655 N.E.2d 189 | Ohio Ct. App. | 1995
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *101 This cause came on to be heard upon the appeal, the transcript of the docket, journal entries and original papers from the Hamilton County Court of Common Pleas, the transcript of the proceedings, briefs and arguments of counsel.
This is an appeal from the trial court's order granting summary judgment to the defendants-appellees in an action arising out of the financial collapse of a limited partnership that had been formed for the purpose of acquiring and operating an eighty-six-unit apartment complex. The plaintiffs-appellants (collectively, "the investors") were limited partners. Their action against the defendants-appellees was premised upon their claims that the financial condition of the limited partnership had been negligently and fraudulently misrepresented to them, that the general partner, Benchmark Equities, Inc. ("Benchmark"), breached the partnership agreement in several respects, most notably its obligation to capitalize the partnership adequately, and that Benchmark had charged the partnership excessive fees and commissions while allowing its affiliates to borrow partnership money in contravention of the partnership agreement.
On appeal, the investors present seven assignments of error challenging the trial court's decision to grant the defendants-appellees summary judgment. For the reasons that follow, we find none of these assignments to be well taken and thus affirm the trial court.
The initial phases of WoodRidge II were structured as follows. The apartment/townhouse units were to be purchased for $3,225,000. Additional fees and expenses were to be paid and a reserve of $45,000 was to be established, creating an initial capital requirement of $3,475,000. To obtain this amount, WoodRidge II was to obtain a first mortgage loan in the amount of $1,800,000, a second mortgage loan from a Benchmark affiliate for $100,000, and a capital contribution of $75,000 from Benchmark. The balance, $1,500,000, was to be obtained from the sale of limited partnership units.
According to the investors, the partnership offering had several safeguards upon which they relied to make sure that the partnership was adequately capitalized. Until fifty percent of the limited partnership units had been subscribed for, the subscriptions were to be placed in escrow, to be returned in the event that the fifty-percent goal was not reached. In the event that more than *103 fifty percent but fewer than one hundred percent of the units had been subscribed for, Benchmark was to subscribe for the remaining units. According to the investors, under no circumstances was the partnership to proceed with the project with anything less than the full capitalization.
The fifty-percent subscription goal was in fact reached. However, following the transfer of the property and the closing of the offering in September 1989, fewer than one hundred percent of the units had been purchased. The investors alleged in their complaint that Benchmark reneged on its obligation to purchase the unsold units, thus causing a capital shortfall of approximately $300,000. The reason for the failure of Benchmark to live up to its obligation, according to the investors, was that it had cash assets of only $5,000, with its only other assets consisting of overvalued notes receivable from other Benchmark affiliates.
The investors alleged further that Benchmark breached its fiduciary duty to the partnership in 1989 and 1990 by "siphoning off $105,000 out of the partnership account as a short-term loan."
The investors also alleged that the price paid by the partnership for the real property was substantially in excess of the market value appraisal, which was itself inflated. According to the investors, Benchmark misrepresented both the appraised value and the mortgage amount of the property. With regard to the latter, the investors alleged that financial statements of the partnership, audited by Ernst Young, incorrectly indicated that the first mortgage on the property was only $1.8 million. According to the investors, Benchmark and its affiliates had agreed to divert $550,000 from the partnership that had been earmarked to pay down the first mortgage. Further, the investors contended that language in the offering circular implied that the first mortgage, at the time of the offering, was held by a Benchmark affiliate when in fact it was held by BancOhio. When one of the Benchmark affiliates stopped making interest payments, BancOhio foreclosed in November of 1992, thus wiping out the investment of the plaintiffs-appellants.
The complaint encompasses sixteen different causes of action. For purposes of analysis these claims can be broken down into four categories: (1) negligence, (2) *104 breach of contract, (3) fraud, and (4) violations of the securities laws of Ohio, Pennsylvania, and Michigan.
The Negligence Claims: Count I alleged a claim of negligent misrepresentation against all defendants for failing to ascertain whether information in the offering circular was correct. Count V alleged accountant negligence against Ernst Young for negligently performing auditing and accounting services for the partnership. Count VI alleged appraiser negligence against Anthony Mollica Associates for negligently performing a number of property appraisals in connection with the acquisition, development, and financing of the WoodRidge II project. Count VII alleged broker-dealer negligence against all broker-dealer defendants for negligently failing to determine whether the partnership was a suitable investment for each of the investors.
