Turtur v. Rothschild Registry Intern., Inc.

• Decision Date: 07 June 1994
• Docket Number: No. 1126,D,1126
• Citation: 26 F.3d 304
• Parties: , Fed. Sec. L. Rep. P 98,241, 29 Fed.R.Serv.3d 227 Mario TURTUR, Chris Turtur & Steve Turtur, Plaintiffs-Appellants, v. ROTHSCHILD REGISTRY INTERNATIONAL, INC., Rothschild Reserve I, International, D.C. Equipment Leasing Corp, American National Associates 367, Paragon Financial, Ltd., Cornick, Garber & Sandler, National Union Fire Insurance Company of Pittsburgh, Pa, Barry H. Trupin, Defendants, Stein, Bliablias, McGuire, Pantages & Gigl, Defendant-Appellee. ocket 93-7966.
• Court: U.S. Court of Appeals — Second Circuit

Page 304

26 F.3d 304

62 USLW 2796, Fed. Sec. L. Rep. P 98,241,

29 Fed.R.Serv.3d 227

Mario TURTUR, Chris Turtur & Steve Turtur, Plaintiffs-Appellants, v. ROTHSCHILD REGISTRY INTERNATIONAL, INC., Rothschild Reserve I, International, D.C. Equipment Leasing Corp, American National Associates 367, Paragon Financial, Ltd., Cornick Garber & Sandler, National Union Fire Insurance Company of Pittsburgh, Pa, Barry H. Trupin, Defendants Stein, Bliablias, McGuire, Pantages & Gigl, Defendant-Appellee.

No. 1126, Docket 93-7966.

United States Court of Appeals Second Circuit.

Argued Feb. 16, 1994.

Decided June 7, 1994.

Neal Schwarzfeld, New York City, David S. Frydman, Schwarzfeld, Ganfer & Shore, NY, for plaintiffs-appellants.

Marc S. Dreier, New York City, Charles S. Joseph, Evan K. Kornrich, Fulbright & Jaworski L.L.P., NY, for defendants-defendant-appellee.

Before: NEWMAN, Chief Judge, CAMPBELL ^*, Senior Circuit Judge, and MAHONEY, Circuit Judge.

LEVIN H. CAMPBELL, Senior Circuit Judge:

Mario Turtur and his two sons, Chris and Steve, plaintiffs below, appeal from the entry of summary judgment against them in the United States District Court for the Southern District of New York. We affirm.

I.

The Turturs were licensed securities brokers residing in Texas who were officers in the securities firm of Turtur and Associates, Inc. ("the Turtur firm"), which Mario Turtur had formed in 1982. Late that year, Rothschild Registry International, Inc. ("Rothschild") approached the Turtur firm to assist in the selling of tax-advantaged limited partnerships that leased computer equipment. Mario Turtur retained a securities lawyer to investigate Rothschild's background and activities as a promoter of limited partnerships. Thereafter, the Turtur firm agreed to sell on Rothschild's behalf various limited partnership units.

In the course of their investigation of Rothschild and of their efforts on Rothschild's behalf, the Turturs learned that the Internal Revenue Service ("the IRS") had questioned various Rothschild equipment leasing limited partnerships and, in some cases, had disallowed related tax deductions. Nevertheless, the Turturs themselves became interested in investing in "Chase Associates," one of the partnerships Rothschild was promoting. Chase Associates was a limited partnership organized under the laws of New York. The Turturs received and reviewed a private placement memorandum ("the PPM") and a tax opinion relative to Chase Associates. The tax opinion was prepared by the New Jersey law firm of Stein, Bliablias, McGuire, Pantages & Gigl ("the Stein firm").

When the Turturs sought to invest in Chase Associates, John Prowant, an officer of Rothschild, told them that Chase Associates was fully subscribed but that another partnership, this one called "American National Associates 367" ("ANA 367"), would soon be available. According to Mario Turtur, Prowant "let [him] understand that A & A [sic] 367 would be basically the same kind of deal" as Chase. (In a subsequent affidavit, Turtur elaborated that Prowant "specifically assured [me] that the substance of the offering documents and tax opinion would be identical to those presented in another offering with which I was personally familiar and had read the underlying documents.") Based on Prowant's assurances, and relying on the offering materials prepared for Chase Associates, the Turturs invested in ANA 367 in December 1982. They did so before receiving or reading the PPM or tax opinion prepared for ANA 367.

As it turned out, the offering documents and the tax opinion in respect to ANA 367 were identical in all material respects to the offering documents and tax opinion for Chase Associates. ¹ The PPM for ANA 367 included a disclaimer, stating in capital letters that prospective investors should rely only upon representations contained in the ANA 367 documents:

NO OFFERING SHALL BE MADE BY MEANS OF ANY LITERATURE OR ADVERTISING EXCEPT THE INFORMATION CONTAINED HEREIN. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATION OR GIVE ANY INFORMATION WITH RESPECT TO THIS OFFERING, EXCEPT FOR THE INFORMATION CONTAINED HEREIN, AND NO OFFEREE MAY RELY ON ANY REPRESENTATION OR INFORMATION THAT MAY BE MADE OR GIVEN IN VIOLATION OF THE ABOVE.

