Steinhardt Group Inc. v. Citicorp

126 F.3d 144 (3rd Cir. 1997)

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Nature of the Case

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Facts

Bristol Oaks is a limited partnership formed under the laws of the state of Delaware for the express purpose of creating an investment vehicle for issuing debt and equity securities to investors. Bristol is made up of one general partner, BGO, Inc. (1% ownership interest), and two limited partners, C.B. Mtge., L.P. (98.79% ownership interest), and OLS, Inc. (.21% ownership interest). The complaint arises out of a severe financial crisis faced by D during the early 1990s. D was on the verge of bankruptcy with a massive amount of bad investments on its books. D came up with a plan to remove the nonperforming assets from its financial books and replace them with cash. D created Bristol Oaks, L.P.--that would issue both debt securities, in the form of nonrecourse bonds, and equity securities, in the form of partnership interests, to investors. Bristol would acquire title to the nonperforming Mortgage Loans and REO properties and would retain Ontra, Inc. to manage and liquidate the assets. Bristol would obtain bridge financing from D; shortly thereafter, it would securitize and underwrite a public offering of bonds and other debt securities to pay off the bridge financing. All of the investors' money was to be paid to Bristol and become the capital of that investment vehicle. The return on these investments was to come from the same pool of assets. D made a series of written and oral presentations to P in which they described returns of 18% or more annually by investing in Bristol. D represented that no institution in America had more experience in single-family residential mortgages or more knowledge about the process of collecting on defaulted mortgage loans. D touted not only its longstanding reputation in the banking industry but also how the assumptions in the Pricing Model were firmly grounded upon D's own unparalleled experience and expertise. D created a Pricing Model which it knew at the time that several of the assumptions underlying the Pricing Model were false. P claims that D obtained inflated valuations by promising the brokers they would later be hired to list the properties for sale if their current estimates of value were satisfactory to D. The inflated valuations, in turn, caused the assets to be overpriced, which resulted in the overstatement of future cash flow. P claimed the entire process was rigged and D used brokers, not on D's approved list, and that it required brokers to provide large numbers of valuations within grossly inadequate periods of time, which further undermined their accuracy. Although D was allegedly warned repeatedly by one of its own officers that the assets were overpriced, these warnings were never revealed to P. P contends these warnings were actively concealed in order to induce it to invest in Bristol. P alleged that D concealed the true cost of repairs and maintenance, and recent appraisals which reflected the decline in the real estate market, the true cost and time for foreclosures, the true likelihood of delays caused by bankruptcy proceedings, and D's intention not to provide a conduit for the sale of reinstated loans. P invested between $ 40 and $ 45 million in Bristol. A portfolio of approximately $540 million to $660 million in Mortgage Loans and REO properties was to be sold by D to Bristol. To fund the acquisition of the properties, D agreed to lend the newly formed partnership no less than 90% of the total purchase price; the remaining 10% was to be provided by the Partnership in the form of a cash payment representing the Partnership's total equity. Debt securities were to be issued by the Partnership to repay the D loans. When the sales were finally consummated D used sales valuations made many years earlier for the vast majority of the properties involved. P first learned of D's fraudulent scheme in 1995 through conversations with a former officer of D. P sued D who moved to dismiss on the basis that the complaint failed to demand any relief from them. The court dismissed and P's appealed.