Silverman v. Niswonger

• Citation: 761 F. Supp. 464
• Decision Date: 01 March 1991
• Docket Number: No. 89-73095.,89-73095.
• Parties: Sidney SILVERMAN, Lee Silverman, Barry P. August, Samuel August, and Judi Ellias, Plaintiffs, v. Thomas R. NISWONGER, George F. Field, Jr., Field Corporation, a Michigan corporation, Your Attic, Inc., a Michigan corporation, Your Attic Properties, Inc., a Michigan corporation, Your Attic Management, Inc., a Michigan corporation, Your Attic of Clinton Township, a Michigan limited partnership, and Your Attic of Tampa, a Florida limited partnership, Jointly and Severally, Defendants.
• Court: U.S. District Court — Western District of Michigan

761 F. Supp. 464

Sidney SILVERMAN, Lee Silverman, Barry P. August, Samuel August, and Judi Ellias, Plaintiffs, v. Thomas R. NISWONGER, George F. Field, Jr., Field Corporation, a Michigan corporation, Your Attic, Inc., a Michigan corporation, Your Attic Properties, Inc., a Michigan corporation, Your Attic Management, Inc., a Michigan corporation, Your Attic of Clinton Township, a Michigan limited partnership, and Your Attic of Tampa, a Florida limited partnership, Jointly and Severally, Defendants.

No. 89-73095.

United States District Court, E.D. Michigan, S.D.

March 1, 1991.

COPYRIGHT MATERIAL OMITTED

Richard Partich, Southfield, Mich., for plaintiffs.

William Garratt, Bloomfield Hills, Mich., George Field, West Bloomfield, Mich., for defendants.

MEMORANDUM AND ORDER

COHN, District Judge.

I.

This is a securities fraud case. Plaintiffs Sidney Silverman, Lee Silverman, Barry P. August, Samuel August, and Judi Ellias (collectively, plaintiffs) allege that defendants George F. Field, Jr. (Field); Thomas R. Niswonger (Niswonger); Field Corporation; Your Attic, Inc. (YAI); Your Attic Properties, Inc. (YAP); Your Attic Management, Inc. (YAM); Your Attic of Clinton Township, Limited Partnership (YAC); and Your Attic of Tampa, Limited Partnership (YAT); all participated in a scheme to defraud them out of $87,500 that they invested in three and a half units of the YAC partnership. On October 16, 1989, plaintiffs filed a six-count complaint against all of the defendants except Niswonger. In the complaint, the plaintiffs sought recovery under Sections 12 and 17(a) of the Securities Act of 1933 (the 1933 Act), 15 U.S.C. §§ 771, 77q(a), and under Sections 15(1) and 10(b) of the Securities Exchange Act of 1934 (the 1934 Act), 15 U.S.C. §§ 78j(b), 78o (Count I); under the Michigan Uniform Securities Act, Mich. Stat.Ann. § 19.776(101) et seq. Mich.C.L.A. § 451.501 et seq., and under Florida Blue Sky Laws, Fla.Stat.Ann. § 517.301 (Count II); under the Michigan Consumer Protection Act (MCPA), Mich.Stat.Ann. § 19.418(1) et seq. Mich.C.L.A. § 445.901 et seq. (Count III); for common law fraud (Count IV); under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. (Count V); and for common law negligence and breach of fiduciary duty (Count VI). On March 2, 1990, plaintiffs filed a pleading styled "First Amended Complaint," adding Niswonger as a defendant but not adding new theories of recovery.

Now before the Court is a motion for judgment on the pleadings, Fed.R.Civ.P. 12(c), filed on behalf of all of the defendants except Field, Field Corporation, and YAC.¹ While the papers filed by the Non-Field defendants reference Fed.R.Civ.P. 56, they do not refer to any matters outside the pleadings. Therefore, Rule 56 is inapplicable. The Non-Field defendants argue that: 1) plaintiffs' claims under § 12 of the 1933 Act are time-barred; 2) plaintiffs' claims under § 17(a) of the 1933 Act should be dismissed because no private right of action exists under that section of the 1933 Act; 3) plaintiffs' claims under § 10(b) of the 1934 Act do not meet the pleading requirements of Fed.R.Civ.P. 9(b); 4) plaintiffs' claims under the Michigan Uniform Securities Act are time-barred; 5) plaintiffs have not alleged a pattern of racketeering sufficient to sustain a RICO claim; 6) that plaintiffs' claims fall outside the scope of the MCPA; 7) that plaintiffs' common law fraud claims do not meet the pleading requirements of Fed.R.Civ.P. 9(b); 8) that plaintiffs' claims under Florida Blue Sky Laws are time-barred; 9) that the Non-Field defendants are not liable for any breach of fiduciary duty committed by Field; and 10) that, because plaintiffs cannot state a federal claim, the Court has no jurisdiction over the state law claims raised. In response, plaintiffs concede that they do not have a private right of action under § 17(a) of the 1933 Act.² However, they argue that: 1) their fraud claims comply with Rule 9(b); 2) their Blue Sky Law claims are not time-barred; 3) they have stated a RICO claim; 4) the MCPA applies to securities cases; and 5) they have stated a claim for negligence and breach of fiduciary duty against Niswonger. For the reasons that follow, the Non-Field defendants' motion is GRANTED in part and DENIED in part.

