The opinion of the court was delivered by: CONSTANCE BAKER MOTLEY
Plaintiffs, as limited partners, brought suit against three land investment limited partnerships and against the general partners, defendant Michael H. Myers ("Myers") and defendant Myers Financial Group, Inc. ("Myers Financial"). The case was tried before the court on November 4-15, 1991.
The parties submitted proposed findings of fact and conclusions of law keyed to the record on or about January 15, 1992. Reply papers were submitted on February 10, 1992. With its reply, defendants made three motions to strike evidence.
On February 24, 1992, plaintiffs notified the court by letter that Myers had filed a petition under Chapter 7 of the Bankruptcy Code on February 19, 1992 in the United States Bankruptcy Court for the Central District of California. Because of the automatic stay provisions of the Bankruptcy Code, 11 U.S.C. § 362(a)(1), which became effective upon the filing of Myers' bankruptcy petition, plaintiffs were stayed from taking further steps prosecuting their case against Myers until the automatic stay was modified.
This case arises out of an extensive fraud on plaintiffs by Myers. Over a two year period, Myers induced plaintiffs to invest in three limited partnerships. In each case, either Myers or his wholly-owned corporation, Myers Financial, were the general partners. Contrary to his statements to plaintiffs that he would not obtain any benefit for himself at the inception of the transactions -- representations which Myers intended not to fulfil -- Myers secretly diverted substantial sums from the monies obtained from plaintiffs for his own purposes.
This repetitive fraud -- conceived in 1984, implemented in 1985-1986 and subsequently concealed by Myers -- forms the basis of plaintiffs' fraud claims against Myers and Myers Financial: (1) civil violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961, et seq. ("RICO"); (2) securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j, and Rule 10b-5 thereunder; (3) common law fraud; and (4) breach of fiduciary duty. In their Amended Complaint, plaintiffs also allege breach of contract against Myers.
By way of relief, plaintiffs seek the removal of Myers and Myers Financial as general partners of the limited partnerships, accountings by defendants, equitable liens on Myers' and Myers Financial's interests in the limited partnerships, rescission of the purchase of the land purchased by defendant Myers Miltland Raleigh Durham Limited Partnership ("the Durham Limited Partnership"), and constructive trusts or liens on the limited partnerships' properties. Plaintiffs also seek approximately $ 1 million in compensatory damages (trebled under RICO). Plaintiffs, however, would have to elect between recission and damages with respect to their breach of contract claim regarding the Durham Limited Partnership. On their breach of fiduciary duty and common law fraud claims, plaintiffs seek punitive damages of at least $ 5 million, a permanent injunction enjoining defendants from committing further wrongful acts, interest and the costs of this action, including attorney's fees.
The court finds that plaintiffs' have prevailed on each of their legal and equitable claims and are entitled to all the relief requested, except where a damage claim would be duplicative of other damage claims.
After hearing the evidence and weighing the testimony and exhibits received in evidence, as well as the credibility of the witnesses, the court makes the following findings of fact:
Plaintiff Miltland Raleigh-Durham (50 partners), plaintiff Miltland Sacramento (50 partners) and plaintiff Miltland Chicago-Santa Fe (39 partners) are a general partnerships under New York law. Each has its principal place of business at 1 Chase Manhattan Plaza, New York, N.Y., 10005, and is comprised of citizens of New York, New Jersey, Connecticut and California. (Pretrial Order, Undisputed Facts, P 1-3).
Defendant Myers was at the time this action was commenced a citizen of Arizona. For a number of years prior to the events giving rise to plaintiffs' claims, and at all material times, Myers, individually and through legal entities, was a promoter and syndicator of real estate investments throughout the United States. (Pretrial Order, Undisputed Facts, P 4).
Defendant Myers Financial is a Delaware corporation which had its principal place of business at the time this action was commenced in Tucson, Arizona, and at all relevant times was controlled by Myers. (Pretrial Order, Undisputed Facts P 8). Myers and Myers Financial are referred to as the "Myers Defendants."
The Durham Limited Partnership and defendant Myers Miltland Sacramento Limited Partnership (the "Sacramento Limited Partnership") are Texas limited partnerships. Plaintiff Miltland Raleigh-Durham is the sole limited partner in the Durham Limited Partnership and plaintiff Miltland Sacramento is the sole limited partner in the Sacramento Limited Partnership. The sole general partner of both the Durham Limited Partnership and the Sacramento Limited Partnership is Myers. (Pretrial Order, Undisputed Facts, P 5-6).
Defendant Chicago-Santa Fe Partnership (the "Chicago Limited Partnership") is an Illinois limited partnership. Plaintiff Miltland Chicago-Santa Fe is one of two limited partners in the partnership. The Chicago Limited Partnership's sole general partner is Myers Financial. (Pretrial Order, Undisputed Facts, P 7).
B. Defendant Michael H. Myers.
Myers has been involved in the real estate business since 1962, when he became a salesman for the David Zone Company specializing in commercial income-producing property. (Myers, Tr. 633-34). In 1965, Myers formed the Myers Company in Seattle (Myers, Tr. 634), which he subsequently used as a vehicle for real estate investments. By 1975, the Myers Company had acquired, on behalf of its clients, approximately 200 pieces of property in three states. (Myers, Tr. 635).
In 1977, Myers founded the Talisman Corporation ("Talisman"), which subsequently became the Myers Capital Corporation ("Myers Capital"). (Myers, Tr. 636). Myers was the sole owner of Talisman and Myers Capital. (Myers, Tr. 503; Walker, Tr. 183). Until 1977, Myers functioned as a real estate broker and manager for real estate properties. (Myers, Tr. 636). Talisman was formed to become the managing general partner for private land syndications to be sponsored by Myers which would ultimately be sold through the broker-dealer National Association of Securities Dealers ("NASD") community. (Myers, Tr. 636).
