Hill v. Equitable Bank, NA

• Decision Date: 29 August 1986
• Docket Number: Civ. A. No. 82-220 CMW.
• Citation: 642 F. Supp. 1013
• Parties: John T. HILL, et al., Plaintiffs, v. EQUITABLE BANK, N.A., Defendant.
• Court: U.S. District Court — District of Delaware

642 F. Supp. 1013

John T. HILL, et al., Plaintiffs, v. EQUITABLE BANK, N.A., Defendant.

Civ. A. No. 82-220 CMW.

United States District Court, D. Delaware.

August 29, 1986.

Steven D. Goldberg of Theisen, Lank, Mulford & Goldberg, Wilmington, Del. (Richard I. Kovelant and Douglas Clark Hollmann of Goldman, Kruger, Kovelant, Hurtt, Hollman & Kaiser, Laurel, Md., of counsel), for plaintiffs.

Martin I. Lubaroff of Richards, Layton & Finger, Wilmington, Del. (Michael D. Colglazier, Timothy L. Mullin, Jr. and Douglas B. Riley of Miles & Stockbridge, Baltimore, Md., of counsel), for defendant.

CALEB M. WRIGHT, Senior District Judge.

Defendant Equitable Bank, N.A., has moved to dismiss the four counts of plaintiffs' Second Amended Complaint alleging violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968. For the reasons set forth below, the Court will grant the motion in part and deny the motion in part.

I. BACKGROUND

This litigation arises out of an alleged scheme to defraud plaintiffs in relation to the sale of interests in two limited partnerships, Wilmington House Associates ("Wilmington House") and Eagle Associates ("Eagle"). Although the Court previously has given extensive recitations of the underlying facts, see, e.g., 562 F.Supp. 1324 (D.Del.1983), and 599 F.Supp. 1062 (D.Del. 1984), it must cover much of the same ground here to put the current motion in context.

On November 11, 1977, plaintiffs John T. Hill, Thomas and Patricia Ruger, Virgil and Marie Scott, and Descomp, Inc., a corporation controlled by Messrs. Ruger and Scott, entered into subscription agreements to purchase shares of Wilmington House, a limited partnership formed for the purpose of acquiring and operating an apartment complex. Lee P. Der orchestrated plaintiffs' purchase of the shares and served as general partner of Wilmington House through Lee P. Der, Inc., a company wholly owned by Der.

Plaintiffs paid for their shares by means of a down payment on November 11, 1977, and subsequent installment payments made on May 1, 1978, February 1, 1979, February 1, 1980, and February 1, 1981. The installment payments were financed through irrevocable letters of credit issued by Equitable on December 18, 1977. Equitable previously had sent applications for the letters of credit into Delaware. Approval of the letters of credit occurred through the recommendation of Equitable vice-president Stephen Meszaros, and possibly other bank employees, who allegedly received kickbacks from principals of Wilmington House.

On November 2, 1978, plaintiffs Thomas Ruger, Virgil and Marie Scott, and Data Controls North, Inc., a corporation controlled by Ruger and Scott, entered into subscription agreements to purchase shares of Eagle, a limited partnership engaged in the coal mining business in West Virginia. Plaintiff James T. Stritzinger entered into a similar subscription agreement on November 30, 1978. Lee P. Der also orchestrated plaintiffs' purchase of Eagle shares and served as general partner of Eagle through Der-Mas, Inc., a corporation Der controlled.

Eagle was formed as the resyndication of a predecessor limited partnership, Alma Coal Properties Ltd. ("Alma"). The resyndication of Alma into Eagle was part of an allegedly fraudulent scheme in which Equitable participated. In August 1978, Ward Development Co. ("Ward"), the sole limited partner of Alma, sued Der, the partnership, and others, claiming breaches of the partnership agreement. On August 31, 1978, Ward obtained a temporary injunction prohibiting Equitable from making payments on letters of credit issued to Ward to finance its purchases of Alma shares. This lawsuit and the possibility of Ward's withdrawal from Alma placed Alma on the brink of bankruptcy and created a substantial risk that Alma would default on Equitable's loans to the partnership. To stave off this possibility, Equitable and Der and other Alma principals in August, 1978, entered into a plan to conceal the lawsuit by foregoing collection of the balance due on Ward's partnership interest and to resyndicate Alma as Eagle. Proceeds from the sales of new partnership interests would be used to retire part of Equitable's loans to Alma, and part of the debt eventually was paid off.

