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Rolo v. City Investing Co. Liquidating Trust

August 31, 1998

JOSE AND ROSA ROLO; AND DR. WILLIAM AND ROSEANNE TENERELLI
v.
CITY INVESTING COMPANY LIQUIDATING TRUST; AMBASE CORPORATION; CARTERET BANCORP, INC.; FEDERAL DEPOSIT INSURANCE CORPORATION, AS SUCCESSOR TO RESOLUTION TRUST CORPORATION, IN ITS CAPACITY AS RECEIVER OF CARTERET SAVINGS BANK, FA; THE HOME INSURANCE COMPANY; GEORGE T. SCHARFFENBERGER; MARSHALL MANLEY; EDWIN I. HATCH; EBEN W. PYNE; REUBIN O'D. ASKEW; HOWARD L. CLARK, JR.; CHARLES J. SIMONS; PETER R. BRINKERHOFF; DAVID F. BROWN; ROBERT F. EHRLING; CRAVATH, SWAINE & MOORE; DAVID G. ORMSBY; FEDERAL DEPOSIT INSURANCE CORPORATION, IN ITS CAPACITY AS RECEIVER OF SOUTHEAST BANK, NA; PAINEWEBBER INCORPORATED; MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; THE PRUDENTIAL INSURANCE COMPANY OF AMERICA; NATIONAL BANK OF CANADA; CITICORP REAL ESTATE, INC.; FIRST NATIONAL BANK OF BOSTON; FEDERAL NATIONAL MORTGAGE ASSOCIATION; FEDERAL HOME LOAN MORTGAGE CORPORATION; CHASE FEDERAL BANK, FSB; CITIZENS AND SOUTHERN TRUST COMPANY (FLORIDA), NA; REGIONS BANK OF LOUISIANA, AS SUCCESSOR TO SECOR BANK, FSB; OXFORD FIRST CORP.; THE OXFORD FINANCE COMPANIES, INC.; LASALLE BUSINESS CREDIT, INC.; AS SUCCESSOR TO STANCHART BUSINESS CREDIT, INC.; HARBOR FEDERAL SAVINGS AND LOAN ASSOCIATION; GREYHOUND FINANCIAL CORPORATION; LLOYDS BANK PLC; AND JOHN DOES 1-10 JOSE ROLO, ROSA ROLO, DR. WILLIAM TENERELLI, AND ROSEANNE TENERELLI, AND PROPOSED INTERVENOR PLAINTIFFS DOMINICK J. CAPEZZA, ESTRELITA CAPEZZA, JACQUES CORMIER, ANITE CORMIER, STEVEN KALINOWSKI, BERNARD KALINOWSKI, CHARLES R. JUDGESLINO, AND CLARISSE JUDGESLINO, APPELLANTS IN 95-5768 PROPOSED INTERVENOR PLAINTIFFS DOMINICK J. CAPEZZA, ESTRELITA CAPEZZA, JACQUES CROMIER, ANITE CORMIER, STEVEN KALINOWSKI, BERNARD KALINOWSKI, CHARLES R. JUDGESLINO, AND CLARISSE JUDGESLINO, APPELLANTS IN 96-5128



Becker, Nygaard and Roth, Circuit Judges

The opinion of the court was delivered by: Roth, Circuit Judge

(Caption amended per Clerk's 11/27/95, 1/3/96 & 2/29/96 orders)

On Appeal from the United States District Court for the District of New Jersey

(D.C. Civil Action No. 90-cv-04420)

Argued September 16, 1996

(Opinion Filed August 31, 1998)

OPINION OF THE COURT

This case arises from the sale of residential realty in Florida. Plaintiffs, Jose and Rosa Rolo and Dr. William and Rosanne Tenerelli, purchased lots and homes from General Development Corporation ("GDC") and its subsidiary GDV Financial, Inc. ("GDV"). They claim that they were deceived by a fraudulent marketing scheme which induced them to purchase residential lots and homes at inflated prices. This case and its related proceedings have a long and convoluted history. The present appeal is the third time this Court has considered this case.

Plaintiffs originally filed suit in 1989 in the United States District Court for the District of New Jersey alleging claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq (RICO), the Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1701 et seq ("Land Sales Act"), federal securities laws, and common law fraud against thirty-five named defendants. They also sought to represent a putative class consisting of all persons who purchased houses or homesites from GDC or GDV over the period from 1957 to 1990 and who are members of the North Port Out-of-State Lot Owners Association ("NPA").

