Volk v. D.A. Davidson & Co.
| Decision Date | 13 May 1987 |
| Docket Number | No. 85-3857,85-3857 |
| Citation | 816 F.2d 1406 |
| Parties | , Fed. Sec. L. Rep. P 93,252, 7 Fed.R.Serv.3d 832, RICO Bus.Disp.Guide 6654 Roy VOLK, L.A. Donahue, Wharram Ranch Company, Thomas Mather, Charles Hope, Robert Scriver, Michael Tilton, Tommy Curran, Robert J. Rangitsch, Lawrence Rossmiller, Harold Poulsen, and Dorothy Anderson, Plaintiffs-Appellants, v. D.A. DAVIDSON & CO., et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Turner C. Graybill, of Graybill, Ostrem, Warner & Crotty, Great Falls, Mont., for appellant.
Edward J. Pluimer, of Dorsey & Whitney, Minneapolis, Minn., for appellee D.A. Davidson & Co.
Charles Schufreider of Barton, Klugman & Oetting argued for Appellee Donald Jackson.
Sheldon M. Jaffe argued for Appellees Diversified Properties Corporation, Devprop Financial Partners, Ltd., DPC Investment Corporation and Ronald L. Platt.
Augustin Medina of Lewis, D'Amato, Brisbois & Bisgaard argued for Appellees Kimble, MacMichael, Jackson & Upton and Kimble MacMichael, Jackson, Magarian, Dowling & Upton.
Appeal from the United States District Court for the District of Montana.
Before GOODWIN and BRUNETTI, Circuit Judges, and STOTLER, District Judge. *
This appeal involves six consolidated cases concerning the same limited partnership tax shelters. Appellants sued in 1984, alleging that appellees fraudulently sold them limited partnership interests in 1976 and 1977. The district court granted appellees' motion for summary judgment, concluding that the statute of limitations barred the claims. It held that the statute of limitations commenced running in 1979 when appellants knew or should have known of the alleged fraud.
Appellants contended that their claim did not accrue and consequently that the statute of limitations was not triggered until they sustained out-of-pocket money damages in 1982 in the form of disallowed tax deductions. The district court rejected this assertion. We agree with the district court and affirm the judgment.
On January 20, 1984, 1 appellants filed their complaint for violations of Sec. 10(b) of the Securities Exchange Act of 1934, Sec. 17(a) of the Securities Act of 1933, the Racketeer Influenced and Corrupt Organization Act ("RICO") and various state causes of action. The appellees are: (1) Diversified Properties Corporation, DPC Investment Corp., Devprop Financial Partners Ltd., and Ronald L. Platt 2--the promoter and general partner of the limited partnerships (the "Diversified appellees"), (2) Donald Jackson and his law firms Kimble, MacMichael, Jackson & Upton; and Kimble, MacMichael, Jackson, Magarian, Dowling, & Upton--tax counsel for the partnership offerings (the "Jackson appellees") and (3) D.A. Davidson & Co.--the broker who sold the investments ("Davidson").
Appellants invested in five limited partnerships, each organized to acquire and develop coal leases in Utah: Energy and Utility, Grand County, Devprop, Western Coal and Green River. The Energy and Utility, Grand County and Devprop appellants purchased their limited partnership interests in 1976. The Western Coal and Green River appellants purchased their interests in 1977 and made further capital contributions in 1978. Each limited partnership subleased what were represented as coal reserves from Intercoast Coal Company, or a related entity. Intercoast warranted that it would supply coal from substitute properties should the reserves produce fewer tons of recoverable coal than anticipated by the parties' agreement. Purchasers of the limited partnership interests received a prospectus and tax opinion letter containing geological reports indicating that the reserves had quantities of mineable coal sufficient for commercial exploitation.
Appellees marketed the limited partnership interests as tax shelters which would give rise to substantial tax deductions from ordinary income under the Internal Revenue Code. These deductions, amounting to $3.50 per dollar invested, represented partnership operating expenses for advanced royalties paid to the coal mine lessors. Each investor, being in the fifty percent tax bracket, realized current tax savings of approximately $1.75 for each dollar invested. Based on the information used to market the partnership interests, appellants also believed that their interests would appreciate from the development and mining of the coal reserves, although earnings were not to accrue prior to 1983.
