Brumbaugh v. Princeton Partners

In Brumbaugh v. Princeton Partners, 985 F.2d 157 (4th Cir.1993), the defendant marketed units in a limited partnership that owned and operated commercial properties and also served as a tax shelter to offset the income of limited partners. The defendant advertised the sale of the units through a document entitled "Private Placement Memorandum." The plaintiff purchased one unit in 1982. Several years later, in 1988, the Internal Revenue Service disallowed the partnership's tax deductions. The plaintiff filed suit, alleging common law fraud and violations of state and federal securities laws. The district court dismissed the complaint on statute of limitations grounds. The Fourth Circuit affirmed, noting that "inquiry notice is triggered by evidence of the possibility of fraud, not by complete exposure of the alleged scam." Id. at 162. The document by which the defendant marketed the investment "contained a host of prior warnings making it plain that the plaintiff was purchasing, to put it mildly, a highly speculative investment." Id. The court therefore concluded that the plaintiff should be charged with constructive knowledge of the contents of the Private Placement Memorandum, which clearly disclosed the risk that the Internal Revenue Service could disallow tax deductions. Id.