I. INTRODUCTION

Defendants' three arguments that their Proposed Plan is not a "roll-up transaction" within the meaning of the Limited Partnership Rollup Reform Act of 1993 ("the Reform Act") are without merit.¹ First, the Proposed Plan is a "reorganization" of the Partnership within the meaning of the Reform Act because the Limited Partners will receive securities in another entity - the Company. Second, the Partnership is a "finite-life" entity subject to the Reform Act - the Partnership Agreement provides that the Partnership's existence must end by 2035 and that the Partnership's purpose is to distribute profits to the Limited Partners. Third, under well-established law, the SEC's failure to take action to stop the Proposed Plan does not constitute approval of the Plan or concurrence with the defendants' position on the roll-up issue.

Defendants' failure to comply with the Reform Act is fatal to the Proposed Plan. In addition to the violations of the Reform Act raised in plaintiffs' October 17 supplemental brief, defendants have also violated provisions in the Reform Act which require certain rights to be given to dissenting limited partners. Under the Reform Act, any security issued in a roll-up transaction where these rights are not provided to dissenting limited partners may not be traded or listed on major stock exchanges (such as the New York Stock Exchange) or on NASDAQ. Therefore, the Underwritten Sale cannot take place, and the Proposed Plan cannot be implemented.

II. THE PROPOSED PLAN IS A REORGANIZATION OF THE PARTNERSHIP

Defendants' first argument is that the Proposed Plan is not a "reorganization" of the Partnership because the Partnership will no longer exist after the Proposed Plan is completed. Accepting this argument would render meaningless the definition of "roll-up" set forth in the SEC's regulations.

The SEC's regulations define "roll-up transaction" as "a transaction involving the combination or reorganization of one or more partnerships, directly or indirectly, in which some or all of the investors in any of such partnerships will receive new securities, or securities in another entity." 17 C.F.R. § 229.901(c)(1) (emphasis added). By its terms, this definition makes plain that a "reorganization" constituting a "roll-up" is a "reorganization" where "all" of the investors in "one" partnership receive "securities in another entity." Obviously, in such a transaction the partnership in question would cease to exist, since all its investors would receive securities in another entity. Therefore, the fact that the Partnership would no longer exist after completion of the Proposed Plan does not prevent the Plan from being a "reorganization" within the meaning of the definition of "roll-up."²

An analysis of an exemption in the definition of "roll-up" confirms that the Proposed Plan is a roll-up. The definition of "roll-up" exempts "a transaction wherein the interests of all of the investors in each of the partnerships are repurchased, recalled or exchanged in accordance with the terms of the preexisting partnership agreement for securities in an operating company specifically identified at the time of the formation of the original partnership." 17 C.F.R. § 229.901(c)(2)(i) (emphasis added). This exemption would be unnecessary unless the definition of "roll-up" generally covered a transaction - such as the Proposed Plan - in which the securities of a partnership are exchanged for securities in an operating company.³

The SEC Release issued when the definition of "roll-up" was adopted further confirms that the Proposed Plan is a roll-up.⁴ This SEC Release states that the regulations covering roll-ups "apply to a reorganization of a single limited partnership in which securities of a successor entity will be issued in exchange for the limited partnership interests, such as converting a limited partnership into a corporation or an entity taxed as a REIT." SEC Release No. 33-6922, 1991 WL 529543 at *9 (Oct. 30, 1991) (emphasis added). The Proposed Plan is a reorganization of a single partnership where securities in a corporation (the Company) are being given to the Limited Partners in exchange for their Partnership Units.

Likewise, the SEC Release issued when the definition of "roll-up" in the regulations was proposed states, "The reorganization of a single partnership into corporate form also would constitute a roll-up transaction under the proposed definition since this restructuring, similar to a 'typical' roll-up, involves the issuance of new securities having substantially different rights and investment risks as compared to the subject partnership." SEC Release No. 33-6899, 1991 WL 286803 (June 17, 1991). The Proposed Plan essentially involves the restructuring of the Partnership into corporate form - the Partnership is effectively being folded into the Company.

Similarly, a treatise on proxy regulation states that the definition of "roll-up" covers:

the combination or reorganization of one or more partnerships [which involves] either:

(i) The offer or sale of securities by a successor entity, whether newly formed or previously existing, to one or more limited partners of the partnerships to be combined or reorganized; or

(ii) The acquisition of the successor entity's securities by the partnerships being combined or reorganized.

Thus, a roll-up involves the merger of a limited partnership into another entity, the reorganization of the limited partnership, or an offer to exchange a security with the limited partners.

