National Union Fire Ins. Co. v. Cooper
| Decision Date | 19 January 1990 |
| Docket Number | No. 85 Civ. 8750 (LLS) to 85 Civ. 8754 (LLS) and 86 Civ. 4220 (LLS).,85 Civ. 8750 (LLS) to 85 Civ. 8754 (LLS) and 86 Civ. 4220 (LLS). |
| Citation | 729 F. Supp. 1423 |
| Parties | NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Wayne Ray COOPER and Dixie R. Cooper, Defendants. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Jonathan SONNEBORN, Defendant. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Joseph DONADIO, M.D., Defendant. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Harold A. BERGGREN, Defendant. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Plaintiff, v. Peter W. BAUER, M.D., Defendant. William WADSWORTH, on behalf of himself and all others similarly situated, Harold A. Berggren, Peter W. Bauer, M.D., Jonathan Sonneborn, Joseph Donadio, M.D., Wayne Ray Cooper and Dixie R. Cooper, James Clark and Jane Clark, Lawrence W. Gough and Barbara E. Gough, Chester Gromala and Eleanor Gromala, George L. Bozzi and Marie R. Bozzi, Worth L. Cox and Virginia Cox, Walter A. Dommers and Evalyn A. Dommers, Richard E. Eaves and Mary Eaves, Jeanne D. Alexander, James D. Zandri and Anita M. Zandri, Walter J. Subsick, Orville R. Parks and Katherine E. Parks, Landon J. Osborn and Marcella J. Osborn, Frank J. Amadec and Annette A. Adamec, Jan Jamharian and Sara K. Jamharian, Bernie A. Kestler and Beverly C. Kestler, Jack D. Mainville and Caroline B. Mainville, Lester Maloney, Ric J. Morin and May I. Morin, Kelmer G. Oldre, Jr., and Barbara J. Oldre, Plaintiffs, v. Jeffrey S. SUNDERMAN, National Union Fire Insurance Company of Pittsburgh, Pa., RepublicBank, Dallas, N.A., and Arthur Andersen & Co., Defendants. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
D'Amato & Lynch, New York City, for plaintiff Nat. Union Fire Ins. Co. of Pittsburgh, Pa.; John J. Cullen, Mitchell J. Winn and Geoffrey W. Heineman, of counsel.
Carmody & Torrance, New Haven, Conn., for defendants Cooper, Sonneborn, Donadio, Berggren, Bauer and plaintiffs Wadsworth, et al.; Anthony M. Fitzgerald, of counsel.
Stein, Zauderer, Ellenhord, Frischer & Sharp, New York City, for defendant Arthur Andersen & Co.; Bertrand C. Sellier, of counsel.
National Union Fire Insurance Company of Pittsburgh ("National Union"), an issuer of financial guarantee bonds, brings the first five of these six actions (the "Note cases")1 to enforce its indemnity agreements with limited partners in tax shelter limited partnerships, and to enforce its rights as subrogee on the limited partners' promissory notes which it honored on their behalf. National Union issued bonds which guaranteed, to the limited partnership and to the bank which financed the limited partnership, that the limited partners would make all of the capital contributions represented by their promissory notes. The limited partners stopped making their required contributions, and National Union paid on their behalf. It now seeks reimbursement, under the indemnity agreements they gave National Union at the time it guaranteed their payments, and as subrogee on the notes on which they defaulted.
In the sixth action (the "Wadsworth case"), the limited partners, in turn, sue National Union, the limited partnership's general partner (Jeffrey Sunderman), the bank which financed the limited partnership (RepublicBank Dallas, N.A.), and the limited partnership's accountants (Arthur Andersen & Co.) (collectively the "defendants")2, seeking rescission of the offering and the indemnity agreements.
This opinion addresses: National Union's motion for summary judgment and to dismiss the affirmative defenses and counterclaims in the Note cases, and defendants' motions to dismiss the complaint, Arthur Andersen's motion for costs and fees, and plaintiffs' motion to amend the complaint in the Wadsworth case.
In the fall of 1983 each defendant in the Note cases (the "investors") received a private placement memorandum (the "PPM") for Broken Arrow Investors, Ltd. ("Broken Arrow" or "the partnership"). The partnership was formed, and the PPM was prepared, by Jeffrey Sunderman, a syndicator of numerous other limited partnerships. Sunderman and SunWard Investments Corporation ("SunWard"), a wholly owned subsidiary of SunWise Corporation which Sunderman controlled, were the general partners of the partnership (the "general partners").3
As stated in the PPM, Broken Arrow's purpose was to raise capital by selling limited partnership interests in order to acquire and then rent units in an apartment complex in Phoenix, Arizona. The PPM contained a financial statement for SunWard for the fiscal year ending January 31, 1983 and two sets of annual projections: anticipated rental income and anticipated rehabilitation expenses ("deferred maintenance"). Arthur Andersen & Co. ("Arthur Andersen") issued an unqualified opinion with respect to the financial statement.
