Rohland v. SYN-FUEL ASSOCIATES-1982 LTD. PART.
| Decision Date | 03 March 1995 |
| Docket Number | 89 Civ. 8593 (SWK).,No. 89 Civ. 3325 (SWK),89 Civ. 3325 (SWK) |
| Citation | 879 F. Supp. 322 |
| Parties | Larry K. ROHLAND and Cheryl A. Rohland, et al., Plaintiffs, v. SYN-FUEL ASSOCIATES — 1982 LIMITED PARTNERSHIP, et al., Defendants. Mark McCORMICK and Susan McCormick, Plaintiffs, v. SYN-FUEL ASSOCIATES — 1982 LIMITED PARTNERSHIP, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Biegel Schy Lasky Rifkind Goldberg & Fertik by Daniel J. Becka, Peter Ordower, Marilyn Neiman, Chicago, IL, for plaintiffs.
Satetsky Katz & Dranoff by Barry G. Saretsky, Marsha Weinstein, New York City, for defendants Joan Lucks Feinstein, Harold Freidman, Lawrence Mandelker, Howard Mann, Eugene E. Murphy, Pearl Polifka, Sanford Saideman, Steven Steingut, Jerome Tarnoff and Charles S. Webb, III.
Volk, Frankovitch, Anetakis, Reich, Robertson & Hellerstedt by Sidney R. Finkel, Pittsburgh, PA, for defendants Philip Baskin, James J. Flaherty and Raymond Baum.
Rivkin, Radler & Kremer by Janice J. DiGennaro, Uniondale, NY, for defendant Michael Zukerman.
Edward W. Zawacki, New York City, for defendants Keith R. Gaskell, Martin Kaye, Chronometer Management & Consultants Inc., Syn-Fuel Associates, Limited Partnership, Syn-Fuel Associates — 1982, Limited Partnership and Peat Oil and Gas Associates, Limited Partnership.
In these consolidated actions for securities fraud, violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. ("RICO") and related state claims, defendants1 move, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, to dismiss the complaints. In the alternative, defendants move for summary judgment pursuant to Federal Rule of Civil Procedure 56. For the reasons set forth below, defendants' motion to dismiss is granted in part and denied in part.
In 1981 and 1982, plaintiffs, citizens of eight different states, invested in three limited partnerships: (1) Syn-Fuel Associates — 1982, Limited Partnership ("Syn-Fuel 1982"); (2) Syn-Fuel, Limited Partnership ("Syn-Fuel"); and (3) Peat Oil and Gas Associates, Limited Partnership ("POGA") (collectively, the "partnerships"). Each plaintiff invested between $80,750 and $646,000 in the partnerships in an attempt to attain certain economic benefits, including favorable tax consequences.
Defendant Arthur Goldman served as the general partner of both Syn-Fuel 1982 and POGA, while defendant Martin Kaye served as the general partner of Syn-Fuel. The partnerships were created to pursue three businesses: (1) owning, licensing or otherwise exploiting technology related to the production of synthetic fuel from cellulosic materials such as peat and wood; (2) developing a pilot plant to test the commercial feasibility of the experimental process for converting cellulosic materials into synthetic fuel; and (3) oil and gas exploration and development. The patent at issue changed hands several times through various licensing agreements, ultimately vesting with defendant Sci-Teck Licensing Corp., which subsequently licensed the technology to the partnerships. Each partnership received rights to market and exploit the technology in specified geographic regions.
As part of their investment strategy, the partnerships sold the rights to exploit the synthetic fuel technology to certain third parties. For example, the partnerships granted to defendant Fuel-Teck Research and Development, Inc. non-exclusive rights to exploit the technology in exchange for royalty fees derived from sublicensing and sales. Additionally, the partnerships entered into an agreement with defendant Fuel-Teck Oil and Gas, Inc. ("O & G") under which O & G would direct all oil and gas investment, exploration and development operations.
The partnerships retained the law firm of Baskin & Sears, P.C. ("Baskin & Sears") to provide advice with respect to the tax consequences of the partnerships' activities.2 Among its services, Baskin & Sears prepared a private placement memorandum for each of the three partnerships (the "Memoranda") which included a description of each partnership and a tax opinion letter (the "Tax Opinion Letters").3
The Memoranda contained stern warnings to prospective investors about the partnerships' high degree of risk and potential for loss. The first page of the POGA Memorandum, for example, states in bold, capital letters: "This offering involves a high degree of risk (See `Risk Factors')." See POGA Memorandum, annexed to the Notice of Motion as Exh. "E," at 1. The POGA Memorandum also provides:
The investment described in this Memorandum involves a high degree of risk (see "Risk Factors"). Purchase of Units should be considered only by persons who understand, or who have been advised with respect to, the long-term nature of, the tax consequences of, and risk factors associated with, this investment and can afford a total loss of their investment.
