Plaintiffs filed this action seeking a declaratory judgment that the General Partner violated the Securities Exchange Act and breached its fiduciary duty in connection with the sale. Count I of the complaint alleges violations of sections 10(b), 14(a), 14(e) and 20(a) of the Securities Exchange Act and Rules 10b-5 and 14a-9 thereunder. Counts II and III assert pendent state law claims for breach of fiduciary duty. In count II, plaintiffs claim that the General Partner breached its fiduciary obligation to obtain "the highest possible price a purchaser would pay" for the limited partners' interests. In Count III, plaintiffs claim that deducting the costs of the transaction from the purchase price constituted a breach of fiduciary duty. Defendants filed a motion to dismiss counts II and III for failure to state a claim and filed a motion to extend the time to respond to count I until the Court rules on the motion to dismiss.
A. Plaintiffs' Motion for Class Certification
Plaintiffs have moved for an order under Fed. R. Civ. P. 23 certifying their claim as a class action on behalf of all the limited partners of Cablevision Associates VII as of November 21, 1988. A trial court may certify a class action only if it is satisfied "after a rigorous analysis, that the prerequisites of Rule 23(a) have been met." General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 102 S. Ct. 2364, 2372, 72 L. Ed. 2d 740 (1982). Rule 23(a) establishes four prerequisites: "(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class." Fed. R. Civ. P. 23(a). In addition, the claim must fall within one of three categories under Rule 23(b). Plaintiffs rely on Rule 23(b)(3), which provides that an action is appropriate for class certification if "the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy."
Defendants do not contest that plaintiffs' claim meets the numerousness requirement of Rule 23(a). Defendants argue that plaintiffs have failed to show that their claims are typical of the class and that common questions of law or fact predominate.
The typicality requirement "screen[s] out class actions when the legal or factual position of the representatives is markedly different from that of other members, even though common issues of law or fact are raised." Kas v. Financial General Bankshares, Inc., 105 F.R.D. 453 (D.D.C. 1984), aff'd, 254 U.S. App. D.C. 217, 796 F.2d 508 (D.C. Cir. 1986);
see Pendleton v. Schlesinger, 73 F.R.D. 506 (D.D.C. 1977), aff'd, Pendleton v. Rumsfeld, 202 U.S. App. D.C. 102, 628 F.2d 102 (D.C. Cir. 1980). The requirement ensures that "the interests of the class members will be fairly and adequately protected in their absence."
General Telephone, 102 S. Ct. at 2370 n. 13. A claim is not typical when "the representative parties are subject to unique defenses" or when "it is predictable that a major focus of the litigation will be on an arguable defense unique to the named plaintiff." Kas, 105 F.R.D. at 461 (citing McNichols v. Loeb Rhoades & Co., 97 F.R.D. 331, 334 (N.D. Ill. 1982)); see also Irvin E. Schermer Trust v. Sun Equities Corp., 116 F.R.D. 332, 336-37 (D. Minn. 1987) (named plaintiffs subject to unique defense of unjustified reliance); Rodriguez v. Dep't of Treasury, 108 F.R.D. 360, 363-64 (D.D.C. 1985) (plaintiff subject to unique defense of failure to exhaust administrative remedies in employment case); In re Nat'l Student Mktg. Litig., 445 F. Supp. 157, 162-63 (D.D.C. 1978) (plaintiffs' failure to act promptly raised unique defense to action for rescission of securities transaction), aff'd, 663 F.2d 178 (1980); Zenith Laboratories, Inc. v. Carter-Wallace, Inc., 530 F.2d 508, 512 (3d Cir.) (named plaintiff subject to unique defenses including res judicata), cert. denied, 429 U.S. 828, 50 L. Ed. 2d 91, 97 S. Ct. 85, 191 U.S.P.Q. (BNA) 414 (1976).
Plaintiffs contend that their claims arise from a course of conduct directed at the entire class, and, therefore, that their claims are typical of all the class members' claims. Plaintiffs point out that all the class members received the identical consent statement and that the General Partner paid the same price for all the limited partnership interests. Therefore, plaintiffs reason, their claims are typical with regard to the issues of disclosure and the adequacy of the purchase price. Defendants argue that plaintiffs' securities claims are not typical of the class members' claims for two reasons. First, defendants note that plaintiffs obtained their interest through inheritance rather than buying it through the initial offering, as the vast majority of the purported class members did. Defendants argue that this distinction renders plaintiffs' claims atypical on the issue of the materiality of the alleged misstatements and omissions. Second, plaintiffs did not vote on the amendment to the Agreement or the sale, unlike 70% of the class members. For this reason, plaintiffs are subject to a unique defense on the issue of reliance.
