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March 18, 1996


The opinion of the court was delivered by: KAPLAN

 LEWIS A. KAPLAN, District Judge.

 Plaintiffs Capital Realty Investors Tax Exempt Fund Limited Partnership ("CRITEF") and Capital Realty Investors Tax Exempt Fund III Limited Partnership ("CRITEF III") (collectively, the "Funds") are publicly traded real estate limited partnerships managed by entities controlled by William Dockser and H. William Willoughby. The Funds are the subjects of proposed mergers with affiliates of Apollo Real Estate Acquisition Corporation ("Apollo"). Defendant Martin C. Schwartzberg, formerly a close associate of Dockser and Willoughby, seeks to block the mergers and replace the Dockser-Willoughby interests as general partners of the Funds.

 The Dockser-Willoughby entities contend that two press releases issued by Schwartzberg, which questioned their integrity and criticized the proposed mergers, constituted proxy solicitations which were unlawful in consequence of Schwartzberg's failure to file proxy statements with the Securities and Exchange Commission ("SEC") and disseminate them to security holders in violation of Rules 14a-3 and 14a-6 under the Securities Exchange Act of 1934 (the "Exchange Act"), 17 C.F.R. §§ 240.14a-3, 14a-6 (1995). They claim also that the press releases were materially false and misleading and thus violated Exchange Act Rule 14a-9, 17 C.F.R. § 240.14a-9. They move for a preliminary injunction. Schwartzberg responds that the press releases were neither proxy solicitations nor materially false and misleading. The motion raises novel issues under Rule 14a-1, as amended by the SEC in 1992, *fn1" 17 C.F.R. § 240.14a-1, to provide a "safe harbor" for certain press releases which announce the way in which a security holder intends to vote and the reasons therefor. *fn2"


 Dockser, Willoughby and Schwartzberg at one time were equal participants in a series of real estate investments and ventures that involved a variety of business entities including those involved in this case, particularly C.R.I., Inc. ("CRI"). The CRI Business, a term the Court will use to refer generally to the array of ventures with which Dockser and Willoughby now have connections, today includes publicly held real estate funds including CRITEF and CRITEF III, private real estate partnerships, CRI and, it appears, other entities involved in activities such as property management.

 The CRITEF Funds

 The Funds are creatures of the boom of the late 1980s just as this dispute is an indirect outgrowth of its end. Both were formed for the purpose of acquiring portfolios of tax exempt bonds which were collateralized by non-recourse participating first mortgage loans on multifamily residential real estate developments. (Proxy *fn3" 19) Their stated objectives were to provide tax exempt distributions and preservation of capital. (Id.) Both no doubt reflected also a desire on the part of Dockser, Willoughby and Schwartzberg to expand the CRI Business by raising capital publicly.

 The structures of the Funds are somewhat complex. Each is organized as a Delaware limited partnership with a single general partner that has a 1.01 percent interest in the fund. (Id. 5, 9) The general partner in each case is another limited partnership -- CRITEF Associates LP ("CRITEF Associates") in the case of CRITEF and CRITEF III Associates LP ("CRITEF III Associates") in the case of CRITEF III. CRI is the sole general partner of CRITEF III Associates and the managing general partner of CRITEF Associates. The other general partners of CRITEF Associates are Dockser, Willoughby and Schwartzberg. (Id. 5; Schwartzberg Decl. P 1 & nn. 1, 2)

 Each of the funds has an "assignor limited partner" which has assigned beneficial interests in its limited partnership interest in the Fund to holders of Beneficial Assignee Certificates, or BACs. Holders of the BACs in effect have all of the rights of limited partners, including the right to vote on certain partnership matters.

 The BACs are registered with the SEC pursuant to Section 12 of the Exchange Act, were sold to the public in offerings conducted in the late 1980s, and are traded on the American Stock Exchange. (Proxy S000341, 19) The public offerings raised over $ 269.5 million, divided approximately evenly between CRITEF and CRITEF III. (Id. 5)

 The 1990 Schwartzberg Transaction

 For reasons that are not clear on this record, Schwartzberg and his erstwhile partners began to disengage from one another in 1989. As of January 1, 1990, Schwartzberg withdrew from CRI and sold his interests in CRI and associated companies for $ 4.7 million and other consideration. The divorce, however, was not absolute. Schwartzberg remained a general partner in CRITEF Associates and retained limited partnership interests in both CRITEF Associates and CRITEF III Associates. CRI and related entities entered into a consulting agreement with Schwartzberg, the performance of which Schwartzberg subcontracted to his company, Capital Management Strategies, Inc. ("CMS"). But CRI indemnified him broadly for liabilities arising from CRI and the related entities. (Willoughby Decl. PP 5-6)

 The Genesis of the Present Dispute

 The Funds have been less than a success. Most of the mortgage loans on the properties securing the mortgage revenue bonds held by them are in default, and the underlying properties were assigned or transferred in the late 1980s or early 1990s *fn4" to so-called Owner Partnerships, nominees of the Funds, by deeds in lieu of foreclosure or otherwise. (See Proxy 20; Carter Decl. Ex. 4, at 15, 16; id. Ex. 5, at 20) Affiliates of CRI took over the management of all or most of these properties pursuant to management contracts that presumably require the payment of management fees. *fn5"

 In late 1993, CRI explored the possibility of putting all or part of its management operations as well as certain properties into a real estate investment trust ("REIT") and conducting a public offering of the REIT. The effort, however, was a failure. (Schwartzberg Dep. 32-34, 41-42) Perhaps as a consequence, on February 1, 1994, CRI and affiliates transferred management contracts on a number of properties, including thirteen of the eighteen multifamily properties securing the bonds held by the Funds, to an Apollo affiliate, Capital Apartment Properties, Inc. ("CAPREIT") in exchange for limited partnership interests aggregating a maximum of 22 percent (assuming certain hurdle rates were met) in CAPREIT's immediate parent entity, AP CAPREIT Partners L.P. ("AP CAPREIT"). *fn6" The relationship between CRI and CAPREIT is significant because the transaction in which the CRI Business' interests in AP CAPREIT were extinguished figures in the analysis of the claims against Schwartzberg.

