Dannenberg v. Dorison
| Decision Date | 08 March 1985 |
| Docket Number | No. 83 Civ. 4396 (JES).,83 Civ. 4396 (JES). |
| Citation | 603 F. Supp. 1238 |
| Parties | Richard B. DANNENBERG, individually and on behalf of others similarly situated, Plaintiff, v. Milton B. DORISON, Richard M. Firestone, Male, Bloom, Bodne, Kuperstein & Eisenberg, a Professional Association, Male, Bodne, Kuperstein & Eisenberg, a Professional Association, Lance E. Eisenberg, Stanley H. Kuperstein, Michael H. Male, Michael D. Bodne, Steven W. Simon, Major Management Corporation, Albert H. Wahl, Amity Financial, a Connecticut limited partnership, Amity Financial Corp., Drake Financial, Inc., Columbo Trust, N.V., Columbus Trust Company, Ltd., Leisure Transportation Inc., Alphanumeric Incorporated, Michael Shore, Mitchell Goldstone, Jeffrey Cohan, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Barbara A. Lee, New York City, for plaintiff.
Lester Schwab Katz & Dwyer, New York City, for defendants Male, Bloom, Bodne, Kuperstein & Eisenberg, a Professional Association; Male, Bodne, Kuperstein & Eisenberg, a Professional Association, Lance E. Eisenberg, Stanley H. Kuperstein, Michael H. Male, Michael D. Bodne and Steven W. Simon, Steven B. Prystowsky, B. Jennifer Jaffee, Stuart W. Axe, Steven B. Getzoff, New York City, of counsel.
Lawrence Iason, New York City, for defendant Wahl.
Townsend Rabinowitz Pantaleoni & Valente, New York City, for defendants Leisure Transportation, Inc., Alphanumeric Incorporated, Michael Shore, Mitchell Goldstone, Jeffrey Cohan and Drake Financial, Inc.; Francis V. Imbornone, New York City, of counsel.
Rogers Hoge & Hills, New York City, for defendants Dorison, Amity Financial and Amity Financial Corp.; Richard J. Schulman, New York City, of counsel.
Plaintiff, Richard B. Dannenberg, sues to recover damages allegedly sustained as a result of his investment in a fraudulent limited partnership tax shelter, Aquarius Associates ("Aquarius").
The defendants1 have filed motions to dismiss the amended complaint.2 Plaintiff has moved for certification that the action may proceed as a class action pursuant to Fed.R.Civ.P. 23. The Court heard oral argument on the motions on January 25, 1985.
According to the amended complaint, limited partnership interests in Aquarius were sold pursuant to a private placement offering memorandum dated March 21, 1979, and supplemented May 8 and 18, 1979 ("the Offering Memorandum"). See Amended Complaint ¶ 5. The Offering Memorandum was prepared by MBBK & E, along with a tax opinion with respect to the offering. Id. at ¶¶ 48, 52. On May 31, 1979, allegedly in reliance on the Offering Memorandum, plaintiff purchased a one-half "unit" of Aquarius for $50,000 — $12,500 paid by check and $37,500 paid by way of a recourse note to the order of Drake. Id. at ¶ 36. Plaintiff also paid a $500 legal fee to MBBK & E. Id.
Plaintiff alleges that the Offering Memorandum was false and misleading because it failed to disclose, inter alia, the identities of the "principals and promoters" of Aquarius and how they would profit from Aquarius, and because it represented that Aquarius would engage in coal mining operations when in fact Aquarius was never intended to actually engage in coal mining or any other business, had no legitimate business purpose, and therefore did not qualify for the tax advantages presented to investors. E.g., id. at ¶ 38. He further alleges that his interest in Aquarius is worthless. Id. at ¶ 60.
Plaintiff sues for damages pursuant to section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), common law fraud, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968.
Defendants Leisure, Alphanumeric, Shore, Goldstone, Cohan, Drake, and Wahl move to dismiss the fraud claims for failure to plead fraud with the requisite particularity as required by Fed.R.Civ.P. 9(b). These same defendants, along with the attorney defendants MBBK & E, MBK & E, Eisenberg, Kuperstein, Male, Bodne, and Simon, also move to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for failure to plead scienter.3
To satisfy Rule 9(b) plaintiff must plead facts from which the Court may reasonably infer fraud as to each defendant. See, e.g., Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir.1982), citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 192 n. 7, 96 S.Ct. 1375, 1380 n. 7, 47 L.Ed.2d 668 (1976); Crystal v. Foy, 562 F.Supp. 422, 424-25 (S.D.N.Y.1983). Tested by these principles the amended complaint is clearly insufficient with respect to the outsider defendants Drake, Wahl, and the attorney defendants.
