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MORIN v. TRUPIN

September 29, 1990

SIMEON MORIN, DELANO MORIN, ANANT MAUSKAR, STEWART BLAIKIE, JAMES BROCKENBROUGH, CELIA BROCKENBROUGH, WILLIAM BRUNNER, DORIS BRUNNER, RICHARD J. CHABAN, ROBERTA M. CHABAN, MABLE CRETEN, MADELYN DENNIS, TRUSTEE FOR DENNIS FAMILY TRUST, EARL J. FIELD, SUBHASH GAJENDRAGADKAR, MORRIS GOLDSMITH, LON A. GRAVES, SANDIS P. GRAVES, JULIUS GRONER, HONG-ZEN LIN HUNG, JFA ASSOCIATES, CRL KIRK, ROGER KIRK, LOUIS LINKER, JAMES C. MAGIDSON, JAMES MARSHALL, CHARLES R. MCNAMEE, COREMCO, INC., CHARLES F. PRATT, JOHN A. ROMITO, CYNTHIA L. ROMITO, RICHARD L. ROUHE, GERARD F. RYAN, BARBARA RYAN, JAMES SCHLENKER, FRANK A. SCHULER, III, HARRY SIMON, MAURICE A. VAN LERBERG, PAUL C. VAN LERBERG, JOYCE B. SEAL AND JOYCE B. SEAL PERSONAL REPRESENTATIVE FOR THE ESTATE OF H. MAX SEAL, ROBERT J. NEJDL, MARY M. NEJDL, JAMES E. WHEELER, ARNOLD L. PETERSEN, II, DONALD T. HLUBUCEK AND RICHARD RATNER, PLAINTIFFS,
v.
BARRY H. TRUPIN, BENNETT W. TRUPIN, ARTHUR BERLIN, SALVATORE A. BUCCI, GERALD SCHAFFER, MARVIN SCHAFFER, FREDERICK GNESIN, DAVID KAYE, HERB SILVERSTEIN, ROBERT D. ABRAMS, GEORGE COHEN, ROTHSCHILD REGISTRY INTERNATIONAL, INC., ROTHSCHILD RESERVE INTERNATIONAL, INC., TRU MANAGEMENT CORP., TRU PROPERTIES CORP., SARASOTA MANAGEMENT CORP., MELLON MANAGEMENT CORP., MHT PROPERTIES CORP., MHT CORPORATION, PRUDENTIAL AMERICAN REALTY CORP., PRUDENTIAL AMERICAN FINANCIAL CORP., BWT CORPORATION, THE TARA JILL TRUPIN 1985-B TRUST, RRI REALTY CORP., CONTINENTAL REALTY CORP., EMANUEL ORGANEK, AMERICAN REALTY ASSOCIATES, NORTH AMERICAN ASSOCIATES, STUART STERN, JERRY BILLS, PASS-THROUGH MORTGAGE CORP., JACKSON-CROSS COMPANY, GEORGE C. HOEZ, RUSSELL E. SNYDER, NETWORK APPRAISAL COMPANY, INC., JOSEPH J. SAVILIA, STEPHEN H. SCHUSTER, GARY ROGERS, H. STEWART CARRICO, II, CHARTERHOUSE CAPITAL INVESTMENT CORP., CHARTERHOUSE FINANCIAL LTD., WESTWIND LEASING CORP., ALAN ASHER, LAVENTHOL & HORWATH, ELLIOT LESSER, MINTZ, FRAADE & ZEIGER, P.C., FREDERICK M. MINTZ, ALAN FRAADE, EISENBERG HONIG & FOGLER, MARTIN HONIG, STUART BECKER & COMPANY, P.C., STUART BECKER, FERBER GREILSHEIMER CHAN & ESSNER, WILLIAM GREILSHEIMER AND ROBERT CHAN, DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

