Wesleyan Pension Fund, Inc. v. First Albany Corp.

• Citation: 964 F.Supp. 1255
• Decision Date: 28 April 1997
• Docket Number: No. IP 96-0023-C-B/S.,IP 96-0023-C-B/S.
• Parties: WESLEYAN PENSION FUND, INC., Plaintiff, v. FIRST ALBANY CORPORATION et al., Defendants.
• Court: U.S. District Court — Southern District of Indiana

964 F.Supp. 1255

WESLEYAN PENSION FUND, INC., Plaintiff, v. FIRST ALBANY CORPORATION et al., Defendants.

No. IP 96-0023-C-B/S.

United States District Court, S.D. Indiana, Indianapolis Division.

April 28, 1997.

Mark B. Barnes Leagre & Barnes, Indianapolis, Indiana, for Plaintiff.

Michael A. Brady, Buffalo, New York, Mark E. Maddox, Maddox, Koeller & Hargett, Indianapolis, Indiana, Laurence Z. Shiekman, Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania, Lynn C. Tyler, Barnes & Thornburg, Indianapolis, Indiana, for Defendant.

ENTRY DISCUSSING DENIAL OF MOTION TO DISMISS

BARKER, Chief Judge.

Plaintiff Wesleyan Pension Fund has brought its Third Amended Complaint ("Complaint") for injuries it believes it sustained as a result of its investment in certain real estate limited partnerships. Wesleyan's claims arise under Indiana statutory and common law and specifically allege (1) violations of Indiana securities law, Ind.Code § 23-2-1-1 et seq., including the offer and sale of unregistered securities, the issuance, offer, and sale of securities by unregistered broker-dealers and agents, and the use of untrue or misleading statements in connection with the sale of those securities; (2) violations of the Indiana Racketeer Influenced and Corrupt Organization Act, Ind. Code § 35-45-6-1 to 6-2; and (3) constructive fraud. Defendants in this action are seventeen separate business entities, eleven named individuals, and an unknown number of unnamed individual defendants. This Court has diversity jurisdiction over this suit pursuant to 28 U.S.C. § 1332.

On June 20, 1996 the following defendants jointly moved to dismiss this cause of action for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) and for lack of personal jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(2): Steven Zalkind ("Zalkind"), Donald Love ("Love"), Robert Hogan ("Hogan"), Clover Financial Corporation, Resource Investment Corporation, Aurora Management Corporation, Gladstone Management Corporation, Fleetwood Management Corporation, Somerset Management Corporation, Dome Management Corporation, Greystone Management Corporation, Action Management Corporation, Marina Park L.P., Indian Hills Apartment L.P., GP Apartments L.P., Hunting Ridge Apartment L.P., Hampton Forest L.P., and Savannah Royale L.P. (collectively "the Clover Defendants").

For the reasons set forth below, the Court DENIES in their entirety the Clover Defendants' Rule 12(b)(6) motion to dismiss for failure to state claim and Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction. The Court DENIES AS MOOT Wesleyan's motion to bar materials outside the pleadings and motion to strike false affidavit, the Clover Defendants' motion to stay the proceedings, and the parties' respective motions to certify questions of Indiana law to the Supreme Court of Indiana.

I. Statement of facts

Plaintiff Wesleyan Pension Fund, Inc. ("Wesleyan") is an Indiana corporation with its principal business location in Indianapolis. Wesleyan is managed and governed by a Board of Directors, which, through its Investment Committee, directs its investments.

For purposes of this Entry the defendants the Court designates as the Clover Defendants consist of three individuals, nine closely held corporations, and six limited partnerships. When examined closely we find that the three individual defendants, Zalkind, Love, and Hogan, appear completely to control all of the closely held corporations and limited partnerships that we count among the Clover Defendants. For example, Zalkind, Love, and Hogan, are allegedly the principal shareholders of each of the nine corporate defendants. Zalkind, Love, and Hogan allegedly own and control Clover Financial Corporation (Id., ¶¶ 28, 30, 32), which in turn allegedly wholly owns the other eight corporations as subsidiaries. In regard to the limited partnerships, Wesleyan alleges that Marina Park L.P. has Aurora Management Corporation as its general partner (Complaint, ¶ 14) and contends that Zalkind, Love, and Hogan are its limited partners (Pl.'s Resp. Br., Ex. A., p. 2). Wesleyan alleges that Indian Hills Apartment L.P. has Gladstone Management Corporation as its general partner (Complaint, ¶ 16) and contends that Zalkind, Love, and Hogan are its limited partners (Pl.'s Resp. Br., Ex. A., p. 3) Wesleyan alleges that GP Apartments L.P. has Fleetwood Management Corporation as its general partner (Complaint, ¶ 18) but does not identify the limited partners. Hunting Ridge Apartment L.P. has as its general partner Dome Management Corporation (Complaint, ¶ 21) and contends that Zalkind, Love, and Hogan are its limited partners along with three other individuals not named as defendants and Plaintiff (Pl.'s Resp. Br., Ex. A., p. 8). Wesleyan alleges that Hampton Forest L.P. has as its general partner Greystone Management Corporation (Complaint, ¶ 23) and contends that Zalkind, Love, and Hogan are its limited partners (Pl.'s Resp. Br., Ex. A., p. 9). Lastly, Wesleyan alleges that Savannah Royale L.P. has Action Management Corporation as its general partner (Complaint, ¶ 26) and contends that the limited partners are itself, Zalkind, Love, and Hogan (Pl.'s Resp. Br., Ex. A. p. 10).

