Faircloth v. Finesod

• Decision Date: 09 July 1991
• Docket Number: No. 89-2788,89-2788
• Citation: 938 F.2d 513
• Parties: , RICO Bus.Disp.Guide 7800 Phyllis FAIRCLOTH, Administratix of the Estate of Jiles T. Lynch, Plaintiff-Appellee, v. Herman FINESOD, Defendant-Appellant, and Jackie Fine Arts, Inc.; F. Peter Rose; L.A. Walker; C.S. Pulkinen; National Settlement Associates of South Carolina, Inc.; Marilyn Goldberg; Marigold Enterprises, Ltd.; Sigmund Rothschild, Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 513

938 F.2d 513

60 USLW 2086, RICO Bus.Disp.Guide 7800

Phyllis FAIRCLOTH, Administratix of the Estate of Jiles T.

Lynch, Plaintiff-Appellee, v. Herman FINESOD, Defendant-Appellant, and Jackie Fine Arts, Inc.; F. Peter Rose; L.A. Walker; C.S.

Pulkinen; National Settlement Associates of South Carolina,

Inc.; Marilyn Goldberg; Marigold Enterprises, Ltd.;

Sigmund Rothschild, Defendants.

No. 89-2788.

United States Court of Appeals, Fourth Circuit.

Argued Feb. 4, 1991.

Decided July 9, 1991.

Elliot Silverman, argued (William B. Wachtel, on brief), Gold & Wachtel, New York City for defendant-appellant.

John Patrick Freeman, Columbia, S.C., for plaintiff-appellee.

Before HALL, Circuit Judge, BUTZNER, Senior Circuit Judge, and MULLEN, District Judge for the Western District of North Carolina, sitting by designation.

K.K. HALL, Circuit Judge:

Herman Finesod appeals a judgment in excess of $4.3 million for fraud, civil conspiracy, and RICO, entered against him after a jury trial. Finesod did not appear at the trial. Nonetheless, we find that a pretrial error requires a reversal in part.

I.

This case arises from a tax avoidance scheme. Appellant Herman Finesod is a promoter of tax shelters. In late 1979, a Finesod-controlled company, Jackie Fine Arts, Inc., ¹ sold Jiles Lynch a Picasso "art master." An "art master" is a copy of a famous painting from which prints, posters, and the like can be made. Along with the picture, Lynch bought the rights to make various kinds of reproductions from it. For his Picasso art master, Lynch paid $100,000 down and gave a note for an additional $450,000. This note was not due until 1994. Jackie Fine Arts sold over 2,000 other art masters to other investors, at an average price of $225,000-$250,000. In 1986, Jackie Fine Arts was holding $409 million in notes receivable from buyers of art masters.

The art masters are actually worth only a tiny fraction of the prices paid by investors; Jackie Fine Arts paid about $10,000 apiece for them. However, Jackie furnished investors with two supposedly independent appraisals of each art master. Lynch's Picasso master was pegged at $750,000 by Sigmund Rothschild and $700,000 by F. Peter Rose. Rothschild and Rose worked out of the same office and used the same secretary, though this arrangement was not disclosed to investors. The two churned out around 2,500 appraisals for Jackie Fine Arts, all of them in the same basic format. Rothschild was paid $250 per appraisal, Rose $150-$300 each, and Rose kicked back $50 per appraisal to Rothschild.

A similarly tainted opinion was provided about the tax consequences of an art master purchase. A Los Angeles law firm wrote an opinion letter supporting the viability of the tax shelter. This firm, however, had a secret deal with Finesod through which it received 1% of the cash received from the sale of the masters, and it had represented a Finesod-controlled entity in previous shady dealings. ²

The IRS has disallowed use of the art masters as tax shelters, and numerous suits have arisen nationwide.

The key event relevant to this appeal occurred February 22, 1985, when Jiles Lynch died. Phyllis Faircloth, his administratrix, filed this suit on July 5, 1985, against Jackie Fine Arts, Finesod, Rothschild, Rose, and others. Faircloth asserted claims for fraud, violations of various securities laws, unfair trade practices, and RICO. ³ The defendants moved for summary judgment and alleged that the fraud and RICO claims did not survive the death of Lynch. The district court, in a reported opinion, held that civil RICO claims do survive. Faircloth v. Jackie Fine Arts, Inc., 682 F.Supp. 837 (D.S.C.1988). Furthermore, the court ruled that, although the South Carolina survival statute as interpreted by that state's courts would not permit a fraud action to survive, the statute violated the Equal Protection Clause of the Fourteenth Amendment. ⁴ Therefore, the district court denied the defendants' motion for summary judgment on the fraud and RICO claims.

After nearly four years of litigation,

Finesod's counsel moved to withdraw, and the district court granted the motion on March 10, 1989. Four months later, the case proceeded to trial against the three remaining pro se defendants--Finesod, Rose, and Jackie Fine Arts. None of the defendants appeared.

