The opinion of the court was delivered by: Stanley Sporkin, United States District Judge.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This action was commenced by the plaintiffs Francine K. Weiss (Weiss) and Jacob Katzow (Katzow) against Linda Lehman individually and in her capacity as personal representative of the estate of Morton A. Gibson, her deceased husband, Lehman Gibson Associates, Inc., and Lehman Gibson Associates (hereinafter sometimes collectively referred to as the Lehman defendants) and against Hyman Alpert, Robert Alpert and Hy-Bob Co., Inc. (hereinafter sometimes collectively referred to as the Alpert defendants). Nine of the fourteen counts in the complaint pertain to alleged violations of the Federal, District of Columbia and Maryland securities laws. In Counts One and Two of their complaint the plaintiffs allege that the Lehman defendants in connection with the offer and sale of joint venture interests in Baltimore real estate violated the anti-fraud provisions of Section 10(b) of the Securities andáExchange Act [15 U.S.C. § 78j] and Rule 10b-5 thereunder [17 CFR 240.10b-5] (Count One) and the registration provisions of Sections 5 and 12(1) and (2) of the Securities Act of 1933 [15 U.S.C. §§ 77e and 77l(1) and (2)] (Count Two) and that the Alpert defendants aided and abetted the Lehman defendants in their alleged violations of Count One. In Count Three of their complaint, the plaintiffs allege that the Lehman and Alpert defendants directly and/or indirectly conspired to violate the federal securities laws alleged to have been violated in Counts One and Two of the complaint. In Count Twelve of the complaint the plaintiffs seek to have the court declare that certain debt securities used by them to purchase joint venture interests in two of the Baltimore Real Estate ventures be declared null and void and that they be relieved of any obligation under the debt securities in question.
In Counts Four and Five of the complaint the plaintiffs allege that the Lehman defendants violated the registration requirements [Title 2-2603] and anti-fraud prohibitions [Title 2-2613 (a) (2)] of the District of Columbia Code in that in connectionsáwith the offer and sale of the joint venture interests the Lehman defendants did not register as broker-dealers or agents with the District of Columbia Public Service Commission (Count Four) and that the Lehman defendants in connection with such offer and sale made untrue statements and omissions of material facts (Count Five). Counts Six, Seven and Fourteen involve alleged violations by the Lehman defendants of the registration requirements [§§ 11-401 and 11-501] and the anti-fraud provisions [§ 11-703 (a) (ii)] of the Annotated Code of Maryland, Section on Corporations and Associations in that, in connection with the offer and sale of the joint venture interests in the Baltimore properties, the Lehman defendants did not register with the State of Maryland as broker-dealers or agents (Count Six) or did not register the joint venture interests being sold with said state (Count Seven) and that in offering for sale and selling these interests in the Baltimore properties they made false and misleading statements and omissions (Count Fourteen). The Alpert defendants, while not charged in Counts Six and Seven are alleged in Count Fourteen to have aided and abetted theáLehman defendants in the violations of the anti-fraud provisions.
Count Eleven of the complaint alleges that the conduct of the Lehman and Alpert defendants in connection with the offer and sale of the interests in the Baltimore properties was in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Section 1962.
In Counts Eight and Nine the plaintiffs allege that the Lehman and Alpert defendants engaged in common law fraud (Count Eight) and breached their fiduciary obligations (Count Nine) in that in connection with the offer and sale of the aforesaid joint venture interests the defendants made false and misleading statements and omissions to the plaintiffs to whom they owed a fiduciary obligation. In Count Ten the plaintiffs alternatively allege that the Lehman defendants negligently through misrepresentations and omissions induced them to purchase the property interests in the joint ventures. In Count Thirteen, in the event the court finds they were defrauded, the plaintiffs seek to have the court declare null and void certain promissory notes and deeds of trust executed by the plaintiffs in favor of the Alpert defendants.
Defendant Lehman has counterclaimed against the plaintiffs Katzow and Weiss. In Count One of her counterclaim, defendant Lehman alleges that plaintiff Katzow intentionally engaged in a course of conduct that was calculated to remind her of her late departed husband which he knew would cause her great emotional distress. In Count Two of her counterclaim defendant Lehman alleges that the plaintiff Katzow, aided and abetted by plaintiff Weiss, under the guise of obtaining discovery in these proceedings, commenced to communicate with clients of Lehman in an effort to get these clients to cease doing business with Lehman. In Count Three of her counterclaim defendant Lehman alleges that commencing on or about March 20, 1986, Katzow aided and abetted by Weiss, in an effort to discredit Lehman, invaded her privacy by disclosing to her investors facts concerning her personal life which Katzow learned while treating her in a professional capacity.
