Hill v. Equitable Bank, Nat. Ass'n
| Decision Date | 16 August 1984 |
| Docket Number | Civ. A. No. 82-220 CMW. |
| Citation | 599 F. Supp. 1062 |
| Parties | John T. HILL, et al., Plaintiffs, v. EQUITABLE BANK, NATIONAL ASSOCIATION, Defendant. |
| Court | U.S. District Court — District of Delaware |
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Harvey S. Kronfeld, of Rawle & Henderson, Philadelphia, Pa., for plaintiffs.
Martin I. Lubaroff, of Richards, Layton & Finger, Wilmington, Del., for defendant; Michael D. Colglazier, and Edward F. Shea, III, of Miles & Stockbridge, Baltimore, Md.
This case arises out of an alleged scheme to defraud plaintiffs in connection with the sale to plaintiffs of interests in two limited partnerships. In a related action, Hill v. Der, C.A. No. 80-146 (D.Del., filed April 1, 1980), plaintiffs have brought suit against various parties involved in these, and other, transactions. In this action, plaintiffs have brought suit against Equitable Bank, N.A.1 (hereinafter "Equitable"), based upon the bank's alleged participation in the fraud.2 Plaintiffs claim that Equitable has violated various anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as various duties under state law.
Presently before the Court is defendant's motion to dismiss. Defendant contends that: (a) plaintiffs' federal securities law claims are barred by applicable statutes of limitations; (b) plaintiffs' allegations, on their merits, fail to state a claim upon which relief may be granted under the federal securities laws; (c) plaintiffs have failed to plead their claims with the degree of particularity required by Fed.R.Civ.P. 9(b); and (d) plaintiffs' state law claims must be dismissed along with plaintiffs' federal securities law claims on grounds of lack of pendant jurisdiction.3 As discussed herein, the Court grants defendant's motion in part.
On November 11, 1977, plaintiffs John T. Hill, Thomas and Patricia Ruger, Virgil and Marie Scott, and Descomp, Inc., a corporation controlled and managed by Messrs. Ruger and Scott, entered into subscription agreements to purchase shares of Wilmington House Associates (hereinafter "Wilmington House"), a limited partnership formed for the purpose of acquiring and operating an apartment complex in Wilmington, Delaware. The sale of Wilmington House shares to plaintiffs was principally orchestrated by Lee P. Der. Through a wholly owned company, Lee P. Der, Inc., Der served as general partner of Wilmington House.
Plaintiffs paid for their Wilmington House shares by means of a down payment on November 11, 1977 and subsequent installment payments on May 1, 1978, February 1, 1979, February 1, 1980, and February 1, 1981. The installment payments were financed through letters of credit issued by defendant Equitable.
On November 2, 1978, plaintiffs Thomas Ruger, Virgil and Marie Scott, and Data Controls North, Inc., a corporation controlled and managed by Ruger and Scott, entered into subscription agreements to purchase shares of another limited partnership, Eagle Associates (hereinafter "Eagle"). Plaintiff James Stritzinger entered into a similar subscription agreement on November 30, 1978. Eagle was formed as a resyndication of a predecessor limited partnership, Alma Coal Properties, Ltd. (hereinafter "Alma"), and engaged in the business of mining and selling coal, and leasing coal lands, in West Virginia. As with the sale of Wilmington House shares, the sale of Eagle shares to plaintiffs was principally orchestrated by Lee P. Der. Through Der-Mas, Inc., a corporation controlled by Der, Der served as general partner of Eagle.
James Stritzinger paid for Eagle shares by means of a down payment on December 18, 1978 and subsequent installment payment on June 1, 1979, and June 1, 1980. Stritzinger financed his down payment with a loan from Equitable and financed his installment payments with letters of credit issued by Equitable.
Thomas Ruger, Virgil and Marie Scott, and Data Controls North, Inc. paid for their Eagle shares by means of a down payment on December 15, 1978 and subsequent installment payments on June 1, 1979 and June 1, 1980. Equitable declined to issue letters of credit to finance plaintiffs' installment payments.4 As a result, between January and March of 1979, Thomas Ruger, Virgil and Marie Scott, and Data Controls North, Inc., issued loans to Eagle to secure payment of the balance due on the purchase price of their shares. These loans were then applied as a set-off against the balance due on the purchase price of the shares when the installment payments subsequently came due.5
Shortly after plaintiffs purchased shares of Wilmington House and Eagle, "storm warnings" began to appear, indicating that the investments were not as sound as they had first appeared. In January, 1979, Wilmington House's principal asset, Lancaster Court Associates, filed a petition for bankruptcy. In May, 1979, plaintiffs received their Wilmington House tax returns, revealing heavy operating losses by the partnership. Furthermore, in the latter months of 1979 and early months of 1980, Der informed plaintiffs that a declining demand for coal would require a restructuring of Eagle's operations and necessitate substantial, unanticipated capital outlays.
