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PARNES v. MAST PROPERTY INVESTORS

October 28, 1991

IRVING PARNES, PLAINTIFF,
v.
MAST PROPERTY INVESTORS, INC., ET AL., DEFENDANTS.



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

  ORDER AND OPINION

In this action, plaintiff Irving Parnes ("Parnes") seeks to recover on behalf of himself and all others similarly situated for losses incurred in real estate limited partnerships organized and sold by defendants.*fn1 Parnes has moved for class certification pursuant to Fed.R.Civ.P. 23. Defendants Mast Property Investors, Inc., Mast Capital Investors, Ltd. (collectively "Mast"), Marvin Greenfield ("Greenfield") and Norman Nick ("Nick") oppose that motion and have moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b). For the reasons stated at oral argument on October 28, 1991 and set out below, both motions are denied.

FACTS

In 1982, Parnes purchased interests in three limited partnerships promoted by Mast and the individual defendants. (Complaint ¶ 4). Parnes alleges that those limited partnerships, as well as the 27 other such partnerships established by defendants, were created as a sham. According to Parnes, companies affiliated with defendants would purchase real estate and then, after holding the property for a brief period, sell it at highly inflated prices to the limited partnerships, earning substantial profits. Based on this scheme, Parnes alleges that: (1) the property appraisals contained in the private placement memoranda were fraudulent because those appraisals stated falsely that the partnerships were paying fair market value for the properties (e.g., Complaint ¶¶ 39-40); and (2) the offering memoranda failed to disclose that the properties would not appreciate in value because the high interest rate "wrap" mortgages on the properties decreased their value below appraised rates (Complaint ¶ 45). (Opposition at 13). More specifically, Parnes claims defendants issued fraudulent private placement memoranda in violation of (1) §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "34 Act"); (2) Rule 10b-5; (3) §§ 15 and 17(a) of the Securities Act of 1933 (the "33 Act"); (4) the Racketeer Influenced and Corrupt Organizations Act ("RICO"); and (5) various common law doctrines.

Parnes seeks relief here on behalf of himself and all other investors similarly situated. Accordingly, he has moved for class certification pursuant to Fed.R.Civ.P. 23. The class proposed by Parnes would include investors in all the limited partnerships sponsored by defendants. (Complaint ¶ 4).

Defendants have moved to dismiss all claims grounded on § 10(b) and Rule 10b-5, claiming that Parnes has not stated a cause of action under the federal securities laws and that Parnes has not pled fraud with sufficient particularity. (Motion at 23-42). Defendants have also moved to dismiss all claims under § 17(a) of the 33 Act and RICO. Defendants assert that dismissal of the allegations under federal law requires dismissal of all pendent state law claims as well. In addition, defendants assert that because Parnes signed a release precluding any legal action against one of the three limited partnerships in which he invested, he may not sue that entity now.

DISCUSSION

1. Motion to Dismiss

In evaluating a motion to dismiss on the pleadings, a court must read the allegations in the complaint "generously" and draw all inferences in favor of the party opposing the motion. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). A complaint should be dismissed under Rule 12(b)(6) only if "it appears `beyond a reasonable doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985).

a. The Securities Fraud/State Law Fraud Claims

Under § 10(b) and Rule 10b-5, a plaintiff must allege that "the defendant has misrepresented or omitted to state material facts in connection with the purchase or sale of a security, that the plaintiff relied upon such misrepresentation or omissions to his detriment, and that the misrepresentations or omissions were made with scienter." In re Gas Reclamation, Inc. Securities Litigation, 659 F. Supp. 493, 502 (S.D.N.Y. 1987) (citations omitted). Consistent with this standard, Parnes has alleged that (1) defendants omitted material facts and affirmatively misrepresented the appraised value of the properties purchased by the partnerships (Complaint ¶¶ 45-46); (2) Parnes and other investors relied on those misrepresentations in purchasing interests in the partnerships (Complaint ¶¶ 44, 47); and (3) defendants knew or should have known that the appraisals contained in the offering memoranda were false. (Complaint ¶ 44). Defendants now argue that Parnes' securities fraud claims are insufficient as a matter of law because he could not have reasonably relied on the allegedly false statements because the offering memoranda contained substantial disclaimers and warnings. (Motion at 23-24).

These allegations are sufficient to state a securities fraud claim. Disclaimers may not absolve a defendant of liability for securities fraud if those disclaimers relate only to the financial projections for the proposed investment, and do not discuss the appraisals for property owned by the company or partnership. See Friedman v. Arizona World Nurseries, Ltd., 730 F. Supp. 521, 541 (S.D.N.Y. 1990) (specifically stating that cautionary language may be insufficient to disclaim liability where plaintiffs alleged that defendants misrepresented the then-existing value of property purchased by limited partnership; motion to dismiss denied as to those counts), aff'd, 927 F.2d 594 (2d Cir. 1991). Accordingly, defendants' motion to dismiss under Rule 12(b)(6) must be denied.

Defendants claim that Parnes may not rely on the offering memoranda alone as proof that each of the defendants participated in the alleged fraud. (Motion at 40). As a general rule, plaintiffs claiming fraud must draw a specific connection between the allegedly fraudulent statements and each defendant, in order that each defendant may be apprised of the particular nature of their participation in the alleged fraud. DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987) ("Where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud."). However, an exception to that rule is made where, as here, plaintiff alleges that an offering memorandum was fraudulent and defendants are insiders or affiliates who participated in the offer of the securities. (Complaint ¶ 43) (defendants participated in or directed the writing and distribution of the offering memoranda); Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986) ("[N]o specific connection between fraudulent representations in the Offering Memorandum and particular defendants are insiders or affiliates participating in the offer of the securities in question.").

Defendants correctly note that the Second Circuit has emphasized that the exception outlined in Luce does not mean that "mere reliance on an offering memorandum or similar document satisfies a pleader's burden under Rule 9(b)." Rather, plaintiffs must still allege "`particular facts demonstrating the knowledge of defendants at the time that ...


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