Sable v. Southmark/Envicon Capital Corp.
| Decision Date | 26 April 1993 |
| Docket Number | No. 90 Civ. 8047 (MBM).,90 Civ. 8047 (MBM). |
| Citation | 819 F. Supp. 324 |
| Parties | Dr. Robert SABLE, et al., Plaintiffs, v. SOUTHMARK/ENVICON CAPITAL CORP., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Joseph J. Tabacco, Jr., Earle Giovanniello, Stamell, Tabacco & Schager, New York City, for plaintiff.
Andrew J. Gershon, Eric Bregman, Sive Paget & Riesel, New York City, for defendants Southmark/Envicon Capital Corp., Equity Associates, Ltd. and Southmark Partners One, Ltd.
Andrew J. Levander, Shereff, Friedman, Hoffman & Goodman, New York City, Leighton Aiken, Dana M. Campbell, Owens, Clary & Aiken, L.L.P., Dallas, TX, for defendants Vista Associates, Ltd., Michael S. McGee and Eugene W. Rosen.
Edward Brodsky, Howard N. Spiegler, Proskauer Rose Goetz & Mendelsohn, New York City, for defendants Gene E. Phillips, William S. Friedman and William S. Friedman, P.C.
Sharon A. McCloskey, D'Amato & Lynch, New York City, for defendant Trotter Smith & Jacobs, P.C.
George B. Schwab, Mayer, Brown & Platt, New York City, Robert J. Kriss, Mayer, Brown & Platt, Chicago, IL, for defendant Grant Thornton.
Jeffrey R. Mann, Rubin, Baum, Levin, Constant & Friedman, New York City.
W. Kelly Stewart, Gardere & Wynne, Dallas, TX, for defendants Rosedale/Palm Associates, Ltd., San-Da-Mor Associates, Ltd., Merchandise Mart Associates, Ltd. and Towne Parc Associates, Ltd.
Edward Rubin, New York City, for defendant Lawrence Bernstein.
Plaintiffs Robert Sable, et al. sue defendants Southmark/Envicon Capital Corp., et al. under RICO and state law. Plaintiffs allege that defendants fraudulently induced them to invest in nine limited partnerships in the mid-1980s through misrepresentations and omissions in the private placement memoranda (the "PPMs") for the partnerships.
In 1990 plaintiffs filed their first complaint in this case. In 1991 plaintiffs filed an amended complaint. On June 4, 1992 — after an April 7, 1992 conference at which I allowed plaintiffs to amend again but cautioned plaintiffs that disclosures in the PPMs flatly contradicted many of the non-disclosure allegations in the amended pleading — plaintiffs filed their third complaint: the Second Amended Class Action and Verified Derivative Complaint, a relatively svelte 29-page highlight of the more than 500 pages of allegations that had not survived until then. Defendants move to dismiss plaintiff's complaint for failure to state a claim upon which relief may be granted, pursuant to Fed. R.Civ.P. 12(b)(6), and for failure to plead fraud with particularity, pursuant to Fed. R.Civ.P. 9(b). Also, defendants move for sanctions. For the reasons stated below, defendants' motions are granted.
