Goodman v. Epstein
| Decision Date | 25 September 1978 |
| Docket Number | No. 77-1209,77-1209 |
| Citation | 582 F.2d 388 |
| Parties | Fed. Sec. L. Rep. P 96,500 David L. GOODMAN et al., Plaintiffs-Appellants, v. Sidney EPSTEIN et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Edward L. Foote, Chicago, Ill., for plaintiffs-appellants.
Paul E. Freehling, Chicago, Ill., for defendants-appellees.
Before TONE, Circuit Judge, KUNZIG, Judge, * and BAUER, Circuit Judge.
This action seeking compensation for damages suffered as a result of a limited partnership land development scheme gone awry comes to us on plaintiffs' appeal from a judgment entered on a general jury verdict for defendants in the United States District Court for the Northern District of Illinois, Eastern Division.
Plaintiffs (David L. Goodman, Mollie E. Goodman, Lee A. Freeman, and Lee A. Freeman, Jr., hereinafter plaintiffs or the investors), certain holders of limited partnership interests 1 in the D-E Westmont Limited Partnership, filed their complaint against the defendants (Sidney Epstein, Raymond Epstein, and Melvin M. Kupperman, hereinafter defendants or developers), the general partners of D-E Westmont, on February 23, 1976. Their complaint charged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976) 2 and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5 (1977) 3 (Count I), common law fraud (Count II), and breach of fiduciary obligations stemming from alleged misrepresentations made by the general partners in calling for funds under the terms of the limited partnership agreement (Count III). Plaintiffs sought damages in the amount of their total investments, $1,061,500. 4
Defendants counterclaimed on the basis of a purported release executed by both Freemans, seeking a declaratory judgment that the release was valid and damages arising from their defense to plaintiffs' action. After a trial that lasted approximately six weeks and which consumed some 4,000 pages of transcript, the jury returned a general verdict against all plaintiffs and in favor of all defendants on each of the three counts. 5
From this general jury verdict, plaintiffs now appeal to this court, which assumes jurisdiction pursuant to 28 U.S.C. § 1291 (1970), raising seven specific errors on the part of the trial judge (four in his instructions, and three in his conduct of the trial), and arguing that any one of the seven could have so prejudiced the proceedings in favor of the defendants that a new trial would be mandated. Defendants reply, essentially, that the trial judge's interpretation of the law was correct, that his conduct of the trial was fair, and that, if plaintiffs could find only these seven points with which to take exception in this complex securities fraud litigation which consumed some thirty trial days, then the fairness of the entire proceedings is manifest and the determination
of the jury should be affirmed. Although, for the stated reasons following in this opinion, it appears that six of the seven alleged errors now asserted by the plaintiffs would be insufficient to necessitate a reversal, we believe that one of the trial judge's instructions could have seriously misled the members of the jury concerning the law with respect to time of purchase of securities. Since this error alone could have resulted in the jury's verdict in favor of the defendants on Count I, we reverse on that Count and mandate a new trial on that Count alone.
The series of events giving rise to the dispute commenced in the summer of 1971, when L. W. Douglas, Jr., an experienced real estate developer, contacted the defendants, who are architects, engineers, and developers, and proposed that they purchase a certain piece of Westmont, Illinois property and develop it into a residential complex. In October of 1971, Lee A. Freeman (Freeman), an experienced investor in real estate who had worked with Douglas on previous projects, informed both Douglas and defendant Sidney Epstein that he wanted a substantial equity interest in the proposed development. Prior to the end of 1971, Freeman, his son and law partner, Lee A. Freeman, Jr. (Freeman, Jr.), and their sometimes client, Jerry E. Poncher (Poncher), contributed an aggregate of $245,955 which was used to prepay the interest on the real estate loan for the Westmont venture. 6 It was not until June of 1972, however, that this amorphous business venture was formalized into a limited partnership.
In the interim, Freeman was apparently a moving force in setting up the financing for the entire deal, tentatively agreeing, in late 1971, to take or place at least 60 percent of the equity, with Poncher agreeing to take the remaining 40 percent. 7 Freeman even went so far as to negotiate many of the terms of the limited partnership agreement with Douglas. However, when the D-E Westmont Limited Partnership Agreement (with the first amendment thereto) was signed in late June of 1972, Freeman, Freeman, Jr., Poncher, and five other individuals signed only as limited partners, agreeing to furnish total capital of $3 million. 8 The general partners, entrusted with the management authority to develop the 108 acres of vacant land, were the Epsteins, Kupperman, and Douglas.
Shortly after this limited partnership agreement and its accompanying first amendment were executed, a certificate of limited partnership was signed and filed as required by Illinois state law. The parties agree that the provisions of the certificate substantially reflect those of the partnership agreement as amended. However, the investors go further and correctly emphasize the legal implications of a limited partnership agreement undertaken in compliance with the Illinois statutes on limited partnerships:
Under the statute, limited partners have no right to participate in the management Brief for plaintiffs at 13-14.
of the enterprise. If they do assume such a role, they lose the protection of limited liability. The partnership agreement itself states that "(n)o Limited Partner will take part in the management of the partnership business or transact any business for the partnership or have any power to sign or bind the partnership or to subject the partnership to any liability or obligation." (citations omitted) 9
The purpose of this limited partnership was expressed in the agreement itself as "the residential development" of the Westmont land and the evidence demonstrates that a substantial apartment complex was planned, consisting of both townhomes and highrise apartments. Some beginning steps had been taken towards accomplishment of this purpose prior to the formalization of the business relationship. In February of 1972, for example, an effort spearheaded by defendant Kupperman resulting in a rezoning of the property to provide greater flexibility in development; the developers also began, in early 1972, the process which eventually resulted in a direct access road to the property from a nearby highway. Therefore, at the time of the signing of the agreement, it appears that the development of the property was proceeding apace.
