Adams v. Cavanagh Communities Corp.

• Decision Date: 02 September 1987
• Docket Number: No. 81 C 7332.,81 C 7332.
• Citation: Adams v. Cavanagh Communities Corp., 669 F.Supp. 870 (N.D. Ill. 1987)
• Court: U.S. District Court — Northern District of Illinois
• Parties: Richard & Valerie ADAMS, et al., Plaintiffs, v. CAVANAGH COMMUNITIES CORPORATION, Ed McMahon, Joseph Klein, Zola Klein, Cavanagh Land Sales Corp. and John Sgarlat, Defendants.

669 F. Supp. 870

Richard & Valerie ADAMS, et al., Plaintiffs, v.CAVANAGH COMMUNITIES CORPORATION, Ed McMahon, Joseph Klein, Zola Klein, Cavanagh Land Sales Corp. and John Sgarlat, Defendants.

No. 81 C 7332.

United States District Court, N.D. Illinois, E.D.

September 2, 1987.

Stephen J. Spitz, Eugene J. Frett, Sperling, Slater & Spitz, Chicago, Ill., for plaintiffs.

Wilber H. Boies, Lawrence Zabinski, McDermott, Will & Emery, Chicago, Ill., Victor Schwartz, Philadelphia, Pa., Steven D. McCormick, Kirkland & Ellis, Richard J. Hoskins, Schiff, Hardin & Waite, Chicago, Ill., Richard S. Kraut, Schiff, Hardin & Waite, Washington, D.C., for defendants.

MEMORANDUM OPINION AND ORDER

NORDBERG, District Judge.

This seven-count complaint, filed on behalf of over one thousand plaintiffs, alleges that defendantsCavanagh Communities Corp.("Cavanagh Communities"), Cavanagh Land Sales Corp.("Cavanagh Land Sales"), Ed McMahon, Joseph and Zola Klein("the Kleins") and John Sgarlat perpetrated a comprehensive land fraud scheme which defrauded plaintiffs and other investors of millions of dollars.The parties are before the court on defendantEd McMahon's motion for summary judgment with respect to the claims against him.¹For the reasons set forth below, the court denies McMahon's motion for summary judgment.

Factual Allegations

In 1969, Cavanagh Communities acquired approximately 26,000 acres of land in central Florida, and commenced plans for the development of a community entitled Rotonda West. Joseph Klein was the president and largest stockholder of Cavanagh Communities, and one of the main individuals responsible for the promotion and development of the Rotonda West project.Using a model constructed for a defunct project entitled "Rotonda East," the Kleins allegedly began marketing Rotonda West as an investment opportunity which would rapidly appreciate in value.They created seven subdivisions surrounding Rotonda West which were designed as "suburbs" to the Rotonda West project.

Basically, the plaintiffs allege that the Kleins and Cavanagh Communities induced them to purchase undeveloped lots by misrepresenting the actual value of the property, and the ability of the company to develop and improve the property.Plaintiffs allege that these defendants continually increased the price of Rotonda lots throughout the period of sales in order to deceive plaintiffs into believing that their lots were appreciating in value.The structure of the sales agreement assisted defendants in concealing the value of the unimproved lots from the plaintiffs.The contract, which usually provided for several installment payments over a ten-year period, contained a provision that no purchaser could build on his property until all installments were paid and title was transferred by deed.In addition, until title passed, all purchasers were required to grant Cavanagh Communities a right of first refusal on any resales, and plaintiffs were prohibited from reselling their property without the express permission of Cavanagh Communities.The alleged concealment was facilitated by the fact that approximately ninety-five percent of these sales were made to out-of-state investors who were not likely to visit the property, and were dependent upon information from defendants concerning the development of the property.

DefendantEd McMahon was appointed as an officer of Cavanagh Communities in 1970, and became the firm's principal sales figure.He narrated several Rotonda sale films, and permitted Cavanagh Communities to use his name and picture on all their promotional materials distributed in Illinois and elsewhere across the country.The contract between McMahon and Cavanagh Communities identified McMahon as a principal spokesman for the project, who would make personal appearances and narrate the sales and promotional films distributed in connection with the Rotonda project.McMahon's compensation included cash payments, a home at Rotonda, Rotonda West Cove lots, home furnishings and Cavanagh Communities common stock.Between 1970 and 1974, Cavanagh Communities used McMahon's name, picture and image in virtually all of its sales promotions.Plaintiffs allege that these promotional talks, films and brochures misrepresented McMahon's actual relationship to the project, the condition of the property, and the viability of the proposed development.

