Summary
dismissing claims under ILSFDA as time-barred
Summary of this case from Gonzalez v. Banco Cent. Corp.Opinion
Civ. No. 82-1835 (JAF).
November 27, 1989.
Francisco M. López Romo and Nilsa M. Calabria Seda, San Juan, P.R., for plaintiffs.
Luis Sánchez-Betances and Ivonne Cruz-Serrano, Sánchez-Betances Sifre, San Juan, P.R., for Banco Cent. Corp.
Diana Azizi de Arbona, San Juan, P.R., for Raoul Núñez.
Mario Oronoz, Hato Rey, P.R., Diana A. de Arbona, San Juan, P.R., Orlin P. Goble, Hato Rey, P.R., William de la Cruz, Jr., Alberto F. Tellechea, Orlando, Fla., José A. Andreu Garcia, San Juan, P.R., and Vincent Phillip Nuccio, Tampa, Fla., for defendants.
OPINION AND ORDER
This complex land fraud case involves three related development projects in Florida which we will refer to collectively as the "Sunrise Projects." The numerous plaintiffs are disenchanted purchasers of plots of land in Sunrise Projects. Defendants include the corporate developers and financiers of the projects, as well as individuals associated with these businesses.
The essential allegations may be briefly stated. In the 1970's various individuals and related organizations were engaged in the sale of undeveloped land located in the state of Florida. The organizations include codefendants J.C. Investments, Inc., J.C. Properties, Inc., J.C. Realty, Inc., Floravest Realty, Inc., Floravest International, and Magic Realty (hereafter referred to together as "J.C. Companies"). Moreover, much of the financing for the Sunrise Projects was undertaken by codefendants Banco Central y Economias and Banco de Economias, the predecessors in interest of Banco Central (hereafter referred to together as "Banco de Economías").
Plaintiffs allege that they were induced to purchase their lots, and to continue making installment payments on them, in reasonable reliance on defendants' misrepresentations and unkept promises concerning the condition of the land, its value, and the plans defendants supposedly had to develop it. These misrepresentations allegedly took the form of written and oral statements from salespersons, as well as misleading statements found in defendants' mailed promotional literature. Plaintiffs claim that defendants' representatives led them to believe that the lots were good investments and suitable for homesites — or soon would be due to the development of roads, utilities and recreational facilities that would be undertaken by the defendants on plaintiffs' behalf. In fact, little development has occurred, nor in many cases could it have occurred given prohibitive zoning laws governing the land in question. Today, much of the area remains what it was when plaintiffs made their purchases: a swamp. In addition, plaintiffs allege they were duped into believing that upon completing their payments they would receive clear title to their lots, when in fact the titles were frequently owned by someone else or were heavily encumbered by outstanding mortgages.
Relief is sought under three federal statutes: a) the Interstate Land Sales Full Disclosure Act ("Land Sales Act"), 15 U.S.C. § 1701 et seq.; b) section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10(b)(5) thereunder, 17 C.F.R. § 240.10b-5; and c) the Organized Crime Control Act ("RICO"), 18 U.S.C. § 1964(c).
The case is submitted on defendants' various motions for summary judgment. For the reasons discussed below, summary judgment is now GRANTED in favor of defendants with respect to claims under the Land Sales Act and the Securities Exchange Act, but DENIED with respect to the civil RICO claims.
I. The Land Sales Act
Plaintiffs first allege that defendants violated subsections 1404(a)(2)(A)-(C) of the Land Sales Act and that defendants are therefore subject to civil liability under section 1410(b)(1) of the same. Subsection 1703(a)(2) reads as follows:
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 —
* * * * * *
(2) In selling or leasing, or offering to sell or lease, any lot in a subdivision —
(A) to employ any device, scheme, or artifice to defraud, or
(B) to obtain money for property by means of a material misrepresentation with respect to any information included in the statement of record or the property report or with respect to any other information pertinent to the lot or the subdivision and upon which the purchaser relies, or (C) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser.15 U.S.C. § 1703(a).
In response to these allegations, two defenses under the Land Sales Act are raised. First, the defendants are united in claiming that plaintiffs' Land Sales Act claims are time-barred. Second, some, but not all, of the defendants argue that they are not "developers" or "agents" within the meaning of subsection 1703(a).
A. The Statute of Limitations.
The Land Sales Act contains its own statute of limitations found at section 1711. As originally enacted, the exact time limit under section 1711 to some extent depends on which substantive provision of the act the claim is based. For example, actions to enforce a liability for false statements of record and false statements in property reports (not at issue here) must be "brought within one year after discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." However, actions such as the present one brought under section 1703(a)(2) (quoted above) are time-barred unless "brought within two years after the violation upon which it is based." (Emphasis supplied). Furthermore, in either case, the original section 1711 contains an "umbrella" limitation such that "[i]n no event shall any such action be brought by a purchaser more than three years after the sale or lease to such purchaser." (Emphasis supplied).
