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KROUNGOLD v. TRIESTER

December 17, 1975

LEON KROUNGOLD and THADDEUS S. BOCHEY
v.
STANTON L. TRIESTER INTERNATIONAL INVESTMENT & FINANCIAL CORP.



The opinion of the court was delivered by: BECHTLE

 This case involves alleged violations of federal and state securities statutes arising out of the sale of limited partnership interests in a real estate venture. Presently before the Court is defendants' motion to dismiss the first, second and fifth causes of action of plaintiffs' amended complaint for failure to state a claim upon which relief can be granted, as well as defendants' motion for a more definite statement. Jurisdiction of this Court over the federal claims is invoked under 15 U.S.C. § 77v and 15 U.S.C. § 78aa. Jurisdiction over the state claims is predicated upon the doctrine of pendent jurisdiction.

 When considering a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the material allegations of the complaint are taken as admitted and the complaint is liberally construed in favor of the plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421, 23 L. Ed. 2d 404, 89 S. Ct. 1843 (1969). The amended complaint in this case reveals the following factual basis for plaintiffs' claims. During the year 1972, defendants *fn1" offered prospective investors, including plaintiffs, subscriptions for limited partnership interests in several real estate investments. One of these potential investments was known as Space #3 Triester Associates ("Space #3"). A summary sheet regarding Space #3 was distributed by defendants at the time of the offering which contained a description of the venture, as well as tax projections regarding anticipated income to investors. In reliance upon this summary sheet, and other representations allegedly made by defendants, plaintiff Kroungold subscribed to a limited partnership interest in Space #3 for the sum of $20,000, and plaintiff Bochey subscribed to a limited partnership interest in Space #3 for the sum of $25,000. *fn2" Space #3 is a limited partnership which owns an apartment development of 216 units in Houston, Texas. Triester is the general partner; Triester International is the substitute general partner; and plaintiffs are two of the 22 limited partners. Plaintiffs now claim that they were misled by defendants and they seek to recover the amount of their investment, plus interest.

 Plaintiffs' first cause of action is based upon Section 5(c) of the Securities Act of 1933, 15 U.S.C. § 77e(c), which provides, in pertinent part, as follows:

 
It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security . . ..

 Plaintiffs contend that defendants' undisputed failure to file a registration statement with the Securities and Exchange Commission ("S.E.C.") in connection with the offer to sell interests in the Space #3 venture violated the above-cited statute. Liability to the purchaser for such a violation is created by Section 12(1) of the Securities Act of 1933, 15 U.S.C. § 77 l (1).

 Preliminarily, the Court notes its agreement with plaintiffs that the offering of a limited partnership interest in Space #3 constituted an offering of a "security" within the meaning of Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1). We believe the offered interest qualifies as an "investment contract" within the definitional perimeter of that term announced in Securities & Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 301, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946):

 
The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value.

 See McGreghar Land Company v. Meguiar, 521 F.2d 822 (9th Cir. 1975); S.E.C. Release No. 33-4877, 32 Fed.Reg. 11705 (1967).

 Defendants contend that, assuming arguendo a registration statement was required to be filed, the first cause of action in plaintiffs' amended complaint is barred by the statutory limitations period. Section 13 of the Securities Act of 1933, 15 U.S.C. § 77m, provides in pertinent part: "No action shall be maintained . . ., if the action is to enforce a liability created under section 77 l (1) of this title, unless brought within one year after the violation upon which it is based."

 The offer to purchase an interest in Space #3 was made to plaintiffs during 1972 and, in fact, the sales took place during that year (Plaintiffs' Amended Complaint, paragraphs 8, 19, 20). The original complaint in this case was filed on June 26, 1974. Clearly, more than twelve months passed between the alleged violation and the filing of the complaint. Accordingly, plaintiffs' first cause of action, based on Section 12(1) of the Act, is barred by the statute of limitations and will be dismissed. *fn3"

 The second cause of action stated in the amended complaint alleges a violation of Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77 l (2), which makes a person liable to a purchaser of a security if that person:

 
"(2) offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraph (2) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission . . . ."

 Defendants have suggested two reasons why they believe this cause of action should be dismissed. The ...


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