The opinion of the court was delivered by: WILLIAM C. CONNER
Plaintiffs Edward Adler, et al bring this action against Harmon Envicon Assoc., f/k/a Berg Harmon Assoc.; Harmon Assoc.; Robert T. Harmon; Charles N. Loccisano; and Southern Ventures, Inc., f/k/a Berg Ventures, Inc. (the Harmon defendants) and Primerica Corp.; Breg Enterprises, Inc.; and Kenneth Berg (the Berg defendants) for violations of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j (b), and SEC Rule 10b-5 promulgated thereunder; Racketeering and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq; and for common law fraud, negligence, and breach of fiduciary duty. The action is presently before the Court on defendants' motion to dismiss and, in the alternative, for summary judgment.
PROCEDURAL HISTORY AND BACKGROUND
The original complaint in this action was filed on December 7, 1989. On June 20, 1991, two Supreme Court decisions created a uniform, retroactive 1- and 3-year limitations period for actions brought under § 10(b) of the Securities and Exchange Act. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991) (establishing the period of limitations); James B. Beam Distilling Co. v. Georgia, 115 L. Ed. 2d 481, 111 S. Ct. 2439 (1991) (applying Lampf retroactively). As a result, plaintiffs amended their complaint deleting the § 10(b) claim except to the extent that it served as a predicate for the RICO action. Defendants then filed a motion to dismiss under Rules 9(b) and 12(b)(6), Fed. R. Civ. P.. The motion was granted with leave to refile by an opinion and order of this Court dated April 7, 1992. Meanwhile, Congress amended the Securities and Exchange Act of 1934 by enacting § 27A which modified the retroactive effect of Lampf. Pursuant to this amendment, plaintiffs were permitted to reinstate their § 10(b) claims by an opinion and order of this Court dated April 27, 1992. The action is now before the Court on defendants' second motion to dismiss or, in the alterative, defendants' motion for summary judgment.
We assume familiarity with our two prior decisions and therefore give only a brief summary of the underlying transaction. In the early 1980's Berg Harmon, a joint venture between Harmon Assoc. and Berg Ventures, Inc., syndicated and promoted the sale of limited partnership interests in 50 real estate tax shelters. The partnership units were marketed to a limited number of investors through the use of private placement memoranda (PPM). The investments lost most of their value in the late 1980's. The investor-plaintiffs claim that the decline was due to the inevitable collapse of defendants' pyramid or "Ponzi" scheme which was fraudulently concealed in the PPMs.
There are two distinct motions made by defendants in this case. All defendants move to dismiss the complaint under Rule 9(b) and 12(b)(6) or, in the alternative, for summary judgment. The basis of this motion is that the alleged misstatements and omissions do not support a claim for securities fraud. Since this motion, if granted, would dispose of the entire case, we address it first. The Berg defendants, while joining their codefendants' motion, also move to dismiss the complaint under Rule 9(b) for its failure sufficiently to allege their connection to the fraudulent conduct and the RICO enterprise.
I. The Motion by All Defendants to Dismiss or for Summary Judgment
Summary judgment is granted only when, after drawing all reasonable inferences in favor of the party opposing the motion, no reasonable trier of fact could find for the nonmoving party. Lund's, Ins. v. Chemical Bank, 870 F.2d 840, 844 (2d Cir. 1989).
A summary judgment is not appropriate where material factual matters are in dispute. National Union Fire Ins. Co. v. Turtur, 892 F.2d 199, 203 (2d Cir. 1989). However, if one party puts forth evidence on an issue, the other party can not avoid summary judgment by resting solely on contentions in its pleadings. 56(e), Fed. R. Civ. P..
A. The Securities Fraud Claim
In order to prevail on a claim for securities fraud under § 10(b) and Rule 10b-5 plaintiffs must show that defendants made material misstatements or omissions with scienter, and that plaintiffs relied on the misrepresentations and suffered a loss caused thereby. Burke v. Jacoby, 981 F.2d 1372, 1378 (2d Cir. 1992). Plaintiffs' third amended complaint alleges four misstatements or omissions in the PPM which form the basis of the securities fraud claim. Defendants have failed to demonstrate that the first alleged misstatement could not support plaintiffs' claim. Thus, the motion to dismiss is denied.
However, plaintiffs' three other fraud allegations do not support their claim, and are therefore dismissed.
1. The Undisclosed Operating Deficit
The PPMs stated that the rent on each property was sufficient to pay its current normal operating expenses and to meet the debt service on the first mortgage. L.T. PPM at 26; C.C. PPM at 32; F.H. PPM at 27. The complaint alleges that in fact all the properties were experiencing operating deficits and that the deficits in the Tree Lake, Friendly Hills, and Country Club Apartments were $ 100,000, $ 1,200,000, and $ 900,000 respectively. Compl. PP 11(a), 13. Plaintiffs claim that defendants made these statements knowing them ...