15 U.S.C. § 1711 (prior to amendment) reads as follows:
No action shall be maintained to enforce any liability created under section 1709(a) or (b)(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 1709(b)(1) of this title, unless brought within two years after the violation upon which it is based. In no event shall any such action be brought by a purchaser more than three years after the sale or lease to such purchaser.
Section 1711 was amended by Congress in 1979, effective June 21, 1980. The parties apparently agree that the original statute of limitations applies rather than the amended version.
What this boils down to here is that each plaintiff must satisfy two tests: first, he must file within two years of the "violations" complained of; second, he must file within three years of the "sale." Only if both tests are met is the action timely.
Taking the first test first, we must decide when a "violation" occurs in order to determine when the two-year time period begins to run. Many courts have held, with regard to subsection 1703(a)(2) actions, that a violation may occur after the signing of the sales contract, especially when it is alleged, as plaintiffs have here, that the defendants engaged in ongoing fraud so as to continue to extract payments on purchase money loans and installment contracts. See Newell v. High Vista, Inc., 479 F. Supp. 97 (M.D.Pa. 1979); Fogel v. Sellamerica Ltd., 445 F. Supp. 1269 (S.D.N.Y. 1978); Husted v. Amrep Corp., 429 F. Supp. 298 (S.D.N.Y. 1977); Happy Investment Group v. Lakeworld Properties, 396 F. Supp. 175 (N.D.Cal. 1975). In such case, the last possible "violation" of the act, or the ending date for a continuing violation, is said to occur on the date of the last payment.
We agree with these cases. Therefore, because this action was filed on August 2, 1982, plaintiffs making final payments prior to August 2, 1980 fail the first test, while those making payments on or after this date satisfy the requirement.
Both plaintiffs and defendants have raised arguments disputing the use of this date as a reference point for statute of limitations purposes.
First, plaintiffs suggest that the proper filing date for all plaintiffs should be March 1, 1982, the filing date of a state court class action involving some of the same parties. We disagree, noting that the filing of the state law action in no way prevented plaintiffs from filing a timely federal action and thus does not toll the limitation period for the federal claims. Drumm v. Sizeler Realty Co., Inc., 817 F.2d 1195 (5th Cir. 1987). See also Ramirez de Arellano v. Alvarez de Choudens, 575 F.2d 315 (1st Cir. 1978) (so long as actions are not barred by the pendency of prior actions, prior judicial actions do not toll the statute of limitations, no matter how close their relationship to the one at bar).
Second, defendants argue that August 2, 1982 (the date of the federal filing) cannot be used as a reference point for those plaintiffs joining the case after this date. To this end, defendants attempt to distinguish the case at hand from American Pipe and Construction Co. v. Utah, 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974) and Crown, Cork Seal Co., Inc. v. Parker, 462 U.S. 345, 103 S.Ct. 2392, 76 L.Ed.2d 628 (1983), both of which held that the commencement of a class action suspends the applicable statute of limitations as to all putative class members until class certification is denied. Defendants argue that the holding of these cases is limited to situations where certification of class status is denied solely for lack of numerosity, a view that ignores the fact that in Crown, Cork Seal certification was denied for reason of inadequate representation. Even assuming some merit to defendants' view, the court finds that the underlying rationale of these cases has been met in the case at bar: the filing of the class action served to put defendants on notice of the nature and extent of plaintiffs' claims, and it would have been inequitable and inefficient to require "protective" individual filings on the part of those plaintiffs who knowingly or unknowingly had a right to assume the class action would be protective of their interests.
Finally, we disagree with defendants' argument that tolling of the statute of limitations pending a ruling on certification should be denied because plaintiffs were not diligent in requesting class certification. While it is true that this action was originally filed on August 2, 1982, and class certification was not denied until March 17, 1987, we do not think this delay was unjustly used by plaintiffs to join additional members, especially in light of the fact that the last plaintiff allowed to join this suit was added on November 24, 1983.
The second test, or "umbrella limitation," requires an action to be brought within three years of the date of sale. Again, the crucial issue is one of definition, for the meaning of the word "sale" determines when the three-year period begins to run.
Defendants submit that "sale" in section 1711 refers exclusively to the date of the formation of the purchase contract. If this is correct, then all of the plaintiffs' causes of action under the Land Sales Act are time-barred because all the land sales contracts were signed more than three years prior to the filing of this action. Plaintiffs, however, argue that "sale" may also refer to the passing of the deed of title, and therefore the three-year time period, like the two-year limitation, does not begin running until the last installment payment on the sales contract is made.
