Myers v. Finkle

• Citation: 758 F. Supp. 1102
• Decision Date: 28 November 1990
• Docket Number: Civ. A. No. 89-571-N.
• Parties: Arthur R. MYERS, II, Mary J. Myers, and Arthur R. Myers, III, Plaintiffs, v. Robert FINKLE, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

758 F. Supp. 1102

Arthur R. MYERS, II, Mary J. Myers, and Arthur R. Myers, III, Plaintiffs, v. Robert FINKLE, et al., Defendants.

Civ. A. No. 89-571-N.

United States District Court, E.D. Virginia, Norfolk Division.

November 28, 1990.

Herbert Beigel, Lewis S. Sandler, Stephen D. Sharp, Beigel & Sandler, Chicago, Ill., and Charles E. Payne and Reid H. Ervin, Payne, Gates, Farthing & Radd, Norfolk, Va., for plaintiffs.

Wayne Lustig, Mays & Valentine, Norfolk, Va., and Stephen A. Northup, Mays & Valentine, Richmond, Va., for defendants.

OPINION AND ORDER

DOUMAR, District Judge.

This action was brought to recover damages for alleged violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder (Count I), and of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (Count V). Plaintiffs have added pendent state law claims for fraud (Count II), breach of fiduciary duty (Count III), and negligence (Count IV).

The plaintiffs allege that as a result of advice received from defendants, their accountants, they invested large sums of money in real estate limited partnerships, which the defendants represented to have the potential to reduce their tax liabilities and to gain profit. They allege that defendants were guilty of fraud and misrepresentation in giving this advice, on which they relied to their considerable detriment.

The complaint as amended is against twelve named individuals and 20 John Does doing business as two partnerships, Finkle & Co., an accounting firm, and Exec Associates.

The defendants have moved to dismiss all counts for failure to state a claim under Fed.R.Civ.Proc. 12(b)(6).¹ In the alternative, they have moved to dismiss Counts I, II, and V for failure to plead fraud with sufficient particularity under Rule 9(b).

By order of this Court dated April 4, 1990, United States Magistrate William Prince was designated to conduct a hearing and to submit to a judge of the Court a report and recommendation for disposition by the judge of defendants' motions. After a hearing and submission of additional material, Magistrate Prince entered his report July 16, 1990, recommending dismissal of the case. Plaintiffs have filed objections to the report and recommendation, to which defendants have responded. The Court subsequently heard oral argument from the parties, and now considers the record de novo. United States v. Raddatz, 447 U.S. 667, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980).

The 12(b)(6) motion to dismiss Count I is treated here as a motion for summary judgment because of the supporting affidavits, deposition transcripts, and other documents supplied by the parties. This motion is based chiefly upon two grounds. First, defendants, as plaintiffs' accountants, were under no duty to disclose the risks associated with the purchase of interests in real estate limited partnerships for tax shelter purposes. Second, even if the defendants were under such a duty, the risks were fully disclosed in the documentation provided in connection with the investments.

Summary judgment may be granted if the pleadings and evidentiary material "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.Proc. 56(c). When a motion for summary judgment is made, the adverse party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.Proc. 56(e).

The Court FINDS that, as to Count I, there is no genuine issue of material fact and that the defendants are entitled to judgment as a matter of law. Summary judgment in favor of the defendants is GRANTED on Count I. Defendants' motion to dismiss Count V is GRANTED. Counts II, III and IV are DISMISSED for want of subject matter jurisdiction.²

FACTS

The following is a summary of the material facts construed in the light most favorable to plaintiffs, the non-moving parties. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142. Factual allegations of the defendants which vary with those of the Myers are not considered on this motion for summary judgment. However, facts stated by the defendants which have not been challenged by the plaintiffs are included.

The plaintiffs in this case are Richard Myers, his wife Mary, and their son Rick. The Myers own several closely held businesses engaged in the harvesting and processing of clams. Amended Complaint para. 4. The individual defendants were all partners in Finkle & Company (herein referred to as "Finkle & Co." to avoid confusion with Robert Finkle, one of the individual defendants), a public accounting firm. The individual defendants were also all partners of Exec Associates, f/k/a FKL Associates. Amended Complaint para. 5. In 1977 Finkle & Co. began rendering tax and accounting services to the Myers' companies, and personal tax services to the Myers. Amended Complaint para. 6.

