William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp.

Decision Date19 September 1984
Docket NumberNos. 1340,1455-1458,D,s. 1340
Citation744 F.2d 935
PartiesFed. Sec. L. Rep. P 91,673 WILLIAM Z. SALCER, PANFELD, EDELMAN, et al., a Texas General Partnership, Robert L. Andrews, M.D., Sanjivani C. Bakare, M.D., H.E. Chiles, Ronald Salcer, Alonzo J. Drummond, M.D., George D. Gibson, Gerald I. Green, M.D., William L. Horner, Donald V. McClarty, Stanley W. Mandel, Renato Martinez, M.D., F.J. Mikulenka, Jr., J.B. Randle, Bernard J. Sackaroff, Robert L. Scheer, Jack P. Solovy, Swanson Analysts Systems, Inc. and Bruce L. Weinberger, M.D., Plaintiffs-Appellees, v. ENVICON EQUITIES CORP., Envicon Development Corp., Envitex Realty Corp., Venture Development Group Inc., a Texas Corporation, U.S. Southwest Associates, a Texas General Partnership, U.S. Properties/Southwest, a Texas General Partnership, Turning Block Associates, a New York Limited Partnership, Feit & Ahrens, a New York Partnership, William B. Bush, Jr., John W. Galston, Erving Wolf, Harry W. Burrow and Blonder, Seymour & Shapss, a New York Partnership, Defendants-Appellants. ockets 84-7183, 84-7185, 84-7187, 84-7189, 84-7191.
CourtU.S. Court of Appeals — Second Circuit

Edward Brodsky, New York City (Thomas H. Sear, Robert Knuts, Spengler, Carlson, Gubar, Brodsky & Frischling, New York City, of counsel), for defendants-appellants Envitex Realty Corp., U.S. Southwest Associates, Turning Block Associates and Erving Wolf.

David R. Simon, New York City (Simon & Allen, New York City, Robert H. Jaffe, Jaffe & Schlesinger, Springfield, N.J., of counsel), for plaintiffs-appellees.

Richard A. Kirby, Asst. General Counsel, S.E.C., Washington, D.C. (Daniel L. Goelzer, General Counsel, Jacob H. Stillman, Associate General Counsel, Martha H. McNeely, S.E.C., Washington, D.C., of counsel), for amicus curiae Securities & Exchange Commission.

Solinger, Grosz & Goldwasser, P.C., New York City (Dan L. Goldwasser, Bernard Persky, Joyce M. Perlmutter, New York City, of counsel), for defendant-appellant Blonder, Seymour & Shapss.

Suzanne Antippas, New York City, for defendants-appellants Venture Development Group, Inc. and William B. Bush, Jr.

D'Amato & Lynch, New York City (Richard G. McGahren, Dennis P. Costigan, New York City, of counsel), for defendant-appellant Feit & Ahrens.

Richard W. Schleifer, New York City, for defendants-appellants Envicon Equities Corp., Envicon Development Corp., U.S. Properties/Southwest, John W. Galston, and Harry W. Burrow.

Tax Division, Dept. of Justice, Washington, D.C. (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paul, Ann Belanger Durney, Attys., Tax Div., Dept. of Justice, Washington, D.C., Rudolph W. Giuliani, U.S. Atty., S.D.N.Y., New York City, of counsel), for amicus curiae United States of America.

Before MANSFIELD, MESKILL and CARDAMONE, Circuit Judges.

MANSFIELD, Circuit Judge:

In this action in the Southern District of New York under Sec. 10(b) of the Securities Plaintiffs are purchasers of 15 partnership interests ("units") in Greenspoint Associates, a limited partnership established to construct, own and operate a residential apartment complex known as "the Greenspoint Project." Defendants are the general partners of Greenspoint Associates and their affiliates, accountants, and attorneys. Plaintiffs purchased their units for $77,500 each between October 1, 1977 and April 30, 1978, based in part on sales literature including an October 1979 Private Placement Memorandum and projections included in a financial analysis dated October 19, 1977. The literature indicated that Greenspoint Associates was a Texas limited partnership and that the Greenspoint Project was to be a 308-unit multi-family rental complex located in Harris County, Texas, outside of the Houston city limits. Although the Private Placement Memorandum is not part of the record, portions of it were annexed to an affidavit in opposition to plaintiffs' motion to strike. The memorandum stated:

Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), 1 and S.E.C. Rule 10(b)5, 17 C.F.R. Sec. 240.10b-5, 2 plaintiffs seek rescissionary damages for defendants' alleged failure to disclose material information relating to a real estate tax shelter in which the plaintiffs invested. Having been granted an interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b), 3 defendants challenge the order of Judge Vincent L. Broderick granting plaintiffs' motion to strike defendants' affirmative defense to the effect that any damages must be reduced by the amount of tax benefits admittedly realized by the plaintiffs. Judge Broderick ruled that the defense was inadequate as a matter of law. We reverse.