          OPINION

Numerous defendants, described with greater particularity below, have moved to dismiss the complaint of plaintiffs Simeon Morin and Delano Morin (together, the "Morins"), Morin v. Trupin, No. 88 Civ. 5743, and plaintiffs in consolidated actions of Blaikie v. Trupin, No. 88 Civ. 8464, Petersen v. Trupin, No. 89 Civ. 3102, and Seal v. Trupin, No. 89 Civ. 5746, on a variety of grounds, including, most prominently, failure to plead in conformity with the requirements of Rule 9(b) and failure to state claims of securities or common law fraud or violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"). Defendants Continental Realty and Emanuel Organek and Eisenberg Honig & Fogler and Martin Honig have also moved in the alternative pursuant to Rule 56(b) Fed.R.Civ.P. for summary judgment; Continental and Organek have also moved for sanctions.

For the reasons set forth below, the motions to dismiss the claims against the defendants are granted, but leave is granted to amend the complaint. The motions for summary judgment are granted. The motion for sanctions is denied.

Prior Proceedings In These Consolidated Actions

In August 1988 the Morin action was initiated against Barry Trupin ("Trupin") and numerous other defendants. That suit was followed in December 1988 by a separate action by the Blaikie plaintiffs, in May 1989 by a third group, the Petersen plaintiffs, and in September 1989 by the Seal plaintiffs. In April 1988 the Morin and Blaikie actions were consolidated, which was followed by the filing of a consolidated and amended complaint in February 1989. All four of these actions were consolidated under index number 88 Civ. 5743 in December 1989.

The instant dispositive motions were first brought in April 1989, following the court's Opinion dated April 13, 1989, Morin v. Trupin, 711 F. Supp. 97, dismissing the Greilsheimer law firm defendants. After several extensions, argument was to be heard in July 1989. Prior to such argument, however, a disqualification and suppression motion was brought against plaintiffs' counsel (then affiliated with another firm), resulting in the instant motions being held in abeyance. Hearing was had instead on the disqualification motion, resulting in a ruling of December 12, 1989, denying the disqualification request but granting certain ancillary relief. Argument on the remaining motions was set down for January 19, 1990, but again was adjourned to February 1990, at which time the matter was to have been taken on submission.

Consideration at that time was interrupted by collateral proceedings brought on February 8, 1990, involving a realignment of plaintiffs' counsel, a matter that after several appearances was settled in March, only to be followed that same month by plaintiffs' applications by order to show cause for an order of attachment of certain New York properties of certain of the Trupin defendants. Briefing and consideration of that application was advanced ahead of these motions, and an opinion denying the application was issued on May 3, 1990. Morin v. Trupin, 738 F. Supp. 98.

A final, further round of briefing and argument was then initiated by defendants Organek and Continental, who requested the court's consideration of a supplemental submission in support of their motion to dismiss and for summary judgment then under consideration, and sought further argument on those motions and their request for sanctions against plaintiffs. Following extensions sought by the parties to brief and argue the renewed motions, the matter was again taken under submission as of June 29, 1990.

The Parties

The Morins, and the plaintiffs in the Blaikie, Seals and Petersen actions (collectively, the "plaintiffs"), are investors in various tax-advantaged limited partnerships, principally in the real estate area (the "Investor Partnerships"), who claim to have been defrauded by the defendants.*fn1

According to the Complaint, each of the Investor Partnerships had as their general partner of a company named Tru Management Corp. ("TMC"), a defendant to this action. The Investor Partnerships owned limited partnership interests in four entities holding real estate assets (themselves organized as limited partnerships and referred to as the Owning Partnerships): Dallas Realty Associates, which owned commercial real estate in Dallas, Texas (the "Dallas Property"), Lincoln Center Associates, which owned commercial real estate in Indianapolis, Indiana (the "Indianapolis Property"), the Mutual Home Bank Building Partnership, which owned commercial real estate in Grand Rapids, Michigan (the "Grand Rapids Property"), and Sarasota Plaza Associates, which owned commercial real estate in Sarasota, Florida (the "Sarasota Property") (collectively, the "Properties"). Each of these Owning Partnerships had as its general partner a corporation, MHT Properties Corp., also a defendant to this action. MHT Properties and TMC were each subsidiaries of defendant MHT Corp. The Owning Partnerships purchased the Properties from other Trupin-affiliated entities, the general partner of each of which was Tru Properties Corp. ("TPC").

