The opinion of the court was delivered by: RICHEY
This case is before the Court on a motion to dismiss filed by defendants Interim Mortgage Company, Chase Manhattan Mortgage Realty and Trust Company, Virginia Mortgage and Investment Company, Louis Russell, and Lela Constance Russell (hereinafter, "the construction lenders"). Defendant R. S. Noonan, Inc., and defendants Phyllis W. Stokes and Margot W. Anderson have also filed motions to dismiss or, in the alternative, for summary judgment. These latter motions raise, inter alia, issues related to the motion filed by the construction lenders; to the extent that the latter motions overlap with the former, they will be treated together in this Memorandum Opinion. The Court has issued separate memoranda and orders this date disposing of those portions of the latter motions which do not overlap with the motion to dismiss filed by the construction lenders. The background section set forth below applies to all aspects of the three motions mentioned above; it has been incorporated by reference in the memoranda dealing with those aspects of the latter motions not covered in this opinion.
For the reasons which follow, the Court will deny the construction lenders' motion to dismiss and, for the same reasons, those portions of the latter motions which raise related issues.
The motions presently under consideration all concern the second phase of the case; accordingly, the Court finds it appropriate to set forth at the outset a summary of the allegations which constitute the second phase. The Court stresses that the summary which follows is merely plaintiffs' version of the events crucial to this case; by setting them forth, the Court, of course, expresses no opinion as to their accuracy.
According to the plaintiffs, each limited partner invested $44,000 per partnership unit when the units were sold to them in 1972. The rights, duties, and obligations of the general and limited partners, in addition to some of the benefits which were to inure to the limited partners, were set forth in the Offering Memorandum and the Partnership Agreement among the parties. For purposes of this case, six facts allegedly established by those documents are crucial: (1) the general partners contributed to the partnership all of their right, title, and interest in the land and its improvements in exchange for contribution of capital by the limited partners; (2) in the event the limited partners did not regain their original investment by June 30, 1974, the general partners committed themselves to taking one of three steps, including foregoing all of their collective interests in the condominium; (3) the general partners agreed to obtain prior approval of at least 60 per cent of the total partnership interests (which were held, under the Partnership Agreement, entirely by the limited partners)
before selling in bulk all or any substantial part of the land or improvements; (4) the general partners agreed to contribute whatever amounts were necessary above scheduled costs to complete the development, construction and marketing of the partnership's property; (5) individual defendants Messrs. Stokes, Anderson, Mack, Butler, and Carpenter and their spouses personally guaranteed the construction loan for the project; (6) the limited partners were to receive income from the sales of condominium apartments as well as from ground leases which were to be created on the units and assigned to the limited partners as the units were sold.
In the two years following the formation of the partnership, the condominium project encountered serious construction and financial difficulties. According to the plaintiffs, the limited partners were not provided with substantial information concerning these difficulties until a meeting on June 28, 1974. A series of meetings and negotiations concerning the future status of the project were begun in the summer of 1974, with representatives of the general and limited partners, the construction lenders, and the holder of the purchase money mortgage on the land, among others, participating.
On June 30, 1974, the limited partners had received no return on their original investment. Accordingly, pursuant to the Partnership Agreement, the general partners resigned their collective interests in the building, leaving the limited partners as the sole parties entitled to income from the project.
In August 1974, defendant R. S. Noonan, Inc., the general contractor on the building, filed a mechanics lien for monies due on the building. The general partners subsequently filed a counterclaim on behalf of the partnership for over $3.4 million in damages resulting from alleged delays in construction on the part of the contractor.
From October 1974 on, the limited partners were, they allege, excluded from further negotiations on the future of the financing and construction of the project. In January 1975, according to plaintiffs, a settlement agreement regarding the project was reached among the construction lenders, the contractor, the general partners, and Messrs. Anderson, Stokes, Butler, Mack, and Carpenter and their spouses. In preparation for this agreement, the general partners had executed in December 1974 a quitclaim deed for consideration of one dollar which purported to convey the partnership's land and building to the general partners as joint venturers. Under the terms of the settlement, the general partners proceeded to convey portions of the partnership property to the construction lenders; the holder of the purchase money mortgage; Mr. and Mrs. Anderson; Anderson-Stokes, Inc., a general partner; and R. S. Noonan, Inc., the general contractor. With some of these conveyances, the ground leases were extinguished upon transfer and the partnership units were conveyed in fee; with others, the units were conveyed subject to ground leases which were transferred to the construction lenders. The lenders released at least the Stokes and the Andersons -- and perhaps the Butlers, the Macks, and the Carpenters -- from their personal guarantees on the construction loans. General partners Anderson-Stokes, Inc., and Real Equity Investments, Inc., obtained releases from similar guarantees. At the same time, the general partners settled the claim made on behalf of the partnership against the contractor, R. S. Noonan, Inc., for a small fraction of the $3.4 million claim.
Plaintiffs allege that they were not informed of the settlement agreement until February 1975. Under the terms of that agreement, the limited partners were given the right, under certain conditions, to purchase condominium units. Finding the conditions unacceptable, all of the limited partners declined to purchase units. Under the settlement agreement, the limited partners now have what they regard as a remote and improbable right to receive payments only if the construction lenders obtain funds in excess of those needed to satisfy the construction mortgage, any mortgages granted pursuant to the settlement agreement, and related expenses. To receive such payments, the limited partners would have to sign a release of all of their claims concerning the project.
In Count XIII of the Third Amended Complaint, plaintiffs allege that, in light of the claims summarized above, various defendants (including all of the defendants whose motions are considered in this opinion) participated in a common scheme and conspiracy to liquidate all or substantially all of the assets of the partnership in violation of the rights and interests of the limited partners, as set forth in, inter alia, the Partnership Agreement. Claiming that this "forced disposition" of plaintiffs' assets constituted a "sale" by plaintiffs within the meaning of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, plaintiffs seek damages for defendants' alleged violations of those provisions as well as for common-law fraud.
In Count XIV, plaintiffs allege that various defendants (including all of the moving defendants except Mrs. Stokes and Mrs. Anderson) conspired with the general partners in an unlawful conversion of plaintiffs' interests in the partnership assets to the defendants' own uses and interests.
The Court stresses again that by setting forth this lengthy summary of the plaintiffs' allegations it expresses no opinion whatsoever as to their accuracy. Because the alleged factual pattern set forth above forms the background for all of the motions presently under consideration, the Court found it necessary to set forth the allegations in some detail. The Court now turns to the specifics of the motions.
II. DEFENDANTS' MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM UNDER § 10(b) AND RULE 10b-5 UPON WHICH RELIEF CAN BE GRANTED MUST BE DENIED.
The construction lenders have filed a motion to dismiss Count XIII for plaintiffs' failure to state a claim upon which relief can be granted. Defendant Noonan has joined in that motion and has raised additional related issues in its own motion to dismiss. Defendants Anderson and Stokes have not joined in the other defendants' motions to dismiss, but their motion to dismiss raises, inter alia, related issues.
A. The Complaint Charges Defendants With Violations Of Obligations Chargeable Under § 10(b) and Rule 10b-5.
In a somewhat general and unfocused fashion, the construction lenders have claimed, and defendant Noonan has joined in the claim, that plaintiffs' complaint alleges a breach of duties which are "not chargeable" under § 10(b) and Rule 10b-5.