In 1978, the general partner, Platt, became aware that the partnership properties did not contain the coal reserves as represented by Intercoast and in May 1979, reported this information to appellants in the partnership's 1978 annual report. The report told investors that the Internal Revenue Service ("IRS") had questioned whether the partnership properties were capable of sustaining commercially viable mining operations and, in the event they were not, raised an issue as to the propriety of the advance royalty deductions taken.
The report also stated:
(1) The IRS action was serious and could result in disallowance of the deductions. The general partner would defend the action but could not guarantee a favorable outcome.
(2) Gates Engineering Company, an independent engineering firm hired by the general partner, examined data concerning the reserves and concluded that the coal seams on the property were probably too thin and too deep for commercial exploitation.
(3) Prior to issuing the report, the general partner had requested Intercoast to provide additional properties containing adequate tonnage, as provided in the parties' agreement. Gates, however, determined that the reserves in the proposed substitute properties also lacked sufficient tonnage for development. Although the parties would continue to explore alternatives, Intercoast probably was not in a position to provide any substitute properties. Despite this negative assessment, the general partner did not plan to terminate the lease at the time of the annual report.
(4) The general partner had temporarily suspended all royalty payments by the partnership to Intercoast. The propriety of the limited partners' deductions for the royalties depended on the general partner making uniform payments over the term of the lease. The general partner had not yet decided whether to reinstate the payments.
(5) The general partner did not have the financial resources to engage in an independent exploration program for alternative mines but would continue to investigate alternatives.
(6) Intercoast had filed a petition for protection under Chapter XI of the bankruptcy laws.
In September 1979, the general partner sent ten of the twelve appellants a letter indicating that the partnership probably had a legal claim against Intercoast and that all payments to Intercoast, on which appellants' deductions were based, were suspended through 1979. In the Fall of 1979, the IRS, as part of its investigation of Platt and Intercoast, sent questionnaires from its criminal investigation division to at least four appellants concerning their investments.
Several appellants communicated their concerns about the partnership to their brokers. In each case, the broker reassured the investor. Davidson Broker Bill McFadden told Poulsen that there was no problem about the lack of coal in the reserves because of the Intercoast agreement to replace the coal. Similarly, Davidson president Ian Davidson told Anderson not to worry about the letter. He promised to phone her if he heard any additional information.
In 1979-1980, the IRS requested that the appellants extend the time for the Service to assess the legality of their deductions. In 1982, the IRS disallowed the deductions taken by the limited partners for the years 1976, 1977 and 1978. On May 17, 1982, appellants executed an agreement tolling the statute of limitations on their claims against the Diversified appellees and Davidson.
Despite the knowledge appellants acquired from the annual report, the parties stipulated that the appellants did not have actual knowledge of the appellees' involvement in the allegedly fraudulent scheme prior to March 1982. With the exception of one telephone call in 1981, the appellants did not communicate with the general partner concerning the viability of the partnership as a tax shelter at any time between 1979 and 1981.
Appellants also alleged that the Jackson appellees used sham corporations to launder and embezzle appellants' investments. The general partner did not become aware of these allegations until 1983, when appellants so informed him.
The factual record consists of the parties' stipulations, declarations, and documentary exhibits compiled pursuant to the order of the district court, directing the parties to move for summary judgment on the applicability of the statute of limitations. The court stayed all discovery and ordered the parties to stipulate to certain facts for purposes of the motions, although the parties were permitted to supplement the record with their own evidence. On May 1, 1985, the district court denied appellants' motion and granted appellees' motion, holding that appellants' federal claims were barred by the statute of limitations and that the court lacked pendent jurisdiction over the state law claims. Appellants timely filed a notice of appeal purporting to appeal both the order granting appellees' motion and the order denying appellants' cross motion. 3
Appellants dispute the district court's ruling that the limitations period on their federal securities and RICO claims began to run before the IRS's 1982 decision to disallow their earlier years' tax deductions for the operating expenses of the partnership interests. They contend that prior to the disallowance, they did not suffer a legally cognizable...
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