Dymm v. Cahill

• Decision Date: 13 February 1990
• Docket Number: No. 89 Civ. 3953 (MBM).,89 Civ. 3953 (MBM).
• Citation: 730 F. Supp. 1245
• Parties: Mandel DYMM, Plaintiff, v. Gerald CAHILL, Raymond Bogert, Stanley Schwartz, James P. Casey, KT Building Associates, Inc., Ernest Hammer and George Devins, Defendants.
• Court: U.S. District Court — Southern District of New York

730 F. Supp. 1245

Mandel DYMM, Plaintiff, v. Gerald CAHILL, Raymond Bogert, Stanley Schwartz, James P. Casey, KT Building Associates, Inc., Ernest Hammer and George Devins, Defendants.

No. 89 Civ. 3953 (MBM).

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

February 13, 1990.

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Lewis S. Sandler, James J. Eccleston, Beigel & Sandler, Ltd., New York City, for plaintiff.

Irwin M. Echtman, Easton & Echtman, P.C., New York City, for defendants.

OPINION AND ORDER

MUKASEY, District Judge.

This case arises out of plaintiff's investment in two limited partnership tax shelters — New Castle and Decker Malls — on the advice of his accountant, who allegedly misrepresented material facts about the partnerships and conspired with the insiders of the New Castle partnership to defraud plaintiff and other investors through a complex scheme involving forged promissory notes, excessive prices and fees to insiders. Plaintiff has sued the accountant, George Devins, and the alleged insiders of the New Castle partnership including the managing agent, McCorhill Publishing, Inc., the general partner, KT Associates, and the officers and principals of these two corporations. Plaintiff brings five claims against all defendants in connection with the New Castle partnership based on § 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder, § 17(a) of the Securities Act of 1933, RICO, and common law claims of fraud and breach of fiduciary duty. He also brings four claims solely against Devins in connection with the Decker Malls partnership based on § 10(b) and Rule 10b-5, § 17 and common law claims of fraud and negligence.

Two of the defendants, Devins and Bogert, move to dismiss the complaint for failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b), and for failure to state a claim upon which relief may be granted pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons set forth below, defendants' motion is granted as to plaintiff's claims under § 17 of the Securities Act of 1933, and denied as to all other claims.

I.

Plaintiff Mandel Dymm is a citizen of Florida who allegedly is not sophisticated or knowledgeable about financial matters. In the Spring of 1984, plaintiff hired defendant Devins as an accountant for plaintiff's graphics business, and in December of that year began looking to Devins for advice on tax matters and investments. At that time, Devins met with plaintiff and advised him to invest in the New Castle Limited Partnership "because it provided tax benefits with the opportunity for profits." (Compl. ¶ 34) Plaintiff bought interests in New Castle both on December 31, 1984, when he bought a one-half unit interest for $37,500, and on April 16, 1985, when he bought another one-half interest at the same price. Allegedly at the direction of Devins, plaintiff on December 31, 1984 made an initial payment of $1,875 on his first one-half unit investment in New Castle with a check made out to New Castle. From then on, allegedly at Devins' direction, plaintiff paid off his first one-half unit investment by writing checks to "Citytrust" in varying amounts at three-month intervals over the next three years, for a total of $41,160.67. Similarly, plaintiff made an initial payment to New Castle for his second one-half unit interest in the partnership, and for the next three years wrote checks to Ingersoll-Rand Financial Corporation in varying amounts, for a total of $80,439.93.

Plaintiff alleges that starting in December, 1984, defendant Gerald Cahill, the chairman, principal and shareholder of McCorhill Publishing ("McCorhill"), defendant Raymond Bogert, vice-president of KT Building Associates, Inc. ("KT") and a principal of McCorhill, and other defendants who were officers and associates of KT and McCorhill, executed a complex scheme to defraud investors. This scheme involved the purchase and sale of property in New Castle, New York called the Kraus-Thompson Building. McCorhill was the managing agent of the New Castle partnership; KT was the partnership's sole general partner.