Breach-of-Contract Claims: Count II alleged that the investors were third-party beneficiaries of the brokerage agreement between Benchmark and the broker-dealers, and that the broker-dealers breached a contractual duty to the investors by failing to determine the suitability of the project for each investor and failing to inform each investor of all the pertinent facts relating to the liquidity and marketability of the partnership units. Count III alleged that Benchmark violated the partnership agreement by failing to provide funds for the cash flow guarantee, subscribe for unsold units, establish a working capital reserve of $45,000, and protect the partnership assets from unauthorized loans to Benchmark affiliates.
Fraud Claims: Count IV alleged that Benchmark and Ernst Young fraudulently misrepresented and concealed the financial condition of the partnership until foreclosure occurred. Count VIII alleged that the broker-dealers fraudulently misrepresented the financial condition of the partnership in the offering circular and other materials.
Statutory Claims: Counts IX through XVI alleged statutory violations of the securities laws of Ohio, Michigan, and Pennsylvania.
Negligence Claims: With regard to these claims, the trial court found the four-year statute of limitations contained in R.C.
Significantly, the trial court did not specifically discuss the negligence claim against Ernst Young contained in Count V. As noted, this claim asserted that Ernst Young negligently performed accounting and auditing services for the partnership after the offering circular had been issued. Without discussing this claim, however, or specifically determining when the wrong occurred which would trigger the running of the four-year statute of limitations, the trial court included this count in its grant of summary judgment.
Contract Claims: With respect to the investors' claim that they were third-party beneficiaries of the Participating Dealer Agreement entered into between Benchmark and the broker-dealers, the trial court, after noting that there must be intent to benefit a third party in order to create in that party an enforceable contract right, expressly considered (1) the Participating Dealer Agreement and (2) the affidavit of R.J. Conley, president of one of the broker-dealer defendants, in which Conley stated that the purpose of the agreement was not to benefit the investors. Finding no evidence to suggest otherwise, the trial court found all the broker-dealer defendants entitled to summary judgment on the contract claims against them.1
With respect to the contract claims against Benchmark for alleged violations of the partnership agreement, the trial court, relying on this court's decision in Katz v. Genninger
(Jan. 31, 1985), Hamilton App. No. C-840219, unreported, 1985 WL 9294, found that these claims arose from the sales of securities and were hence governed by the statute of limitations contained in R.C.
"No action for the recovery of the purchase price as provided for in this section, and no other action for any other recovery based upon or arising out of a sale or contract for sale made in violation of Chapter 1707. of the Revised Code, shall be brought more than two years after the plaintiff knew, or had reason to know, of the facts by reason of which the actions of the person or director were unlawful, or more than four years from the date of such sale or contract for sale, whichever is the shorter period." *106
The trial court found that after receipt of a November 6, 1989 letter from Daniel P. Reidel, president of Benchmark, each investor either knew, or should have known, of the facts giving rise to their contract claims, thus implicitly finding the two-year statute of limitations applicable and sufficient to time-bar these claims.
Fraud Claims: As in its resolution of the contract claims in Count III, the trial court, relying on Katz, supra, found that the investors' fraud claims arose from the sale of securities and were thus time-barred under R.C.
The Securities Claims: In accordance with its determination with respect to the contract claim in Count III and the fraud claims, the trial court found the investors' securities claims under Ohio law time-barred under R.C.
"In a case involving matters of motive, intent and other key factual issues, it is error to grant summary judgment when a movant is unable to offer any factual support for his contention that there exist no genuine factual disputes on material issues."
The investors next note that "[i]t perhaps states the obvious" that the parties' interpretation of events is in dispute and next offer "examples [to] illustrate the problem."
Initially we note that the investors have appealed from the trial court's order granting summary judgment on all sixteen counts of their complaint. As a matter of basic appellate procedure, it is the investors' burden to identify a specific error with respect to each count. Thus, in the context of the investors' first assignment of error, it is their burden to identify, with respect to each count, a triable issue of material fact. The investors' use of illustrative examples to form their appellate argument does not impose a duty upon this court to extrapolate from those examples and raise arguments not otherwise made. In other words, we will address the examples given, but no more.