In the course of the business of Talisman, and its successor, Myers Capital, Myers acquired raw land in his name which he transferred to limited partnerships, of which Talisman or Myers Capital was the general partner. (Myers, Tr. 636-39). The limited partnership interests were sold to public investors. (Myers, Tr. 637-39). After formation of the limited partnerships, the acquisition of the land from Myers and the syndication of the limited partnership interests, the limited partnerships were administered and managed by Talisman or Myers Capital. (Myers, Tr. 638-39). From November 1977 through July 1980, Talisman syndicated approximately six limited partnerships. (Myers, Tr. 639). In 1981, Talisman syndicated an additional fourteen or fifteen partnerships. (Myers, Tr. 640).
In 1982, with the growth of Myers' real estate business, Myers restructured his entities. He formed The Myers Group, which became the sole owner of the Myers Company and Myers Capital. (Myers, Tr. 640; Ashton-Blair, Tr. 432). Myers was the sole owner and president of The Myers Group. (Myers, Tr. 503; Ashton-Blair, Tr. 432). The Myers Company functioned as a real estate broker for the purchase and resale of the land purchased for the Myers sponsored limited partnerships. (Myers, Tr. 641). The Myers Company also had responsibility for demographic research and analysis in land management. (Myers, Tr. 641).
Also in 1982, Myers formed a captive broker-dealer, Syndex Securities Corporation ("Syndex"), which was registered with the NASD as a broker-dealer in securities. (Myers, Tr. 642). Syndex sold the limited partnership units in the limited partnerships sponsored by Myers Capital. (Myers, Tr. 642).
By 1984, Myers-controlled entities had syndicated roughly 42 limited partnerships which had purchased raw land throughout the United States. (Myers, Tr. 645). In 1985, Myers-controlled entities syndicated to public investors an additional 60 limited partnerships which had been formed to purchase raw land. (Myers, Tr. 645; Stark, Tr. 21). By 1985, Myers had been involved in the acquisition of, or had acquired, approximately 250 to 300 parcels of raw land, at an aggregate acquisition price of approximately $ 350,000,000 to $ 400,000,000. (Myers, Tr. 646).
C. Myers' Problems with Kent Land.
One of the limited partnerships which Myers sponsored in the early 1980's was Kent Land Investors Limited Partnership ("Kent Land"), which purchased an approximately 40 acre parcel of raw land in Kent, Washington on March 3, 1981 (the "Kent Parcel). (Plf. Ex. 135, 136; Def. Ex. EEE). The purchase price for the 40 acres was $ 1,600,000, or $ 0.94 per square foot (Plf. Ex. 135, 136; Volchok, Tr. 366-67). The Kent Parcel was subject to a mortgage of $ 1,250,000. (Def. Ex. EEE, at 46). Talisman and Myers were Kent Land's general partners. (Def. Ex. EEE, at 23).
Myers was the major shareholder and director of Talisman. (Def. Ex. EEE, at 18). The two general partners, Talisman and Myers, personally received annual administration and management fees of $ 32,000 and would receive a 35% "Subordinated Incentive Fee" when the Kent Parcel was sold providing them with 35% of the sales price of the Kent Parcel after the return of the limited partners' capital. (Def. Ex. EEE, at 8-9).
At the time of the purchase of the Kent Parcel, the 40 acres were zoned for "manufacturing agricultural" which allowed for agriculturally related industrial use. (Volchok, Tr. 337-38). When the Kent Land limited partners were being solicited by Talisman and Myers they were advised in the prospectus that the General Partners believed that the Kent Parcel would be rezoned "for industrial use." (Def. Ex. EEE, at 25). The Kent Land investors were also advised in the prospectus that the Kent Parcel had been appraised at $ 2,000,000. (Def. EEE, at 26).
Shortly after Kent Land purchased the Kent Parcel it was rezoned, not for industrial use, but for agricultural use only. (Volchok, Tr. 338-39). Moreover, the Kent Parcel was 4-5 feet below flood level and flooded once or twice a year. (Volchok, Tr. 318-24, Plf. Ex. 232). In order to develop the Kent Parcel, 3-4 feet of fill would be required for all or a substantial part of the 40 acres, at a cost of over $ 1,200,000. (Volchok, Tr. 334-36). The combination of the zoning of the Kent Parcel to agricultural and the flooding problem meant that the property could only be used for raising crops or raising cattle, and the market value of the Kent Parcel plummeted to 6 to 7 cents per square foot by early 1985. (Volchok, Tr. 343-44; 359-60). At that price, the Kent Parcel had a value in early 1985 of approximately $ 105,000 to $ 122,000, which rendered the Kent Land Limited Partnership substantially insolvent because the Kent Parcel was subject to a $ 1,250,000 mortgage.
D. Myers' Proposals to Milbank.
In 1984, Myers approached the law firm Milbank, Tweed, Hadley & McCloy ("Milbank") to perform legal work for him in connection with an initial public offering. (Myers, Tr. 643; Stark, Tr. 18-19). The proceeds of the offering, projected to be between $ 50,000,000 and $ 100,000,000, were to be used to provide capital for a new Myers-sponsored publicly owned partnership which would purchase raw land. (Stark, Tr. 19; Myers Tr. 643). The Milbank partner in charge of the work on the initial public offering was Richard A. Stark, who was a corporate lawyer experienced in the public offering of securities. (Stark, Tr. 10, 18). The proposed initial public offering never came to fruition and by late 1984, Milbank's work on the project had substantially ceased. (Stark, Tr. 19-20).
