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December 26, 1990


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


This purported class action alleges federal securities claims against corporations and individuals involved in the public sale of interests in a lodge and resort in Stratton, Vermont. Plaintiffs also assert related state statutory and common law claims. Certain defendants now move to dismiss the complaint under Rule 12(b)(6), Fed.R.Civ.P.


The complaint alleges the following:

  Plaintiffs Paul Finkel and Paul Magnuson are
  residents of New Jersey. Plaintiffs Glenn Yarnis
  and Harvey Watkins are residents of New York. They
  each purchased units in Phase I at the Stratton
  Mountain Village Lodge ("The Lodge"). Defendant
  The Stratton Corporation ("Stratton" or
  "StratCorp") is a Vermont corporation maintaining
  its principal office in Stratton, Vermont.
  Defendant Moore & Munger, Inc. is a Delaware
  corporation with its principal office in Stamford,
  Connecticut and at the pertinent times was the

The purported class consists of purchasers of 91 units of The Lodge. The class is alleged to include more than 70 individuals who reside in at least nine states and at least one foreign country. Judging by the alleged state "Blue Sky" laws violations, members of the class reside in Vermont, Connecticut, Florida, Maryland, Massachusetts, Texas, and Virginia, in addition to New Jersey and New York.

On or after June 21, 1984, defendants or their agents delivered to plaintiffs and to the class members a Prospectus offering to sell to potential investors units in Phase I of The Lodge. The units were offered at initial prices ranging from $92,500 to $137,800. The Lodge was to be located at Stratton Mountain, Vermont, which defendants represented to be a winter and summer resort area including cluster houses and cooperatives, single family houses and lots, inns, a ski area, a golf course and other recreational facilities. The complex included 174 resort condominium lodge units, of which Phase I comprised 91 units and were offered for sale to the public by the Prospectus. The packages offered for sale consisted of the units themselves and a percentage of common elements, including a fee simple interest in the land upon which the units were to be situated, coupled with a required management agreement. Pursuant to that management agreement, Stratton as "Lodge Agent" would operate the units sold to investors as lodging accommodations through a contract with its affiliate, Stratton Restaurant and Lodging Corporation. The coupled package of lodge unit and management agreement constituted a security within the meaning of the federal securities laws.

Investors who purchased units deposited with Dowmar, the dealer/manger, a portion of a required 10% downpayment at the time they executed a non-binding unit subscription and management agreement. The terms of the offering provided that:

  at any time until investors deposit the
  downpayment in full, investors may cancel the
  broker's instructions by a notice in writing
  without liability to Dealer/Manager or StratCorp,
  and upon such cancellation Dealer/Manager shall
  promptly return to the Investor all funds and
  documents deposited with Dealer/Manager on account
  of Investor's intended purchase. However, once
  Investor has deposited the downpayment in full and
  all 91 units in Phase I have been subscribed, all
  Investor cancellation rights terminate.

The final installment of the 10% purchase price downpayment was to be made within ten days after notice from the dealer/manager that all 91 units in Phase I were subscribed.

The complaint alleges that between the time of the issuance of the Prospectus and the date upon which investors would be asked to deliver the balance of the 10% downpayment, the defendants issued other written and oral communications to plaintiffs, the class members and other potential investors "with the intent that said individuals rely upon said communications in determining whether or not to purchase units in Phase I of the Lodge." Complaint, ¶ 32. Based upon the statements of the defendants contained in the Prospectus "and in other written and oral communications including those specified below, plaintiffs consummated purchases of units in Phase I." ¶ 33.

The Prospectus represented The Lodge was to be built in two phases, Phase I consisting of 91 units and Phase II consisting of an additional 83 units. The Prospectus further represented that The Lodge would be an integral part of a proposed "integrated and inter-related resort village" called Stratton Mountain Village which was to include 174 non-residential condominium lodge units of The Lodge and a conference center consisting of approximately 16,000 to 18,000 square feet. In addition to paraphrasing those representations, the complaint quotes the following language from the Prospectus:

  StratCorp Management estimates that it will
  commence construction on the first major component
  within the proposed Stratton Mountain Village by
  April of 1984. In addition, it is planned that
  construction on the initial part of the main
  parking structure will begin at the same time.
  Construction on the other major components will be
  based upon the real estate market and the economy.
  The StratCorp Management estimates that the
  completion of all major components within the
  proposed village will occur over the next three to
  five years, but no assurance can be given.
  Though future development of facilities at
  Stratton Mountain is master planned or being
  planned for municipal approval, such future
  development is neither financed or approved by the
  appropriate public authorities, but neither
  StratCorp nor any of its affiliates make any
  representation or commitment as to the
  construction or availability of any recreational,
  commercial or other facilities at Stratton
  Mountain or Bromley Ski Area beyond those already
  in place or under construction, and purchase of a
  condominium security offered hereby should not be
  made in reliance on any facility not already in
  place or under construction at Stratton Mountain
  and Bromley. Registrant has no reason to believe
  that all necessary consents, permits and approvals
  will not be received. The foregoing is set forth
  herein not as a promise of future facilities but
  rather to inform a prospective Investor of
  StratCorp's plans and intentions.
  Lack of Meeting Facilities. The Lodge will have no
  facilities for meeting or conference business until
  the Conference Center is built nearby. No assurance
  can be given that the conference center ever will
  be built and certainly, at present, financing for
  such center is not available. However, StratCorp
  will not commence the sale and construction of
  Phase II until assurance can be given that the
  Conference Center will be completed at
  approximately the same time as Phrase II is
  completed. Group and Conference business is
  necessary in a resort to maintain and increase
  occupancies in off seasons when tourist business is
  low. Stratton Mountain Inn has certain meeting
  facilities and The Lodge may derive "overflow"
  business from the Inn, though no assurance can be
  given that this business will be significant.
  Laventhol & Horwath considered this lack of meeting
  and conference facilities in projecting occupancy
  and room rates in their market study of Phase I.