The investors identify three instances in which they maintain that the trial court improperly determined issues of fact. Those instances involve the contract claims, the November 6, 1989 letter, and the time of occurrence of a legally cognizable injury. *107
The Contract Claims. Initially we note that the investors had the burden at trial to establish that they were the intended third-party beneficiaries of the contract between the broker-dealers and Benchmark. Moreover, to make a point that bears emphasis with respect to all of the investors' claims, the defendants-appellees' motions for summary judgment imposed a burden on the investors to produce evidence on all issues for which they bore the burden of production at trial. Wing v.Anchor Media, Ltd. of Texas (1991),
The Reidel Letter. The investors argue that the trial court ignored the affidavit of Robert E. Hater, averring that he had no awareness of the risk of loss of his investment until the property was foreclosed upon, and instead improperly interpreted the November 6 letter as barring the claims of the investors. The investors contend that the trial court "chose to ignore this unrebutted testimony that Mr. Hater, and presumably otherinvestors, had no idea of the woeful state of the partnership's financial condition." (Emphasis added.)
In rejecting this argument we first note that the only affidavit on this point was from investor Hater; evidence of what the other investors knew about the financial condition of the partnership was not before the trial court and is not part of the record before this court. Moreover, even were there similar affidavits from all the investors, they would not have rendered the trial court's grant of summary judgment improper. This is so because R.C.
"Further, the trial court implicitly determined when the appellants suffered their injuries. This is likewise a factual issue which the court should not have decided at this stage."
Although this is the extent of the investors' argument here, by referring to their third assignment of error, where this issue is argued with more elaboration, we glean that their point of contention is that they did not suffer injury until the WoodRidge II property was foreclosed upon, and hence it was not until this injury, giving rise to a cause of action, that the statute of limitations should have commenced running. Whether the foreclosure in this case constituted the actionable injury, however, triggering the running of the statute of limitations, is a legal, not a factual issue. Thus, we hold that the trial court did not "improperly resolve factual disputes" in granting the defendant-appellees summary judgment. Furthermore, as is discussed more fully below, in our discussion of the investors' fourth assignment of error, it is not the date of the injury but the date that the allegedly negligent act was committed that triggers the running of the statute of limitations in the types of negligence claims with which we are here concerned.
The investors' first assignment of error is, therefore, overruled.
In their fourth assignment of error, the investors allege that the trial court erred in its analysis of when the negligence statute of limitations commenced to run. The crux of their argument is that the statute of limitations could not have commenced running until they had suffered an actionable injury, and that event *109 did not occur until 1992 when the WoodRidge II apartment complex was foreclosed upon.
As noted previously, the investors alleged several different types of professional negligence in their complaint: negligent misrepresentation against all defendants, accountant negligence against Ernst Young, appraiser negligence against Mollica Associates, and broker-dealer negligence against the broker-dealer defendants. Under this assignment of error they do not distinguish among these claims, so it is assumed that the assignment of error applies to all.
With specific regard to accountant negligence, inInvestors REIT One, supra,
"1. Claims of accountant negligence are governed by the four-year statute of limitations for general negligence claims found in R.C.
"2a. The discovery rule is not available to claims of professional negligence brought against accountants."
In arriving at the law expressed in its syllabus, the court in REIT One did not limit its discussion of the inapplicability of the discovery rule to actions for accountant negligence. We believe the logic of REIT One can reasonably be extended to the claims of professional negligence brought against the broker-dealers and appraisers in this case. See, e.g., Avery B.Klein Co. v. Joslyn (Apr. 8, 1993), Cuyahoga App. No. 61841, unreported, 1993 WL 106948 (holding of REIT One not limited to claims of accountant negligence, but applies generally to claims for professional negligence controlled by R.C.
