Gurfein v. Sovereign Group, Civ. No. 92-2083.

• Decision Date: 04 June 1993
• Docket Number: Civ. No. 92-2083.
• Citation: Gurfein v. Sovereign Group, 826 F.Supp. 890 (E.D. Pa. 1993)
• Parties: Richard GURFEIN, et al. v. SOVEREIGN GROUP, et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

826 F. Supp. 890

Richard GURFEIN, et al. v.SOVEREIGN GROUP, et al.

Civ. No. 92-2083.

United States District Court, E.D. Pennsylvania.

June 4, 1993.

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Arnold Levin, Levin, Fishbein, Sedran & Berman, Stuart H. Savett, Savett, Frutkin, Podell & Ryan, P.C., Laurence S. Berman, Levin, Fishbein, Sedran & Berman, Philadelphia, PA, Douglas W. Lohmar, Jr., Beigel & Sandler, Chicago, IL, for plaintiffs.

Denis F. Sheils, Kohn, Savett, Klein & Graf, P.C., Philadelphia, PA, for defendants.

OPINION

LOUIS H. POLLAK, District Judge.

Plaintiffs,¹ a group of individual investors, purchased security interests in two limited partnerships — the Sovereign Realty1984-VII, Ltd., d/b/a The Sovereign Building, a Pennsylvania limited partnership ("the Sovereign Partnership") and Sovereign Realty1985-2 Ltd., d/b/a Crestwood Apartments, limited partnership("Crestwood Partnership") — organized and promoted by defendants, Sovereign Group, Inc., Butcher & Company, Sovereign Realty Management, Deilwydd Properties 303-A, Ltd., Lyle W. Hall, Jr., John S. Seal, Jr., Deilwydd Properties 603-A, Ltd., Butcher & Singer, Inc., B & S and Sovereign Management,² and Deilwydd Properties304-A.Plaintiffs from Exhibit A of the amended complaint ("A-plaintiffs") purchased securities in the form of cash and notes in the Sovereign Partnership, while plaintiffs from Exhibit B of the amended complaint ("B-plaintiffs") purchased securities in the form of cash and notes from the Crestwood Partnership.

In connection with the above securities transactions, A-plaintiffs allege that Sovereign Group, Inc., Butcher & Company, Sovereign Realty Management, Deilwydd Properties 303-A, Ltd., Lyle W. Hall, Jr., John S. Seal, Jr., Deilwydd Properties 603-A, Ltd., and Butcher & Singer, Inc.("Sovereign defendants") violated § 10(b) of the Securities Exchange Act(15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated thereunder (Claim I).In addition, all plaintiffs allege that defendants: engaged in a pattern of racketeering activity in violation of RICO,18 U.S.C. §§ 1961 et seq.(Claim II); and engaged in conduct that was fraudulent (Claim III), negligent (Claim V)³, and in breach of their fiduciary duty (Claim VI).

Presently before the court is defendants' motion to dismiss plaintiffs' claims pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6).For the following reasons, defendants' motion shall be granted in part and denied in part.

I.Standard of Review

A claim should be dismissed under Fed.R.Civ.P. 12(b)(6) only where, taking all allegations of the complaint as true, and making all reasonable inferences in the complainant's favor, "it appears beyond doubt that the plaintiffs can prove no set of facts in support of their claim which would entitle them to relief."Wisniewski v. Johns-Mansville Corp.,812 F.2d 81, 83 n. 1(3d Cir.1987)(citations omitted);see alsoUnger v. National Residents Matching Program,928 F.2d 1392(3d Cir.1991.)The standard is the same for RICO and non-RICO claims.Rose v. Bartle,871 F.2d 331, 355(3d Cir.1989).

It should be noted that defendants have submitted a number of exhibits with their motion to dismiss.⁴Among defendants' exhibits are the Sovereign Partnership offering memorandum, the Crestwood Partnership offering memorandum and the September 1989 Sovereign Partnership Information Statement.Plaintiffs allege in their complaint that defendants made a number of misrepresentations and omissions in these three documents.However, plaintiffs did not themselves attach the documents to their complaint.

In general, a court may not consider materials outside the pleadings and the briefs without converting a motion to dismiss into a motion for summary judgment.Fed. R.Civ.P. 56.However, since the above three documents are integral to the plaintiffs' complaint, I believe that they are properly reviewable on a 12(b)(6) motion."A contrary holding would enable plaintiffs to survive a 12(b)(6) motion where the terms of the document on which the claim is based would render the complaint insufficient as a matter of law, simply by refusing to attach the document to the complaint."Goodwin v. Elkins & Co.,730 F.2d 99, 113(3d Cir.1984)(Becker, J., concurring).⁵SeeIn re Donald Trump Casino Securities Litigation,793 F.Supp. 543, 546 n. 1(D.N.J.1991).See alsoI. Meyer Pincus & Assoc. v. Oppenheimer & Co.,936 F.2d 759, 762(2d Cir.1991);Romani v. Shearson Lehman Hutton,929 F.2d 875, 879 n. 3(1st Cir.1991).While I will refer to the three documents mentioned, as well as to the published opinions from the district courts from the Southern District of New York and from the District of New Jersey, I find it unnecessary to refer to the other materials submitted by defendants to decide the present motion.

