The opinion of the court was delivered by: DICKINSON R. DEBEVOISE
DEBEVOISE, District Judge
II. JURISDICTION AND VENUE
1. Targeting Prospective Lot Purchasers
3. Purchaser Defaults and GDC Recycling of Lots
B. THE ALLEGED PARTICIPANTS IN THE SCHEME
2. The Inside Director Defendants and Director Defendants
3. The Financing Defendants
4. The Mortgagee Defendants
5. The Lot Contract Defendants
A. MOTION TO DISMISS UNDER RULE 12(b)(2)
B. MOTIONS TO DISMISS UNDER RULE 12(b)(6)
2. Interstate Land Sales Full Disclosure Act (Count III)
a. Aider and Abettor Liability under the Land Sales Act
b. Disposition of Motions to Dismiss
c. Statute of Limitations
d. Summary of Count III Rulings
b. The Revised RICO Allegations
i. Primary Liability under the Revised RICO Allegations
ii. Aider and Abettor Liability under the Revised RICO Allegations
c. Statute of Limitations
4. Securities Laws (Count II)
a. The Instruments are Not Securities
b. Statute of Limitations
5. Common Law Fraud (Count VII)
Plaintiffs in this action are Jose and Rosa Rolo and Dr. William and Roseanne Tenerelli. They seek money damages and equitable relief on behalf of themselves and on behalf of others who purchased lots and/or houses in Florida from General Development Corporation ("GDC") and GDV Financial Corporation ("GDV") and who are members of the North Port Out-of-State Lot Owner Association (the "Association").
In general terms, the First Amended Complaint charges that GDC and its related corporations engaged in a nationwide fraudulent marketing scheme to induce plaintiffs and other members of the Association to purchase lots and houses in Florida at inflated prices. The defendants in this case are various corporate entities and individuals who, plaintiffs allege, participated in the scheme.
II. JURISDICTION AND VENUE
This court has subject matter jurisdiction pursuant to the Racketeer-Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1964; Section 1420 of the Interstate Land Sales Full Disclosure Act (the "Land Sales Act"), 15 U.S.C. § 1719; Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78aa; and the principles of pendent jurisdiction. Venue is proper pursuant to 28 U.S.C. § 1391, 15 U.S.C. § 1719 and 18 U.S.C. § 1965.
On August 9, 1989, the named plaintiffs filed a complaint commencing an action entitled Rolo v. General Dev. Corp., No. 89-3373 (D.N.J. 1989) ("Rolo I"), alleging that GDC had engaged in a fraudulent marketing scheme during the period of 1956 to 1987. The complaint in Rolo I listed more than 3,000 named plaintiffs, each of whom alleged that he or she was deceived by GDC in connection with the purchase of Florida real estate. On September 7, 1989, plaintiffs filed an amended complaint, in which they asserted the following causes of action: fraud and breach of contract; federal RICO violations; federal securities violations; violations of the Land Sales Act; breach of fiduciary duty; and violations of state RICO statutes of New Jersey, Connecticut, Florida, New York, Ohio and Pennsylvania.
On October 31, 1989, the Rolo I defendants filed three separate notices of motion: (1) for an order dismissing the complaint pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6); (2) for an order transferring the action to the United States District Court for either the Southern or Middle District of Florida; and (3) for an order severing from this action all of the named plaintiffs except Mr. and Mrs. Rolo pursuant to Fed. R. Civ. P. 21. In an opinion dated January 8, 1990, the court ruled only on defendants' Rule 9(b) motion to dismiss, and agreed with defendants that plaintiffs' complaint had failed to plead fraud with sufficient particularity. On January 19, 1990, the District Court ordered plaintiffs to submit a second amended complaint within 120 days. However, plaintiffs did not file their second amended complaint in Rolo I because on April 6, 1990, GDC filed a Chapter 11 bankruptcy petition. The court entered an order administratively terminating that action on April 16, 1990. See Rolo v. General Dev. Corp., et al., 949 F.2d 695, 698 (3d Cir. 1992) (wherein plaintiffs appealed the district court's decisions to stay both their damage suit pending defendants' bankruptcy and criminal proceedings and their application for a preliminary injunction).
On November 8, 1990, plaintiffs filed a complaint in the present action ("Rolo II"). While plaintiffs allege the same fraudulent marketing scheme and assert substantially the same causes of action as set forth in their prior suit,
Rolo II is different from Rolo I in three respects. First, unlike Rolo I, Rolo II is styled as a class action on behalf of members of the Association, a group comprised of more than 4,000 individuals who purchased property from GDC and its agents. Second, since all actions against GDC are currently stayed because of the Chapter 11 bankruptcy proceedings, the Rolo II Amended Complaint does not name GDC or GDV as defendants. See In re General Dev. Corp., et al., No. 90-12231 (Bankr. S.D. Fla.) (the "GDC/GDV Bankruptcy Action"); see also 11 U.S.C. § 362; Am. Compl. at P 37. Third, Rolo II names a number of new defendants.