Under the terms of its PPM, ANA 367 was to purchase computer equipment from D.C. Equipment Leasing Corp. ("D.C. Leasing"), subject to certain user leases, for approximately $6.2 million. ANA 367 would then enter into a long-term lease agreement with Paragon Financial, Ltd. ("Paragon"), which had previously sold the equipment to D.C. Leasing for approximately $5.7 million after acquiring it from yet another company, Comdisco, Inc., for approximately $4.7 million. The Stein firm prepared the tax opinion for ANA 367, and the Turturs claim that the Stein firm also helped author the PPM for ANA 367.

The ANA 367 deal was quite risky, as its success hinged, among other things, on whether the IRS would allow the positive tax status of the investment. This determination would depend on IRS rulings as to the valuation attributed to the equipment, the partnership's basis in the equipment, and D.C. Leasing's independence from the partnership. The PPM and the tax opinion for ANA 367 contained much cautionary language as to the various risks.

As it turned out, in 1987 the IRS informed Mario Turtur that it was disallowing various deductions and losses he had claimed on the basis of his investment in ANA 367. In 1990, the IRS advised Steve Turtur that his deductions with respect to ANA 367 were disallowed. Chris Turtur acknowledges that the IRS has never advised him that his deductions for ANA 367 have been disallowed.

In December 1987, the Turturs brought a complaint in the Texas state court, alleging a violation of the Texas Securities Act, a violation of the Texas Consumer Protection Act, and common law fraud. They named a large number of defendants, including Rothschild, Paragon, D.C. Leasing, the Stein firm, and ANA 367 itself. Defendants removed the case from the Texas state court to the United States District Court for the Southern District of Texas. The district court dismissed the Texas state law claims, holding that New York law applied in accordance with the parties' arrangement in the limited partnership agreement.

Over time, all of the defendants except for the Stein firm were dismissed from the action. Almost five years after the Turturs had filed their original complaint, the district court, in November 1992, sua sponte dismissed the claim against ANA 367 for plaintiffs' failure to prosecute the claim ²--service had been imperfect, ANA 367 had never filed an appearance, and the Turturs had never moved for a default judgment. Once the Stein firm was left as the sole defendant, the district court transferred the remaining common law fraud claim to the United States District Court for the Southern District of New York.

This remaining claim, against the Stein firm, was dismissed on summary judgment in August 1993. The district court found that the Turturs failed to establish, as required by New York law in a claim for common law fraud, their "actual, direct reliance upon the alleged misrepresentations made in connection with ANA 367." The fatal flaw in the Turturs' claim, according to the district court, was that they had never actually seen, much less relied on, the supposed misrepresentations that appeared in the ANA 367 offering materials.

On appeal, the Turturs argue that the district court erred in granting summary judgment, as their reliance on the Chase Associates documents was sufficient to support a fraud claim against the Stein firm. In addition, though they failed to raise the issue below, the Turturs argue that the federal district court did not have jurisdiction, as the presence of ANA 367 as a defendant, until its dismissal in November 1992, destroyed complete diversity. We address the jurisdictional point first and then move to the merits.

II.

The Turturs contend that by reason of the Supreme Court's decision in Carden v. Arkoma Assocs., 494 U.S. 185, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990), the presence of ANA 367 as a defendant in this action destroyed diversity jurisdiction. In Carden, the Supreme Court held that, for diversity purposes, a limited partnership is a citizen of each jurisdiction in which any of its limited partners is a citizen. Id. at 195-96, 110 S.Ct. at 1021. The rule in Carden would destroy diversity in this action because at least three of ANA 367's limited partners, the plaintiff-appellants, are citizens of Texas. Hence both the plaintiffs and the partnership are citizens of the same state. The Turturs argue that after Carden was decided in 1990, the district court ceased to have jurisdiction, was "obligated" to remand the action to the Texas state court, and was powerless to dismiss ANA 367 from the case in 1992.

Even though appellants failed to raise this jurisdictional issue below, we must consider it, as "subject matter jurisdiction is an unwaivable sine qua non for the exercise of federal judicial power." Curley v. Brignoli, Curley & Roberts Assoc., 915 F.2d 81, 83 (2d Cir.1990) (citations omitted), cert. denied, 499 U.S. 955, 111 S.Ct. 1430, 113 L.Ed.2d 484 (1991). Nevertheless, the Stein firm argues that an application of Carden at this stage of the case would give the plaintiff-appellants an undeserved windfall: after more than six years of proceedings, after a failure to prosecute the alleged non-diverse party, and after waiting for an outcome in federal court and having their claims dismissed in their entirety, the Turturs would now be able to begin again in state court. The Stein firm urges this court to mitigate the harshness of such an application of Carden by pursuing, as this court did in Curley, its " 'obligation to explore any promising avenue to the District Court's jurisdiction.' " Curley, 915 F.2d at 85 (quoting Association of Am. Medical Colleges v. Califano, 569...