Defendants to the consolidated complaint number over fifty. For ease, they may be classified as follows:

(a) The Trupin Defendants:

— Barry Trupin ("Trupin") is alleged to have founded and controlled a network of companies referred to by plaintiffs as the "Rothschild Group," consisting of, inter alia, TPC, TMC, Rothschild Registry International, Inc. ("Registry"), Rothschild Reserve International, Inc. ("Reserve"), RRI Realty Corp. ("Realty"), MHT Properties, MHT Corp., BWT Corp., several other corporations and a series of trusts (the "Trusts").*fn2

— Gerald Schaffer, Herb Silverstein, Arthur Berlin, Salvatore Bucci, Marvin Schaffer, Frederick Gnesin, David Kaye, and Robert D. Abrams are all alleged to have been employed by Rothschild Group companies in various capacities as officers, executives, legal advisors, accountants, dealers and salesmen, and to have functioned as controlling persons with respect to one or more of the Rothschild companies.

(b) Gary Rogers allegedly controls two Texas corporations, Charterhouse Capital Investment Corp. and Charterhouse Financial, Ltd. (collectively "Charterhouse"), which are alleged to have been involved in the promotion, sale and management of the Investment Partnerships, as well as several other companies which were formerly part of the Rothschild Group, viz., TPC, TMC, MHT Prop., MHT Corp., the Sarasota Management Corp. ("SMC") and the Airjet Trusts. H. Stewart Carrico II is said to be the chief financial officer of Charterhouse and a controlling person of that company.

(c) Continental Realty Corp. and Emanuel Organek, its principal, are alleged to have provided services to the Rothschild companies in connection with the acquisition and management of the Properties.

(d) Appraisers, Accountants, and Lawyers:

— Jackson-Cross is a corporation that provides real estate appraisals. Its alleged controlling persons are George Hoez and Russell Snyder.

— Network Appraisal Company, Inc. is also in the appraisal business; Joseph Savilia and Steven Schuster are its officers and controlling persons, according to the complaint.

— Laventhol & Horwath is an accounting firm; Elliot Lesser is a member of the firm. Stuart Becker & Co. is alleged to have been a predecessor of that firm, and Stuart Becker a partner of the predecessor firm.

— Mintz Fraade & Zeiger, P.C., and Eisenberg Honig & Fogler are professional corporations engaged in law practice. Frederick Mintz and Alan Fraade are principal members of the former firm and Martin Honig is a partner of the latter. Mintz Fraade is alleged to have acted as legal counsel to Rothschild Group entities for years, preparing private placement memoranda for the Investment Partnerships other than the Airjet Trusts. Eisenberg Honig is alleged to have acted as legal counsel to the Rothschild Group in connection with the Airjet Trusts.

(c) Pass-Through Mortgage Corp. ("Pass-Through") is a Colorado corporation, allegedly controlled by Jerry Bills ("Bills") and by Trupin.

(f) Westwind Leasing Corp. and Alan Asher, its vice-president and a controlling person, are alleged to have been promoters and sponsors of the Airjet Trusts.

(g) American Realty Associates and North American Associates are companies allegedly controlled by Trupin through their general partner, Stuart Stern. These companies, which sold certain of the Properties to the Owning Partnerships, were allegedly represented in the placement memoranda as unaffiliated with the Rothschild companies.

The Complaint*fn3

The Complaint alleges that in November, 1985, Simeon Morin purchased 5.75 units in an Investment Partnership, Rothschild Realty, in the face amount of $1,006,250, and Delano Morin purchased 2.75 units in the face amount of $467,500. In connection with these investments, the Morins executed promissory notes (the "Notes"). Between July, 1986 and December 31, 1986, they made payments on the Notes of approximately $345,000 to Rothschild Realty. Other plaintiffs made similar investments in the Investment Partnerships, the dates, dollar amounts and other circumstances of which are not pleaded.

