Panna v. Firstrust Sav. Bank, Civ. No. 89-3732(SSB).
| Decision Date | 30 October 1990 |
| Docket Number | Civ. No. 89-3732(SSB). |
| Court | U.S. District Court — District of New Jersey |
| Parties | Ronald A. PANNA, et al., Plaintiffs, v. FIRSTRUST SAVINGS BANK, Neil I. Rodin, North Atlantic Investment Corporation, Rodin Realty Investment Corporation, Joseph Dennis Pasquarella & Co., Joseph Dennis Pasquarella, Rodin Management Inc., Rodin Enterprises Inc., Fifty-Three Hundred Boardwalk, Inc., Ivan J. Krouk, Regional Realty Investments I, Inc., Sanders D. Newman, Blank, Rome, Comisky & McCauley, and Laventhol & Horwath, Defendants. |
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Steven M. Coren, Kaufman, Coren & Ress, Philadelphia, Pa., for plaintiffs.
John F. Stoviak, Saul, Ewing, Remick & Saul, Philadelphia, Pa., for defendant Firstrust.
Jeffrey S. Batoff, Obermayer, Rebmann, Maxwell & Hippel, Philadelphia, Pa., for defendant Rodin Realty.
Mark Schwartz, Kenney & Kearney, Cherry Hill, N.J., for defendant Laventhol & Horwath.
William B. Hildebrand, Slimm, Dash & Goldberg, Philadelphia, Pa., for defendant Pasquarella & Co.
Edward Toole, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for defendant Joseph Dennis Pasquarella.
Justin P. Walder, Walder, Sondak, Berkeley & Brogan, P.A., Roseland, N.J., for defendant Blank, Rome.
Presently before the court is the motion of defendants Firstrust Savings Bank (Firstrust); Neil I. Rodin, North Atlantic Investment Corporation (NAIC), Rodin Realty Investment Corporation (RRIC), Rodin Management, Inc., Rodin Enterprises, Inc., and Ivan J. Krouk (collectively, the Rodin Defendants); Blank, Rome, Comiskey and McCauley (Blank, Rome); Joseph Dennis Pasquarella & Company and Joseph Dennis Pasquarella (Pasquarella); and Laventhol & Horwath (L & H) to dismiss all counts of the complaint against them. Because of the complex nature of the case,1 this court will address the defenses common to all defendants first before addressing the defenses particular to individual defendants, if necessary.
Plaintiffs are twenty-five limited partners of Oceanaire Associates, a Pennsylvania limited partnership formed in 1984 to purchase and control property in Ventnor, New Jersey known as the "Oceanaire Apartments" (the property). Plaintiffs' allegations, which the court must take as true at this stage of the pleadings, Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), are the following: On March 16, 1981, Defendant Fifty-Three Hundred Boardwalk, Inc. (Fifty-Three Hundred) purchased the property utilizing purchase money financing of $3,800,000 obtained from Defendant Firstrust.2 As Firstrust knew, Fifty-Three Hundred planned to market and sell the property as individual condominium units, with the income to be used to pay back the principal and interest on the Firstrust mortgage. Fifty-Three Hundred was to pay interest only on the mortgage for the first twelve months; at the end of this period, the entire loan balance was to be due and payable in full. Fifty-Three Hundred's efforts to market the property as condominium units, however, were unsuccessful and on March 16, 1982, it defaulted on it obligations to Firstrust. Firstrust, however, did not exercise its right to foreclose upon and take back the property at this time.
While Firstrust and Fifty-Three Hundred discussed what to do with the property, Fifty-Three Hundred operated the unsold units (approximately six out of sixty-two units were sold as condominiums) as a motel. The revenues generated from operating the property as a motel, however, were insufficient to pay the interest owed on the debt to Firstrust.
At this same time, Firstrust was in the process of converting from a federal mutual savings and loan association to a Pennsylvania stock savings bank. In order to complete that process, Firstrust was required to prepare a proxy statement and other documents disclosing in-depth financial information, including problem loans and bad debts; these documents were required to be filed with various federal and state regulatory bodies. Rather than initiate mortgage foreclosure proceedings in connection with the property owned by Fifty-Three Hundred, and thereby disclose the loan at the same time it sought to convert to a stock company, Firstrust allegedly initiated a fraudulent scheme to avoid any such disclosure.