Id. at 3. The POGA Memorandum cautions further:
The estimates contained in this Memorandum are prepared on the basis of assumptions and hypotheses which are believed to be reasonable but which are subject to substantial risks and contingencies covering an extended period of time. No assurance can be given that any of the potential benefits described in this Memorandum will prove to be available.
The POGA Memorandum also contains a section entitled "Risk Factors," which sets out numerous risks associated with the partnerships, including: (1) lack of experience in acquiring, developing or exploring oil and gas properties; (2) inadequate funding; (3) general risks associated with mineral property operation; (4) the speculative nature of oil and gas exploration; (5) potential equipment shortages; (6) lack of insurance; (7) potential property title defects; (8) technological viability; (9) need for adequate land; (10) environmental hazards; (11) uncertain patent protection; (12) infringement liability; (13) limitations on licensing technology; (14) conflicts of interest between the investors and the general partners; (15) lack of arms-length negotiation of contracts and licensing fees; (16) uncertainty as to the tax classification of the partnerships; and (17) tax problems related to the potential impermissibility of certain deductions. See id. at 20-32.
The POGA Memorandum details the federal income tax consequences of investing in the partnerships. In addition to advising prospective investors about tax risks, such as the difficulty of anticipating rulings by the Internal Revenue Service (the "Service") and the United States Tax Court (the "Tax Court"), the POGA Memorandum cautions, in capital letters, that "a prospective investor should obtain professional guidance from his own tax advisor in evaluating the tax risks involved." Id. at 50.
The Tax Opinion Letters also set forth the possible tax treatments the partnerships may receive by the Service. Specifically, the POGA Tax Opinion Letter states that "from a federal tax standpoint there are substantial and material risks associated with a limited partner's investment in the partnership." See POGA Tax Opinion Letter, annexed to the Notice of Motion as Exh. "E," at B-12. The POGA Tax Opinion Letter also advises prospective investors that the Service may determine that the partnerships were not engaged in a "business for profit" and therefore are not entitled to tax deductions pursuant to Section 183 of the Internal Revenue Code.4 Id. at B-38. With respect to this issue, the POGA Tax Opinion Letter concludes:
The determination of whether an activity is engaged in for profit is based on all the facts and circumstances and no one factor is determinative. Although the General Partner anticipates that the operations of the Partnership will constitute a profitmotivated activity, and therefore that Section 183 should not apply, no assurance can be given that the Service would not contend that it does apply and would not be successful in its contention.
Id. at B-39.
Despite the risks associated with investing in the partnerships and the warnings set forth in the Memoranda and Tax Opinion Letters, plaintiffs decided to invest in the partnerships. In connection with the purchase of shares in the partnerships, each investor completed a "suitability questionnaire." By signing this document, the investors affirmed that they possessed "such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks" of the investment. See Suitability Questionnaire, annexed to the POGA Memorandum at C-2. Plaintiffs acknowledged further that they were "willing and able to bear the economic risk of the investment," and that their financial commitment would be "reasonable in relation to ... net worth." Id.
Between 1985 and 1986, the Service began an investigation of the partnerships. Subsequently, in October 1988, the Tax Court ruled that "the partnerships' ... activity was not a trade or business, lacked economic substance, and was not within the contemplation of Congress in enacting section 174."5 Smith v. Commissioner, 91 T.C. 733, 765, 1988 WL 100255 (1988) ("Smith"). Accordingly, the court denied the tax deductions claimed by the limited partners, see id., thereby triggering the present litigation.
On August 18, 1989, plaintiffs in Rohland v. Syn-Fuel Associates — 1982, Limited Partnership, 89 Civ. 3325 (the "Rohland action"), filed their amended complaint, alleging that defendants had "embarked on a scheme to defraud the plaintiffs and other members of the investing public."6 Amended Complaint at ¶ 6. Specifically, plaintiffs allege that defendants induced them into investing in the partnerships through a series of material misrepresentations including, for example, statements regarding: (1) the expected rate...
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