The First Circuit has not addressed this question and the reported decisions appear to be split. The majority of these cases support defendants' theory. See Cook v. Deltona Corp., 753 F.2d 1552 (11th Cir. 1985); Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036 (10th Cir. 1980); Armbrister v. Roland Intern. Corp., 667 F. Supp. 802 (M.D.Fla. 1987). A minority of courts, however, agree with plaintiffs and construe "sale" to include the date the deed is executed or the last installment payment is made. See Hadad v. Deltona Corp., 535 F. Supp. 1364 (D.N.J. 1982); Newell v. High Vista, Inc., 479 F. Supp. 97 (M.D.Penn. 1979).
The cases supporting plaintiffs begin by noting that a violation of section 1703(a)(2) may occur years after the signing of a contract, such as when the defendant "obtain[s] money for property by means of material misrepresentation. . . ." 15 U.S.C. § 1703(a)(2)(B). When installment payments are scheduled for many years to come, so the argument goes, acts giving rise to a cause of action (obtaining money by fraud) might occur more than three years after the signing. If "sale" were to mean the signing date in these actions, then the buyer would be foreclosed from filing a claim against behavior apparently contemplated by the statute. Thus, plaintiffs argue it would be ill-fitting to adopt a narrow definition of "sale" in such a case, especially keeping in mind the court's duty to interpret a remedial statute broadly to fulfill its purpose.
Furthermore, cases such as Hadad distinguish between actions where liability is based on violations occurring after signing and those where liability may occur only at the time of signing. The latter type includes false statements or material omissions in the disclosure documents and "selling" the land without filing such documents in advance. See, e.g., Fogel v. Sellamerica, Ltd., 445 F. Supp. 1269 (S.D.N.Y. 1978). The court in Hadad concluded that interpretations of "sale" in the context of violations arising at the time of the signing should not be dispositive of cases where liability arises, at least in part, from fraudulent acts committed years after the ink is dry. Hadad, 535 F. Supp. at 1368. Rather, Hadad found that in cases alleging post-signing fraud, "sale" should include the time when the final payment is made and title transferred.
As the court in Hadad observed,
[t]his interpretation of section 1711 makes eminent good sense and implements the purposes of the Original Act both to provide real estate purchasers with a remedy and to place a definable limit upon the time within which the remedy may be pursued in court. A real estate purchaser may enter into a contract which provides for payments for a period extending beyond three years. It is quite likely that he will not discover fraudulent conduct on the seller's part until he completes the payments and calls for performance. It would be absurd to hold that he could not sue because three years had run since the signing of the contract. Both the language of section 1711 and the intent of the Original Act are implemented rationally by interpreting "sale" to include not only the signing of the agreement but also all the steps implementing the agreement up to and including delivery of the deed.Hadad, 535 F. Supp. at 1368-69.
We acknowledge that this view is appealing in terms of policy. However, it is contradicted by the structure of section 1711 which indicates, we think, that Congress was aware that certain violations could occur after signing but nevertheless chose to put a three-year cap on filings. As the court in Aldrich noted, this view is bolstered by the fact that regulations issued under the Land Sales Act define sale as "any obligation or arrangement for consideration to purchase." Aldrich, 627 F.2d at 1044 ( quoting 24 C.F.R. § 1710.1(n)). Moreover, Aldrich also points out that the Securities Act of 1933, the general model for the Land Sales Act, defines sale to include every contract of sale or disposition of a security. Aldrich, 627 F.2d at 1044 n. 9.
Therefore, we hold that "sale" in section 1711 refers to the formation of the purchase contract. Cook v. Deltona Corp., 753 F.2d 1552 (11th Cir. 1985); Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036 (10th Cir. 1980); Armbrister v. Roland Intern. Corp., 667 F. Supp. 802 (M.D.Fla. 1987). This action was filed August 2, 1982, and so the claims of plaintiffs signing contracts prior to August 2, 1979 are time-barred. Because all plaintiffs fall into this category, summary judgment must be granted in favor of defendants absent the application of an equitable doctrine.
B. Equitable Doctrines.
There are two distinct equitable barriers to application of the statute of limitations: equitable tolling and equitable estoppel. We now turn to these doctrines, keeping firmly in mind that the burden is on plaintiffs to demonstrate their applicability. Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1041 n. 4 (10th Cir. 1980), and cases cited therein.