Plaintiffs contend that Firstrust approached the Rodin Defendants and arranged for them to syndicate the property as a way to avoid disclosure and to "unload this problem property to unsuspecting investors in the form of securities." Complaint at ¶ 51. Firstrust worked with the Rodin Defendants in preparing the offering materials that were presented to the plaintiffs and approved them knowing they contained numerous material omissions and misrepresentations. Central to plaintiffs' claim is the alleged failure to disclose the earlier unsuccessful marketing of the property as condominium units by Fifty-Three Hundred.
On May 12, 1983, Defendants Fifty-Three Hundred, NAIC and Firstrust entered into an agreement pursuant to which Fifty-Three Hundred agreed to sell, and NAIC agreed to buy, the remaining condominium units of the property. This agreement was expressly conditioned on the successful syndication of the property by forming a limited partnership, selling the property to the limited partnership, and selling limited partnership interests to outside investors.
Beginning in June, 1984, a number of the defendants, including Firstrust, the Rodin Defendants, Fifty-Three Hundred, Regional Realty, and Newman, began offering and selling to the public approximately $2,000,000 of unregistered securities in the form of limited partnership interests in Oceanaire Associates, of which Regional Realty was the general partner. These unregistered securities were marketed through a 110-page "Confidential Memorandum Dated June 18, 1984" (Offering Memorandum), which was provided to each plaintiff. The Offering Memorandum was attached as an exhibit to the Complaint for the court's attention.
Other defendants were hired by the Rodin Defendants and Regional Realty to advise them on the transaction. Defendant Blank, Rome represented them in connection with the syndication, helped prepare the Offering Memorandum, and issued a tax opinion on the consequences of investing in Oceanaire Associates. Defendant Pasquarella & Company was engaged to appraise the property. Defendant L & H was engaged to review and issue an opinion concerning various financial projections concerning the limited partnership. The syndication and purchase of the property by Oceanaire Associates were conditioned upon an appraised market value exceeding the $5,800,000 purchase price to be paid by Oceanaire Associates. The appraisal, which was issued by Pasquarella & Company on June 18, 1984, and appraised the property at $5,925,000, was not attached to the Offering Memorandum and allegedly was not available.
On August 31, 1984, pursuant to the earlier agreements, NAIC and RRIC purchased the property from Fifty-Three Hundred for approximately $4,000,000 and then immediately "flipped" and sold the property to Oceanaire Associates for approximately $5,800,000. The property was sold subject to a $3,500,000 underlying first mortgage owed to Firstrust. On that same date, plaintiffs collectively purchased 20 units of limited partnership interests in Oceanaire Associates at $50,000 per unit ($70,000 per unit on an installment basis).
Plaintiffs claim that, as defendants knew would be the case at the time of the syndication, the revenues subsequently generated from the operation of the property as a motel, and the failure to sell the property as condominium units, would make it impossible to service the debt owed to Firstrust. Such a situation, they contend, made foreclosure inevitable, as the defendants knew all along.
On April 20, 1989, Firstrust commenced mortgage foreclosure proceedings in connection with the property. On August 2, 1989, Oceanaire Associates filed a Voluntary Petition in the United States Bankruptcy Court for the Eastern District of Pennsylvania, for reorganization pursuant to Chapter 11 of Title 11 of the U.S.Code, which petition is pending. Plaintiffs filed this suit on September 7, 1989. Pursuant to stipulation entered into by Firstrust, Oceanaire Associates and some of the plaintiffs, and approved by the Bankruptcy Court, the validity of Firstrust's mortgage is to be determined by the court (Order of January 19, 1990). The foreclosure action and this securities action have been consolidated for all purposes before this court (Order of May 2, 1990). Discovery has been stayed and Firstrust's motion for summary judgment on its foreclosure action has been dismissed without prejudice to refiling pending the outcome of this motion to dismiss (Order of August 23, 1990).
Based on the preceding alleged facts, plaintiffs complain that defendants made numerous omissions and misrepresentations of material facts to the plaintiffs in connection with the sale of limited partnership interests in Oceanaire Associates. For example, plaintiffs allege defendants concealed, among other things, that Firstrust was the motivating force behind the syndication; that Fifty-Three Hundred failed in its attempt to sell the property as individual condominium units; that Fifty-Three Hundred had defaulted on its obligations to Firstrust as a result; that revenues generated by the property as a motel were insufficient to pay the interest on the debt owed to Firstrust; that the property was purchased from Fifty-Three Hundred for $4,000,000 and then immediately sold to the partnership for $5,800,000; that the future foreclosure was inevitable and unavoidable and that, therefore, plaintiffs' securities were essentially worthless; and that the partnership would build no equity and provide no future profits nor tax benefits to the limited partners.
The court will now turn to the arguments to dismiss the specific...
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