Feinman v. Schulman Berlin & Davis

• Decision Date: 11 January 1988
• Docket Number: No. 86 Civ. 7942 (SWK).,86 Civ. 7942 (SWK).
• Citation: 677 F. Supp. 168
• Parties: Robert FEINMAN, Burton Laskin, Barry Lief, Marvin Weissman, Bernard Pliskin, Emanuel Pokart and R & P Energy Associates Limited Partnership, Plaintiffs, v. SCHULMAN BERLIN & DAVIS, Mark A. Berlin, William Apuzzo and Stanley Blay, Defendants.
• Court: U.S. District Court — Southern District of New York

677 F. Supp. 168

Robert FEINMAN, Burton Laskin, Barry Lief, Marvin Weissman, Bernard Pliskin, Emanuel Pokart and R & P Energy Associates Limited Partnership, Plaintiffs, v. SCHULMAN BERLIN & DAVIS, Mark A. Berlin, William Apuzzo and Stanley Blay, Defendants.

No. 86 Civ. 7942 (SWK).

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

January 11, 1988.

Rochman, Platzer & Fallick, New York City by Barry M. Fallick, for defendants Schulman, Berlin & Davis and Mark A. Berlin.

Schulman & Berlin, P.C., New York City by Robert D. Schulman, for defendant William Apuzzo.

Newman Schlau Fitch & Burns, P.C., New York City by Philip Schlau, for defendant Stanley Blay.

Stanley Blay, Brooklyn, pro se.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

Plaintiffs filed this securities fraud action pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, and state law, including § 352-c of the General Business Law of New York ("Martin Act"). Plaintiffs claim they were defrauded by their participation in a limited partnership. Defendants are lawyers who either advised plaintiffs or prepared documents for plaintiff with regard to the limited partnership.

This action is presently before this Court on defendants' motion to dismiss (1) for insufficiency of process pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(4), (2) for insufficiency of service of process pursuant to Rule 12(b)(5), (3) for failure to state a claim pursuant to Rule 12(b)(6), and (4) for failure to plead fraud with particularity. Defendants also claim the action is time barred by applicable statutes of limitation. Defendants' motion to dismiss pursuant to Rule 9(b) is granted in full, while the motion to dismiss pursuant to Rule 12(b)(6) is granted in part and denied in part. The Court does not reach the other issues raised in defendants' motions.¹

BACKGROUND

Plaintiffs invested in Tech-Sav Associates Limited Partnership (the "partnership") on either October 15 or October 20, 1980² through a private placement memorandum. See Affidavit of Mark A. Berlin, April 20, 1987, at Exh. C (hereinafter "the offering memorandum"). Plaintiffs are apparently the only limited partners. See Plaintiffs' Memorandum of Law, Exh. A (Certificate of Amendment). The name of the partnership was changed, with the help of defendant law firm Schulman, Berlin & Davis, in November, 1980, to R & P Energy Associates Limited Partnership. Berlin Affidavit at ¶ 19. The partnership, apparently on October 15, 1980, see note 2, supra, purchased from Auto Energy Systems, Inc., a computer energy management system (the "system") for $420,000 which was designed to provide a computerized method of energy management to commercial, residential and motel/hotel facilities. Complaint at ¶¶ 3, 15. The limited partners contributed a total of $55,000 in cash and took a non-recourse note for the balance. The partnership entered into a management agreement with The Fuel Governor, Inc. for installation and management of the system. The Fuel Governor then executed a contract with the Hertz Corporation which was to use the energy control system. Complaint at ¶ 15.

Plaintiffs allege that in October or November of 1980, Mark Berlin and William Apuzzo, on behalf of Schulman, Berlin & Davis, acted as attorneys and financial advisors to the plaintiffs and recommended that plaintiffs purchase one or more systems from Auto Energy Systems, Inc. Complaint at ¶ 16. These attorneys allegedly told plaintiffs that the purchase would "provide substantial tax benefits". Id. Though they do not specify when, where or how, plaintiffs allege that defendants made the following misrepresentations:

a. That the documentation presented to plaintiffs was the documentation necessary to structure the series of transactions in the manner previously represented to plaintiffs.

b. That the Fuel Governor, Inc., had the necessary experience to manage the system.

c. That the transaction was an activity engaged for a profit and for the production of income.

d. That any losses incurred in connection with (sic) transaction would be allowable and deductible for tax purposes as losses incurred in a trade or business engaged for a profit or held for the production of income.

e. That an investment tax credit would be allowable.

Complaint at ¶ 22.

