On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil No. 84-6124.
Before: GIBBONS, SLOVITER, and STAPLETON, Circuit Judges
Appellant Bernardo J. Penturelli purchased 28 fractional undivided working interests in the Addison Development, a coal mining operation in Pennsylvania. Claiming to have been defrauded in the sale, Penturelli brought this suit against twenty-five defendants, alleging causes of action under the federal securities law, the Racketeer Influenced and Corrupt Organization Act (RICO), and various state laws. The defendants include a law firm involved in the Addison Development, Spector, Cohen, Gadon & Rosen; plaintiff's accountants, Herr, Nicholas & Co.; the sublessor and developer, Ashley Mining Co., Inc.; the operating manager, Donald R. Sarp; the mining service contractors, including Bituminous Coals, Inc., and others connected with the investment opportunity.*fn1 The district court dismissed the action for failure to state a claim under either RICO or the securities laws and declined to exercise jurisdiction over the pendent claims. Penturelli v. Spector, Cohen, Gadon & Rosen, P.C., 603 F. Supp. 262 (E.D. Pa. 1985).*fn2
The basis for the court's dismissal of the RICO count was the absence of any allegations of "an inquiry different in kind from that occurring as a result of the predicate acts themselves" or of "defendants' prior criminal conviction on one of the predicate acts." Id. at 267. On appeal all parties now agree that the district court's dismissal of the RICO claim must be reversed because in Sedima, S.P.R.L. v. Imrex Company, Inc., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985), the Supreme Court squarely held that a RICO claims "is not deficient for failure to allege either an injury separate from the financial loss stemming from the alleged acts of mail and wire fraud, or prior convictions of the defendants." Id. at 3287. See also Zap v. Frankel, 770 F.2d 24 (3d Cir. 1985). Therefore, the only issue presented for decision is whether the "fractional undivided interest" purchased by Penturelli is a security within the meaning of the federal securities laws.
In reviewing the district court's dismissal of this action, we take the allegations of Penturelli's complaint, summarized below, as true.
In 1978, defendant Herr, Nicholas, Penturelli's accountant, encouraged him to invest in the Addison Development, an offering of a limited number of sublease rights in coal from specific seams in Addison Township, Somerset County, Pennsylvania. Thereafter, Penturelli was advised by defendant Spector, Cohen, Gadon & Rosen that investment in the Addison Development would result in significant tax benefits. Penturelli was given the Preliminary Private Placement Memorandum (hereafter Preliminary Memo), prepared by defendant Donald R. Sarp, the "Operating Manager" of the Addison Development, which described the investment opportunity.
The Preliminary Memo*fn3 offered to sell sixty fractional undivided working interests in the Addison Development for $67,500 per share to a total of no more than thirty-four persons (subscribers). The coal-bearing land had been acquired in 1978 for less than $100,000 by Bituminous Coals, Inc., a defendant, and ownership had devolved to the Ashley Mining Company, Inc. (AMCI), also a defendant, which had obtained a sublease through a series of transactions. Subscribers were required to sublease the land from AMCI by a document which is described in the Preliminary Memo as ". . . in actually, a series of separate agreements with each co-owner conveying to each co-owner a fractional undivided working interest in the Coal Property." App. at 61a. For the sublease, which was for a ten (10) year term with automatic annual renewal until all mineable coal was produced, AMCI received a non-refundable minimum annual royalty of $300,000 in cash and $550,000 in non-recourse promissory notes. Each subscriber was also required to execute simultaneously (1) a development contract with AMCI, (2) a mining services contract with Bituminous Coals, (3) a coal sales agreement with defendant Fetterolf Mining, Inc., and (4) a joint operating agreement with Donald R. Sarp, the accountant for Bituminous Coals, designating him as the Operating Manager.
The Preliminary Memo explained that the participants would have certain rights over the conduct of the mining and marketing operations of the development. These rights and the percentage of interests needed to exercise them are set forth in the Joint Operating Agreement and include the following:
(1) The right to call a meeting of co-owners (25% of interests);
(2) The right to terminate the Joint Operating Appendix (50% of interests);
(3) The right to object to the Operating Manager's exercise of his specifically enumerated ...