Zervas v. Faulkner

• Decision Date: 15 December 1988
• Docket Number: No. 87-1243,87-1243
• Citation: 861 F.2d 823
• Parties: RICO Bus.Disp.Guide 7097 John ZERVAS, et al., Plaintiffs-Appellees, v. D.L. FAULKNER, et al., Defendants, Spencer Blain and Jane Nix, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 823

861 F.2d 823

RICO Bus.Disp.Guide 7097

John ZERVAS, et al., Plaintiffs-Appellees, v. D.L. FAULKNER, et al., Defendants, Spencer Blain and Jane Nix, Defendants-Appellants.

No. 87-1243.

United States Court of Appeals, Fifth Circuit.

Dec. 15, 1988.

William M. Ravkind, Deborah Goodall, Dallas, Tex., for Blain.

Judy M. Spalding, Vincent W. Perini, Dallas, Tex., for Jane Nix.

Mark S. Werbner, Marc W. Joseph, Carrington, Coleman, Sloman & Blumenthal, Dallas, Tex., for plaintiffs-appellees.

Appeals from the United States District Court for the Northern District of Texas.

Before BROWN, GEE and GARWOOD, Circuit Judges.

GARWOOD, Circuit Judge:

In this civil suit based on the Racketeer Influenced and Corrupt Organizations Act (RICO) and related pendant state law fraud theories, defendants-appellants Spencer Blain (Blain) and Jane Nix (Nix) appeal the judgment on the jury's verdict against them and in favor of plaintiffs-appellees John Zervas (Zervas) and certain entities controlled by him. ¹ We reverse.

Facts and Proceedings Below

The crux of Zervas' claim is that in connection with his September 1982 purchase and subsequent development of a 14.55-acre tract of land near Dallas, Texas, he was a victim of a complex, wide-ranging, and ongoing conspiracy centered around Empire Savings and Loan Association (Empire) of Mesquite, Texas, just outside of Dallas, and involving Blain, Nix, and many others. To place the contentions of the parties in an understandable context, we outline the background facts and circumstances surrounding Zervas' purchase and development, the alleged conspiracy, and the roles therein of Blain and Nix, as shown by the evidence at trial. ²

In March 1982, Blain left his job as president of First Federal Savings and Loan Association (First Federal) in Austin, Texas to become president of Empire. As Empire's president, Blain was to receive an annual salary of $30,000 plus twenty-five percent of the profits generated by Statewide Service Corporation (Statewide), a wholly-owned subsidiary of Empire that engaged in real estate transactions. Shortly after his arrival in the Dallas area, Blain was given a Rolex watch by D.L. Faulkner (Faulkner), a local developer whom Blain had come to know while working at First Federal and who was instrumental in Blain's decision to move from Austin to the Dallas area. Two months after his arrival at Empire, Blain learned that a controlling block of Empire's stock was for sale. After obtaining a loan of some $800,000 from Faulkner and Faulkner's business partner James L. Toler (Toler), Blain purchased this block of stock and became Empire's majority shareholder.

Nix owned and ran nearby Dallas Title Company of Rowlette (Dallas Title), which frequently did large volumes of business with Empire, Statewide, and Faulkner, among others. Nix served on the Empire board (though not on its loan committee) for approximately six months until she resigned in October 1982.

In the summer of 1982, Toler informed Blain that he had an option to buy some land adjacent to other land that he owned in the Faulkner Creek area of the so-called I-30 corridor located in eastern Dallas County, Texas, and that he believed that this land could be sold at a substantial gain. Based on this information, Blain caused Statewide to borrow money from a local bank in order to purchase this land. This land was subsequently sold to certain builders and developers, netting Statewide an $800,000 gain.

The Faulkner Creek transaction was not the only land transaction in which Blain was involved with Faulkner and Toler. In August 1982, Faulkner and Toler sold to Blain personally a sixty-five-acre tract of land in Rowlette, Texas for between $800,000 and $1,100,000. This property was subsequently appraised by appraiser Paul Tannehill (Tannehill) at $5,800,000. Based on this appraisal, Blain was able to obtain a loan of $2,250,000, which he used both to pay for the land and to pay off the $800,000 loan that Faulkner and Toler had previously made to him. The closing for this transaction took place at Dallas Title. In December 1982, Blain agreed to sell this tract to developer Cliff Sinclair (Sinclair) for some $16,000,000 in cash and real estate. The closing for this transaction, which occurred on February 17, 1983, also took place at Dallas Title. Nix personally handled that closing. Shortly before that closing took place, Empire loaned some $32,000,000 to certain investors buying land in which Sinclair had an interest.