1. Equitable Tolling.
Plaintiffs look first to equitable tolling, particularly to the doctrine of fraudulent concealment. Absent Congressional intent to the contrary, principles of equitable tolling are to be read into every federal statute of limitations. Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946); Cook v. Deltona Corp., 753 F.2d at 1562. However, most courts interpreting section 1711 have concluded that while the two-year limitation may be tolled, the "in no event" preface to the three-year limitation evidences Congressional intent that this time period may not be suspended. See, e.g., id.; Timmreck v. Munn, 433 F. Supp. 396 (N.D.Ill. 1977). We agree. Therefore, the principles of equitable tolling have no application to the Land Sales Act claims because all plaintiffs failed the second (three-year) test.
2. Equitable Estoppel.
We next turn to equitable estoppel. This doctrine is appropriate when would-be plaintiffs are aware of the basis for a claim against a defendant, but the defendant has lulled the plaintiffs into delaying or forgoing a legal remedy until after the statute of limitations has expired. See generally Cook v. Deltona Corp., 753 F.2d at 1562-63. The oft-quoted rule is that
[e]stoppel arises where one, by his conduct, lulls another into a false security and into a position he would not take only because of such conduct. Estoppel, in the event of a disputed claim, arises where one party by words, acts, and conduct led the other to believe that it would acknowledge and pay the claim, if, after investigation, the claim were found to be just, but when, after the time for suit had passed, breaks off negotiations and denies liability and refuses to pay.Bomba v. W.L. Belvidere, Inc., 579 F.2d 1067 (7th Cir. 1978) ( quoting Bartlett v. United States, 272 F.2d 291 (10th Cir. 1959)). After a thorough review of the record, we find no facts indicating that the failure to file a timely action was due to an ill-motived attempt at appeasement. As it is clearly plaintiffs' burden to submit these facts, we hold that estoppel is not applicable to this action.
The defendants have submitted statements of material fact with respect to the majority of plaintiffs in this case. Here and elsewhere, we have reviewed these in making our determinations, as well as the pertinent objections filed by the plaintiffs. Where the facts submitted by one party are not seriously and specifically rebutted by the party bearing the burden of proof on a particular issue, or where the burdened party has otherwise failed to document facts in support of its position, we have found that there is no genuine issue of material fact as to this matter. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Because each plaintiff bears the burden of demonstrating facts warranting the application of equitable estoppel, and because no such facts have been brought to the court's attention, we find no triable issue on this matter.
As the equitable doctrines fail to afford plaintiffs relief, we hold that the claims under the Land Sales Act are time-barred and summary judgment is GRANTED to defendants accordingly. Given this determination, we need not decide whether defendants are "developers" or "agents" within the meaning of section 1404(a) of the Land Sales Act. See, e.g., Bartholomew v. Northampton Nat. Bank of Easton, 584 F.2d 1288 (3rd Cir. 1978); McCown v. Heidler, 527 F.2d 204, 207 (10th Cir. 1975); Timmreck v. Munn, 433 F. Supp. 396, 405-07 (N.D.Ill. 1977).
II. Securities Fraud
A. Was There a Security?
The threshold issue under the federal securities laws is the existence of a security. Union Planters National Bank v. Commercial Credit Business Loans Inc., 651 F.2d 1174, 1179 (6th Cir. 1980). Plaintiffs apparently argue that the purchased lots, combined with defendants' promises to develop the area, constitute "investment contracts" included within the definition of a security.
The Supreme Court has defined "investment contract" broadly to include any "[1] contract, transaction or scheme whereby a person invests his money in a common enterprise and [2] is led to expect profits [3] solely from the efforts of the promoter or a third party." S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-03, 90 L.Ed. 1244 (1946). This definition can include interests in real property. SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943); McCown v. Heidler, 527 F.2d at 208. However, in determining whether a real estate deal constitutes an investment contract, courts have paid particular attention to whether the developer's promotional emphasis was on the investment potential of the land or on selling lots to be occupied by the purchasers. "Clearly the lots are not securities if the purchasers were induced to obtain them primarily for residential purposes — `to occupy the land or to develop it themselves.' Similarly, if the benefit to the purchasers of the amenities promised by defendants was largely in their own use and enjoyment, the necessary expectation of profit is missing." Aldrich v. McCulloch Properties, Inc., 627 F.2d at 1036 ( quoting SEC v. W.J. Howey Co., 328 U.S. at 300, 66 S.Ct. at 1103) (other cites omitted). See also United Housing Foundation v. Forman, 421 U.S. 837, 850, 95 S.Ct. 2051, 2059, 44 L.Ed.2d 621 (1975).
Furthermore, although the "necessary expectation of profit" can include the capital appreciation of the land due to development, Forman, 421 U.S. at 852, 95 S.Ct. at 2060, the increase in value must be the result of efforts promised to be performed by the developer. The mere hope that the value of purchased land will increase does not convert a run of the mill real estate transaction into an investment contract. McCown, 527 F.2d at 208. Indeed, there is an investment aspect to every land transaction arising from the hope of increased property values. But as the Supreme Court has stressed, there is also a strong motivation to purchase real estate for purposes of "consumption" — i.e., to occupy it oneself or to develop it by one's own efforts. Forman, 421 U.S. at 853, 95 S.Ct. at 2060-61. The court must therefore consider the nature of the promotion to determine whether the emphasis was on the "investment" or the "consumption" side of the real estate duality.
