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Bramblewood Investors v. C & G Associates

New Jersey Superior Court, Law Division


Decided: June 26, 1992.

BRAMBLEWOOD INVESTORS, LTD., PLAINTIFF AND DEFENDANT ON THE COUNTERCLAIM; THIRD PARTY PLAINTIFF ON CLAIM AGAINST MORTENSON, FLEMING, GRIZZETTI & BOIKO,
v.
C & G ASSOCIATES, ROBERT S. MORTENSON, RICHARD J. GRIZZETTI, JOHN A. BOIKO, DENNIS M. GAITO, KENNETH M. GOLDMANN, AND ANGELO J. COPPOLINO, DEFENDANT/COUNTERCLAIMANTS, THIRD PARTY PLAINTIFFS, BRAMBLEWOOD ASSOCIATES, LTD., UNITED CAPITAL SECURITIES, INC., UNITED CAPITAL CORPORATION, UNITED CAPITAL PROPERTIES, INC., UNITED CAPITAL INVESTMENTS, INC., POFF CONSTRUCTION, INC., PCI MANAGEMENT, INC. AND UNIVERSAL CONSTRUCTORS, INC., THIRD PARTY DEFENDANTS, MORTENSON, FLEMING, GRIZZETTI, & BOIKO, THIRD PARTY DEFENDANTS ON CLAIM ASSERTED BY PLAINTIFF BRAMBLEWOOD INVESTORS, LTD.

Alley, J.s.c.

Alley

[262 NJSuper Page 99] Plaintiff Bramblewood Investors, Ltd. ("Bramblewood") seeks summary judgment for $67,358.82 as the amount allegedly due and owing on three promissory notes executed by defendant C & G Associates. At relevant times, the individual defendants were partners in C & G. On or about April 17, 1985, Bramblewood offered limited partnership interests pursuant to a Confidential Private Offering Memorandum (sometimes abbreviated as "Memorandum") to raise money for the construction and operation of an apartment complex in High Point, North Carolina. On May 22, 1985, C & G, a New Jersey general partnership, acquired three limited partnership interests in Bramblewood, executing the promissory notes which are the subject of plaintiff's complaint. C & G allegedly defaulted on the notes in May 1989.

[262 NJSuper Page 100]

The defendants filed a counterclaim and third party complaint against Bramblewood and others alleging misrepresentation and breach of duty. They further claim that Bramblewood failed to register the offering of limited partnership interests as allegedly required by the New Jersey Bureau of Securities. Defendants also submit that they have the right to rescind the transaction because United Capital Securities Inc. (an affiliate of United Capital Investment Inc., the general partner of Bramblewood) did not register as an "agent" under the New Jersey Uniform Securities Law.

For the reasons that follow, plaintiff's motion for summary judgment is granted in all respects, dismissing defendants' affirmative defenses and counterclaims. The summary judgment motion of the third party defendants involves essentially the same issues and is granted for the same reasons. Defendants' motion for summary judgment is denied in all respects.

I. Defendants' counterclaim is barred by the statute of limitations.

Any claim that Bramblewood was required to register the offering of limited partnership interests under N.J.S.A. 49:3-60(b) is time-barred by N.J.S.A. 49:3-71(e).*fn1 Under the "discovery rule", the time to file suit is triggered when the plaintiff "learns, or reasonably should learn, the existence of a state of facts that may equate in law with a cause of action." Vispisiano v. Ashland Chem. Co. 107 N.J. 416, 426, 527 A.2d 66 (1987). (citations omitted). The purpose of the rule is to ". . . avoid harsh results that otherwise would flow from mechanical application of a statute of limitations." Id.

N.J.S.A. 49:3-71(e), as amended in 1986, provides in pertinent part that:

[262 NJSuper Page 101]

"No person may sue under this section more than two years after the contract of sale, or within two years of the time when the person aggrieved knew or should have known of the existence of his cause of action, whichever is later."

Defendants here knew as early as the Spring of 1985 that the Bramblewood offering was not registered with federal or state securities authorities. The cover page of the Confidential Private Offering Memorandum states:

The offer and sale of limited partnership interests covered by this confidential private offering memorandum have not been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended . . . or the securities authorities of other states, pursuant to the securities laws of other states, pursuant to the securities laws of . . . such other states, in reliance upon certain exemptions from registration under such laws.

Under the "Investment and Inducement" letter signed by Angelo Coppolino, a partner of C & G, "[t]he undersigned acknowledges being informed by the Issuer that the securities being purchased . . . are unregistered." Mr. Coppolino's execution of those documents in the partnership name binds C & G and its partners (N.J.S.A. 42:1-9, "[e]very partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership . . ."). Moreover, C & G's partners explicitly authorized Mr. Coppolino to act as representative and signator on behalf of the partnership. Significantly, Mr. Coppolino admits that he read and signed the Investment and Inducement letter. Coppolino dep., T92:9-24.

