In re Merrill Lynch Ltd. Partnerships Litigation, 95Civ.10657(MBM).

• Decision Date: 25 August 1997
• Docket Number: No. 95Civ.10657(MBM).,95Civ.10657(MBM).
• Citation: 7 F.Supp.2d 256
• Parties: In re MERRILL LYNCH LIMITED PARTNERSHIPS LITIGATION.
• Court: U.S. District Court — Southern District of New York

7 F.Supp.2d 256

In re MERRILL LYNCH LIMITED PARTNERSHIPS LITIGATION.

No. 95Civ.10657(MBM).

United States District Court, S.D. New York.

August 25, 1997.

COPYRIGHT MATERIAL OMITTED

Nicholas E. Chimicles, Lisa Chanow Dykstra, Chimicles, Jacobsen & Tikellis, Haverford, PA, Melvyn Weiss, Patricia M. Hynes, Salvatore Graziano, Milberg, Weiss, Bershad, Hynes & Lerach, New York, NY, Co-Lead Counsel for Plaintiffs.

Wesley G. Howell, Jr., Robert F. Serio, Jr., Gibson, Dunn & Crutcher, New York, NY, Edward J. Yodowitz, Skadden, Arps, Slate, Meagher & Flom, New York, NY, for Defendants.

OPINION AND ORDER

MUKASEY, District Judge.

Investors in a series of Merrill Lynch real estate limited partnerships sue Merrill Lynch & Company, Inc. ("Merrill Lynch & Co."), their wholly-owned subsidiaries, Merrill Lynch, Pierce Fenner & Smith & Co. ("Merrill Lynch, Pierce") and Merrill Lynch, Hubbard Inc. ("MLH"), and 18 limited partnerships or corporations wholly-owned or controlled by MLH, which functioned as the general partners or associate general partners of the limited partnerships at issue. Plaintiffs assert class claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"), as well as assorted state common law and statutory claims. Defendants move to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), arguing both that plaintiffs have failed to state claims entitling them to relief, and that their claims are barred by the statute of limitations. For the reasons outlined below, plaintiffs' RICO claims are dismissed on statute of limitations grounds, and I decline to exercise supplemental jurisdiction over plaintiffs' state law claims.

I.

Plaintiffs' claims relate to a series of real estate limited partnerships which defendants created and offered for sale from 1979 to 1987. The limited partnerships fall into two groups. The MLH Properties Limited Partnerships I-III ("MLH Prop. I-III") were to invest in leveraged real estate transactions. Initially, these limited partnerships were to

provide investors with losses yielding tax benefits. Over time, MLH Prop. I-III were to yield annual income payments and long-term capital appreciation. (Compl.¶ 82)¹ MLH Income Realty Partnerships I-VI ("MLHIRP I-VI") were to invest in real estate on an all-cash basis and provide investors with an immediate annual cash flow and long-term capital appreciation. (Id.) The named plaintiffs represent investors in each of these nine partnerships and the class they represent has been defined as "[a]ll investors who purchased units [in the initial offering or in the secondary market created by defendants] in any of MLH Properties Limited Partnership I-III or MLH Income Realty Partnerships I-VI (The "Partnerships") from the inception of the offer and sale of such Partnerships to the present." (Id. ¶ 54) The final closing dates of the public offerings of these investments were: MLH Prop. I — November 29, 1979; MLH Prop. II — December 16, 1980; MLH Prop. III — December 1, 1982; MLHIRP I — February 16, 1982; MLHIRP II — January 31, 1983; MLHIRP III — July 1, 1983; MLHIRP IV — August 1, 1984; MLHIRP V — July 8, 1985; MLHIRP VI — May 7, 1987. (Def. Mem. at 4 n. 4)

Plaintiffs allege that each defendant had a role in these limited partnerships. They claim that Merrill Lynch & Co. or its subsidiaries or employees "were responsible for the development, organization, sale, operation, or management of the Partnerships in the [alleged] scheme" (Compl.¶ 41); that Merrill Lynch, Pierce acted as the offeror and/or underwriter for the sale of some of these partnerships (id. ¶ 43); that MLH, through its subsidiaries, acted as general partner, managing general partner, or associate general partner of these partnerships and controlled their operations (id. ¶ 45); and that 18 of MLH's subsidiaries served as general partners or associated general partners of the limited partnerships (id. ¶ 46).