II.

Plaintiffs' first amended complaint makes the following allegations. Sidney Silverman, Lee Silverman, Barry P. August, and Samuel August reside in Oakland County, Michigan. Judi Ellias resides in Colorado Springs, Colorado. Field resides in Bloomfield Hills, Michigan. Niswonger resides in Washtenaw County, Michigan.

Field Corporation, YAI, YAP, and YAM are Michigan corporations affiliated with and controlled by Field, with their principal place of business in Troy, Michigan. YAC is a Michigan limited partnership affiliated with and controlled by Field, with its principal place of business in Troy, Michigan. YAT is a Florida limited partnership affiliated with and controlled by Field and Niswonger, with its principal place of business in Troy, Michigan.

As a result of solicitations and representations by Field beginning in December 1985 and continuing through February 1986, plaintiffs purchased a total of three and a half units, at the price of $25,000 per unit, in a private offering for YAC. Sidney Silverman and Lee Silverman each purchased one unit. Barry P. August and Samuel August each purchased a half unit, and Judi Ellias purchased a half unit. Field represented verbally and in writing that the purpose of YAC was to build and operate a 91,300 square foot mini-storage facility in Clinton Township, Michigan.

The private placement memorandum for the YAC offering stated only that the project site was owned by a non affiliate of YAC. It did not disclose any contingencies concerning the acquisition of the project site. On January 25, 1986, Sidney Silverman was told by Field that YAC was having difficulty acquiring title to the project site from its owners, but Field said that the difficulties could be resolved. On April 2, 1986, Field informed plaintiffs that all units of YAC had been sold, but there would be a delay in the start of construction due to a problem with relocating a drainage ditch on the site. Field also stated that all permits had been obtained and assured them construction would commence shortly.

On September 24, 1986, plaintiffs received another letter from YAC indicating that construction had commenced and that it would be completed before winter. Plaintiffs then made numerous attempts to contact Field to inquire about the status of the project. On January 14, 1987, Sidney Silverman contacted Field who informed him that construction still had not begun. On February 11, 1987, Field told plaintiffs, at a meeting in his office, that unresolved difficulties with the sellers of the project site rendered the project "dead in the water." Field never explained whether YAC had obtained title or begun construction.

Field then used the meeting to convince plaintiffs to invest in the YAT project. He coerced and manipulated plaintiffs into transferring their investment in YAC to YAT, a project that he said was not subject to any delays or impediments. Field also told plaintiffs that all of the funds previously invested with YAC were safe and intact and being held for their benefit. Plaintiffs agreed to transfer their funds from YAC to YAT in a letter dated February 11, 1987. On March 27, 1987, plaintiffs received confirmation of the transfer.

Like the private placement memorandum for YAC, the private placement memorandum for YAT did not disclose the status of the project site. Nor did it disclose any potential problems with financing or that Niswonger was a general partner. The memorandum stated only that YAT "will acquire the project site."

Construction began on the YAT project site in August 1987. On January 23, 1988, plaintiffs received a letter from YAT that the project had been halted because of approval requirements and a need for re-engineering. On May 2, 1988, plaintiffs were notified that the YAT project was delayed due to its inability to obtain financing and that there was a shortage of equity funding despite Field's prior representations that the project was not subject to any delays or impediments.

In soliciting plaintiffs' investment, neither Field nor Niswonger disclosed that YAT was without sufficient equity funding because the minimum number of units had not been sold. On May 12, 1988, at a meeting of investors in YAT, Field reported that construction was at a standstill but that the land value had appreciated significantly. As a result, he stated that he was negotiating to sell the land at a price that would provide plaintiffs with a substantial return on their investment. Plaintiffs never received word on whether a sale took place.

From July 12, 1988 on, Field, Niswonger, and the other defendants have failed to return plaintiffs' telephone calls, advise them of the status of their investments, or account for the funds invested. After filing an action for an accounting filed in Oakland County Circuit Court, plaintiffs learned that YAT had received a $2.2 million loan from Florida National Bank, of which $651,617 was used to acquire the property for the YAT project on January 15, 1986. The YAT private placement memorandum made no mention of this method of financing or the impact the mortgage would have on an investor's return.

Plaintiffs also learned that, on February 15, 1987, YAT requested that Florida National Bank increase the loan to $2.65 million based on the representation that equity funding was complete and that YAT had raised $800,000, even though it had raised only $240,000. Despite YAT's inability to raise necessary funding, Field and the other defendants were paid substantial fees for a variety of services: from February 2, 1987 through May 22, 1987, Field received $82,612.75 in general partner's fees; from January 8, 1987 through ...