Adams v. Cavanagh Communities Corp., 81 C 7332.

CourtUnited States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
Citation847 F. Supp. 1390
Docket NumberNo. 81 C 7332.,81 C 7332.
PartiesRichard & Valerie ADAMS, et al., Plaintiffs, v. CAVANAGH COMMUNITIES CORP., et al., Defendants.
Decision Date10 March 1994


Eugene J. Frett, Stephen J. Spitz, Sperling, Slater & Spitz, P.C., Christopher James Murdoch, Stein, Ray & Conway, Chicago, IL, for plaintiffs.

Robert A. Downing, Sidley & Austin, Barbara Merrey DeCoster, Wilber H. Boies, Lawrence E. Zabinski, Paul Evans Chronis, McDermott, Will & Emery, Chicago, IL, W. Paul Tobin, Crowley & Cuneo, Los Angeles, CA, for defendants.


NORDBERG, District Judge.


This action, filed on behalf of more than one thousand Plaintiffs, alleges that Cavanagh Communities Corp. ("Cavanagh Communities"), Cavanagh Land Sales Corp. ("Cavanagh Land Sales"), Joseph and Zola Klein ("the Kleins"), John Sgarlat, (collectively "the Cavanagh Defendants") and television personality Ed McMahon perpetrated a comprehensive land fraud scheme that defrauded Plaintiffs and other investors of millions of dollars. Plaintiffs' Seven Count Amended Complaint seeks remedies under the Securities Act of 1933, ch. 38, 48 Stat. 74 (codified as amended in scattered sections of 15 U.S.C. (1988)); the Securities Exchange Act of 1934, ch. 404, 48 Stat. 881 (codified as amended in scattered sections of 15 U.S.C. (1988)); the Interstate Land Sales Full Disclosure Act ("ILSFDA"), Pub.L. No. 90-448, 82 Stat. 590 (1968) (currently codified as amended at 15 U.S.C. §§ 1701-1720) (1988)); the Racketeer Influenced and Corrupt Organizations Act ("RICO"), ch. 96, 84 Stat. 941 (1970) (currently codified as amended at 18 U.S.C. §§ 1961-1968 (1988)); and the common law of fraud and contract.

Before the Court is Defendant McMahon's Renewed Motion to Dismiss and the Cavanagh Defendants' Motions to Dismiss and for Summary Judgment. For the following reasons, the Motions to Dismiss are granted in part and denied in part. The outstanding Motions for Summary Judgment are denied, without prejudice.


With the Court assuming as true all of the well pleaded allegations of Plaintiffs' Amended Complaint, and reasonable inferences therefrom, the facts of this case are as follows. 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 original chairman of the board, chief operating officer, and largest stockholder of Cavanagh Communities, and was one of the driving forces in promoting Rotonda West. Zola Klein was an officer and director of Cavanagh Communities, and also was actively involved in promoting the project.1 John Sgarlat was chairman of Cavanagh Communities at the time the original Complaint in this case was filed.

Cavanagh Land Sales was a wholly owned subsidiary of Cavanagh Communities which was used to market Rotonda West. Cavanagh Communities employed other subsidiaries, referred to here as the "Cape Corporations," in developing Rotonda West.2 Employing a model constructed for a defunct project called "Rotonda East", the Kleins began marketing Rotonda West as an opportunity to acquire undeveloped land that would rapidly appreciate in value as a result of promised development. The project was to become a self-contained community, replete with homes, paved roads, canals, parks, golf courses and other facilities and was to be ringed with seven subdivisions promoted as "suburbs". As a result of their efforts, the promoters sold over one thousand lots. Many of those purchasers are Plaintiffs in this case.

Plaintiffs allege that the Kleins and the other Defendants induced them to purchase lots in Rotonda West by misrepresenting the actual value of the property and the ability of Cavanagh Communities and the Cape Corporations to develop and improve it. These Defendants artificially increased the price of Rotonda lots throughout the period of sales in order to deceive earlier purchasers into believing that their lots were appreciating in value, when, in fact, the lots were virtually worthless.