On November 6, 1978, Der set up a meeting in which Messrs. Ruger and Scott met with R. Kenneth Rous, an Equitable vice-president, to discuss, among other things, financing for plaintiffs' purchases of Eagle shares. At the meeting, Rous allegedly omitted to disclose material information about the partnership and made certain affirmative misrepresentations. These misrepresentations included statements that Eagle was a sound investment, that the Eagle private Placement Memorandum was accurate, and that Equitable had no conflicts of interest in the sale of Eagle shares.

James Stritzinger paid for his Eagle shares by means of a down payment on December 18, 1978, and subsequent installment payments on June 1, 1979, and June 1, 1980. Equitable provided a loan to finance Stritzinger's down payment and issued letters of credit to finance his installment payments.

Ruger, Virgil and Marie Scott, and Data Controls North, Inc., paid for their Eagle shares by means of a down payment on December 15, 1978, and subsequent installment payments on June 1, 1979, and June 1, 1980. Equitable declined to issue letters of credit to finance their installment payments, and plaintiffs financed the installment payments by other means.

On July 16, 1979, the Securities and Exchange Commission ("SEC") issued an order finding that Der and Lee P. Der, Inc. had willfully violated several provisions of the securities laws in connection with their offers and sales of limited partnership interests. The order also suspended the broker-dealer registration of D & S Financial, Inc. ("D & S"), a broker-dealer controlled by Der which had handled plaintiffs' applications for loans and letters of credit to finance their purchases of Wilmington House and Eagle shares. Equitable learned of the SEC order on July 24, 1979, but failed to inform plaintiffs of its content.

On April 1, 1980, plaintiffs filed suit against Der, the partnerships, and others involved in the sale of partnership interests to plaintiffs, alleging they were fraudulently induced to purchase Wilmington House and Eagle shares through various misrepresentations. Hill v. Der, No. 80-146 (D.Del., filed April 1, 1980).

On February 20, 1981, Stritzinger wrote a letter to the Maryland State Banking Commissioner inquiring about possible improprieties regarding Equitable's relationship with Der and D & S, and Equitable's financing of Stritzinger's purchase of Eagle shares. The Commissioner forwarded this letter to Equitable with a request for an explanation. Hill wrote a letter to Equitable on March 9, 1981, inquiring about similar improprieties in connection with Equitable's financing of plaintiffs' purchases of Wilmington House shares and whether Equitable had terminated any employees as a result of such improprieties.¹ On March 17, 1981, Virgil Scott sent Equitable a similar letter.

On March 10, 1981, Equitable wrote a letter to the Bank Commissioner, denying any wrongdoing in connection with its financing of Stritzinger's purchase of Eagle shares, a copy of which the Commissioner forwarded to Stritzinger on March 17, 1981. Similarly, on April 17, 1981, Equitable wrote letters to Hill and Scott denying any improprieties in connection with its financing of plaintiffs' purchases of Wilmington House shares, copies of which were forwarded to the Bank Commissioner. The Bank Commissioner apparently took no further action on these matters.

At an April 15, 1982, meeting between plaintiffs and Equitable officials, the bank denied that it had done anything improper or illegal relating to its issuance of loans or letters of credit to plaintiffs.

Plaintiffs filed suit against Equitable on April 30, 1982. The Second Amended Complaint, filed January 2, 1986, alleges an assortment of claims under the federal securities laws and the common law of Maryland and Delaware. The particular federal claims alleged in relation to the Wilmington House deal include substantive violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 stemming from various omissions of material facts by the Bank, aiding and abetting violations of those provisions, conspiracy to violate those provisions, and aiding and abetting violations of § 12(2) of the Securities Act of 1933. The federal claims relating to Eagle include various affirmative misrepresentations and omissions of material fact in violation of § 10(b) and Rule 10b-5, aiding and abetting violations of 10b-5, conspiracy to violate 10b-5, aiding and abetting violations of § 12(2), and "controlling person" liability under § 20 of the Exchange Act and § 15 of the Securities Act. In addition, plaintiffs allege a substantive violation of RICO (§ 1962(c)) and a conspiracy to violate RICO (§ 1962(d)) for each partnership deal, which are the subject of the current motion to dismiss.

II. DISCUSSION

Plaintiffs have alleged violations of the following provisions of RICO:

(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsections (a), (b), or (c) of this section.

18 U.S.C. § 1962(c), (d). Liability under § 1962(c) requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., ___ U.S. ___, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985). In relation to both the Wilmington House and Eagle RICO counts, Equitable is the "p...