Isaak v. Trumbull Sav. & Loan Co.

• Decision Date: 02 March 1999
• Docket Number: Nos. 97-4347,97-4349 and 97-4350,s. 97-4347
• Citation: 169 F.3d 390
• Parties: RICO Bus.Disp.Guide 9660 William A. ISAAK; Lola J. Isaak; Edmond M. Gray; Judith Gray, on behalf of themselves and other persons similarly situated, Plaintiffs-Appellants, v. TRUMBULL SAVINGS & LOAN COMPANY, Defendant-Appellee. John F. McDonagh and Virginia McDonagh, on behalf of themselves and other persons similarly situated, Plaintiffs-Appellants, v. Cortland Savings and Banking Company, Defendant-Appellee, Geico Financial Services, Inc., Defendant. Frank Slentz; Lois Slentz; Melody Brammer, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. Cortland Savings and Banking Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 390

169 F.3d 390

RICO Bus.Disp.Guide 9660

William A. ISAAK; Lola J. Isaak; Edmond M. Gray; Judith

Gray, on behalf of themselves and other persons

similarly situated, Plaintiffs-Appellants, v. TRUMBULL SAVINGS & LOAN COMPANY, Defendant-Appellee.

John F. McDonagh and Virginia McDonagh, on behalf of themselves and other persons similarly situated, Plaintiffs-Appellants, v. Cortland Savings and Banking Company, Defendant-Appellee, Geico Financial Services, Inc., Defendant.

Frank Slentz; Lois Slentz; Melody Brammer, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. Cortland Savings and Banking Company, Defendant-Appellee.

Nos. 97-4347, 97-4349 and 97-4350.

United States Court of Appeals Sixth Circuit.

Argued Dec. 9, 1998.

Decided March 2, 1999.

Michael P. Malakoff, James M. Pietz (argued and briefed), Malakoff, Doyle & Finberg, Pittsburgh, Pennsylvania, for Plaintiffs-Appellants.

Kevin P. Murphy (argued and briefed), Michael G. Marnado, Harrington, Hoppe & Mitchell, Warren, Ohio, for Defendant-Appellee Trumbull Savings & Loan in No. 97-4347.

Michael L. Robinson (argued and briefed), Robinson & Associates, Akron, Ohio, for Defendants-Appellees Geico Financial Service, Inc., Cortland Savings and Banking Company in No. 97-4349.

Robert M. Platt, Gessner, Platt & Dull, Warren, Ohio, Michael L. Robinson (argued and briefed), Robinson and Associates, for Defendant-Appellee Cortland Savings and Banking Company in No. 97-4350.

Before: SUHRHEINRICH, CLAY, and GILMAN, Circuit Judges.

CLAY, Circuit Judge.

Class Plaintiffs in these three consolidated actions appeal from the district court's order dismissing with prejudice Plaintiffs' Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., claims against the defendant banks on statute of limitations grounds, and dismissing without prejudice Plaintiffs' pendent state law breach of contract claims. Plaintiffs constitute thousands of individuals who purchased and obtained installment loan financing for interests in two "to be developed" timeshare resorts in northern Ohio: Ponderosa Park and The Landing at Clay's Park (collectively, the "Campgrounds"). Defendants are banks that entered into an agreement with the owners and developers of these resorts to provide on-site installment loans for individuals seeking to purchase interests in the resorts.

The district court found Plaintiffs' claims barred by RICO's four-year statute of limitations. On appeal, Plaintiffs argue: (i) that the district court improperly found that Plaintiffs had standing to bring a RICO cause of action as early as October 1988, when the Campgrounds filed for bankruptcy; and (ii) that the district court wrongly held that Plaintiffs discovered, or reasonably should have discovered, the source and existence of their injuries and a "pattern" for RICO purposes more than four years before the first complaint was filed on May 25, 1993. We AFFIRM the district court's grant of summary judgment for the reasons set forth below.

I.

A. Procedural Background

In 1993, Plaintiffs filed three class action complaints against Trumbull Savings and Loan Company ("Trumbull"), Cortland Savings and Banking Company ("Cortland") and GEICO Financial Services, Inc. ("GEICO"), alleging civil violations of RICO. ¹ Plaintiffs in these actions are represented by nine class representatives. Each representative was invited through the use of the wires or mails to tour the "to be developed" Campgrounds in 1986, 1987 or 1988, and purchased an interest in the Campgrounds on the day of the tour by executing a form contract entitled "Agreement For Deed." In addition, each representative agreed to obtain installment loan financing being offered on-site through the defendant banks pursuant to installment loan contracts that were executed simultaneously with the purchase contracts.

In their complaints, Plaintiffs allege that the owners and operators of the Campgrounds, known as the LiVorio-Sabatini Group, engaged in a pattern of racketeering that injured Plaintiffs' property interests in the Campgrounds, in violation of RICO. The complaints allege that the banks were liable in damages to Plaintiffs for participating in and conspiring in the LiVorio-Sabatini Group's RICO violations.