From the record presented, the court finds that no genuine issue of fact exists on the question whether defendants knew (or should have known) that the limited partnership offerings were unregistered. It is indisputable that they were aware of a ". . . state of facts which may equate in law with a cause of action" when the Memorandum was reviewed and the Investment and Inducement letter was signed by Mr. Coppolino in 1985. Vispisiano, 107 N.J. at 426, 527 A.2d 66. Applying

[262 NJSuper Page 102]

N.J.S.A. 49:3-71(e), the statute of limitations ran in 1987, because defendants knew or should have known of the existence of a cause of action, if any, when the relevant documents were reviewed and signed in 1985. Two years after defendants had the knowledge necessary to equate in law with a state of facts upon which a cause of action could be based, they still had not asserted their claims, which are thus time-barred.

Defendants' reliance on Petruzzi v. Kobrin, 241 N.J. Super. 439, 575 A.2d 80 (Law Div.1989), is mistaken. In Petruzzi, plaintiff filed a securities fraud action on February 9, 1987, based on a transaction that occurred on or before July 30, 1984. Defendant moved to dismiss certain claims as barred by the two-year statute of limitations of N.J.S.A. 49:3-71(e) prior to its amendment. The transactions took place prior to the effective date of the discovery rule and the complaint was filed over two and one-half years after the transaction. The court, however, stated, "This amendment occurred before plaintiff's time to file under the original time period had run," and that "the timeliness of this filing is measured as of when a cause of action became known or should have become known to plaintiff." Id. at 442, 575 A.2d 80. Accepting, arguendo, the reasoning of Petruzzi as binding here, defendants have still failed to show that their claims are saved by the discovery rule. The discovery rule, under N.J.S.A. 49:3-71(e), became effective April 9, 1986. Even if the court were to apply the discovery rule as of April 9, 1986, defendants still did not assert a claim until October 4, 1990, or well after the two-years allowed by the statute had expired. And if the timeliness of a filing is measured from the date a cause of action became known (as Petruzzi suggests), defendants nevertheless are unable to establish the basic premise on which the discovery rule is grounded, -- their unawareness of a state of facts upon which to state a cause of action. Defendants claim the existence of facts that could have been equated in law with a cause of action. They failed to do so, and thus any claim they assert for violation of the state securities laws is barred by N.J.S.A. 49:3-71(e) for

[262 NJSuper Page 103]

failure to file suit within the applicable two-year statute of limitations and any discovery rule which may apply thereto.

II. Even if defendants' counterclaim was not in all respects barred by the statute of limitations, defendants' claims and defenses based on alleged violations of the Uniform Securities Law are without merit.

In 1985, when the Bramblewood offering was made, N.J.S.A. 49:3-60(b) provided that an offering or sale of securities need not be registered with the Bureau of Securities if:

the security or transaction is not subject to, or is exempted from, the registration requirements of the Securities Act of 1933 and the rules and regulations thereunder; other than by reason of section 3(a) of such act and the rules and regulations under said section 3(a).

It is beyond legitimate dispute that the Bramblewood offering was exempt from the registration requirements of the 1933 Act by reason of Sections 3(b) and 4(2).

The offering was made in accordance with Rules 505 and 506 of Regulation D, 17 C.F.R. § 230.501 et. seq. Rule 505 requires that the aggregate offering price of the offering not exceed $5,000,000.00. 17 C.F.R. § 230.505(b)(2)(i). The cover page of the Memorandum plainly states that the Bramblewood Offering consisted of 45 interests priced at $52,000.00 each, for an aggregate price of $2,340,000.00. The rule further requires that the issuers reasonably believe that there are not more than 35 purchasers of the securities. 17 C.F.R. § 230.505(b)(2)(ii).

In calculating the number of purchasers, "accredited" investors are not included. 17 C.F.R. § 230.501(e)(1)(iv). Plaintiff, in its "Notice of Sales of Securities pursuant to Regulation D or Section 4(b)" (filed with the SEC), indicates that 11 of the investors were "accredited" and the remaining 29 were "unaccredited," making the total number of investors for the purposes of § 230.505(b)(2)(ii) well under 35. Thus, plaintiff complied with the requirements of Rule 505.