While plaintiff alleges that Dorison and Firestone, the alleged insiders, promoted about fifty fraudulent tax shelters, no facts are pleaded from which the Court may infer that the outsider defendants knew or deliberately avoided knowing that Aquarius or any of these other tax shelters were fraudulent. Merely multiplying the number of transactions in which a defendant allegedly participated, either by preparing a tax opinion or providing financing or underwriting services, without pleading facts that would permit an inference of knowledge that any one of these other transactions was fraudulent, does not satisfy the requirement of Rule 9(b). See, e.g., Decker, supra, 681 F.2d at 114; Crystal, supra, 562 F.Supp. at 424. Yet that is all that is alleged against these defendants. See, e.g., Amended Complaint ¶¶ 48, 51, 52, 67.
Moreover, plaintiff has not alleged any factual basis upon which the Court could properly infer that these outside defendants owed any fiduciary duty to plaintiff, which would render recklessness a sufficient predicate for an allegation of fraud.4 See, e.g., ITT, An International Investment Trust v. Cornfeld, 619 F.2d 909, 923-25 (2d Cir.1980); Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 602 F.2d 478, 484-85 (2d Cir.1979), cert. denied, 444 U.S. 1045, 100 S.Ct. 734, 62 L.Ed.2d 731 (1980); Cf. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978). Therefore, plaintiff's first, second, and fourth claims are dismissed as to these defendants, without prejudice to repleading if during the course of discovery plaintiff acquires sufficient facts against any of them upon which a charge of fraud may properly be predicated.
The situation is different as to defendant Leisure, general partner of Aquarius, defendant Alphanumeric, the controlling person of Leisure, and defendants Shore, Goldstone, and Cohan, who are all insiders of Aquarius. As to these defendants, the Court may reasonably infer, based on their inside knowledge of and participation in the business of Aquarius, that they were aware of the fraudulent nature of the transactions in which Aquarius was involved. Cf. Goldman v. G.C. Belden, Jr., 754 F.2d 1059, 1070 (2d Cir. 1985). Their motions to dismiss plaintiff's fraud claims are therefore denied.5
Defendant Dorison moves pursuant to Fed.R.Civ.P. 12(f) to strike certain allegations of the amended complaint pertaining to other actions and proceedings, arguing they are irrelevant, prejudicial and will unfairly broaden the scope of discovery.
Because the Court finds that these allegations, if true, might be relevant with respect to whether or not Dorison acted fraudulently with respect to Aquarius, the motion to strike is denied. Any problems arising in connection with the scope of discovery as a consequence of the inclusion of these allegations may be presented to and dealt with by the Court at the appropriate time.
The fifth and sixth claims of the amended complaint allege violations of the civil provisions of RICO. As discussed at oral argument, because the Supreme Court has agreed to review the Second Circuit's decision in Sedima, S.P.R.L. v. Imrex Company, 741 F.2d 482 (2d Cir.1984), cert. granted, ___ U.S. ___, 105 S.Ct. 901, 83 L.Ed.2d 917 (1985), the Court will not consider the motions to dismiss the RICO claims at this time. The parties shall submit a Stipulation and Order within ten (10) days of the date of this Opinion and Order either (i) severing and suspensing the RICO claims pending the Supreme Court's ruling in Sedima, or (ii) dismissing the RICO claims without prejudice to reinstating them should that be appropriate in light of the Supreme Court's ruling in Sedima, assuming of course that defendants agree to a tolling of the statute of limitations from the time of the filing of the complaint until the Supreme Court rules on this issue.
Plaintiff moves pursuant to Fed.R. Civ.P. 23 to have this action certified as a class action and to have plaintiff certified as class representative. Plaintiff defines the proposed class as all persons who purchased limited partnership interests in Aquarius pursuant to the Offering Memorandum, with the exception of any defendants herein.
In order to qualify for class action status, the Court must find that (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the proposed class representative are typical of the claims or defenses of the class, (4) the proposed representative will fairly and adequately protect the interests of the class, (5) common questions of law or fact predominate over individual questions, and (6) a class action is superior to other available methods for the fair and efficient adjudication of the controversy. Fed.R.Civ.P. 23(a) & (b)(3).
Defendants contend that the proposed class fails to satisfy the numerosity requirements of Rule 23(a)(1). Plaintiff concedes that the maximum possible number of...
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