U.S. Supreme Court
Randall v. Loftsgaarden, 478 U.S. 647 (1986)
Randall v. Loftsgaarden
Argued April 2, 1986
Decided July 2, 1986
478 U.S. 647
In 1973, petitioners purchased interests in a limited partnership organized by the individual respondent who, together with a corporation (also a respondent) of which he was the president and sole shareholder, was to be a general partner in the venture of building and operating a motel. Petitioners purchased their interests on the basis of an offering that marketed the project as a "tax shelter" through which individual limited partners could claim deductible partnership losses in substantial amounts and offset those losses against other income. In 1976, petitioners brought a securities fraud suit against respondents in Federal District Court, tendering return of their securities to respondents shortly before trial. Petitioners asserted claims under both § 10(b) of the Securities Exchange Act of 1934 and § 12(2) of the Securities Act of 1933, which provides that an investor harmed by prospectus fraud may sue
"to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security."
After a jury found respondents liable for fraud, the court held, inter alia, that the remedy of rescission was proper under § 12(2), and entered judgment for petitioners in the amount of the consideration paid for their limited partnership units, together with prejudgment interest. The court rejected respondents' contention that petitioners' recovery should be offset by tax benefits received by petitioners as a result of their investments. The Court of Appeals sustained respondents' liability under § 12(2) and § 10(b), but reversed and remanded with regard to the rescissory award, holding that it must be reduced by an amount equal to any tax benefits received by petitioners under an "actual damages" principle. After the District Court, on remand, recalculated each petitioner's damages accordingly, both petitioners and respondents appealed, and the Court of Appeals adhered to its original decision with regard to the tax benefit reduction. For purposes of liability under § 10(b), the court relied on § 28(a) of the 1934 Act, which provides that a person suing for damages under that Act shall not recover "a total amount in excess of his actual damages on account of the act complained of." As to liability under § 12(2) of the 1933 Act, the court concluded that the rescission remedy chanroblesvirtualawlibrary
of that section should be construed as substantially equivalent to the "actual damages" permitted under § 28(a) of the 1934 Act.
Held: The Court of Appeals erred in holding that § 28(a) requires a rescissory recovery under § 12(2) or § 10(b) to be reduced by tax benefits received from a tax shelter investment. Pp. 478 U. S. 655-667.
(a) Section 12(2) does not authorize an offset of tax benefits received by a defrauded investor against the investor's rescissory recovery either as "income received" or as a return of "consideration," and this is so whether or not the security in question is classified as a tax shelter. The language of § 12(2) requiring a reduction for "income received" is sufficiently clear to invoke the "plain language" canon of statutory interpretation, because tax benefits received by defrauded investors by virtue of their ownership of the security cannot, under any reasonable definition, be termed "income." Section 12(2)'s legislative history does not establish that Congress intended tax benefits to be treated as "income received." Nor is there merit to the contention that the nature of the equitable remedy of rescission compels petitioners' tax benefits to be offset as a direct product of the security at common law. Moreover, the word "consideration" in § 12(2) means what the context would suggest the money or property given by the investor in exchange for the security. Pp. 478 U. S. 655-660.
(b) Section 28(a) of the 1934 Act does not alter the conclusion that § 12(2) of the 1933 Act does not authorize a tax benefit offset. Nor does § 28(a) require such an offset when a rescissory measure of damages is applied to a plaintiff's § 10(b) claim. To read § 28(a) as mandating a limit on the rescission remedy created in the earlier enacted § 12(2) would be to effect a disfavored partial repeal of § 12(2) by implication. Assuming, arguendo, that rescissory recovery may sometimes be proper on a § 10(b) claim, and that this is such a case, Congress did not specify what was meant by "actual damages" as used in § 28(a), and there is no basis for concluding that § 28(a) must be interpreted so as to limit rescissory damages under § 10(b) to the net economic harm suffered by the plaintiff. This Court has never interpreted § 28(a) as imposing a rigid requirement that every recovery on claims under the 1934 Act must be limited to the plaintiff's net economic harm. Thus, the mere fact that the receipt of tax benefits, plus a full recovery under a rescissory measure of damages, may place a § 10(b) plaintiff in a better position than he would have been in absent the fraud does not establish that the flexible limits of § 28(a) have been exceeded. Any "windfall" gains to plaintiffs emerge more as a function of the Internal Revenue Code's complex provisions than of an unduly generous damages standard for defrauded investors. Congress' aim in enacting the 1934 Act was not confined solely to compensating defrauded investors, but also included deterrence of fraud and manipulative chanroblesvirtualawlibrary
practices in the securities markets. These goals would be ill-served by a too rigid insistence on limiting plaintiffs to recovery of their "net economic loss." Section 28(a) cannot fairly be read to require a full-scale inquiry into a defrauded investor's dealings with the tax collector lest the investor escape with anything more than his "net economic loss." Tax benefits should not be treated as a separate asset that is acquired when a limited partner purchases a share in a tax shelter partnership, because tax deductions and tax losses are not a form of freely transferable property created by the promoters of the partnership. Pp. 478 U. S. 660-666.
768 F.2d 949, reversed and remanded.
O'CONNOR, J., delivered the opinion of the Court, in which BURGER, C.J.,and WHITE, MARSHALL, BLACKMUN, POWELL, REHNQUIST, and STEVENS, JJ., joined. BLACKMUN, J., filed a concurring opinion, post, p. 478 U. S. 667. BRENNAN, J., filed a dissenting opinion, post, p. 478 Ung opinion, post, p. 478 Ung opinion, post, p. 478 U. S. 670.