I. INTRODUCTION

By this motion for partial summary judgment, plaintiffs seek an order establishing that defendants violated SEC Rules 14a-3, 14a-6, and 14a-9 in connection with their March 21 Letter and June 9 Press Release. Plaintiffs leave for another day what relief may or should be granted for these violations.

Attempting to confuse matters, defendants base their opposition memorandum on issues and arguments that as a matter of law are irrelevant to this motion. The law is clear that an objective test is to be used here to determine whether defendants violated securities regulations. The issues the defendants raise as to their purported good or bad faith, intent, and the presence or lack of scienter or negligence are irrelevant in determining whether the violations occurred.

Notably, defendants do not even attempt to dispute any of the facts set forth in Plaintiffs' Statement of Undisputed Material Facts in Support of Motion for Partial Summary Judgment. These are the facts relevant to whether defendants violated the federal securities laws, and these facts are not subject to dispute. The issues and considerations raised by defendants, to the extent they are relevant at all, are relevant to the issue of what relief should be granted in response to defendants' violations, not to the issue of whether violations in fact occurred.

II. AN OBJECTIVE TEST MUST BE USED TO DETERMINE WHETHER DEFENDANTS VIOLATED THE FEDERAL PROXY REGULATIONS

In determining whether the federal proxy rules have been violated, and in deciding whether to issue equitable relief in response to a violation, a purely objective test is used. Issues such as scienter and the other issues defendants raise are relevant not to the threshold issue of whether a violation occurred -- the only question raised by this motion -- but to damages. For instance, in Ash v. LFE Corp., 525 F.2d 215, 220 (3d Cir. 1975), the court stated,

Whatever may be the rule with respect to scienter when other remedies such as damages or rescission of a sale are sought, we have no hesitancy in recognizing that for prospective relief looking to the protection of the franchise the test for the purposes of Rule 14a-9 is the objective sufficiency of the disclosure.

(Emphasis added.) Where only equitable relief for violations of Rule 14a-9 is being requested, it is not relevant whether a defendant acted in good faith or bad faith. Calumet Industries v. MacClure, 464 F. Supp. 19, 28 (N.D. Ill. 1978).

Plaintiffs' partial summary judgment motion seeks a ruling that defendants violated federal securities regulations by issuing the March 21 Letter and the June 9 Press Release, and the motion is not itself seeking damages or any other relief. While good faith, scienter and the other issues defendants raise would become relevant in connection with damages that might be sought should the Proposed Plan go forward, they are not relevant now to this motion.¹ Thus, the only relevant test here is an objective one, and the considerations raised by defendants are immaterial at this time.

III. BECAUSE THE RELEVANT TEST IS AN OBJECTIVE TEST, PLAINTIFFS ARE ENTITLED TO PARTIAL SUMMARY JUDGMENT THAT DEFENDANTS VIOLATED SEC RULES 14A-3 AND 14A-6

While Ash and Calumet specifically discuss only SEC Rule 14a-9, there is no logical basis to apply anything other than an objective test in deciding whether violations of SEC Rules 14a-3 or 14a-6 have occurred. The test for ascertaining whether a communication is a proxy solicitation set forth in Capital Real Estate Inv. Tax Exempt Fund Ltd. Partnership v. Schwartzberg ("CRITEF II"), 929 F. Supp. 105, 113 (S.D.N.Y 1996), is obviously an objective test. Under CRITEF II, the determinative factor is whether the communication is a neutral presentation of the facts or "a more commendatory or subjective presentation." Id.

Relying on General Electric Co. v. Cathcart, 980 F.2d 927, 932 (3d Cir. 1992), defendants contend that "a section 14(a) plaintiff 'must show that [1] a proxy solicitation [2] contained a material misrepresentation or omission which [3] caused the plaintiff injury and [4] that the proxy solicitation . . . was 'an essential link in the accomplishment of the transaction.''" Defendants' Opposition at 7. However, it is clear from its face that the General Electric formulation only sets forth the applicable requirements for damages being awarded for violations of Rule 14a-9, not the applicable requirements where violations of Rules 14a-3 or 14a-6 are claimed or where only equitable relief is being sought. General Electric's requirement that the proxy solicitation "contained a material misrepresentation or omission" implicates only Rule 14a-9, not Rules 14a-3 or 14a-6. And the requirement in General Electric that the proxy solicitation was "an essential link in the accomplishment of the transaction" assumes that the transaction has already taken place -- the requirement cannot be applicable here, where the proposed transaction has not yet occurred and where equitable relief to stop the proposed transaction is being sought.

