Forcier v. Cardello
| Decision Date | 07 November 1994 |
| Docket Number | Civ. A. No. 91-0337L. |
| Citation | 173 BR 973 |
| Court | U.S. District Court — District of Rhode Island |
| Parties | Regis FORCIER, Joseph P. Labreche, Severino DiSandro and Wilfred Lapiere, Individually and on behalf of all other Debenture Holders of Columbus Mortgage and Loan Corporation of Rhode Island, Inc., Plaintiffs, v. Augusta CARDELLO, Richard J. Riccitelli and Alan S. Casale, Partners d/b/a Cardello, Riccitelli & Casale, CPAs, Defendants. |
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Edmond A. DiSandro, DiSandro-Smith & Associates, P.C., Inc., A. Lauriston Parks, III, Hanson, Curran, Parks & Whitman, Providence, RI, for plaintiffs.
John F. Dolan, Mark P. Dolan, Rice, Dolan & Kershaw, Joseph A. Kelly, Carroll, Kelly & Murphy, Providence, RI, for defendants.
This matter is now before the Court on the motion of defendants Augusta Cardello, Richard J. Riccitelli, and Alan S. Casale, partners d/b/a Cardello, Riccitelli & Casale, CPA's ("Cardello"), for summary judgment as to four counts of plaintiffs' Amended Complaint. For the reasons stated below, Cardello's motion is granted as to Count II and denied as to Counts I, III, and IV.
On February 15, 1991, Columbus Mortgage & Loan Corporation of Rhode Island, Inc., ("Columbus"), a mortgage lending firm, filed for protection from creditors pursuant to Chapter 11 of the United States Bankruptcy Code. Columbus had been in business for over thirty years and had specialized in residential real estate loans secured by first and second mortgages. From August of 1961 until December of 1991, Columbus was owned and controlled by Joseph R. Muratore, Sr. ("Muratore").
At the time it declared its bankruptcy, Columbus' most significant group of creditors was its debenture holders1. These debenture holders provided a significant financial base for the operations of Columbus. For years, Columbus had used the money that it had acquired through selling the debentures to execute loans for first and second mortgages on real estate. At some point, however, Columbus' business practices changed. Columbus began making unsecured loans to Muratore and his associated real estate entities so that Muratore could purchase income-producing real estate. Muratore's self-dealing and breach of fiduciary duty is fully described in Darr v. Muratore, 8 F.3d 854 (1st Cir.1993). Columbus began issuing its debentures around 1970 and did so until 1990. In later years, some of the issues were used to retire maturing debentures. Finally, by 1991, approximately $4 million in debentures were outstanding in the hands of the public.
This action by debenture holders was filed on July 3, 1991. An Amended Complaint was filed on April 20, 1992. On April 27, 1993, this Court entered an Order certifying this as a class action suit, the class of plaintiffs consisting of all debenture holders of Columbus as of December 31, 1991. The plaintiffs named in the caption of this case were designated as class representatives.
Plaintiffs allege that at all relevant times Cardello provided accounting services to Columbus. Among the services provided by Cardello were the preparation of tax returns and unaudited financial statements from 1970 until 1975 and the preparation of audited certified financial statements from 1975 until 1990. Columbus used the certified financial statements to obtain approval from the Rhode Island Department of Business Regulation ("DBR") for the sale of debentures to the public. DBR received yearly financial statements describing the condition of Columbus, which it reviewed prior to permitting Columbus to sell debentures to the investing public. Between 1975 and 1979, DBR, partly in reliance upon the certified financial statements, permitted Columbus to issue debentures to the general public. While Cardello disclaims any knowledge that the debenture holders were receiving its financial statements or, indeed, that there even were any debenture holders, plaintiffs allege that Cardello either directly submitted the financial statements to DBR or submitted the statements to Columbus with the understanding that DBR would review the statements prior to permitting debenture sales by Columbus. The financial statements that Cardello provided to Columbus allegedly contained a series of misstatements and omissions of material fact. Most important, the statements failed to indicate that Columbus was experiencing severe financial difficulties. In particular, it is claimed that Columbus was de facto insolvent during the whole period 1983 to 1991.
