Schultz v. Rhode Island Hosp. Trust Nat. Bank, N.A.

• Citation: 94 F.3d 721
• Decision Date: 07 June 1996
• Docket Number: Nos. 95-1997,95-2113 and 95-2172,s. 95-1997
• Parties: RICO Bus.Disp.Guide 9108 Peter M. SCHULTZ and Pamela A. Schultz, Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, N.A., et al., Defendants, Appellees. BOWDOIN CONSTRUCTION CORP., Plaintiff, Appellant, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, N.A., et al., Defendants, Appellees. ALLENBY ENTERPRISES, INC., et al., Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, N.A., et al., Defendants, Appellees. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 721

94 F.3d 721

RICO Bus.Disp.Guide 9108

Peter M. SCHULTZ and Pamela A. Schultz, Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, N.A., et al.,

Defendants, Appellees.

BOWDOIN CONSTRUCTION CORP., Plaintiff, Appellant, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, N.A., et al.,

Defendants, Appellees.

ALLENBY ENTERPRISES, INC., et al., Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, N.A., et al.,

Defendants, Appellees.

Nos. 95-1997, 95-2113 and 95-2172.

United States Court of Appeals First Circuit.

Heard June 7, 1996.

Decided Aug. 22, 1996.

Edwin A. McCabe, with whom McCabe Brown Sutherland, Joseph P. Davis III, and Lane, Altman & Owens were on brief, Boston, for plaintiffs-appellants.

Joseph L. Kociubes, with whom Peter Alley, Denise Jefferson Casper, and Bingham, Dana & Gould were on brief, Boston, for Rhode Island Hospital Trust National Bank.

Allen N. David, Elizabeth Z. Holmes, and Peabody & Arnold, on brief, Boston, for Federal Deposit Insurance Corp. as receiver of Coolidge Bank and Trust Co.

Robert D. Cultice, Louis J. Scerra, Jr., and Goldstein & Manello, P.C., on brief, Boston, for Chrysler First Business Credit Corp.

Before TORRUELLA, Chief Judge, and CAMPBELL, Senior Circuit Judge, and LYNCH, Circuit Judge.

LYNCH, Circuit Judge.

These three actions, consolidated for appeal, arise out of a failed real estate venture involving the purchase and redevelopment of the Sea Crest Hotel in Falmouth, Massachusetts ("the Sea Crest"). In a federally registered public offering, investors purchased condominium unit deeds and "pooled income" interests in the Sea Crest project. One of the offering's features, as disclosed in the prospectus, was that the offering would be terminated and all investor deposits refunded if the aggregate amount of investments sold did not reach a minimum subscription level ("MSL") by a set deadline. Plaintiffs asserted that Rhode Island Hospital Trust National Bank ("RIHT"), the lender that financed the developer's purchase of the Hotel and served as the escrow agent responsible for holding investor deposits, was liable to them for purportedly failing to determine that the MSL requirement had not in fact been satisfied by the requisite date. The district courts concluded, as a matter of law, that the plaintiffs' claims against RIHT for fraud, negligent misrepresentation, breach of contract, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq., were all deficient. We agree that plaintiffs have established no legal basis for holding RIHT liable for their losses. Accordingly, we affirm.

I. Factual Background

In the mid-1980's, Eugene Marchand developed a plan to purchase and renovate the Sea Crest Resort and Conference Center, a large beach resort on Cape Cod. Marchand sought to revitalize the hotel as a convention-oriented facility. The plan involved converting the Sea Crest into a condominium, and then selling the individual condominium units to investors, together with interests in the pool of income to be generated from the resort. The condominium units and these "pooled income" interests were to be sold as registered securities in a public offering. The issuer of the securities would be Marchand's development company, Laurel-Sea Crest Realty Sales Corp. ("Laurel"), of which Marchand was the sole shareholder. Laurel's purchase of the Sea Crest, for $19.4 million, would be financed through sales to investors and a bank loan from RIHT. With projected expenses of $40.5 million and total expected gross proceeds from the offering projected at $45 million, Laurel stood to make a net profit of $4.5 million.

On September 12, 1986, Laurel filed a registration statement and prospectus with the SEC, describing the proposed offering of 266 "condominium hotel interests." The prospectus stated that the offering would be conditioned upon a minimum level of investor participation:

Unless 60 Hotel Interests are subscribed for by qualified investors ("Minimum Subscription Level") within 60 days of the effective date of the Registration Statement of which this Prospectus is a part, but in no event later than December 31, 1986, this offering will be withdrawn and all funds will be returned promptly to subscribers.

