were issued by, inter alia, S.E. Bank and NBC. (Id. at P 213.)
In addition to its role as a Financing Defendant and a stockholder of GDC, Prudential purchased or originated mortgages from GDV on properties sold by GDC allegedly with the knowledge that the mortgages had been fraudulently obtained to continue to support the fraudulent sales scheme. (Id. at P 218.)
5. The Lot Contract Defendants
Beginning in or about 1978, the monthly payments due to GDC from plaintiffs and others on their lot contract/notes were pooled (into "lot contract pools") and resold to the Lot Contract Defendants. (Id. at P 219.) Approximately 70% of all lot contract/notes were sold between 1986 and 1990. (Id.) As of April 25, 1990, the outstanding aggregate principal balance of these lot contract/notes was approximately $ 783,514,495. (Id. at P 220.) GDC was only able to place 26%, or approximately $ 203,713,768, of the lot contract/notes into pools. (Id.) As security, GDC was required to maintain groups of additional contract/notes which were not in default for each Lot Contract Defendant ("substitution pools"). (Id.) As of April 1990 these substitution pools had an aggregate face value of $ 54,846,014. (Id.)
GDC used two methods to service the lot contract pools. (Id. at P 222.) In the first method, the Lot Contract Defendants acted in a fashion similar to the Mortgagee Defendants. The Lot Contract Defendants authorized GDC to service their contracts, collect and disburse on their behalf and negotiate with the respective lot owners. (Id.) In the second method, utilized by Oxford and Greyhound, payments were made by the lot purchasers directly to the Lot Contract Defendants. (Id. at P 223.) Under both methods, substitution pools were used as security, and when a sold lot contract/note went into default, GDC would take it back and replace it with a performing contract from that Lot Contract Defendant's substitution pool. (Id. at P 224.) However, some or all of the Lot Contract Defendants required additional security such as (a) an unconditional guarantee by GDC of the payment obligations including a lien upon the assets and/or capital stock of GDC, (b) the issuance of letters of credit, (c) an assignment of GDC's rights to withdraw monies under certain of its escrow agreements, and (d) the placement in trust of deeds to the lots underlying the respective pools. (Id. at P 225.)
Plaintiffs allege that all Lot Contract Defendants performed a full business investigation which included a review of GDC's financial statements and operating cash flows, analysis of property location and an on-site property inspection. (Id. at P 226.) Merrill Lynch also performed due diligence in connection with its role as an underwriter of various GDC financings. (Id. at P 227.) Oxford had extensive experience in both finance services and land and community development. (Id. at P 228.) Before 1985, Oxford was involved in a land development project in Florida of over 7,000 lots. (Id.) In addition, both prior to its purchase of GDC lot contract pools and subsequently, Oxford has represented to lot purchasers in its pools that it "intensely investigate[s] every facet of a proposed portfolio purchase" and that it "never purchase[s] mortgages where the customer pays an interest rate in excess of what [Oxford] considers[s] to be equitable." (Id. at P 229) (citing Oxford First Corporation, 1985 Annual Report, at 2.)
Plaintiffs claim that the Lot Contract Defendants should have been aware of GDC's fraudulent scheme when they discovered that Fannie Mae and Freddie Mac were no longer accepting GDV-originated mortgages. (Id. at P 236.) According to plaintiffs, GDC's knowledge is imputable to each Lot Contract Defendant based on the agency relationship GDC had to the Lot Contract Defendants. (Id. at P 230.) Finally, plaintiffs allege that the Lot Contract Defendants remained silent because disclosure of the scheme would make repayment to them impossible and render their collateral worthless. (Id. at P 235.)
6. Cravath and Ormsby
Cravath acted as general counsel to GDC, GDV, and the City Defendants City Trust, AmBase, Home and Carteret. (Id. at P 39.) Ormsby was a partner of Cravath. (Id. at P 40.)
Cravath acted as the principal drafter of various prospectuses, loan documents for public and private financings, and public disclosure documents. (Id. at P 298.) Cravath and Ormsby prepared GDC's regulatory filings, formulated GDC's public statements, and represented GDC in connection with government investigations and grand jury proceedings. (Id.) In addition, Cravath defended GDC and GDV in actions instituted by disgruntled lot and house owners. (Id.) GDC, GDV and the City Defendants were collectively one of Cravath's largest clients and generated millions of dollars in legal fees for Cravath. (Id.)