Plaintiff's offering was also exempt under Rule 506, 17 C.F.R. § 230.506. That provision places no ceiling on the

[262 NJSuper Page 104]

aggregate offering price, but limits the number of purchasers to 35 and requires that the issuer reasonably believe immediately prior to making any sale that "each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment." 17 C.F.R. § 230.506(b)(2)(ii). The proof shows that plaintiff made this determination with respect to each unaccredited investor who invested in Bramblewood. Defendant has offered no contradictory proof sufficient to create any fact issue.

Under § 230.502(b), certain information, which under 17 C.F.R. § 230.501 through 503 should be furnished to unaccredited investors prior to sale, must be supplied to all Bramblewood investors. Under § 230.502(c), the issuer may not offer or sell its securities through any form of general solicitation or advertising. The uncontradicted proofs established that plaintiff complied with this requirement.

Plaintiff met the requirements of both rules 505 and 506 at the time of the offering and was exempted from federal registration requirements. Since Bramblewood qualified for exemption under federal law, it was also exempted by N.J.S.A. 49:3-60(b) from the registration requirements of the New Jersey Uniform Securities Law.

Defendants' attempt to find technical deviations from the requirements of the applicable Regulation D exemptions in an effort to create a material issue of fact is futile because, even if such a deviation were found to exist, the offering would still be exempt by reason of Section 4(2) of the 1933 Act, which exempts "transactions by an issuer not involving any public offering." 15 U.S.C. § 77d(2). See Preliminary Note 3 to Regulation D, 17 C.F.R. § 230.501 et seq. The facts outlined above and set forth fully in the record entitle plaintiff to this statutory exemption as well. There is absolutely no evidence

[262 NJSuper Page 105]

before the court in this case that this was anything but a private offering.

III. It is irrelevant whether sales were made to New Jersey Investors by "unregistered agents ".

Defendants assert they are entitled to rescission and damages pursuant to N.J.S.A. 49:3-71(a)(1) because the Bramblewood offering involved sales to New Jersey investors, who are not parties to this case, through an unregistered agent in alleged violation of N.J.S.A. 49:3-56(a). Even accepting these allegations as true, and even assuming for the moment that they are not time-barred, the facts presented by defendants in support of these allegations are not material because they have no nexus to the defendants' claim.

Defendants argue that a United Capital representative in North Carolina was required to register as an agent under New Jersey law. They claim that a meeting took place in New Jersey at which a prospective investor (a Mr. Anton) and a purported United Capital representative were both present. The United Capital representative allegedly spoke at this meeting, but no selling of the security or offer of sale there was established.*fn2

[262 NJSuper Page 106]

The Uniform Securities Law applicable to agent registration requirements shows that the only activities at all relevant to a determination of the provisions' applicability are those activities engaged in by a person selling or offering to sell securities in the State of New Jersey. N.J.S.A. 49:3-56(a) provides as follows:

It shall be unlawful for any person to act as a broker-dealer, agent or investment advisor in this State unless he is registered under this act; (emphasis added).

Similarly, N.J.S.A. 49:3-51(a) provides:

Sections 5, 8, 9(a) [49:3-56], 13 and 24 of this act apply to persons who sell or offer to sell when (1) an offer to sell is made in this State, or (2) an offer to buy is made or accepted in this State; (emphasis added).

The activities which defendants allege violated New Jersey law occurred in North Carolina, not in New Jersey, and thus did not involve a violation of New Jersey law, contrary to their assertions.*fn3

IV. Defendants have admitted there are no facts to support their counterclaims and third party complaint.

Defendants assert without factual support numerous claims, including that plaintiff and the third-party defendants

[262 NJSuper Page 107]

made material misrepresentations in connection with the subject offering; that these parties inflated real estate and rental values to induce C & G's investment; that excessive fees were paid by and between these parties for various services rendered in connection with the offering; and that certain agreements entered into between these parties were not negotiated at "arm's-length". The assertion that these are material facts that preclude summary judgment against defendants is completely without merit, as is shown by defendants' own testimony.

Defendants admitted in depositions, for example, to having no knowledge of any misrepresentations on the part of plaintiff or any third party defendant at the time of the offering.*fn4 With respect to the other claims in defendants' counterclaim and third-party complaint and the allegations that certain unidentified agreements between entities involved in the offering were not negotiated at "arm's-length," and that excessive fees were paid to entities involved in the offering, defendants also admitted lack of knowledge, and the evidence showed without contradiction that defendants' claims and defenses in this action are groundless.*fn5

[262 NJSuper Page 108]

V. Defendant's other claims and defenses are meritless.

Defendants further assert (1) that the Memorandum falsely states that the offering is registered in New Jersey, and (2) that they were not informed of an alleged "glut" in the relevant North Carolina housing market at the time of their purchase of interests in Bramblewood. Defendants claim that these alleged misrepresentations and omissions entitle them to rescind their purchase of interests in Bramblewood. But as indicated earlier, the evidence indisputedly shows that defendants were aware that the offering was not registered in New Jersey.