The origin of plaintiffs' limited partnership interest may affect the issue of materiality. To prevail on a claim of securities fraud, a plaintiff must demonstrate a misstatement or omission concerning a material fact. See Basic, Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 983, 99 L. Ed. 2d 194 (1988) (Rule 10b-5); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 96 S. Ct. 2126, 2132-33, 48 L. Ed. 2d 757 (1976) (Rule 14a). The Supreme Court has applied a "reasonable investor" standard to determine what facts are material. Basic, 108 S. Ct. at 983; TSC, 96 S. Ct. at 2132-33. That standard is not completely objective in nature, as it takes into consideration the "total mix" of available information. Id. Plaintiffs did not purchase their interest pursuant to the offering prospectus, therefore, the total mix of information available to them may have differed from that available to the rest of the class. Id. Plaintiffs' unique position affects their ability to demonstrate the scope of disclosure. A material fact may have appeared in the prospectus but not in the consent statement. Because plaintiffs did not receive the prospectus, they cannot attest to the full scope of disclosure that the majority of the class received.
Plaintiffs' claim also does not satisfy the typicality requirement, because plaintiffs face a unique defense on the issue of reliance.
The Supreme Court has held that there is a rebuttable presumption of reliance on a material misstatement or omission under Rule 10b-5. Basic, 108 S. Ct. at 990-91.
Even if plaintiffs can show a material misstatement in the consent statement, defendants may be able to rebut the resulting presumption of reliance because plaintiffs did not vote on the transaction. Several courts have denied class certification in securities actions when the proposed class representatives were subject to special reliance issues. See, e.g., In re Bexar County Health Facility Dev. Corp. Sec. Litig., 130 F.R.D. 602, 611 (E.D. Pa. 1990) (class certification denied because plaintiffs failed to read the challenged offering circular); Kas, 105 F.R.D. at 459 (class certification denied because plaintiffs did not vote on challenged transaction); Kline v. Wolf, 702 F.2d 400, 403 (2d Cir. 1983) (class certification denied because evidence sufficient to rebut presumption of reliance as to plaintiffs in case involving "fraud on the market theory"). In Kas, this court denied class certification in light of facts similar to those presented in this case. See Kas, 105 F.R.D. at 461-62 (Judge Johnson). The plaintiffs in Kas did not vote in favor of the challenged merger, unlike a majority of the class members. The Kas court concluded that the plaintiffs' claims were not typical of the class members' claims because those plaintiffs faced a defense on the issue of reliance that would not apply to other members of the proposed class. Id. Plaintiffs' failure to have voted on the proposed amendment and transaction in this case (although they could have) poses a similar bar to class certification.
B. Defendants' Motion To Dismiss Counts II and III
Defendants have moved to dismiss counts II and III of plaintiffs' complaint pursuant to Rule 12(b)(6). Counts II and III set forth pendent claims for breach of fiduciary duty. Pursuant to the Partnership Agreement, Iowa law governs the relationship between the General Partner and the limited partners. See NRM Corp. v. Hercules, Inc., 244 U.S. App. D.C. 356, 758 F.2d 676, 681 n. 13 (1985) (contractual choice of law provision is enforceable provided choice bears a substantial relation to the parties and the transaction); Gray v. American Express Co., 240 U.S. App. D.C. 10, 743 F.2d 10, 16-17 (1984) (same). Defendants contend that the allegations in counts II and III, which are premised on defendants' failure to obtain "the highest possible price" for the limited partners' interests, do not state a claim for breach of fiduciary duty under Iowa law.
Dismissal for failure to state a claim is appropriate when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957); Baker v. Director, United States Parole Comm., 286 U.S. App. D.C. 310, 916 F.2d 725 (D.C. Cir. 1990). To decide a motion to dismiss, the court must accept the factual allegations of the complaint as true. See Estelle v. Gamble, 429 U.S. 97, 97 S. Ct. 285, 288, 50 L. Ed. 2d 251 (1976). Rule 8 abolishes technical forms of pleading and calls for liberal construction of all pleadings. Thus, defendants' motion presents the question whether the facts alleged in plaintiffs' amended complaint set forth a claim for breach of fiduciary duty under Iowa law.
The Iowa Limited Partnership Act provides that a general partner in a limited partnership "has the rights and powers and is subject to the restrictions and liabilities of a general partner in a partnership without limited partners." Iowa Code § 545.403 (1990). A general partner in a partnership without limited partners is accountable to the partnership as a fiduciary. See id. § 544.21. Thus, a general partner in a limited partnership is accountable to the limited partners as a fiduciary. The Supreme Court of Iowa has stated:
A partnership involves fiduciary relations, and no partner may deceive his copartners for his benefit and their injury by false representations or concealments, and this obligation of partners to exercise the utmost good faith toward one another applies not only during the life of the partnership, but extends to their settlements and transactions from the inception of the partnership to its dissolution, as well as for the purchase or sale of a partner's share in the business.