Michael D. Waters, Proxy Regulation, 1993 Cumulative Supplement at 43-44 (emphasis added). The Proposed Plan is thus a roll-up - it is an offer to the Limited Partners of securities in the Company, a previously existing entity, in exchange for securities in the Partnership.

III. THE PARTNERSHIP IS A "FINITE-LIFE" ENTITY SUBJECT TO THE REFORM ACT

Attempting to evade the Reform Act, defendants argue that the Partnership is not a "finite-life" entity. This argument is without merit - the Partnership is clearly a "finite-life" entity because, as set forth in the Partnership Agreement, it has a finite term and its purpose is to distribute profits to the Limited Partners.

A limited partnership is "finite-life" if:

(A) It operates as a conduit vehicle for investors to participate in the ownership of assets for a limited period of time; and

(B) It has as a policy or purpose distributing to investors proceeds from the sale, financing or refinancing of assets or cash from operations, rather than reinvesting such proceeds or cash in the business (whether for the term of the entity or after an initial period of time following commencement of operations).

17 C.F.R. § 229.901(b)(2)(i) (emphasis added).

The Partnership easily meets both prongs of the definition of "finite-life." It meets the first prong - existence "for a limited period of time" - because the Partnership Agreement provides that "the term of the Partnership shall end on December 31, 2035, unless sooner terminated in accordance with this Agreement." Ex. Z, § 3(a), p. 131.⁵

The Partnership meets the second prong because it has a purpose of distributing proceeds to its investors. The Partnership Agreement contemplates that distributions will be made both during the lifetime of the Partnership and upon liquidation. The Agreement has a long section governing both kinds of distributions. Ex. Z, § 6, pp. 134-41.

For instance, the Partnership Agreement provides, "the General Partner shall determine the amount of cash or other property . . . available for distribution to the Partners, taking into consideration the current financial condition of the Partnership, anticipated operating income and expenses, [and other factors]." Ex. Z, § 6(f)(i), p. 138. The Agreement further provides, "[t]he General Partner shall . . . seek to maximize the amount of cash or other property available for distribution." Ex. Z, § 6(f)(i), pp. 138-39. See also Ex. Z, § 6(c)(i), p. 135 ("Profits of the Partnership . . . shall be allocated among the Partners . . ."); Ex. Z, § 6(f)(ii), p. 139 (prior to a liquidating sale, "Distributions shall be made . . ."); Ex. Z, § 6(f)(v), p. 139 (after a liquidating sale, "distributions shall be made . . .").

The fact that the General Partner has failed to fulfill the Partnership's purpose of making distributions cannot exempt the Partnership from the Reform Act. The second prong of the definition of "finite-life" covers partnerships whose "policy or purpose" (emphasis added) is the distribution of proceeds to investors. The SEC Release issued when the SEC's roll-up regulations were adopted makes clear that "[t]he question of whether a particular partnership is 'finite-life' will depend upon an examination of the partnership's purposes and is not subject to any numerical tests." SEC Release No. 33-6922, 1991 WL 529543 at *8 (emphasis added).

This SEC Release also explains that partnerships which do not meet the definition of "finite-life" are those where "[i]nvestors . . . have no expectation that the partnership will distribute its cash from operations or sell its assets and distribute the proceeds to investors." Id. at *9. The Limited Partners here, based on the Partnership Agreement, clearly expected to receive distributions of proceeds from operations and/or from a sale of the Partnership's assets.⁶

IV. THE SEC'S FAILURE TO TAKE ACTION TO STOP THE PROPOSED PLAN DOES NOT CONSTITUTE APPROVAL OF THE PLAN OR CONCURRENCE WITH THE DEFENDANTS' POSITION ON THE ROLL-UP ISSUE

Defendants' suggestion that this Court should give some weight to the SEC's failure to act against the Proposed Plan after the SEC raised the roll-up issue is contrary to established law. In Holt v. Katy Industries, Inc., 71 F.R.D. 424, 427 (S.D.N.Y. 1976), the court rejected a virtually identical argument. The defendants in Holt argued that contentions made by the plaintiffs were not meritorious because "these contentions were raised in a letter to the Securities and Exchange Commission dated July 14, 1975, and . . . the SEC rejected these arguments by 'clearing' the Joint Proxy Statement and declaring it effective on August 18, 1975." The court responded:

This argument is specious. The cover sheet of the Proxy Statement itself clearly warns the reader that:

'THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.'