The investors, however, would distinguish between the "discovery rule" and a "delayed damage" theory. In other words, the investors contend that they need not rely upon the discovery rule as such because, under classic tort law dating back toPalsgraf v. Long Island RR. Co. (1928),
In responding to this argument, we note first that a similar distinction between the discovery rule and the delayed-damage theory was rejected as a distinction without a difference by the court in Reidel v. Houser (1992),
Several other Ohio decisions have reached conclusions similar to Reidel on similar facts: Avery B. Klein Co. v. Joslyn,supra (cause of action for negligent investment advice accrued when advice was received, not when appellant's note was called as a result of allegedly faulty advice); Philpott v. Ernst Whinney (Nov. 25, 1992), Cuyahoga App. No. 61203, unreported, 1992 WL 357250 (appellant's argument that statute of limitations on claim for accountant malpractice did not commence until IRS audit had assessed deficiency rejected upon the basis of REITOne); Bagley v. Hall (June 11, 1992), Franklin App. No. 92AP-18, unreported, 1992 WL 132454 (appellants' argument that their cause of action for accountant negligence did not accrue at the time of the misrepresentation because they suffered no damage until the lapse of time precluded recovery of overpayment of taxes rejected on the basis of REIT One); Lord v. Ernst Whinney (June 3, 1992), Summit App. No. 15361, unreported, 1992 WL 126125 (appellant's argument that claim for accountant negligence for improperly prepared gift tax return did not accrue until IRS assessed gift tax liability rejected, delayed-damage approach determined not to "survive as a viable legal concept" in light of the holding in REIT One). Furthermore, one law review writer has noted that "most states provide that the statute of limitations for an accountant's negligence to a third party begins to run on the date the party received the report." Note, Who Should Pay When Federally Funded Insured Pension Funds Go Broke?: A Strategy for Recovery from the Wrongdoers (1990), 65 Notre Dame L.Rev. 308, 363.
The controlling law on this issue is, we believe, set forth in REIT One. By holding that the statute of limitations began to run "when the allegedly negligent act was committed," the court in REIT One, in our view, meant exactly that: the date upon which the tortfeasor committed the tort, in other words, when the act or omission constituting the alleged professional malpractice occurred. Regardless of its validity or support in the common law of torts, the delayed-damage *111 theory cannot, we believe, be used to circumvent the clear holding of REIT One by resurrecting the discovery rule in a different analytical guise.3
The investors' fourth assignment of error is overruled.
We have in our discussion of the fourth assignment of error already discussed the holding of REIT One that the four-year statute of limitations for accountant negligence under R.C.
It bears emphasis that we are concerned under this assignment of error solely with the issue of the statute of limitations, and not the sufficiency of the *112 pleadings.4 With that in mind, we nonetheless find that the trial court did not err in holding these claims time-barred because we hold that the issuance of subsequent audits, which repeat or perpetuate the alleged misrepresentations of earlier audits, do not constitute separate acts of negligence, with different limitations periods. Rather, the time "when the allegedly negligent act was committed," for the purposes of applying REIT One to the accountant negligence claims, is the time when the original misrepresentations were made.
The investors' third assignment of error is, therefore, overruled.
As noted previously, the trial court, relying on this court's decision in Katz, supra, found that the fraud claims in Count IV of the complaint were predicated on a sale of securities and thus subject to the statute of limitations contained in R.C.
The allegations of fraud contained in Count IV are as follows: that the Benchmark defendants and Ernst Young (1) concealed from the investors the actual value of the encumbrances on the property while issuing audited financial statements and other financial reports stating an incorrect value, (2) concealed from the investors that a loan of partnership assets to a Benchmark affiliate violated the partnership agreement, (3) concealed from the investors that the assets of Benchmark consisted of notes due from affiliates and were worth substantially less than their stated value, and (4) concealed from the investors the existence of a fair market value appraisal stating that the WoodRidge II property was worth less than the price paid by the limited partnership. *113
We concur with the trial court that these claims arise essentially from, and are thus predicated upon, the sale of securities and are therefore subject to the period of limitations contained in R.C.
"No action for the recovery of the purchase price as provided for in this section, and no other action for any recovery basedupon or arising out of a sale or contract for sale made inviolation of Chapter 1707. of the Revised Code, shall be brought more than two years after the plaintiff knew, or had reason to know, of the facts by reason of which the actions of the person or director were unlawful, or more than four years from the date of such sale or contract for sale, whichever is the shorter period." (Emphasis added.)
In Katz, we recognized that although, in general, claims based on common-law fraud are governed by the four-year period set forth in R.C.
R.C.
The investors' sixth assignment of error is, therefore, overruled.
The specific alleged breaches of contract to which the investors refer are that the Benchmark defendants (1) failed to provide funds to the limited partnership by failing to subscribe for the unsold partnership units, (2) failed to establish the working capital reserve of $45,000, and (3) allowed a Benchmark affiliate to improperly borrow partnership funds.
The trial court, as noted, found that these claims arose from the sale of securities and were thus subject to the statute of limitations contained in R.C.
Judgment affirmed.
SHANNON, P.J., GORMAN and M.B. BETTMAN, JJ., concur.