The Prospectus also contained a summary of a "Market Study with Financial Projections" dated March 23, 1984, prepared for Stratton by the accounting firm of Laventhol & Horwath. The Market Study was based in part on Stratton's representations that it "presently has plans for the further development of the mountain" which included "a conference center facility." The Market Study recited that its purpose was to determine the viability of the proposed Conference Center and Village Lodge Components of the proposed Stratton Mountain Village. The summary of the Market Study recites the conclusion of Laventhol & Horwath that: "On the basis of our study of the New England ski resort conference market, we believe there is sufficient demand to support the development of a conference center facility on Stratton Mountain in Stratton, Vermont." The study also set forth financial projections demonstrating the substantial impact of the conference center upon income and cash flow to investors in The Lodge.

The complaint alleges that the initial offering took place "in or about July of 1984." ¶ 38. Between that time and the time when investors were called upon to complete their 10% down payment (upon notification by Dowmar that all 91 units of Phase I had been sold), there was increasing uncertainty concerning the potential tax benefits of investments in The Lodge and the effect that proposed tax reform legislation might have. These factors caused concern to plaintiffs and the class members with respect to the economic viability of their investment and in deciding whether to exercise their rights to cancel their investments and obtain a refund of all payments made.

On or about October 24, 1984 Dowmar mailed to plaintiffs and the other class members a letter which the complaint quotes in part:

  We are happy to announce that the First Phase of
  the Village Lodge Condominium-Hotel has been full
  subscribed. Sales began on the 91 unit hotel on
  the 22nd day of June and have now been completed.
  Per terms of the Purchase Agreement, the balance
  of the 10 percent downpayment requirement is now
  due and payable in full.
  We have enclosed an account status form showing
  the amount you have paid to date and the balance
  due to complete your 10 percent escrow payment.
  Please return the W-9 Form for the bank along with
  your remittance within 10 days.
  For your perusal, we have enclosed the latest
  Stratton News Release to help keep you abreast of
  the many exciting events here at Stratton.

The complaint also quotes portions of the "Stratton News Release" forwarded with the Dowmar letter. It was dated October 11, 1984 and stated in part:

  STRATTON MOUNTAIN, VT., — For years the thought of
  building a village at the base of Stratton seemed
  to be only a dream. Now, as construction of the
  first phase of the $60 Million complex nears
  completion, that dream has become a reality.
  Essentially the Village has four components
  — a residential area, a commercial center, a
  conference center and parking facility. And, with
  Stratton becoming the new home of the Volvo
  International Tennis Tournament, the Village will
  take on another exciting dimension — a new
  mountainside tennis stadium.
  The scope of this undertaking is greater than
  anything Stratton has ever done before, and, said
  Stratton President, Lovick Suddath, `When each
  component of the Village is completed, few other
  resorts will have anything that will compare. And,
  we feel that the addition of the Volvo Tournament
  will enhance the Village even more.'
  Since ground was broken in June, work on the first
  stages of the Stratton Mountain Village has
  progressed quickly and preparations are already
  under way for the next phase of construction. When
  completed within three years, the new 22-Acre
  complex will enhance Stratton's position as one of
  the country's premiere year-round resorts.

Future Plans

  Also scheduled next year is the completion of the
  Village's residential areas. During the summer of
  1986 the Village Hall, a 500-person conference
  center will be added to help make Stratton one of
  New Englands top meeting and convention sites.

Plaintiffs and class members relied upon the statements contained in the Dowmar letter and the news release in deciding whether to complete their 10% downpayment or to exercise their right of cancellation. They characterize the statements quoted from those documents as containing "material information which removed uncertainties in the Prospectus concerning the intentions and plans of Stratton with respect to the development of the Conference Center and other facilities at Stratton Mountain." ¶ 40. The statements made by defendants in the Dowmar letter and the news release were knowingly false in that at the time they were made defendants did not plan to add a "village hall, a 500 person Conference Center in the summer of 1986;" nor did they expect Stratton to become a "top meeting and convention site;" the Stratton Mountain Village complex was not planned to be completed within three years as represented by defendants; and Stratton was not nor was it planned by defendants to be a "year-round resort." ¶ 41.

Turning again to the Prospectus, the complaint quotes this language:

  While the Investors have the opportunity to
  inspect the outline plans and specifications which
  are described herein, Investors will not have the
  opportunity to review the final plans and
  specifications or to inspect the Lodge prior to
  becoming bound to purchase Units. The outline
  plans and specifications contained in this
  Prospectus, however, contains sufficiently [sic]
  less detail than the final plans and
  specifications will contain. ...

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