Nielsen v. Professional Financial Management, Ltd.

• Decision Date: 15 April 1987
• Docket Number: 4-86-570,4-85-1643,4-86-571 and 4-86-672.,4-86-752,Civ. No. 4-85-1600,4-85-1642
• Citation: 682 F. Supp. 429
• Parties: W. Kent NIELSEN and Patricia Nielsen, et al., v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al. Franklin J. BURNS, v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al. Franklin J. BURNS and Marian R. Burns, v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al. Paul A. BENSON, et al., v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al. Charles W. BETZ, et al., v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al.
• Court: U.S. District Court — District of Minnesota

682 F. Supp. 429

W. Kent NIELSEN and Patricia Nielsen, et al., v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al.

Franklin J. BURNS, v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al.

Franklin J. BURNS and Marian R. Burns, v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al.

Paul A. BENSON, et al., v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al.

Charles W. BETZ, et al., v. PROFESSIONAL FINANCIAL MANAGEMENT, LTD., et al.

Civ. Nos. 4-85-1600, 4-85-1642, 4-85-1643, 4-86-570, 4-86-752, 4-86-571 and 4-86-672.

United States District Court, D. Minnesota, Fourth Division.

April 15, 1987.

COPYRIGHT MATERIAL OMITTED

Richard I. Diamond, and Jeff Ross, Estes Parsinen & Levy, Minneapolis, Minn., for plaintiffs W. Kent and Patricia Nielsen, et al., Franklin J. Burns, and Franklin J. and Marian R. Burns.

William P. Luther, Luther, Ballenthin & Carruthers, and Alonzo B. Seran, Olson, Gunn & Seran, Minneapolis, Minn., for plaintiffs Paul A. Benson, et al., and Charles W. Betz, et al.

Thomas J. Shroyer, and Mitchell H. Cox, Moss & Barnett, Minneapolis, Minn., for defendants Professional Financial Management, Ltd., J. Kmetz & Associates, Joseph Louis Kmetz, and James Erwin Kmetz.

Donald F. Hunter, Gislason, Dosland, Hunter & Malecki, Minneapolis, Minn., for defendants Olstead & Associates, Inc., and Arthur Walter Olstead.

Frank A. Dvorak, Mackall, Crounse & Moore, Minneapolis, Minn., for defendants Preeshl, Helstad, Shoup & Co., Robert C. Shoup, Michael J. Bruder, Mary K. Glubka, and Earl Engelson.

David F. Herr, and Charles A. Hoffman, Maslon Edelman Borman & Brand, Minneapolis, Minn., for defendants Alfred Sannerud and A.M. Sannerud & Associates, Inc.¹

MEMORANDUM OPINION AND ORDER

DIANA E. MURPHY, District Judge.

Plaintiffs brought these seven actions alleging that defendants fraudulently organized and promoted certain tax shelters. The complaint in each action asserts 18 causes of action, relying on the Securities Act of 1933, 15 U.S.C. § 77a et seq.; the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.; the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq.; the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968; the Minnesota Securities Act, Minn. Stat. § 80A.01 et seq.; other Minnesota statutory provisions; and state common law. Plaintiffs seek damages and allege jurisdiction pursuant to the federal statutes invoked in their claims, 28 U.S.C. § 1331, and pendent jurisdiction. Now before the court are motions for consolidation and "relation back" brought by a number of plaintiffs and motions to dismiss under Fed.R. Civ.P. 12(b)(6) brought by many of the defendants.

Background

These actions share a number of common elements. In each action, plaintiffs are Minnesota residents who allegedly invested money by entering into lease agreements with various defendants, believing that they would become entitled to substantial tax benefits and a return on their investment. Instead, plaintiffs allege, the property leased had minimal value and the Internal Revenue Service (IRS) may soon bring tax deficiency actions against plaintiffs. Defendants can be classified into two general categories: local defendants who allegedly promoted the shelter plans in Minnesota, who are parties in each action, and national defendants who allegedly promoted the plans throughout the country, who are parties only in actions related to the tax shelter plans that they allegedly organized and promoted. Four of the actions concern the "Energy Brain" plan, while three concern the "Kiddie Klassics" plan.²

A. The "Energy Brain" Plan

On November 29, 1985, plaintiffs W. Kent and Patricia Nielsen filed a suit asserting causes of action arising from their investment of $158,443.84 related to energy conservation equipment called Energy Brain units. Civ. X-XX-XXXX. The Nielsens allegedly leased this equipment from defendant Saxon Energy Corp. (Saxon)³ on December 1, 1982, paying $79,000 at that time and the remaining balance on June 15, 1983. In addition, the Nielsens allegedly entered into service agreements with defendants Management Support Services (MSS) and ALH Energy Management Corporation (ALH).⁴ Under the agreements, these defendants were to locate an enduser for the equipment.

On the basis of appraisals provided by Saxon,⁵ plaintiffs took substantial credits and deductions on their state and federal income tax returns. Plaintiffs believe that defendant Saxon and other defendants misrepresented the actual value of the equipment.⁶ This misrepresentation, according to plaintiffs, prevented them from realizing a material return on their investment and may lead to the disallowance of the tax credits and deductions taken on that basis.