Each investor was encouraged to "consult his own counsel, accountant and other advisors as to legal, tax and related matters concerning the investment described herein and its suitability for him/her." (Exhibit D to the affidavit of J.E. Bishop, sworn to Nov. 14, 1986).
The expected return to the limited partners included income tax deductions as well as payments based upon the rental income.
William Wadsworth, the sole shareholder and president of Wadsworth Investment Co., Inc. ("WIC"), personally invested in and advised many of his clients to invest in various limited partnerships organized by the general partners. In November 1983 WIC sold Broken Arrow limited partnership interests to some of the plaintiffs in the Wadsworth case.
Those electing to become limited partners could pay for their limited partnership interests in cash, whether borrowed or their own. Or, as did all the investors, they could make a cash down payment, and sign promissory notes (the "notes") for the balance of the purchase price of their limited partnership interests.
Broken Arrow wished to obtain a loan of working capital from RepublicBank, Dallas, N.A. ("RepublicBank") in order to acquire the apartment complex. The general partners needed, and asked, National Union to supply Broken Arrow a bond which guaranteed payment by the limited partners of their notes. On November 30, 1983 National Union issued a bond in favor of Broken Arrow. On that same date Broken Arrow received a $381,900 loan from RepublicBank, having given RepublicBank the notes as security and assigned RepublicBank its rights under the bond. (RepublicBank had extended a $10 million revolving line of credit to SunWise Corporation in September 1983.) The bond included a provision waiving, as against RepublicBank, any defenses to payment that National Union could have asserted against the partnership (the "waiver provision"). The waiver provision states "Defenses available to the Surety i.e., National Union against the Obligee i.e., Broken Arrow to deny payment of a claim under this Bond ... shall not be valid against such Permitted Assignee i.e., RepublicBank." The PPM did not contain a copy of the bond, but Exhibit E to the PPM lists "Loan and Surety Agreement and Closing Documents" as item 21 among the "Pertinent Documents" that would be made available to prospective investors upon request.
National Union, in its turn, required the limited partners to execute indemnity agreements whereby they agreed to reimburse National Union for any payments it made on the notes to RepublicBank on their behalf. In addition, the limited partners pledged their partnership interests as security for their obligations to National Union under the indemnity agreements.
All of the investors made their first installment payments on the notes in May 1984. But, in January 1985 Wadsworth and other investment managers travelled to Dallas, Texas to investigate the problems they had heard that SunWard and the partnership were experiencing. Wadsworth's trips to Texas, and also Arizona, continued throughout the next four months, during which time he wrote periodic letters to the investors and, along with others, formed the Due Diligence Advisory Committee "for the purpose of attempting to avoid total disaster for investors, and to get current on expenses of the partnership." (Letter dated February 2, 1985 from William F. Wadsworth to "Fellow Investor", Exhibit A to affidavit of Merle M. Martin, sworn to Apr. 29, 1987) At Wadsworth's recommendation, none of the investors made their second installment payments in May 1985. RepublicBank notified National Union of the defaults, and it paid RepublicBank on their behalf. In November 1985 National Union commenced the Note cases for reimbursement.4
On May 28, 1986 the investors commenced the Wadsworth case. Their complaint contained nine causes of action: aiding and abetting federal securities laws violations, violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68 (1982 and 1986 Supp.), common law fraud and misrepresentation, conversion (against only the general partners), rescission of, and construction of, the indemnity agreements (against only National Union), and violations of the Connecticut Uniform Securities laws. After RepublicBank and Arthur Andersen each filed answers and motions to dismiss the complaint, and National Union moved to dismiss the complaint in lieu of an answer, the investors filed an amended complaint on March 20, 1987. The amended complaint retains the allegations against all defendants of aiding and abetting securities law violations and common law fraud and misrepresentation, as well as those of conversion against Sunderman and rescission of the indemnity agreements against National Union, omits the allegations of violations of RICO and the Connecticut laws, and construction of the indemnity agreements, and adds allegations of common law negligence against only Arthur Andersen and rescission of the offering...
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