Koester v. American Republic Investments, Inc.

• Decision Date: 21 January 1994
• Docket Number: 92-3381,Nos. 92-3370,s. 92-3370
• Citation: 11 F.3d 818
• Parties: James F. KOESTER; Robert Rives; Harry J. Nichols; Janice Spengel; Alexander Loeb; Thomas Zensen; Frank B. Green; Dr. Gerald Newport; Lawrence J. Siefel; Robert E. Perkinson; Dr. James R. Criscione; Dr. A. Sciortino; Eugene Fahrenkrog; Eugene Fahrenkrog, Jr.; Scott Kell; William Londoff; John Larsen; Spero Bourdoures; Fox, Goldblatt & Singer, P.C.; Noah Susman; Steve Gilmore; Robert Evans; Dr. Jacques Paul Schaerer; William Curren; Virginia Curren; Patricia Baxter; Lester A. Schamel; Dr. Alan Pierce; Bernie Plouch; Jerry Kopp; Donna J. Hill; Phillip Sweeney; Dr. Ronald Hertel; Joseph Straub; Dr. John Keethler, Plaintiffs-Appellees, v. AMERICAN REPUBLIC INVESTMENTS, INC.; American Resource Corporation, Inc.; Ronald Ruis; Tatco Investment Co., Defendants, G. Charles Cole; Sherman Mazur, also known as Masur, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 818

11 F.3d 818

James F. KOESTER; Robert Rives; Harry J. Nichols; Janice Spengel; Alexander Loeb; Thomas Zensen; Frank B. Green Dr. Gerald Newport; Lawrence J. Siefel; Robert E Perkinson; Dr. James R. Criscione; Dr. A. Sciortino Eugene Fahrenkrog; Eugene Fahrenkrog, Jr.; Scott Kell William Londoff; John Larsen; Spero Bourdoures; Fox, Goldblatt & Singer, P.C.; Noah Susman; Steve Gilmore; Robert Evans; Dr. Jacques Paul Schaerer; William Curren; Virginia Curren; Patricia Baxter; Lester A. Schamel; Dr. Alan Pierce; Bernie Plouch; Jerry Kopp; Donna J. Hill; Phillip Sweeney; Dr. Ronald Hertel; Joseph Straub; Dr. John Keethler, Plaintiffs-Appellees, v. AMERICAN REPUBLIC INVESTMENTS, INC.; American Resource Corporation, Inc.; Ronald Ruis; Tatco Investment Co., Defendants, G. Charles Cole; Sherman Mazur, also known as Masur, Defendants-Appellants.

Nos. 92-3370, 92-3381.

United States Court of Appeals, Eighth Circuit.

Submitted June 14, 1993.

Decided Dec. 14, 1993.

Rehearing Denied Jan. 21, 1994.

Matthew Hale, Kansas City, MO, argued (George L. Fitzsimmon, St. Louis, MO, and David A. Welte and Matthew R. Hale, Kansas City, MO, on the brief), for defendant-appellant G. Charles Cole.

Timothy Nicholas Vujnich, St. Louis, MO, argued for defendant-appellant Sherman Mazur.

Mark Goodman, Clayton, MO, argued, for plaintiffs-appellees.

Before WOLLMAN and LOKEN, Circuit Judges, and BOGUE, ^* Senior District Judge.

LOKEN, Circuit Judge.

This diversity case arose from the ashes of an all too common financial disaster. Plaintiffs are St. Louis professionals who invested some $9,000,000 in real estate limited partnerships in the late 1970's and early 1980's, primarily for tax sheltering purposes. In hindsight, the properties were wildly overpriced. The projects were eventually sold or foreclosed, leaving plaintiffs with large investment losses. They sued the general partners and insiders for breach of their fiduciary duties. Two of those insiders, defendants G. Charles Cole and Sherman Mazur, appeal jury verdicts awarding the various plaintiffs a total of $6,400,000 in compensatory damages and $4,800,000 in punitive damages. We reverse the judgments against Cole because plaintiffs' claims against him are time barred. We reverse the awards of punitive damages but affirm the awards of compensatory damages against Mazur.

I.

The parties' relationships began in 1978, when Cole and his colleague, Ron West, traveled to St. Louis and made a presentation regarding their real estate syndication efforts to an investor group that included some of these plaintiffs. Over the next few years, plaintiffs invested as limited partners in thirteen "investment level" partnerships. Though each plaintiff invested individually, and is suing individually in this lawsuit, plaintiff Harry J. Nichols, a St. Louis attorney, performed many services for the limited partner investors as a group, including review of Confidential Investment Memoranda, partnership agreements, and real estate documents, and day-to-day communication with the general partners and property managers. The syndicators paid Nichols $477,000 in fees or commissions for these efforts.

The investment level partnerships reinvested plaintiffs' money in numerous "project level" limited partnerships. These partnerships acquired and managed commercial real estate properties and "passed through" to plaintiffs tax deductions greatly exceeding their investments (though some of these aggressive deductions were eventually disallowed following I.R.S. audits). Typically, a corporation owned by Cole was the general partner of the project level partnerships.