In the fall of 1984, Myers learned of the zoning problem with regard to the Kent Parcel. (Myers, Tr. 673). At that time, Myers learned that Myers Capital, under its president, Steven P. Walker, III ("Walker"), had sued the Kent City Council in an effort to obtain rezoning of the Kent Parcel from agricultural to commercial for the purpose of increasing its value. (Myers, Tr. 673).
In October 1984, Myers met another Milbank partner, Jonathan Blattmachr (" Blattmachr "), and requested Blattmachr to do trusts and estate work for him. (Blattmachr, Tr. 515). At the time, Myers advised Blattmachr that he was the largest dealer in the United States in syndicating raw land. (Blattmachr, Tr. 515).
At their initial meeting in October 1984, at Myers' home in Tucson, Myers told Blattmachr that he was unhappy with the private placement syndications which he had been sponsoring in which thirty to forty unrelated people would invest because brokerage commissions were too high and because communications with a number of unrelated investors had proven difficult. (Blattmachr, Tr. 516-17). Myers discussed with Blattmachr the idea that it would be easier for Myers to invest with a single wealthy individual or a group for which there would be a single representative, such as a group of lawyers. (Blattmachr, Tr. 517).
In late December 1984, approximately two months after Myers had met with Blattmachr in Tucson, Walker, who had left Myers' employ to go into business on his own, received a visit from another Myers associate, Peter W. Mudie (" Mudie"). (Walker, Tr. 170-71). Walker was attempting to purchase an approximately 53 acre tract of land in Durham, North Carolina (the "Durham Parcel") from Hal Pettigrew ("Pettigrew"), a Dallas real estate entrepreneur who had had prior dealings with Myers. (Walker, Tr. 164-70). Pettigrew, through a limited partnership which he controlled called Redwood Partners ("Redwood") (Pretrial Order, Undisputed Facts, P 10), had just acquired the Durham Parcel for $ 673,000, paying $ 155,178 in cash and giving back a $ 523,000 purchase money mortgage. (Pettigrew, Tr. 256-62; Plf. Ex. 81, 94, 95, 96, 97, 99). Walker was attempting to buy the Durham Parcel from Redwood for $ 896,790 and had forwarded a partially executed contract to Pettigrew with the request that it be signed. (Walker, Tr. 164-70; Plf. Ex. 79, 80). Walker testified that Mudie told him to "drop the contract" to purchase the Durham Parcel and that if he did not do so he would anger Myers and that Myers would "disrupt" Walker's business if he pursued the Durham Parcel. (Walker, Tr. 170-73). Walker further testified that as a result of Mudie's statements, and Walker's fear that Myers would cause injury to his business if he continued in his efforts to buy the Durham Parcel, Walker abandoned his efforts to purchase the property. (Walker, Tr. 170-73).
In January 1985, Myers met with the executive committee of Myers Capital at Myers' offices in Dallas, at which time the Kent Land problem was discussed. (Myers, Tr. 675, 833-34). Myers testified that at that time he came up with the idea that a way of solving the Kent Land problem would be the granting of "a three year option with enough money to pay the underlying [mortgage] payments." (Myers, Tr. 835). Also in January 1985, Myers met Blattmachr in New York and told him "that he was considering approaching someone at Milbank Tweed to see whether any or all of the partners at [the] firm would have an interest in acquiring some land with him." (Blattmachr, Tr. 516).
At about the time of his meeting with Blattmachr in January 1985, Myers telephoned Stark and made a detailed proposal that Milbank partners invest with him. (Stark, Tr. 23). Myers told Stark that he would select the land for the Milbank partners, which Myers represented to be his particular skill, and that he would form and manage a limited partnership in which the Milbank partners would become limited partners. (Stark, Tr. 23). Myers, as general partner of each of the limited partnerships, was to have control over the business affairs of the limited partnerships. (Stark, Tr. 23). The limited partners were to rely entirely upon the efforts of Myers, as general partner, to bring about a return on their investment. (Stark, Tr. 23-25).
Myers told Stark that there would be no up front charges or commissions for raising the money or purchasing the land, including no broker's commission paid to Myers for purchasing the land or preparing it for sale. (Stark, Tr. 23). Myers told Stark that his total compensation would be a share of the profits when the property was sold. (Stark, Tr. 23). Myers proposed that when the property was sold the limited partners would share in the profit first, to the extent of an annualized return of 20% on their original investment, and that after the limited partners had received their capital and the 20% annualized return, Myers would begin to share in the profits. (Stark, Tr. 23). Myers proposed that at that point he would receive a share of the profits up to the amount equal to the profit share that the Milbank limited partners had received (i.e. the 20% annualized return) and thereafter share 50-50 with the limited partners. (Stark, Tr. 24).
Myers told Stark that the Milbank partners would be doing him a "huge favor" if they would invest in the ventures with Myers because the ventures would become a "showcase for his marketing similar arrangements with other law firms and with accounting firms and similar organizations." (Stark, Tr. 24). In contrast to the raw land investments which Myers had previously sponsored, where the land had been purchased subject to mortgages, Myers claimed that a better price could be obtained for the land if it were purchased for cash. (Stark, Tr. 24). Myers also told Stark that it would be advantageous for him to deal with a limited number of people and that there would be no "real expense" to Myers in raising the money. (Stark, Tr. 24-25).
Myers also told Stark that one of the reasons he wished to take a back-end profit only would be to underscore his belief and confidence that he could find properties that would appreciate. (Stark, Tr. 25). He was therefore willing to enter into the venture and rely entirely on the back-end profit for his compensation. (Stark, Tr. 25). Myers told Stark, "if [the Milbank investors] did not make money, he did not make money." (Stark, Tr. 25).