Beginning in the 1970s, Southmark Corporation and its affiliates sponsored, syndicated, and managed hundreds of real estate limited partnerships, including the nine limited partnerships at issue here. (Compl. ¶¶ 20, 22-23)1 Defendants all functioned under the umbrella of Southmark Corporation, which filed for protection under the Federal Bankruptcy laws on July 14, 1989. (Compl. ¶ 22)
The limited partnerships offered plaintiffs income tax and other benefits. Between 1983 and 1986, plaintiffs as a class invested more than $50 million in the partnerships, as follows:
Date of Offering
Partnership State of Partnership Size of Offering Property Type
Club Assoc. Ltd. July 1, 1983 5.7 million Apartment Complex
("Club") Texas
Rosedale/Palms Assoc. September 1, 1983 5.25 million Office Building
Ltd. ("Rosedale/Palms") South Carolina Apartment Complex
San-Da-Mor Assoc. November 25, 1983 8.4 million Office Building
Ltd. ("San-Da-Mor") Texas Apartment Complex
Williamsburg Assoc. October 1, 1984 6.1 million Resort Hotel
Ltd. ("Williamsburg") Virginia
Sanlando Assoc. Ltd. June 15, 1985 4.5 million Office Building
("Sanlando") Florida
Merchandise Mart Assoc. September 1, 1985 7.65 million Merchandise/Mart
Ltd. ("Merchandise Mart") Colorado and Hotel
Towne Parc Assoc., Ltd. September 15, 1985 2.35 million Apartment Complex
("Towne Parc") Texas
Honolulu Storage, Ltd. October 15, 1985 6.1 million Personal Storage
("Honolulu") Hawaii Warehouse Facility
Vista Assoc. Ltd. June 1, 1986 5.75 million Health Care Facility
("Vista") Texas
(Compl. ¶¶ 23, 28)
Plaintiffs' claims, brought on their behalf, on behalf of class members, and derivatively, are for violations of RICO, 18 U.S.C. §§ 1962(a), (c), (d), and various pendent state claims for common law fraud, breach of fiduciary duty, waste, and mismanagement, under the laws of Texas, South Carolina, Virginia, Florida, Colorado, and Hawaii. (Compl. ¶¶ 89-93) Plaintiffs claim that defendants, through the PPMs,2 fraudulently induced plaintiffs to invest in the nine partnerships listed above. (Compl. ¶¶ 22-25)
Defendants move to dismiss plaintiffs' claims for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6), and for failure to plead fraud with particularity, pursuant to Fed. R.Civ.P. 9(b). Defendants Southmark/Envicon Capital Corp., Equity Associates, Ltd., Gene E. Phillips, William S. Friedman, John W. Galston, Eugene W. Rosen, Michael S. McGee, and William S. Friedman, P.C. (the "Moving Defendants") have joined in one motion to dismiss. Each of defendants Grant Thornton, Trotter Smith & Jacobs, and Lawrence Bernstein (the "Professional Defendants") has brought a separate motion to dismiss. One of the limited partnerships — Vista Associates, Ltd. — brought a separate motion to dismiss, as well as a motion for summary judgment. The other limited partnerships joined in another motion to dismiss.
"The court's function on a Rule 12(b)(6) motion is not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Festa v. Local 3 Int'l Bhd. of Elec. Workers, 905 F.2d 35, 37 (2d Cir.1990). Thus, a motion to dismiss must be denied "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)); Morales v. New York State Dep't of Corrections, 842 F.2d 27, 30 (2d Cir.1988).
In deciding a motion to dismiss, the court must accept the plaintiff's allegations of fact as true, together with such reasonable inferences as may be drawn in his favor. Papasan v. Allain, 478 U.S. 265, 283, 106 S.Ct. 2932, 2943, 92 L.Ed.2d 209 (1986). Nevertheless, the complaint must set forth enough information to suggest that relief would be based on some recognized legal theory. Telectronics Proprietary, Ltd. v. Medtronic, Inc., 687 F.Supp. 832, 836 (S.D.N.Y.1988). "The District Court has no obligation to create, unaided by plaintiff, new legal theories to support a complaint." District of Columbia v. Air Florida, Inc., 750 F.2d 1077, 1081-82 (D.C.Cir.1984).
In addition, in deciding a motion to dismiss, a court in the Second Circuit may consider documents which form the basis of allegations of fraud if the documents are "integral to the complaint." I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir.1991) (); see also Kramer v. Time Warner Inc., 937 F.2d 767 (2d Cir.1991); Adler v. Berg Harmon Assocs., 816 F.Supp. 919, 922 n. 3 (S.D.N.Y. March 29, 1993); Ferber v. Travelers Corp., 785 F.Supp. 1101, 1103-04 n. 6 (D.Conn.1991); United States v. District Council, 778 F.Supp. 738, 749 n. 3 (S.D.N.Y. 1991). The parties have submitted the PPMs, each with an appended tax opinion prepared by Trotter, Smith & Jacobs ("Trotter"). (See, e.g., Burns Aff. Ex. B at A00375) Those documents are integral to plaintiffs' fraud claims — especially those claims relating to the "true market value" of certain partnership properties. (Compl. ¶ 25) Accordingly, I have considered the PPMs and the Trotter tax opinions in deciding these motions.
O'Brien v. Price Waterhouse, 740 F.Supp. 276, 279 (S.D.N.Y.1990) (citing Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir.1990)). The extent to which the PPMs and the tax opinions satisfy Rule 9(b) is discussed below.
The limited partnerships at issue here were typical of the genre known as "tax shelters." The partnerships were structured...
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