UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
March 11, 1985
RICHARD B. DANNENBERG, individually: and on behalf of others similarly situated, Plaintiff, against MILTON B. DORISON, RICHARD M. FIRESTONE, MALE, BLOOM, BODNE, KUPERSTEIN & EISENBERG, a professional Association, MALE BODNE, KUPERSTEIN & EISENBERG, a Professional Association, LANCE E. EISENBERG, STANLEY H. KUPERSTEIN MICHAEL H. MALE, MICHAEL D. BODNE, STEVEN W. SIMON, MAJOR MANAGEMENT CORPORATION, ALBERT H. WAHL, AMITY FINANCIAL, a Connecticut limited partnership, AMITY FINANCIAL CORP., DRAKE FINANCIAL, INC., COLUMBO TRUST, N.V., COLUMBUS TRUST COMPANY, LTD., LEISURE TRANSPORTATION INC., ALPHANUMERIC INCORPORATED, MICHAEL SHORE, MITCHELL GOLDSTONE, JEFFREY COHAN, Defendants.
The opinion of the court was delivered by: SPRIZZO
OPINION AND ORDER
Plaintiff, Richard B. Dannenberg, sues to recover damages allegedly sustained as a result of his investment in a fraudulent limited partnership tax shelter, Aquarius Associates ("Aquarius").
have filed motions to dismiss the amended complaint.
Plaintiff has moved for certification that the action proceed as a class action pursuant to Fed. R. Civ. P. 23. The Court heard oral argument on the motions on January 25, 1985.
According to the amended complaint, limited partnership interests in Aquarius were sold pursuant to a private placement offering memorandum dated March 21, 1979, and supplemented May 8 and 18, 1979 ("the Offering Memorandum"). See Amended Complaint [P] 5. The Offering Memorandum was prepared by MBBK&E, along with a tax opinion with respect to the offering. Id. at [P] [P] 48, 52. On May 31, 1979, allegedly in reliance on the Offering Memorandum, plaintiff purchased a one-half "unit" of Aquarius for $50,000 -- $12,500 paid by check and $37,5000 paid by way of a recourse note to the order of Drake. Id. at [P] 36. Plaintiff also paid a $500 legal fee to MBBK&E. Id.
Plaintiff alleges that the Offering Memorandum was false and misleading because it failed to disclose, inter alia, the identities of the "principals and promoters" of Aquarius and how they would profit from Aquarius, and because it represented that Aquarius would engage in coal mining operations when in fact Aquarius was never intended to actually engage in coal mining or any other business, had no legitimate business purpose, and therefore did not qualify for the tax advantages presented to investors. E.g., id. at [P] 38. He further alleges that his interest in Aquarius is worthless. Id. at [P] 60.
Plaintiff sues for damages pursuant to section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), common law fraud, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968.
A. Motions to Dismiss
1. Claims pursuant to sections 10(b) and 17(a), and common law fraud
Defendants Leisure, Alphanumeric, Shore, Goldstone, Cohan, Drake, and Wahl move to dismiss the fraud claims for failure to plead fraud with the requisite particularity as required by Fed. R. Civ. P. 9(b). These same defendants, along with the attorney defendants MBBK&E, MBK&E, Eisenberg, Kuperstein, Male, Bodne, and Simon, also move to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) for failure to plead scienter.
To satisfy Rule 9(b) plaintiff must plead facts from which the Court may reasonably infer fraud as to each defendant. See, e.g., Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982), citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 192, 47 L. Ed. 2d 668, 96 S. Ct. 1375 n.7 (1976); Crystal v. Foy, 562 F. Supp. 422, 424-25 (S.D.N.Y. 1983). Tested by these principles the amended complaint is clearly insufficient with respect to the outsider defendants Drake, Wahl, and the attorney defendants.
