Morley v. Cohen
| Decision Date | 31 May 1985 |
| Docket Number | Civ. No. R-83-4198. |
| Citation | 610 F. Supp. 798 |
| Court | U.S. District Court — District of Maryland |
| Parties | Daniel C. MORLEY, et al. v. Irving COHEN, et al. |
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Richard D. Bennett and Marr, Bennett & Carmody, Baltimore, Md., for plaintiffs.
George R. Kucik, David T. Dekker, John M. Packman, and Arent, Fox, Kintner, Plotkin & Kahn, Washington, D.C., for defendants Irving Cohen, Halajen Mineral Development Corp., Mountainview Associates, Newport Associates, and Marvin Rosenbaum.
David M. Webster, David B. Wilkins, Carl S. Kravitz, and Nussbaum, Owen & Webster, Washington, D.C., and Paul Weinstein, Baltimore, Md., for defendant Schwartzman, Weinstock, Garelik & Mann, P.C.
Michael P. Crocker, Bel Air, Md., for defendant DiGuilan & DiChiara, P.A.
William A. Hylton, Jr., Louise Michaux Gonzales and Hylton & Gonzales, Baltimore, Md., for defendants Baker, Watts & Co.
John T. May, John T. Coyne, Paul D. Krause, and Jordan, Coyne, Savits & Lopata, Washington, D.C., for defendants Schwartzman, Weinstein, Troy, Jacobs, and Fingerman, individually.
Zayle A. Bernstein, pro se, and Bernstein, Bernstein & Stein, Fort Lauderdale, Fla., for defendant Zayle A. Bernstein.
Sidney A. Bernstein, pro se, and Bernstein & Berk, P.A., Fort Lauderdale, Fla., for defendant Sidney A. Bernstein.
This matter is before the Court on motions by all defendants to dismiss the second amended complaint, as further amended by interlineation. The motions are made pursuant to Rules 9(b), 12(b)(3), and 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs oppose the motions, and have filed memoranda in opposition. Notwithstanding plaintiffs' request for a hearing, the Court now rules pursuant to Local Rule 6 without oral argument. The positions of all parties have been briefed thoroughly.
Plaintiffs in this action and in four other cases now pending before this Court,1 contend that numerous promoters, partnerships, accountants, lawyers, and stockbrokers violated federal and state law in the creation and operation of various coal mining limited partnership tax shelters in the late 1970's. Plaintiffs assert a myriad of claims for relief ranging from traditional common law fraud to the federal Racketeer Influenced and Corrupt Organizations Act. 18 U.S.C. ? 1961 et seq.
The second amended complaint, as further amended by interlineation,2 alleges that in 1976 and in 1977 two investors, Daniel C. Morley, a resident of Maryland, and William T. Evans, a resident of Virginia, purchased units of two limited partnerships, which were involved in coal mining, from a partner of Baker, Watts & Company, a licensed Maryland broker-dealer. Morley purchased a one-half unit of a limited partnership known as Mountainview Associates in October 1976 for $50,000.00 and a full unit of a limited partnership known as Newport Coal Associates in November 1977 for $40,000.00. Evans purchased a full unit of Mountainview Associates in October 1976 for $100,000.00 and two units of Newport Coal Associates for $80,000.00.
Mountainview Associates ("Mountainview") and Newport Coal Associates ("Newport") were formed in 1976 and in 1977 respectively, for the stated purpose of mining and selling coal. Plaintiffs allege that it was represented to them that Mountainview had exclusive rights by sublease to mine coal in all seams located on or under approximately 3,500 surface acres of land in Pulaski County, Kentucky. Newport purported to have acquired rights by sublease to mine coal on or under approximately 400 surface acres of land in Leslie County, Kentucky. Investments in Mountainview totaled approximately $2,000,000.00; in Newport, $1,200,000.00. Both entities had the same general partner: defendant Halajen Mineral Development ("Halajen"), a New York corporation, which is solely owned by defendant Irving Cohen ("Cohen"), a New York resident. The offering circular for Mountainview was prepared by the New York law firm of Weiss, Rosenthal & Schwartzman, P.C. A successor firm, Schwartzman, Weinstock, Garelik & Mann, P.C., and five individual attorneys are sued as defendants (collectively referred to a "SWG & M"). Newport's circular was prepared by the Florida law firm of DiGuilian, Spellacy & Bernstein. In their present complaint, plaintiffs sue DiGuilian & DiChiara, P.A., a successor firm, and two individual defendants, Zayle Bernstein and Sidney Bernstein. Defendant Marvin F. Rosenbaum ("Rosenbaum") is alleged to have been the accountant for the Mountainview partnership and to have prepared an opinion with respect to the tax consequences attendant the investment in Mountainview.3 The seventeen defendants whom plaintiffs added in the second amended complaint are all partners of Baker, Watts & Co. (hereinafter collectively referred to as "Baker, Watts"), the brokerdealer which sold the partnership interests to Morley and Evans.4
Plaintiffs' investments in Mountainview and Newport did not result in the tax advantages and other benefits they had anticipated. The Internal Revenue Service audited plaintiffs and assessed additional taxes, penalties, and interest against them as a result of disallowed deductions. Morley and Evans allege that the partnerships did not have the binding mineral leases that they were represented to have had and which were essential to favorable tax treatment.
