Bhatla v. Resort Development Corp.

• Decision Date: 03 August 1989
• Docket Number: Civ. A. No. 88-147.
• Parties: Monmohan BHATLA and Shabnam Bhatla, et al., Plantiffs, v. RESORT DEVELOPMENT CORPORATION et al., Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

720 F. Supp. 501

Monmohan BHATLA and Shabnam Bhatla, et al., Plantiffs, v. RESORT DEVELOPMENT CORPORATION et al., Defendants.

Civ. A. No. 88-147.

United States District Court, W.D. Pennsylvania.

August 3, 1989.

COPYRIGHT MATERIAL OMITTED

Joseph H. Reiter, Philadelphia, Pa., Robert Carmody and William A. Carey, Washington, D.C., and Michael P. Malakoff, Pittsburgh, Pa., for plaintiffs.

Glenn Douglas Dolfi, Pittsburgh, Pa., pro se.

Joseph F. Moore, Jr., Philadelphia, Pa., for Mellon Bank.

Thomas Allen, Pittsburgh, Pa.

Kel M. Damsgaard, Philadelphia, Pa., for U.S. Capital.

Richard Klaber, Pittsburgh, Pa.

OPINION

D. BROOKS SMITH, District Judge.

This complicated piece of litigation is before this Court after the filing by all the defendants of a Motion to Dismiss all counts of the Second Amended Complaint.¹ The Second Amended Complaint contains four counts: a RICO claim, and claims for fraud, breach of contract and rescission. For the reasons hereinafter stated we grant, in part, the Motion to Dismiss.

This action arises out of the development of a condominium project at a ski resort in the Allegheny Mountains of Western Pennsylvania. Plaintiffs purchased condominiums at this project. Subsequently, the plaintiffs discovered they did not get what they thought they had bargained for in purchasing their condominiums. Hence, this suit against the fifteen defendants.

Plaintiffs purchased their condominiums from Resort Investment Corporation (Resort).² Resort was the corporation responsible for the construction of the condominium project. Resort's parent corporation, U.S. Capital Corporation, (U.S. Capital) had acquired the land for the project and had been responsible for financing, developing and marketing the condominiums. Three other U.S. Capital subsidiaries were involved in this transaction. These subsidiaries were Capital Acceptance Corporation (CAC), U.S. Capital Mortgage Corporation (USCM) and First Capital Finance Corporation (First Capital). Their involvement related to the initial financing and mortgage services for new condominium owners. The six individual defendants also were associated with defendant U.S. Capital and its subsidiaries.³ The remaining four defendants are all associated with Mellon Bank, N.A.⁴ The Mellon defendants provided construction financing for Resort's construction of the condominium.

The condominium project was marketed to potential purchasers in several ways. A mail campaign was initiated with the public offering statement and related sales literature being mailed to potential purchasers. 2d Am.Co. ¶ 64(d)(1). A phone network was established so that sales presentations could be made. Id., ¶ 64(d)(2). Advertisements describing the condominiums also were placed in widely circulated east coast newspapers. 2d Am.Co. ¶ 64(d)(3).

The potential purchasers netted by these marketing efforts received a sales presentation describing the condominium. Within this presentation, an exclusive rental agreement was included with the condominiums. This rental agreement would require that the owners pay a portion of their rentals to U.S. Capital. 2d Am.Co. ¶ 64(d)(6). In turn, a major hotel chain had been retained to handle condominium rentals through its 800 phone number. 2d Am.Co. ¶ 64(e)(4).

In addition, the condominiums purchased by plaintiffs were in Phase I of a four phase development. 2d Am.Co. ¶ 63(a). Phase I units would be complemented by further phases which would maintain an appearance consistent with phase I. 2d Am.Co. ¶ 64(b). Condominiums in phase I also would appreciate in value because future units would exceed the price of those being offered for sale. This would assure purchasers a greater resale value and generate greater rental activity. Id., ¶ 64(e)(1) and (2). The condominiums in phase I also were supposed to include as amenities an outdoor pool and tennis courts. 2d Am.Co. ¶ 64(i)(3).

After the plaintiffs purchased their units, however, the sparkle began to fall from the package. The first phase of the condominium was built, but future phases were abandoned. 2d Am.Co. ¶ 64(f). Instead, on the same land that phase II would have been built, the U.S. Capital defendants planned to construct a new and different condominium project. This new project would consist of lower priced efficiency units called ski chalets. 2d Am.Co. ¶ 64(h). These efficiency units allegedly eroded the value of the plaintiff's condominiums in phase I, as well as their potential rental prospects.