Robert Harmon (not a party), a former partner of Finkle & Co., left that firm in 1980 to form Harmon Associates ("Harmon"). Harmon was the general partner of Berg Harmon Associates, f/k/a Berg-Harquel Associates ("Berg Harmon"), a joint venture with Berg Ventures, Inc. Berg Harmon syndicated a series of real estate limited partnership agreements referred to as Harmon Limited Partnerships (HLPs). These entities are limited partnerships which purchase real estate properties, such as apartment buildings, and sell limited partnership interests to wealthy investors. The investors may then "shelter" themselves from high tax rates by subtracting from their incomes their pro rata shares of partnership losses. This practice was permitted by the tax laws in effect at the time the Myers invested in these partnerships. Wetter aff. para. 4.

Berg Harmon was the general partner in all but one of the HLPs involved in this suit. Amended Complaint para. 7. Exec Associates was a limited partner of Harmon Associates, and as such received distributions of profits from Berg Harmon. Exec Associates owned a 40% interest in Harmon, which had a 50% interest in Berg Harmon. The individual defendants thus had a 20% ownership interest in Berg Harmon. Amended Complaint para. 8; Finkle Dep. pp. 53, 64.

Beginning in 1981 Stephen Wetter and Robert Finkle, defendants and partners of Finkle & Co., advised the Myers that they should invest in HLPs, which offered tax shelters. These recommendations were often made during the final preparation of the Myers' tax returns. Finkle & Co. advised the Myers that Berg Harmon would provide the subscription documents. Amended Complaint paras. 9, 11.

On several occasions Wetter or Robert Finkle assured the Myers that investments in the HLPs were conservative investments which would result in "economic profit" to the investors. Amended Complaint paras. 10, 12; Mary Myers Aff. para. 4; Richard Myers Aff. para. 6.

Finkle & Co. never advised the Myers that sale of the investments or foreclosure on partnership properties would trigger recapture tax liabilities. Sale of all the Myers' interests would result in tax liability in excess of $850,000. Amended Complaint paras. 13, 15, 22.

The Myers, relying solely on the representations and advice of Finkle & Co. and making no independent investigation, invested a total of $4,845,000 in 15 HLPs between September 1981 and January 1985. Amended Complaint paras. 14, 16.

Of the first 11 investments made by plaintiffs in HLPs, most were in the amount of $150,000 (one was in the amount of $75,000, another for $300,000, and a third for $450,000). In 1984 defendant Wetter advised heavy investment in HLPs. In answer to Mrs. Myers' cash flow concerns, Wetter advised her that earlier HLPs could be sold profitably. (There is no evidence that the Myers have ever attempted to sell any of their interests in the HLPs.) Amended Complaint para. 13; Mary Myers Aff. para. 7. Plaintiffs invested $1,920,000 in a twelfth HLP (the Friendly Hills partnership), and a total of $900,000 in three more HLPs.

The Myers contend that Finkle & Co. failed to disclose the following alleged facts:

1) that the HLPs paid substantially more than fair market value for the properties;

2) that the appreciation of the properties could never outpace the amounts due on their mortgages;

3) that the investments had no potential for profit because of the large fees taken by Berg Harmon and its affiliates;

4) that the Myers would be subject to recapture tax liability if their interests were sold;

5) that the Myers' interests could be resold profitably;

6) that Harmon, the general partner of Berg Harmon, was spun off from Finkle & Co. for the purpose of developing the HLPs; and 7) that Finkle & Co. had a financial stake in the fees paid to Berg Harmon and its affiliates.

The Myers contend that the HLPs had no potential for economic profit, and that Finkle & Co. knew of their precarious financial position. Amended Complaint paras. 19, 23; Objections to Magistrate's Report at 7-10, 13-14.

The defendants assert that the financial projections for the HLPs in which the Myers invested, which were prepared by different firms of independent certified public accountants, "showed projected losses from the operation of the projects for each year over a period of several years. In no case was a profit projected for any year. The financial projections also show the projected benefits to high tax-bracket investors, which were tax savings rather than economic profits." Wetter Aff. para. 13, 14.

The defendants also state that independent appraisals were obtained for the HLP properties, that the purchase prices for the properties were supported by the appraisals, and that the IRS did not challenge these valuations. Wetter Aff. paras. 18-19. The IRS has not disallowed any deductions taken by the Myers. Para. 20.

In addition, the partners of Finkle & Co. have themselves invested in many of the same HLPs in which the Myers invested. Wetter ...