Viewing the documents submitted in the light most favorable to the non-moving parties, Fed.R.Civ.P. 56, we find a significant emphasis on investment. First, a sales manual provided to J.C. salespersons anticipates customer objections and provides sellers with canned answers, many of which stress the investment value of Sunrise Projects. These canned answers clearly indicate that J.C. salespersons used capital appreciation as an inducement to purchase.
Examples of objections and answers emphasizing investment potential are the following:
Objection: "I'm not ready to make investments right now."
Answer: "[I]'ve called you because I have ideas that could earn you a lot of money without you having to lay out a lot of money yourself."O: "I'm not able to buy anything now."
A: "I have called you because I have an idea that is going to represent money to you."
O: "Look, the reality is that I'm not able to buy anything now, having made many investments recently."
A: "Sr. Prospect, I don't believe that's a problem for a person of your economic solvency."
O: "Look, I'm going to consult my wife on this matter."
A: "I believe that's a good idea, but there's a reason you haven't thought of; why not give your wife a surprise by taking the initiative in deciding for yourself an investment that guarantees the economic future of your family?"
O: "The investment looks good but I prefer to invest in Puerto Rico."
A: "I believe that investing in Puerto Rico is a great idea, but the reasons for investing in the Disney area at this moment surpass all arguments to the contrary. . . ."O: "I already have lands in Florida."
A: "Fantastic, Sr. Prospect. With this you've proven that you believe in this type of investment; let me see where you bought . . . Magnificent investment! But I'm going to demonstrate the special differences of our project."
O: "It's a good investment, and a valuable one, but to who do I sell it to later?"
A: "Sr. Prospect, according to the statistics, in 1971 sales of undeveloped land in the United States surpassed 27 million acres, the increase in value of this land guaranteeing you an extraordinary profit such that anyone, including myself, would be willing to buy it at a reasonable time."
O: "But this project doesn't have streets or anything."
A: "Precisely . . . An investment in land is truly an investment when the cost is low, the quantity of land obtained is large, and the possibilities of acquiring greater value for this land are greater still . . . When you buy without developing you are buying with all the benefits that your land is able to acquire."
(Translation ours).
Moreover, the key selling point running throughout all the promotional literature is the proximity of the land to Disney World and the increased development in the area Disney's presence would bring. Statements such as the "phenomenal growth and the extraordinary future impact of Walt Disney World," ( See Exhibit 2), as well as predictions concerning the area's increase in population, income, development and tourism, are rife throughout the promotional materials. These statements lend additional weight to the argument that the plots were promoted as an investment.
Finally, the docket contains evidence indicating that defendants intended to develop the area. Plaintiffs have submitted documents showing that the J.C. Companies collected "dues" from various property owners for the purpose of constructing a country club in the area, and most of the contracts provide a general maintenance fee, as well as a promise that the sellers will maintain community facilities until 1980. Moreover, J.C. promotional material mentions communal recreational facilities including a club house, swimming pool, tennis and racquetball courts, horse stables, a parking lot, guest chalets, water treatment facilities, a shuffleboard court, a shooting range, and a golf course. In addition, J.C. sent brochures showing floor plans for houses to lot owners, indicating that orders could be placed for construction. ( See Exhibit D to Plaintiffs' Statements of Facts In Controversy). J.C. also implied that it would provide roads. ( See Exhibit D). These planned improvements, while serving the "consumption" side of the duality insofar as they make the area a more attractive place to live, also add to the land's value. To the extent that these improvements were to be made with dues or with purchase price money from lot sales, the scheme falls within the "common enterprise" definition. McCown v. Heidler, 527 F.2d at 211; Timmreck, 433 F. Supp. at 404.
Defendants argue that they were under no contractual obligation to provide improvements, and indeed some of the promotional materials indicate as much. However, in determining the existence of an investment contract, courts have looked beyond boilerplate disclaimers to the economic reality and character the transaction is given in commerce. SEC v. Joiner Corp., 320 U.S. at 352-53, 64 S.Ct. at 124-25; Timmreck, 433 F. Supp. at 400. Viewing the evidence in the light most favorable to plaintiffs, the court cannot conclude at present that these transactions fall outside the definition of an investment contract as stated in Howey. Rather, we find factual questions sufficient to defeat a motion for summary judgment as to whether defendants promoted Sunrise Projects as investment property and explicitly or implicitly promised to develop the same using common funds. Bhatla v. Resort Development Corp., 720 F. Supp. 501 (D.C.W.Pa. 1989).
