("NTS partnerships have always met or exceeded cash projections.") See NTS V Summary of Offering, at 2; see also NTS IV Summary of Offering, at 1, 4. The Prospectuses do warn investors of the likelihood that conflicts of interest will arise among the various entities in the NTS family. The Prospectuses represent, however, that any conflicts will be resolved consistent with the general partner's fiduciary duty to the limited partners and with the investment objectives of the partnerships. See NTS IV Prospectus, at 12-14; NTS V Prospectus, at 15-18. Those objectives include preserving and protecting the limited partners' capital. See NTS IV Prospectus, at 24; NTS V Prospectus, at 28.
Certainly, for obvious reasons, nothing in the Prospectuses or Summaries of Offering warns potential investors that Nordstrom and Farmer, acting in their capacity as the general partners of NTS Properties Associates IV and NTS Properties Associates V, might misappropriate funds, take kickbacks, convert assets, and usurp partnership opportunities. Investors and brokers could reasonably rely on NTS's representations that the partnerships would be properly managed. The Third-Party Complaint has therefore alleged facts that, if true, would satisfy the justifiable reliance element of a cause of action under Rule 10b-5, common law fraud or negligent misrepresentation.
NTS also argues that Goldberg has not alleged facts that would demonstrate that Nordstrom and Farmer's actions caused any injury to McCoy. NTS contends, therefore, that Goldberg is not entitled to contribution based on the theory that NTS could be liable to McCoy under Rule 10b-5 or for common law fraud.
NTS asserts that Goldberg's allegations of causation are insufficient in several respects. First, NTS raises a standing-type argument, asserting that Nordstrom and Farmer's misconduct caused injury, at most, to the partnerships themselves rather than to McCoy. NTS then argues that Goldberg's contentions do not satisfy the loss causation requirement of Rule 10b-5 or the "direct and independent cause of injury" requirement of an action for common law fraud. If NTS is correct in any of these arguments, Goldberg's contribution claims would be deficient, because he would have failed to allege all of the elements of a cause of action against NTS. We find, however, that each of NTS's arguments is flawed.
NTS is correct that in many situations a limited partner may not bring suit on her own behalf when the defendant's actions injured only the partnership. See Lenz v. Associated Inns & Restaurants Co., 833 F. Supp. 362, 380 (S.D.N.Y. 1993) (dismissing breach of fiduciary duty action where limited partner damaged only to extent of diminution of stake in partnership); Attick v. Valeria Assocs., L.P., 835 F. Supp. 103 (S.D.N.Y. 1992) (dismissing RICO claims where only injury to limited partner is diminution of value of investment). Limited partners commonly sue on their own behalf, however, when the injury alleged is a violation of the securities laws or common law fraud. See, e.g., Parnes v. Mast Property Investors, Inc., 776 F. Supp. 792, 795-97 (S.D.N.Y. 1991) (denying motion to dismiss limited partner's securities fraud claims); Friedman v. Arizona World Nurseries Ltd., 730 F. Supp. 521, 541 (S.D.N.Y. 1990) (denying motion to dismiss limited partners' securities and common law fraud claims), aff'd, 927 F.2d 594 (2d Cir. 1991); Thornock v. Kinderhill Corp., 712 F. Supp. 1123, 1127-28 (S.D.N.Y. 1989) (same).
In those cases, and countless more like them, the limited partners have alleged direct injuries to themselves caused by the partnerships' fraudulent failure to disclose information that would have affected their investment decisions. Likewise, in this case, Goldberg is not merely alleging that Nordstrom and Farmer's actions diminished the value of the partnership and therefore reduced the value of McCoy's investment. Instead, he is alleging that NTS's failure to disclose Nordstrom and Farmer's misconduct injured McCoy by misleading her in violation of Rule 10b-5 or common law fraud.
Hence, NTS's first argument is not persuasive.