In 1973 and 1974, McMahon began receiving letters from disgruntled investors complaining about the fact that the lots had not been improved in accordance with his representations.McMahon contacted Cavanagh Communities and requested that they withdraw his narrated film from its sales promotion scheme.The other defendants agreed to withdraw the promotional film, and paid McMahon an additional $100,000 in exchange for his permission to use his name and image in sales promotions of the development.They continued to use his name and image for approximately six to nine months after this agreement.

By 1975, Cavanagh Communities had agents promoting the Rotonda project in offices located in twenty-seven cities and over sixteen states.The plaintiffs allege that defendants' sales force used false and misleading slides, films, property reports and sales brochures (including the McMahon printed materials) to induce them to invest in the project.These materials promised that the final development, which was to include seven golf courses and club houses, a marina, thirty-two miles of canals, and extensive shopping, commercial and recreational facilities, would be completed by 1977.

Plaintiffs allege that in furtherance of their comprehensive scheme to defraud, the Kleins, Sgarlat and Cavanagh Communities filed inaccurate reports with the Securities and Exchange Commission and with regulatory agencies of twenty-six states.According to plaintiffs, these reports were misleading in that they failed to disclose Cavanagh Communities' lack of permits and approvals, flooding conditions at Rotonda, governmental and environmental restrictions on development, and prohibitive economic factors.This misrepresentation continued up to the filing of the complaint in 1981.At the time this complaint was filed, over ninety-five percent of the lots remained undeveloped and could not be reached by conventional means due to flooding and other environmental hazards.Aside from the development of one "core" community in the project, the defendants have never developed the property in accordance with their original promises; nor have they ever refunded these plaintiffs with any portion of the purchase price.

The plaintiffs' seven-count complaint alleges that defendants' perpetration of this land fraud constitutes a violation of the Interstate Land Sales Full Disclosure Act("ILSFDA"), 15 U.S.C. § 1701 et seq.; the Securities Act of 1933 and the Securities Exchange Act of 1934,15 U.S.C. § 77(l)and§ 78(j); the Racketeer Influenced Corrupt Organizations Act("RICO"), 18 U.S.C. §§ 1961-1964; and common law breach of contract and fraud.

Motion for Summary Judgment

On a motion for summary judgment, the moving party has the burden of establishing that there is no genuine issue of material fact, and that it is entitled to judgment as a matter of law.Cedillo v. International Ass'n of Bridge & Structural Iron Workers,603 F.2d 7, 10(7th Cir.1979).The non-moving party is entitled to all reasonable inferences that can be made in its favor.United States v. Diebold, Inc.,369 U.S. 654, 655, 82 S.Ct. 993, 993, 8 L.Ed.2d 176(1962).However, a plaintiff may not merely rely on conclusory pleadings to withstand summary judgment.In responding to a motion for summary judgment, he must set forth specific facts in affidavits or otherwise show that there are genuine issues that must be decided at trial.First National Bank of Arizona v. Cities Service Co.,391 U.S. 253, 88 S.Ct. 1575, 20 L.Ed.2d 569(1968);Posey v. Skyline Corp.,702 F.2d 102, 105(7th Cir.), cert. denied,464 U.S. 960, 104 S.Ct. 392, 78 L.Ed.2d 336(1983).

McMahon's motion for summary judgment alleges that the plaintiffs executed a covenant not to sue him, thereby relinquishing any claims they might have had against him.He asserts that there is no genuine issue of material fact with respect to this covenant; and therefore, he is entitled to judgment as a matter of law.The terms of this alleged covenant not to sue are set forth in three letters that McMahon received in 1981, which form the crux of his motion for summary judgment.

According to McMahon, representatives of the Rotonda Lot Purchasers Association, Inc.("RLPA") contacted him in the spring of 1981 to inquire about his knowledge of the alleged fraud perpetrated at Rotonda.They told him that he had been targeted as a potential defendant in a lawsuit against Cavanagh Communities and the Kleins.They also represented that they needed more information about the Cavanagh Communities operations before they could file a lawsuit, and suggested that if McMahon consented to be "interviewed" regarding his knowledge of the Rotonda development, he would not be included as a defendant in the impending lawsuit.McMahon's personal business agent, Lester Blank, notified the RLPA in April of 1981 that McMahon would agree to this arrangement.

The basic terms of the agreement are contained in three separate letters, all dated April 22, 1981.The first letter, typed on RLPA letterhead, provides:

Dear Mr. McMahon:

Mr. Mark P. Binstein, this Association's investigator, has provided us with information and material relating to the previous role of yourself and others concerning Cavanagh Communities Corporation.In addition, Mr. Binstein has informed us of the results of his meeting with yourself, his meeting with Mr. Lester Blank(your representative), and his telephone communications with Mr. Blank.Finally, Mr. Binstein has expressed his professional opinions and conclusions concerning the facts and circumstances of your

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