The prospectus also stated that every investor would be required to "pay a down payment of 10% of the purchase price of the Hotel Interest (the 'Escrow Deposit')," which would be "deposited ... in a segregated, federally insured, interest bearing account ... at the Rhode Island Hospital Trust National Bank ... on behalf of Investor." The prospectus named RIHT as escrow agent for the offering.

As Laurel waited for the registration statement to be declared effective by the SEC, it secured the financing it needed to purchase the Sea Crest. On November 14, 1986, RIHT issued a commitment letter to Laurel approving a fourteen million dollar first mortgage construction loan to be used by Laurel in acquiring and renovating the Sea Crest facility. RIHT's commitment, like the offering, was conditioned upon the "presale" of a minimum number of Sea Crest interests prior to December 29, 1986, the expiration date of RIHT's commitment letter. ¹

As of the date that RIHT issued its commitment letter to Laurel, however, the SEC had yet to approve Laurel's registration statement. In fact, the registration statement was not declared effective by the SEC until December 12, 1986, leaving just two and a half weeks for Laurel to achieve the MSL set in the prospectus and the minimum number of presales required by RIHT. It was clear that Laurel needed more time. Laurel sought to restructure the offering and obtain a new commitment agreement from RIHT, with a new timetable for meeting the minimum presale requirement. RIHT agreed to renegotiate.

As Laurel and RIHT neared agreement on a new loan commitment, Laurel filed, on March 2, 1987, a post-effective amendment to its original registration statement. The amendment established a new deadline for Laurel to meet the MSL requirement. It also restructured the requirement to condition the offering on a minimum dollar amount of aggregate sales, rather than a minimum number of unit sales. The amended prospectus explained:

Unless Hotel Interests of $6,000,000 in aggregate purchase price are subscribed for by qualified investors ("Minimum Subscription Level") within 120 days of the effective date [ ²] of the Registration Statement of which this Prospectus is a part, this offering will be withdrawn and all funds will be returned promptly to subscribers.

The amended prospectus left unchanged the original prospectus's representation that each investor would be required to tender a down payment equal to ten percent of the selling price of the unit to be purchased, which would be deposited in an escrow account held by RIHT.

RIHT issued a new commitment letter to Laurel on March 30, 1987. This time, RIHT agreed to give Laurel an 18.3 million dollar loan, conditioned upon the presale of only 40 units with a minimum aggregate selling price of $6 million, each presale requiring a ten percent nonrefundable investor deposit. Laurel was required to satisfy the new 40-unit presale condition by no later than April 10, 1987, the expiration date of the new commitment letter.

Apart from RIHT's lending relationship with Laurel, the bank's only role in the Sea Crest offering was to act as escrow agent. RIHT did not sign the registration statement. Nor did it participate in promoting the offering or in selling or soliciting subscriptions. RIHT's duties as escrow agent were to be governed by a written escrow agreement between Laurel and RIHT, addressed to the investor. A copy of the agreement, annexed as an exhibit to Laurel's registration statement, was to be provided to each subscribing investor. As will be discussed, there is some dispute as to the particular form of agreement by whose terms RIHT agreed to be bound. It is clear, however, that RIHT assumed at most a duty to hold investors' deposits in escrow until "[Laurel] shall verify to the Bank that ... $6,000,000 in aggregate purchase price for Hotel Interests have been subscribed for and received as required under the Registration Statement...."

As the offering proceeded, Laurel, through its selling agent (Broad Reach Capital), collected purchase and sale agreements for individual Sea Crest condominium units ("unit sale agreements"). Notwithstanding the prospectus's representations that investors would be required to tender a ten percent non-refundable "escrow deposit" upon subscribing to the offering, Laurel and Broad Reach Capital accepted promissory notes for ten percent of the purchase price--in lieu of cash deposits--from almost half of the investors who signed unit sale agreements prior to the MSL deadline. Such cash deposits as were tendered by the investors were placed in an escrow account at RIHT. But as the deadline for meeting the MSL approached, only a total of some $309,000 had been deposited into the RIHT escrow account.

RIHT and Laurel conducted their loan closing on April 9, 1987, just prior to the expiration date of the March commitment letter. At the closing, RIHT was provided with copies of the unit sale agreements that had been executed. An officer of the bank counted the sale agreements to verify that there had been at least 40 units sold (as required in RIHT's loan commitment letter) and tallied the aggregate amount of sales to verify that the six million dollar MSL requirement had been met (as set forth in the agreement and the prospectus). No one at RIHT undertook to verify whether there was a ten percent deposit in escrow for each unit subscription. Having satisfied itself that at least 40 subscriptions and $6 million in aggregate sales had been achieved, RIHT proceeded to close its loan with Laurel and thereafter released the escrowed investor deposits to Laurel. Laurel purchased the Sea ...