Document: 478 U.S. 647 106 S.Ct. 3143 92 L.Ed.2d 525 William C. RANDALL, Roger E. Austin, Tom W. Anderson and Myrel A. Neumann, Petitionersv.B.J. LOFTSGAARDEN et al. No. 85-519. Argued April 2, 1986. Decided July Syllabus In 1973, petitioners purchased interests in a limited partnership organized by the individual respondent who, together with corporation (also respondent) of which he was president sole shareholder, to be general partner venture building operating motel. Petitioners their on basis an offering that marketed project as "tax shelter" through partners could claim deductible losses substantial amounts offset those against other income. 1976, brought securities fraud suit respondents Federal District Court, tendering return shortly before trial. asserted claims under both § 10(b) Securities Exchange Act 1934 12(2) 1933, provides investor harmed prospectus may sue "to recover consideration paid for such security interest thereon, less amount any income received upon tender security, or damages if no longer owns security." After jury found liable fraud, court held, inter alia, remedy rescission proper entered judgment units, prejudgment interest. The rejected respondents' contention petitioners' recovery should tax benefits result investments. Court Appeals sustained liability 10(b), but reversed remanded regard rescissory award, holding it must reduced equal "actual damages" principle. remand, recalculated each petitioner's accordingly, appealed, adhered its original decision benefit reduction. For purposes relied 28(a) Act, person suing shall not "a total excess his actual account act complained of." As 1933 concluded section construed substantially equivalent permitted Act. Held: erred requires from shelter investment. Pp. 655-667. (a) Section does authorize defrauded investor's recovery, either "income received" "consideration," this is so whether question classified shelter. language requiring reduction sufficiently clear invoke "plain language" canon statutory interpretation, because investors virtue ownership cannot, reasonable definition, termed "income." 12(2)'s legislative history establish Congress intended treated received." Nor there merit nature equitable compels direct product at common law. Moreover, word "consideration" means what context would suggest—the money property given exchange security. 655-660. (b) alter conclusion offset. require when measure applied plaintiff's claim. To read mandating limit created earlier enacted effect disfavored partial repeal implication. Assuming, arguendo, sometimes claim, case, did specify meant used 28(a), concluding interpreted net economic harm suffered plaintiff. This has never imposing rigid requirement every harm. Thus, mere fact receipt benefits, plus full damages, place plaintiff better position than have been absent flexible limits exceeded. Any "windfall" gains plaintiffs emerge more function Internal Revenue Code's complex provisions unduly generous standard investors. Congress' aim enacting confined solely compensating investors, also included deterrence manipulative practices markets. These goals ill served too insistence limiting "net loss." cannot fairly full-scale inquiry into dealings collector lest escape anything Tax separate asset acquired purchases share deductions are form freely transferable promoters partnership. 660-666. 768 F.2d 949, remanded. O'CONNOR, J., delivered opinion BURGER, C.J., WHITE, MARSHALL, BLACKMUN, POWELL, REHNQUIST, STEVENS, JJ., joined. filed concurring opinion, post, p. 667. BRENNAN, dissenting 670. Robert Brunig, Minneapolis, Minn., petitioners. Lawrence G. Wallace, Washington, D.C., S.E.C., amici curiae, support petitioners, special leave Court. John M. Friedman, Jr., New York City, respondents. Justice O'CONNOR 1 presented available investor, entitled rescind fraudulent transaction obtain 2 * Alotel Associates (Associates), B.J. Loftsgaarden build operate motel Rochester, Minnesota. shareholder Alotel, Inc. (Alotel), which, Loftsgaarden, venture. 3 $3.5 million shelter," " 'significantly greater returns persons relatively high brackets.' Austin v. 675 168, 173 (CA8 1982) (Austin I). partnership, taxed entity. Rather, taxable pass partners, who then shares partnership's extent adjusted interests. 26 U.S.C. 704(d). Especially attractive high-income perspective "in real estate investment one contemplated partner's restricted (the 'at risk'); rather, increased proportional nonrecourse loans made partnership." F.2d, 173. See 465(c)(3)(D). Consequently, able greatly funds invested, 4 initial memorandum indicated employ financing techniques designed provide large immediate savings partners: loan finance bulk project, rapid depreciation methods throw off losses. Nonetheless, unsuccessful, revised plan propose rent land instead purchasing it, thereby incurring another expense. subscribed second offering, investing $35,000 $52,500 each. soon began experience financial difficulties, February 1975 asked make additional Associates; they complied, initiated investigation eventually defaulted obligations, 1978 foreclosed creditors. 