Lehman-Gibson Associates, Inc. filed a counterclaim against the plaintiffs Weiss and Katzow containing numerous counts, all of which pertain to Lehman-Gibson Associates, Inc., seeking to have the court grant judgment against the plaintiffs on promissoryánotes and deeds of trust executed by the plaintiffs in connection with their purchases of properties from Lehman-Gibson Associates, Inc.
This case was heard by the court in a non-jury trial. The presentation of the evidence consumed fourteen trial days at which time thirty-one witnesses were called by the parties including plaintiffs Weiss and Katzow and defendants Linda Lehman, Hyman Alpert and Robert Alpert. Numerous documents were introduced into evidence by the parties. Post trial proposed findings of fact and conclusions of law were submitted to the court and argument was held in the matter.
The following represent my findings of fact and conclusions of law based upon the evidence adduced at trial and the legal arguments advanced by the parties.
The Parties In This Lawsuit
Plaintiff Jacob J. Katzow (Katzow) was, at the time of trial, 51 years old and since 1967 has been a practicing psychiatrist. Since 1970 he has served as an Associate Clinical Professor at George Washington Medical School.
Plaintiff Francine K. Weiss (Weiss) was at the time of trial 38 years old. She is an attorney specializing in labor law and employment discrimination. Since 1982 she has been engaged in the practice of law as a sole practitioner.
Plaintiffs Katzow and Weiss are husband and wife and have been married since February 3, 1979. At all times relevant to these proceedings they have resided in the District of Columbia. They are the parents of two children who were 4 and 6 years at the time of trial.
The defendant Linda Lehman Gibson ("Lehman"), who at time of trial was 37 years old, is an adult resident of the State of Maryland. She has been sued individually and as personal representative of the estate of her deceased husband Morton A. Gibson ("Gibson"), who died on August 2, 1984. Lehman is a 1971 graduate of George Washington University with a degree in philosophy. Gibson was a graduate of the Wharton Business School of the University of Pennsylvania.
The defendant Lehman Gibson Associates ("LGA") is a partnership formed by Lehman and Gibson in 1977. LGA sold tax-sheltered investments, residential real estate, insurance, stocks, bonds, mutual funds and other investment products from an office in Silver Spring, Maryland.
The defendant Lehman Gibson Associates, Inc. ("LGA, Inc.") is a Maryland corporation established in 1977, the stockáof which was owned entirely by Lehman and Gibson. LGA, Inc. is a licensed Maryland mortgage banking company.
The defendant Hyman Alpert and his son, Robert Alpert ("Alperts") are adult residents of the State of Maryland and were the sole owners of the defendant Hy-Bob, Inc. ("Hy-Bob"), and Redstart Corporation, both Maryland corporations. These defendants are sometimes collectively referred to as the Alpert defendants.
Events Leading to the Creation of the Baltimore Joint Ventures
Katzow first became acquainted with Lehman in 1975 when he was introduced to her at the home of one of Katzow's friends. At the time Lehman was associated with Investors Economic Systems (IES), an investment firm which was selling real estate limited partnerships. Katzow did not meet Gibson, who was also employed by IES until several years later.
Katzow purchased a $10,000 unit in a limited partnership from Lehman while she was employed by IES. Katzow ultimately lost his $10,000 investment due to the fraudulent practices of that firm and its principals. During the investigation by federal authorities into the illegal activities of IES, Lehman cooperated fully and was in fact credited withástopping the illicit activities by blowing the whistle on that concern.
Weiss was first introduced to Gibson and Lehman in 1978. Weiss and Katzow developed a personal as well as a business relationship with Lehman and Gibson. In 1978, prior to their marriage, Weiss and Katzow each purchased for investment a residential property in Montgomery County through Lehman and Gibson, who at the time were licensed real estate agents for a realtor in Montgomery County, Maryland. They later sold these properties through Lehman and Gibson at a substantial profit.