Due to the large number of proxy statements which are submitted to the SEC every year, the Commission staff is unable to examine each one in detail and to pass upon the accuracy of the statements which are contained therein. No inference should be drawn from its inaction respecting the alleged violation of its proxy rules.

71 F.R.D. at 427 (emphasis added, citations omitted).

Similarly, in Crooker v. S.E.C., 161 F.2d 944, 947 (1st Cir. 1947), the court stated,

Failure of the Commission to delay the effectiveness of a registration statement . . . or failure of the Commission to suspend the effectiveness of a registration statement by a stop order . . . is not, in either case, to be deemed a finding by the Commission that the registration statement is true and accurate or held to mean that the Commission has passed upon the merits of, or given approval to, such security.

And, in Klastorin v. Roth, 353 F.2d 182, 183 n.2 (2d Cir. 1965), the court stated:

[I]t is advisable that the District Judge be advised that the S.E.C., as amicus curiae, urges that Judge McGohey, in attaching weight to the inaction of the Commission, misapprehended its function. It [the SEC] argues convincingly that no inference is to be drawn from its inaction respecting the alleged violations of its proxy rules; nor can Fuller urge that the Commission's action, in any sense, constituted approval of the solicitation material.

Moreover, review by the Commission of the material is informal in nature.

Likewise, Section 23 of the Securities Act of 1933 states,

Neither the fact that the registration statement for a security has been filed or is in effect nor the fact that a stop order is not in effect with respect thereto shall be deemed a finding by the Commission that the registration statement is true and accurate on its face or that it does not contain an untrue statement of fact or omit to state a material fact, or be held to mean that the Commission has in any way passed upon the merits of, or given approval to, such security. It shall be unlawful to make, or cause to be made to any prospective purchaser any representation contrary to the foregoing provisions of this section.

15 U.S.C. § 77w. See also Regulation S-K, Item 501, 17 C.F.R. § 229.501 (implementing Section 23); SEC Rule 14a-9(b), 17 C.F.R. § 240.14a-9(b).

Thus, there is no merit to defendants' suggestion that this Court should give some weight to the SEC's apparent decision not to act against the Proposed Plan. Indeed, the evidence put forward by defendants does not show that the SEC agreed with defendants' position on the applicability of the Reform Act, but only shows that the SEC was concerned about the matter.

V. DEFENDANTS' FAILURE TO COMPLY WITH THE REFORM ACT IS FATAL TO THE PROPOSED PLAN

In addition to violating the provisions of the Reform Act described in plaintiffs' October 17 supplemental brief, defendants have violated another, crucial provision of the Reform Act. This violation is fatal to the Proposed Plan.

The Reform Act effectively requires dissenting limited partners (limited partners who vote against a roll-up transaction) to be given one of the following rights ("Dissenters' Rights"):

(i) an appraisal and compensation;

(ii) retention of a security under substantially the same terms and conditions as the original issue;

(iii) approval of the limited partnership rollup transaction by not less than 75 percent of the outstanding securities of each of the participating limited partnerships;

(iv) the use of a committee of limited partners that is independent . . . of the general partner or sponsor, that has been approved by a majority of the outstanding units of each of the participating limited partnerships, and that has such authority as is necessary to protect the interest of limited partners, including the authority to hire independent advisors, to negotiate with the general partner or sponsor on behalf of the limited partners, and to make a recommendation to the limited partners with respect to the proposed transaction; or

(v) other comparable rights that are prescribed by rule [of the registered national securities exchange or registered national securities association trading the security] and that are designed to protect dissenting limited partners.

15 U.S.C. §§ 78f(b)(9), 78o-3(b)(12)-(13).

The Reform Act requires all registered national securities exchanges - such as the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) - to adopt rules prohibiting the exchange from listing any security issued in a roll-up transaction unless the transaction provides Dissenters' Rights. 15 U.S.C. § 78f(b)(9). Similarly, the Reform Act requires all registered national securities associations, such as the National Association of Securities Dealers (NASD), to adopt rules prohibiting participation in roll-up transactions where Dissenters' Rights are not provided. 15 U.S.C. § 78o-3(b)(12). Moreover, the Reform Act requires registered national securities associations to adopt rules prohibiting the quotation on automated interdealer quotation systems (such as NASDAQ, which is sponsored by NASD) of securities issued in roll-up transactions where Dissenters' Rights were not provided. 15 U.S.C. § 78o-3(b)(13).