Thus, there is no merit to defendants' argument that purportedly genuine issues of material fact relating to causation, materiality, or culpability preclude partial summary judgment that defendants violated the federal proxy rules -- these considerations are irrelevant to the issue of whether Rules 14a-3 and 14a-6 have been violated. Plaintiffs are therefore entitled to partial summary judgment that defendants violated SEC Rules 14a-3 and 14a-6.

IV. BECAUSE THE RELEVANT TEST IS AN OBJECTIVE TEST, PLAINTIFFS ARE ENTITLED TO PARTIAL SUMMARY JUDGMENT THAT DEFENDANTS VIOLATED SEC RULE 14A-9

Because only equitable relief is being sought, defendants' arguments regarding culpability and causation are also irrelevant to plaintiffs' claim that defendants violated SEC Rule 14a-9. See Alizac Partners v. Rospatch Corp., 712 F. Supp. 599, 605 (W.D. Mich. 1989) (rejecting effort "to create exception to the general objective test applied to Rule 14a-9 cases," and reiterating that "plaintiffs in a proxy solicitation case need not prove subjective, actual reliance on the part of shareholders receiving the allegedly misleading information."). It is true that, unlike the case with plaintiffs' Rule 14a-3 and 14a-6 claims, the making of material misrepresentations is an element of plaintiffs' Rule 14a-9 claim. However, there is no merit to defendants' argument that a genuine issue of material fact exists as to whether defendants failed to disclose material facts in the March 21 Letter.

For purposes of Rule 14a-9, "[t]he test of materiality is an objective one -- that is, whether a reasonable man would attach importance to the particular facts in controversy." Thomas v. Duralite, 524 F.2d 577, 584 (3d Cir. 1975). As stated in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."

Here, there is no doubt that defendants failed to disclose numerous material facts in the March 21 Letter and the June 9 Press Release. For instance, any reasonable investor would wish to know, in deciding how to vote, what the details of the defendants' Proposed Plan are, who is proposing the Plan, and what their interests are. But defendants disclosed none of this information in the Press Release or the March 21 Letter.

Defendants argue that, by finally making more detailed disclosures in a proxy statement sent out nearly six months after the March 21 Letter, they have "cured" the nondisclosures in the March 21 Letter and the Press Release. However, even if the defendants' proxy statement did disclose all the material facts, this still would not change the fact that the March 21 Letter and the Press Release violated Rule 14a-9 when they were issued because of their numerous material nondisclosures. Whether a violation of Rule 14a-9 has been "cured" by a "corrective disclosure" goes to what relief should be issued in response to the violation, not to whether the original violation was in fact committed.

Moreover, defendants' proxy statement fails to disclose all the material facts that should have been disclosed in the March 21 Letter and the Press Release. For example, the proxy statement makes absolutely no mention of the fact that the individual defendants have a conflict of interest because they have fiduciary duties to the minority shareholders in the Company and because they have an incentive to liquidate the Partnership only through transactions that would not threaten their lucrative positions as officers in the Company. See Brown Decl. in Support of Defendants' Opposition, Ex. B. Furthermore, as detailed in Count III of plaintiffs' proposed First Amended and Supplemental Complaint, defendants' proxy statement contains numerous other material misrepresentations and nondisclosures -- instead of "curing" defendants' March 21 and June 9 violations, the proxy statement exacerbates them. For these reasons, plaintiffs are entitled to partial summary judgment on their claim that defendants violated SEC Rule 14a-9.

V. THIS MOTION IS FAR FROM MOOT

Once again, defendants argue that they should be allowed to get away with breaking the law under the rubric of "mootness." Plaintiffs' motion is far from moot for a number of reasons. For example, in their motion for a temporary restraining order and a preliminary injunction, plaintiffs suggest that the Court prohibit defendants from communicating with the Limited Partners unless they first receive approval of each potential communication from the Court. A factor in deciding whether this would be an appropriate remedy is whether defendants violated the federal securities laws in connection with the March 21 Letter and the Press Release.