"[I]nvestment in the Units is suitable only for persons of adequate financial means who have no need for liquidity with respect to their investment. Only persons whose income is subject to high rates of income taxation will derive the full economic benefit of the intended tax benefits of this offering."

Plaintiffs alleged in the first count of their Amended Complaint that defendants knew or should have known, and failed to disclose, that the City of Houston was planning to annex that part of Harris County in which the Greenspoint Project was to be built. According to plaintiffs, annexation could be expected to cause a marked increase in the costs of building and operating the project because of (1) the imposition of water, sewer and building permits, certificates of occupancy, sales tax and real Each defendant included in the answer to the complaint an affirmative defense asserting that plaintiffs had realized tax benefits stemming from their investment that were in excess of their claimed loss of $47,500. The defenses were premised on the assumption that each plaintiff was taxed at a marginal rate of at least 50% during the years 1977 through 1981, an assumption that plaintiffs do not challenge. There has not, however, been any discovery of the actual tax consequences for each plaintiff.

estate taxes, (2) additional construction requirements such as water and sewer utility lines, landscaping and sidewalks, (3) additional roofing, plumbing and electrical work needed to comply with Houston's building code, and (4) a delay in the project's completion that would jeopardize the permanent financing described in the sales literature. The City of Houston did annex the area and a forced sale of the premises occurred in September 1981. Each plaintiff received $30,000 per unit as a result of the forced sale and claims a net investment loss of $47,500 per unit. Since the forced sale rendered rescission impossible, plaintiffs seek the latter amount per unit as rescissionary damages.

On August 29, 1983, plaintiffs moved for an order pursuant to Fed.R.Civ.P. 12(c), 12(f), and/or 56, to strike these affirmative defenses. Oral argument on the motion was held on December 9, 1983, at which time the parties stipulated that tax benefits were a factor in plaintiffs' decision to purchase their units and that defendants' calculations showing tax benefits to each plaintiff exceeding the $47,500 were correct. Defendants sought discovery for the purpose of proving that "with one or more plaintiffs the sole reason they got into this investment was because of the tax benefits." The district court agreed that "a desire for very extensive tax deductions was a primary motivation for people to invest here, because the whole thrust of the offering letter or the document was to that effect." However, Judge Broderick granted the Rule 12(f) motion to strike at the close of oral argument.

The district court reasoned that although "tax considerations come into this case in determining whether there was in fact a fraud committed," there were effectively two investments at issue: "One was the opportunity to receive currently available but probably rapidly wasting tax benefits or tax deductions or tax shelters. The second part of the bargain was an investment in a capital resource that ultimately they, the [plaintiffs], expected to increase in value" and to "ultimately produce income." The allegations of fraud, said the court, pertained only to the latter aspect of the investment; there had been no claim of fraud with respect to the tax consequences of the Greenspoint Project. The district court then concluded that it "makes no sense to say that any loss to the defrauded investor and hence, any gain or recovery which he is entitled to should be reduced by the tax benefits that he has realized," stating:

"Those tax benefits would have been realized whether or not there was a fraud in this particular situation.

* * *

* * *

"The investor who was interested in tax considerations when he invested here could very well have invested in some entirely different company, realized comparable tax benefits, and not suffered the loss that the investors here are alleged to have suffered because of the fraud."

Judge Broderick stressed that the defendants would still be permitted to explore plaintiffs' tax shelter considerations in order to show that these were their prime motivations and that they did not rely on the defendants' alleged fraudulent omissions with respect to annexation of the site by the City of Houston. Since the issue of whether any recovery must be reduced by the amount of tax benefits was critical, plaintiffs having represented that if they received an adverse ruling on that issue they would drop their suit, the district court certified the issue as appropriate for

interlocutory review under 28 U.S.C. Sec. 1292(b).


A motion to strike an affirmative defense under Rule 12(f), Fed.R.Civ.P. for legal insufficiency is not favored and will not be granted "unless it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense." Durham Industries, Inc. v. North River Insurance Co., 482 F.Supp. 910, 913 (S.D.N.Y.1979) (quoting Lehmann Trading Corp. v. J. & H. Stolow, Inc., 184 F.Supp. 21, 22-23 (S....

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