At the close of the evidence, the district court directed a verdict for the plaintiff against all three defendants. The jury deliberated only as to what, if any, punitive damages were appropriate. The awards were considerable. Faircloth was awarded $469,839 compensatory damages for fraud and civil conspiracy ⁵ and $1,409,517 treble damages on the RICO claim (three times the same $469,839). The jury assessed punitive damages of $5 million against Jackie Fine Arts, $2.5 million against Finesod, and $500,000 against Rose. The court permanently enjoined the defendants from trying to collect on the $450,000 promissory note when it matured. Finally, the plaintiff was awarded attorney's fees of $615,170.

Finesod filed a timely pro se notice of appeal, but Rose and Jackie Fine Arts did not. After we calendared the case for argument, Finesod retained counsel to prosecute the appeal.

II.

The central issue presented, and that of most importance to the bench and bar of South Carolina, is the constitutionality of the survival statute. At common law, tort claims did not survive the death of the plaintiff or defendant. In 1932, the South Carolina legislature repudiated the old rule and enacted a liberal survival statute (codified at S.C.Code Sec. 15-5-90):

Causes of action for and in respect to any and all injuries and trespasses to and upon real estate and any and all injuries to the person or to personal property shall survive both to and against the personal or real representative, as the case may be, of a deceased person and the legal representative of an insolvent person or a defunct or insolvent corporation, any law or rule to the contrary notwithstanding.

Though this language is broad, the South Carolina Supreme Court has persisted in recognizing an exception to survivability for claims of slander, malicious prosecution, and fraud. Mattison v. Palmetto State Life Insurance Co., 197 S.C. 256, 15 S.E.2d 117 (1941). There is no question that Faircloth's fraud claim is barred if the South Carolina statute is constitutional.

The district court held otherwise, however. The court found that the statute, as interpreted by the South Carolina courts, creates a distinction between two classes of plaintiffs that, at least as regards a fraud claim, ⁶ is not rationally related to a legitimate government objective. Therefore, the court concluded that the statute violates the Equal Protection Clause.

There are few cases addressing the constitutionality of exceptions for particular torts from a survival statute. Other than the district court's opinion in this case, there are only four reported cases on point, all from state courts--Nadstanek v. Trask, 130 Or. 669, 281 P. 840 (1929) (exception for personal injury does not violate "fundamental law" of state); Stanley v. Petherbridge, 96 Colo. 293, 42 P.2d 609 (1935) (claim that has not been reduced to judgment is not such a vested right that legislature may not take it away), overruled on other grounds, Publix Cab Co. v. Colorado National Bank of Denver, 139 Colo. 205, 338 P.2d 702, 712 (1959); Moyer v. Phillips, 462 Pa. 395, 341 A.2d 441 (1975) (libel and slander exception violated Equal Protection Clause of state and federal constitutions); Thompson v. Petroff's Estate, 319 N.W.2d 400 (Minn.1982) (exception for all intentional torts violated state constitution's Equal Protection Clause). Though the first two challenges failed, and the more recent two have succeeded, these decisions are too few and scattered to say that there is either a trend or a prevailing view.

We are not concerned with whether a fraud exception to a general survival statute is a prudent legislative choice. Statutes are presumed constitutional, and a law that neither creates a suspect class nor abridges a fundamental right is given only minimal equal protection scrutiny. City of New Orleans v. Dukes, 427 U.S. 297, 303, 96 S.Ct. 2513, 2516, 49 L.Ed.2d 511 (1976). A court applying minimal scrutiny will not overturn a statute " 'unless the varying treatment of different groups or persons is so unrelated to the achievement of any combination of legitimate purposes that [the court] can only conclude that the legislature's actions were irrational.' " Pennell v. City of San Jose, 485 U.S. 1, 14, 108 S.Ct. 849, 858, 99 L.Ed.2d 1 (1988), quoting Vance v. Bradley, 440 U.S. 93, 97, 99 S.Ct. 939, 942, 59 L.Ed.2d 171 (1979). ⁷

We do not believe that the presumption of constitutionality has been overcome here. The district court relied heavily on the lack of an explanation of the exception's rationale by the South Carolina courts as evidence of the absence of any rationale. That conclusion does not necessarily follow. The South Carolina courts have simply construed the statute. The constitutionality of the statute has not been challenged before them; they have consequently had no cause to delve into its purpose. Immediately after referring to this silence, the district court continued: "This court refuses to speculate as to what considerations may underlie the distinction between fraud and other causes of action." 682 F.Supp. at 849. On the contrary, a court must make every feasible attempt to discern the reasons for a legislative distinction before it declares that distinction irrational and unconstitutional.

Appellant argues that the South Carolina legislature could have left the harsh common-law rule intact, and its decision to modify, rather than abolish, the rule should not render it constitutionally infirm. While this argument has some superficial appeal, it does not resolve the question before us. Even if the legislature acts in a wholly beneficent manner, it...