In re Lion Capital Group
| Decision Date | 03 December 1984 |
| Docket Number | 84-5997A.,Bankruptcy No. 84-B-10668 (HCB) to 84-B-10672 (HCB),Adv. No. 84-5996A |
| Parties | In re LION CAPITAL GROUP, Debtor. Stanley T. LESSER, Trustee for Hamilton Gregg Monetary Management Limited, Plaintiff, v. A-Z ASSOCIATES, Barnard Partnership, James L. Ferguson, Oran G. Kirkpatrick, Arthur B. Laffer, William E. Law, Thaddeus A. Dukes, Bruce D. Williams, Oliver J. Zandona, Robert E. Boyd, David C. Garfield, Robert C. Blanz, Tommaso Zanzotta, William V. Weithas, Vera Nabokob, Georgie W. Lewis, David H. Means, T.K. Flately, Brenda D. Neal, James P. Penders, J & Jr Partnership, Louis A. Lannuccillo, Donald C. Lowe, Herbert Kurz, FPMKR & L. Associates, Deborah Beinecke & Kinsella Trust November 24, 1964, Walter Beinecke III Trust November 24, 1964, Gen. Alexander M. Haig, Jr., Will G. Gaither, Jr., Robert S. Sutton, The Canaan National Bank, Harvard Resources, Inc., David S. Kaye, Peter L. Scott, Eugene A. Birnbaum, December Associates, John R. Hall, Robert T. McGowan, Theodore D. O'Hearn, George P. Giard, Jr., Harold J. Miller, Adolph J. Medica, and BGL Associates, Defendants. Stanley T. LESSER, Trustee for Hamilton Gregg Asset Management Limited, Plaintiff, v. 931 INVESTORS, James R. Anderson, John H. Chequer, Elsworth F. Baker, Robert G. Diforio, Walter F. Eells, James R. and Irene R. Farley, Dan M. Krausse, Donald C. Lowe, Harold M. Mayer, Harold J. Miller, Merlin D. Schulze, Robert K. Swandon, W. Paul Tippett, Jr., Martin Woolin, Annie Woolin, Oliver J. Sandona, Robert M. Worchester, Tom K. Smith, Jr., Hubert Faure, T. Mitchell Ford, Avery Corman, Donald L. McIntosh, William S. Anderson, Manuel Garcia, Charles E. Exley, Jr., Frank W. McAbee, Jr., Joseph A. Biernat, Joel B. Alvard, Harry L. Langdon, Morton M. Winston, John D. Lyon, Rolf D. Bibow, Philip H. Geier, Jr., Louis A. Loiseau, Nat T. Harris, R.W. Bowman, G-H Partners, Jerre M. Freeman, and Gregg Group, Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
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Kaye, Scholer, Fierman, Hays & Handler, New York City, for Trustee; Bruce Margolius, New York City, of counsel.
Stroock & Stroock & Lavan, New York City, for The Limited Partner defendants known as The Schedule A Defendants; Curtis C. Mechling and Mark A. Speiser, New York City, of counsel.
Stanley T. Lesser, as Chapter 11 Trustee for the Lion Capital Group, Lion Capital Associates, Blackburn Associates, Hamilton Gregg Monetary Management Ltd., and Hamilton Gregg Asset Management, Ltd. (collectively "debtors"), moves to dismiss the fraud-based counterclaims and defenses asserted by defendants pursuant to Federal Rule of Civil Procedure 9(b) and Bankruptcy Rule of Procedure 7009(b) and, counterclaims and defenses based on alleged violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c) ("RICO") and pursuant to F.R.C.P. 12(b)(6),1 the thirty-fifth counterclaim asserted by defendant Canaan National Bank in Lesser v. A-Z Associates pursuant to F.R.C.P. 12(b)(6). The Trustee also requests that this Court stay certain of the defendants to these adversary proceedings from prosecuting two actions filed in the United States District Court for the Southern District of New York pending resolution of those actions.
The defendants to these two adversary proceedings hold limited partnership interests, respectively, in debtors Blackburn Associates and Lion Capital Associates ("Lion Capital"), having executed agreements of limited partnership in 1981 (Lion Capital) or 1982 (Blackburn). As is common in this form of tax shelter investment, those agreements obligated each limited partner to make an initial capital contribution and provided that certain partners make additional contributions in amounts up to 300% of the initial contribution, thereby enabling those investors to take advantage of the benefits afforded by § 465 of the Internal Revenue Code. 26 U.S.C. § 465 (1983). The additional contributions, according to the agreements, were to be triggered by a call of the managing general partner of each partnership and were due within 30 days of receiving of notice of the call. Rollin H. Needham is a general partner of Blackburn. He has filed a personal bankruptcy petition with the United States Bankruptcy Court for the District of Connecticut. Debtors Hamilton Gregg Monetary Management Ltd. ("Gregg Monetary") and Hamilton Gregg Asset Management Ltd. ("Gregg Asset") serve as managing general partner for Blackburn and Lion Capital respectively.