The district court dismissed plaintiffs' claims in their entirety. Rolo v. City Investing Co. Liquidating Trust, 845 F. Supp. 182 (D.N.J. 1993). The court held that plaintiffs' RICO claims were time-barred; plaintiffs had failed to plead adequately the existence of a RICO conspiracy; and they had failed to satisfy the essential requirements for pleading aider and abettor liability under RICO. Although the court found that plaintiffs' complaint stated claims under the Land Sales Act for aiding and abetting against some defendants, but not others, all of their Land Sales Act Claims were time barred. The district court dismissed plaintiffs' Securities Act claims on the grounds that the sales contracts and mortgage notes were not securities within the meaning of § 10 of the 1934 Act or Rule 10b-5. Having dismissed all of plaintiffs' federal claims, the court declined to exercise pendent jurisdiction over plaintiffs' common law fraud claims. Finally, the district court denied plaintiffs' Motion to file a Second Amended Complaint that would have restructured and reformulated their action. Following a remand for reconsideration of plaintiffs' claims in light of our decision in Jaguar Cars, Inc. v. Royal Oaks Motor Car Co., 46 F.3d 258 (3d Cir. 1995), the district court reaffirmed its dismissal of each of plaintiffs' claims and its denial of further leave to amend the complaint. Rolo v. City Investing Co. Liquidating Trust, 897 F. Supp. 826 (D.N.J. 1995).

The present appeal is from the district court's decision on remand. Plaintiffs assert that the district court erred in dismissing their RICO claims and abused its discretion by denying them leave to amend their complaint. We conclude that there were adequate grounds to dismiss each of plaintiffs' RICO claims and that the district court did not abuse its discretion by denying plaintiffs further leave to amend their complaint. Accordingly, we will affirm the district court's decision on remand in its entirety.

I. BACKGROUND

A. The Fraudulent Scheme

Plaintiffs allege that GDC and GDV engaged in a fraudulent marketing scheme to sell real estate in violation of several federal criminal and civil statutes. The First Amended Complaint alleges that GDC improved only a small portion of the 1,000 square mile tract of land that it owned in Florida and that it had no intention of developing the land further. Prospective purchasers were told, however, that the entire tract would be developed.

According to plaintiffs, GDC targeted unsophisticated purchasers, particularly those who spoke English only as a second language. Prospective purchasers were invited to attend lavish "investment seminars" at which GDC represented that the value of the real estate continually appreciated, that there was a good resale market for the lots and houses, and that the real estate was an excellent investment. The Complaint further alleges that much information was concealed from prospective purchasers, including the very low resale value of the lots, the artificial nature of the original sale prices of the lots, and the fact that most purchasers defaulted within two years, allowing GDC to cancel their contracts and resell the same lots over and over again. According to plaintiffs, similar tactics were also used to sell homes to those who already owned lots.

B. The Defendants

The Amended Complaint names thirty-five defendants and classifies them according to the nature of their participation in the allegedly fraudulent scheme, placing some defendants in more than one category. The district court adopted this classification and divided the defendants into six categories:*fn1 City Defendants, Inside Director Defendants, Director Defendants, Financing Defendants, Mortgagee Defendants and Lot Contract Defendants. The Complaint did not specifically include the lawfirm Cravath, Swaine & Moore ("Cravath") or David Ormsby, a Cravath partner, in any of these categories. The Complaint alleges that in rendering legal services to GDC and GDV, Cravath and Ormsby assisted the defendants in concealing their fraudulent scheme. Ormsby also acted as GDC's secretary from 1985-1988.

The City Defendants include City Investing Company, later City Trust, ("City"), its subsidiaries and several of its directors.*fn2 The Complaint alleges that City had an ownership interest in and controlled GDC. After the sales fraud was initially discovered, the City Defendants attempted to distance themselves from GDC. With the assistance of Cravath, City Investing sought to disassociate itself from GDC by transferring itself into a liquidating trust, City Trust. The City Defendants and Cravath arranged for City to sell 62% of GDC stock to the public and retain 38% in City Trust for later distribution. GDC also borrowed in excess of $100 million,*fn3 which was remitted to City as a dividend.

The Inside Director Defendants include Edwin Hatch, Marshall Manley, Eben Pyne and George Scharffenberger, individuals who served as directors of GDC and City Trust for various periods from September 1985 onwards. The Director Defendants, Reubin O'D. Askew, Howard L. Clark, Jr., Charles J. Simons, and Peter R. Brinkerhoff, are persons who served as "outside directors" of GDC for various periods dating from September 1985. Also included in this category are David F. Brown and Robert F. Ehrling, who served as both officers and directors of GDC during this period. Both Brown and Ehrling were convicted of criminal charges in connection with their involvement in the fraudulent scheme. Their convictions were subsequently reversed on appeal. See infra. The Complaint alleges that the Inside Director Defendants along with the Director Defendants controlled the City Defendants and used them in furtherance of the fraudulent scheme.