Plaintiffs claim that the defendants' substitution of the lower priced efficiency units for subsequent phases of the condominium development was fraudulent. Plaintiffs' claim is based on the fact that defendants' actions and representations induced plaintiffs to believe that a specific plan existed to regularly increase prices. This plan would prevent future units from being sold at prices below those paid by plaintiffs. 2d Am.Co. ¶ 64(e)(2). This representation was further buttressed by a sales agent who told plaintiffs that Phase II would be built upon the closing of Phase I. See Plaintiffs' Opposition to Motions to Dismiss, p. 6 n. 2. In addition, plaintiffs note that the amended Public Offering Statement, received by some of the plaintiffs indicated that there were no changes to the condominium project except for the completion date of one of the buildings in Phase I. 2d Am.Co. ¶ 64(f). Plaintiffs claim that had they known the representations regarding the condominiums were false, they would not have purchased condominium units. 2d Am.Co. ¶ 64(c).

Before we reach the merits of defendants' Motions to Dismiss, we note our procedural posture in resolving these issues. Federal Rule of Civil Procedure 12(b) requires that a motion to dismiss be treated as one for summary judgment if matters outside the pleadings are presented to, and not excluded by, the court. Fed. R.Civ.P. 12(b). The parties have extensively briefed the motions and filed numerous exhibits, affidavits, and excerpts from depositions in support of their positions. We, therefore, will treat this motion as one for summary judgment. Accordingly, judgment will be rendered if "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).

I. RICO

The plaintiffs' RICO claim avers violations of section 1962(a), (c) & (d). 18 U.S.C. § 1962(a), (c) & (d). We will address each subsection seriatim. Moreover, each subsection will be addressed separately with regard to the U.S. Capital defendants and Mellon defendants.

A. § 1962(a) and the U.S. Capital defendants.

Subsection (a) of section 1962 provides: It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity ... in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce....

18 U.S.C. § 1962(a). Hence, to assert a cause of action pursuant to § 1962(a), plaintiffs must allege each of the following elements: (1) a person; (2) receipt of income derived from; (3) a pattern of racketeering activity; and (4) said person used or invested the income; (5) in an enterprise engaged in or affecting interstate commerce.

Plaintiffs allege each of these elements in a conclusory fashion in their Second Amended Complaint. Paragraph 81 states

Each of the defendants derived income directly or indirectly from the aforementioned pattern of racketeering activity. Such income was used and invested directly and indirectly by the defendants in the operation of BKS & CC, RDC, U.S. Capital, Capital Acceptance Corporation, Mellon Financial Services Corporations No. 7, 11 and 1 and Mellon Bank, N.A. each of which was an enterprise engaged in and the activities of which, affected interstate commerce....

2d Am.Co. ¶ 81. The U.S. Capital defendants contend, however, that as a matter of law the plaintiffs are unable to show either a "pattern" or "racketeering activity." U.S. Capital also asserts that plaintiffs do not have standing to bring this civil action.

Before we reach the issue of standing, we address whether there is a "pattern" of "racketeering activity." Plaintiffs submit that the racketeering activity consisted of mail, wire and securities fraud, 2d Am.Co. ¶ 78, 79, all of which are included in section 1961's definition of "racketeering activity." 18 U.S.C. § 1961(1)(B) and (C). We address only the allegation of fraud in the sale of securities.⁵

U.S. Capital contends that plaintiffs are unable to establish fraud in the sale of securities. First, U.S. Capital argues condominium units are not securities. Second, U.S. Capital submits plaintiffs cannot prove justifiable reliance because the alleged oral misrepresentations are contradicted by written statements in the public offering statements and sales agreement. We are unpersuaded by either argument.

First, we address whether the condominiums purchased by plaintiffs can be considered securities. Plaintiffs allege that the condominiums are investment contracts. 2d Am.Co. ¶ 64(d)(6). Investment contracts are included in the definition of security as established in 15 U.S.C. § 77b, but the term itself is undefined. The Supreme Court defined the term "investment contract" in SEC v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The Court stated that

an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party....

328 U.S. at 298-99, 66 S.Ct. at 1102-03.

The Howey definition was applied...