Plaintiffs Jose and Rosa Rolo are residents of the State of New Jersey, and purchased Lot 26, Block 2297 at GDC's North Port location from GDC by contract dated February 27, 1974. (Am. Compl. at P 16.) Plaintiffs Dr. William and Roseanne Tenerelli are also residents of the State of New Jersey, and purchased a total of 12 lots and a house in various GDC developments from GDC and GDV between the years 1972 and 1978. (Id. at P 17.) All prospective class action plaintiffs are members of the Association, and all have purchased one or more lots and/or one or more houses in one or more GDC developments. (Id. at P 15.)
There are 35 named defendants. Plaintiffs divide defendants into several groups "for purposes of description only, and in order to more easily understand the events" as set forth in their Amended Complaint. (Am. Compl. at p. 7.) Some defendants are listed in more than one group because, as plaintiffs claim, "various defendants have played multiple roles in the conspiracy." Id.; see also id. at PP 18-69.
The Amended Complaint classifies defendants in the following groups: n2
City Investing Company Liquidating Trust
AmBase Corporation ("AmBase")
The Home Insurance Company ("Home")
Carteret Bancorp, Inc. ("Carteret Bancorp") ] referred to collect-
Carteret Savings Bank, FA ("CSB") n3 ] ively as "Carteret"
George Scharffenberger ("Scharffenberger")
Marshall Manley ("Manley")
Edwin Hatch ("Hatch")
Eben Pyne ("Pyne")
Inside Director Defendants:
Robert F. Ehrling ("Ehrling")
Reubin O'D. Askew ("Askew")
Howard J. Clark, Jr. ("Clark")
Charles J. Simons ("Simons")
Peter R. Brinckerhoff ("Brinckerhoff")
Southeast Bank, NA ("S.E. Bank")
PaineWebber, Inc. ("PaineWebber")
Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch")
Prudential Insurance Company of America ("Prudential")
National Bank of Canada ("NBC")
Citicorp Real Estate, Inc. ("Citicorp")
First National Bank of Boston ("Boston")
Federal National Mortgage Association ("Fannie Mae")
Federal Home Loan Mortgage Corporation ("Freddie Mac")
Chase Federal Bank, FSB ("Chase")
Citizens and Southern Trust Company (Florida), N.A. ("C&S Trust")
Secor Bank, FSB ("Secor")
Oxford First Corp. and Oxford Finance Companies, Inc.
Greyhound Financial Corporation ("Greyhound")
StanChart Business Credit, Inc. ("StanChart")
Lloyds Bank, PLC ("Lloyds")
Harbor Federal Savings and Loan Association ("Harbor")
Defendants 1-10 are persons and/or companies unknown to plaintiffs but who are believed to have joined or aided and abetted the conspiracy alleged in the Amended Complaint.
Plaintiffs do not include defendants Cravath Swaine & Moore ("Cravath") or David G. Ormsby ("Ormsby") in any of these group classifications.
n2 For uniformity's sake, I shall refer to defendants in these same groups throughout this opinion. Out of fairness to defendants, however, I have renamed these groups as follows:
Amended Complaint Opinion
Control Conspirators City Defendants
Controlling Interlocking Directors Inside Director Defendants
GDC Director Conspirators Director Defendants
Financing Conspirators Financing Defendants
Mortgagee Conspirators Mortgagee Defendants
Lot Contract Conspirators Lot Contract Defendants
The following is an overview of the facts as presented in the Amended Complaint, and is not intended to be comprehensive. Specific facts pertinent to allegations against particular defendants or groups of defendants will be set forth in the appropriate portion of the Discussion section below.
According to plaintiffs, in or about 1957 GDC, together with "others," formulated a plan and scheme to defraud lot and house purchasers. (Am. Compl. at P 70.)
In or about 1977 City Investing Company ("City") adopted a corporate plan to purchase, subdivide, market and finance the sale of raw acreage in Florida. Pursuant to such plan City acquired an ownership interest in GDC and at all times thereafter GDC was under the control of City and the City Defendants. (Am. Compl. at P 5.)
Thus, all allegations against GDC and GDV, its wholly owned mortgage subsidiary, are asserted against the City Defendants.