While plaintiff alleges that Dorison and Firestone, the alleged insiders, promoted about fifty fraudulent tax shelters, no facts are pleaded from which the Court may infer that the outsider defendants knew or deliberately avoided knowing that Aquarius or any of these other tax shelters were fraudulent. Merely multiplying the number of transactions in which a defendant allegedly participated, either by preparing a tax opinion or providing financing or underwriting services, without pleading facts that would permit an inference of knowledge that any one of these other transactions was fraudulent, does not satisfy the requirement of Rule 9(b). See, e.g., Decker, supra, 681 F.2d at 114; Crystal, supra, 562 F. Supp. at 424. Yet that is all that is alleged against these defendants. See, e.g., Amended Complaint [P] [P] 48, 51, 52, 67.
Moreover, plaintiff has not alleged any factual basis upon which the Court could properly infer that these outside defendants owed any fiduciary duty to plaintiff, which would render recklessness a sufficient predicate for an allegation of fraud.
See, e.g., ITT An International Investment Trust v. Cornfeld, 619 F.2d 909, 923-25 (2d Cir. 1980); Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 602 F.2d 478, 484-85 (2d Cir. 1979), cert. denied, 444 U.S. 1045, 62 L. Ed. 2d 731, 100 S. Ct. 734 (1980); cf. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44 (2d Cir.), cert. denied, 439 U.S. 1039, 58 L. Ed. 2d 698, 99 S. Ct. 642 (1978). Therefore, plaintiff's first, second, and fourth claims are dismissed as to these defendants, without prejudice to repleading if during the course of discovery plaintiff acquires sufficient facts against any of them upon which a charge of fraud may properly be predicated.
The situation is different as to defendant Leisure, general partner of Aquarius, defendant Alphanumeric, the controlling person of Leisure, and defendants Shore, Goldstone, and Cohan, who are all insiders of Aquarius. As to these defendants, the Court may reasonably infer, based on their inside knowledge of and participation in the business of Aquarius, that they were aware of the fraudulent nature of the transactions in which Aquarius was involved. Cf. Goldman v. G.C. Belden, Jr., 754 F.2d 1059, slip op. at 1932-33 (2d Cir. Feb. 12, 1985). their motions to dismiss plaintiff's fraud claims are therefore denied.
2. Motion to Strike
Defendant Dorison moves pursuant to Fed. R. Civ. P. 12(f) to strike certain allegations of the amended complaint pertaining to other actions and proceedings, arguing they are irrelevant, prejudicial, and will unfairly broaden the scope of discovery.
Because the Court finds that these allegations, if true, might be relevant with respect to whether or not Dorison acted fraudulently with respect to Aquarius, the motion to strike is denied. Any problems arising in connection with the scope of discovery as a consequence of the inclusion of these allegations may be presented to and dealt with by the Court at the appropriate time.
3. Motions to Dismiss the RICO Claims
The fifth and sixth claims of the amended complaint allege violations of the civil provisions of RICO. As discussed at oral argument, because the Supreme Court has agreed to review the Second Circuit's decision in Sedima, S.P.R.L. v. Imrex Company, 741 F.2d 482 (2d Cir. 1984), cert. granted, 484 U.S. 1006, 108 S. Ct. 698, 98 L. Ed. 2d 650, 53 U.S.L.W. 3495 (U.S. Jan. 15, 1985), the Court will not consider the motions to dismiss the RICO claims at this time. The parties shall submit a Stipulation and Order within ten (10) days of the date of this Opinion and Order either (i) severing and suspensing the RICO claims pending the Supreme Court's ruling in Sedima, or (ii) dismissing the RICO claims without prejudice to reinstating them should that be appropriate in light of the Supreme Court's ruling in Sedima, assuming of course that defendants agree to a tolling of the statute of limitations from the time of the filing of the complaint until the Supreme Court rules on this issue.
B. Motion for Class Certification
Plaintiff moves pursuant to Fed. R. Civ. P. 23 to have this action certified as a class action and to have plaintiff certified as class representative. Plaintiff defines the proposed class as all persons who purchased limited partnership interests in Aquarius pursuant to the offering Memorandum, with the exception of any defendants herein.
In order to qualify for class action status, the Court must find that (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the proposed class representative are typical of the claims of defenses of the class, (4) the proposed representative will fairly and adequately protect the interests of the class, (5) common questions of law or fact predominate over individual questions, and (6) a class action is superior to other available methods for the fair and efficient adjudication of the controversy. Fed. R. Civ. P. 23(a) & (b)(3).