Focusing next on the requirements for pleading causation under Rule 10b-5, we find that Goldberg has alleged facts that meet those standards. To state a claim, a party must allege both transaction causation and loss causation. Transaction causation "involves proof that the [third-party] defendants' misrepresentations and omissions caused the purchase of securities. Loss causation involves a showing that the misrepresentations and omissions proximately caused the economic harm." Hemming v. Alfin Fragrances, Inc., 690 F. Supp. 239, 243 n.3 (S.D.N.Y. 1988) (citing, inter alia, Bennett v. United States Trust Co., 770 F.2d 308, 313 (2d Cir. 1985), cert. denied, 474 U.S. 1058, 88 L. Ed. 2d 776, 106 S. Ct. 800 (1986)). The Second Circuit has explained that when "the misrepresentation . . . both induced the purchase [transaction causation] and related to the stock's value [loss causation], it could be deemed causally related to the loss." Bennett, 770 F.2d at 314.
Goldberg has alleged that but for the representations made by NTS IV and NTS V, including the representations of experienced and professional management, McCoy would not have purchased her interests in NTS IV and NTS V. See Third-Party Complaint, at PP 22(b), 144(b). We have no difficulty imagining that had McCoy been aware of Nordstrom and Farmer's alleged misconduct, she would not have chosen to invest in NTS. Goldberg has also alleged loss causation by claiming that "plaintiff's losses were proximately caused by Third-Party Defendants' representations and omissions." See Third-Party Complaint, at PP 22(b), 144(b). If Nordstrom and Farmer were in fact diverting business opportunities from the partnerships, charging lavish personal expenses and vacations to the partnerships and misappropriating funds, that behavior could no doubt be extensive enough to endanger the financial health of the partnerships and to result in a substantial decrease in the value of McCoy's interests. NTS's failure to disclose Nordstrom and Farmer's activities was therefore related to the value of the interests.
These allegations satisfy this Circuit's requirements for pleading causation under Rule 10b-5. See Bruce v. Martin, 691 F. Supp. 716, 726 (S.D.N.Y. 1988). In resolving this motion, we need not opine on the likelihood that Goldberg can convince a jury that these allegations are true. Instead, we merely find that a jury could decide that NTS's failure to disclose the misconduct of its management both induced McCoy's purchases and related to the value of interests in NTS IV and NTS V.
Goldberg has also alleged facts sufficient to satisfy the causation element of a common law fraud theory of liability. Under New York law, a plaintiff must establish that "the loss complained of is a direct result of the defendant's wrongful actions and independent of other causes." See Revak v. SEC Realty Corp., 18 F.3d 81, 89-90 (2d Cir. 1994). This formulation is essentially a statement of the loss causation element of an action for common law fraud. See id. NTS contends that the loss causation requirement for common law fraud is more stringent than that for Rule 10b-5. Even if NTS is correct on this score, however, the requirement is not so strict that Goldberg's allegations of causation are insufficient.
In making its argument, NTS attributes great, and in our view unwarranted, significance to the phrase "independent of other causes." NTS asserts that
Goldberg necessarily caused Rose McCoy's injury by breaching the special relationship of trust and confidence which he alone owed to her. Accordingly, to the extent his contribution claim against NTS is predicated on a theory of common law fraud, he is unable to prove that NTS's alleged omissions caused Mrs. McCoy's injuries independent of other causes.
NTS Mem., at 28. This argument fails in two respects. First, it characterizes McCoy's injury too narrowly. As we explained above in connection with the same injury requirement, McCoy's injury is the financial loss that she suffered when her investments declined in value, rather than the actual breach of Goldberg's fiduciary duty to her.
Second, even if we assume that NTS has properly identified the injury to McCoy, NTS's reasoning is flawed. NTS argues that it is impossible for Goldberg to satisfy the independent causation requirement of a common law fraud theory of liability because Goldberg is alleging that both his actions and NTS's actions caused McCoy's loss. If NTS were correct, no joint tortfeasor would ever be able to recover for contribution based on allegations of common law fraud.
Numerous courts have, however, recognized the right to contribution when the third-party plaintiff has alleged facts that, if proven, would establish that the third-party defendant participated in defrauding the plaintiff in the underlying action. See, e.g., In Re Crazy Eddie Securities Litigation, 802 F. Supp. 804, 815 (E.D.N.Y. 1992) (denying summary judgment dismissing contribution claim against alleged joint tortfeasor based on common law fraud theory); McCoy v. Goldberg, 778 F. Supp. 201, 204 (S.D.N.Y. 1991) (denying motion to dismiss contribution claim brought by other third-party defendants in this case based on similar allegations of fraud); Dep't of Economic Development v. Arthur Andersen & Co., 747 F. Supp. 922, 936 (S.D.N.Y. 1990) (denying third-party defendants' motion to dismiss contribution claim based on underlying claim of common law fraud). Because a third-party plaintiff may recover contribution from a third-party defendant when both participated in defrauding the plaintiff, NTS's construction of the direct and independent cause requirement for an action of common law fraud cannot be correct.