McCorhill bought both the building and part of the publishing businesses of Kraus-Thomson Organization, Ltd., and then allegedly sold only the property to New Castle at an inflated price and kept the rights to the businesses. Plaintiff alleges that New Castle structured the transaction using features including a wraparound mortgage and excessive fees to KT and McCorhill so as to divert funds to defendants without the knowledge of investors. Further, plaintiff alleges that New Castle, by its general partner KT, forged the signatures of investors on promissory notes, falsely notarized these notes and pledged them as collateral for loans from two lending institutions, Citytrust and Ingersoll-Rand. Later, New Castle defaulted on the loans and declared bankruptcy, and investors received demands on the notes from the banks.

Plaintiff asserts that defendants authorized Devins to make misrepresentations to plaintiff regarding the New Castle investment, including, inter alia, that the building owned by New Castle was completely rented or soon would be, that the building was about to be sold at a high profit, that each limited partner would receive substantial tax-free distributions, and that the limited partners would be liable only for the amount they invested. Neither Devins nor the other defendants disclosed certain facts to plaintiff, such as, inter alia, that the borrowed money had been secured by forged promissory notes, and that KT and another company had not paid the capital contribution required by the partnership agreement.

Plaintiff also sues Devins with regard to another limited partnership investment Devins advised plaintiff to purchase in September, 1985. Plaintiff alleges that Devins told him that he would soon be receiving profits from the New Castle investment, and that he should immediately reinvest these profits in Decker Malls by becoming a limited partner in that partnership. Plaintiff in fact did not wait for a return on his New Castle investment before committing himself to buy an interest in Decker Malls, allegedly relying on Devins' statement that he would not have to pay for his Decker Malls interest until he received a return on his New Castle investment. On September 30, 1985, plaintiff purchased a one-unit investment in Decker Malls for $75,000, exclusive of interest, and made payments over the course of the next two years totalling $99,191.99. These payments did not comport with a capital contribution schedule listed in documents plaintiff never received.

Plaintiff sues the New Castle defendants, including Devins, based on § 10(b) of the Securities and Exchange Act of 1934, § 17(a) of the Securities Act of 1933, RICO, and common law fraud and breach of fiduciary duty. Plaintiff also sues Devins for his misrepresentations regarding Decker Malls based on § 10(b), § 17(a), and common law fraud and negligence. Only defendants Bogert and Devins have moved to dismiss the complaint.

II.

In his first claim, plaintiff charges that all defendants conspired to violate and aided and abetted each other in violating § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 under that act, 17 C.F.R. § 240.10b-5, through their misrepresentations in connection with the purchase and sale of securities in the New Castle partnership. In his seventh claim, plaintiff alleges that Devins violated § 10(b) and Rule 10b-5 by making misrepresentations in connection with the sale of securities in Decker Malls. Defendants Bogert and Devins, in their motion to dismiss, assert that plaintiff fails to plead fraud with sufficient particularity under Fed.R.Civ.P. 9(b), fails to plead scienter, and cannot bring this claim because it is barred by the statute of limitations. Because plaintiff has pleaded fraud particularly enough, and has pleaded scienter adequately to state a § 10(b) claim against both Devins and Bogert, defendant's motion to dismiss the first and seventh claims on those bases is denied. Further, because plaintiff has sufficiently pleaded that the statute of limitations has been tolled by fraudulent concealment, plaintiff's § 10(b) claims survive a motion to dismiss based on the statute of limitations.

A. Particularity

Rule 9(b) requires that in "all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Rule 9(b)'s strict requirements are tempered, however, by the general pleading rule set forth in Fed.R. Civ.P. 8(a) that a complaint consist of "short and plain statements" of claims for relief. See DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242 (2d Cir.1987). Section 10(b) claims, which are based upon fraudulent acts, must satisfy the pleading requirements of Fed.R. Civ.P. 9(b). See Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir.1986). In order to plead fraud with particularity, "a complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989). Such allegations cannot be conclusory, but must be supported by assertions of fact. Luce, 802 F.2d at 54. On a motion to dismiss, a court must read the complaint generously and draw all inferences in favor of the pleader. Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 562 (2d Cir.1985).

In the case at bar, plaintiff asserts his § 10(b) claim against all defendants as a group for taking part in the New Castle scheme, including the forgery of notes, and for making misrepresentations through Devins, whom plaintiff alleges was their agent. "Where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each ...