Gilmore v. Berg

• Decision Date: 05 April 1991
• Docket Number: Civ. No. 86-4694(SSB).
• Citation: 761 F. Supp. 358
• Parties: Robert J. GILMORE and Noah Liff, Plaintiffs, v. John Gordon BERG, Harold M. Winston, Stephen T. Marcoe, Jr., Rosalind Schneider, Martin R. Barker, Howard Green, Gilbert Tucker, Cooper River Office Building Associates, American Real Estate Associates, Inc., Management of Cooper River, Inc. Office Buildings of Cooper River, Inc., Pat Charles, Charles, Sturm & Masters and Norman S. Cohen, Defendants.
• Court: U.S. District Court — District of New Jersey

761 F. Supp. 358

Robert J. GILMORE and Noah Liff, Plaintiffs, v. John Gordon BERG, Harold M. Winston, Stephen T. Marcoe, Jr., Rosalind Schneider, Martin R. Barker, Howard Green, Gilbert Tucker, Cooper River Office Building Associates, American Real Estate Associates, Inc., Management of Cooper River, Inc. Office Buildings of Cooper River, Inc., Pat Charles, Charles, Sturm & Masters and Norman S. Cohen, Defendants.

Civ. No. 86-4694(SSB).

United States District Court, D. New Jersey.

April 5, 1991.

COPYRIGHT MATERIAL OMITTED

Howard Kaufman, Steven Coren, Kaufman, Coren & Ress, Philadelphia, Pa., and Manya Kamerling, Haddonfield, N.J., for plaintiffs.

John W. Markwardt, Horn, Kaplan, Goldberg, Gorny & Daniels, Voorhees, N.J., for defendants Pat Charles and Charles, Sturm & Masters.

Justin T. Loughry, Tomar, Simonoff, Adourian & O'Brien, Haddonfield, N.J., for defendant Norman S. Cohen.

Fredric R. Cohen, Katz, Ettin, Levin & Kurzweil, Cherry Hill, N.J., for defendant Gilbert Tucker.

Michael S. Silberman, Philadelphia, Pa., for defendants John Berg, Cooper River Office Bldg. Assoc., American Real Estate Assoc., Inc., Mgt. of Cooper River, Inc., Office Bldgs. of Cooper River, Inc.

Andrew Karcich, Sherman, Silverstein & Kohl, Pennsauken, N.J., for defendant Martin Barker.

Howard I. Green, pro se.

BROTMAN, District Judge.

This matter is presently before the court on the separate motions of defendant Pat Charles and Charles, Sturm & Masters (hereinafter "Charles"), and defendant Norman Cohen to dismiss or stay these proceedings pending the outcome of a related tax court case, or in the alternative, to dismiss or grant summary judgment on various counts of the complaint. These defendants played limited roles in the offering of a private placement memorandum (offering memorandum) on which plaintiffs allegedly relied in their purchase of stock in a real estate limited partnership venture. Combined, these two defendants argue that, as to them, (1) the statute of limitations bars plaintiffs' Section 10(b) and Rule 10(b)(5) claims,¹ (2) scienter cannot be established, (3) there could be no justifiable reliance on the offering memorandum, (4) the RICO counts should be dismissed because of certain pleading deficiencies, for failure to prove a pattern of racketeering activity, and because the statute is unconstitutionally vague, and (5) the pendent state claims should be dismissed on several separate grounds.

BACKGROUND

In December of 1980, plaintiffs Robert J. Gilmore and Noah Liff purchased unregistered securities in Cooper River Office Building Associates ("CROBA"), a New Jersey limited partnership. The information regarding the limited partnership was contained in the offering memorandum, dated September 19, 1980.

The Amended Complaint alleges that on December 13, 1980, Office Buildings of Cooper River, Inc. ("OBCR"), a Nevada corporation owned by defendants Berg (50 percent), Green (25 percent) and Tucker (25 percent), purchased two commercial office buildings and the underlying parcel of land, located in Pennsauken Township, New Jersey, from a bankrupt entity in Camden New Jersey, for a price of $2,500,000. Plaintiffs allege that on that same day, OBCR sold the two buildings for a sum of $4,700,000 and leased the accompanying land for a 17-year term to defendant Management of Cooper River, Inc. ("MCR"), a wholly owned subsidiary of defendant American Real Estate Associates, Inc. ("AREA"), a company controlled by Berg. Also on that same day, MCR sold the two buildings and assigned the lease to its parent AREA for the sum of $5,300,000. Plaintiffs describe the December 13, 1980 transactions as an "illegal scheme" concocted by defendants to impair the value of their investment.