Ormsby was Secretary of GDC from 1985 to 1988. (Id. at P 299.) Plaintiffs allege that in the course of his duties Ormsby and Cravath acquired actual knowledge of, had a duty to acquire knowledge of, and/or recklessly disregarded knowledge of the GDC scheme. (Id.) When Cravath issued opinions, prepared contracts and drafted disclosure documents for GDC and GDV, Cravath and Ormsby knowingly disregarded and omitted and/or obfuscated material facts known to them concerning the fraudulent scheme. (Id. at P 301.) Cravath and Ormsby knew that the independent certified public accountants for GDC and GDV did not know of or recklessly disregarded material facts necessary to fairly present their financial condition since 1985. (Id. at P 310.) According to plaintiffs, Cravath and Ormsby were aware that having Cravath's name associated with GDC and GDV lent credibility to the companies and their proposed transactions, (id. at PP 301-02), and that disclosure of the fraudulent sales scheme would endanger the viability of the scheme and Cravath's ability to obtain its sizable legal fees paid by GDC and GDV.
Cravath served as general counsel to and advised both City and GDC in connection with the City Dividend and the 1985 ML City Dividend Financing. (Id. at P 303.) Representing both parties created a conflict of interest because GDC failed to have independent counsel. (Id. at P 304(g).) Given that Cravath was acting as a fiduciary to both City and GDC, it was obligated to advise both parties according to their own best interest, not favor one party over the other and not allow one client to be used as an instrumentality for the benefit of the other. (Id. at P 303.)
In connection with the 1988 S.E. Bank Private Placement Certificates, GDC and Cravath, with the assistance of the Inside Director Defendants and the Director Defendants, pressured the underwriter to omit and hide from disclosure material information that the values of GDC houses and lots were lower than the sales prices, and that GDC sales prices were based on non-conforming appraisals. (Id. at P 311.) Cravath knew or recklessly disregarded the fact that truthful disclosure would make impossible or impair GDC's ability to sell the certificates or result in raised financing costs due to investors requesting additional security. (Id.) When Cravath was unable to omit similar information from the disclosure documents prepared in connection with the 1989 C&S Public Issue Certificates, it drafted disclosure language in a manner intended to hide and obfuscate these material facts by claiming that the facts resulted from differences in judgment and were based on insufficient data -- even though Cravath knew these were material misrepresentations. (Id. at PP 312-13.) In 1990, after the GDC bankruptcy and indictment, GDC counsel admitted for the first time that the cost of the required improvements and amenities to render the lots usable exceeded the GDC sales price for the lot. (Id. at P 315.) This information also was omitted from the documents presented in connection with these offerings. (Id. at P 316.)
All defendants except Carteret Bancorp and CSB (see supra note 3) move to dismiss the Amended Complaint under Rule 12(b)(6). Additionally, City Trust, AmBase, Scharffenberger, Manley, Hatch and Pyne collectively move to dismiss under Rule 12(b)(2). The following discussion addresses each motion.
A. MOTION TO DISMISS UNDER RULE 12(b)(2)
Defendants Scharffenberger, Manley, Hatch and Pyne jointly move to dismiss Counts III and VII of the Amended Complaint (alleging violations of the Land Sales Act and common law fraud) for lack of personal jurisdiction pursuant to Fed. R. Civ. P. 12(b)(2). These defendants and plaintiffs agree that the district court's jurisdiction over defendants with regard to the state common law fraud claim and the Land Sales Act claim is based solely on the doctrine of pendent personal jurisdiction. Plaintiffs effectively concede, then, that personal jurisdiction is entirely dependent on the viability of their RICO and securities fraud claims.
The Judicial Improvements Act of 1990 statutorily codified (at 28 U.S.C. § 1367) the doctrines of pendent claim, pendent party, and ancillary jurisdiction as "supplemental jurisdiction." The statute provides in pertinent part:
(a) . . . in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.
