In re Der
| Decision Date | 05 March 1990 |
| Docket Number | Adv. No. 83-01018B.,Bankruptcy No. 83-B-0448 |
| Citation | 113 BR 218 |
| Parties | In re Lee P. DER, Debtor. John T. HILL, et al., Plaintiffs, v. Lee P. DER, Defendant. |
| Court | U.S. Bankruptcy Court — District of Maryland |
COPYRIGHT MATERIAL OMITTED
Brian W. Shaughnessy, Shaughnessy, Borowski & Gagner, Washington, D.C., for debtor/defendant.
Douglas Clark Hollmann, Goldman, Kruger, Kovelant & Hollmann, Laurel, Md., for plaintiffs.
The instant complaint to determine dischargeability of debt was brought by eight plaintiffs who lost money invested in several unsuccessful business enterprises which they claim the debtor promoted by fraud and misrepresentation. For the reasons stated, only the relief requested in Count 1 of the complaint will be granted; Counts 2 and 3 will be dismissed.
FINDINGS OF FACT
Lee P. Der was the sole stockholder in D. & S. Financial, Inc., the securities broker-dealer which offered for sale to the plaintiffs limited partnership interests in three partnerships (Eagle Associates, Wilmington House Associates and Orgas, Ltd.), which the plaintiffs purchased. Mr. Der was also the majority stockholder in a corporation known as Der-Mas, Inc., a general partner in Eagle Associates; the sole stockholder of Lee P. Der, Inc., a general partner in Wilmington House Associates; and the majority stockholder in Lee-Mar, Inc., a general partner of Orgas, Ltd. The debtor's Chapter 7 bankruptcy case was commenced in this Court on March 14, 1983, by the filing of an involuntary petition against him by Equitable Bank, N.A., Edward L. Blanton and Charles H. Flanders. An order for relief was entered on April 20, 1983.
Descomp, Inc. is a Delaware corporation with its principal place of business at No. 3 Fairwinds Shopping Center, Bear, Delaware 19701.
Data Controls North, Inc. is a Maryland corporation with its principal place of business at No. 3 Fairwinds Shopping Center, Bear, Delaware, 19701.
John T. Hill is a resident of Delaware.
Virgil Scott, Jr. and Marie Scott are residents of Pennsylvania. Mr. Scott is the president, director and stockholder of Descomp, Inc., a vice-president and director of Data Controls North.
Thomas L. Ruger and Patricia A. Ruger are also residents of Pennsylvania. Mr. Ruger is secretary-treasurer, director and stockholder of Descomp, Inc., and Data Controls North.
James R. Stritzinger is a resident of Delaware.
A. EAGLE ASSOCIATES was a limited partnership organized as a resyndication of a predecessor limited partnership known as Alma Coal Properties, Ltd. The business of both Alma and Eagle was the leasing of coal lands and the mining and sale of coal in Boone County, West Virginia. One limited partnership unit was purchased by Mr. Ruger individually and one unit jointly by Mr. and Mrs. Scott by subscription agreement dated November 2, 1978, at a price of $52,000 per unit. Mr. Stritzinger purchased 1½ limited partnership units at a price of $78,000 by subscription agreement dated December 18, 1978. Data Controls North, Inc., purchased eight limited partnership units at a price of $416,000 by subscription agreement dated November 2, 1978.
The plaintiffs paid for their shares in installments in the following amounts on the dates indicated:
STRITZINGER
$ 18,000.00 December 18, 1978
27,000.00 June 1, 1979
33,000.00 June 1, 1980
___________
$ 78,000.00
DCN
$ 96,000.00 December 15, 1978
144,000.00 June 1, 1979
176,000.00 June 1, 1980
___________
$416,000.00
RUGER
$ 12,000.00 December 15, 1978
18,000.00 June 1, 1979
22,000.00 June 1, 1980
___________
$ 52,000.00
SCOTT
$ 12,000.00 December 15, 1978
18,000.00 June 1, 1979
22,000.00 June 1, 1980
___________
$ 52,000.00
Complaint, paragraph 17.
Because of other charges and credits, the plaintiffs claim net losses in the following amounts:
STRITZINGER $ 73,757.68
DCN 358,278.86
RUGER 48,793.73
SCOTT 47,794.56
___________
TOTAL $528,624.83
Exhibits to Plaintiff's Brief for Damages P. 27.
B. WILMINGTON HOUSE ASSOCIATES was a limited partnership organized under the laws of the State of Maryland with its place of business located at 1517 Reisterstown Road, Pikesville, Maryland 21208. The purpose of the limited partnership was the sale to investors of limited partnership interests and the acquisition of a limited partnership interest in Lancaster Court Associates, a Delaware limited partnership. John T. Hill, Mr. and Mrs. Ruger, Mr. and Mrs. Scott and Descomp, Inc., invested in Wilmington House Associates by purchasing limited partnership interests. One partnership unit was purchased by Dr. Hill individually, one unit jointly by Mr. and Mrs. Scott and one unit jointly by Mr. and Mrs. Ruger at a price of $42,309 per unit by subscription agreement dated November 11, 1977. Descomp, Inc. purchased eight partnership units at a price of $338,472 by subscription agreement dated November 11, 1977.
