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NOONAN v. GRANVILLE-SMITH

July 7, 1981

John H. NOONAN, et al., Plaintiffs,
v.
Edward GRANVILLE-SMITH, Jr., et al., Defendants



The opinion of the court was delivered by: KNAPP

MEMORANDUM AND ORDER

Plaintiffs in this securities fraud action are purchasers of limited partnership interests in the now insolvent Maidsville Coal Mining Partnership ("Maidsville" or "the Partnership"). The thirty-three corporate and individual defendants are categorized in the Amended Complaint as: Granville-Smith defendants; Laurita defendants; Trubin Sillcocks defendants; Bank defendants; and Boyd defendants. *fn1" Originally brought in the United States District Court for the District of Columbia, the action was transferred to this district by order dated February 26, 1981. The Bank, Boyd, Laurita and Granville-Smith defendants now move to dismiss for improper venue/lack of personal jurisdiction, failure to state a claim on which relief may be granted, and failure to plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. The Laurita defendants alone move to dismiss for insufficiency of process as to the Children's Trust, and to strike certain portions of the Amended Complaint as redundant and scandalous.

 Background

 Maidsville, a West Virginia limited partnership, was organized by the Granville-Smith defendants in October 1977 for the purpose of leasing or sub-leasing coal rights to various West Virginia and Pennsylvania properties that were to be acquired from the Laurita defendants. The Granville-Smith defendants, in conjunction with the Trubin Sillcocks defendants (Granville-Smith's counsel for this purpose) offered limited partnerships in Maidsville as an investment opportunity. In addition to individually soliciting potential purchasers, the Granville-Smith and Trubin Sillcocks defendants provided such potential investors with a Private Placement Memorandum containing information allegedly supplied by the Laurita and Boyd defendants. They also invited prospective purchasers to attend a November 1, 1977 meeting where such prospective purchasers were permitted to question a Granville-Smith defendant about the offering. The closing of the partnership offering was held on December 28, 1977, at which time each of the plaintiffs purchased a limited partnership unit.

 Jurisdictional Allegations

 Jurisdiction is predicated primarily on Section 27 of the Securities and Exchange Act of 1934, 15 U.S.C. § 78aa, and on 28 U.S.C. § 1331. With respect to venue, plaintiffs rely on the so-called co-conspirator theory, which provides that under Section 27, venue is proper as to all conspirators if a single conspirator is shown to have committed an act in the forum in furtherance of the alleged fraudulent scheme. Wyndham Associates v. Bintliff (2d Cir. 1968) 398 F.2d 614, 620, cert. denied, 393 U.S. 977, 89 S. Ct. 444, 21 L. Ed. 2d 438; Keene Corp. v. Weber (S.D.N.Y.1975) 394 F. Supp. 787, 790-91. Plaintiffs point, in this connection, to two acts allegedly committed in New York by the Trubin Sillcocks defendants: the preparation of the Private Placement Memorandum; and the mailing to purchasers-after the closing took place-of a letter stating that the closing had gone as planned. Plaintiffs also claim that this court has subject matter jurisdiction pursuant to 18 U.S.C. § 1964 (the so-called RICO Act). Diversity among the parties not being complete, plaintiffs rely on the doctrine of pendent jurisdiction with respect to the various state law claims.

 Factual Allegations

 A wide variety of representations were made to prospective purchasers of limited partnership units at the November 1, 1977 meeting, in the Private Placement Memorandum, and at various other times and places.

 Insofar as here relevant, they were told: that the Laurita defendants would convey their properties to the Partnership in return for an irrevocable letter of credit to be furnished by the Granville-Smith defendants, thus giving the Partnership clear and unencumbered title to the properties; that the Partnership would acquire from the Lauritas a viable contract to sell Maidsville coal to the Monongahela Power Company; that although it was contemplated that the Lauritas, who had profitably operated the properties in the past, would continue to operate them for the Partnership, the Partnership would in no sense be dependent on the Lauritas but could operate the properties on its own if it chose to do so; that the properties had been subjected to a geological survey (by the Boyd defendants) with highly optimistic results; and that the Bank defendants would provide financing for any prospective investor who required it.

 It is claimed that all of the foregoing representations were false when made-or thereafter became so-with the exception of the last which, for reasons discussed below, is claimed to have been misleading. The Granville-Smiths never provided the promised irrevocable letter of credit. Instead, at the December 28 closing, the Granville-Smith, Laurita, and Trubin Sillcocks defendants arranged for the deeds and leases to the Maidsville properties, as well as plaintiffs' promissory notes, to be placed in an escrow account which was later transferred to the Lauritas as security for the price of the properties. Thus the Partnership's title to such properties was anything but clear and unencumbered. The Lauritas had no right to assign to the Partnership their contract with Monongahela Power without the latter's consent, which was not forthcoming; moreover, the properties were incapable of producing coal of a grade and quality acceptable to Monongaleha. Because of bitter disagreements between the Granville-Smiths and the Lauritas, it became impossible for the latter to operate the properties for the Partnership; and because of practical difficulties in obtaining the necessary permits from the states of Pennsylvania and West Virginia, there was no possibility that the Partnership could operate them alone. The Boyd defendants' geological survey contained reckless exaggerations and misstatements.

 The representations that the Bank defendants would furnish financing to any investor requiring it was, it seems, wholly accurate. Indeed, the Bank defendants apparently went so far as to finance some investors of rather shaky credit. Such representation is nevertheless claimed to have been misleading in that it suggested that the Banks had thoroughly examined the Maidsville enterprise and were prepared to underwrite it. In this connection, it is alleged that the Granville-Smith defendants made available to certain Bank officers an automobile and other economic benefits with the purpose of inducing such officers to extend loans to investors in the Maidsville Partnership.

 With respect to the Bank defendants, it is also alleged that they disbursed (or authorized Granville-Smith to disburse) plaintiffs' funds to the Partnership at the December 28 closing, despite their actual or constructive knowledge that the Granville-Smith defendants had failed to provide the promised letter of credit and had mortgaged the investors' capital.

 Plaintiffs claim that despite vigorous efforts on their part to learn the truth, they were not apprised of any of these matters until well after the closing took place; and, indeed, that the Trubin Sillcocks defendants-in the letter mailed ...


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