B. Statute of Limitations.
Defendants next argue that the statute of limitations has run on the securities claims. Since there is no statutory time limitation for private actions brought under section 10(b) and Rule 10b-5 of the securities laws, courts have applied the most closely analogous state rule. General Builders Supply Co. v. River Hill Coral Venture, 796 F.2d 8 (1st Cir. 1983). In the past, this district has applied the two-year statute of limitations provided in Puerto Rico's Securities Act, 10 L.P.R.A. § 890(e), to federal securities claims. Verrecchia v. Paine Weber, 563 F. Supp. 360 (D.P.R. 1982); Salgado v. Piedmont Capital Corp., 534 F. Supp. 938 (D.P.R. 1981). Moreover, it is well established as a matter of federal common law that the statute of limitations for claims under federal securities laws accrues when an investor, in the exercise of reasonable diligence, discovered or should have discovered the alleged fraud. Maggio v. Gerard Freezer Ice Co., 824 F.2d 123 (1st Cir. 1987); Cook v. Avien Inc., 573 F.2d 685, 695 (1st Cir. 1978). Therefore, this action is time-barred if plaintiffs discovered or should have discovered the fraud prior to August 2, 1980.
Plaintiffs claim that the statute did not begin to run — or that it was tolled — until sometime after this date. As the First Circuit explained in Cook:
[t]he doctrine of fraudulent concealment operates to toll the statute of limitations "where the party injured by the fraud remains in ignorance of it without any fault or want of diligence or care on his part . . . until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party." Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348 [ 22 L.Ed. 636] (1875) (footnote omitted). [E]ven without affirmative acts on the part of defendants, then, a federal cause of action will accrue at the time when plaintiff in the exercise of reasonable diligence discovered or should have discovered the fraud of which he complains.Cook, 573 F.2d at 694-95.
The court in Cook further explained that "storm warnings" sounding the possibility of fraud place the plaintiff on inquiry notice and trigger a plaintiff's duty to investigate in a reasonably diligent manner. Id. at 697. Moreover, while the question of whether a plaintiff should have discovered the fraud is an objective one using the reasonable investor standard, "the determination of whether a plaintiff actually exercised reasonable diligence requires a more subjective inquiry focusing upon the circumstances of the particular case, including the existence of a fiduciary relationship, the nature of the fraud alleged, the opportunity to discover the fraud, and the subsequent actions of the defendants." Maggio v. Gerard Freezer Ice Co., 824 F.2d 123, 128 (1st Cir. 1987).
With these standards in mind, we examine the record for "storm warnings" that should have put plaintiffs on inquiry notice of the fraud. First, we note that most of the sales contracts contain statements similar to the following: "SUNRISE ACRES IS UNIMPROVED, UNSURVEYED ACREAGE WITHOUT PHYSICAL ACCESS TO EACH INDIVIDUAL TRACT, WITHOUT DRAINAGE OR OTHER IMPROVEMENTS. 35% IS MARSH OR SWAMPY AND IS SUBJECT TO FLOODING."
Defendants argue that this representation alone was enough to trigger the requirement of due diligence, and that the statute of limitations thus began running with the signing of the contracts. We disagree and note that the nature of the fraud alleged is that defendants had promised to convert this unimproved land into a valuable residential community. In this sense, the promises to develop are not necessarily inconsistent with what is stated in the contract, thus distinguishing this case from others which hold that a plaintiff has a duty to investigate when representations made by salespersons are inconsistent with information contained in formal disclosure documents. See, e.g., Maggio v. Gerard Freezer Ice Co., 824 F.2d at 128-29. Moreover, the nature of the fraud also makes discovery at the time of signing unlikely, for "[i]t is self-evident that fraudulent promises to build certain amenities in the future cannot be detected at the time of the representations." Timmreck, 433 F. Supp. at 404; see also Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1041-42 (10th Cir. 1980); Fuls v. Shastina Properties, Inc., 448 F. Supp. 983 (N.D.Cal. 1978).
We also note that the Spanish version of the contract mistranslates "MARSH AND SWAMPY" as "BAJO" — i.e., "LOW." Moreover, there is evidence in the record that this was no accident and that sellers were instructed to capitalize on this mistranslation. For instance, the manual for salespersons contains the following canned "objection" and "answer":
Objection: [B]ut here it says that 35% is a low zone; what does this mean?
Answer: [Y]ou should sign this document because this is the way we show the seriousness of our operation. Sunrise Acres is an extremely large extension of land, 3,000 acres with levels 120 to 150 feet above sea level . . . it's natural that some parts are lower than others.