Indeed the sixth page of the "Cover Page" in the Offering Memorandum, contains the following statement:

FOR NEW JERSEY RESIDENTS; THE ATTORNEY GENERAL OF THE STATE OF NEW JERSEY HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. THE FILING OF THE WITHIN OFFERING WITH THE BUREAU OF SECURITIES DOES NOT CONSTITUTED [SIC]

[262 NJSuper Page 109]

APPROVAL OF THE ISSUE OR THE SALE THEREOF BY THE BUREAU OF SECURITIES OR THE DEPARTMENT OF LAW AND PUBLIC SAFETY OF THE STATE OF NEW JERSEY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

There is no genuine factual basis for concluding that the quoted language amounts to an affirmative representation that the offering was registered in New Jersey.*fn6 As a matter of law, its plain purpose is to notify prospective investors that any filing of the offering with state securities authorities does not constitute approval or endorsement of any kind by those authorities. Indeed, the clause, by its very language, alerts the potential investor to the risks associated with the investment.

There can be no genuine material fact to support the claim that the plaintiff misrepresented that the offering was registered in New Jersey based solely on the language just quoted, in light of the overwhelming number of disclosures in the Offering Memorandum itself, as well as other documents which the defendants reviewed prior to purchase, that the offering was not registered in any state. The cover page of the Memorandum explicitly states in capital letters that:

THE OFFER AND SALE OF LIMITED PARTNERSHIP INTERESTS COVERED BY THIS CONFIDENTIAL PRIVATE OFFERING MEMORANDUM HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED . . . OR THE SECURITIES AUTHORITIES OF OTHER STATES, PURSUANT TO THE SECURITIES LAWS OF . . . SUCH OTHER STATES, IN RELIANCE UPON CERTAIN EXEMPTIONS FROM REGISTRATION UNDER SUCH LAWS.

(emphasis added).

Page 4 of the Cover page states that:

[262 NJSuper Page 110]

BECAUSE THESE SECURITIES ARE BELIEVED EXEMPT FROM REGISTRATION UNDER FEDERAL LAWS AND STATE LAWS, THEY HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION AND HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY SUCH COMMISSION.

(emphasis added).

The Memorandum explained that "the Partnership is offering the Interests in reliance upon certain exemptions from registration and qualification requirements of federal and state securities laws." (Id. at page 1-1). Page 15-2 of the Memorandum recites that:

As to the distribution of these partnership interests, each investor must understand and acknowledge the following: (i) that the interests being offered hereby are not being registered under any federal or state securities law by virtue of applicable registration exemptions . . .

The Investment and Inducement Letter given to each investor shows that "[t]he undersigned acknowledges being informed by the Issuer that the securities being purchased . . . are unregistered." (pgs. 3-7, 1st para. 3.)

Finally, the Purchaser Questionnaire given to each investor states that "the Interest(s) will not be registered under the [1933] Act or under any such state securities laws." (pg. E-16, 1st para.)

These uncontradicted disclosures preclude as a matter of law defendants' assertion that the plaintiff misrepresented the fact of registration. Moreover, under the civil liabilities section of the New Jersey Uniform Securities Law, relied upon by defendants in this action, the defendants must prove that the plaintiff intended to deceive the defendants by its inclusion of the subject provision. See N.J.S.A. 49:3-71(a). Defendants have offered no proof concerning fraudulent intent of plaintiff in including the subject language in the Memorandum. (Defendants do not explain why, if plaintiff intended to deceive New Jersey investors into believing that the offering was registered, it included so many disclosures to the contrary.)

The defendants did not, moreover, rely upon any representation that the offering was registered when making their [262 NJSuper Page 111] investment decision, and they have affirmatively admitted that they knew the security was unregistered. Defendant Angelo Coppolino, C & G's authorized representative for purposes of the Bramblewood purchase, acknowledges being informed at the time of purchase that the securities were unregistered. Coppolino dep. 12/17/91, T92:9-24. There is no fact issue to the contrary.*fn7

[262 NJSuper Page 112]

VI. Summary:

Based on the facts and reasons set forth above, plaintiff's motion for summary judgment, and the motion for summary judgment by third party defendants, are granted in all respects. Defendant's cross-motion for summary judgment is denied in all respects.

Disposition

Based on the facts and reasons set forth above, plaintiff's motion for summary judgment, and the motion for summary judgment by third party defendants, are granted in all respects. Defendant's cross-motion for summary judgment is denied in all respects.


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