The rules required by the Reform Act have been adopted by the NYSE, the AMEX, numerous other major stock exchanges (including the Chicago Stock Exchange, the Cincinnati Stock Exchange, the Pacific Stock Exchange, the Chicago Board Options Exchange, the Boston Stock Exchange, and the Philadelphia Stock Exchange), and the NASD. SEC Release No. 34-35934, 1995 WL 408621 (July 3, 1995); SEC Release No. 34-35111, 1994 WL 718575 (Dec. 16, 1994); SEC Release No. 34-35109, 1994 WL 718568 (Dec. 16, 1994). As a result, if Dissenters' Rights are not provided in a roll-up, "the transaction becomes virtually impossible to implement." Alan Bickerstaff, The Limited Partnership Rollup Reform Act of 1993: Necessary Protection for Limited Partners or Overreaction to the Rollup Phenomena?, Bulletin of the Business Law Section of the State Bar of Texas, March 1995, at 37 (available on Westlaw at 32-MAR Bull. Bus. L. Sec. St. B. Tex. 5). Unless Dissenters' Rights are provided, "the Exchanges will not be permitted to list the new securities, the NASDAQ will be prohibited from providing quotes for such securities, and broker/dealers who are members of a registered securities association will not be permitted to participate in the rollup transaction." Id.

It is beyond dispute that the Proposed Plan does not provide Dissenters' Rights. As a result, the Proposed Plan's Underwritten Sale cannot take place, since it would require the participation of NASD and the major stock exchanges. Moreover, implementation of the Proposed Plan would cause the Company's stock - the stock that would be distributed in the Dissolution - to no longer be traded or listed on NYSE, AMEX, the other major exchanges, and NASDAQ. No rational Limited Partner aware of these facts would vote for the Proposed Plan, yet these facts were not disclosed. Thus, defendants' failure to provide Dissenters' Rights is fatal to the Proposed Plan, and the need for equitable relief is clear.

VI. CONCLUSION

For the reasons given in this brief and their prior briefs, plaintiffs respectfully request that their Motion for a TRO and a Preliminary Injunction be granted.

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¹ This reply brief focuses solely on the issue of whether the Proposed Plan is a "roll-up transaction" within the meaning of the Limited Partnership Rollup Reform Act of 1993. With respect to the other issues raised in plaintiffs' supplemental briefs, plaintiffs believe that nothing more needs to be added, and elect to stand on their prior briefs.

² Black's Law Dictionary gives a very broad definition of "reorganization":

General term describing corporate amalgamations or readjustments occurring, for example, when one corporation acquires another in a merger or acquisition, a single corporation divides into two or more entities, or a corporation makes a substantial change in its capital structure. The exchange of stock and other securities in a corporate reorganization can be effected favorably for tax purposes if certain statutory requirements are followed strictly.

The classification of the Internal Revenue Code (§ 368(a)(1)) is widely used in general corporate literature. A Class A reorganization is a statutory merger or consolidation (i.e., pursuant to the business corporation act of a specific state). A Class B reorganization is a transaction by which one corporation exchanges its voting shares for the voting shares of another corporation. A Class C reorganization is a transaction in which one corporation exchanges its voting shares for the property and assets of another corporation. A Class D reorganization is a "spin off" of assets by one corporation to a new corporation; a class E reorganization is a recapitalization; a Class F reorganization is a "mere change of identity, form, or place of organization, however effected." . . .

³ As explained in plaintiffs' October 17 supplemental brief, the exemption does not apply here because the Proposed Plan would not give Limited Partners securities in the Company "in accordance with the terms of the preexisting partnership agreement" but instead would involve amendment of the Partnership Agreement.

⁴ The SEC adopted regulations governing roll-up transactions prior to the passage of the Reform Act. The Reform Act codified many of the SEC's regulations, including the basic definition of "roll-up." See Alan Bickerstaff, The Limited Partnership Rollup Reform Act of 1993: Necessary Protection for Limited Partners or Overreaction to the Rollup Phenomena?, Bulletin of the Business Law Section of the State Bar of Texas, March 1995 (available on Westlaw at 32-MAR Bull. Bus. L. Sec. St. B. Tex. 5).

⁵ Exhibit Z is attached to the Supplemental Declaration of Alex J. Luchenitser, filed on October 17, 1997.

⁶ Defendants' argument that the Partnership has a "policy" of reinvesting its earnings in its business, in addition to being irrelevant because the Partnership's purpose is to distribute its profits to the Limited Partners, is not supported by the evidence. Defendants cite no evidence to back up their statement that "the Partnership has reinvested its earnings in its business." See Defendants' Opposition at p. 9, lines 4-5. In fact, the Partnership has never received any earnings to distribute or reinvest.