Furthermore, because NTS's argument fails with respect to joint tortfeasors, it must also be incorrect when applied to concurrent, successive, independent, alternative, and intentional tortfeasors/--all of which are entitled to contribution under New York law. See Board of Educ., 523 N.Y.S.2d at 478. Therefore, we find that Goldberg's allegations concerning Nordstrom and Farmer's misconduct adequately plead causation under a common law fraud theory of liability.
Goldberg's allegations of misconduct by Nordstrom and Farmer, if proven, would establish NTS's liability under either a Rule 10-b5 or a common law fraud theory. Therefore, to the extent that Goldberg relies on these allegations in bringing his claims for contribution, we hold that he has stated a claim for which relief may be granted. Goldberg's allegations of misconduct by Nichols, however, fail adequately to plead scienter on the part of NTS, and therefore do not state a claim for contribution based on NTS's liability under Rule 10b-5, common law fraud, or negligent misrepresentation.
4. Special Relationship
Last, we turn to Goldberg's theory that he is entitled to contribution because NTS committed negligent misrepresentation. Because NTS does not specifically attack Goldberg's pleading of scienter, justifiable reliance and causation with respect to this theory of liability, we will assume for the purposes of this discussion that Goldberg has adequately alleged these elements of a cause of action for negligent misrepresentation. Some sort of special relationship of trust and confidence between the parties is, however, also required to ground liability for negligent misrepresentation. See Banque Arabe et Internationale D'Investissement v. Maryland National Bank, 819 F. Supp. 1282, 1293 (S.D.N.Y. 1993). No such relationship appears to exist between a seller of securities and a member of the general investing public. See Time-Warner, 9 F.3d at 271. Therefore, Goldberg does not argue that he is entitled to contribution based on NTS's liability to McCoy for negligent misrepresentation.
Goldberg does argue, however, that NTS could be liable for negligent misrepresentations or omissions that it made to him. Goldberg contends that the contracts that he signed with NTS establishing him as a Soliciting Dealer of NTS interests created a tie sufficiently close to satisfy the special relationship of a claim for negligent misrepresentation. See Goldberg Opp. Mem., at 21-23. NTS disagrees. Because we find that Goldberg has alleged facts sufficient to ground his contribution claims under a Rule 10b-5 or a common law fraud theory of liability, we need not rule at this time on the issue of whether the Soliciting Dealer arrangement in this case is a special relationship. We note, however, that an ordinary contractual relationship is often insufficient to establish a special relationship, Banque Arabe, 819 F. Supp. at 1293, while a continuing or potentially long-term contractual relationship may do so, see Congress Financial Corp. v. John Morrell & Co., 790 F. Supp. 459, 474 (S.D.N.Y. 1992). Since the parties' treatment of this issue is quite brief, however, we cannot be certain at this time where the contractual relationship in this case falls along that spectrum.
NTS argues that since, in the Third-Party Complaint, Goldberg claims only that he was a "Soliciting Dealer" for NTS but does not specifically allege the existence of the Soliciting Dealer agreements, see NTS Reply Mem., at 19; Third-Party Complaint, PP 13, 137, Goldberg cannot rely on those contracts to claim that a special relationship exists. We note, however, that in its Counterclaims brought in response to the Third-Party Complaint, NTS itself alleges that Goldberg signed the Soliciting Dealer agreements and bases five of its six counterclaims on the terms of those agreements. See NTS's Amended Answer to Third-Party Complaint and Counterclaims, at 10-19. Under these circumstances, we find NTS's argument somewhat disingenuous. Accordingly, we grant Goldberg permission to file, within two weeks, an amendment to the Third-Party Complaint alleging that Goldberg entered into a contractual Soliciting Dealer relationship with NTS.
For the foregoing reasons, NTS's motion to dismiss Goldberg's contribution claims for failure to state a claim upon which relief may be granted is denied.
William C. Conner
Sr. United States District Judge
Date: March 31, 1995
New York, New York