The Complaint alleges that the Morins and other plaintiffs who purchased interests in the Investment Partnerships have been defrauded in connection with their investments in the Partnerships. Principally, it alleges that the Properties were sold and resold among entities controlled by Barry Trupin at inflated prices in less-than-arms-length transactions; that the private placement memoranda for the Partnerships contained fraudulent information and material misrepresentations and omissions; that appraisals of the Properties were inflated; that financial forecasts for the Investor Partnerships were fraudulent; that tax opinions were false; and that adverse information concerning the Properties and their operation was covered up both prior to and after units in the Investment Partnerships had been purchased by plaintiffs. The defendants are also said to have used fraudulent means to obtain financing, placed massive mortgage debts on the Properties, bribed advisors of potential investors to recommend the investment, siphoned off the proceeds of the transactions, and covered up problems to prevent investors from discovering the fraud.

Those charged with such conduct include the general partner of the Partnerships, the promoters of the offering of Partnership interests and their affiliates, control persons, officers, sales people, successors in interest, known employees, lawyers who worked on the offering memorandum, accountants, and appraisal companies.

In total, forty-four of the fifty-four defendants are alleged to have played some role in the creation, sale, and management of the entities in which plaintiffs invested or in the sale of units in the entities (the "Securities Defendants"). These defendants include two law firms, two accounting firms and two appraisal companies. Excluded from the Securities Defendant category are the four Trusts and other companies alleged to have served as Trupin's alter egos, as well as defendants Pass Through and Bills.

MOTIONS TO DISMISS

On a motion to dismiss, the factual allegations of the complaint must be accepted as true, and the complaint must be liberally construed and its allegations considered in the light most favorable to plaintiffs. Morin v. Trupin, 711 F. Supp. 97, 103 (S.D.N.Y. 1989) (citing Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir. 1985) and Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974)). "A motion to dismiss will be granted only if it appears to be certain that the plaintiff is entitled to no relief under any set of facts which could be proved in support of the claim made." Id. (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)).

I. The Securities Claims

A. Section 10(b) Claims under Rule 9(b)

Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. Rule 9(b). Such general pleading of conditions of mind, must, however, be supported by the allegation of "circumstances . . . that provide a factual foundation for otherwise conclusory allegations of scienter." Stern v. Leucadia National Corp., 844 F.2d 997, 1004 (2d Cir.), cert. denied, 488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988).

As plaintiffs' 10b-5 security law claims sound in fraud, their pleadings respecting that claim must satisfy the strictures of Rule 9(b). In numerous respects, Trupin and other defendants assert failure in that regard. The sheer length of the complaint (it exceeds 150 pages and contains 437 numbered paragraphs) forecloses paragraph by paragraph consideration and recital in this opinion of the particularity of pleading. Examination of the complaint nevertheless indicates several infirmities under Rule 9(b) which warrant granting the motion for dismissal with leave to replead.

The most significant questions concern the specificity of alleged misrepresentations relating to the securities and the various defendants' relations to such misrepresentations. As defendants for the most part concede, the complaint's allegations of misrepresentations contained in the offering memoranda succeed in identifying, if not with utmost precision, the factual substance of the representations contained therein that are alleged to be false or misleading. Under Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986), of course, "no specific connection between [these] fraudulent representations in the Offering Memorandum and particular defendants is necessary" where defendants are alleged to have participated in the offering as insiders or affiliates. See also Bruce v. Martin, 691 F. Supp. 716, 722 (S.D.N.Y. 1988).