Plaintiffs allege that at all relevant times the primary assets of Columbus were promissory notes secured by mortgages on real estate and that Cardello accepted, for the purposes of the financial statements, the real estate values provided by Muratore. As previously noted, Muratore owned and controlled Columbus, as well as its wholly-owned real estate subsidiary corporation, Columbus Development Corporation. Plaintiffs further allege that the values were inflated and that Cardello knew, or should have known, that the values were incorrect.
Plaintiffs also allege that for many years Columbus made unsecured loans to various affiliates of Columbus, including corporations and partnerships controlled by Muratore and his wife, Rose E. Muratore, and of which Muratore and/or his wife were often the sole shareholders, owners, officers or directors. For example, Muratore was a shareholder, director, and officer of Muratore Agency, Inc. ("Muratore Agency") and Muratore Realty Corp. ("Muratore Realty"), and a general partner of Shawomet Holding Association ("Shawomet Holding"). Muratore's wife was a shareholder in Columbus, Muratore Agency, and Muratore Realty. She was also a director and secretary-treasurer of Columbus, an officer and director of Muratore Agency and Muratore Realty, and a partner in Shawomet Holding. These Muratore entities were all involved in the business of selling and developing real estate.
There is no dispute that Columbus provided several unsecured loans to the Muratore entities, drawing funds from the pool of money accumulated by the selling of debentures to citizens of Rhode Island. These loans were by no means insignificant. In fact, loans to the Muratore entities totaled $2,044,313 as of June 30, 1989, more than half of Columbus' total assets of $3,973,791 at that time.
While Columbus loaned money to these affiliates, in very few instances were there any promissory notes attending the affiliate loans. There was seldom any security for the loan, nor any written indication of the amount of interest to be paid on the loan. For example, although the loans were often used for the acquisition of real estate by the Muratore entities, rarely, if ever, were mortgages placed on the real estate. To the extent that security did exist for the loans, plaintiffs allege that the value of the security was insufficient collateral for the loans.
Despite the fact that Columbus received no money from any of the Muratore entities prior to 1991, Cardello stated in the financial statements for 1988 and 1989 that Columbus received interest income from its affiliates. Cardello failed to make clear that interest on the various loans was accrued but not paid and that a large percentage of the assets of Columbus were the unsecured receivables.
In addition, for many years prior to 1991, Columbus provided loans to its chief operating officer and principal shareholder, Muratore. As with the loans to the affiliated entities, these were essentially unsecured loans, not evidenced by promissory notes, security or evidence of interest rates. In preparing Columbus' financial statements, Cardello failed to identify the officer who received the loans or to indicate whether Columbus had ever received any repayments on the loans. This omission occurred despite the fact that Cardello performed the accounting work, including preparing tax returns and financial statements, for Columbus' affiliates.
Plaintiffs allege that the financial statements prepared by Cardello were an integral part of the prospectuses for the debentures provided by Columbus and that plaintiffs purchased their debentures in reasonable reliance upon the statements of Cardello. The prospectuses included a statement that "all of the financial statements included in this prospectus have been included in reliance upon the opinions and reports of Cardello, Riccitelli & Casale. . . ." Columbus stated in the prospectuses that it would use the proceeds of the debenture sales to provide first and second mortgage financing, but, in fact, Columbus loaned considerable amounts of the money it received to Muratore and his entities, unsecured. Although Columbus was insolvent from 1983 until the time when it filed for bankruptcy protection, Cardello never made clear in any financial statement that the company was insolvent. Cardello never provided a "going concern" provision in the financial statements. Indeed, nothing in the statements suggested that the financial health of Columbus was suspect.
Nor did anything in the debentures suggest that the funds were being used for anything other than secure first and second mortgage financing. However, the reality was far different from the appearance presented by the financial statements. The debentures were used to fund what was in reality an elaborate pyramid scheme. The debentures were used to pay interest on the debenture notes extant at any particular time. Muratore also used the debenture money to fund the operations of his entities. In addition, Columbus' funds may have been used to pay miscellaneous personal debts of Muratore. The record contains no proof of repayment from Muratore to Columbus. This Court entered a judgment against Muratore and his entities in the amount of $2,146,034.24 in favor of Stephen Darr, the Trustee of Columbus. That judgment was affirmed by the First Circuit....
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