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MURPHEY v. HILLWOOD VILLA ASSOCS.

January 21, 1976

Murphey, et al., Plaintiffs
v.
Hillwood Villa Associates et al., Defendants


Conner, District Judge.


The opinion of the court was delivered by: CONNER

MEMORANDUM AND ORDER

CONNER, District Judge:

 In April 1972, defendants Karr and Gaines entered into an agreement with plaintiffs to form defendant Hillwood Villa Associates (Hillwood), which was organized as a limited partnership under the laws of Tennessee, with Karr and Gaines as general partners and plaintiffs as limited partners. The primary purpose of the partnership was to construct, own and operate a rental housing project in Nashville, Tennessee, under the provisions of Section 221(d)(4) of the National Housing Act.

 The Limited Partnership Agreement (the Agreement), executed in Tennessee by Karr and plaintiffs' attorney-in-fact, Arnold Goldstein, obligated plaintiffs to make capital contributions to Hillwood in the aggregate amount of $198,000 plus interest, $50,000 to be paid in cash immediately and the balance to be represented by a series of non-negotiable promissory notes due on January 31 of each of the years 1973 through 1976. The Agreement provided that, upon default by a limited partner in the payment of his particular obligations, the remaining limited partners would have the "First Option" to purchase the defaulting partner's interest, exercisable within thirty days after receipt of notice from the general partners of the default. A failure to exercise such option would give the general partners a "Second Option" to sell the defaulting limited partner's interest, subject to any required approval of the Federal Housing Administration. If neither of these two options was exercised, the Agreement stipulated that the general partners "shall be deemed to be the assignees" of the defaulting limited partner's interest in the partnership.

 Although the record is not entirely clear, it appears that plaintiffs made the initial cash contribution of $50,000, and subsequently paid the amounts due on the promissory notes maturing on January 31, 1973 and January 31, 1974. These payments were apparently made in the manner prescribed by the Agreement, which required that all checks be made payable directly to the partnership. Prior to the January 31, 1975 maturity date of the third set of promissory notes, however, Gaines, purporting to act on Hillwood's behalf, mailed to the law firm of Conrad & Smith in New York City, which was designated "Counsel for the Partnership" by the Agreement, an "irrevocable assignment" transferring Hillwood's right to receive $8,500 of the total amount due from the limited partners under the soon-to-mature promissory notes to various assignees, who had supposedly rendered services to Hillwood. The assignment directed Conrad & Smith, upon receiving the limited partners' respective contributions, to pay the assigned $8,500 directly to the assignees and to forward the balance to Hillwood.

 On February 5, 1975, Goldstein, who was a member of Conrad & Smith, mailed the limited partners' checks in accordance with Gaines' directive. In mid-February, however, Karr sent letters to all of the plaintiffs, advising them that their installment obligations due January 31, 1975 had not been paid. Goldstein, having received copies of these letters, notified Karr by mail that the payments had in fact been made, but did not mention the assignment executed by Gaines. On February 24, 1975, Karr sent plaintiffs yet another letter, advising them of their dereliction in failing to pay the amounts due. Copies were again mailed to Conrad & Smith and were received by Goldstein. Finally, on April 17, 1975, no further correspondence from plaintiffs or Goldstein having been received, and the time for exercise of the two options specified in the Agreement having expired, Karr notified plaintiffs that their interests in Hillwood had been forfeited and assigned to him.

 Plaintiffs then instituted the present action, seeking a declaratory judgment, pursuant to 28 U.S.C. § 2201, that they have met all of their obligations under the Agreement, that they remain limited partners of Hillwood, and that their partnership interests have not been assigned to Karr, and additionally seeking $300,000 punitive damages plus reasonable costs and attorneys' fees. The complaint alleges both federal and non-federal grounds for relief. Plaintiffs claim that defendants' conduct constitutes a "device, scheme, or artifice to defraud" in violation of both Section 17(a) of the Securities Act of 1933 (the 1933 Act), 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Jurisdiction over that claim is allegedly based on Section 22 of the 1933 Act, 15 U.S.C. § 77v, and Section 27 of the 1934 Act, 15 U.S.C. § 78aa. Plaintiffs additionally claim that divestiture of their limited partnership interests constitutes an unlawful forfeiture at common law. Subject matter jurisdiction over this claim is based upon diversity of citizenship, 28 U.S.C. § 1332(a)(1).

 Defendants have now moved for an order, pursuant to Rule 12(b), F.R. Civ. P., dismissing the complaint for failure to state a claim for relief under the federal securities laws, for lack of personal jurisdiction over defendants, and for improper venue, or, alternatively, for an order, pursuant to 28 U.S.C. § 1404, transferring this action to the United States District Court for the Middle District of Tennessee.

 Specifically, defendants contend that, even assuming the validity of plaintiffs' substantive allegations and their assertion that their limited partnership interests were "investment contracts," and thus securities within the meaning of Section 3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10), no action under Section 10(b) and Rule 10b-5 can be maintained, since the alleged fraudulent scheme was not "in connection with the purchase or sale" of the limited partnership interests. They argue that plaintiffs merely allege "a disagreement between the parties relating to performance of an agreement."

 Next, defendants reason that, since plaintiffs' securities violation claim is baseless and subject to dismissal, their claim of unlawful forfeiture must also be dismissed for lack of in personam jurisdiction. Although conceding subject matter jurisdiction on the basis of diversity, defendants contend in essence that they are not subject to the exercise of New York State's long-arm statute, N. Y. C.P.L.R. § 302(a)(1), and that service of extraterritorial process upon them was thus ineffective. Finally, defendants argue that, even if in personam jurisdiction exists, venue is improperly laid in this Court, requiring dismissal of the complaint or at least transfer of the action pursuant to 28 U.S.C. § 1404. In support of this argument, they point out that, under 28 U.S.C. § 1391(a), civil actions based on diversity may be "brought only in the judicial district where all plaintiffs or all defendants reside, or in which the claim arose." Since, in the instant case, all of defendants reside in the Middle District of Tennessee and plaintiffs reside in New Jersey, Connecticut and New York, the only possible basis for venue in this district is that the claim arose here. Defendants contend that the present claim arose in Tennessee, and not in the Southern District of New York. Finally, defendants assert, in the alternative, that this action should be transferred to the Middle District of Tennessee "in the interest of justice."

 Defendants' motions thus raise the following issues, each of which will be considered below:

 
I. Does this Court have subject matter jurisdiction in this action?
 
II. Does this Court have in personam jurisdiction ...

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