The debtors, including Gregg Monetary and Gregg Asset, filed a petition seeking reorganization under Chapter 11 of the Bankruptcy Code (11 U.S.C. § 1101 et seq.) (the "Code") on May 2, 1984. Lesser was appointed operating trustee pursuant to § 1104(a) of the Code. As such, he, by registered mail dated May 18, 1984, demanded additional contributions from each defendant limited partner. The contributions were not made. On June 24, 1984, the majority of the defendants began two parallel actions in the district court against Hamilton Gregg II, Rollin Needham and certain entities said to be affiliated with the debtors.2 The Trustee sent each defendant a written notice of default on June 27, 1984, and began adversary proceedings on June 29, 1984, to compel defendants to pay.
In response to the Trustee's simple and straight forward complaint seeking to enforce a debt payable on demand, the defendants to these two actions denied nearly all material allegations and asserted massive sets of defenses and counterclaims.3 These counterclaims proceed in all instances by alleging, in each case, that Gregg Asset or Gregg Monetary and various nonbankrupt affiliates made some 16 misrepresentations including the supposed absence of a need to register the offering under state or federal securities laws.
Whether the alleged misrepresentations were contained in a document or in oral statements is not indicated in the counterclaims. Nor is it disclosed whether some representations were made to some of the limited partners or whether all representations were received by all the partners. Similarly, it is not revealed who made the representations, it being merely stated that "Gregg Monetary and/or its Affiliates made and/or aided and abetted these misrepresentations and omissions of material fact." (A-Z Associates Counterclaims ¶ 29). And although the limited partners in their brief assert that the representations were made at the time they obtained their interests, their counterclaims are not so limited. The Schedule A defendants claim that the misrepresentations were made with intent to deceive or with reckless indifference in order to "induce defendants to purchase and retain limited partnership interests...." Ibid.
On the basis of these allegations, it is claimed that Gregg Monetary and Gregg Asset are liable in common law fraud and for violating §§ 12 and 17(a) of the Securities Act of 1933 (15 U.S.C. §§ 77l(2) and 77q(a)), § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), Rule 10b-5 (17 C.F.R. § 240.10(b)(5)), §§ 4b, 4m and 4o of the Commodity Exchange Act (7 U.S.C. §§ 6b, 6m, 6o (1982)) and RICO. These allegations of fraud are repleaded in additional counterclaims asserting that the sale of unregistered partnership interests violated § 5 of the Securities Act of 1933 (15 U.S.C. § 77e (1975)) and applicable state blue sky laws governing the registration of securities offerings in the states of Alabama, Arizona, California, Colorado, Connecticut, Florida, Idaho, Illinois, Kentucky, Maryland, Massachusetts, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas, Utah and Virginia. These latter causes of action are brought only on behalf of those defendants, names not given, who were "offered or sold" partnership interests in the particular state.
Two defendants assert counterclaims peculiar to them. Canaan National Bank asserts that the transaction was ultra vires, and R. Wallace Bowman asserts that he was hospitalized at the time he purchased his partnership interest in Lion Capital and thus lacked contractual capacity. The Trustee asserts that the Canaan National Bank counterclaim fails to state a cause of action on its face. No motion is made with respect to Bowman's individual counterclaim.
The fraud-based allegations, remarkable for their lack of particularity, are all the more remarkable in their similarity to the complaints filed in the district court. That similarity, due no doubt to the retentive ability of word processing equipment, leads the Trustee to seek to stay the defendants from proceeding with their district court complaints pending resolution of the disputes here. In so urging, he asserts that the district court actions seriously threaten the Trustee's ability to prosecute this action and his ability to administer these estates and are "mere shams" brought to provide a basis for a motion before the district court to withdraw its reference of these proceedings to this Court and thereby delay and complicate them.
In responding to the Trustee's motion to dismiss the counterclaims and to stay the district court actions, the limited partners assert that the matter should be deferred pending the district court's resolution of their motions to withdraw its reference of these adversary proceedings to this Court.
Such deference is not warranted here. These matters have been referred here pursuant to 28 U.S.C. § 157(a), enacted as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984, P.L. 98-353 (July 10, 1984). In enacting that statute, Congress amended 28 U.S.C. § 1334 to provide the district courts with jurisdiction over all cases under the Bankruptcy Code and all civil proceedings arising in or related to a case under the Code. As provided in P.L. 98-353 § 115(a)(2), this amendment took immediate effect and jurisdiction over pending...
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