DiVittorio v. Equidyne Extractive Industries, Inc., 504

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Writing for the Court: MAHONEY
• Citation: 822 F.2d 1242
• Parties: Fed. Sec. L. Rep. P 93,300, 8 Fed.R.Serv.3d 421, RICO Bus.Disp.Guide 6683 Vincent DiVITTORIO, Individually, and as Representative of a Class of Investors Who Purchased the Securities of Equidyne Extractive Industries 1979 Petro/Coal Program II, and also Derivatively on behalf of the Aforesaid Partnership, Plaintiff-Appellant, v. EQUIDYNE EXTRACTIVE INDUSTRIES, INC.; Eastern Mining Systems, Inc.; Eastland Drilling Corp.; Eastland Industries, Inc.; Equidyne Corporation; Equidyne Properties, Inc.; Stuart R. Ross; Joel I. Beeler; Peter P.R. Rock; Robert L. Liebmann; Wofsey Certilman Haft and Lebow; Marks Shron and Company; Arnold Gruber, Individually and as a partner of Marks Shron and Company; Inland Drilling Company, Inc.; and Equidyne Extractive Industries 1979 Petro/Coal Program II, Defendants-Appellees. ocket 86-7771.
• Docket Number: D,No. 504,504
• Decision Date: 26 June 1987

Page 1242

822 F.2d 1242 Fed. Sec. L. Rep. P 93,300, 8 Fed.R.Serv.3d 421,
RICO Bus.Disp.Guide 6683 Vincent DiVITTORIO, Individually, and as Representative of a
Class of Investors Who Purchased the Securities of Equidyne
Extractive Industries 1979 Petro/Coal Program II, and also
Derivatively on behalf of the Aforesaid Partnership,
Plaintiff-Appellant,
v.
EQUIDYNE EXTRACTIVE INDUSTRIES, INC.; Eastern Mining
Systems, Inc.; Eastland Drilling Corp.; Eastland
Industries, Inc.; Equidyne Corporation; Equidyne
Properties, Inc.; Stuart R. Ross; Joel I. Beeler; Peter
P.R. Rock; Robert L. Liebmann; Wofsey Certilman Haft and
Lebow; Marks Shron and Company; Arnold Gruber,
Individually and as a partner of Marks Shron and Company;
Inland Drilling Company, Inc.; and Equidyne Extractive
Industries 1979 Petro/Coal Program II, Defendants-Appellees. No. 504, Docket 86-7771. United States Court of Appeals,
Second Circuit. Argued Dec. 12, 1986.
Decided June 26, 1987.

Page 1243

Curtis V. Trinko, New York City (Kevin J. Yourman, of counsel), for plaintiff-appellant.

Geoffrey W. Heineman, New York City (D'Amato & Lynch, New York City, of counsel), for defendant-appellee Wofsey Certilman Haft and Lebow.

Carolyn H. Henneman, New York City (Scoppetta & Seiff, New York City, of counsel), for defendant-appellee Joel I. Beeler.

Andrew J. Entwistle, New York City (Vincent R. Fontana, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, of counsel), for defendants-appellees Marks Shron and Co. and Arnold Gruber.

Stuart A. Jackson, New York City, for defendants-appellees Equidyne Extractive Industries, Inc., Eastern Mining Systems, Inc., Eastland Drilling Corp., Eastland Industries, Inc., Equidyne Corporation, Equidyne Properties, Inc., Stuart R. Ross, Peter P.R. Rock, and Equidyne Extractive Industries 1979 Petro/Coal Program II.

Daniel J. Kornstein, New York City (Kornstein Veisz & Wexler, New York City, of counsel), for defendant-appellee Inland Drilling, Co.

Before MANSFIELD, ^* VAN GRAAFEILAND and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

In this action, plaintiff Vincent DiVittorio complains of an alleged fraud in the public solicitation of purchasers of interests in defendant Equidyne Extractive Industries 1979 Petro/Coal Program II, a New York limited partnership (the "Partnership") formed to obtain and exploit various coal properties and oil leases. DiVittorio, suing individually and on behalf of a class of investors, filed an amended complaint on or about January 10, 1986. He alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78j(b) (1982)) and Rule 10b-5 promulgated thereunder (17 C.F.R. Sec. 240.10b-5 (1986)); Section 17 of the Securities Act of 1933 (15 U.S.C. Sec. 77q (1982)); and Section 1962 of the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. Sec. 1962 (1982)). Various pendent claims were also asserted, including breach of fiduciary duties, fraudulent

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misrepresentation, negligence, and legal and accounting malpractice.

All of the defendants thereafter either made or joined in motions to dismiss the amended complaint. In a memorandum and order dated August 18, 1986, the district court dismissed the complaint for failure to plead fraud with particularity, as required by Fed.R.Civ.P. 9(b). Plaintiff was given leave to replead within sixty days. This appeal followed. We affirm in part, and reverse and remand in part.