The terms of a given Plaintiff's investment in Rotonda West were governed by that Plaintiff's sales contract. The Plaintiffs' sales contracts provided for payment through monthly installments over approximately ten years coupled with annual interest rates of five percent to seven and a half percent. These contracts forbade purchasers to build on their property until all installments were paid. Until the purchase price and cost of improvements were fully paid, the developers retained title and possession of the lots. In addition, purchasers were required to grant Cavanagh Communities a right of first refusal on any resales. Plaintiffs who had not completed paying for their lots were prohibited from offering their property for resale without the express permission of Cavanagh Communities.

The concealment was further facilitated by the fact that approximately ninety-five percent of the lot sales were made to out-of-state investors who were not likely to visit the property and who depended on information from Defendants concerning the development of the property.

By 1975, Cavanagh Communities was promoting the Rotonda West project in twenty-seven cities located in sixteen states. The sales force used false and misleading slides, films, property reports and sales brochures to induce investors to purchase lots. These materials promised that Rotonda West, 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. The "suburban" subdivisions surrounding Rotonda West were similarly promoted, with promised improvements to be completed between 1977 and 1981. The latest specified completion date for all improvements was January 1, 1983. Refunds were promised if the improvements were not made as planned. The overriding theme of these promotional activities was that the purchase of lots at the Rotonda project was a good investment, superior in kind to alternative investments such as bonds, insurance, savings or stocks. Much of the promotional literature was mailed to prospective purchasers.

Plaintiffs allege that in furtherance of the comprehensive scheme to defraud, Defendants also filed inaccurate reports with the Securities and Exchange Commission and several state regulatory agencies. These reports failed to disclose that Cavanagh Communities lacked certain permits and approvals, that flooding conditions existed at Rotonda, that governmental and environmental restrictions and prohibitions existed regarding development of the Rotonda property, and that prohibitive economic factors existed. At the time the original Complaint in this case was filed, on December 31, 1981, over ninety-five percent of the lots remained undeveloped and could not be accessed by conventional means because of flooding and other environmental hazards. Aside from one "core" community in the project, built as a showplace model and where approximately 700 families eventually resided, the Defendants neither developed the property in accordance with their original promises nor refunded any portion of Plaintiffs' installment payments.

The majority of the 22,000 unimproved lots in the Rotonda project were sold between 1969 and 1975. Prices ranged from $7,690 to $13,740 for "single-family homesites", and from $14,840 to $28,240 for "multiple family homesites". The comparable residential price ranges in the suburban subdivisions were from $4,540 to $11,390 for single-family sites, and from $9,840 to $61,890 for multiple-family sites.

Instrumental in the sales, Plaintiffs allege, were the activities of Ed McMahon. Hoping to parlay McMahon's television fame into lot sales, the Cavanagh Defendants hired him as the project's advertising spokesman. As compensation, McMahon received "approximately $500,000 in the form of cash payments, a home at Rotonda designed by a world famous architect, home furnishings, lots in the Rotonda West Cove area, and common stock of Cavanagh Communities." (Am.Compl. ¶ 47.) In addition, McMahon was named an officer of Cavanagh Communities in November 1970.

McMahon agreed to the use of his likeness, name and statements attributed to him in sales brochures, company newspapers, magazines, letters, and other sales and promotional materials. Most important, according to Plaintiffs, was the use of a film narrated by McMahon at presentations for prospective purchasers. Under the terms of his contract with the developers, McMahon's approval was required before the developers could use any sales materials involving him. Throughout these materials, Plaintiffs allege, were a series of misrepresentations concerning the scope of McMahon's involvement in the project, the rise of Rotonda property values, and the project's ultimate potential for success. Plaintiffs allege, among other things, that the various promotional materials included untrue claims that McMahon was a substantial investor in Rotonda West and an active officer in Cavanagh Communities who participated in the determination of policies and the review of development plans.

In 1973 and 1974, disgruntled lot purchasers began sending McMahon letters complaining that the lots were not being developed as promised. McMahon began correspondence with Cavanagh Communities, requesting that the film he had narrated no longer be used for lot sales. Eventually, the developers agreed to pay McMahon at least an additional $100,000 in return for the continued use of his name and likeness on other sales materials.

Plaintiffs allege that Cavanagh Communities, "in conspiracy" with the Kleins, Cavanagh Land Sales and McMahon, distributed to Plaintiffs and other lot purchasers, either directly or through management agents, a stream of information designed to conceal the...

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