Cole was touted to the investors as a property management expert, and he personally managed the properties owned by the project partnerships until mid-to-late 1981. In 1979 and 1980, Cole was investigated by the Securities and Exchange Commission. He entered into a consent agreement with the agency in April 1981 that curtailed his activities. ¹ Later that year, without advising the limited partner investors, Cole sold his interests in the general partner entities to Ronald Ruis, Cole's former employee. Ruis and his corporation, defendant American Republic Investments, Inc., became co-general partners of the investment level partnerships. Though Nichols had previously communicated hundreds of times with Cole about the partnership investments, after 1981 Nichols dealt solely with Ruis and his company.

After Cole's departure, the general partner of the project level partnerships was defendant Tatco Investments, Inc. Mazur acquired all the stock of Tatco in November 1982, and plaintiffs were told that Mazur would personally assume responsibility for managing the properties. The partnership investments fared badly, and plaintiffs finally commenced this action for breach of fiduciary duty and fraud in May 1987. In October 1987, a project in which plaintiffs had invested over $2,000,000 was foreclosed; Tatco and Mazur did not advise the limited partner investors until the day before the foreclosure sale.

In December 1991, Mazur was indicted by a federal grand jury in California. The district court denied Mazur's motion to stay this action and permitted plaintiffs to take Mazur's deposition on the eve of the June 1992 trial. At the deposition, Mazur broadly invoked his Fifth Amendment privilege against self-incrimination. When Mazur did not attend the trial, plaintiffs read this deposition to the jury.

Just prior to trial, Cole moved to dismiss on statute of limitations grounds. Trial commenced without a ruling on this motion. Cole requested that the statute of limitations defense be submitted to the jury, but the district court ruled that it was an issue for the court. ² After the jury verdict in favor of plaintiffs, the court denied Cole's statute of limitations motion without explanation.

Only plaintiffs' breach of fiduciary duty claims were submitted to the jury. Plaintiffs claimed that Cole wrongfully sold partnership properties without plaintiffs' consent, allowed property foreclosures, and "walked away" from his management responsibilities despite the syndicators' initial representations that Cole personally would manage the properties. Plaintiffs claimed that Mazur wrongfully sold partnership properties without accounting for the proceeds to the limited partners, and gave the limited partner investors insufficient notice of the October 1987 foreclosure sale. The jury found that both Cole and Mazur had breached their fiduciary duties, awarding plaintiffs $3,235,287 in compensatory damages and half that amount in punitive damages against Cole, and $3,209,840 in compensatory damages and an equal amount in punitive damages against Mazur.

II.

On appeal, Cole argues that any breaches of fiduciary duty occurred at or before his withdrawal from management of the partnerships in 1981, and therefore plaintiffs' May 1987 action is barred by the five year statute of limitations in Mo.Rev.Stat. Sec. 516.120. A claim for breach of fiduciary duty is governed by the five-year statute of limitations found in Sec. 516.120(4). See Lehning v. Bornhop, 859 S.W.2d 271, 273 (Mo.App.1993). For most claims, "the cause of action shall not be deemed to accrue when the wrong is done or the technical breach of contract or duty occurs, but when the damage resulting therefrom is sustained and is capable of ascertainment." Sec. 516.100. However, a claim for relief "on the ground of fraud" accrues, not when the resulting damage is capable of ascertainment, but when the facts constituting the fraud are discovered. See Sec. 516.120(5); Schwartz v. Lawson, 797 S.W.2d 828, 832 (Mo.App.1990); Nerman v. Alexander Grant & Co., 926 F.2d 717, 721 (8th Cir.1991).

Under the capable-of-ascertainment test, a cause of action accrues when "the injury to plaintiff was complete as a legal injury." Chemical Workers, 411 S.W.2d at 165. "The most that is required is that some damages have been sustained, so that the claimants know that they have a claim for some amount." Dixon v. Shafton, 649 S.W.2d 435, 439 (Mo. banc 1983). Under the fraud discovery standard, the cause of action accrues when plaintiff has "sufficient facts to inform a reasonable person that a fraud has been committed." Vogel v. A.G. Edwards & Sons, Inc., 801 S.W.2d 746, 755 (Mo.App.1990).

Not surprisingly, plaintiffs contend that the fraud standard applies, while Cole argues for the ascertainment standard. There is support for both positions. Compare Lehnig, 859 S.W.2d at 273; with Vogel, 801 S.W.2d at 754-55. In this case, although plaintiffs' complaint was replete with allegations of fraud by Cole, their case was submitted to the jury on the issue of whether Cole breached a fiduciary duty "to deal fairly and honestly" with the limited partners. That is not a claim "grounded in fraud," and we therefore doubt whether the Supreme Court of Missouri, which has not addressed this issue, would apply the discovery rule of accrual. But in any event, on these facts we conclude that plaintiffs' claims against Cole are time-barred under either standard.

In a sixty-nine page brief, plaintiffs devote less than three pages to this question. They assert in conclusory fashion that they "first discovered some of the claims no earlier than 1985," and alternatively that their damages were "capable of ascertainment no earlier than 1987." The linchpin of plaintiffs' case against Cole is the charge that he walked away from his management duties when he secretly sold his partnership interests to Ruis in 1981. But it is undisputed that, by the end of 1981, plaintiffs knew that Cole was no longer actively managing the properties. Plaintiffs' examination of Cole included the following:

Q. ... Did you write the investors a letter, close to that time, the first quarter of 1981, where you told them that you were withdrawing, and that you could not raise additional monies in the marketplace by virtue of an SEC consent that you...