Penturelli v. Spector, Cohen, Gadon & Rosen, Attorneys at Law, 2
| Decision Date | 18 December 1985 |
| Docket Number | No. 2,I,No. 85-1129,2,85-1129 |
| Parties | , Fed. Sec. L. Rep. P 92,403, RICO Bus.Disp.Guide 6143 Bernardo J. PENTURELLI, Appellant, v. SPECTOR, COHEN, GADON & ROSEN, ATTORNEYS AT LAW, P.C.; Edward Cohen; Betsy Cohen; Stephen Sokolic; Richard J. Abt; Herr, Nicholas & Co.; Ashley Mining Co., Inc.; Balance Security Programs, Inc.; Alan T. Schiffman; Alan T. Schiffman & Co., P.C.; Robert R. Herr; George S. Mack; Steven F. Gadon; Donald R. Sarp; Donald R. Sarp & Company; Bituminous Coals, Inc.; George D. Visnic; Fetterolf Mining, Inc., Fetterolf Group, Inc.; Estate of Myron F. Fetterolf, Deceased; Louis T. Flori; Anthony A. Dalessandro; Mark Miningnc.; Ely & French Associates, Inc.; Richard C. Ely. |
| Court | U.S. Court of Appeals — Third Circuit |
Henry H. Janssen (Argued), Scott W. Morgan, Rawle & Henderson, Philadelphia, Pa., for appellant.
Patrick T. Ryan (Argued), Peggy L. Snodgrass, Drinker Biddle & Reath, Philadelphia, Pa., for appellees Richard C. Ely and Ely & French Associates, Inc.
Allan D. Windt, Spector Cohen Gadon & Rosen, Philadelphia, Pa., for appellees Spector, Cohen, Gadon & Rosen, Edward Cohen, Betsy Cohen, Stephen Sokolic, Richard J. Abt, Balance Security Programs, Inc., George Mack and Steven Gadon.
Eugene J. Maginnis, Jr., Cozen, Begier & O'Connor, Philadelphia, Pa., for appellees Alan T. Schiffman and Alan T. Schiffman & Co., P.C.
William F. Kiniry, Jr., Harvey, Pennington, Herting and Renneisen, Ltd., Philadelphia, Pa., for appellees Herr, Nicholas & Co. and Robert R. Herr.
David E. Tungate, Eckert, Seamans, Cherin & Mellott, Pittsburgh, Pa., for appellees Bituminous Coals, Inc., Fetterolf Mining, Inc., Fetterolf Group, Inc., Estate of Myron F. Fetterolf, Louis T. Flori, Anthony A. Dalessandro, and Mark Mining No. 2, Inc.
Thomas J. Ziomek, Ellen K. Glessner, White and Williams, Philadelphia, Pa., for appellees Donald R. Sarp and Donald R. Sarp & Co.
Before GIBBONS, SLOVITER and STAPLETON, Circuit Judges.
Appellant Bernardo J. Penturelli purchased 28 fractional undivided working interests in the Addison Development, a coal mining operation in Pennsylvania. Claiming to have been defrauded in the sale, Penturelli brought this suit against twenty-five defendants, alleging causes of action under the federal securities law, the Racketeer Influenced and Corrupt Organization Act (RICO), and various state laws. The defendants include a law firm involved in the Addison Development, Spector, Cohen, Gadon & Rosen; plaintiff's accountants, Herr, Nicholas & Co.; the sublessor and developer, Ashley Mining Co., Inc.; the operating manager, Donald R. Sarp; the mining service contractors, including Bituminous Coals, Inc., and others connected with the investment opportunity. 1 The district court dismissed the action for failure to state a claim under either RICO or the securities laws and declined to exercise jurisdiction over the pendent claims. Penturelli v. Spector, Cohen, Gadon & Rosen, P.C., 603 F.Supp. 262 (E.D.Pa.1985). 2
The basis for the court's dismissal of the RICO count was the absence of any allegations of "an injury different in kind from that occurring as a result of the predicate acts themselves" or of "defendants' prior criminal conviction on one of the predicate acts." Id. at 267. On appeal all parties now agree that the district court's dismissal of the RICO claim must be reversed because in Sedima, S.P.R.L. v. Imrex Company, Inc., --- U.S. ----, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court squarely held that a RICO claim "is not deficient for failure to allege either an injury separate from the financial loss stemming from the alleged acts of mail and wire fraud, or prior convictions of the defendants." Id. at 3287. See also Zap v. Frankel, 770 F.2d 24 (3d Cir.1985). Therefore, the only issue presented for decision is whether the "fractional undivided interest" purchased by Penturelli is a security within the meaning of the federal securities laws.
In reviewing the district court's dismissal of this action, we take the allegations of Penturelli's complaint, summarized below, as true.