DISCUSSION

Failure to State a Claim

The Court first considers defendants' motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6). Dismissal in a Rule 12(b)(6) motion is not proper unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-6, 78 S.Ct. 99, 101-2, 2 L.Ed.2d 80 (1957). The Court must rely only on the allegations in the complaint and those documents attached as exhibits or incorporated by reference. Goldman v. Belden, 754 F.2d 1059, 1066 (2d Cir.1985).³

To state a claim in a Section 10(b) action, the plaintiff must allege (1) material misstatements or omissions, (2) indicating an intent to deceive or defraud (scienter), (3) in connection with the sale or purchase of any security, (4) upon which the plaintiff detrimentally relied. See Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir.1986); Jaksich v. Thomson McKinnon Securities, 582 F.Supp. 485, 493 (S.D.N.Y.1984). A party must also allege that the defendant used instruments of interstate commerce or the national securities exchange to facilitate the fraud and that the fraud in fact caused the injuries. First Federal Savings & Loan v. Oppenheim, Appel, Dixon & Co., 629 F.Supp. 427, 438 (S.D.N.Y.1986). The Court will assume for the purposes of this discussion that the alleged misrepresentations were material to the extent that plaintiffs would not have purchased the limited partnership interests had the misstatements not been made. See Harkavy v. Apparel Industries, 571 F.2d 737, 741 (2d Cir.1978) (standard of materiality in § 10(b) case concerns whether omitted facts would have had actual significance in investor's deliberations).

Reliance on statements which are directly contradicted by the clear language of the offering memorandum through which plaintiffs purchased their securities cannot be a basis for a federal securities fraud claim. Kennedy v. Josephthal & Co., 814 F.2d 798, 804-05 (1st Cir.1987) (court affirmed summary judgment motion for defendants since offering memorandum's candid warnings made any reliance unjustified as a matter of law); see also Luce, supra, 802 F.2d at 56. The securities laws' policy of "full disclosure", see Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 478, 97 S.Ct. 1292, 1303, 51 L.Ed.2d 480 (1977), has been met when the relevant documents fully disclose the risks involved.

Plaintiffs have failed to allege a § 10(b) violation for the last four of the five alleged misrepresentations listed in ¶ 22 of plaintiffs' complaint. Any reliance by plaintiffs on the allegedly false statements⁴ could not have reasonably been made.

Assuming for the purposes of this motion that defendants made the statements in connection with the plaintiffs' purchase of the limited partnership interests,⁵ plaintiffs' reliance on the statements was wholly unreasonable since the offering memorandum specifically warned plaintiffs of the tax and other risks associated with the limited partnership. In Luce, plaintiffs alleged "that the Offering Memorandum contained intentional misrepresentations as to the potential cash and tax benefits of the partnership." Id. The Second Circuit decided that the claims did not state a claim under § 10(b) since the offering memorandum "made it quite clear that its projections of potential cash and tax benefits" were inherently speculative in nature. Id. As explained more fully below, the offering memorandum in this case unequivocally warns potential investors of the risks involved with investing in the limited partnership.

The offering memorandum considers each of the alleged misrepresentations. The offering memorandum states on page 7 that "the Manager defined earlier as The Fuel Governor, Inc. was organized in 1979 and to date has conducted only limited business in the energy management area and has limited personnel and resources." On page 9 under the heading "Risk Factors", the offering memorandum states that the Manager "is a recently formed Delaware corporation with little experience in the field of energy management or in the care of supervision of systems similar to the one being acquired by the Partnership."

Under the heading "Tax Factors", the offering memorandum states on page 18 that "NEITHER THE PARTNERSHIP NOR ANY AGENT THEREOF ASSUMES ANY RESPONSIBILITY FOR THE TAX CONSEQUENCES OF THIS TRANSACTION TO AN INVESTOR OR POTENTIAL PARTNER.... There can be no assurance that the Internal Revenue Service will not take a position which differs from the tax treatment proposed by the Partnership." (emphasis in original). The memorandum then goes on to remind the reader in a later section on page 22 that, under the Internal Revenue Code, "deductions or losses generated from `activities not engaged in for profit' ... may not be allowable in whole or in part. The determination whether an activity is engaged in for profit is based on all facts and circumstances; no one is determinative." While this section does not specifically warn the prospective buyer that the partnership may not be an activity engaged in for profit, in combination with the general warnings it does put the reader on notice that the IRS may determine that the Partnership is not a "for profit" activity. Plaintiffs should have known from the language used that the availability of a loss deduction was not a certainty.

Finally, the offering memorandum warns on pages 20—21 that there "can be no assurance that the Internal Revenue Service will not challenge the useful life and cost (including all or part of the Note)...