In late 1978, Lehman and Gibson became disenchanted with the Montgomery County real estate market and switched their interest to the Baltimore, Maryland, real estate market. At the time Baltimore was experiencing a development renaissance in the Baltimore Inner Harbor. Lehman and Gibson believed that greater profits could be derived from real estate ventures in the Baltimore area where properties downtown were selling from $5,000 to $10,000 a unit as opposed to the Washington, D. C., area where a shell in downtown Washington, D. C., was selling for $45,000.
Lehman and Gibson decided that they would market their purchases of realáestate in Baltimore through the use of joint ventures. When they commenced operations, á Lehman and Gibson did not know how many joint ventures they would create. Their purpose in creating the joint ventures to purchase the Baltimore properties was twofold, i.e. the purchasers would get certain immediate tax benefits and eventually would benefit from the appreciation of the real estate.
Sometime in August 1978, Hyman Alpert, a real estate promoter, became interested in purchasing real estate in downtown Baltimore. Hyman Alpert and his son Robert Alpert as part of their real estate operations typically would purchase in packages numerous real estate properties and thereafter (after preparing them for sale) would offer them for sale at a substantial profit.
On or about August 7, 1978, the Alperts, in the name of Hy-Bob, purchased from Philip Needle a package of 66 properties in downtown Baltimore for approximately $315,000. These 66 houses were within twenty to thirty minutes walking distance from the renowned Baltimore Inner Harbor development.
Shortly after the purchase of the 66 houses, Hyman Alpert was introduced to Lehman and Gibson by William Wadle, a Vice Presidentáfor VMI Mortgage Bank of Baltimore. The Alperts offered Lehman and Gibson the properties which they had purchased.
The first sale of Baltimore properties by the Alperts to Lehman and Gibson occurred in March 1979. This involved the sale of the 66 properties which the Alperts had obtained from Philip Needle in August 1978. The Alperts received $660,000 for these properties, or approximately $10,000 per property. As a part of the transaction the Alperts arranged for non-recourse financing and assured that the properties were in compliance with Baltimore's strict housing code. The Alperts also guaranteed that each property sold would be tenant occupied.
Altogether, the Alperts purchased close to 1,000 Baltimore properties in the name of Hy-Bob or Robert Alpert. Subsequently, as will be discussed hereinafter, the Alperts sold, directly or indirectly, approximately 360 of these Baltimore properties, about 35%, to the twenty-nine Baltimore Joint Ventures organized and sponsored by Lehman and Gibson.
At the time Lehman and Gibson purchased properties from the Alperts neither of them knew what the Alperts had paid for the properties. Further, neither Lehman nor Gibson obtained any appraisalsáon the approximately 360 Baltimore properties which were purchased from the Alperts. Neither Lehman nor Gibson inspected these properties because after viewing 25 or 30 of them they knew what to expect, since all the houses obtained from the Alperts were similar in condition.
Lehman and Gibson determined that they would place the properties purchased from the Alperts in joint ventures which came to be known as the Baltimore Joint Ventures (hereinafter collectively referred to as the BJVs and individually as BJV I, BJV II, etc.).
The substantial majority of the Baltimore properties placed in the BJVs averaged $10,000 a property. The prices at which the properties were actually sold ranged between $5,500 per property to $13,750 a property. All the properties purchased for the BJVs were located within a 1-1/2 mile radius.
Lehman and Gibson's primary concerns in selecting these properties for sale to the BJVs were that: 1) properties were violation free, and 2) the price was reasonable. All told, there were 29 BJVs created to hold the approximately 360 Baltimore properties obtained from the Alperts. These BJVs were sold during the period March 6, 1979, through December 28, 1981. As will be discussed later, the plaintiffs Katzow and Weiss purchased interests in BJVs I, II, IV, VI, VIII, X, XII, XVI, XXI, XXIV, XXVI and XXVIII.
In the purchases by the BJVs of the Alpert-owned Baltimore properties, Lehman and Gibson in the name of LGA received a 10% interest in each venture. For this interest LGA was to maintain records related to the venture, prepare the necessary tax forms and to hire a Baltimore manager who would oversee the day-to-day management of the properties, as required by Baltimore City law. The function of LGA, however, was not to manage the properties on a day-to-day basis.
In addition to receiving a 10% interest from the BJVs, Lehman and Gibson received a commission from the Alperts, payable to LGA for acting as a real estate broker for the sale of the Baltimore properties owned by the Alperts which were placed in the BJVs. The commission paid by the Alperts to Lehman and Gibson depended on the structure of the sale. A greater commission was paid if the amount of cash received in the acquisition of property was substantial. Where the purchase was financed in part by a mortgage taken back by the Alperts, the commission was less.
