Lubin v. Sybedon Corp., Civ. No. 87-1844-E(IEG).
| Court | United States District Courts. 9th Circuit. United States District Court (Southern District of California) |
| Citation | 688 F. Supp. 1425 |
| Docket Number | Civ. No. 87-1844-E(IEG). |
| Parties | Robert P. LUBIN, Plaintiff, v. SYBEDON CORPORATION, et al., Defendants. |
| Decision Date | 22 June 1988 |
688 F. Supp. 1425
Robert P. LUBIN, Plaintiff,
v.
SYBEDON CORPORATION, et al., Defendants.
Civ. No. 87-1844-E(IEG).
United States District Court, S.D. California.
June 22, 1988.
John H. L'Estrange, William Nevitt, Wright & L'Estrange, San Diego, Cal., for Sybedon Corp., Sybedon Equities Corp., Edwin J. Glickman, Bertram Lewis, Arthur Fefferman, Donald M. Flaks, Mitchell Davis, Evan Graf and Dean Levitt.
Donald M. Wessling, Eugene Hanson, O'Melveny & Myers, Los Angeles, Cal., for Prudential-Bache Properties, Inc. and Prudential-Bache Securities, Inc.
Donald McGrath II, John Hershberger, Macdonald, Halsted & Laybourne, San Diego, Cal., for Christopher D. Sickels, CDS-Grant Associates, CDS-Grant Corp., CDS Management Co., Inc., CDS Lodging Properties, Inc. and Ulysses Management Co.
Michael D. Dempsey, Joel Schiff, Shea & Gould, Los Angeles, Cal., for Pannell Kerr Forster.
Peter Benzian, Mark W. Smith, Latham & Watkins, San Diego, Cal., for Laventhol & Horwath.
Michael Weaver, Timothy Taylor, Sheppard, Mullin, Richter & Hampton, San Diego, Cal., for Home Federal Sav. & Loan.
Morton Rosen, Haight, Brown & Bonesteel, Santa Monica, Cal., for Hill Financial Sav. & Loan.
Kinkle, Rodiger & Spriggs, San Diego, Cal., agent for Wilrock Appraisal & Consulting, Inc.
R. Gaylord Smith, Patrick E. Mundy, Lewis, D'Amato, Brisbois & Bissgard, San Diego, Cal., Robert J. Perry, Brown & Wood, New York City, agent for National Union & Fire Ins. Co. of Pittsburgh.
MEMORANDUM DECISION
ENRIGHT, District Judge.
INTRODUCTION
This is a proposed class action for damages, injunctive relief, rescission, attorneys' fees and other relief brought by investor Robert Lubin against a wide array of defendants who were involved in the restoration of the U.S. Grant Hotel (hereinafter "Hotel") in San Diego. Lubin alleges generally that through material misstatements and omissions defendants fraudulently exaggerated the prospects for the Hotel's success and at the same time failed to disclose the severe financial straits into which the restoration project was falling. Various defendants now move to dismiss this action and to strike portions of the First Amended Complaint. In addition, Lubin has moved to certify a class of plaintiffs, and a group of investors has moved to intervene as representative plaintiffs.
The defendants in this case are the following individuals and entities:
1. Sybedon Corporation ("Sybedon")— the general partner of U.S. Grant Hotel Associates, Ltd. ("Grant Associates"); co-issuer of the limited partnership interests purchased by investors such as Lubin;
2. Sybedon Equities—the broker-dealer; marketed the limited partnership interests in Grant Associates;
3. Prudential-Bache Securities—the underwriter-broker; also marketed the securities;
4. Prudential-Bache Properties (together with # 3 referred to as "Prudential-Bache")—the property manager; purportedly the sole "Class B" limited partner of Grant Associates (although Lubin alleges it to be a general partner);
5. Chris D. Sickels—the developer and general partner of CDS-Grant Associates;
6. CDS-Grant Associates—a California general partnership, with Sickels and CDS-Grant Corporation as general partners; sold the Hotel to the Grant Associates;
7. CDS-Grant Corporation—a California corporation; general partner of CDS-Grant Associates;
8. Ulysses Management Company—a limited partnership which leased the Hotel from the Grant Associates; has been voluntarily dismissed from this suit;
9. CDS-Grant Management Company —an affiliate of Sickels; managed some commercial aspects of the Hotel;
10. CDS Lodging Properties—the general partner of Ulysses Management Company and an affiliate of Sickels (Note—defendants 5-7, 9, and 10 are referred to as "Sickels and the CDS-Grant defendants");
11. Pannell, Kerr & Forster ("Pannell") —the accountants who prepared projections for the Hotel;
12. Wilrock Appraisal & Consulting, Inc. ("Wilrock")—the appraiser of the Hotel;
13. Laventhol & Horwath ("Laventhol") —the accountants for the Grant Associates;
14. Proskauer, Rose, Goetz & Mendelsohn ("Proskauer")—the lawyers for Sybedon and the Grant Associates; drafted the private placement memorandum;
15. Edwin Glickman—Executive vice-president and director of Sybedon;
16. Bertram Lewis—Chairman and director of Sybedon;
17. Arthur Fefferman—Senior vice-president, secretary and director of Sybedon;
18. Donald Flaks—President and director of Sybedon;
19. Mitchell Davis—Senior vice-president and director of Sybedon;
20. Evan Graf—alleged controller of Sybedon and Sybedon Equities;
21. Dean Levitt—alleged controller of Sybedon and Sybedon Equities (Note—defendants 1, 2, and 15-21 are referred to as the "Sybedon defendants");
22. National Union Fire Insurance ("National Union")—the corporate surety;
23. Home Federal Savings and Loan ("Home Federal")—a federally chartered savings and loan; alleged co-issuer of the limited partnerships;
24. Hill Financial Savings and Loan ("Hill Financial")—a Pennsylvania savings and loan; made investor loan note to the Grant Associates;
