Nichols v. Merrill Lynch, Pierce, Fenner & Smith

• Citation: 706 F. Supp. 1309
• Decision Date: 19 January 1989
• Docket Number: No. 3-86-0486.,3-86-0486.
• Parties: Donald NICHOLS, et al. v. MERRILL LYNCH, PIERCE, FENNER & SMITH, et al.
• Court: U.S. District Court — Middle District of Tennessee

706 F. Supp. 1309

Donald NICHOLS, et al. v. MERRILL LYNCH, PIERCE, FENNER & SMITH, et al.

No. 3-86-0486.

United States District Court, M.D. Tennessee, Nashville Division.

January 19, 1989.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Nader Baydoun, Harris & Baydoun, and Kenneth Jones, O'Hare, Sherrard & Roe, Nashville, Tenn., for plaintiffs.

Anthony Iannacio, Baker Worthington Crossley Stansberry Woolf, Nashville, Tenn., A. Inge Selden, Maynard, Cooper, Frierson & Gale, P.C., Birmingham, Ala., for Merrill Lynch.

Leo Bearman, Jr., Roy Keathley, Heiskell, Donelson, Bearman, Adams, Williams & Kirsch, Memphis, Tenn., for Merrill Lynch, Sandestin Beach Hotel, Frank Flautt, Jr., William Mann, Wilton Hill, Sandestin Innkeepers, Fred and William Alias, and Robert Kamm.

William R. Willis, Jr., Willis & Knight, Nashville, Tenn., for Merrill Lynch, Sandestin Beach Hotel, Frank Flautt, Jr., William Mann and Wilton Hill.

Byron R. Trauger, Paul C. Ney, Jr., Doramus, Gideon & Trauger, Nashville, Tenn., Robert I. Chaskes, Frank, Bernstein, Conaway & Goldman, Tysons Corner, Va., for Dominion Federal Sav. & Loan Ass'n.

Thomas H. Peebles, III, Nashville, Tenn., Michael Edwards, Patricia A. McGee, Balch & Bingham, Birmingham, Ala., for Laventhol & Horwath.

Robert A. Heeken, Jacksonville, Fla., Robert Kamm, Memphis, Tenn., for Peter Bos.

Perry Allen Craft, Steven A. Hart, Asst. Atty. Gen., Nashville, Tenn., for amicus curiae the State of Tenn.

Winston S. Evans, Evans, Jones & Reynolds, Nashville, Tenn., for defendants.

MEMORANDUM

HIGGINS, District Judge.

This is an action alleging fraud and other unlawful acts incident to the sale of securities in violation of federal securities laws, state blue-sky laws, the Racketeer Influence and Corrupt Organization Act (RICO), the Tennessee Consumer Protection Act (TCPA), and various theories of common law liability discussed in more detail below. Plaintiff Donald Nichols and 112 others filed their original complaint in this Court on May 30, 1986.¹ The complaint names fourteen persons as defendants in this action. Those defendants which have filed motions presently under review are identified in the complaint as follows:

Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) is a broker-dealer and a Delaware corporation with its principal place of business in New York, New York. Pursuant to an agreement with the Sandestin Beach Hotel, Merrill Lynch acted as the exclusive selling agent for the sale of hotel interests to all investors. Merrill Lynch substantially participated in preparing the Private Placement Memorandum (PPM) and the sales presentations made to the plaintiffs to induce them to purchase hotel interests.

Defendant Sandestin Beach Hotel (Sandestin) is a Florida corporation with its principal business office in Destin, Florida. Sandestin was incorporated for the express purpose of developing the resort hotel that became the focus of the litigation. It was to be responsible for setting up the hotel on a condominium basis and for all aspects of the resort's development, construction, and financing.

Defendant Dominion Federal Savings & Loan Association (Dominion) is a savings and loan association with its principal place of business in Tysons Corner, Virginia. Before any plaintiffs had bought their hotel interests, Dominion, Sandestin and Merrill Lynch agreed that Dominion would lend to people seeking money to finance the purchase of their hotel interests.

Defendant Laventhol & Horwath (Laventhol) is a partnership of certified public accountants having its principal place of business in Tampa, Florida. Before either the sale of hotel interests to the plaintiffs or the preparation of the PPM, Sandestin or its affiliates retained Laventhol to prepare financial projections and a market study to determine whether it was feasible to build the hotel and finance it through the sale of hotel interests. Laventhol played a significant role in preparing the financial projections set forth in the PPM.

Defendant Morton Olshan is a resident of New York. Since at least February 1983, he has been Vice President, a director and shareholder of Sandestin. The plaintiffs allege that Mr. Olshan owns more shares of Sandestin stock than any other shareholder. He provided funds to Sandestin to initiate the development of the hotel, thereby making it possible for Sandestin and its affiliates to proceed with the project.