Myers provided Stark with his proposal in their first telephone conversation, in late December 1984 or early January 1985, together with some of the advantages, which Myers elaborated on in several telephone conversations in January and early February 1985. (Stark, Tr. 25-26). In the first telephone conversation in which Myers proposed to Stark that Milbank partners provide capital for investments with him, Stark told Myers that Milbank could not be his counsel in the proposed transactions and that Myers would have to obtain separate counsel. (Stark, Tr. 28-29). Myers replied that he saw "no difficulty" and that he had "plenty of lawyers, both inside and outside" of his organization. (Stark, Tr. 29). At that time, the general counsel of Myers' organization was Rex Brown, III. (Stark, Tr. 29). Myers also had a real estate lawyer working for his organization, Michael Casey. (Stark, Tr. 29-30). In his testimony at trial, Myers did not contest any of the foregoing facts.
During the time that Myers was making his proposal to Stark, he met with Blattmachr in early February 1985 at the Carlyle Hotel in New York City and discussed his proposed investments with Milbank partners. (Blattmachr, Tr. 517-18). Myers repeated what he had told Stark: that there would be no fees at the inception of the investment for the finding of the land or arranging the deal and that his only compensation would be a share in the profits upon resale. (Blattmachr, Tr. 518-20, 546). Myers again stated that the Milbank partners would receive a 20% annualized preferred return, after which Myers would share in the profits 50-50. (Blattmachr, Tr. 519).
In late January or early February 1985, Myers suggested to Stark in a telephone conversation that Stark and John C. Nelson, a Milbank partner who specialized in real estate and who entertained reservations about the Milbank partners investing in raw land (Stark, Tr. 27-28), take a trip with Myers so that he could show Nelson and Stark the kinds of investments which Myers was making and they could meet some of Myers' employees. (Myers, Tr. 714-15). Myers told Stark that he believed that he could show Nelson enough about investing in raw land that he would be persuaded to go forward with Myers' investment proposals. (Stark, Tr. 28).
E. Myers' Trip with Stark and Nelson to View Properties.
On February 26, 1985, Stark and Nelson flew from New York to Raleigh-Durham, North Carolina where they met with Myers the next morning. (Stark, Tr. 28, 30-31; Plf. Ex. 192). Myers met Stark and Nelson the morning of February 27, 1985 at the hotel where Stark and Nelson were staying. (Stark, Tr. 32). They were joined by Mudie. (Stark, Tr. 32). Mudie was one of several individuals who Myers used to "find" raw land for possible investment. (Ashton-Blair, Tr. 438). Typically, Mudie was compensated by a commission when land was purchased by Myers. (Myers, Tr. 734).
Myers and Mudie gave Stark the understanding that Mudie represented Myers in the Raleigh-Durham area. (Stark, Tr. 32-33). Myers and Mudie told Stark that Mudie found land to be purchased by raw land syndications organized by Myers. (Stark, Tr. 32). Myers also told Stark that Mudie had previously worked for Myers in Dallas and that Myers had moved Mudie to the Raleigh-Durham area to have representation there. (Stark, Tr. 33).
After Stark and Nelson met Myers and Mudie, the party toured the Raleigh-Durham area inspecting undeveloped tracts of land. (Stark, Tr. 33). Among the parcels seen was the Durham Parcel. (Stark, Tr. 34). Mudie and Myers told Stark and Nelson that a railroad right-of-way on the Parcel, running along the land's western boundary, would be abandoned and that a major thoroughfare was planned to go through the land. (Stark, Tr. 34-35).
As with Mudie, Pettigrew, the owner (through Redwood) of the Durham Parcel, had had prior business dealings with Myers. Myers-sponsored publicly owned limited partnerships had purchased two properties in Fort Worth, Texas from Pettigrew-sponsored entities the previous year, 1984. (Pettigrew, Tr. 237, 251; Myers, Tr. 690). In addition, Myers, through an entity known as the Snow Creek Trust, owned land in Raleigh-Durham with Pettigrew and Mudie which had been sold to them in June 1984 by Myers Capital and Myers Group Partners, also organized by Myers. (Myers, Tr. 682-90; Pettigrew, Tr. 222-23, 252-54; Plf. Ex. 108, 113, 114).
The Durham Parcel which was shown to Stark and Nelson by Myers and Mudie on February 27, 1985 had been acquired by Pettigrew, through Redwood, less than six months earlier for $ 673,000. (Plf. Ex. 81, 94, 95, 96, 97, 99). At the time Pettigrew and Redwood signed the contract to purchase the Durham property on August 30, 1984, Mudie paid the $ 5,000 earnest money deposit. (Plf. Ex. 99, 99A, 100, 101, 102). Mudie had also acted on behalf of Redwood in the purchase, signing an amendment to the purchase agreement on October 27, 1984. (Plf. Ex. 82). Mudie had told Walker two months earlier to "drop his contract" to acquire the Durham Parcel for $ 896,790 or incur Myers' anger. (Walker, Tr. 164-73). Mudie personally had a 25% equity interest in the Durham Parcel. (Pettigrew, Tr. 273-74; Plf. Ex. 99A, 100, 101, 102). Myers and Mudie did not disclose to Stark and Nelson the fact that Mudie had a 25% equity interest in the Durham Parcel. (Stark, Tr. 35). There is no evidence that either Myers or Mudie disclosed to plaintiffs that the owner of the Durham Parcel, Pettigrew, was involved with Myers and Mudie in other ventures.
After Mudie and Myers had shown Stark and Nelson the Durham Parcel and other properties in the Raleigh-Durham area, the group continued on the inspection trip flying next to Atlanta, Georgia. (Stark, Tr. 36). There they were met by another Myers representative, boarded a helicopter and were shown various properties in the Atlanta area. (Stark, Tr. 36). After Atlanta, and still on February 27, 1985, the group again boarded Myers' jet and flew to Tampa, Florida, where they were met by Myers' local representative, boarded a helicopter and were again shown parcels of raw land. (Stark, Tr. 36-37).