Moreover, defendants are currently soliciting proxies with respect to the Proposed Plan for which they advocated in the March 21 Letter and in the Press Release. The March 21 Letter and the Press Release have tainted the current proxy solicitation process by unlawfully predisposing Limited Partners into being in favor of the Proposed Plan. In addition, as stated above, defendants' proxy statement fails to cure all of the material nondisclosures of the Press Release and March 21 Letter. Thus, the illegal Press Release and March 21 Letter are not past events that no longer have relevance -- they continue to have a detrimental impact on the Limited Partners' rights of suffrage.

Furthermore, the only ruling made by the Court with respect to the March 21 Letter and the Press Release was the denial of plaintiffs' motion for a preliminary injunction. Plaintiffs still seek a permanent injunction barring defendants from continuing to violate the securities laws and a declaratory judgment that the defendants violated the securities laws. As these requests for relief have not yet been ruled on, and for the other reasons stated above, defendants' March 21 and June 9 violations of the securities laws are not moot.

VI. DEFENDANTS' OTHER RED HERRINGS

Defendants make a number of additional arguments which are meritless and/or irrelevant. For instance, defendants mischaracterize plaintiffs' opening brief as somehow arguing that the statements made by the Court in its August 4 order are binding conclusions of fact and/or law. Plaintiffs made no such argument. Plaintiffs simply pointed out that based on the reasoning and the law discussed in the August 4 order, which addresses the relevant issues at length, plaintiffs should be entitled to partial summary judgment.

While the Court is, of course, free to change its mind, there is no reason to depart from the direction embarked upon by the Court at the July 25 hearing and in the August 4 order with respect to the issue of what constitutes a proxy solicitation. For example, in P.T.C. Brands, Inc. v. Conwood Company, L.P., 887 F. Supp. 963, 965 (W.D. Ky. 1995), the court used its ruling at the preliminary injunction stage "as a guide in considering the merits" of a summary judgment motion. Likewise, in Lanvin, Inc. v. Colonia, Inc., 776 F. Supp. 125, 127 (S.D.N.Y. 1991), the court stated, "In determining a motion for summary judgment, we may consider the Court's findings of facts and conclusions of law in a prior motion for preliminary injunction." And, in Massachusetts Law Reform Institute, Inc. v. Legal Services Corp., 601 F. Supp. 415, 417 (D.D.C. 1984), for purposes of deciding a summary judgment motion, the court adopted the findings of fact and conclusions of law it had previously entered in granting a preliminary injunction motion. See also Resorts International, Inc. v. Greate Bay Hotel and Casino, Inc., 830 F. Supp. 826, 832 (D.N.J. 1992); Ross Controls, Inc. v. I.R.S., 164 B.R. 721, 723 (E.D. Pa. 1994).

Defendants also point out that plaintiffs' original complaint does not mention the June 9 Press Release. However, plaintiffs' proposed First Amended and Supplemental Complaint does cover the violations of the securities laws committed by the defendants in connection with the Press Release.

Finally, it is noteworthy that instead of attempting to respond directly to Plaintiffs' Statement of Undisputed Material Facts in Support of Motion for Partial Summary Judgment, defendants filed something called a "Counter-Statement of Genuine Issues of Material Facts Precluding Partial Summary Judgment." However, the "genuine issues of material fact" defendants purport to raise consist either of incorrect legal conclusions or immaterial factual claims (many of which are based on the self-serving declaration of defendant Chill) dealing with irrelevant issues such as defendants' intent.

The truth is that defendants have not disputed any of the material facts -- facts which are sufficient to establish defendants' violations -- set forth in Plaintiffs' Statement of Undisputed Material Facts. This is because none of those facts is legitimately subject to dispute.

VII. CONCLUSION

Defendants' unlawful March 21 Letter and June 9 Press Release were part of a pattern of securities violations that has continued through defendants' current proxy solicitation in favor of their Proposed Plan. These earlier violations, which have been compounded by defendants' more recent violations, should not go unpunished. For the foregoing reasons, plaintiffs respectfully request that their motion for partial summary judgment be granted.

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¹ Plaintiffs believe that damages would be a grossly inadequate remedy if the Proposed Plan is passed. Damages cannot remedy violations of the Limited Partners' rights to cast a fully informed vote on the Proposed Plan. And, even if damages could be theoretically awarded to compensate the Limited Partners for the economic harm that passage of the Proposed Plan would inflict upon them, such damages would be extremely difficult to calculate, and could be so large that defendants would be unable to pay them.