In short, each of the six limited partnership (except possibly GP Apartments L.P.) has Zalkind, Love, and Hogan as limited partners and a corporation controlled by Zalkind, Love, and Hogan as its general partner. These latter six corporations and the other three corporate defendants are all allegedly controlled by Zalkind, Love, and Hogan, because the individual defendants are the alleged sole shareholders and controlling principals of one of the corporations, Clover Financial Corporation, which in turn wholly owns the other eight corporations.

In its Complaint, Wesleyan alleges that the Clover Defendants promoted, offered, and sold to Wesleyan by the end of 1989 over § 14.2 million of real estate securities ("the Clover Securities") that were illiquid, overvalued, difficult to value, speculative, and unsuitable for a tax-exempt organization such as Wesleyan. (Complaint, ¶ 95) These securities allegedly represented one third of its pension find's total assets. (Complaint, ¶ 96) Wesleyan acquired these securities between 1986 and 1989 through seven principal investment transactions, which we outline in the following paragraphs.

1. In January 1986 Wesleyan purchased half of the mortgage of Marina Park Apartments in North Miami, Florida, for $1.6 million from defendant Marina Park L.P. (Complaint, ¶ 36). In January 1990 Wesleyan agreed to extend the maturity date of the mortgage note until January 1996. (Id., ¶ 40) In February 1990 Wesleyan and Marina Park L.P. entered into an agreement to defer the payment of certain interest until the maturity date of the mortgage. (Id.) Marina Park L.P. eventually sold the mortgaged apartment complex in July 1994, transmitting to Wesleyan approximately $1.7 million of the proceeds. (Id., ¶ 42) Wesleyan alleges the defendant still owes it $494,225 in accrued deferred interest from the original financing and the 1991 refinancing of the mortgage. (Id.)

2. In January 1986 Wesleyan lent $1.6 million to defendant Indian Hills L.P. in exchange for a promissory note, secured by the limited partnership's ownership interest in Indian Hills Apartments in Aniston, Alabama, and by personal guaranties of Zalkind, Love, and Hogan. (Id., ¶¶ 44, 48). In 1992 and 1993 Wesleyan agreed to modify the note by deferring certain interest due under the note. (Id., ¶¶ 50, 51) Indian Hills L.P. eventually sold the apartment complex in July 1994, remitting to Wesleyan $1,050,000. (Id., ¶ 52)

3. In February 1988 Wesleyan formed Grove Park Joint Venture with defendant GP Apartments L.P. and contributed $2,550,000 at that time to the joint venture in exchange for an interest in any profit from the joint venture's ownership of Grove Park Apartments in Raleigh, North Carolina. (Id., ¶¶ 53, 58) The joint venture sold the apartment complex in July 1994, and Wesleyan received $1,560,000 from the sale. (Id., ¶ 60)

4. In June 1988 Wesleyan formed Summerville Joint Venture with defendant Somerset Management Corporation and contributed $5.4 million to the joint venture at that time in exchange for an interest in any profit from the joint venture's purchase of Somerset Apartments in Summerville, South Carolina. (Id., ¶¶ 61, 66) In September 1989 $3 million of Wesleyan's initial investment was returned to it. (Id., ¶ 66) The joint venture sold the apartment complex in July 1994, and Wesleyan received $735,000 in proceeds. (Id., ¶ 68)

5. In July 1988 Wesleyan invested $1,350,000 to obtain a 65 percent interest in defendant Hunting Ridge L.P. and an equal interest in any profit generated by the limited partnership's ownership of Hunting Ridge Apartments in Greenville, South Carolina. (Id., ¶¶ 69, 74) The limited partnership sold the apartment complex in November 1994, and Wesleyan received $250,000 of the proceeds. (Id., ¶ 76)

6. In July 1988 Wesleyan purchased a 55 percent interest in a $3 million promissory note from defendant Hampton Forest L.P., secured by a mortgage on Hampton Forest Apartments in Greenville, South Carolina. (Id., ¶¶ 77, 82) In December 1988 defendant Vest Associates, the other mortgagee, assigned 5 percent of the mortgage interest to Wesleyan (augmenting Wesleyan's interest to 60 percent) and the remaining 40 percent to a third party. (Id., ¶ 83) The limited partnership sold the apartment complex in July 1994, and Wesleyan received § 1,823,000 in proceeds. (Id., ¶ 86) Wesleyan alleges that the limited partnership owes it accrued deferred interest on the mortgage note in the amount of § 199,212. (Id.)

7. In September 1989 Wesleyan invested $4.1 million to obtain an 80 percent interest in Savannah Royale L.P. and an equal interest in any profit generated by the limited partnership's ownership of Royal Oaks Apartment in Savannah,...