On the evening of February 27, 1985, Nelson, Stark and Myers boarded Myers' jet again and flew to Dallas, arriving late in the evening. (Stark, Tr. 37). The next morning, Stark and Nelson were given a tour of the offices of the Myers Group and Myers Capital in Dallas where they met additional members of Myers' staff, including the lawyers, Brown and Casey. (Stark, Tr. 37-38).
After visiting Myers offices in Dallas, the group again boarded Myers' jet and flew to Sacramento, California, arriving later the same day, February 28. (Stark, Tr. 39). Upon arrival the group boarded another helicopter and were shown various pieces of land in the area by Myers. (Stark, Tr. 39). After the helicopter inspection, the group was taken to Myers' office in San Francisco where they met with Linda Koplowitz ("Koplowitz"), who, like Mudie, was a "finder" of raw land for Myers-sponsored ventures. (Stark, Tr. 40; Ashton-Blair, Tr. 438-40; 451). In discussing land with Stark and Nelson, Koplowitz singled out a particular parcel in the Sacramento area of approximately 64 acres (the "Sacramento Parcel") which she advised Stark was "in a great location" near other land owned by "important development owners." (Stark, Tr. 41).
By the end of the day on February 28, 1985, Nelson had been persuaded that Myers could "pick land and that the areas where the land would be purchased were sufficiently growth areas." (Stark, Tr. 42). Stark and Nelson had come to the belief that the ventures Myers was proposing would be the type of investment which they could present to their partners at Milbank. (Stark, Tr. 42). At the end of the trip, Stark and Nelson indicated to Myers that they were favorably disposed to his proposals. (Stark, Tr. 42-43).
During the two day trip on February 27 and 28, 1985, Myers had shown Stark and Nelson approximately 20 properties in six cities as "potential investments." (Myers, Tr. 860). However, the only two parcels which Myers submitted to Stark and Nelson were the Durham Parcel and the Sacramento Parcel. (Myers, Tr. 862-63). The day after the trip, in a telephone conversation with Stark and Nelson, Myers "very strongly recommended" that the Milbank partners invest in the Durham and Sacramento Parcels. (Stark, Tr. 44). Stark and Nelson were persuaded by Myers that there were elements about each of the properties which would cause them to appreciate and that the suggested tracts would be good investments. (Stark, Tr. 44). In making that decision, Stark and Nelson believed the most influential factors were Myers' general expertise that "he had demonstrated to us on the trip, and the form of the transaction that he proposed wherein he would share only in the profit at the end, which demonstrated his confidence in the properties he would select." (Stark, Tr. 44). Stark and Nelson had come to the belief that they could depend on Myers to select the land which was to be subject to investment. (Stark, Tr. 44).
F. The Durham Transaction.
During the week after the trip, between March 1-8, 1985, Myers had several telephone conversations with Stark in which Stark reiterated the decision he and Nelson had reached to recommend to the Milbank partners that they invest in the two pieces of property suggested by Myers. (Stark, Tr. 45). Stark testified that "we talked with him several times during that week and told him that we wanted to participate in these two pieces of property." (Stark, Tr. 45).
About March 6, 1985, Stark received a telephone call from Chemical Bank of New York asking whether Milbank partners were conducting business with Myers and whether they were going to be involved the Durham Parcel. (Stark, Tr. 46). Stark replied that they were. (Stark, Tr. 46).
The next morning, March 7, 1985, Myers, Mudie, Pettigrew and a business associate of Pettigrew, Murray Hardisty ("Hardisty"), met in Myers' offices in Dallas. (Pettigrew, Tr. 275; Hardisty, Tr. 564-66). The purpose of the meeting was to sign a contract for the purchase of the Durham Parcel. (Hardisty, Tr. 567). At the meeting, Myers told Pettigrew that he wanted to buy the Durham Parcel but that he wanted Pettigrew to help him "fix a problem that [Myers] had in Kent, Washington." (Pettigrew, Tr. 276). Myers told Pettigrew that after the Kent Parcel had been purchased it had been rezoned to agricultural use. (Pettigrew, Tr. 277). "He [Myers] gave [Pettigrew] the impression that the deal was in trouble unless the problem got solved." (Pettigrew, Tr. 291). Myers told Pettigrew that he would buy the Durham Parcel for $ 1,430,000 on condition that an option was purchased on the Kent Parcel for $ 230,000 (the "Kent Land Option" or the "Option"). (Pettigrew, Tr. 277-78, 284-85).
Pettigrew agreed with Myers to purchase the Option. (Pettigrew, Tr. 277). As a result, several transactions took place on March 7, 1985. Myers signed a contract to purchase the Durham Parcel from Redwood for a purchase price of $ 1,430,000, with an earnest money deposit of $ 400,000. (Pettigrew, Tr. 275-76; Plf. Ex. 90). Myers arranged for the $ 400,000 earnest money deposit to be paid by having Chemical Bank transfer that amount by wire to Redwood's account and charged against Myers' line of credit. (Pettigrew, Tr. 275-76). Stark's statements to Myers the previous week that he was "confident" that the Milbank partners would invest (Stark, Tr. 45) allowed Myers to make the $ 400,000 transfer -- and incur the debit to his line of credit at Chemical Bank -- with the assurance that the Milbank partners would be reimbursing him. Simultaneously, Pettigrew wrote a $ 230,000 check drawn on Redwood's account and payable to Hardisty, which Hardisty deposited into his account that day. (Pettigrew, Tr. 276, 282-84; Plf. Ex. 104). Hardisty then signed the Option agreement with Myers for a purchase price of $ 230,000 which he paid by delivering to Myers his check in that amount drawn on his account -- the same account in which Hardisty had deposited the $ 230,000 check from Redwood. (Pettigrew, Tr. 276, 282-84; Hardisty, Tr. 573; Plf. Ex. 105, 106).
