Gurfein v. Sovereign Group, Civ. No. 92-2083.
| Citation | 826 F. Supp. 890 |
| Decision Date | 04 June 1993 |
| Docket Number | Civ. No. 92-2083. |
| Parties | Richard GURFEIN, et al. v. SOVEREIGN GROUP, et al. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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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.
Plaintiffs,1 a group of individual investors, purchased security interests in two limited partnerships — the Sovereign Realty 1984-VII, Ltd., d/b/a The Sovereign Building, a Pennsylvania limited partnership ("the Sovereign Partnership") and Sovereign Realty 1985-2 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 Properties 304-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.
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 also Unger 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.4 Among 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).5 See In re Donald Trump Casino Securities Litigation, 793 F.Supp. 543, 546 n. 1 (D.N.J.1991). See also I. 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.
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:
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.
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 ().
The renovation of the Sovereign buildings was supposed to commence in 1984 and be completed by 1985. Am. Comp. at ¶ 21. Defendant Deilwydd 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...
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