I. BACKGROUND

We assume the truth of the plaintiff's allegations. Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986).

A. The Defendants.

Plaintiff has divided all but one of the various defendants into three groups, and we shall do the same for ease of reference. The "Equidyne defendants" are:

(1) the Partnership;

(2) Equidyne Extractive Industries, Inc. (the "General Partner"), a New York corporation serving as general partner in the Partnership;

(3) Eastern Mining Systems, Inc. ("Eastern"), a New York corporation affiliated with the General Partner and the contract miner for the Partnership's coal properties;

(4) Eastland Drilling Corp. ("EDC"), an affiliate of the General Partner and a co-contracting driller under an agreement for the development of the Partnership's oil and gas properties;

(5) Eastland Industries, Inc. ("Eastland"), an affiliate of the General Partner that sublet coal properties to the Partnership;

(6) Equidyne Corporation ("Equidyne"), a New York corporation and the parent of the General Partner;

(7) Equidyne Properties, Inc. ("Properties"), a New York corporation and subsidiary of Equidyne serving as a manager and syndicator of Equidyne's real estate investments;

(8) Stuart R. Ross, a controlling stockholder and president of Equidyne, president of the General Partner and secretary-treasurer and a director of Properties;

(9) Joel I. Beeler, president or former president and a director of Properties, and present or former secretary-treasurer and a director of Equidyne;

(10) Peter P.R. Rock, vice president of the General Partner; and

(11) Robert L. Liebmann, formerly vice president-finance of the General Partner.

The "Lawyer defendant" is Wofsey Certilman Haft and Lebow ("Wofsey"), a law firm which, at all relevant times, acted as general counsel, tax counsel and business advisor to the Partnership.

The "Accountant defendants" are:

(1) Marks Shron and Company ("Marks Shron"), an accounting firm; and

(2) Arnold Gruber, a general partner in Marks Shron.

Defendant Inland Drilling Company, Inc. ("Inland") is an Ohio corporation which is wholly owned by the Buckeye Petroleum Company, Inc., which is not named as a defendant herein. Inland, along with EDC, is a co-contracting driller under an agreement for the development of the Partnership's oil and gas properties.

B. The Alleged Fraudulent Scheme.

According to the complaint, pleaded, except as to the identity of the class/derivative plaintiff, entirely upon information and belief, the Partnership was formed to acquire and exploit various coal properties and oil leases, and to provide, inter alia, "positive economic benefits" to its limited partners through the sale of oil, gas and coal, as well as certain tax benefits, such as deductions for intangible drilling costs and depreciation allowances on equipment. Pursuant to a "Descriptive Offering Memorandum" ("Memorandum") dated November 26, 1979, the Partnership solicited limited partners, ostensibly to facilitate the purchase of mining and other equipment for use in the Partnership's operations. DiVittorio invested in the Partnership some time during the latter half of 1979, although the

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precise circumstances surrounding his purchase are not disclosed in the complaint. From that time through and including at least July, 1983, defendants allegedly defrauded plaintiff by means of material misrepresentations and omissions in certain documents, including: (1) the Memorandum; (2) the "Limited Partnership Agreement of Equidyne Extractive Industries 1979 Petro/Coal Program II" dated December 3, 1979; and (3) "[v]arious reports and correspondence transmitted by the General Partner to the plaintiff and other investors in the Partnership subsequent to November, 1979."

Plaintiff alleges that the defendants failed to reveal that they had no intention of developing the Partnership's coal reserves. Plaintiff attempts to support this allegation by pointing to a statement, found elsewhere in the Memorandum, that the General Partner had suspended coal mining operations in another of its ventures due to poor market conditions. Further, it is alleged that mining equipment was never purchased and/or delivered to the Partnership, and that the defendants never intended to acquire such equipment.

The Memorandum acknowledged that the General Partner stood in a fiduciary relationship to the limited partners such as DiVittorio. The General Partner "stated its intention" of "exercis[ing] integrity and good faith in dealings with respect to Partnership affairs." The Memorandum also advised investors that the General Partner and its affiliates were involved in other business ventures, in which the limited partners would enjoy no rights. DiVittorio claims these statements constituted material misstatements of facts, because the defendants--and, as is often the case throughout the amended complaint, plaintiff fails to assign specific roles to any of the defendant groups or individual defendants--did not maintain separate business structures or segregated finances for the various businesses they managed. Plaintiff also alleges that defendants diverted funds contributed by investors to the Partnership, and monies generated by the Partnership's oil and gas properties, to other businesses controlled by defendants to bail those businesses out of financial difficulties.

The...