GDC purchased large tracts of raw, undeveloped, almost worthless rural land totalling more than 1,000 square miles at various locations in Florida,
(id. at P 73.), platted and subdivided the tracts, and made extensive improvements to only a small core of the tract to produce a "model area." (Id. at P 72.) These model areas were used to persuade prospective purchasers that GDC had an existing intent to develop the rest of the tract similarly. (Id. at P 74.) Moreover, GDC even provided skeletal improvements such as cutting canals and roads outside the model areas to portray the picture of a planned development and burgeoning community. (Id. at PP 72(a), 74.)
Plaintiffs allege that the City Defendants and GDC had no present intent to develop the tracts beyond the "model area" because GDC typically had not acquired the requisite building and municipal permits, (id. at 76), and because GDC was operating at a loss due to the construction and maintenance costs of the "model areas." (Id. at 75.)
In exchange for the lot, each purchaser executed a contract/non-recourse note pursuant to which he or she was required to make monthly payments. (Id. at P 109.) Plaintiffs allege that these contract/notes were securities within the meaning of the 1934 Act. (Id.) GDC would then package its homesite contract receivables into pools that it could sell to others, and obligated itself to replace defaulted contracts with performing contracts. (Id. at P 111.) GDC and the Lot Contract Defendants did not acquire the contracts/notes in a normal commercial transaction whereby the income would be derived from the interest payments. (Id. at P 113.) Instead, the recycling of lots as described below was relied on to generate a profit. (Id.) Similarly, plaintiffs claim that mortgages issued by house purchasers were also securities within the meaning of the 1934 Act. (Id. at P 139.)
1. Targeting Prospective Lot Purchasers
GDC identified prospective purchasers nationwide and in foreign countries, (id. at P 72(b)), by telephone, mailings and media advertising. (Id. at P 81.) According to plaintiffs, GDC mostly preyed upon individuals who would be particularly vulnerable to its scheme, including those who spoke English only as a second language.
(Id. at P 80.) To persuade these individuals to buy, GDC resorted to high-pressure sales tactics and false sales presentations. (Id. at P 72(c).) Prospective purchasers were invited to attend local standardized sales presentations which were frequently labeled "investment seminars." (Id. at P 82.) These presentations were usually held in hotel ballrooms where the prospective purchasers were treated to meals, liquor and prizes. (Id.) Seating was carefully arranged so that prospective purchasers were always accompanied by a GDC salesperson. (Id. at P 83) GDC provided its salespeople with sophisticated sales training, (id. at P 86), which even specified a salesperson's body movements. (Id. at P 87.)
Most importantly, the prospective purchasers were unaware that each time the value of the lots and houses was referred to by GDC, the amount being quoted was really GDC's arbitrarily assigned sales price and not the fair market value of the property. Beginning in 1985, and in order to give the impression that the "appreciation" was based on fair market value, GDC inflated and regularly increased the amount it collected from lot owners supposedly as property tax assessments when in fact the property taxes had not increased. (Id. at P 161.) For example, GDC would collect $ 275 per year in "taxes" when the actual allotted tax was only $ 16. (Id. at P 162.) If an owner defaulted, GDC simply kept all the "tax" money that had been paid.
Similar techniques were employed for house sales. GDC targeted almost exclusively lot owners in its efforts to sell houses. (Id. at P 116.) When GDC believed that a lot owner was financially qualified to buy a GDC house, (id. at P 121), GDC frequently sponsored promotional trips to Florida. (Id. at P 119.) These trips were planned by GDC because it knew that most lot owners did not live in Florida and were not familiar with the area's housing market. (Id. at P 116.) While the prospective house purchasers were on these promotional trips, GDC carefully monitored their activities to prevent them from becoming aware of the true market value of houses in the contiguous geographic regions, even though GDC promoted these trips as an opportunity for a prospective purchaser to make an informed decision. (Id. at P 122, 123.) GDC employed a group of hotels which would screen incoming telephone calls to these prospective house purchasers (to prevent independent realtors from speaking with the prospective purchasers), and would remove all newspapers and non-GDC advertising materials from the hotel. (Id. at P 123.) GDC did not want it revealed that a comparable house in Florida was selling 50% to 75% below GDC's selling price. (Id. at P 126.)
