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June 10, 1992

KAY N. BROWN, et al., Plaintiffs,
THE HUTTON GROUP, et al., Defendants.

The opinion of the court was delivered by: WILLIAM C. CONNER

 Plaintiff investors charge defendants with fraudulent conduct in connection with the sale of interests in an oil and gas limited partnership. Plaintiffs allege as a first cause of action "Prospectus and Brochure Fraud" under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"). Second Amended Complaint PP6-35. Plaintiffs also assert claims of common law fraud against all defendants and a breach of fiduciary duty against defendant E. F. Hutton Group. Defendants have moved to dismiss plaintiffs' claims for failure to state a claim pursuant to Rule 12(b)(6), Fed. R. Civ. P. and for failure to plead fraud with particularity pursuant to Rule 9(b), or, in the alternative, for summary judgment pursuant to Rule 56(b). *fn1"


 Plaintiffs are investors in the Hutton/Indian Wells 1983 Energy Income Fund, Ltd., a limited partnership designed to generate income through the purchase and management of oil and gas producing properties. The partnership has failed to produce any real profits, and plaintiffs brought suit, originally before Judge Walker, against the corporate parties allegedly responsible for organizing and promoting the Partnership and selling interests therein. Defendants include: Hutton Energy Services II, Inc., one of the co-general partnrs; E. F. Hutton & Co., Inc.; The E. F. Hutton Group, parent of E. F. Hutton & Co. and Hutton Energy; Shearson Lehman Hutton, Inc., recent acquirer of Hutton and its subsidiaries, as well as the partnership, Indian Wells Production Company, the co-general partner, and its parent company, Indian Wells.

 In the earlier proceeding before Judge Walker, the Court granted defendants' motions for summary judgment and for dismissal pursuant to Rule 9(b) and dismissed the Amended Complaint. *fn2" Judge Walker found that the Amended Complaint alleged two distinct categories of fraud from which all claims arose: (1) that the offering materials misrepresented the risks involved in this venture and (2) that the defendants knew from the inception that the limited partnership was an economic sham and doomed to certain failure. Brown, 735 F. Supp. at 1200-02. Judge Walker first addressed the misrepresentation claim, granting defendants summary judgment and dismissing all of plaintiffs' claims regarding misrepresentation in the offering materials.

 Judge Walker then proceeded to dismiss, for failure to plead with the requisite particularity, plaintiffs' remaining Section 10(b) claim which alleged that the defendants knew that the investment was "fatally flawed" and thus was an economic sham from its inception. Id. at 1202-05. Plaintiffs were, however, granted a limited right to replead:

The Court will grant plaintiffs leave to replead in order to allege some such specific, conclusive facts. But the Court wishes to emphasize that it has serious doubts regarding plaintiffs' ability to plead such facts. Plaintiffs have submitted their complaint twice already and have not yet come close to alleging the sort of damning facts to which the Court is referring here. Plaintiffs are hereby warned not to replead unless they can satisfy this requirement of conclusiveness. Should they choose to replead and fail to make sufficient allegations, this Court will entertain a motion by defendants for sanctions.

 Id. at 1205.

 Since Judge Walker issued his summary judgment opinion, this Court has issued two opinions, the later of which nullified the earlier because of an intervening change in the law. *fn3"

 Plaintiffs now return and aver that as a result of defendants' wrongful conduct, their investments are worthless, and consequently seek judgment in the amount of their investments (less cash distributions), consequential damages, interest, costs and disbursements and punitive damages.

 Defendants argue that plaintiffs' Second Amended Complaint fails to comply with Judge Walker's Order of March 7, 1990, fails to plead fraud with particularity, and fails to plead causation. In addition, defendants contend that plaintiffs' common law fraud and breach of fiduciary duty claims should be dismissed.


 I. Failure to Comply with the Court's Previous Ruling

 A. Misrepresentation in the Offering Materials

 Defendants vigorously assert that plaintiffs' Second Amended Complaint does not comply with the Court's instructions. Defendants note that the Second Amended Complaint raises three claims: (1) a § 10(b) violation alleging prospectus and brochure fraud by both the Indian Wells defendants and Hutton; (2) common law fraud against both the Indian Wells defendants and Hutton on the same grounds as the first count; and (3) breach of fiduciary duty against Hutton only.

 Defendants contend that insofar as Counts I and II allege misrepresentation in the offering materials, these counts are clearly in violation of Judge Walker's Order of March 7, 1990. The Court agrees. After a careful examination of the offering materials, Judge Walker found:

Despite the existence of the statements pointed to by plaintiffs, the court concludes that the offering materials taken as a whole "bespeak caution" and sufficiently disclose the relevant risks of investment. Thus, with regard to the standard misrepresentation claim, the Court concludes that the offering materials are not misleading as a matter of law, or, to the same effect, that plaintiffs' reliance on certain portions of the materials was not reasonable as a matter of law. Summary judgment for defendants is therefore appropriate on this claim.

 Brown, 735 F. Supp. at 1200. Therefore, those portions of the Second Amended Complaint that again allege misrepresentations in the offering materials are dismissed.

 B. The Fatal Flaw Theory

 In paragraph 8 of the Second Amended Complaint, plaintiffs make three allegations which, they assert, establish defendants' knowledge that the partnership was inexorably doomed. These "three flaws" cited by plaintiffs are that (1) the properties were acquired on terms which result in an excessive ratio of production costs to revenue; (2) these properties had low and declining production levels, therefore making it impossible for the capital of the partners to be preserved; (3) these properties were purchased at premium prices.

 In Judge Walker's Opinion and Order, plaintiffs' burden in repleading was clearly articulated. For their "fatal flaw" claim to succeed, "plaintiffs would have to allege some specific facts which were known to defendants and which would conclusively establish that the partnership was doomed. Specific problems known to defendants regarding particular properties, or specific economic/market facts known to defendants and not the rest of the market, might suffice." ...

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