain an immediate hearing and prevent the forfeiture of their interests in the building partnership. The case was transferred to the docket of another district judge and eight days later he filed an order denying the temporary restraining order and dismissing all of the investors' claims.

The order dismissing the case read in full:

Plaintiffs' application for temporary restraining order is DENIED for the reason that there is no likelihood that Plaintiffs would prevail on the merits. There is no likelihood that the Plaintiffs would prevail on the merits because there appears from the face of the pleading that there is no sound basis for federal jurisdiction over this action. This is so because Plaintiff's claims under the Securities Acts are time barred and Plaintiffs' attempts to allege an action under RICO allege no "RICO damages" and seek recovery only for alleged injuries suffered as a result of predicate acts.

There being no basis for federal jurisdiction, all claims asserted by Plaintiffs are DISMISSED.

Judgment was entered for the defendants, and the investors appeal.

II. DISCUSSION

A. Claims Under the 1933 Act and the Investment Advisers Act

The investors' claims under sections 5(a), (c) [prohibiting the sale of unregistered securities] and 12(2) [prohibiting misleading statements in the sale of securities] of the Securities Act of 1933 are time barred. The investors received the offering memorandum in November 1980 and purchased their interests in the building partnership in December 1980, but did not bring suit to challenge the allegedly unlawful and misleading sale of unregistered securities until September 1984. The applicable limitations provision reads as follows:

No action shall be maintained to enforce any liability created under section ... 77l (2) [section 12(2) of the 1933 Act] of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 77l (1) [section 12(1) of the 1933 Act, which prohibits violations of section 5, 15 U.S.C. Sec. 77e] of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section ... 77l (1) of this title more than three years after the security was bona fide offered to the public, or under section 77l (2) of this title more than three years after the sale.

15 U.S.C. Sec. 77m. This provision creates an absolute bar, and the normal tolling rules are not applicable to toll the three-year period. Summer v. Land &...