GDC promoted a "One-Stop Shopping" program, whereby GDV would provide the mortgage, Florida Home Finders, Inc. ("FHF") (GDC's rental agent subsidiary) would provide rental services and Community Title Agency ("CTA") (a wholly owned subsidiary of GDC) would conduct all closings and title conveyances, eliminating the purchaser's need to have his or her own attorney at the closing. (Id. at PP 123, 125, 127.) Prospective house purchasers were advised that if they did not obtain their mortgage from GDV, they would have to pay in cash. (Id. at P 127(b).) If a prospective house purchaser attempted to secure independent financing, GDC denied independent appraisers access to the property, thus making independent mortgage financing almost impossible. (Id. at P 127(d).)
GDC also formulated other plans to further its efforts to sell houses. For example, GDC sponsored a "lot exchange" program which permitted a current GDC lot owner (who had not yet paid the full balance due on the lot) to acquire a new lot and house (a "package") by giving him or her credit for both the money already paid toward the old lot and for a portion or all of any purported "appreciation" in the price of the old lot, as measured by GDC's inflated sales price. (Id. at P 133.) The leftover balance on the package's price was to be paid by cash and a GDV mortgage. (Id.) The old lot was then placed into GDC's inventory and resold. (Id.) Similarly, a "lot swap" program was available whereby GDC re-acquired the old lot when the balance had already been paid in full. (Id. at P 134.) Like the "lot exchange" program, the purchaser got a credit equal to a portion or all of the original GDC sales price plus some part of the "appreciation" towards the purchase price of a package. (Id. at P 134.) Again, the remainder of the balance was paid by cash and a GDV mortgage, and the old lot returned to GDC inventory for resale. (Id.)
3. Purchaser Defaults and GDC Recycling of Lots
Since most of the lots were purchased primarily as investments, and most of the purchasers lacked the money to visit their lots, GDC anticipated that most of the prospective purchasers would never discover the fraud, that most of the loans would end in default, that GDC could then recycle the lot for resale at a higher price to another purchaser, and that this repeated recycling of lots would postpone the need to commence the improvement and development of the "communities" indefinitely. (Id. at PP 92-93, 95.)
Lots were sold with 10 1/2- to 12 1/2-year payment schedules. (Id. at P 88.) GDC typically retained title and possession of a lot unless the entire purchase price was paid or separate arrangements were made with the parties financing the lot contract receivables. (Id.) The average lot contract down payment was 8.4% and the balance bore interest at 4.9% to 9%, depending on the amount of the down payment. (Id.)
To convince lot owners that their lots were increasing in value, GDC regularly announced publicly and via letters, brochures and appraisal cards, and at periodic status meetings, that lot prices had appreciated. (Id. at PP 100-101, 103.) For example, GDC suggested that a lot could be expected to lead to a 250% return on investment and that a purchase of a GDC lot was "an investment in an inflation proof growth." (Id. at P 104.) What GDC failed to reveal is that the quoted amounts were merely GDC's sales prices which were arbitrarily set and not reflective of the fair market value, and that 50% of the purchasers defaulted on their payments within the first two years. (Id. at P 102.)
These practices led to an investigation of GDC by the Federal Trade Commission (the "FTC") in the early 1980's, which culminated in a 1982 consent decree (the "FTC Consent Decree") in which GDC agreed to refrain from such practices. Pursuant to the FTC Consent Decree, GDC included disclaimer language in various written documents to lot purchasers -- language which plaintiffs allege to be false. (Id. at 107.) According to plaintiffs, the disclaimer language was substantially as follows:
HOMESITES ARE BEING OFFERED BY GENERAL DEVELOPMENT FOR FUTURE USE IN BUILDING A HOME AND NOT AS A BUSINESS INVESTMENT. PROFIT ON A RESALE CANNOT BE GUARANTEED AND SHOULD NOT BE ASSUMED.
Homesite prices are based on the cost of doing business, the fact that the offering is for extended terms over a period of years, and other factors. Such prices may not necessarily reflect the level of market prices of similar property sold by others on different terms.
THE PURCHASER SHOULD ASCERTAIN FOR HIMSELF THAT THE PROPERTY OFFERED MEETS HIS PERSONAL REQUIREMENTS AND EXPECTATIONS. MISUNDERSTANDINGS AS TO THE DESIRABILITY OF THE PROPERTY MAY ARISE WHEN THE PURCHASER FAILS TO UNDERSTAND THE NATURE OF THE PROPERTY OFFERED OR THE TERMS OF THE CONTRACT.
DO NOT SIGN UNLESS YOU HAVE READ THE OFFERING STATEMENT
(Am. Compl. at P 106) (citing GDC Florida Public Offering Statement (North Port) Rev. Nov. 21, 1986, at pp. 3, 8-9 (emphasis in original)). Plaintiffs contend that this disclaimer language is false primarily because GDC knew that the market and resale prices of GDC lots were materially lower than GDC sales ...