28 U.S.C. § 1367(a). The supplemental jurisdiction statute became effective on December 1, 1990, and applies prospectively only to civil actions commenced after the effective date. See Pub. L. No. 101-650, Title III, § 310(c), 104 Stat. 5114 ("The amendments made by this section shall apply to civil actions commenced on or after the date of the enactment of this Act [December 1, 1990]"); Loeber v. Bay Tankers, Inc., 924 F.2d 1340, 1345 n.3 (5th Cir. 1991) ("Because the instant action commenced be tore the enactment of the Judicial Improvements Act on December 1, 1990, that act does not apply to the instant case"). The Judicial Improvements Act does not apply to the present case because the original complaint was filed on November 8, 1990 -- 22 days before the Act became effective. Even if this Rule 12(b)(2) motion were decided not under the doctrine of pendent personal jurisdiction but under the supplemental jurisdiction statute, the result would be the same, as the statute provides that "the district courts may decline to exercise supplemental jurisdiction over a claim . . . if . . . (3) the district court has dismissed all claims over which it has original jurisdiction. . . ." 28 U.S.C. § 1367(c)(3).
Counts I and II (alleging violations of RICO and federal securities laws) are dismissed, as discussed infra, as to all defendants moving under Rule 12(b)(6). Accordingly, the doctrine of pendent personal jurisdiction does not justify the exercise of personal jurisdiction in this case, and defendants' motion to dismiss Counts III and VII will be granted.
The New Jersey long-arm statute
extends to the limits of Constitutional due process protection. Carteret Sav. Bank, F.A. v. Shushan, 954 F.2d 141, 145 (3d Cir.), cert. denied, 121 L. Ed. 2d 29, U.S. 113 S. Ct. 61 (1992). The Third Circuit has stated that "[a] federal court may assert personal jurisdiction over a nonresident of the state in which the court sits to the extent authorized by the law of the state." Provident Nat'l Bank v. California Fed. Sav. and Loan Ass'n, 819 F.2d 434, 436 (3d Cir. 1987).
The Due Process Clause requires that the defendant possess sufficient minimum contacts with the forum state such that the court's exercise of personal jurisdiction does not offend "the traditional notions of fair play and substantial justice." International Shoe Co. v. Washington, 326 U.S. 310, 316, 90 L. Ed. 95, 66 S. Ct. 154 (1945); see also Jacobs v. Lakewood Aircraft Serv., Inc., 493 F. Supp. 46 (E.D. Pa. 1980); Watson McDaniel Co. v. National Pump and Control, Inc., 493 F. Supp. 18 (E.D. Pa. 1979); Giangola v. Walt Disney World Co., 753 F. Supp. 148, 154-56 (D.N.J. 1990). The central concern is the "predictability and fairness of the court taking jurisdiction over the defendant." Giangola, 753 F. Supp. at 155.
However, Fed. R. Civ. P. 4(f), which sets the territorial limits within which service of process will be effected upon a party, states:
all process other than a subpoena may be served anywhere within the territorial limits of the state in which the district court is held, and when authorized by statute of the United States or by these rules, beyond the territorial limits of that state. . . . (emphasis added).
This rule extends the district court's ability to obtain personal jurisdiction over a defendant beyond the boundaries of the state in which the district court sits by authorizing nationwide service of process by federal statutes or rules. "Where Congress specifically authorizes nationwide service of process, a Federal District Court's jurisdiction encompasses the boundaries of the United States, and due process requires only a defendant in a federal suit have minimum contacts with the United States." Ginsburg v. Faragalli, 776 F. Supp. 806, 807 (S.D.N.Y. 1991) (citations omitted); see also Robinson v. Penn Cent. Co., 484 F.2d 553, 555-56 (3d Cir. 1973) (the 1934 Act).
Both RICO and the 1934 Act contain provisions for nationwide service of process. See 18 U.S.C. §§ 1965 (b), (d) and 15 U.S.C. § 78aa. The Land Sales Act contains no such provision, however, and common law fraud claims are traditionally state claims ungoverned by federal law because there is no general federal common law. It is clear, then, that there is no basis for exercising jurisdiction over Scharffenberger, Manley, Hatch and Pyne for the claims of either common law fraud or violations of the Land Sales Act in the absence of any independent basis for the exercise of jurisdiction under the New Jersey long-arm statute, unless these claims can be heard as pendent to the RICO and 1934 Act claims. As the RICO and 1934 Act claims are dismissed as discussed infra, there are no federal claims on which plaintiffs may hang their fraud or Land Sales Act claims.