5 alleging raising federal 48 Stat. 84, amended, 15 77l (2), 1934, 891, 78j(b), SEC Rule 10b-5, 17 CFR 240.10b-5 (1985), well pendent state law claims. had knowingly material misrepresentations omissions memorandum, reasonably these misstatements, caused damages. Among mischaracterized available, terms lease, manner compensation services rendered. findings accepted jury's advisory verdict were making induced purchases. App. Pet. Cert. E-1. 6 Finding investments worthless time discovered 1975, held 12(2), (2). Rescission permissible, ruled, notwithstanding until E-15. Accordingly, interest; noted counts independently liability, "each only single recovery." Id., E-16. received, "[a]bsent [respondents'] purchases, [petitioners] probably produced temporary savings, without loss investment." F-9—F-10. 7 A panel Eighth Circuit award new trial issue. trial, 179, agreeing Court's "decision apply essentially case." 181. however, refusing reduce "the damage award" "on Ibid. 8 panel's view, principle," applicable required 'reduced value transaction.' 181 (quoting Garnatz Stifel, Nicolaus & Co., 559 1357, 1361 1977), cert. denied, 435 951, 98 1578, 55 801 (1978)). observed anticipated successful typically include early years, followed later reasoned "unlike corporate . even enterprise fails become profitable, clearly something investment's unique treatment." 182. light generated investment," strictly compensatory awardable private actions taken determining inflicted plaintiffs." 183. Finally, objection "because consequences makes, evidence will now figure case," "cases involving expressly sold shelters." 9 On bench issue calculated purchase price simple interest, minus benefits. C-5. Both appealed judgment, and, after ruled various subsidiary issues, reconsidered case en banc. 949 1985), II). 10 Relying part noting Second reached similar Salcer Envicon Equities Corp., 744 935 (1984), vacated remanded, 1015, 3324, 731 (1986), I actually received. offset, moreover, stemmed 12(2). 953-954. "no maintain chapter recover, satisfaction actions, 78bb(a). acknowledged words 'actual damages' do appear Act," suggested provided been, be, 11 "substantially 28(a). Cf. Affiliated Ute Citizens United States, 406 128, 155, 1456, 1473, 31 741 (1972). goal parties status quo ante, 'and hence can her loss," ' i.e., damages.' 954 Salcer, supra, 940). 12 Although recognized strict accounting sense," 955, nonetheless concluded, interpretation remedy, within meaning 954-955. 13 proceeded engage detailed analysis determined. based petitioner, rather 'out-of-pocket' during year 958. determined theory flowing themselves, doubled including reflect petitioner 50% bracket. 960-961. combined II court's several rulings this: approach originally employed recoveries ranging $64,610 $96,385, B-1—B-2; Appeals' final ruling, $506 $7,666. 961. 14 Two judges dissented adherence I. plausibly viewed allowing windfall defendant—the party." 963 (Lay, dissenting). We granted certiorari question's importance administration laws, Courts divided treatment calculating litigation. 474 978, 379, 88 333 (1985). Burgess Premier 727 826, 838 (CA9 1984) (refusing action 10(b)). reverse. specifies conduct gives rise creates right favor "may equity competent jurisdiction, prescribes except where Wigand Flo-Tek, Inc., 609 1028, 1035 (CA2 1979). Even latter situation, we assume employed; paid, realized H.R.Rep. 85, 73d Cong., 1st Sess., (1933) (under 12, buyer "sue price, exceeding price"); L. Loss, Fundamentals Regulation 1020 (1983) (hereinafter Loss) ("[W]hen measured rescission"). 16 contend excludes pursuant II, 955 (footnote omitted), such. argue Here, contexts, starting point construing statute itself. E.g., Santa Fe Industries, Green, 430 462, 477, 97 1292, 1303, 51 480 (1977). "if provision laws odds history, unnecessary 'to examine considerations "policy" influenced lawmakers formulation statute.' Aaron SEC, 446 680, 695, 100 1945, 1955, 64 611 (1980) Ernst Hochfelder, 425 185, 214, n. 33, 96 1375, 1391, 47 668 (1976)). think, speaks clarity necessary canon: encompass 18 attributable initially take credits. themselves; true benefit"—arises sources use credits taxes otherwise payable Unlike payments cash security—such distributions dividends stock, bonds, distributive capital profits—the "receipt" itself event, "income" Code. 61. compelling imputing intent describe derives thereon." 19 Housing Foundation, Forman, 421 837, 95 2051, 44 621 (1975), lends our hands particular certain housing projects deemed "securities" deductibility portion monthly rental charge mortgage," said constitute "an expectation 'income.' 