Plaintiffs allege violations of RICO, 18 U.S.C. §§ 1962(a), (c) & (d). As predicate acts for their RICO claims, plaintiffs allege mail and wire fraud in violation 18 U.S.C. §§ 1341 and 1343, and securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and §§ 11 and 12(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k & 771(2). (Id. ¶¶ 187-88)

The allegedly fraudulent misrepresentations or omissions plaintiffs allege fall into several categories. Plaintiffs claim first that defendants "guaranteed" specific annual yields and long-term capital appreciation, even though they knew from prior experience, and from their internal projections of expected yields from real property, that these guaranteed yields could not be achieved. (Compl.¶¶ 2, 58, 62, 63, 66, 67, 73, 75, 93, 98, 103-05, 108, 117-18, 132) Plaintiffs assert that "[d]efendants' entire marketing scheme thus represented, promised, characterized, and fostered the reasonable expectation that the percentage priority returns of each of the Partnerships was, as Defendants' own internal written materials stated, a `yield guarantee.'" (Id. ¶ 66)

Relatedly, plaintiffs allege that defendants marketed the investments as safe and conservative. They claim that defendants emphasized their expertise in real estate investments, their careful investigation of properties, and in relation to the MLHIRP Limited Partnerships, the all-cash nature of the investment, and represented that these features would allow the investments to achieve the alleged guaranteed returns. (Id. ¶¶ 85-87, 89-92) Plaintiffs claim that in fact, the investments were not safe because their guaranteed yields and long-term capital appreciation were unattainable. (See, e.g., id. ¶¶ 95-96) Further, they claim that the statements relating to defendants' expertise and the all-cash nature of the MLHIRP limited partnerships were misleading because defendants were aware that these features would not assist the limited partnerships in attaining the guaranteed yields. (Id. ¶ 93)

Plaintiffs claim second that defendants led them to believe that "the limited partnership sponsors would not make money until the limited partners had received their capital back plus the cumulative per annum yields promised." (Id. ¶ 2) For example, plaintiffs allege that internal marketing guides for MLHIRP I reported that "the MLHIRP product tied compensation of the managing general partner to the availability of net distributable cash every year [and that t]he managing general partner of the MLHIRP series was then required to `subordinate its 10% share of distributable cash if that is necessary to enable the Limited Partners to receive a minimum 8% cumulative yield on their investment.'" (Id. ¶ 65)

Third, plaintiffs claim that defendants represented that prior partnerships were meeting their objectives, including guaranteed annual distributions, but failed to disclose that those annual distributions were being funded in part from return on capital and return from non-real estate investments. (Id. ¶¶ 2, 60, 64, 68, 96, 108, 109-114, 119-21, 132, 136)

Fourth, plaintiffs claim that defendants failed to disclose the returns that the properties would have to generate for the limited partnerships to reach their stated objectives. (Id. ¶¶ 4, 61, 62, 64, 68, 102, 108)

Fifth, plaintiffs claim that defendants did not disclose their intention of keeping cash reserves, uninvested in real estate, to supplement shortfalls in income from the properties and thereby to keep limited partner distributions at the promised levels. (Id. ¶¶ 6, 74, 84, 102, 108, 122-29) Plaintiffs claim that defendants maintained uninvested capital reserves in amounts ranging from 6.3% for MLHIRP I to 13.9% for MLHIRP VI, well above the levels of reserves disclosed the prospectuses. (Id. ¶ 125)

In addition to these alleged misrepresentations or omissions, which form the basis for most of the mail and wire fraud and for all of the securities fraud claims — the predicate acts for the RICO claims — plaintiffs allege other improprieties. They claim that defendants knowingly or recklessly purchased properties that did not meet the criteria necessary to deliver the guaranteed annual yields and long-term capital appreciation. (Id. ¶¶ 3, 69, 70-73, 75, 76, 78, 103, 106). Further, plaintiffs claim that defendants used the illusion of a secondary market to create an aura of liquidity and made no attempt to obtain the best price for sellers of limited partnership units. (Id. ¶¶ 139-44)

Finally, plaintiffs allege that defendants concealed these misrepresentations, omissions and breaches in performance by continually reassuring investors that the partnerships were "on-track," and that shortfalls were temporary. (Id. ¶¶ 77, 146-179) They claim also that defendants' account statements concealed the fraud by "listing the original cost of the unit on client account statements and by labeling such valuation as `current price' or `market price.'" (Id. ¶¶ 78, 174) These allegations form the basis of the other mail and wire fraud claims, i.e., that defendants mailed fraudulent reports and statements to investors to mislead them.

In addition to the RICO claims, plaintiffs allege state law claims, including fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, tortious interference with contract, and violation of the New Jersey Uniform Securities Act, N.J. Stat. Ann. § 49:3-71, and the New Jersey Criminal Justice Act of 1970, N.J. Stat. Ann. § 2C:41-2.c-2.d.

Several cases were filed against defendants relating to these limited partnerships. See Lanza v. Merrill Lynch & Co., 95 Civ. 10657(MBM) (S.D.N.Y. filed Dec. 15, 1995); Rose v. Merrill Lynch & Co., 95 Civ. 10894(MBM) (S.D.N.Y. filed Dec. 22, 1995); Keleman v. Merrill Lynch & Co., 96 Civ. 0898(MBM) (S.D.N.Y. filed Feb. 6, 1996); Carnegie v. Merrill Lynch & Co., Civ. Action No. 95-4030-B (RBB) (S.D. Cal. filed Nov. 29, 1995). On February 25, 1996, I issued stipulated Case Management Order No. 1,...