LOCATION: Circuit Court of Jefferson County
DOCKET NO.: 85-519
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Eighth Circuit
CITATION: 478 US 647 (1986)
ARGUED: Apr 02, 1986
DECIDED: Jul 02, 1986
John M. Friedman, Jr. - on behalf of the Respondents
Lawrence G. Wallace - for United States and the SEC, as amici curiae in support of Petitioners
Robert A. Brunig - on behalf of the Petitioners
Facts of the case
Media for Randall v. Loftsgaarden
Audio Transcription for Oral Argument - April 02, 1986 in Randall v. Loftsgaarden
Warren E. Burger:
We'll hear arguments next in Randall against Loftsgaarden.
Mr. Brunig, I think you may proceed when you are ready.
Robert A. Brunig:
Mr. Chief Justice, and may it please the Court:
This case presents the issue of whether economic benefits if any which flow from the tax deductions available to a defrauded limited partner are to be deducted from his recovery under the federal securities laws.
The case involves two specific questions: do what the Eighth Circuit characterizes as tax benefits constitute income received, as that term is used in Section 12(2) of the Securities Act of 1933; and secondly, does the actual damage limitation of Section 28 of the Securities Exchange Act of 1934 mandate such deduction.
We would argue that the answer to all of those questions is no.
I'd like to speak about this briefly in its factual context.
The petitioners here bought limited partnership associates in Alotel Associates.
When they bought it, they bought it based on an offering memorandum.
The offering memorandum projected losses for tax purposes in 1973 through 1975 which ranged from slightly above $20,000 to $476, and thereafter taxable income.
The taxable income for the entire period through 1991 was estimated to be $96,000, and that these people would be required to pay taxes of over $52,000 during that period.
Instead, they got something else.
They got certain tax deductions which led to lesser tax payments in the amounts ranging from $29,000 to slightly more than $38,000 per unit.
The reason that they got greater tax benefits was because B. J. Loftsgaarden, the general partner, created greater losses, either operating losses or greater deductions for other items that were involved, and those were not disclosed, and those were amounts which benefited him either directly or indirectly or benefited his affiliates.
There was less income, in addition, because for example the motel could not operate as it was anticipated.
Sixty of 159 rooms were not able to be occupied whenever it rained because Mr. Loftsgarden's wholly owned corporation, 2361 Building Corporation, had built a building that leaked through the walls.
He of course did not sue himself or the architects, which was a firm of which he was a 30 percent stockholder.
Now, to take that along, we look at that in the statutory context, and this is a question of statutory construction.
The first question to be looked at is under Section 12(2) of the Securities Act of 1933, which provides that any person in a similar circumstance may recover the consideration paid for the security, with interest thereon, less the amount of any income received thereon, upon the tender of such security, and it offers an alternative remedy for those who have sold their securities, that is, damages.
The Eighth Circuit at a number of points characterized this under Section 12(2) as a damage case.
It is not, as the Eighth Circuit held in Austin One, a damage case.
It is an actual rescission case.
There was a tender, and in fact the formula applies: consideration paid, together with interest, less income received.
The Eighth Circuit held that what is called tax benefits are not a reduction in consideration paid, and that's logical sense.
If in fact a person bought gasoline for his or her automobile and used it for business purposes, and the price was $10, there would be no reduction in the consideration paid, just as here there was no reduction in the consideration paid.
Each partnership unit had the consideration of $35,000.
Respondents asked the Court, despite the lack of a counter-petition, to review that holding.
It should not, both because it's not logical and because it's not appropriately before the Court.
So, the case then goes to, do in fact the reductions in the taxes paid by these individual petitioners constitute income received.
These tax benefits, as they are called, are not such income received.