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ADLER v. BERG HARMON ASSOCS.

July 17, 1995

EDWARD ADLER, et al., Plaintiffs, against BERG HARMON ASSOCIATES, et al., Defendants.

William C. Conner, Sr., United States District Judge.


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

CONNER, SENIOR D.J.:

 Plaintiffs Edward Adler et al. bring this action for damages against Berg Harmon Associates, et al. for violations of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and Securities and Exchange Commission ("SEC") Rule 10b-5 promulgated thereunder; Racketeering and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.; and common law fraud. The action is presently before the Court on defendants' motion for summary judgment. For reasons explained below, defendants' motion is granted.

 PROCEDURAL HISTORY AND BACKGROUND

 This is the fourth order and opinion issued by this Court in this action. The original complaint was filed on December 7, 1989, which alleged violations of the securities laws, RICO, common law fraud, breach of fiduciary duty and negligent misrepresentation. On June 20, 1991, in two cases, the Supreme Court created a retroactive uniform one-and-three-year limitations period for actions brought under Section 10(b) of the Securities and Exchange Act. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991); James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 115 L. Ed. 2d 481, 111 S. Ct. 2439 (1991). As a result, plaintiffs amended their complaint to withdraw their securities claims except to the extent that they served as predicate acts for their RICO claims. The defendants moved to dismiss the remaining claims, which we granted in an order and opinion dated April 7, 1992, with leave to replead. Meanwhile, Congress modified the retroactive effect of Lampf by enacting § 27A of the Securities and Exchange Act. Consequently, we permitted plaintiffs to reinstate their securities claims in an order and opinion dated April 27, 1992.

 Defendants then filed a second motion to dismiss or, in the alternative, a motion for summary judgment. On March 29, 1993, we issued an order and opinion dismissing all but one of plaintiffs' securities law claims. Similarly, we dismissed the RICO and common law fraud claims except to the extent that they were based on the one remaining securities law claim. Plaintiffs' claims for negligent misrepresentation and breach fiduciary duty were dismissed in their totality. Defendants now move for summary judgment on the remaining securities law claim.

 The facts have been detailed in our prior opinions, familiarity with which is presumed. The relevant facts for purposes of this motion are as follows. In the early 1980's Berg Harmon, a joint venture between Harmon Assoc. and Berg Ventures, Inc., syndicated and promoted the sale of limited partnerships in 50 real estate tax shelters, 44 of which are at issue in this action. The partnership units were marketed to a limited number of investors through the use of Private Placement Memoranda (PPMs). The investments substantially declined in 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. The remaining securities law claim in the Complaint is that the PPMs for each of the 44 properties misrepresented that present rents from the properties were sufficient to cover normal operating expenses and debt service. Compl. P11(a), 13.

 DISCUSSION

 Summary judgment is to be granted when "there is no genuine issue as to any material fact and [] the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Summary judgment is appropriate 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, Inc. v. Chemical Bank, 870 F.2d 840, 844 (2d Cir. 1989). However, the nonmoving party cannot avoid summary judgment by resting solely on the contentions in its pleadings. Rather, if the moving party puts forth evidence on an issue, the nonmoving party "must set forth specific facts showing there is a genuine issue for trial." Fed.R.Civ.P. 56(e).

 In order to prevail on a securities fraud claim under § 10(b) and Rule 10b-5, plaintiffs must prove that defendants knowingly and intentionally made material misstatements or omissions in connection with the purchase or sale of a security, upon which plaintiffs reasonably and detrimentally relied and suffered a loss caused thereby. Burke v. Jacoby, 981 F.2d 1372, 1378 (2d Cir. 1992), cert. denied, 124 L. Ed. 2d 249, 113 S. Ct. 2338 (1993). As noted, the remaining allegation in the Complaint is that the PPMs falsely stated that present rents were sufficient to pay normal operating expenses and debt service. Plaintiffs allege that in fact all of the properties were experiencing operating deficits; that defendants made these statements knowing them to be untrue; that plaintiffs relied on these statements in the PPMs; and that the undisclosed operating deficits ultimately made plaintiffs' securities worthless.

 Defendants first argue that only 16 of the 44 PPMs state that present rents are sufficient to meet current normal operating expenses and debt service, and thus the claims concerning the remaining 28 properties must be dismissed. Upon examining all 44 PPMs, it is clear that indeed only 16 of the 44 PPMs contain the statement alleged in the Complaint. *fn1" We first address the group of 28 PPMs that do not contain the alleged misstatement.

 A. 28 PPMs Not Containing Statement Alleged in Complaint

 Of the 28 PPMs that do not state that present rents are sufficient to cover normal operating expenses and debt service, seven of them state the exact opposite: that present rents are insufficient to meet operating expenses and debt service. *fn2" Summary judgment is granted in favor of defendants on the claims concerning these properties because the factual predicate for plaintiffs' allegations is simply incorrect.

 Three other PPMs contain no statement concerning the sufficiency of present rents to cover operating expenses or debt service. *fn3" These claims are likewise dismissed because they do not contain the statement alleged in the Complaint. Plaintiffs argue that these PPMs were misleading because they did not reveal that the properties were experiencing operating deficits. However, not only have plaintiffs failed to produce any specific evidence supporting their argument that there were in fact operating deficits for these properties, but the Complaint does not allege that there was a material omission in these PPMs. As explained in our prior opinion, to support a claim of fraud by omission, Rule 9(b), Fed. R. Civ. P., requires that the complaint allege (1) what omissions they were, (2) the person responsible for the failure to disclose, (3) the context of the omissions and the manner in which they misled the plaintiffs, and (4) what defendant obtained through the fraud. Adler v. Berg Harmon Assoc., 816 F. Supp. 919, 924 (S.D.N.Y. 1993) (citing Gould v. Berk & Michaels, 1991 U.S. Dist. LEXIS 10454, 1991 WL 152613, *3 (S.D.N.Y. 1991)). The instant Complaint fails to ...


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