On April 1, 1980, plaintiffs filed suit against Der, the partnerships, and others involved in the sale of partnership interests to plaintiffs. Hill v. Der, C.A. No. 80-146 (D.Del., filed April 1, 1980). Plaintiffs allege, inter alia, that they were fraudulently induced to purchase shares of Wilmington House and Eagle through various misrepresentations concerning the soundness of the investments.
On February 20, 1981, James Stritzinger wrote a letter to the Maryland State Bank Commissioner inquiring about potential improprieties regarding Equitable's relationship with Der6 and Equitable's financing of Stritzinger's purchase of Eagle shares. The Bank Commissioner forwarded Stritzinger's letter to Equitable with a request for an explanation. On March 9, 1981, John T. Hill wrote a letter to Equitable, and on March 13, 1981, Virgil Scott wrote a letter to Equitable, inquiring about similar improprieties in connection with Equitable's financing of plaintiffs' purchases of Wilmington Associates shares. They inquired further whether any employees had been terminated by Equitable as a result of such improprieties.7
On March 10, 1981, Equitable wrote a letter to the Bank Commissioner, denying any wrongdoing in connection with its financing of Stritzinger's purchases of Eagle shares, a copy of which was forwarded by the Bank Commissioner to Stritzinger on March 17, 1981. Similarly, on April 27, 1981, Equitable wrote letters to Hill and Scott, denying any improprieties in connection with its financing of plaintiffs' purchases of Wilmington House shares, copies of which were forwarded to the Bank Commissioner. The Bank Commissioner apparently took no further action on this matter.
On March 20, 1982, Thomas Ruger unexpectedly received a phone call from Martin E. Mason, a 40% shareholder of Der-Mas, Inc., a general partner of Eagle. Mason informed Ruger that Stephen Maszaros, a Vice President of Equitable, and other employees of the bank, had received kickbacks in return for arranging the financing for plaintiffs' purchases of Wilmington House shares.
On April 30, 1982, plaintiffs filed suit against Equitable based upon the alleged kickbacks. Plaintiffs claimed that Equitable violated the federal securities laws by failing to disclose the kickbacks and by otherwise aiding and abetting, and conspiring in, a scheme to defraud plaintiffs in connection with their purchases of Wilmington House and Eagle shares.
On September 15, 1982, Equitable filed a motion to dismiss on the grounds that plaintiffs' federal securities law claims are time-barred and fail to state valid claims under the securities law. In considering Equitable's motion, the Court found plaintiffs' claims to be conclusory, incomplete, and otherwise wholly inadequate under the specificity requirements of F.R.C.P. 9(b). Nevertheless, the Court found that plaintiffs' allegations raised sufficient questions of fact to prevent the Court from ruling upon Equitable's statute of limitations defense as a matter of law. Furthermore, in their briefs and at oral argument, plaintiffs set forth additional allegations to supplement the merits of their claims. Therefore, the Court denied Equitable's motion in substantial part. The Court granted plaintiffs leave to conduct additional discovery to flesh out their claims and ordered plaintiffs to file an amended complaint setting forth their claims with specificity and detail. When the amended complaint was filed, Equitable would be permitted to renew its motion to dismiss. Hill v. Equitable Trust Co., 562 F.Supp. 1324 (D.Del.1983).
On October 7, 1983, plaintiffs filed an amended complaint. The Wilmington House claims set forth in the amended complaint are substantially similar to those set forth in the original complaint. Plaintiffs' claims are primarily grounded in the alleged kickbacks received by employees of Equitable in return for arranging the financing for plaintiffs' purchases of Wilmington House shares. Plaintiffs claim that Equitable violated the federal securities laws by failing to disclose the kickbacks to plaintiffs and by otherwise aiding and abetting and conspiring with Der and others in a scheme to defraud plaintiffs in connection with their purchases of Wilmington House shares.
Plaintiffs have also set forth an additional allegation against Equitable not alleged in their original complaint, pertaining to their purchases of Wilmington House shares.8 On November 6, 1978, Der set up a meeting with some of the plaintiffs to discuss, inter alia, financing for plaintiffs' purchases of Eagle shares. Plaintiffs allege that at the meeting, R. Kenneth Rous, a Vice President of...
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