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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,
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.
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
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
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 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
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
— 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
(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 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
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
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.
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)).
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
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
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 ...