The Kent Land Option was for a term of three years, with an exercise price of $ 3,484,800. (Plf. Ex. 106). Myers set the Option exercise price. (Hardisty, Tr. 576-80). Myers also set the purchase price of the Option of $ 230,000. (Hardisty, Tr. 576-78). Myers chose the purchase price of the Kent Land Option as $ 230,000 by determining what was necessary to pay the debt service on the Kent Parcel mortgage. (Myers, Tr. 505-06). Hardisty testified that there were no negotiations as to the $ 230,000 purchase price of the Option or the $ 3,484,800 exercise price. (Hardisty, Tr. 576-79). Hardisty stated that he had no idea of the value of the Kent Parcel. (Hardisty, Tr. 577-80). The $ 230,000 purchase price was non-refundable and, under the terms of the Option signed by Hardisty, was put into an escrow and used to pay the debt service on the Kent Parcel mortgage for the three year term of the Option. (Myers, Tr. 505; Baxter, Tr. 186-99; Plf. Ex. 72, 73).
Pettigrew and Hardisty knew that the $ 230,000 used by Hardisty to purchase the Option on the Durham Parcel came from the $ 400,000 earnest money deposit which Myers had provided. Pettigrew testified that the $ 230,000 he paid to Hardisty came out of the $ 400,000 which Myers had transferred from Chemical. (Pettigrew, Tr. 276). Pettigrew was also aware that the $ 230,000 was used by Hardisty to pay for the Kent Land Option. (Pettigrew, Tr. 276). Hardisty testified that he obtained the $ 230,000 from Pettigrew. (Hardisty, Tr. 573-74). Pettigrew testified that he knew, from Hardisty or Myers, that the $ 230,000 was going to be placed in escrow to pay the mortgage on the Kent Parcel. (Pettigrew, Tr. 308-09).
The Court finds that Myers knew that the $ 230,000 used by Hardisty to purchase the Kent Land Option came from the $ 400,000 Myers had wired to Redwood. David Sandell, an executive of Medina Holdings, Inc., an accounting and property management services company, testified that in January or early February 1988, Myers admitted to him that he had engaged in a transaction in North Carolina which could be construed as providing Myers with a brokerage commission which had been disguised as if it had been paid to another person. (Sandell, Tr. 423-24). Myers told Sandell that the other person, who Myers identified as Hardisty, had "gotten a commission . . . which he had used to buy the [Kent Land] option". (Sandell, Tr. 423-24). Sandell also testified that Myers had led him to believe "that he, Myers, had earned the commission but that he had had the commission treated as though the other guy [Hardisty] was the broker and that [he had] earned the commission so that the other guy [Hardisty] would put the money into the Kent Land transaction." (Sandell, Tr. 423). Sandell further testified that Myers had admitted to him "that he was concerned about the disclosure ramifications to the investors of having sold the options under circumstances where he might be viewed as having provided the consideration for the option amount or had something to do with it." (Sandell, Tr. 424).
Myers denied receiving a commission on the Durham transaction or even receiving the $ 230,000 paid for the Kent Land Option. (Myers, Tr. 776). The Court finds that Myers' testimony is contrary to the facts and that Myers personally benefited from receipt of the $ 230,000. The testimonial and documentary evidence establishes that the Kent Land Limited Partnership -- of which Myers was a general partner, which Myers controlled and in which he had a substantial personal economic interest -- received the $ 230,000 which had been paid for the Kent Land Option and that the $ 230,000 was used to pay the mortgage on the Kent Parcel for three years (Baxter, Tr. 186-99; Plf. Ex. 72, 73; Pettigrew, Tr. 285-86; Plf. Ex. 106), as Myers admits he intended. (Myers, Tr. 505-06, 675-76). Myers, personally, and Talisman, of which Myers was the major shareholder, were the general partners of the Kent Land Limited Partnership. (Def. Ex. EEE, at 18, 23). Myers and Talisman would receive 35% of the profit on the sale of the Kent Parcel. (Def. Ex. EEE, at 8-9). Myers admitted that the sale of the Kent Land Option was his idea as a way of solving the Kent Land problem by paying debt service on the mortgage for three years during which the land might be rezoned. (Myers, Tr. 675-76).
Myers also testified that the Durham transaction and the Kent Land Option were independent transactions. (Myers, Tr. 740). The Court finds Myers testimony unworthy of belief. The Court, on the basis of the evidence, finds to the contrary, that the two transactions were interdependent and that Myers insisted that they be so. Pettigrew testified that Myers conditioned the sale of the Durham Parcel on the purchase of the Kent Land Option. (Pettigrew, Tr. 276-77, 284-85). The fact that Myers conditioned the purchase of the Durham Parcel on Pettigrew's purchase of the Kent Land Option is also evidenced by contemporaneously written documents, prepared by Pettigrew's employees, which were received in evidence at trial. (Plf. Ex. 216, 217; Pettigrew, Tr. 249-51). One handwritten document (Plf Ex. 107) states "3/7/85 Kent 230,000.00 Murray Hardisty charged to 10809 represents reimb of 3 yr option on Seattle property owned by Meyers [sic], purchaser of 53Ac Goodwin. Meyers [sic] required option as part of sale of 53Ac. Option was pd by Hardisty to Meyers [sic]." (Emphasis supplied). Another document, entitled "Note to UDI (Wynne) File, 11 June 1985," signed by Pettigrew's secretary, Carla Fulton, states:
(Plf. Ex. 127; Pettigrew, Tr. 249-51, 305) (emphasis supplied).