From March to October 1982, Empire, under Blain's direction, initiated an aggressive campaign to increase its assets by soliciting "brokered" deposits from out of state. These deposits vastly multiplied Empire's size and enabled it to expand its construction loan business substantially. In soliciting these deposits, it is not disputed that interstate wire transmissions were made and that the mails were used.

In July 1982, Zervas, a real estate developer with a somewhat checkered past, ³ who was living in Dallas and was also involved in a condominium project in Galveston, learned from his friend Mike Kammerling (Kammerling), a real estate broker with Merrill Lynch in Dallas, that some interesting real estate activity was occurring in the I-30 corridor. At Kammerling's suggestion, Zervas decided to attend an informal Saturday morning breakfast gathering at a local restaurant that was frequently attended by many of those involved in developing the I-30 corridor. On this occasion, Paul O'Dell (O'Dell), a Merrill Lynch colleague of Kammerling who worked with many of the developers in this area, introduced Zervas to Faulkner and Toler. Although Zervas indicated that he might be interested in building some condominium units in that area, Toler informed him that there was no land available for purchase at that time. The following week, however, Zervas received a phone call from O'Dell, who informed him that a tract owned by Faulkner, Toler, and others had recently become available for purchase. The next Saturday--August 7, 1982--Zervas met with Faulkner and Toler and was shown a four- to five-acre tract in an area called Faulkner Point. After seeing this land, Zervas signed a contract to purchase it at six dollars a square foot and gave a $1,000 earnest money check to Faulkner and Toler.

On August 9, 1982, Zervas went to Empire, which he had been told was heavily involved in lending in the I-30 corridor, and submitted certain financial information to one of its employees. Subsequently, Zervas received another phone call from O'Dell, who informed Zervas that ten acres of land adjacent to the land that Zervas had under contract had just become available due to a previous potential buyer's having backed out of a contemplated purchase. Zervas testified that O'Dell told him the value of this land, when added to that Zervas already had under contract, "was somewhere around seven million dollars." Zervas then called a friend of his named Ralph Falgiamo (Falgiamo), who owned a trucking company in New Jersey, and asked whether he was interested in becoming Zervas's partner in building some condominium units on this land. Shortly thereafter, Falgiamo flew to the Dallas area and, on August 25, 1982, after he and Zervas viewed the property that was available for sale, they signed four contracts, each covering a separate parcel and providing for $1,000 earnest money, in Toler's office to purchase this additional land. When this additional land was added to the land that Zervas had previously contracted to buy, the total acreage amounted to 14.55 acres, for which the sale price was approximately $5,600,000. That same day, Falgiamo and Zervas went to a lawyer and had a partnership agreement drawn up.

After returning to New Jersey, however, Falgiamo changed his mind about the partnership and informed Zervas that he did not intend to go through with the purchase. Zervas then called O'Dell to inform him that because Falgiamo was withdrawing, Zervas was only going to be able to purchase the tract that he had originally planned to purchase. ⁴ At O'Dell's urging however, Zervas agreed to talk with Faulkner and Toler about going through with the agreement to purchase all 14.55 acres himself, O'Dell again stating it was worth seven million dollars. At the meeting with Faulkner and Toler, Zervas stated that he would only be able to purchase the 14.55 acres if the purchase price was lowered from the previously agreed upon price of some $5,600,000 to about $4,000,000, which would be approximately $6.31 a square foot. Although no agreement was reached that evening, Toler subsequently called Zervas and informed Zervas that he and Faulkner would accept the lower amount offered by Zervas.

Although Zervas had now committed himself, at least informally, to purchase the 14.55 acres alone, he continued to have doubts about certain aspects of the transaction. In particular, Zervas informed Faulkner and Toler that he doubted that he would be able to arrange the necessary financing by himself. Faulkner informed Zervas, however, that financing the transaction would not be a problem and that he would take care of it for Zervas. Zervas agreed to let Faulkner act as his "mortgage broker"; however, Zervas never discussed with Faulkner the terms or conditions that Zervas would accept on a loan to buy the property.

About two weeks later, Zervas was informed by Merrill Lynch that the transaction to purchase the land was to close at Dallas Title on September 14, 1982. On the closing date, still without any knowledge of the terms of any loan, Zervas went to Dallas Title approximately two hours early. He asked to speak with Nix, whom he had not previously met, and was introduced to her. Nix, who was then preparing to conduct the closing, informed Zervas that Paul Jensen (Jensen), the president of Lancaster Savings and Loan Association (Lancaster), had attempted to reach Zervas at Dallas Title and that Zervas should return...