Although Luce to some extent answers much of the defendants' argument, a defendant who is an affiliate must nevertheless be tied to the offering memorandum in some, albeit non-specific, way, if he is to be charged with liability for misrepresentations contained therein, DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1249 (2d Cir. 1987), followed in Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990) (mere allegation that entity was affiliate was insufficient to link it to misrepresentations in offering memorandum). This, at least for purposes of a claim under § 10(b), requires more than a general allegation of knowledge wholly divorced from any pleading of facts that "give rise to an inference of knowledge, intent or reckless disregard. . . ." Tobias v. First City National Bank and Trust Co., 709 F. Supp. 1266, 1277 (S.D.N.Y. 1989). As to any defendant to whom cannot fairly be ascribed insider or affiliate status, a more precise connection to, or role in preparation of, the Memorandum must be pleaded to sustain a claim against Rule 9(b) challenge. Thornock v. Kinderhill Corp., 712 F. Supp. 1123, 1128 (S.D.N Y 1989); see also Devaney v. Chester, 813 F.2d 566, 568-69 (2d Cir. 1987) (discussing requirement that sufficient facts be pleaded to give rise to inference of scienter).

Plaintiffs have named 45 defendants as "Securities Defendants." It is not clear exactly which of these are alleged to have been insiders or affiliates of the Investment Partnerships, nor, as to any number of the defendants (e.g., Jackson-Cross, George Cohen, Marvin Schaffer, Fred Gnesin, David Kaye, Herb Silverstein and Arthur Berlin) is it obvious from which facts plaintiffs ask scienter to be inferred. Rule 9(b), in conjunction with Rule 8(a), which addresses clarity in pleading, therefore directs dismissal with leave to replead with greater particularity and clarity each of the Securities Defendant's status as an insider or affiliate and as primary wrongdoer or an aider/abettor, the basis for the knowledge ascribed to each, and, as to those who are not established to be insiders or affiliates, the specific connection each has to the misrepresented material in the offering memoranda.*fn4

Plaintiffs also leave Rule 9(b) unsatisfied to the extent they concededly rely upon nonparticularized oral representations or written statements extrinsic to the offering memoranda. As to these alleged misrepresentations (see, e.g., ¶ 72, referring to misleading market literature and projections, or ¶ 74, referring to oral sales pitches), plaintiffs are obligated under Rule 9(b) to give the specific defendants charged with such communicative acts more specific notice of the content, context, place and time of such representations. See Luce, supra, 802 F.2d at 54; Tobias, supra, 709 F. Supp. at 1277.

Where there is reliance upon other fraudulent acts (such as other fraudulent representations, or the use of the mails or wires to communicate fraudulent representations, as discussed further below), the standards of Rule 9(b) must be observed more meticulously, especially the obligation to specify the factual basis for holding a particular defendant responsible for a particular act (including whether such responsibility arises from his or her direct commission of such act, or less directly, by virtue of a particular agreement with certain others to accomplish such act or particular assistance provided to specified persons engaging in such acts). See, e.g., ¶¶ 372, 378, 387(i), 428 (alleging in general terms that defendants aided and abetted each other).

It is also necessary to remind plaintiffs that allegations based upon "information and belief" must be accompanied by a statement of the facts upon which the belief is founded, so that persons other than plaintiffs may judge whether the facts as pleaded sustain an inference of fraud. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974); Stevens v. Equidyne Extractive Industries, 694 F. Supp. 1057, 1062 (S.D.N.Y. 1988); Crystal v. Foy, 562 F. Supp. 422, 424 (S.D.N Y 1983). Defendants correctly indicate that at several places, little if any factual underpinning is provided for allegations made on information and belief. E.g., ¶¶ 73-75, 173, 205, 224, 274. Upon repleading, all such allegations should conform to this important requirement.

The other significant respect in which Rule 9(b) has been ignored in the securities claims is in the allegations addressing the circumstances of plaintiffs' investments. There are over 35 plaintiffs. As to all but two of them, the complaint is silent as to the dates of their purchase of their various investments. ¶¶ 126-27. Additionally, although the amount of each investment is disclosed, there is no indication of how the loans were financed and how much each plaintiff has paid to date, nor is there an indication of the amounts actually lost on the investments. Mere participation in an unsuccessful investment program, in the absence of any alleged loss, is insufficient to state a claim. Moreover, although the complaint does generally allege that each plaintiff relied upon the allegedly misleading memoranda in making their decision to purchase interests in the Investment Partnerships, it is to some extent ambiguous even in this regard. See ¶ 127.*f ...


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