Myers attempts to cloud the issue by arguing that plaintiffs and Myers were not yet partners on the date that Myers purchased the Durham Parcel. He asserts that he purchased the Durham Parcel anyway because he wanted it for himself whether or not plaintiffs decided later to invest with him. (Def. Proposed Findings, PP 33-35). However, this argument does not negate the evidence that Myers conditioned his purchase on the purchase of the Kent Land Option. In addition, by this time Myers knew plaintiffs were likely to invest in the Durham Parcel. Thus, the issue is whether Myers intended to defraud plaintiffs by conditioning his purchase of the Durham Parcel on the purchase of the Kent Land Option. The court finds that he did.
At trial, defendants called an appraiser, Gordon Cole, to testify as to the fair market value of the Durham Parcel in March 1985. Mr. Cole testified that the range of the fair market value of the Durham Parcel was between $ 1.1 million to $ 1.4 million. (Cole, Tr. 998-99). Upon cross examination, Mr. Cole testified that if a purchaser had been attempting to obtain the best terms he could on March 7, 1985, it is possible that he could have purchased the Durham Parcel for $ 1.1 million. (Cole, Tr. 999). The Court finds, on the basis of Mr. Cole's testimony, that if Myers had been attempting to buy the Durham Parcel for the lowest price he could on March 7, 1985, he could have bought it for less than the $ 1,430,000 he paid and closer to $ 1,100,000. Myers thus signed an agreement by which the purchase price of the Durham Parcel was set up to $ 330,000 higher than it could have been had Myers negotiated for the lowest price. The Court infers that Myers did not attempt to negotiate for the lowest price and that that failure was a breach of Myers' fiduciary duty to the plaintiff limited partners to represent them fairly and to the best of his ability.
The Option on the Kent Parcel was a sham. Pettigrew testified that "a three year option is almost unheard of." (Pettigrew, Tr. 292). The exercise price of the Option, $ 3,484,800, was approximately $ 2.00 per square foot for the Kent Parcel. (Myers, Tr. 505-06). Gary L. Volchok, a real estate broker and salesman who had been familiar with the Kent Parcel for more than 10 years, testified that at no time from 1980 to 1990 was the Kent Parcel ever worth $ 2.00 per square foot (Volchok, Tr. 312-50; 362-63). The most recent sale, in 1990, was for $ 0.30 per square foot (Volchok, Tr. 363). In March 1985, when Myers set the exercise price for the Option, the value of the Kent Parcel was 6 to 7 cents per square foot because it was zoned for only agricultural use and because of the property's flooding problem. (Volchok, Tr. 360). Even if the Kent Parcel had been rezoned to allow commercial development, it would have been worth approximately $ 0.65 per square foot. (Volchok, Tr. 360-62). The Option exercise price was thus greatly inflated. The fact that Hardisty did subsequently look into the zoning problem (Hardisty, Tr. 595-97) does not prove that the Option was a bona fide transaction separate from the purchase of the Durham Parcel. Instead, it merely shows that Hardisty's curiosity compelled him to check into the matter, if only to ensure himself that the Option which he "purchased" -- after no negotiations and without any knowledge of its value (Hardisty, Tr. 576-80) -- had no value. Schedule D of the Federal tax return for 1985 filed on April 7, 1986 by the Redwood and Mudie joint venture (which held the Durham Parcel) treats the Kent Land Option as worthless, claiming a deduction of $ 245,000 for a "forfeited option." (Plf. Ex. 103).
In an attempt to prove that the Option was not a kickback, Myers reports that Stark's son-in-law, David Baxter, was given the title and escrow work on the Option, holding the $ 230,000 in trust and using it only for payments on the underlying mortgage and taxes on the Kent Parcel. (Myers, Tr. 742-43; Baxter, Tr. 187-88). Myers thus asks the court to infer that "he did not go out of his way to secrete [the Option] from anyone at Milbank." (Def. Proposed Findings, P 44). However, this evidence is of little probative value and does not negate the weighty evidence regarding Myers' fraud.
The limited partners in the Kent Land Limited Partnership were advised that because of the Option on the Kent Parcel, the $ 230,000 non-refundable purchase price paid by Hardisty would "cover the costs of the partnership for as much as four years, thus relieving the [Kent Land Limited] partnership's burden of payments. . . ." (Plf. Ex. 212, Myers Group 3/14/85 letter, at 2). The Court finds that it is reasonable to infer that Myers used the Kent Land Option to mollify the Kent Land limited partners and hide the fact that their investment was in jeopardy.
On March 8, 1985, Myers mailed to Stark two letters containing brochures on the Durham Parcel and the Sacramento Parcel. (Stark, Tr. 47-49; Plf. Ex. 38, 142). One brochure purported to present comparable sales of land in the Durham area, but failed to list the prior sale of the Durham Parcel to Redwood in August 1984 for $ 673,000. (Stark, Tr. 48; Plf. Ex. 142). The representations as to comparable sales contained in the brochure were fraudulent and deceptive in that they failed to disclose that the Durham Parcel had been purchased by Redwood six months earlier (in August 1984) for $ 673,000, less than half the price for which the property was being offered to Miltland Raleigh-Durham. The brochure and the deceptive chart as to purported comparable sales were prepared by Mudie for Myers. (Myers, Tr. 503-04). At the time Mudie prepared the brochure and chart he knew that the Durham Parcel had been purchased in August 1984 for $ 673,000 because he had put up the $ 5,000 earnest money deposit for Redwood on the purchase. (Plf. Ex. 99, 99A, 100, 101, 102).