Furthermore, defendants undertook acts construable as concealment. These acts include the mailing of "facto-grams" and other promotional literature describing in glowing terms the area's progress, as well as solicitations for membership in the Sunrise Country Club and brochures related to the construction of housing, all of which indicated that development was feasible and forthcoming. Thus, viewing the nature of the fraud, the opportunity to discover it, and defendants' subsequent actions, we cannot conclude as a matter of law that the quoted statements in the sales contract triggered further investigation.
Defendants next point to information found in the Florida Public Offering Statements for the Sunrise properties. This document includes the following warnings: that Sunrise Projects is not a homesite offering, that it is encumbered by mortgages, that no provision has been made for sewage, water, streets or other public utilities, that the property is not useful for building, that a certain percentage of the land is marsh or swampy, and that the buyer should seek professional guidance and ascertain for himself that the property meets personal requirements.
Defendants claim that each and every plaintiff received the offering statement prior to purchase, and if this allegation were uncontested we would hold that the offering statement supplied the "storm warnings" to trigger due diligence. Armbrister v. Roland Intern. Corp., 667 F. Supp. at 810-11. However, many plaintiffs state, in depositions and elsewhere, that they never received the offering statement in spite of the fact that they may have signed documents indicating they did. Indeed, while defendants have submitted signed offering statement "receipts" as well as signed blanket statements claiming the signatory "has received all documents relevant to the contract," rarely have they submitted the actual offering statement to go along with the so-called receipts. See generally Defendants Statements of Uncontested Facts. Therefore, we find a question of fact as to when and whether many of the individual plaintiffs received the Florida Public Offering Statement.
We are of course mindful that some plaintiffs have admitted receiving and reading the offering statement, and in such cases a determination that due diligence was triggered would be in order. We need not make such rulings on a plaintiff-by-plaintiff basis, however, given our objective holding, infra, that all plaintiffs should have discovered the fraud prior to August 2, 1980.
In the end, however, defendants do not need to rest their case on contractual disclaimers or disclosure statements. Since this action was filed on August 2, 1982, the only question that matters is whether, with the exercise of reasonable diligence, the fraud alleged was discoverable prior to August 2, 1980. Undoubtedly it was.
By August 2, 1980, virtually all of the sales contracts were several years old. Even assuming plaintiffs signed due to false promises to develop, and that these promises were fostered over the years by fraudulent mailings, there nevertheless came a time for the investors to seek hard information as to whether these promises were more than castles in the air. That time, though hard to pinpoint, nevertheless occurred prior to August 2, 1980. In reaching this determination we note the following: (1) By late 1978 various Florida agencies were issuing cautionary statements regarding the Sunrise Projects. These statements mention that on March 2, 1978 a Florida court issued a cease and desist order in relation to misleading and unapproved Sunrise advertisements, and that J.C. Investments filed for bankruptcy that same year. (2) The campaign of fraudulent mailings largely ended with the cease and desist order; there are few examples of facto-grams or housing and country club solicitations after this date. (3) Virtually every plaintiff who visited the Sunrise site in Florida in the late 1970's or early 1980 was able to uncover a cause for disappointment. (4) And finally, beginning in late 1978, newspaper articles began appearing in Florida and Puerto Rico expressing problems and dissatisfactions with development projects in Florida's Green Swamp area.