Specifically, plaintiffs allege that defendants failed to disclose the "step-up" in the purchase of the two buildings (i.e., the difference between the purchase price of $2,500,000 originally paid by AREA and the $5,300,000 purchase price ultimately paid by the limited partnership), which "substantially diminished the likelihood that the plaintiffs and the other investors would realize the desired profits and appreciation, caused an inflated basis on the property for federal income tax purposes, and misled the plaintiffs and other investors into believing, inter alia, that they would be afforded substantial depreciation and interest deductions." Plaintiffs' Amended Complaint at ¶ 38.

Plaintiffs filed suit in this court on November 26, 1986 alleging financial injury in the form of loss of investment, lost tax deductions and credits, and substantial interest and penalties due to defendants' fraudulent misrepresentations, concealments and omissions. Plaintiffs allege violations of Section 10(b) of the Securities and Exchange Act of 1934, Sections 1962(a)-(d) of the Racketeering Influenced and Corrupt Organizations Act (RICO) and numerous state common law and statutory provisions.

On June 24, 1987, this court denied defendants' motions to dismiss without prejudice and granted plaintiffs leave to amend their complaint. Defendants then renewed their motions to dismiss primarily on grounds that plaintiffs' federal claims were barred by New Jersey's two-year discovery rule of limitations and that their RICO claims did not state a claim upon which relief could be granted. This court, on July 28, 1988, denied all of defendants' motions to dismiss except as to claims under the Tennessee Consumer Protection Act. In doing so, this court found that a disputed issue of material fact existed as to when plaintiffs knew or should have known of defendants' fraudulent acts. Plaintiffs then sought an order certifying the suit as a class action, which was denied July 21, 1989 for failure to satisfy the numerosity requirement.

The facts relevant to the present motions involve the limited roles played by Charles, an attorney who prepared a tax opinion letter, and Cohen, an accountant who prepared a report on the projected financial performance of the partnership. Both documents were attached to the offering memorandum, which referred to Charles and Cohen as "experts." According to Charles' certification provided to the court, Berg contacted Charles in April of 1980 and retained him to represent AREA in connection with the purchase of CROBA out of bankruptcy. In May of 1980, Berg informed Charles that if AREA were successful, Berg would probably syndicate the property, and asked Charles to prepare a tax opinion letter, which AREA would use in syndicating the property. Berg told Charles that Berg and a tax attorney had drafted a tax opinion letter, which was then submitted to Charles for his review, along with the proposed offering memorandum. Prior to this time, Charles had never been hired to render tax advice relating to any syndication. Charles reviewed the letter, conducted legal research, revised the letter and agreed to sign it as revised. Berg and Charles agreed on the revised letter on June 13, 1980, and Berg then put it on Charles' stationary. The letter states that the purchase price of $5.3 million reflects the fair market value of the property as determined by AREA, and that the opinion would be amended to reflect any variation between information in the offering memorandum and later developed facts.

Several weeks later, Berg told Charles that he would not request Charles to sign the letter and would not send it to proposed investors until after the closing of title on the property. Plaintiffs say that, according to his own deposition testimony, Charles understood the letter was to be included in the offering memorandum. Plaintiffs' Brief in Opposition, p. 5. Sometime prior to December, 1980, Charles learned that Berg was selling interests in the syndication but he says he was not aware that his tax opinion letter was part of it. In fact, Berg started actively soliciting limited partners through the offering memorandum, which included Charles' tax opinion letter, sometime in July of 1980.

Around this same time, Charles helped obtain bankruptcy court approval of the proposed AREA purchase and prepared the documentation necessary to close title, which took place at two meetings—December 15, 1980 and January 13, 1981. Charles and Berg agreed on a flat fee of $9,000, plus costs, for all of Charles' legal services, which was paid in full at the final closing. Two weeks later, at Berg's request, Charles executed the tax opinion letter and sent it to Berg. Thereafter, Charles provided limited legal services to Berg and his controlled entities.

An important event during the syndication of CROBA was the preparation of a draft "errata" sheet that was meant to inform prospective investors of, inter alia, (1) the purchase out of bankruptcy for $2,500,000, (2) Berg's full role in the transaction, and (3) the step-up in price from $2.5 million to $5.3 million. Charles received the errata sheet sometime in November of 1980 and was told by Berg not to worry about it. Plaintiffs Gilmore and Liff claim that there is no evidence they ever received the errata sheet and, therefore, they never knew these material facts before purchasing their interest in CROBA.

As to defendant Cohen, Berg retained him in June of 1980 to review a set of financial projections for the limited partnership and to prepare and sign a forecast letter to be included in the offering memorandum. Cohen had been Berg's personal accountant for many years, and had prepared financial statements and tax returns for Berg's Fidelity America Mortgage Company (FAMCO) limited partnerships. Berg gave Cohen a set of projections, assumptions to the projections and a draft forecast letter. Cohen prepared the forecast letter and delivered it to Berg in July of 1980 for inclusion in the offering memorandum. The disputed language of that letter on which plaintiffs stake their claims against Cohen reads:

My review of AREA's projections and assumptions included tests of the computations, inquiries as to

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