Newmyer v. Philatelic Leasing, Ltd.

• Decision Date: 27 November 1989
• Docket Number: Nos. 88-1345,89-1288,s. 88-1345
• Citation: 888 F.2d 385
• Parties: Fed. Sec. L. Rep. P 94,767, RICO Bus.Disp.Guide 7357 Joseph M. NEWMYER, John W. Kwiatkowski, John C. Collins and Tobin R. Collins, (88-1345) Plaintiffs-Appellants, v. PHILATELIC LEASING, LTD., et al., Defendants-Appellees. Edward O'CONNELL, (89-1288) Plaintiff-Appellant, v. PHILATELIC LEASING, LTD., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 385

888 F.2d 385

Fed. Sec. L. Rep. P 94,767, RICO Bus.Disp.Guide 7357

Joseph M. NEWMYER, John W. Kwiatkowski, John C. Collins and Tobin R. Collins, (88-1345) Plaintiffs-Appellants, v. PHILATELIC LEASING, LTD., et al., Defendants-Appellees.

Edward O'CONNELL, (89-1288) Plaintiff-Appellant, v. PHILATELIC LEASING, LTD., et al., Defendants-Appellees.

Nos. 88-1345, 89-1288.

United States Court of Appeals Sixth Circuit.

Argued July 28, 1989.

Decided Oct. 20, 1989.

Order on Denial of Rehearing and Rehearing En Banc Nov. 27, 1989.

Michael H. Whiting, Joseph A. Ahern argued, John M. Rady, Harry S. Stark, Stark, Reagan & Flinnerty, P.C., Troy, Mich., for plaintiffs-appellants.

Robert A. Hudson, James P. Murphy, Berry, Moorman, King, Cook & Hudson, Detroit, Mich., for Philatelic Leasing, Ltd. in Hambrose Stamps, Ltd., H & J Holding Corp., Global Intern., Herman Finesod, E. Joseph McConnell, Inc., Melvin Hersch, Pimgrim Stamp & Coin, Inc., Dell Philatelic Consultants, Ltd., in Case No. 88-1345.

Dennis K. Egan argued, Douglas G. Graham, Detroit, Mich., for Friedman & Shaftan, P.C., in Case No. 88-1345.

Clayton P. Farrell, Noreen L. Slank, Southfield, Mich., Michael J. Barton, Plunkett, Cooney, Rutt, Watters, Stanczyk & Pedersen, Detroit, Mich., for Trager Glass & Co. in Case No. 88-1345.

Kenneth E. Prather, James R. Stearns, Prather, Harrington & Foley, Detroit, Mich., for Boelter, Hopt & Gale in Case No. 88-1345.

Ernest R. Bazzana, Plunkett, Cooney, Rutt, Watters, Stanczyk & Pedersen, Detroit, Mich., Elliot Silverman, Gold and Wachte, New York City, for Westminster Stamp Gallery, Ltd., in Case No. 88-1345.

Clayton P. Farrell, Southfield, Mich., Stanley A. Prokop, Plunkett, Cooney, Rutt, Watters, Stanczyk & Pedersen, Kenneth E. Prather, Prather, Harrington & Foley, Detroit, Mich., Thomas W. Elkins, Birmingham, Mich., Donald V. Palazzo, President, Dell Philatelic Consultants, Ltd., Foxboro, Mass., for Philatelic Leasing, Ltd., in Case No. 89-1288.

Clayton P. Farrell, Southfield, Mich., Stanley A. Prokop, Robert A. Hudson, Berry, Moorman, King, Cook & Hudson, Kenneth E. Prather, Detroit, Mich., Thomas W. Elkins, Birmingham, Mich., Elliot Silverman, Gold and Wachte, New York City, Donald V. Palazzo, President, Foxboro, Mass., for Hambrose Stamps, Ltd., M & J Holding Corp., Globe Intern., Melvin Hersch, Herman Finesod, E. Joseph McConnell, Inc., Pimgrim Stamp & Coin, Inc., Continental Management Co., D.W. Brubaker in Case No. 89-1288.

Dennis K. Egan argued, Douglas G. Graham, for Friedman & Shaftan, P.C., in Case No. 89-1288.

Clayton P. Farrell, Southfield, Mich., Ernest R. Bazzana, Stanley A. Prokop, Plunkett, Cooney, Rutt, Watters, Stanczyk & Pedersen, Robert A. Hudson, Kenneth E. Prather, Detroit, Mich., Thomas W. Elkins, Birmingham, Mich., Elliot Silverman, New York City, Donald V. Palazzo, President, Foxboro, Mass., for Robert V. Yeo, Jr., in Case No. 89-1288.

Clayton P. Farrell, Southfield, Mich., Stanley A. Prokop, Robert A. Hudson, Kenneth E. Prather, Detroit, Mich., Thomas W. Elkins, Birmingham, Mich., Noreen L. Slank, Southfield, Mich., Elliott Silverman, New York City, Donald V. Palazzo, President, Foxboro, Mass., for Trager Glass & Co., in Case No. 89-1288.

Clayton P. Farrell, Southfield, Mich., Stanley A. Prokop, Robert A. Hudson, Kenneth E. Prather, James R. Stearns, Prather, Harrington & Foley, Detroit, Mich., Thomas W. Elkins, Birmingham, Mich., Elliot Silverman, New York City, Donald V. Palazzo, President, Foxboro, Mass., for Boelter, Hopt & Gale, in Case No. 89-1288.