The following are examples of plaintiffs who uncovered facts that should have put them on notice of the fraud prior to August 2, 1980: Miguel Cires Blanco and Evelia Méndez Cantón (told by friend in 1976 that area was inaccessible and that he had been defrauded); Andrés Rodríguez Rivera and Edelmira Rivera Nieves (visited lot in 1976 and not satisfied); Miguel Palacios Calzada and Antonia Mercado Soto (visited lot in 1977 and saw that land was flooded); Jesús E. Hernández and Celia Acosta (visited area in 1976 and "knew" he had been defrauded); Ezequiel Maldonado and Casilda Castrello (tried to sell lot since 1976 because had been told land was floodable and not valuable); José A. Crescioni and Sonia Cuebas (visited lot before 1980 and saw no development); Humberto Torres and Provinés Méndez de Torres (visited area in 1978 and grew suspicious upon not receiving information sought); Amelia Cabiya Martínez and Gregorio Alfonso Reyes (dissatisfied after 1978 visit); Luis A. Rosario (grew suspicious after seeing no development upon visits in 1974 and 1976); Josés Luis Martinez and Carmen Vital (saw land was "swampy" during several visits beginning in 1975); Angelina San Miguel (disappointed upon visit in 1978); Francisco Fontanet Perfecto and Aida Maldonado de Fontanet (suspected "bad deal" after visit in 1975); Nicolás Ayala Pláceras and Dinorah F. Ayala (saw lots flooded in 1978); Hilton Montes Gaztambide and Ramonita Medina Rivera (letter dated 1/21/80 detailing visits and suspicions re: lack of development); Luis Becerra González and Tomasa Lamberty (saw that area was a swamp and conducted inquiries around 1974-75); Luis F. Suárez (visited area; heard he could not register property); Victor Rivera Inglés and Teoldula Santos (disenchanted after visit in 1976); Julio C. Aguilar Morena and Alfa Caridad Núñez Hernández ("nearly cried" after visiting area in 1976); Josés Maldonado Crespo and Carmen Ortiz Collado (had doubts and worries about the project since 1977); Paul Rodríguez Rodriguez and Josephina Rivera Santiago (made insecure by visit to area in 1979); Carmen Vélez Rivera (quit making payments in 1979 because not happy with purchase); Heriberto Alvarado and Ana Luisa Santos (saw water and no development upon visit in 1979); Juan C. Montalvo Ruiz and Luz Minerva Márquez (not satisfied with area after visit in 1978); Vilma Mosquera (very disappointed after visit in 1977 and requested that her lot be sold); Ramón A. González Padilla and Hilda E. Lugo Rivera (saw area undeveloped and felt uncomfortable after visit around 1980); Mario Santiago Rodriguez and Carmen Aurora Ortiz Claudio (visited area around 1980 and told by a passerby that the development companies had left); Alejo Pérez Ortiz and Carmen Pérez Muñoz (tried to sell lot in 1980 because had information the project was not developed).
Other plaintiffs discovered problems with their lots and had them exchanged for others. They are: Carmelina Martinez and Don Santesson; Eddie Aguilu Emmanuelli and Carmen Alicia Semidey Rolón; William Rodriguez Lugo and Elsie H. Pérez.
See Defendants' Statements of Material Facts Not In Controversy and plaintiffs' objections thereto.
Viewing the record in the light most favorable to plaintiffs, the court finds nothing to rebut this combination of factors or to support the conclusion that plaintiffs' ignorance of the fraud justifiably extended into August of 1980. Thus, while we cannot determine as a matter of law that due diligence was triggered at the time plaintiffs signed their contracts, we can and do conclude as an objective matter that plaintiffs should have discovered the fraud prior to August 2, 1980. As such, all the securities fraud claims in this case are time-barred and summary judgment is GRANTED to defendants on this part of the complaint.
III. Civil RICO
We finally turn to the civil RICO claims. Section 1964(c) provides a civil remedy to "[1] Any person injured in his business or property [2] by reason of a violation of section 1962 of this chapter. . . ." 18 U.S.C. § 1964(c). Plaintiffs have adequately demonstrated injury to their property to the extent of payments made under purchase contracts. However, we must inquire whether this injury occurred "by reason of a violation of section 1962."
Section 1962 prohibits: the use of income derived from a pattern of racketeering activity to acquire an interest in or establish an enterprise engaged in or affecting interstate commerce, section 1962(a); the acquisition or maintenance of any interest in an enterprise through a pattern of racketeering activity, section 1962(b); conducting or participating in the conduct of an enterprise through a pattern of racketeering activity, section 1962(c); and conspiring to violate any of these provisions, section 1962(d). See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985).
Of these four "prohibited activities," the only one specifically mentioned in plaintiffs' amended complaint is subsection 1962(a), concerning the investing of money gained from a pattern of racketeering. Nevertheless, we note that the facts alleged in the amended complaint also sound in a violation of subsection 1962(c). Thus, we will examine defendants' arguments for dismissal with these two provisions in mind.
Plaintiffs requested permission to file, and in fact submitted, an amended complaint on June 10, 1988. See Docket Document No. 401. The court denied that request in an order dated July 27, 1988, referring to defendants' motion in opposition to the amended complaint at Docket Document No. 406. We now clarify and reconsider that order in the following manner. The amended complaint of June 10, 1988 is rejected insofar as it attempts to bring new plaintiffs into this action or to state any new causes of action under Puerto Rico law not previously alleged in the original complaint. However, we think it proper that the June 10th complaint should govern the cause of action under civil RICO, and to this extent our order is altered. In making this determination, we note the policy in civil RICO actions to allow amendment of the complaint following adequate discovery so as to comply with the requirements of Fed.R.Civ.P. 9(b). See New England Data Services, Inc. v. Becher, 829 F.2d 286 (1st Cir. 1987). Thus, we recognize the June 10th complaint as the one governing this action, striking, however, any attempt by plaintiffs to add additional parties or additional state law causes of action.
A. Standing To Assert a Violation of 1962(a).
As an initial matter, defendants in a recent filing have questioned whether