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MORIN v. TRUPIN

June 2, 1993

SIMEON MORIN, et al., Plaintiffs,
v.
BARRY H. TRUPIN, et al., Defendants. NORMAN E. GAAR, Plaintiff, v. BARRY H. TRUPIN, et al., Defendants. MICHAEL P. ALBERTI, M.D., et al., Plaintiffs, v. BARRY E. TRUPIN, et al., Defendants.


SWEET


The opinion of the court was delivered by: ROBERT W. SWEET

Sweet, D. J.

 Defendants Emmanuel Organek ("Organek"), President of Continental Realty ("Continental"), and Stuart Becker and Stuart Becker, P.C., (collectively "the Becker Defendants" or "Becker"), have moved to reargue this Court's determination that the Plaintiffs in the Morin and in the Alberti actions had adequately pled securities and common law fraud against them. For the reasons given below, Organek's motion to reargue is granted and Becker's motion to reargue is denied. Upon reconsideration, Organek's motion to dismiss the securities fraud claims against him is granted, and for lack of pendent jurisdiction, the state law claims are dismissed as well.

 The Parties

 The Alberti Plaintiffs are investors in a New York limited partnership known as the Sacramento Office Park Associates ("Sacramento Associates"), organized to own, operate and lease a two-building office park complex in Sacramento, California referred to as the Butano Buildings (the "Butano Property"). The Plaintiffs allege they purchased their limited partnership interests from November 1984 through the spring of 1985 in reliance upon allegedly misleading offering materials, especially a private placement memoranda (the "Sacramento PPM"). The Morin plaintiffs are investors in other real estate limited partnerships, referred to as the 118, 119, 119M, 130 and 218 syndications, formed to divide up and offer to the public interests in three office buildings located in Sarasota, Florida, Grand Rapids, Michigan, Dallas, Texas, and in warehouses in Indianapolis, Indiana. Apart from the manner in which interlocking interests in the four properties were distributed among the different limited partnerships, the Morin plaintiffs alleged that the syndications were structured in precisely the same way as the Sacramento offering in Alberti. Certain of the Morin plaintiffs also invested in tax shelters which leased helicopters, the Airjet Trusts.

 Barry H. Trupin ("Trupin") is alleged to be the founder and controlling person of several interconnected companies and partnerships (the "Rothschild Group") which offered all of these interests to accredited investors. Trupin is also alleged to have controlled North American Associates ("North American"), a New York limited partnership which was represented by Trupin to be unaffiliated with the Rothschild Group. Defendant Gerald Schaeffer ("Schaeffer") was President of two of these companies, Rothschild Reserve International, Inc. ("Rothschild Reserve") and Prudential American Realty Corp. The Plaintiffs allege that the Sacramento PPM revealed neither that Trupin was behind these limited partnership offerings nor that other Trupin tax shelters had been routinely disallowed by the I.R.S.

 Mintz, Fraade & Zeigler, P.C. (the "Mintz Fraade Defendants" or "Mintz, Fraade") is a New York law firm which is alleged to have acted as counsel to both entities in the Rothschild Group and North American, to have provided tax opinions and tax information in private placement memoranda prepared for these offerings, and to have represented Trupin in partnership audit proceedings before the I.R.S.

 Organek is the principal and sole owner of Continental Realty Corp., a New York corporation which "packages" real estate purchases for other interests.

 Stuart Becker & Co. is a New York accounting firm which prepared financial information and rosy financial projections about the Butano Property for inclusion in the Sacramento PPM. It also prepared the audited financial statements of the Sacramento Associates for the year ending December 31, 1984.

 Prior Proceedings

 The underlying disputes and principal parties which are the subject of these actions are recounted in prior opinions of the court, familiarity with which is assumed. See, e.g., Morin v. Trupin, 711 F. Supp. 97 (S.D.N.Y. 1989); Morin v. Trupin, 728 F. Supp. 952 (S.D.N.Y. 1989); Morin v. Trupin, 738 F. Supp. 98 (S.D.N.Y. 1990); Morin v. Trupin, 747 F. Supp. 1051 (S.D.N.Y. 1990); Morin v. Trupin, 778 F. Supp. 711 (S.D.N.Y. 1991); and Morin v. Trupin, 799 F. Supp. 342 (S.D.N.Y. 1992).

 The most recent opinion of this Court in the Morin/Alberti actions was the opinion dated January 6, 1993, which reinstated the Plaintiff's claims against the Becker Defendants, the Mintz, Fraade Defendants, and Organek and Continental Realty by permitting the Plaintiffs to plead a third amended complaint in the Alberti and in the Morin actions (the "Complaints"). The Plaintiffs' original pleadings against Organek and Continental had been dismissed for insufficient particularity in this Court's opinion dated September 29, 1990 ( Morin v. Trupin, 747 F. Supp. 1051 (S.D.N.Y. 1990)), and claims against these defendants were not repleaded until the Plaintiffs filed the new Complaints.

 The third amended Complaint in Alberti, apart from certain generalized allegations of fraud which were not plead with sufficient particularity under Rule 9(b), alleges that Organek who was not licensed as a real estate broker in California, had been paid a $ 750,000 brokerage fee out of the proceeds of the offering of limited partnership interests in the Butano Property in Sacramento Associates syndicated by Trupin. The Plaintiffs allege that this "brokerage fee," listed as such in the Sacramento PPM, was fraudulent because the underlying transaction never happened, and that all brokerage services contributing to Sacramento Associates' purchase of the Butano Property were performed by the Sacramento office of Caldwell Banker, which was paid a true brokerage fee of four percent of the $ 10,500,000.00 gross said price or $ 420,000.00.

 According to the Sacramento PPM, a Trupin-controlled entity, Sacramento Realty Corporation (SCR), purchased the property by paying cash, assuming the first mortgage, and taking out a second mortgage owed to the seller and that SCR paid Continental a brokerage fee of $ 750,000 for its services. SCR then sold the Butano property to an unaffiliated partnership, listed in the Sacramento PPM as North American, which assumed the obligations owed under both mortgages. North American then sold the property to Sacramento Associates, leaving a wrap-around mortgage owed to North American such that all tax deductions for the mortgages on the Butano Property would flow through to the limited partners on a pro rata basis.

 The Plaintiffs essentially allege that these transactions as described in the Sacramento PPM never happened because the initial purchase price of the Butano Property was $ 10,500,000, not $ 12,900,000 as represented in the Sacramento PPM, and the building was appraised in 1988 in connection with bankruptcy proceedings and valued at $ 6,870,000; North American was a shell corporation; the title documents indicate that Sacramento Associates took title directly from the original seller, and neither SCR nor North American was ever involved in any sale of the Butano Property. Since the wrap-around note did not represent a genuine obligation to North American, the interest (which accrued at an annual rate of 18%) was not deductible and that the inflated acquisition price would not support the depreciation deductions also promised to ...


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