854-855, S.Ct., 2062. contrary, view payment consequent purposes, constitutes profits." 855, reject analogous suggestion "constitut[e] 20 Respondents specific sparse Instead, urge look rescission, say exclusively effort restore ante." Brief 27. Under maintain, 'any demanding contract party offer whatever way money, property, benefit.' H. Black, Contracts Cancellation Written Instruments 617, 1417 (1916)). Petitioners' argue, "consideration benefit." 21 Generalities these—which come us unsupported instance returned rescission—fall far short showing overcome plain law, quite likely ignored remedy. "direct product" rule, seeking credit whom sought rescinded: "The phrase 'direct product' derived possession intervention independent possessor." Restatement Restitution 157, Comment b (1937). agree amici, States Commission, accrue throws owed income, all likelihood Amici Curiae 13. Cereal Byproducts Co. Hall, Ill.App.2d 79, 147 N.E.2d 383, aff'd, Ill.2d 313, 155 (1958) accountant's negligence discovering embezzlement theft). reason think curtail relaxing offsets imposed rule. 22 Respondents' likewise flawed. Certainly restoration prior generally restitution. But ensure compensated: "aim[s] prevent further exploitation public sale unsound, fraudulent, misrepresentation [and] adequate information investor." S.Rep. 47, (1933). Naftalin, 441 768, 775-776, 99 2077, 2082-2083, 60 624 (1979). therefore infer chose order deter encourage disclosure whole. Indeed, enabling victims demand shifted risk intervening decline defendants, fraud. Thompson, Measure Recovery 10b-5: Alternative Tort Damages, 37 Vand.L.Rev. 349, 369 (1984) Thompson); 1133. adds compared purely 23 reject, Appeals, 958, alternative of, in, 'consideration.' 29-30. There indication mean And, express received," implicit investor. took deductions, derive consideration. hold III 24 consider suggest pari materia, arguing correctly stands broad principle damages," victim victim's recovery. principle, say, construe encompassing 25 Globus Law Research Service, 418 1276 1969), 397 913, 90 93 (1970), 17(a) materia insofar bar punitive 954. decided, distinguishable, implied one, makes reference compensatory. 1283-1284. By contrast, addressed matter considerable specificity antedates left untouched passed 1024. enactment implication, '[i]t is, course, cardinal construction repeals implication favored.' Radzanower Touche Ross 426 148, 154, 1989, 1993, 540 (1976) Continental Tuna 164, 1319, 1322-1323, 653 "irreconcilable conflict" here between two Acts, nor 'the covers whole situation substitute.' U.S., quoting Posadas National City Bank, 296 497, 503, 56 352, 80 L.Ed. 351 (1936). Herman MacLean Huddleston, 459 375, 384, 103 683, 688, 74 548 (adopting "cumulative remedies Acts"). circumstances unsettled one. (1972), involved violations 10b-5 securities, ordinarily correct 28 78bb(a), difference fair [plaintiff] conduct." "out-of-pocket" cases seller see, e.g., Harris American Investment 523 220, 225 1975), 423 1054, 784, 46 643 (1976); 365. authority plaintiff, least some circumstances, choose "undoing bargain (when events since impossible) defendant him pay [out-of-pocket] damages." See, Blackie Barrack, 524 909 1975) ("While out pocket ordinary suit, discretion district judge appropriate measure"), 429 816, 57, 50 75 (1976). 27 dispute assume, case. It appropriate, therefore, legislation enacted" guidance defining scope limitation. Merrill Lynch, Pierce, Fenner Smith Curran, 456 353, 378, 102 1825, 1839, 72 182 (1982). When stood conspicuous example intend compel different obtained 10(b). 29 apart analogy furnished sure, "Section damages,' Blue Chip Stamps Manor Drug Stores, 723, 734, 1917, 1925, 539 governing measures permissible 1473. "where seller's defendant's profit." aims preventing unjust enrichment buyer, simply proximately buyer's rationale underlying "[i]t give windfalls let keep them." Janigan Taylor, 344 781, 786 (CA1), 382 879, 86 163, 120 (1965). Falk Hoffman, 233 N.Y. 199, 135 N.E. 243 (1922) (Cardozo, J.). 30 receive undeserved "windfalls" overstated. properly characterized windfall—which doubt—the serve reduce, although necessarily eliminate, plaintiffs' gain ante. told rule" thus Hillsboro Bank Commissioner, 460 370, 1134, 130 (1983); 25. residual operation overlook markets, decisions. Citizens, 151, 1471; see MacLean, 386-387, 1144-1145. deterrent purpose 940. often insulate commit frauds appreciable resulting diminution incentives comply seriously impair rights action, emphasized, "provide 'a most effective weapon enforcement' 'necessary supplement Commission action.' Bateman Eichler, Hill Richards, Berner, 472 299, 310, 105 2622, 2628, 215 (1985) J.I. Case Borak, 377 426, 432, 84 1555, 1560, (1964)). 32 elaborate method supplies rejecting need inquire concerning speculative beyond province. Norfolk Western R. Liepelt, 444 490, 755, 62 689 (1980). enough formidable difficulties predicting ultimate claimed audit commenced, burdens associated reconstruction substantial. 