The Financing Defendants include banks and financial institutions,*fn4 who provided a variety of financial services to the other defendants. Some, for example, underwrote the $125,000,000 in notes issued by GDC in its 1988 public offering. Others loaned GDC money and extended credit to the company. Another "warehoused" new GDV mortgages until they could be pooled and sold, while also lending GDV money using these mortgages as collateral. The Complaint alleges that these defendants knew or should have known of GDC's sales fraud.

The mortgagee defendants, including the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") and a number of private institutions,*fn5 purchased pools of mortgages on GDC houses. The Complaint alleges that these defendants knew or recklessly disregarded information that the GDC mortgages were overvalued. The Complaint also alleges that Fannie Mae and Freddie Mac stopped purchasing GDV mortgages in 1985 because GDV's practices did not meet their standards, but that these defendants permitted GDV to repurchase the mortgages through a confidential agreement. In addition, they did not strip GDV of its privileges to sell mortgages under the Federal Home Mortgage Act.

The Lot Contract Defendants,*fn6 purchased pools of monthly payments due to GDC from the sale of residential property in Florida. Some of these defendants authorized GDC to service their contracts, including collection from and negotiations with the lot owners. Others collected their payments from owners directly. Under GDC's agreements with these defendants, substitution pools were used as a security. When a contract or note went into default, GDC would replace it with a performing contract. Thus, these defendants incurred no losses from defaults and had no incentive to ensure that loans reflected the true value of the property. The Complaint alleges that these defendants had conducted extensive financial review of GDC and knew or should have known of GDC's fraudulent scheme, but chose to remain silent in order to protect their own interests.

The defendants must also be divided into two additional categories, the primary and secondary defendants. The primary defendants are those defendants who, plaintiffs allege, participated in the operation and management of the affairs of GDC through a pattern of racketeering activity. The primary defendants are City Trust, George Scharffenberger, Marshall Manley, Edwin Hatch, Eben Pyne, David F. Brown, and Robert F. Ehrling. All of the remaining defendants are categorized as secondary defendants, who, it is alleged, aided and abetted the pattern of racketeering activity devised and controlled by the primary defendants. The plaintiffs allege that the actions of the secondary defendants are also in violation of RICO.

C. Procedural History

Plaintiffs filed their original complaint on August 8, 1989, in the United States District Court for the District of New Jersey against GDC and its subsidiary, GDV, asserting claims under RICO, § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the Land Sales Act, various state RICO statutes, and breach of fiduciary obligations. On September 7, 1989, plaintiffs filed an amended complaint, adding claims for breach of contract and fraud.

Defendants moved to dismiss the First Amended Complaint, and in January 1990 the district court dismissed the case in its entirety finding that plaintiffs had failed to plead fraud with the particularity required by Fed. R. Civ. P. 9(b). Plaintiffs were given 120 days in which to file a second amended complaint. Before plaintiffs filed their amended complaint, on April 16, 1990, the case was administratively terminated because GDC had filed a petition for bankruptcy under Chapter 11.

In November 1990, plaintiffs filed the present action. As in their earlier action, plaintiffs allege that the defendants participated in a fraudulent marketing scheme in violation of several federal criminal and civil statutes. *fn7 Although plaintiffs listed GDC and GDV as defendants in this action, they did not serve either company with a copy of the summons or the complaint. Rolo v. General Development Corp., 949 F.2d 695, 698 (3d Cir. 1991). Plaintiffs asserted before the district court their intention "to delete all references to GDC and GDV as defendants." Rolo v. General Dev. Corp., Civ. Action No. 90-4420, slip op. at 15 (D.N.J. April 26, 1990). Accordingly, neither the district court nor this Court, in its 1991 decision, treated GDC or GDV as defendants in this case. Rolo, 949 F.2d at 698.

About two weeks after the filing of this case, plaintiffs filed a proof of claim with the bankruptcy court, on behalf of all members of the NPA, a group of more than 5,000 individual who had purchased property from GDC and its agents.

Id.

In support of their claim, plaintiffs reiterated the allegations detailed in their complaint, which was attached to their proof of claim.

Id.

During the bankruptcy proceedings, the bankruptcy Judge denied class treatment of plaintiffs' claims and approved settlements in which over 60,000 homesite and house purchasers participated. See In re GDC, No. 90-12231-BKC-AJC, slip op. at 1, 6 (Bankr. S.D. Fla. Aug. 16, 1991).

Proceedings in this case were stayed by the district court from December 1990 until March 1993, pending Disposition of GDC and GDV's bankruptcy proceedings. Rolo , 949 F.2d at 699. In April 1991 the district court denied reconsideration of its stay order and "further directed that the action be stayed on the terms set forth in the December Order pending the resolution of the criminal cases against Brown and Ehrling."*fn8

Id.

The following month, the district court also stayed plaintiffs' request for a preliminary injunction to bar Ambase and City Investment from liquidating and distributing their assets.

Id.

These stay orders were the subject of the first appeal ...


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