Upon receipt of the March 8, 1985 letters, Stark and Nelson proceeded to solicit funds from Milbank partners for investing in the Durham and Sacramento Parcels. (Stark, Tr. 51-52). In addition, they approached individuals outside of Milbank. (Stark, Tr. 52). As a result, 50 individuals most of whom were partners in Milbank, agreed to invest in the partnerships established by Myers to purchase the Sacramento and Durham Parcels. (Stark, Tr. 52-53).
In April 1985, the Durham Limited Partnership was formed as the vehicle by which the Milbank investors and a limited number of others would invest in the Durham Parcel. (Plf. Ex. 1). The terms of the Durham Limited Partnership Agreement, which was drafted with the active participation of Myers' counsel, reflected the representations which Myers had made earlier to Stark and Blattmachr that Myers would not take any commissions on the purchase of the land. (Stark, Tr. 53-65; Ashton-Blair, Tr. 456-75; Spielberg, Tr. 368-78, 382-94; Plf. Ex. 1, 15, 197, 199, 211). The Agreement provided that "the General Partner [Myers] may not charge the Partnership for any services performed by the General Partner or an affiliate of the General Partner. . . ." (Plf. Ex. 1, § 3.3). This was consistent with the initial draft of the Sacramento Limited Partnership agreement which had been prepared by Myers' counsel, David Spielberg, and which was to be the basis for the Durham Limited Partnership Agreement. (Ashton-Blair, Tr. 473-74). Mr. Spielberg testified that he understood that Myers was to provide certain services to the partnership without cost, including the purchase of the property. (Spielberg, Tr. 393-94, 399-400). Ashton-Blair testified that the intent of the Agreements was that Myers was not to receive any commission on the purchase of the properties. (Ashton-Blair, Tr. 457-58).
On June 10, 1985, the purchase of the Durham Parcel by the Durham Limited Partnership closed. (Stark, Tr. 69; Plf. Ex. 4, 126). Miltland Raleigh-Durham provided the funds for the Durham Limited Partnership to purchase the Durham Parcel, in reliance on Myers' representations. (Stark, Tr. 70; Plf. Ex. 4, 126). Myers required the Milbank investors to reimburse him for the $ 400,000 earnest money deposit (Stark, Tr. 77; Plf. Ex. 215), which they did. (Stark, Tr. 70; Plf. Ex. 4, 126). At trial, Myers admitted that the Miltland investors reimbursed him for the $ 400,000 earnest money deposit which he had borrowed from Chemical Bank. (Myers, Tr. 917-18; Stipulation of Counsel, Tr. 305; Plf. Ex. 130). At the time, Myers was general partner of the Durham Limited Partnership. (Myers, Tr. 918-19; Plf. Ex. 1, 12). Myers also charged Miltland for interest on the $ 400,000. (Stark, Tr. 70; Myers, Tr. 920). Stark testified that the Miltland Raleigh-Durham investors thought that Myers "was using that money to buy that property for us." (Stark, Tr. 70). Myers did not disclose that $ 230,000 of the $ 400,000 had been used for non-partnership purposes, the purchase of the Kent Land Option and the payment of the mortgage debt on the Kent Parcel for three years. (Stark, Tr. 70-71; Myers, Tr. 919-20). The result of the Durham transaction was that $ 230,000 belonging to the Durham Partnership, which had been provided by Miltland Raleigh-Durham, was diverted by Myers for his own purposes.
At the time the Durham Parcel was purchased, the Miltland investors understood that the railroad right of way through the Durham Parcel was about to be abandoned and that the fee to the land underneath the right of way was owned by the Durham Limited Partnership. (Stark, Tr. 86). Subsequently, Stark discovered that the railroad owning the right of way had not only not abandoned it, but was claiming that it owned the fee interest to the land covered by the right of way. (Stark, Tr. 86). Myers admitted that the railroad owns the fee interest to the land underneath the right of way. (Myers, Tr. 509).
Myers' representations to Stark, Nelson and Blattmachr that he would obtain no benefit for himself in connection with the purchase of the Durham Parcel were false and fraudulent, were known by Myers at the time they were made to have been so, and were made with the intent of not fulfilling them and for the purpose of deceiving and defrauding plaintiffs. Instead of receiving only a share of the profit on the resale of the land, Myers structured the Durham transaction so that he would receive a substantial undisclosed commission or kickback, in the form of the $ 230,000 paid for the Kent Land Option.
Mudie acted as agent for Myers and as broker on behalf of Miltland Raleigh-Durham in the purchase of the Durham Parcel. Myers himself admitted that he intended to pay Mudie a commission on the purchase of the Durham Parcel. (Myers, Tr. 733-34). Myers and Mudie failed to disclose to Miltland Raleigh-Durham that Mudie was a joint venturer with Pettigrew and Redwood Partners and that he had a 25% equity interest in the Durham Parcel. Such failure to disclose was with fraudulent intent. As a result of his undisclosed 25% equity interest in the Durham Parcel, Mudie fraudulently obtained $ 153,962 when the sale of the Durham Parcel to the Durham Limited Partnership closed on June 10, 1985. (Plf. Ex. 124, 131, 132).
Myers' failure to make the mortgage, tax and water assessment payments on the Durham Parcel constituted a breach of his duty under the Durham Limited Partnership Agreement (Plf. Ex. 1, § 3.1(d)) to pay all claims against the Partnership. (Stark, Tr. 100). Myers improperly abdicated his responsibilities as general partner without consent of the limited partner by delegating his duties to another entity, Landvest Real Estate Group ("Landvest"), and purporting to transfer half his interest in the Durham Limited Partnership to Landvest in violation of § 5.2 of the Durham Limited Partnership Agreement. (Stark, Tr. 97, 106-12; Plf. Ex. 1, 260, 261). Landvest is owned by a close associate of Myers, Charles Baumgardner. (Stark, Tr. 160). Landvest's office is in Mr. Baumgardner's home. (Victors, Tr. ...