Defendants contend that the proposed class fails to satisfy the numerosity requirements of Rule 23(a)(1). Plaintiff concedes that the maximum possible number of class members in the instant action is thirty-three. In fact, it appears that the actual number may be significantly lower.
Thus, this is clearly a case in which the numerosity requirements of the Rule are, at best, marginally met. But see Meyer v. Stevenson, Bishop, McCredie, Inc., [1975-76]Fed. Sec. L. Rep. (CCH) [P] 95,548 (S.D.N.Y May 11, 1976).
Plaintiff, however, argues that some court's have stressed that mere numbers should not be dispositive, citing DeMarco v. Edens, 390 F.2d 836, 845 (2d Cir. 1968). However, DeMarco involved precisely the reverse of the facts presented here. In that case, the Second Circuit stressed that merely because the numerosity requirements of the Rule were met, it did not follow that the Court should necessarily certify a class action. That case does not stand for the proposition that where the numerosity requirements of the Rule are at best marginally complied with, the Court should certify the class for other reasons.
Nor is the Court persuaded by other cases cited by plaintiff where courts have certified relatively small classes because of the impracticability of joining all class members in one action because they lived in widely dispersed geographic locations. Rule 23(a)(1) by its terms requires that the number of potential class members make joinder impracticable, and that is clearly not the case here.
Furthermore, the Court is not convinced that a class action is the most efficient means in which to resolve this case. Since it appears that all of the potential defendants have been sued in this action, any common questions of law or fact determined adversely to these defendants will in all likelihood have collateral estoppel effect against them in any subsequent action brought by another purported class member. Therefore, it is not clear that a class action is necessary to avoid multiple litigation of the same claims.
Defendants also argue that a class action should not be certified because plaintiff's interests are inconsistent with those of other class members. See Green v. Santa Fe Industries, 82 F.R.D. 688, 690 (S.D.N.Y. 1979). They argued that to succeed in this action plaintiff must argue and prove that Aquarius was a sham, whereas as noted supra at note 6, other class members are contesting the internal Revenue Service's determination that the limited partnership lacked a valid business purpose. In fact, a number have requested the assistance of Leisure in this effort. See Affidavit of Michael Goldstone (Dec. 2, 1983). Given this additional factor, the Court sees no reason why it should certify a class in this case. The motion for class action certification is therefore denied.
In view of the denial of plaintiff's class action motion for the reasons set forth above, the Court need not address the question of whether plaintiff's counsel can adequately represent the class because she may lack the office and secretarial resources necessary to efficiently and thoroughly manage a class action.
For the reasons set forth in this Opinion and Order, it is hereby
1. The motions to dismiss the Amended Complaint as to defendants Drake, Wahl, MBBK&E, MBK&E, Eisenberg, Kuperstein, Male, Bodne, and Simon are granted, without prejudice;
2. The motions to dismiss the Amended Complaint as to defendants Leisure, Alphanumeric, Shore, Goldstone, and Cohan are denied;
3. Defendant Dorison's motion to strike is denied without prejudice;
4. The parties shall submit a Stipulation and Order within ten (10) days of the date hereof, disposing of the third, fifth and sixth claims of the Amended Complaint, in accordance with this Opinion; and
5. Plaintiff's motion for class action certification is denied.
It is further ORDERED that:
6. All parties shall complete discovery on or before October 30, 1985;
7. A Pre-Trial Order shall be prepared in accordance with Court's directions and shall be filed on or before December 16, 1985;
8. If the Pre-Trial Order is not filed on the date hereinbefore set forth, the Court will entertain appropriate applications to dismiss;
9. All parties shall be ready for trial of the above-captioned action on January 2, 1986, and thereafter counsel for all parties shall be prepared to proceed to trial on twenty-four hours notice by the Court; and
10. A Pre-Trial Conference shall be held on November 1, 1985 at 10:00 a.m.
It is SO ORDERED.