Under Fed. R. Civ. P. 12(b)(2), a complaint must be dismissed if it can be proved that the district court lacks personal jurisdiction over the defendant(s). However, under the doctrine of pendent claim jurisdiction, a federal district court has the power to hear a state law claim when it is so integrally related to a federal claim that the two claims ought to be brought together in one suit. Lovell Mfg. v. Export-Import Bank of U.S., 843 F.2d 725, 731 (3d Cir. 1988) (citing United Mine Workers v. Gibbs, 383 U.S. 715, 725, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966)). "Pendent jurisdiction is essentially a discretionary doctrine to permit a party to try in one judicial proceeding all claims arising out of a 'common nucleus of operative fact,' without regard to their federal or state character, where to do so would promote convenience and sound judicial administration." Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 195-96 (3d Cir. 1976) (citing Gibbs, 383 U.S. at 725). This is accomplished by allowing a court to entertain additional pendent claims against a defendant who is already a party to the suit. Lovell Mfg., 843 F.2d at 731.
A pendent claim analysis begins with a determination of whether the federal claim is of sufficient substance to confer subject matter jurisdiction on the court. Tully, 540 F.2d at 196; see also Francesconi v. Kardon Chevrolet, Inc., 703 F. Supp. 1154, 1160 (D.N.J. 1988), aff'd, 888 F.2d 18 (3d Cir. 1989); Nanavati v. Burdette Tomlin Memorial Hosp., 857 F.2d 96, 105 (3d Cir. 1988), cert. denied, 489 U.S. 1078, 103 L. Ed. 2d 834, 109 S. Ct. 1528 (1989). However, the doctrine of pendent jurisdiction is discretionary, and even after a substantial federal claim is established, the district court may weigh "'considerations of judicial economy, convenience and fairness to [the] litigants'" before exercising its discretion in favor of assuming pendent jurisdiction over the state claim. Francesoni, 703 F. Supp. at 1160 (citing Gibbs, 383 U.S. at 726); see also Shaffer v. Board of School Dirs., 730 F.2d 910, 911-12 (3d Cir. 1984); Robinson v. Penn. Cent. Co., 484 F.2d at 555-56.
The court's discretionary exercise of pendent jurisdiction is an issue which remains open throughout the litigation. Francesoni, 703 F. Supp. at 1160 (citing Dumansky v. United States, 486 F. Supp. 1078, 1089 (D.N.J. 1980)). The Third Circuit has held that absent extraordinary circumstances, if the federal count is dismissed on a 12(b)(6) motion or a motion for summary judgment, then the district court should "ordinarily refrain from exercising pendent jurisdiction [over the state law claims]." Francesoni, 703 F. Supp. at 1160 (citing Tully, 540 F.2d at 196). Therefore, in the Third Circuit, once all federal claims have been dismissed or dropped from a case, the case "simply does not belong in federal court," and "absent extraordinary circumstances, a district court in this circuit [is] powerless to hear claims lacking an independent jurisdictional basis." Francesoni, 703 F. Supp. at 1160 (citing Lovell Mfg., 843 F.2d at 735).
In the present case, it is clear that Counts III and VII arise out of the same "common nucleus of operative fact" as Counts I and II. If Counts I and II, the federal claims, were not dismissed for failure to state a claim, Counts III and VII would be proper pendent claims for reasons of judicial economy and convenience. However, given that these federal claims have been dismissed, and that there are no extraordinary circumstances which would warrant the exercise of jurisdiction, the pendent claims doctrine cannot be used to establish personal jurisdiction over these defendants for Counts, III and VII.
Third Circuit case law makes it clear that once a defendant raises the issue of in personam jurisdiction, the plaintiff bears the burden of proving, by a preponderance of the evidence, facts sufficient to establish jurisdiction. Carteret, 954 F.2d at 143 n.1.