33 remaining rule reality 14. They represent important tangible advantage expected 940, allowable version "economic reality," note analyzed consisting flow, value, 11, courts promised Sharp Coopers Lybrand, 649 175 (CA3 1981), 455 938, 1427, 71 648 34 already established design accommodate arguments, them surer footing. ask treat legal treatment. acquiring alienable accrued ownership. not, acquire separate, bundle partners. obvious reasons, absence wholly severed activity relate: "[t]he statutes pertaining determination disclos[e] confine taxpayer sustaining them, personal usable another." Colonial Ice Helvering, 292 435, 440, 54 788, 790, 78 1348 (1934). much Congress, decide modified comport reality. 35 acknowledge that, incentive wait raise shelter, tendered cease persuaded, lack deal potential abuse score. barred electing delayed increase market decline. Baumel Rosen, 412 571, 574-575 (CA4 396 1037, 681, 681 (1970); 1133, 127; 369-370. delay today. 36 occasion whether, assuming invariably free elect out-of-pocket ever refuse allow "premium" represented event might yield significantly smaller 5. proper, abandoned challenge ruling. conclude, then, reversed, proceedings consistent opinion. 38 ordered. 39 concurring. 40 join well-reasoned recognizes, concerns distinct schemes—§ §§ 78j(b) 649. concludes remedial formula set reducing Ante, Since prevailed select favorable them. write separately merely explain why leaves open. 666-667. 41 still rescissory: permits ." considered "consideration." 656-657, 659-660. governed unlike appropriate. 661-662. account. Normally, loss, [the plaintiff] (1972); 42 ascertain taking elements go That asset—here, stream appreciation—and write-offs generate. 935, 940 1984), 731; 174 ) (respondent forced attract investors). An appreciation benefits.1 43 invested ways. First, promoter misled respect level Lasker Bear, Stearns 757 1985); Second, asset. (referring views amicus curiae ). falls category: expect investment; profitability receives appreciation, course injured. injury—the promised—is represented, entire went toward quality lower words, buying received.2 recognizes major inducement investment, 45 dissenting. facts restitution own securities. believe purchaser bargained begin statute. know misrepresentation, directly, relief describes Given intent, interpreting common-law restitution, Code, does. 1022 ("Section perhaps best evaluated comparing (or equitable) adapted"). At equity, entails undoing involves precontract position. 616, 1482 (2d ed., 1929); D. Dobbs, Remedies 9.4, 618 (1973); McCormick, Damages 121, 448 (1935). reestablish subject transaction, else consideration, benefit, bargain, 1485, 1487; Corbin, 1114, 607 (1964); Palmer, 3.9, 275, 3.11, 294, 3.12, pp. 303-305 (1978); 366, (1984). practice, steps leading streamlined: transaction. If defendant, allowed gave placed occupied made—a contrary E.g. supra; 1488 ("[A] reclaim parted with, same retain transaction"). 49 Application principles misrepresentation-induced investor-plaintiff's bargains benefit. ("One prime motivations partnerships bracket individuals") 731. Banoff, What Extent Will Benefits Shelters Be Permitted Offset Damages?, 57 J. Taxation 157 (1982) ("[T]he invests largely motives"); Note, Loftsgaarden: Fraud Real Estate Limited Partnership Investments—Offsetting Plaintiffs' Relief Received, Creighton L.Rev. 1140, 1143 (1983). pays higher sheltering producing future growth indicates aspect bargained-for agreement, incidental ignoring flows flow 863-864, 2066, (1975) (BRENNAN, dissenting) omitted) ("[I]n practical world [money earned saved advantages]. finds distinguish after-tax income"). rational yields $101 differs $100 way—by $1. my ignore term embrace purchased. Income commonly defined recurrent usually labor." Webster's Ninth Collegiate Dictionary 610 meaning, income: capital. monetary respondent's check bearing nothing suggesting using "income," word. reading carve out, exclusion forms directly code, award.* violation reasons conclude provision. 52 affirm respectfully dissent. example, A, runs hotels $10 $5 stock. Investor B $110 proportionate addition receiving possible receives, $25 source. Suppose B, 1, cases, worthless. non-tax investor) sued $100. (e.g., because, roof leaked rooms unusable, costs incurred), (because worth worthless) promised, fully informed bought investment). Similarly, turned hotel $40, occupancy projected revenues anticipated), $60. did, 952 1985) ), No $1 ability obtained, includes expert testimony. disagree assertion "accrue income," "would law." 658. valued entirely do. valuing marketing assumes generate, just rebuilt automobile engine car put engine. not—at not—describe "indirect" exploit value.

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