The opinion of the court was delivered by: LASKER
In this suit alleging violations of the securities laws of the United States and the New York law, plaintiff moves (1) for a preliminary injunction against the sale of a motel belonging to defendant Bessemer-Birmingham Motel Associates ("Bessemer") or for alternative injunctive relief, and (2) to designate the case a class action under Rule 23(a) of the Federal Rules of Civil Procedure. Defendants Nadelson and Nelson move for an order pursuant to Rule 12, F.R. Civ. P., requiring plaintiff to "submit an amended complaint."
Plaintiff purchased $10,000 of an offering of $675,000 limited partnership interests in Bessemer. The partnership interests were sold in connection with a Prospectus dated April 12, 1961, and it is stated that approximately 180 persons purchased such securities on the basis of the representations in the Prospectus.
Bessemer is a limited partnership organized in New York State in 1961 for the purpose of purchasing for investment the title to the Holiday Inn Motel located in Bessemer, Alabama. The Units in the partnership were offered for sale through Interamerica Securities Corp. as underwriter. Interamerica is wholly owned by Jules Yablok, a general partner of Bessemer. Among other general partners are Samuel Nadelson and O. Taft Nelson, who appear in opposition to plaintiff's motion to declare a class action and in support of their own motion to compel an amended complaint. Defendants Harrison and Gittler are represented by the same counsel as Nadelson and Nelson, but do not appear on the motions nor do any other defendants.
TRANSACTIONS COMPLAINED OF IN THE PRINCIPAL ACTION
The complaint alleges that the 1961 Prospectus was false and misleading in violation of § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and various sections of the General Business Law of New York, and in violation of the common law. Plaintiff seeks for herself and her class rescission of her purchase of Bessemer units and compensatory, punitive and exemplary damages.
It is claimed that statements contained in the Prospectus led the plaintiff and other investors to believe that the purchase of a unit would yield during the first year of ownership $650 as a cash distribution for each $5,000 participation; that the cash distribution would increase annually; that the real estate would be under professional management of experts in the motel field; that the geographical locality of the area had extensive growth potential; that to the injury of the members of the class, none of these representations was realized, and that defendants well knew they would not be. There are further allegations of omission of information which it is claimed the Prospectus should have contained. In brief, this is a classic case in which, the business venture having gone sour, the investors claim fraud and seek redress from the original promoters.
TRANSACTIONS SOUGHT TO BE ENJOINED
The Holiday Inn Motel is Bessemer's chief asset. As a result of its operating at a loss, the general partners sought a buyer for the motel. By letter dated August 27, 1970, Yablok as a general partner wrote to all partners informing them that a buyer, not identified, was ready to purchase the motel despite the claimed adverse effect that the construction of a new expressway five miles from the present site would have on the business of the motel. The two-page printed letter advised that the sale was conditioned on the willingness of Holiday Inn Corporation to franchise to the buyer a new motel near the new expressway and on the further condition that the management of the existing motel and Yablok sublease the existing motel and the proposed new motel. The financial implications of the sale and its impact on the partnership was set forth in some detail. In response to the letter, 78.41 percent of the partners gave their written approval (the consent of 65 percent being required by the terms of the partnership agreement). The number who consented represented 78.79 percent of the ownership of the partnership and 96.5 percent of the limited partners who responded to the letter. The plaintiff seeks to enjoin the sale on the ground that the letter of notification sets forth the terms of the proposed transaction in summary fashion only, fails to name the prospective purchaser or to describe his financial stability, provides that the lease would take over miscellaneous assets not included in the sale, thereby excluding the limited partners from benefit as to those assets, cuts the limited partners out of future operation of the existing motel and the new motel, and in general benefits the general partners to the detriment of the members of the class. Plaintiff alleges that she cannot locate Yablok, who has not been served, that the real estate is the major assets of the defendants, and that her claim for punitive and exemplary damages would be "difficult if not impossible to collect" if the motel were sold. On these grounds she seeks to restrain the sale or, in the alternative, an order that the sale be enjoined unless the consent of all limited partners who were original holders is secured, or that a fund be created out of the distributable assets of the sale to secure the rights of all original holders of limited partnership interests.
At the time the motions were heard, the documents required to transfer title had already been placed in escrow, in accordance with the customs and procedure prevalent in California, with the City National Bank of Beverly Hills, California. It was unclear whether the sale had actually been completed or not. The transaction was consummated on November 12, 1970, in accordance with the terms of the contract of sale. Even had the sale not become final, there would have been serious questions as to this court's jurisdiction to enjoin its completion, since service has not been made on all of the general partners, but in any event, in view of the consummation of the transaction, the prayer for an injunction against the sale is moot and I deal solely with the application for alternative injunctive relief.
Nadelson and Nelson assert in opposition to the motion that the letter of August 27th was accurate, in detail, that the purchaser was unidentified because, as of the date of the letter, it had not yet been determined by what entity the assets were to be purchased; that the transaction was negotiated at arm's length, that the miscellaneous assets to be turned over to the lessee consisted of insignificant items such as some linen and tableware, and that the interests of the limited partners will be adequately secured by a purchase money second mortgage on the asset itself.
In answer to the claim that Yablok and other defendants would reap benefits from the lease-back arrangement to the exclusion of the limited partners, the defendants assert that since the buyers were willing to buy the motel only on condition that they would obtain another Holiday Inn franchise and that the Bessemer partnership agreement specifically precluded the partnership from purchasing additional property, the only way a sale could be made was for Yablok and associates as partners in Bessemer to meet the condition. It is claimed that, far from securing a benefit, Yablok is assuming a risk in this regard, since he must arrange financing of $200,000 and ...