After the close of discovery, the banks filed motions for summary judgment on all claims. In relevant part, the banks argued that Plaintiffs' RICO claims were time-barred under the applicable four-year statute of limitations. The district court agreed and issued an order dismissing the RICO claims. First, the district court held that Plaintiffs' RICO injuries were ascertainable and definable at the time Campgrounds filed for bankruptcy in October 1988. Second, the district court found that Plaintiffs had, or reasonably should have, discovered the existence and source of their injuries and the "pattern" for RICO purposes more than four years before the complaints were filed in 1993. Accordingly, the court dismissed with prejudice Plaintiffs' federal RICO claims and dismissed without prejudice their state law claims for lack of supplemental jurisdiction. This appeal followed.

B. Factual Background

The parties do not dispute the basic facts regarding the LiVorio-Sabatini Group's fraudulent "bust-out" scheme. ² Plaintiffs generally paid from $4,000 to $6,000 apiece for the purchase of an undivided 1/750th interest in one phase of the Campgrounds. Each phase was an undeveloped, six-acre plot of land, and the overall property in which each plaintiff had an interest was described by metes and bounds in the Agreement For Deed entered into between Plaintiffs and the Campgrounds. Each Agreement For Deed promised that the "to be developed" Campgrounds would be a fully developed year-round timeshare campground operation. Upon payment of the total purchase price, the Campgrounds were required to deliver a warranty deed conveying title to Plaintiffs. The Agreements For Deed also required an annual fee for the maintenance and operation of the recreational facilities owned by the Campgrounds.

After the Group had partially developed the Campgrounds and obtained millions of dollars in purchase money loan proceeds and other membership sales proceeds, the Group then looted the Campgrounds of all capital necessary to complete and operate the Campgrounds. After only three years, the Campgrounds became insolvent and were placed into bankruptcy.

1. 1985-86: LiVorio-Sabatini Group commences "bust-out" scheme

In 1985, the LiVorio-Sabatini Group obtained from Bank One of Youngstown (Ohio) ("Bank One") commercial financing for the purchase and development of the Campgrounds. Bank One and the LiVorio-Sabatini Group devised an installment financing plan to sell undivided interests in the Campgrounds. Following a tour of the Campgrounds, interested purchasers executed sales agreements (the Agreements For Deed) and installment financing contracts. The resulting loan proceeds were then disbursed among the Group's account and Bank One's reserve accounts. Huge profits followed.

In order to execute the "bust-out" scheme, the Group first needed an influx of financing and an appearance of credit-worthiness. The Group obtained both by bribing two Bank One officials. After these officials touted the Campgrounds to their superiors, the Group received substantial commercial loans and an on-site installment loan facility through Bank One. The ensuing sales of interests in the Campgrounds helped further create the appearance of credit-worthiness and provided a quick infusion of cash into the business. The LiVorio-Sabatini Group was then able to proceed with its bust-out scheme. Once the Group obtained Plaintiffs' money "up-front" as a result of financing obtained by Plaintiffs, it diverted the money from the Campgrounds. In 1985 and 1986, the Campgrounds generated more than $12 million in sales through the use of Bank One's on-site installment loan program. The Campgrounds were under construction at this time.

However, in 1986, senior Bank One officials uncovered the fraud, finding that the LiVorio-Sabatini Group was draining the company. In July 1986, Bank One canceled its loan relationship with the Group, thus imperiling the continuation of the bust-out scheme.

2. 1986-87: Group obtains financing from Trumbull, Cortland and GEICO

After Bank One canceled its financing agreement, in August 1986 the Group approached Trumbull seeking another lender to finance the Campgrounds interests. Plaintiffs allege that Trumbull agreed to finance an installment loan program even though it knew that the LiVorio-Sabatini Group could not guarantee the repayment of these loans. Plaintiffs claim that the deal structure effectively operated to provide Trumbull with "kickbacks" because Trumbull knew that the Group was unable to repurchase or guarantee the loans. According to Plaintiffs, Trumbull and the LiVorio-Sabatini Group structured the deal to enhance Trumbull's ability to enforce and collect on the installment loans once the Campgrounds were bankrupt.

In 1987, the Campgrounds began experiencing serious financial problems and had difficulty paying off its debts. As a result, the LiVorio-Sabatini Group approached Cortland for additional financing. Cortland agreed to finance an installment loan program under an arrangement similar to Trumbull's. Again, Plaintiffs allege that the deal structure effectively operated to provide Cortland with "kickbacks" because Cortland knew that the Group would be unable to repay the loans.

The LiVorio-Sabatini Group continued to drain money from the Campgrounds after obtaining financing from Trumbull and Cortland. In addition, GEICO purchased Bank One's portfolio of Campground installment loans in 1987, and also began making on-site installment loans at the Campgrounds in 1987 and 1988.

3. 1988: Mounting problems culminate in bankruptcy

In March 1988, the Ohio Attorney General ("OAG") brought...