In early July of 1972, soon after the limited partnership was formalized, the Goodmans became limited partners in the venture by purchasing 25 percent of Poncher's 40 percent equity interest. 10 Within six weeks of the signing of the agreement, negotiations began with Larwin Multi-Family Housing Corporation (a subsidiary of CNA, a large insurance company) concerning the possibility of Larwin's purchasing the Westmont venture from the partnership. These negotiations eventually culminated in an offer from Larwin. The developers now assert that an immediate sale to the Larwin interests would have provided the investors with a huge, short-term profit, but that the investors were more interested in tax loss than in cash profits and, so, were "unenthusiastic" about selling. The investors, however, claim that only the developers had detailed, inside knowledge of the Larwin negotiations and that only the developers could, therefore, have been responsible for, or could have had reasonable expectation of, the final collapse of the Larwin deal in December of 1972.
During the pendency of the Larwin negotiations, development was not at a standstill. After the signing of the limited partnership agreement, the developers moved to secure the necessary permits from local authorities to allow installation of sewerage facilities for the planned residential complex. The exact progress of this application Closely related to the sewerage permit problem is the difficulty encountered with an adjacent land developer Miller Builders over responsibility for the undersizing of sewer pipelines which prevented the Westmont project from getting even local government approval. Plaintiffs here cite a letter from defendant Kupperman to the president of Miller Builders, dated October 30, 1972, describing the inability of Westmont to get a permit because of the actions of Miller and the "three month delay" already encountered, and stating that "(t)his letter to you is my last rational resort . . . before I do something that will be distasteful for all of us." Plaintiffs again assert that they were given no notice of this problem which was, apparently, sufficiently serious to drive Mr. Kupperman to his "last resort."
was the subject of some dispute between the parties. Plaintiffs asserted at oral argument that significant problems (as evidenced by an Epstein organization internal memorandum) developed as early as September 14, 1972. Defendants, on the other hand, argued that the first hint of any difficulties occurred in January of 1973, when the Illinois Environmental Protection Agency (IEPA), formally denied the developers' application for a permit, and that, even then, they were being assured...
To continue reading
Request your trial
-
Alley v. Miramon
...Garner v. Enright, E.D.N.Y.1977, (1977-1978 Transfer Binder) Fed.Sec.L.Rptr. (CCH) P 96,158 at 92,222. See also Goodman v. Epstein, 7 Cir. 1978, 582 F.2d 388, 410 & n.64 (citing Vine with approval).27 See Jacobs, Standing to Sue under Rule 10b-5 After Blue Chip Stamps, 3 Sec.Reg.L.J. 387, 4......
-
Murphy v. Gutfreund
...denied, 459 U.S. 1086, 103 S.Ct. 568, 74 L.Ed.2d 931 (1982); SEC v. Murphy, 626 F.2d 633, 640-41 (9th Cir. 1980); Goodman v. Epstein, 582 F.2d 388, 406-08 (7th Cir.1978), cert. denied, 440 U.S. 939, 99 S.Ct. 1289, 59 L.Ed.2d 499 (1979); Hirsch v. duPont, 396 F.Supp. 1214, 1227-28 (S.D.N.Y. ......
-
Issen v. GSC Enterprises, Inc.
...but rather upon "whether an investment decision remains to be made by the party from whom disclosure is withheld...." Goodman v. Epstein, 582 F.2d 388, 413 (7th Cir. 1978), cert. denied, 440 U.S. 939, 99 S.Ct. 1289, 59 L.Ed.2d 499 (1979). See also Sundstrand Corp. v. Sun Chemical Corp., 553......
-
Board of Trade of City of Chicago v. S.E.C.
...548, 19 L.Ed.2d 564 (1967); Canadian Imperial Bank of Commerce Trust Co. v. Fingland, 615 F.2d 465 (7th Cir. 1980); Goodman v. Epstein, 582 F.2d 388 (7th Cir. 1978), cert. denied, 440 U.S. 939, 99 S.Ct. 1289, 59 L.Ed.2d 499 ...
-
SECURITIES FRAUD
...“no reasonable jury could have concluded that the loan agreements were anything other than securities”). 110. Compare Goodman v. Epstein, 582 F.2d 388, 406 (7th Cir. 1978) (holding the existence of security is a question for the judge), with United Cal. Bank v. THC Fin. Corp., 557 F.2d 1351......
-
Securities fraud.
...on the existence of a security (citing Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94 (1998))). Compare Goodman v. Epstein, 582 F.2d 388, 406 (7th Cir. 1978) (holding the existence of security is a question for the judge), with United Cal. Bank v. THC Fin. Corp., 557 F.2d 1351, 1......
-
Securities Fraud
...“no reasonable jury could have concluded that the loan agreements were anything other than securities”). 109. Compare Goodman v. Epstein, 582 F.2d 388, 406 (7th Cir. 1978) (holding the existence of security is a question for the judge), with United Cal. Bank v. THC Fin. Corp., 557 F.2d 1351......
-
Securities fraud.
..."security" should be construed broadly (citing United States v. Austin, 462 F.2d 724, 736 (10th Cir. 1972))). Compare Goodman v. Epstein, 582 F.2d 388, 406 (7th Cir. 1978) (holding the existence of security is a question for the judge), with United Cal. Bank v. THC Fin. Corp., 557 F.2d 1351......