In the present case, plaintiffs have made it clear that their only defense to the 12(b)(2) motions at issue is that jurisdiction is proper because of the pendent claim doctrine. Such a defense, given the dismissal of the federal claims in this action, fails to satisfy their burden of proof. Moreover, it appears that even if plaintiffs had argued that an independent jurisdictional basis existed due to contacts the four moving defendants had with the state of New Jersey, that argument would fail as well.
Accordingly, Scharffenberger, Manley, Hatch Pyne, Askew, Brinckerhoff, Clark and Simons' motion to dismiss Counts III and VII for lack of personal jurisdiction is granted.
B. MOTIONS TO DISMISS UNDER RULE 12(b)(6)
1. Standard of Review
Pursuant to Rule 12(b)(6), a plaintiff's complaint must be dismissed for failure to state a claim if a defendant demonstrates "beyond a doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); In re Craftmatic Sec. Litig., 890 F.2d 628, 634 (3d Cir. 1989); Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir. 1980). All allegations set forth in the complaint must be accepted as true, see Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972), and all reasonable inferences must be drawn in the plaintiff's favor. See McKnight v. Southeastern Pa. Transp. Auth., 583 F.2d 1229, 1235-36 (3d Cir. 1978).
On a 12(b)(6) motion, the district court is limited to the facts alleged in the complaint, not those raised for the first time by counsel in their legal memoranda. Hauptmann v. Wilentz, 570 F. Supp. 351, 364 (D.N.J. 1983), aff'd without opinion, 770 F.2d 1070 (3d Cir. 1985), cert. denied, 474 U.S. 1103 (1986); Seevers v. Arkenberg, 726 F. Supp. 1159, 1165 (S.D. Ind. 1989) ("This court is not at liberty, however, to consider allegations which do not appear in the complaint, but which are averred only in legal briefs"). The Third Circuit, however, recently held that a "court may consider an undisputedly authentic document that a defendant attaches as an exhibit to a motion to dismiss," without converting the motion into a motion for summary judgment, "if the plaintiff's claims are based on the document." Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., No. 92-3676, slip op. at 6 (3d Cir. June 30, 1993).
Moreover, a plaintiff generally should be allowed to amend its complaint to cure any pleading deficiencies. "Even after a responsive pleading has been filed . . . great liberality in allowing amendment of an initial pleading is often appropriate, especially when amendment will further the ends of justice, effectuate presentation of a suit's merits and not prejudice the opposing party." Kiser v. General Elec. Corp., 831 F.2d 423, 427 (3d Cir. 1987), cert. denied sub nom. Parker-Hannifin Corp. v. Kiser, 485 U.S. 906, 99 L. Ed. 2d 238, 108 S. Ct. 1078 (1988); see also Howze v. Jones & Laughlin Steel Corp., 750 F.2d 1208, 1212 (3d Cir. 1984). Generally, "a district court should give a plaintiff an opportunity to amend his complaint rather than dismiss it when it appears that a more carefully drafted complaint might state a claim upon which relief could be granted." Friedlander v. Nims, 755 F.2d 810, 813 (11th Cir. 1985).
Indeed, "it is not only within the power, but is a duty, of a federal court to consider on the merits a proposed amendment of a defective allegation once the court's attention is called to the defect." Kiser, 831 F.2d at 427. A "plaintiff should be granted every opportunity to cure defects in its pleadings by amendment, no matter how unpromising its initial attempt." Sixth Camden Corp. v. Township of Evesham, 420 F. Supp. 709, 720 (D.N.J. 1976). See also 5A C. Wright & A. Miller, Federal Practice & Procedure § 1357, at 361-65 (1990). This is so because "courts must be cautious in assessing motions to dismiss, particularly where granting such a motion would terminate the litigation before the parties have had their day in court." Kiser, 831 F.2d at 428. In the present case plaintiffs have taken full advantage of the opportunity to amend their complaint, and their complaint now under review must surely include all the facts and legal theories available to them.
2. Interstate Land Sales Full Disclosure Act (Count III)
a. Aider and Abettor Liability under the Land Sales Act
Count III charges that the conduct of the defendants violated Section 1703(a) of the Land Sales Act, 15 U.S.C. §§ 1701-20. (Am. Compl. at P 410.) Section 1703(a) of the Land Sales Act provides in pertinent part:
It shall be unlawful for any developer or agent, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce, or of the mails--
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