In addition to these defendants who have filed motions to dismiss, plaintiffs have filed a motion to dismiss the counterclaim of certain individual defendants. These defendants/counterplaintiffs are:

1. Frank L. Flautt, Jr., a resident of Memphis, Tennessee, and since at least February 1983, he has served as President, a director and shareholder of both Sandestin and Sandcastle.² Mr. Flautt is alleged to be the individual chiefly responsible for developing the hotel, including formulating the financing plan, offering and selling hotel interests, and managing the entire development project.

2. William Jeffries Mann, a resident of Memphis, Tennessee. Since at least February 1983, he has been Vice President, a director and a shareholder of Sandestin.

3. Wilton D. Hill, a resident of Memphis, Tennessee. Since at least February 1983, he has been the Secretary/Treasurer, a director and a shareholder of Sandestin.

4. Fred V. Alias, a resident of Destin, Florida. Since at least February 1983, he has been a shareholder, an officer and a director of Sandcastle and Sandestin Beach Resort, Inc., both of which corporations are affiliated with Sandestin.

5. William Alias, Jr., a resident of Destin, Florida. Since at least February 1983, he has been a shareholder, an officer and a director of Sandcastle and Sandestin Beach Resort, Inc.

6. Robert Kamm, a resident of Memphis, Tennessee. Mr. Kamm is Vice President of Sandcastle and is also the Vice President of Financial for Flautt Properties, formerly Flautt and Mann Properties, a corporation controlled by defendant Frank Flautt and operated for the purpose of developing and managing real property.

Disparate as these defendants are, they all had one thing in common. All were involved in some way in the development and promotion of a Gulf Coast resort in Destin, Florida. The resort was called the Sandestin Beach Hilton Hotel (the Hotel). The Hotel was to be a sizable affair, with fifteen stories and four hundred rooms. Like many such projects in recent years, it was planned to be a condominium complex. Each buyer acquired fee simple title to his own room and received an undivided interest in the resort's common areas. The plaintiffs allege that they bought such interests in the Hotel in December 1984.

The plaintiffs allege that they were induced to buy rooms by the defendants' attractive Private Placement Memorandum, which described the resort and its potential in somewhat rosy terms. The PPM had three parts: (1) the "legal document," a formal disclosure document that purports to contain the disclosures required by the securities laws; (2) a collection of exhibits to the legal document; and (3) a brochure containing photographs, drawings, and narrative descriptions of various aspects of the Hotel.

The alleged deficiencies generally concern (1) statements about the position, orientation, and location of the Hotel on the beach and the view from each hotel room; (2) statements concerning the profits realized by the developers from the sale of hotel interests; (3) financial projections concerning the expected profitability of the Hotel; (4) the adequacy of the Hotel's structural facilities; and (5) miscellaneous internal inconsistencies and inadequacies in the sales presentation materials. In addition to these specific inadequacies of the PPM, plaintiffs also allege oral misrepresentations made to them concerning the same subject matter.

The Honorable Thomas Wiseman, Jr., United States District Judge for the Middle District of Tennessee, recused himself in this action on August 6, 1986. The action was then transferred to this Court and on March 12, 1987, this Court referred the following motions to the Honorable Kent Sandidge III, United States Magistrate: (1) motion (filed March 6, 1987) of defendant Morton Olshan to dismiss; (2) motion (filed March 6, 1987) of defendant Dominion to dismiss or alternatively for summary judgment; (3) motion (filed March 6, 1987) of defendant Michael D. Williams to dismiss; (4) motion (filed March 6, 1987) of defendant Laventhol to dismiss; (5) motion (filed March 6, 1987) of defendant Merrill Lynch to dismiss or alternatively for summary judgment; and (6) motion (filed March 6, 1987) of defendants Sandestin Beach Hotel, Inc., Sandcastle, Frank Flautt, Jr., William Jeffries Mann, Milton D. Hill, Fred V. Alias, William Alias and Robert Kamm for summary judgment.³

A hearing on the motions was held before the Magistrate on March 3, 1988. On July 1, 1988, the Magistrate filed his Report and Recommendation, in which he concluded that

(1) all of the plaintiffs' complaints against all defendants should be dismissed under Rule 12(b)(6), Fed.R.Civ.P., insofar as they were based on (a) Section 17(a) of the Securities Act of 1933, (b) the Tennessee Consumer Protection Act, and/or (c) RICO;

(2) the complaint against Merrill Lynch for vicarious liability based on the conduct of Michael Williams should be dismissed;

(3) the claims against defendant Morton Olshan for breach of contract and breach of warranty should be dismissed;

(4) the defendants' counterclaim against the plaintiffs should be dismissed; and

(5) in all other respects, the motions to dismiss should be reserved pending ninety days of discovery and the filing of an amended complaint.

So the matter stands now. This Court has jurisdiction over the controversy by virtue of 28 U.S.C. § 1331, 15 U.S.C. §§ 77v and 78aa, and 18 U.S.C. § 1964.

The Court will consider the objections to the Magistrate's Report seriatim.

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