The 66 properties initially purchased by the Alperts from Philip Needle were placed in BJVs I, II, III, and IV. Lehman and Gibson received a commission from the Alperts of $780 to $790 a property for these transactions. Thereafter the commissions paid to Lehman and Gibson were higher and they received a commission of approximately $2,000 per property for placing Alpert-owned properties in BJVs XXVI, XXVII, and XXVIII. The total commissions received by Lehman and Gibson in connection with their promotion of the 29 BJVs were substantial and exceeded $300,000.
The Alperts made a profit of approximately $2,200 to $3,000 a house on the sale of the 80 properties to BJVs I, II, III, and IV. Thereafter they made an average $1,900 a property on the sales into the remaining twenty-five BJV programs. The Alperts made in excess of $500,000 on the sale of the properties placed in the BJVs. In addition, commencing with BJV IV, the Alpert defendants began receiving an interest in the BJVs being offered and sold. That interest was usually 10%.
Phase I Purchases by Katzow and Weiss of Baltimore Real Estate
In late 1978 Lehman and Gibson in discussions with Katzow and Weiss firstá broached the subject of investing in the Baltimore real estate market. They told Katzow and Weiss that there was more money to be made in investing in Baltimore properties than in investing in real estate located in Montgomery County, Maryland. They believed that the Washington suburbs had nearly reached their full investment potential but that the city of Baltimore was at the beginning of its renaissance.
Sometime in early 1979 Lehman and Gibson, as part of their campaign to promote the Baltimore properties, approached Katzow and Weiss regarding these properties. Even after Katzow and Weiss had made their first investment in the BJV ventures, Lehman and Gibson continued their campaign to advise Katzow and Weiss about the merits of investing in future BJVs. For example, Lehman and Gibson advised Katzow and Weiss sometime in 1980 that downtown Baltimore real estate was still a good investment.
Katzow and Weiss made their first investment in a BJV in March, 1979, and made their last investment in a BJV in mid-October, 1981. All told, Katzow and Weiss invested $162,333.72 in 12 BJV programs. See Appendix A. The plaintiffs acquired a 10% ownership interest in BJVs I, II, VI, VIII, X, XXIV and XXVIII; a 15% interest in BJVs XII and XXVI; a 20% interest in BJV IV, and an 80% interest in BJVs XVI and XXI. The reason the plaintiffs purchased 80% interests in BJVs XVI and XXI was because they wanted eventually to own their own venture. BJV XVI consisted of 5 properties and BJV XXI consisted of 7 properties.
The plaintiffs' objectives in investing in these BJVs was two-fold. First, they were principally interested in obtaining tax benefits since Katzow was a practicing psychiatrist who was beginning to earn substantial monies from his practice. In addition Weiss, his wife, was also starting to earn money from her legal practice. They also hoped that the properties would appreciate, particularly if the Inner Harbor Development extended to the area where their properties were located. Katzow recognized the risks inherent in this second aspect of his investment objective.
As stated earlier, the average cost of the properties placed in the BJV ventures in which Katzow and Weiss invested was approximately $10,000 per property. Katzow testified that he believed that this price was reasonable, and his counsel conceded there would be no case if the investmentáprogram was concluded after these initial purchases.
The purchase price paid for interests in the various BJVs differed, depending on the number of and the quality of the properties placed in each BJV. For example, 20 properties were placed in BJVs I and II, and 15 in BJV IV as opposed to only 5 properties placed in BJV XVI. The number of cash investors in the 12 BJVs ranged from 1 (the plaintiffs Katzow and Weiss) in BJV XVI and XXI to 10 in BJV I. As was stated earlier, Lehman and Gibson in the name of LGA received a 10% interest in each of the twelve BJVs in which Katzow and Weiss participated; and the Alpert defendants, after BJV IV in which they received a 5% interest, received a 10% interest in the nine BJVs formed subsequent to BJV IV in which the plaintiffs participated. Plaintiffs Katzow and Weiss were fully aware of this arrangement when they made their investments.
Lehman and Gibson received commissions from the Alperts in connection with the sale of the Alpert-owned properties to the various BJVs. The settlement sheets sent to ...