25. Nationwide Lending ("Nationwide") —originally named as "Doe 1").
Lubin has also added Does 2-250 as defendants.
FACTUAL BACKGROUND
This action arises out of the sale of approximately $43 million of "Class A" limited partnership interests, which were issued in order to raise capital for renovation of the Hotel. The interests were in the California limited partnership, U.S. Grant Hotel Associates, Ltd. ("Grant Associates"), and were offered nationally by defendant Prudential-Bache Securities from January through April, 1985. Three hundred limited partnership units were each sold for approximately $143,000, in principal and interest.
The sale of the limited partnerships was part of a massive renovation effort spearheaded by defendant Sickels. In July 1979, Sickels acquired a long-term lease on the Hotel; he also acquired an option to purchase the Hotel upon the death of then-owner Joseph Drown. On April 4, 1980, Sickels closed the Hotel for refurbishing. In July 1983, Sickels acquired the Hotel for $8.5 million, $6 of which was designated as a payoff on the long-term lease which had been taken out in July 1979. Roughly $5 million of the purchase price was secured by a First Deed of Trust on the Hotel, with the Drown Foundation as beneficiary.
Sometime after acquiring the lease, Sickels began to devise plans for the Hotel's renovation—plans which, according to Lubin, were revised four times during the next five years and for which the estimated cost jumped from $10 million to over $80 million. After purchasing the Hotel in July 1983 (in the name of CDS-Grant Corporation), Sickels embarked on a $33.5 million renovation plan. This plan was funded by a construction loan of $27.25 million from Home Federal and an Urban Development Action Grant of $6 million. The Home Federal Loan was secured by a Second Deed of Trust on the Hotel. The loan was subsequently increased by $4.75 million, so that the total debt to Home Federal was $32 million. Of the $6 million Action Grant, $1.2 million was borrowed from the City of San Diego, and $4.8 million was borrowed from funds administered by the United States Department of Housing and Urban Development. The Action Grant was secured by a Third Deed of Trust on the Hotel.
Lubin asserts that during the initial demolition phase of the redevelopment in August 1983, massive structural defects were discovered in the Hotel. These defects allegedly escalated the cost of renovation by some $17 million. At this time, says Lubin, Sickels decided to restructure his stake in the project by syndicating equity interests. The limited partnership that resulted was the Grant Associates. Sickels's restructuring allegedly enabled him "to enjoy the economic benefits of the hotel, while moving into a liability-free zone." Memorandum in Support of Motion for Class Certification, p. 7. On October 26, 1984, the CDS-Grant Corporation contributed the Hotel to the CDS-Grant Associates, a general partnership of Sickels and the CDS-Grant Corporation. The CDS-Grant Associates assumed the obligations under the Second Deed of Trust.
In order to raise additional capital for the Hotel's renovation, the Grant Associates limited partnership was formed on or about November 21, 1984. The single general partner of the Grant Associates was Sybedon. On December 1, 1984, Sickels and the CDS-Grant defendants agreed to sell the Hotel to the Grant Associates; the price was $58.7 million. Various real estate contracts were then concluded, under which Sickels and the CDS-Grant defendants would continue to renovate the Hotel, Ulysses Management Company would lease the Hotel from the Grant Associates, and two more deeds of trust (the Fourth and Fifth Deeds of Trust) would secure the purchase money notes which were issued in favor of the CDS-Grant Associates as part payment for the Hotel. (The Fourth Deed of Trust wrapped around the First, and the Fifth Deed of Trust wrapped around the Second.) These real estate agreements closed on December 28, 1984.
In January 1985, Sybedon and Prudential-Bache Securities commenced an offering of $30 million worth of limited partnership interests in the Grant Associates. Offerings continued through April 1985. The purchase price of each Class A unit was $100,000; with interest, the cost to investors would be $143,000. According to Lubin, neither the Hotel's renovation history nor its later cost overruns were disclosed in the...
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