 The Initial Merger Overture

 According to the draft proxy statement, CAPREIT approached Dockser and Willoughby in January 1995 to discuss a possible tender offer by CAPREIT for the BACs. In March 1995, however, CAPREIT proposed mergers of the Funds into subsidiaries of CAPREIT. But on April 3, 1995, Dockser and Willoughby are said to have indicated that they would not proceed with discussions regarding the mergers until CAPREIT had financing in place. (Proxy 20) CAPREIT thereupon sought financing. But discussions regarding a subject other than the mergers evidently proceeded.

 The AP CAPREIT Redemption

 On June 30, 1995, the CRI Business' limited partnership interests in CAPREIT were redeemed by AP CAPREIT in exchange for $ 4.75 million. (Proxy 23-24; Carter Decl. Ex. 9) Pursuant to the terms of the Redemption Agreement, however, CRI and its affiliates agreed to pay to CAPREIT in certain circumstances as much as $ 3.55 million if certain management contracts, including contracts relating to certain properties securing the mortgage revenue bonds held by the Funds, are terminated other than a termination following acquisition of the property by CAPREIT or its affiliates. (Proxy 24; Redemption Agreement, Carter Decl. Ex. 9, P 5a) Thus, although merger discussions allegedly were "on hold" as of the date of the redemption agreement, the prospect of mergers of the Funds into CAPREIT subsidiaries was very much in view.

 The Merger Agreements and their Consequences

 Merger plans proceeded during the summer. On September 11, 1995, the parties entered into agreements to merge CRITEF and CRITEF III into subsidiaries of CAPREIT for $ 150 million in cash. The salient terms included the following:

 (a) BAC holders were to receive cash as follows: CRITEF Series I - $ 13.761 per BAC; CRITEF Series II - $ 13.313 per BAC; and CRITEF III - $ 14.36 per BAC.

 (b) The general partners of each Fund would sell their general partnership interests to CAPREIT or its designee for $ 500,000 each.

 (c) On the closing date, CAPREIT or its designee would acquire allegedly accrued mortgage servicing fees payable to (i) CRI through June 30, 1995 and (ii) CRIIMI MAE, Inc. ("CRIIMI MAE"), another CRI affiliate, *fn7" after June 30, 1995. The total accrued fees, assuming a timely closing, were $ 4.55 million of which, plaintiffs said at oral argument, CRI would receive approximately $ 4 million and CRIIMI MAE approximately $ 550,000.

 Given the payments to the general partners, CRI and CRIIMI MAE, it appears that the initial merger agreement contemplated that the BAC holders would receive about $ 145 million in exchange for interests initially offered to the public for nearly $ 269.5 million.

 The general partners of the Funds issued a press release on the day the merger agreements were signed which, it fairly may be said, touted the deal. It pointed out that the offers represent substantial premiums of approximately 20 percent over recent market prices" for the BACs, that the general partners had agreed to sell their own interests and had concluded that the offers were "in the best interests of the BAC holders," and that CAPREIT already managed most of the properties securing the bonds held by the Funds. (Schwartzberg Decl. Ex. 1)

 By September 28, 1995, the Funds had prepared a draft proxy statement. It was shown to Schwartzberg at or about that time, but it never has been publicly disclosed other than as an exhibit to the plaintiffs' reply papers on this motion. In some respects, the draft was overtaken by events.

 The announcement of the proposed mergers spawned class actions suits brought in the Delaware Court of Chancery in late September and early October. Allegedly filed on behalf of BAC holders, the actions contended that the mergers were the product of self-dealing, that the prices were inadequate, and so on. The complaints sought to enjoin the mergers, to require arms-length negotiations to increase the prices, and to require evaluation of alternatives. *fn8" (Carter Decl. Ex. 4, at 39)

 The merger announcement seems also to have coincided, at least roughly, with the start of the battle, of which this lawsuit is but a part, between Dockser and Willoughby, on one side, and Schwartzberg, on the other.

 On October 3, 1995, Schwartzberg's counsel, who are well known for representing parties in, inter alia, corporate control contests, announced by letter to Dockser and Willoughby that they had been "retained as special securities and corporate litigation counsel." They asserted that their "preliminary investigation" supported Schwartzberg's belief that he had claims against Dockser, Willoughby, CRI and affiliates "in connection with an asset management agreement and other agreements, the Capital Housing Partnerships ('CHP') and the four public limited partnerships (CRI Ltd. I-IV), the CRIIMI-Mae proxy statement dated April 28, 1995, and the recently announced CRITEF disposition." They demanded production within ten days of a vast quantity of documents dating back for years. (Schwartzberg Decl. Ex. 3)

 In about the same time frame, CRI questioned the level of CMS's compensation under Schwartzberg's 1990 consulting contract. When the parties failed to resolve their differences, CRI sued Schwartzberg in November 1995 in a Maryland state court for a declaratory judgment. (Willoughby Decl. PP 9-10)

 The proposed mergers did not advance quickly. On December 13, 1995, the general partners of the Funds issued a press release stating that "material conditions to the mergers" -- including settlement of the class actions -- had "not yet been satisfied." They added, however, that they were in discussions with CAPREIT with a view to obtaining a new offer that would improve the terms for the BAC holders. (Schwartzberg Decl. Ex. 4)

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