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ROSO v. SAXON ENERGY CORP.

January 10, 1991

ARTHUR R. ROSO, INDIVIDUALLY AND AS REPRESENTATIVE OF ALL THOSE PERSONS SIMILARLY SITUATED, PLAINTIFF,
v.
SAXON ENERGY CORPORATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge.

MEMORANDUM AND ORDER

Plaintiff Arthur Roso, Individually, and as Representative of all those persons similarly situated ("Roso"), was certified by this Court on December 6, 1988 to bring this action against Saxon Energy Corporation ("Saxon") et al. on behalf of the designated class for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-68, the Securities Act of 1933 ('33 Act), 15 U.S.C. § 77l (2) (1981), and the Security Exchange Act of 1934 ('34 Act), 15 U.S.C. § 78j(b) (1981). In addition, the complaint alleges causes of action for fraud, breach of contract, negligence, and negligent misrepresentation. Roso moves pursuant to Fed.R.Civ.P. 56 for summary judgment against defendant Sheldon Barr on the first and second causes of action for fraud and RICO violations. In addition, Roso moves pursuant to Fed.R.Civ.P. 64 and N.Y.Civ.P.Law & R. 6201(3) for an order of attachment to protect certain money in Swiss bank accounts within Barr's control from being dissipated by him. Barr cross-moves pursuant to Fed.R.Civ.P. 56 for summary judgment dismissing the entire action against him individually, or in the alternative, staying the action, or granting summary judgment dismissing Roso's RICO cause of action.

FACTS

This civil action arises out of a scheme whereby members of the class were induced to invest in leases for energy saving devices referred to as "Energy Brains." These Energy Brains were apparently designed to work in tandem with heating and air conditioning units in order to promote energy efficiency for large commercial spaces and buildings.*fn1 Three corporations, Saxon, Enersonics Inc., ("Enersonics"), and ALH Energy Management Corporation ("ALH") participated in the Energy Brain Leasing Program. Saxon is self-described as a "closely held leasing company specializing in energy conservation equipment." Bouman Affid., Exh. 7. Enersonics manufactures the Energy Brain units. Bouman Affid., Exh. 7. ALH were the managers of the Energy Brain, entering into service agreements with class members. Bouman Affid., Exh. 3, p. 235; Exh. 1, p. 24. In addition, Sheldon Barr, Leonard Freedman, Kamal Fereg, Charles Taylor, and Frank Leha individually and together held different posts at the various companies and participated in the Energy Brain Leasing Program. See Bouman Affid., Exh. 2, p. 2. Barr was identified to be both the secretary of Enersonics and Saxon's corporate legal counsel. Tr. 4378, 4527.

Members of the class at bar were apparently encouraged to lease the Energy Brain devices in order to obtain tax advantages and credit. Status as a lessee was purportedly crucial because tax deductions were not available to passive investors whereas owners of businesses for profit were afforded deductions. See Bouman Affid., Exh. 6. Class members were told that as lessees, they would be considered business owners and not security holders, which connotes a passive investment. See Bouman Affid., Exhs. 5-10. Furthermore, the promotion materials stated that the lease would likely not be construed as a security.

Investors in the Energy Brains were provided promotional materials containing projections of tax credits and tax deductions. Bouman Affid., Exh. 7. Between credits and deductions, it was estimated that lessees could get a tremendous return on their investments. The materials specifically stated that for every dollar invested, three dollars could be deducted and/or credited to taxes so that under the scheme, as delineated in the promotional materials, only the "government loses".

The tax scheme was a sophisticated one which required a vertical structure in order to gain the tax advantages. Enersonics, the manufacturer, was at the top. Saxon was the intermediary or lessor; it paid a minimal sum for the purchase of the Energy Brains and then backed its purchases with promissory notes for the remainder owed. Each installed "Brain" was supposed to provide sufficient rental funds to pay off the promissory note between Saxon and Enersonics and further provide a profit to the investor lessees. Saxon also functioned as a conduit whereby the tax credits were to pass through it to the advantage of the lessees at the bottom. An arms-length relationship between Saxon and Enersonics was crucial in order for the tax shelter to be legal, meaning that it was mandatory for Saxon's interests in the scheme to be wholly separate from Enersonic's interests.

DISCUSSION

Roso moves for summary judgment on the theory of issue preclusion, contending that the requisite elements for both common law fraud and RICO violations were essentially proven beyond a reasonable doubt at the state level. The doctrine of collateral estoppel, which is intended to reduce litigation and conserve judicial resources, is predicated upon the general notion that a party should not be permitted to relitigate an issue that has previously been decided. Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455, 492 N.Y.S.2d 584, 482 N.E.2d 63 (1985). It is well settled that a criminal conviction, whether by jury verdict or guilty plea, estops a convicted defendant from raising factual issues decided in the criminal proceeding in a subsequent civil lawsuit. In fact, "in the case of a criminal conviction based upon a jury verdict of guilty, issues that were essential to the verdict must be regarded as determined by the judgment." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569, 71 S.Ct. 408, 414, 95 L.Ed. 534, reh. denied, 341 U.S. 906, 71 S.Ct. 610, 95 L.Ed. 1345 (1951).

1. Fraud

The plaintiff seeking the benefit of collaterally estopping the defendant from asserting the same claim a second time in a different forum has the burden of demonstrating the identity of the issues in the present civil litigation. Ryan v. New York Tel. Co., 62 N.Y.2d 494, 501, 478 N.Y.S.2d 823, 467 N.E.2d 487 (1984). Each and every element of the claim at bar must have been proven in the state forum to the satisfaction of Roso's burden. Roso maintains that the same elements proven beyond a reasonable doubt in Barr's conviction on scheme to defraud and grand larceny grounds, are equivalent to that which must be proven for common law fraud. I agree.

During trial, Judge Bradley instructed the jury that in order to find Barr guilty of the crime of Scheme to Defraud in the First Degree in violation of New York State Penal Law § 190.65,*fn2 they must find, beyond a reasonable doubt, that Barr had committed the following three separate elements:

  1. That from on or about April 7, 1981 to on or
  about March 24, 1986 in the County of New York
  and elsewhere the ...

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