Lawaetz v. Bank of Nova Scotia

• Decision Date: 23 January 1987
• Docket Number: Civil Action No. 1986/102
• Parties: JENNIE A. LAWAETZ, an individual; ERIK J. LAWAETZ, an individual; MONA L. DOANE, an individual; ROY LAWAETZ, an individual; DAVID LAWAETZ, an individual who sues by and through his guardian Erik Lawaetz; and the LAWAETZ FAMILY PARTNERSHIP, Plaintiffs v. THE BANK OF NOVA SCOTIA, a Canadian Corporation and, JOHN OR JANE DOE ONE THROUGH TEN, Defendants
• Court: U.S. District Court — Virgin Islands

23 V.I. 132

JENNIE A. LAWAETZ, an individual; ERIK J. LAWAETZ,

an individual; MONA L. DOANE, an individual;

ROY LAWAETZ, an individual; DAVID LAWAETZ,an individual who sues by and through his guardian Erik Lawaetz;and the LAWAETZ FAMILY PARTNERSHIP, Plaintiffs v. THE BANK OF NOVA SCOTIA, a Canadian Corporation and,JOHN OR JANE DOE ONE THROUGH TEN, Defendants

Civil Action No. 1986/102

District Court of the Virgin Islands Div. of St. Croix

January 23, 1987

Defendants' motions for summary judgment and dismissal challenging civil Racketeer Influenced and Corrupt Organizations (RICO) action as vexatious. The District Court, O'Brien, J., held that the complaint was timely and distinct from previous litigation, and that it adequately pleaded substantive charges of Racketeer Influenced and Corrupt Organizations (RICO) provisions and fraud but not conspiracy, which count was ordered dismissed.

[COPY RIGHT MATERIAL OMITTED]

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GERALD T. GRONER, ESQ., St. Croix, V.I., and W. H. C. VENABLE, ESQ., Mathews, Va., for plaintiffs

LLOYD DE VOS, ESQ., and WILLIAM L. BLUM, ESQ., St. Thomas, V.I., for defendant Bank of Nova Scotia

O'BRIEN, Judge

MEMORANDUM OPINION AND ORDER

This RICO action is vehemently challenged by the defendantbank as vexatious. We hold that the complaint survives the initial attack virtually intact. It is both timely and distinct from previous litigation and adequately pleads substantive charges of RICO and fraud. The conspiracy count, however, does not state a cognizable claim and will be dismissed.

I. FACTS

Plaintiff Erik Lawaetz is the sole shareholder of the St. Croix Hotel Corporation, owner of the St. Croix by the Sea resort. Defendant Bank of Nova Scotia financed the Hotel's expansion throughout the 1970's. These transactions have formed the basis for litigation through the 1980's.

The First Lawsuit

In June 1981, the Hotel sued the Bank for fraud.¹ These are the facts underlying that suit. The Hotel began construction of a condominium complex in 1969. The Bank extended a $1 million loan at New York prime plus two percent and took back a mortgage and note secured by the hotel and condominium properties. The construction loan was repaid exclusively with the proceeds of condominium sales pursuant to the parties' agreement whereby the Hotel assigned the unit owners' mortgage notes to the Bank, which then reduced the construction debt accordingly. The condominium notes demanded nine percent interest and this rate exceeded the interest due on the master loan. To secure the Bank's position in the event of default, the Hotel executed its own note at prime plus two to back up the individual mortgagors.

In 1972, the parties struck a similar agreement for further expansion. Repayment extended through the 1970's, during which interest rates rocketed skyward. Consequently, the yield of the Hotel's collateral notes exceeded the nine percent due from the condominium owners. The Hotel alleged that the Bank took two measures. First, it held the Hotel primarily liable on its notes and calculated interest at the higher variable rate. And, based on the assumption that the already financially-ailing Hotel could not cover the debt service, the Bank induced the Hotel to execute a document entitled "Ratification Agreement and Novation of Existing Mortgage". This document effectively recast the 1972 construction loan to encompass the debts of the individual mortgagors, giving the Bank first priority over all of the Hotel's creditors and enablingit to foreclose on the resort's properties in the imminent bankruptcy proceeding.

On April 13, 1981, the Bank demanded payment of all outstanding indebtedness and seized a $152,000 certificate of deposit owed by Erik Lawaetz and his wife, Jennie. The Hotel filed for protection and reorganization under Chapter 11 and sued the Bank, alleging that its frauds forced the Hotel into bankruptcy.

The case was tried in December 1981 and resulted in a plaintiff's verdict of $750,000. The District Court granted the Bank a new trial on damages and in December 1983, a jury awarded the Hotel compensatory damages of $3.5 million. The Bank won its appeal, which resulted in another trial on both liability and damages. This third trial began in November 1984. The matter settled three days into the proceeding and was dismissed with prejudice.².