II.Facts

As explained by plaintiffs, defendants formed a number of limited partnerships during the early 1980's.These limited partnerships would purchase or lease property, offering for sale units of the property to interested investors.At that time, investment in real estate was a rather safe investment, providing opportunities for property appreciation, profit and tax benefits.

According to plaintiffs, defendants played the following roles within the limited partnerships:

(a)Deilwydd Properties 303-A, Ltd.("303-A") is a Pennsylvania limited partnership.303-A acted as general partner for the Sovereign Partnership.303-A's general partners were defendantsLyle W. Hall, Jr. and John S. Seal, Jr.

(b)Deilwydd Properties 603-A, Ltd.("Contractor") is a Pennsylvania limited partnership.Deilwydd Properties 603-A acted as the contractor for the Sovereign Partnership.The Contractor's general partners were also defendantsLyle W. Hall, Jr. and John S. Seal, Jr.

(c) Deilwydd Properties 304-A ("304-A") is a Pennsylvania limited partnership.304-A acted as general partner for the Crestwood Partnership.304-A's general partners are also defendantsLyle W. Hall, Jr. and John S. Seal, Jr.

(d)Lyle W. Hall, Jr.("Hall") acted as a general partner of 303-A, 304-A and Contractor.

(e)John S. Seal, Jr.("Seal") acted as a general partner of 303-A, 304-A and Contractor.

(f)Sovereign Group, Inc.("Sovereign") is a Pennsylvania corporation and parent company of Sovereign Realty Management....Sovereign is the parent company of Sovereign Partners, Inc. which owns a 50% interest in 303-A and 304-A.

(g)Butcher & Company("Butcher") is a Pennsylvania corporation and is the parent company of Sovereign.In addition to Sovereign Group, Inc., ... Butcher and Singer, Inc. is a wholly owned subsidiary of Butcher....

(h)Butcher and Singer, Inc.("B & S") is a Pennsylvania corporation and a wholly owned subsidiary of Butcher.B & S acted as the selling agent for both the 303-A and 304-A partnerships.

(i) Sovereign Realty Management ("Sovereign Realty") is an unincorporated subsidiary of Butcher.Sovereign Realty acted as the management company for the 303-A and 304-A projects.

Amended Complaint ("Am. Comp.")at ¶ 7.This case involves defendants' conduct with respect to two of their supposedly many limited partnerships: the Sovereign Partnership and the Crestwood Partnership.I will address each transaction in turn.

A.The Sovereign Partnership

The Sovereign Partnership, in which only the A-plaintiffs invested, was formed "to acquire, renovate and operate, as an office and retail complex, four buildings located next to each other in Philadelphia, Pennsylvania."Am. Comp. at ¶ 20.The goals of the partnership were to preserve the partners' capital contribution, garner a return on the investment once the project began operating in 1989, appreciate the value of the project, and receive tax benefits.Am. Comp. at ¶ 22(citing the Private Placement Memorandum distributed by the Sovereign Partnership("Sovereign PPM") in connection with the sale of the property units).

The renovation of the Sovereign buildings was supposed to commence in 1984 and be completed by 1985. Am. Comp. at ¶ 21.DefendantDeilwydd Properties 603-A, Ltd. was hired by the Sovereign Partnership as the contractor responsible for the renovation.Under the construction contract, the contractor was responsible for the design and execution of all renovations, and would pay "all project costs" as defined in the contract.Am. Comp. at ¶ 25.

The construction contract, affixed as an appendix to the Sovereign PPM, also provided that the renovation was to be done for the fixed price of $10,550,000.Am. Comp. at ¶ 26.Accordingly, the Sovereign Partnership acquired a $12,000,000 loan to finance the project.Am. Comp. at ¶ 26.A-plaintiffs explain that they distinctly relied on defendants' representation that the construction costs would be fixed in deciding to invest in the partnership.Am. Comp. at ¶ 27.

However, not atypically, the construction costs exceeded expectations and the contractor refused to complete the renovation for $10,550,000, claiming that the contract did not contemplate "finishing" costs.The Sovereign Partnership agreed and permitted an increase in construction costs.The Sovereign Partnership was forced to negotiate a new loan in 1987 for $18,000,000 — 50% more debt than plaintiffs originally expected to incur.Plaintiffs contend that the Sovereign Partnership was not in a sufficiently strong financial position to service the increased debt.Yet, defendants failed to inform the investors of the threatened state of the partnership.

About two years later, though, in July 1989, the Sovereign Partnership did inform plaintiffs of the partnership's "dire financial straits."Am. Comp. at ¶ 32.In addition, defendants told its investors that Seal and Hall were being replaced as the general partners of 303-A, "and as a requirement for the change, the limited partners of the Sovereign Partnership would be forced to relinquish a...