Plaintiffs also assert claims against a number of defendants located in Minnesota. Plaintiffs allege that defendant Professional Financial Management, Ltd. (PFM), a Minnesota corporation with its principal place of business in Minneapolis, was a "primary promoter and marketer of the Energy Brain scheme in Minnesota." According to plaintiffs, PFM advised them to invest in Energy Brain and serviced their account. Defendant J. Kmetz & Associates, a partnership of certified public accountants, was allegedly closely connected to PFM and prepared financial documents for investors in Energy Brain.⁷ Defendant Olstead & Associates is an insurance agency that allegedly promoted Energy Brain. Defendants James Erwin Kmetz and Joseph Louis Kmetz are partners in J. Kmetz & Associates and are shareholders, directors, and officers of PFM. They allegedly made misrepresentations to plaintiffs about Energy Brain to encourage their investment. Defendant Cynthia Kmetz was an employee of PFM who allegedly promoted Energy Brain to plaintiffs. Finally, defendant Arthur Walter Olstead, a shareholder, director, and officer of PFM and the managing partner of Olstead & Associates, also allegedly promoted Energy Brain.

On December 12, 1985, plaintiff Franklin J. Burns filed an action asserting identical claims as the Nielsens against the same defendants. Civ. X-XX-XXXX. Burns alleged that he invested $15,191.62 in Energy Brain, paying $5,550 on December 29, 1982 and the remainder on June 15, 1983. The final two Energy Brain suits were filed on June 30, 1986 by Paul A. Benson and approximately 30 other plaintiffs who allege that they invested in Energy Brain "beginning in December, 1982 and continuing up to the present." Civ. 4-86-570 and 4-86-752.⁸ The complaint filed in Benson asserts the same 18 causes of action against virtually the same defendants.

In an order dated September 26, 1986, United States Magistrate Floyd E. Boline granted the motion of the Nielsen plaintiffs to amend their complaint.⁹ The Nielsen plaintiffs subsequently amended their complaint on September 29, 1986 to add 32 other investors as plaintiffs (the "September plaintiffs") and 8 other defendants. The plaintiffs also allegedly entered into lease agreements in December 1982. The new defendants included two accounting firms, defendants Preeshl, Helstad, Shoup & Co. (PHS), and A.M. Sannerud & Associates, Inc., as well as a number of accountants who practiced at those firms.¹⁰

B. The "Kiddie Klassics" Plan

On December 12, 1985, plaintiffs Franklin J. and Marian R. Burns filed an action asserting the same 18 causes of action as those in the Energy Brain cases, but related to their investment in a different tax shelter plan. Civ. No. 4-85-1643. Plaintiffs allege that on December 30, 1981, they entered into a lease agreement for "Kiddie Klassic" master recordings of children's songs, making an initial payment on that date and a subsequent payment on June 2, 1982. Although plaintiffs expected to receive a return on their investment and substantial tax benefits, they allege that they have not received a material return and they may be penalized for the tax credits and deductions they have taken. Plaintiffs sued all of the Minnesota defendants originally joined in the Energy Brain cases and a different group of national defendants who allegedly organized or promoted the Kiddie Klassics plan in some way. These defendants include Structured Shelters Inc., Robert Iles, Monica Iles, Oxford Production Company, Phyllis Capp, Aim Record Distribution, Inc., Louis Merestein, Joseph Abend, Western Educational Systems Technology, Harold A. Landers, MPA Associates, Inc., MTA Associates, Inc., Michael L. Duncan, Al Landry, and American Family Entertainment Club.

On June 30, 1986, Charles W. Betz and approximately 25 other plaintiffs filed two suits virtually identical to the Burns Kiddie Klassics action. Civ. 4-86-571 and 4-86-672.¹¹ The Betz plaintiffs allege that they "invested substantial amounts of money in Kiddie Klassics from December of 1981 to the present."

C. The Motions Before the Court

The Nielsen plaintiffs have moved to consolidate their case with the Burns and Benson Energy Brain actions for trial or, alternatively, to amend their complaint to include those plaintiffs and to "relate back" the date of the amendment to November 29, 1985, the date of their original filing. In addition, the Nielsen plaintiffs move to "relate back" the date of the amendment adding the 32 "September plaintiffs" to November 29, 1985. Plaintiffs in Benson move to consolidate their action with the Nielsen and Burns Energy Brain actions, or, alternatively, to intervene and be added as additional plaintiffs in Nielsen. The Betz plaintiffs move to consolidate their action with the Burns Kiddie Klassics action, or, alternatively, to intervene and be added as plaintiffs in Burns.¹² Plaintiffs seek to prevent their claims from being time barred.

PFM and a number of other defendants moved to dismiss both the Benson and Betz actions, largely on statute of limitations grounds. Plaintiffs Nielsen and Burns sought to intervene in the consideration of those motions. The court denied the motion to intervene and ordered that all motions to dismiss based on...