C. ORGAS, LTD. was a Maryland limited partnership located at 1517 Reisterstown Road, Pikesville, Maryland 21208. Orgas was engaged in the leasing of coal lands and the mining and sale of coal in Boone County, West Virginia. John T. Hill purchased a 1½ limited partnership unit in Orgas, Ltd. at a price of $50,000 by subscription agreement dated April 5, 1979.
4. On April 1, 1980, the plaintiffs filed a suit in the U.S. District Court for the District of Delaware styled John T. Hill, et al v. Lee P. Der, et al, Case No. 80-146, seeking damages against Lee P. Der and others based upon alleged fraudulent conduct in the sale of securities to the plaintiffs in the form of limited partnership interests in Wilmington House Associates, Eagle Associates and Orgas, Ltd.
5. On April 20, 1982, the plaintiffs filed a second suit in the U.S. District Court for the District of Delaware styled John T. Hill, et al v. Equitable Bank, N.A., Case No. 82-220, seeking damages against the former Equitable Trust Company based upon its alleged conspiracy with Lee P. Der and others to defraud the plaintiffs in connection with the sale of securities in Wilmington House Associates and Eagle Associates.
6. Neither of the foregoing lawsuits had come to trial before the plaintiffs filed the instant complaint to determine dischargeability of debt in this Court on November 4, 1983. By Order P. 19 dated November 7, 1985, the instant action was stayed at the request of the plaintiffs pending the outcome of a trial by jury in Hill v. Equitable Bank, N.A. before the U.S. District Court for the District of Delaware. Upon the rendering of a verdict by the jury in favor of the Bank, the instant matter was scheduled for trial in October, 1988.
7. The instant complaint is 38 pages in length and contains three counts. Count 1 relates to the debtor's sales of securities in Eagle Associates to Data Controls North, Inc., Mr. and Mrs. Scott, Mr. Ruger and Mr. Stritzinger. Count 2 relates to the debtor's sales of securities in Wilmington House Associates to Descomp, Inc., Dr. Hill, Mr. and Mrs. Ruger and Mr. and Mrs. Scott. Count 3 relates to the debtor's sale of securities in Orgas, Ltd. to Dr. Hill only. Each of the three counts prays for a determination of nondischargeability of debts pursuant to Bankruptcy Code section 523(a)(2), (a)(4) and (a)(6).
8. Trial of the instant case occurred on October 3-6 and 11-13, 1988.
9. At the conclusion of the plaintiff's case, this Court granted a motion to dismiss as to Counts 2 and 3. Count 3 was dismissed because there was no evidence whatsoever adduced in support of it. Count 2 was dismissed because after taking all of the evidence in the light most favorable to the plaintiffs, the Court found a lack of materiality of the alleged fraudulent misrepresentations made by the debtor. The plaintiffs had alleged that at the time they invested in Wilmington House Associates, Mr. Der was the subject of investigations and complaints by the Securities and Exchange Commission "S.E.C." and by the National Association of Securities Dealers "N.A.S.D.". In dismissing Count 2, the Court held that even if the plaintiffs had contacted the S.E.C. and N.A.S.D. and had in fact learned about the investigations pending against Mr. Der, the nature of those investigations was so routine and unexceptional that such knowledge would not have dissuaded a reasonably prudent investor from purchasing securities from Mr. Der. This was borne out by the minor sanctions imposed by the regulatory bodies in response to his infractions of the rules.
10. On the other hand, Count 1 alleges certain facts which were proven at trial which the Court held established a case for nondischargeability of debt pursuant to § 523(a)(2)(B).
11. In order to induce Data Controls North, Inc., Mr. Ruger, Mr. Stritzinger and Mr. and Mrs. Scott to invest in Eagle Associates limited partnership, the debtor published a "private placement memorandum" dated September 25, 1978. In the memorandum, the debtor stated that the reason for the resyndication of Alma Coal Properties, Ltd., as Eagle Associates was because ". . . Alma's sole limited partner . . . decided to withdraw from the operational side of the coal business." Private Placement Memorandum, plaintiffs' exhibit no. 100.
12. The foregoing statement was false and misleading. In actuality, the sole limited partner, Ward Development Company, had sued the debtor and others in the Circuit Court for Baltimore County on August 31, 1978, and had obtained an injunction against them.
13. Richard W. Ward, president of Ward Development Company, testified at the hearing on the instant complaint, that the Baltimore County suit alleged the...
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