The Securities and Exchange Commission also investigated these partnerships. On January 27, 1981, Cohen, Halajen, and Mountainview consented to the entry of judgments of permanent injunction and other equitable relief. Notwithstanding these judgments, defendant Cohen allegedly represented to the plaintiffs that Mountainview and Newport continued to be viable investments.
Plaintiffs also raise numerous other complaints. They contend that the organization fees received by the general partner "had no reasonable relationship to the actual cost anticipated or incurred;" that defendants improperly transferred funds to foreign bank accounts; that plaintiffs omitted several material facts from the offering circular; and that much of what defendants represented was false and misleading. In addition, they allege that their inquiries into the continued viability of the partnerships were met with assurances that all was well.
The complaint contains sixteen counts: Count I sues Cohen, Halajen, Mountainview, and Newport for violations of section 1962(c) of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. ? 1961 et seq. Count II sues these four defendants and Baker, Watts for violations of sections 5(a), 12(1), and 15 of the Securities Act of 1933, 15 U.S.C. ? 77a et seq. Count III sues all defendants for violations of sections 12(2), 15, and 17(a) of the Securities Act of 1933, sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. ? 78a et seq., and Rule 10(b)(5). Count IV sues Cohen, Halajen, Mountainview, Newport, and Baker, Watts for violations of the registration provisions of the Maryland Securities Law, MD. CORP. & ASS'NS CODE ANN. ?? 11-205, 11-501, and 11-703. Count V sues all defendants for violations of the anti-fraud provisions of the Maryland Securities Law, MD.CORP. & ASS'NS CODE ANN. ?? 11-301, 11-703. Count VI sues all defendants for negligent misrepresentation. Count VII sues all defendants for breach of fiduciary duty. Count VIII sues Cohen, Halajen, Mountainview, and Newport for breach of contract. Count IX sues SWG & M and the individual partners, Schwartzman, Weinstock, Troy, Jacobs, and Fingerman, for professional negligence. Count X sues DiGuilian & DiChiara, P.A. and the Bernsteins for professional negligence. Count XI, which proceeds against Case Engineering Company for professional negligence, has been dismissed because of plaintiffs' failure to serve this defendant. See supra n. 3. Count XII sues Marvin Rosenbaum, for professional negligence. Count XIII sues Cohen and Halajen for conversion. Count XIV sues Cohen for fraud. Count XV sues Baker, Watts for negligence. Finally, Count XVI sues Baker, Watts for fraud.
This Court's jurisdiction over the RICO claim is premised upon 18 U.S.C. section 1964(c) (civil RICO) and 28 U.S.C. section 1331 (federal question) and 1337 (commerce and antitrust). Jurisdiction over the federal securities laws claims is based upon 28 U.S.C. section 1331 and 1337.5
Jurisdiction over the state claims is premised upon 28 U.S.C. sections 1331, 1332 (diversity) and 1337. Plaintiffs further seek to invoke this Court's pendent jurisdiction over the state claims. Only pendent jurisdiction is relevant for the purposes of the state claims and will be discussed below.6 The requested relief includes recission, actual damages, statutory treble damages under RICO, punitive damages, and costs and expenses of this action, including attorneys' fees. A jury trial was demanded under Rule 38(b) of the Federal Rules of Civil Procedure. See Paper No. 29.
The pending motions to dismiss7 are directed toward the sufficiency of plaintiffs' factual allegations under the various counts, as well as several preliminary matters such as lack of jurisdiction and venue. Before the Court are seven motions to dismiss:
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...Ramsey of this Court has stated in passing that RICO establishes exclusive jurisdiction in the federal courts. See Morley v. Cohen, 610 F.Supp. 798, 822 (D.Md.1985) (citing 18 U.S.C. § 1965(a) (the venue statute)). It does not appear from that opinion, however, that the issue was argued or ......
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