In 1978, defendant Herr, Nicholas, Penturelli's accountant, encouraged him to invest in the Addison Development, an offering of a limited number of sublease rights in coal from specific seams in Addison Township, Somerset County, Pennsylvania. Thereafter, Penturelli was advised by defendant Spector, Cohen, Gadon & Rosen that investment in the Addison Development would result in significant tax benefits. Penturelli was given the Preliminary Private Placement Memorandum (hereafter Preliminary Memo), prepared by defendant Donald R. Sarp, the "Operating Manager" of the Addison Development, which described the investment opportunity.
The Preliminary Memo 3 offered to sell sixty fractional undivided working interests in the Addison Development for $67,500 per share to a total of no more than thirty-four persons (subscribers). The coal-bearing land had been acquired in 1978 for less than $100,000 by Bituminous Coals, Inc., a defendant, and ownership had devolved to the Ashley Mining Company, Inc. (AMCI), also a defendant, which had obtained a sublease through a series of transactions. Subscribers were required to sublease the land from AMCI by a document which is described in the Preliminary Memo as "... in actuality, a series of separate agreements with each co-owner conveying to each co-owner a fractional undivided working interest in the Coal Property." App. at 61a. For the sublease, which was for a ten (10) year term with automatic annual renewal until all mineable coal was produced, AMCI received a non-refundable minimum annual royalty of $300,000 in cash and $550,000 in non-recourse promissory notes. Each subscriber was also required to execute simultaneously (1) a development contract with AMCI, (2) a mining services contract with Bituminous Coals, (3) a coal sales agreement with defendant Fetterolf Mining, Inc., and (4) a joint operating agreement with Donald R. Sarp, the accountant for Bituminous Coals, designating him as the Operating Manager.
The Preliminary Memo explained that the participants would have certain rights over the conduct of the mining and marketing operations of the development. These rights and the percentage of interests needed to exercise them are set forth in the Joint Operating Agreement and include the following:
(1) The right to call a meeting of co-owners (25% of interests);
(2) The right to terminate the Joint Operating Agreement (50% of interests);
(3) The right to object to the Operating Manager's exercise of his specifically enumerated powers (66 2/3% of interests);
(4) The right to advise the Operating Manager concerning ministerial conduct and to audit his accounting (66 2/3% of interests) (5) The right to give or withhold consent to major management decisions, including the borrowing of money, the execution of notes or the commencement of any operations in excess of the minimum needs of the business (50% of interests);
(6) The right to reserve a proportionate share of coal to sell for his/her own account (each co-owner).
In addition to the rights granted by the Joint Operating Agreement, the investors had the right to terminate the development contract with AMCI on thirty-days notice (50% of interests), and to terminate the mining services contract with Bituminous Coals on ninety-days notice (50% of interests). Finally, the Preliminary Memo makes it clear that each investor was expected to assume unlimited liability.
In December 1978, Penturelli purchased twenty-eight of the sixty interests, or 47%, for $560,000 in cash and $1,300,000 in non-recourse notes. He signed all the requisite agreements. According to Penturelli, the defendants subsequently diverted his funds to mine worthless land in Maryland, and his investment is now worthless. In addition, the tax benefits that supposedly were to accompany the investment never materialized and Penturelli claims that he has had to pay over $1,000,000 in additional federal taxes, penalties, and interest because of the investment.
Penturelli alleges that the defendants made numerous fraudulent misrepresentations and omissions in connection with the sale of shares in the Addison Development. Thus, for example, Penturelli claims that the defendants knew that mining the Addison Development was not commercially feasible, that they intended from the beginning to divert his investment to the Maryland land, that the defendants knew the purported tax benefits were unlikely to materialize, and that the defendants never intended to return his investment if the development was not completed. Penturelli alleges that these misrepresentations and omissions are the basis for his state law claims and that they constituted violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and SEC rule 10b-5, 17 C.F.R. Sec. 240.10b-5, as well as section 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a). Penturelli further claims that the defendants are "controlling persons" within the meaning of sections 20(a) and (b) of the 1934 Act, 15 U.S.C. Sec. 78t(a) and (b).
The district court granted defendants' motion to dismiss the claim based on the Federal Securities Acts on the ground that the interests purchased by plaintiff did not constitute a "security" within the meaning of these acts. The district court acknowledged that "fractional, undivided interest[s] in oil, gas or other mineral rights" are specifically included in the definition of a "security" found in the Securities Act of 1933, 15 U.S.C. Sec. 77b(1), 4 and that the 1934 Federal Securities Act, 15 U.S.C. Sec. 78c(a)(10), defines security to include "Any ... certificate of interest or participation in ... any mineral royalty or lease...." See 603 F.Supp. at 265 n. 1. However, the court interpreted the...
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