The Second Lawsuit

On May 6, 1986, various members of the Lawaetz family filed the present action asserting counts of fraud, conspiracy, conversion, breach of contract and civil RICO. The allegations of this suit begin in time with the execution of the aforementioned ratification agreement. (Complaint, para. 34-37.) As alleged in the earlier litigation, the purpose of that document was to make the Bank the top priority creditor. "Crystallization" of that position, however, depended on the agreement surviving the 120-day bankruptcy preference period, during which the Bank sought to avoid lending the Hotel additional operating expenses. Hence, the heart of this action: the Bank purportedly induced the plaintiffs to operate the Hotel with their own funds and efforts with a promise that it would soon be granted a substantial loan. (Complaint para. 19, 29, 37-41.)³

The plaintiffs invested approximately $582,000 during this period and this contribution, in addition to their uncompensated labor, gave rise to a "de facto family partnership." (Complaint, para. 10, 39, 41.) The partnership spent an additional $600,000 operating the business during the reorganization as a joint venture with the Hotel. (Id., para. 16, 43-44.) The Bank's demand of payment onApril 13, 1981, and the Hotel's consequential filing under Chapter 11 spurred this suit.

II. DISCUSSION

[1, 2] The Bank advances this motion alternatively under Rules 12(b)(6) and 56 of the Federal Rules of Civil Procedure. In determining the sufficiency of the pleading, we are bound by the rule that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). We are required, moreover, to view the factual allegations of the complaint as true. D. P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984).

[3, 4] Consideration of matters outside the pleadings, such as the affidavits submitted by the plaintiffs, converts a motion to dismiss into one for summary judgment. Carter v. Stanton, 405 U.S. 669, 671 (1972). Summary judgment is proper if the nonmoving party cannot show a factual dispute warranting a trial. Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2552-53 (1986).

The Bank's Defenses

A. Statute of Limitations

The Bank's first defense is that this action is timebarred.⁴.

1) The RICO Claims

[5, 6] The Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., does not set a limitations period and thus one must be borrowed from the Virgin Islands as the forum of this suit. The Third Circuit instructs "that in borrowing state limitations for civil RICO claims courts must select, in each state, the one most appropriate statute of limitations for all civil RICO claims." Malley-Duff & Associates v. Crown Life Insurance Co., 792 F.2d 341, 349 (3d Cir. 1986) (U.S. appeal pending) (emphasis inoriginal) (citations omitted).⁵ Because "RICO is a strictly statutory remedy to enforce statutory rights," the proper limitations provision is one "'applying generally to all statutory causes of action that have no express statute of limitations).'" 792 F.2d at 352-53 (quoting and adopting test of A.B.A. Task Force on Civil RICO Report at 389-91).

Malley-Duff involved Pennsylvania law and the Third Circuit chose for the RICO limitations "a residual 'catchall' statute of limitations for actions, primarily based on statute, that are not governed by any more specific period of limitations." 792 F.2d at 352 (emphasis added). Two Virgin Islands limitations statutes fit this description.

The general catchall provision, 5 V.I.C. § 31(2)(A), sets a ten-year deadline for "[a]n action for any cause not otherwise provided for in this section." Section 31(3)(B) provides a six-year deadline for "[a]n action upon a liability created by statute, other than a penalty or forfeiture."

[7, 8] Selection of either statute is consistent with Malley-Duff but the better choice is the six-year provision because it is more responsive to the Third Circuit's characterization of RICO as a purely statutory action while specifically fulfilling the purpose of Pennsylvania's catchall provision. Thus, to be timely, this action must have accrued after May 6, 1980. Malley-Duff, however, expressly deferred on the issue of when the statute of limitations begins running on a RICO claim. 792 F.2d at 345 n.8. We elect to adopt the prevailing view that a claim accrues when the plaintiff knows or should know of the wrongful conduct. See Compton v. Ide, 732 F.2d 1429, 1433 (9th Cir. 1984); Alexander v. Perlan Elmer Corp., 729 F.2d 576, 577 (8th Cir. 1984); Moore v. A. G. Edwards & Sons, Inc., 631 F. Supp. 138, 144 (E.D. La. 1986); A. J. Cunningham Packing v. Congress Financial Corp., 611 F. Supp.532, 537 (W.D. Pa. 1985), rev'd on other grounds, 792 F.2d 330 (3d Cir. 1986).⁶

[9] Accordingly, the RICO claims accrued either when the "smoking gun" memoranda were discovered in November 1984 or at any earlier time that it is shown that the plaintiffs knew or should have known of the Bank's purportedly unlawful behavior. Untimeliness is an affirmative defense and the Bank has the burden to prove it. Until it establishes facts to support a contrary finding, we will continue to view the RICO claims as timely. See Ingvoldstad v. Estate of Young, 19 V.I. 115 (D.V.I. 1982).

2) Common Law Fraud

[10, 11] Under Virgin Islands law, fraud is governed by a two-year limitations period, 5 V.I.C. § 31(5)(A) (1986 Supp.) that begins to run when the act is...