Chester E. Kasiborski, Jr., John J. Ronayne, III, Kasiborski, Ronayne & Flaska, Detroit, Mich., for Rose, Feldman, Radin, Pavone & Skehan and Stephen R. Feldman, amicus curiae.

Before MERRITT, Chief Judge, NELSON, Circuit Judge, and CELEBREZZE, Senior Circuit Judge.

DAVID A. NELSON, Circuit Judge.

As a speculative investment, presumably, and as a device for sheltering income from taxes, the plaintiffs in these consolidated cases executed standard-form lease and security agreements under which, in exchange for cash and promissory notes, they acquired leasehold interests in plates for The Internal Revenue Service disallowed the deductions and credits claimed by the plaintiffs on their individual tax returns. Alleging fraud and conspiracy to defraud, the plaintifs then sued the promoters of the tax shelter, with their lawyers, accountants, and others, under the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78a-78kk, the Securities Act of 1933, 15 U.S.C. Secs. 77a-77bbbb, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-68.

printing local postage stamps bearing the names of certain small islands off the coast of Scotland. The plaintiffs had no knowledge of or experience in the stamp business, and each plaintiff elected to have the lessor, defendant Philatelic Leasing, Ltd., arrange for the printing of the stamps. In addition, most of the plaintiffs contracted with defendant Dell Philatelic Consultants, Ltd. to sell the stamps to collectors for a commission of 25 percent. The plaintiffs agreed that 50 percent of the remaining proceeds would be paid to Philatelic Leasing, in the form of prepayments on the notes, until the notes were paid in full.

The lawsuits were dismissed by the district court on motions filed under Rule 12(b)(1) and (6), Fed.R.Civ.P. The court held, among other things, (a) that the agreements at issue did not represent "securities," not being "investment contracts" within the meaning of the federal securities laws, and (b) that the plaintiff could not show the requisite "pattern of racketeering activity," within the meaning of RICO, because the predicate acts were all part of a single scheme.

The "single scheme" test has now been rejected by the Supreme Court, see H.J. Inc. v. Northwestern Bell Telephone Co., --- U.S. ----, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989), and we shall reverse the dismissal of the plaintiffs' RICO claim for that reason. Whether the plaintiffs could show that their investments qualified as securities is a closer question, but we are not prepared to say at this juncture that the plaintiffs were not investing in "securities." We think this question presents genuine issues of material fact, and the dismissal of the claims asserted under the securities laws will therefore be reversed as well.

I

The island of Staffa, an uninhabited outcropping of rock measuring about 3/4 mile long and 1/3 mile wide, is located near the Isle of Ulva in the Inner Hebrides. Johnson and Boswell visited the proprietor of Ulva and Staffa, the Chief of the Clan M'Quarrie, during their tour of the Hebrides in 1773, and the travelers were distressed to hear that although the property had been in Mr. M'Quarrie's family for 900 years, it was soon to be sold for the payment of his debts. One wonders what thoughts would have gone through the minds of the impecunious M'Quarrie and his distinguished visitors if they could somehow have foreseen the multimillion dollar financial maneuvers with which the name of Staffa was to be associated in the 20th Century. ¹

Sometime before 1979, as we learn from United States v. Philatelic Leasing, Ltd., 601 F.Supp. 1554 (S.D.N.Y.), aff'd, 794 F.2d 781 (2d Cir.1986), ² the British government granted the Laird of Staffa and several other Scottish islands a right to issue postage stamps. The stamps would be good only for the carriage of mail between points on the islands or to the nearest British post office, where regular British postage would have to be affixed if the mail were to travel further.

The complaints in the present lawsuits, the factual allegations of which have been largely accepted as true for purposes of the motions to dismiss, state that beginning in 1979 a British corporation called Crailheath, Ltd. started acquiring stamp production rights from the islands' owners. Crailheath was owned by a certain Clive Feigenbaum. The plaintiffs' briefs assert that Mr. Feigenbaum also owned defendant Dell Philatelic Consultants, Ltd., a Massachusetts corporation with which all but one of the plaintiffs ultimately contracted to market their stamps. ³

The consideration given by Crailheath for the stamp production rights was quite modest: $3.60 for each separate type of stamp produced, plus some free stamps. In subsequent transfers, as we shall see, the amount of money involved grew considerably larger.

Crailheath assigned its stamp production rights to defendant Global International, a Liberian corporation said to be controlled by Feigenbaum. See Philatelic Leasing, 794 F.2d at 783. Global had sets of stamp-printing plates--called "masters"--manufactured for it at a cost of approximately $1,000 per master.

On May 31, 1982, pursuant to what the plaintiffs allege was a fraudulent scheme to over-value the stamp masters, Hambrose Stamps, Ltd., a New York corporation controlled by defendant Herman Finesod, signed an option contract for the purchase from Global of up to 9,711 stamp masters, with associated copyrights, at prices ranging from $106,800 for a master that would produce two different stamps to $207,500 for a master that would produce eight different stamps. Less than two percent of these prices would be payable in cash; the balance was to take the form of promissory notes issued without recourse against Hambrose.

One day later, on June 1, 1982, Hambrose entered into an option and security agreement with defendant Philatelic, a thinly capitalized New York corporation owned by defendant Melvin Hersch. (Hersch had been hired by Finesod to act as president of Hambrose in 1980 and 1981, a period when Hambrose was making direct sales of stamp masters to the public; there was a shift from sales to leases in 1982, at which time Hersch moved from the presidency of Hambrose--where he was replaced by Finesod--to the presidency of Philatelic. See Philatelic Leasing, 794 F.2d at 784.)

Under the June 1 agreement, a two-stamp master...