Perlman & Perlman Marketplace Inv.

• Citation: 185 F.3d 850
• Decision Date: 27 August 1999
• Docket Number: Nos. 98-3600,98-3780 and 98-3781,s. 98-3600
• Parties: (7th Cir. 1999) Richard M. Perlman and Perlman Marketplace Investors, Plaintiffs-Appellees, Cross-Appellants, v. Samuel Zell, et al., Defendants-Appellants, Cross-Appellees
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 850

185 F.3d 850 (7th Cir. 1999)

Richard M. Perlman and Perlman Marketplace Investors, Plaintiffs-Appellees, Cross-Appellants, v. Samuel Zell, et al., Defendants-Appellants, Cross-Appellees.

Nos. 98-3600, 98-3780 and 98-3781

United States Court of Appeals, Seventh Circuit

Argued May 12, 1999

Decided August 2, 1999

Rehearing and Rehearing En Banc Denied Aug. 27, 1999.

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 C 4242--Ruben Castillo, Judge.

Before Coffey, Easterbrook, and Ripple, Circuit Judges.

Easterbrook, Circuit Judge.

Between 1976 and 1990 Richard Perlman worked at Equity Financial and Management Company, a real estate syndication and management group under the control of Samuel Zell and Robert Lurie. While at Equity, Perlman invested in several of the firm's real estate partnerships. Perlman also received "participations" in other partnerships--that is, fractional interests in Equity's share of these partnerships. Paying employees with participations put their self-interest to work; participation holders would profit only to the extent other investors did.

After leaving Equity, Perlman complained about the payments he received on account of his partnership and participation interests. Equity replied that payments were being offset against a $300,000 loan that Perlman had not repaid before he left; Perlman rejoined that the money was a bonus, not a loan. Equity also informed Perlman that distributions on participation interests were being deferred because some of the ventures were ongoing. According to Equity, a participation is measured by the value of all real estate partnerships established in the year it is awarded, and its final value cannot be calculated until all of these partnerships have been wrapped up or refinanced; Perlman contended, to the contrary, that participations created interests in each partnership and should be valued and paid out (if the value is positive) when each partnership concludes, rather than when all of the year's ventures come to an end. If some partnerships lose money, then the dispute about participations affects total payments as well as timing. Suppose Perlman had a 1% participation in Equity's share of three 1988 partnerships, two of which finished with a $1 million profit in 1992 and the third of which incurred a $1 million loss in 1995. Equity contends that nothing is payable until 1995, when all three ventures have been wound up, after which the loss would be offset against the profit and 1% of the net (or $10,000) paid to Perlman. On Perlman's view, however, Equity should have paid $20,000 for the two profitable ventures in 1992, and he would owe nothing to Equity in 1995 on account of the losing partnership.

Each side stuck to its guns and litigation ensued. Perlman sought relief under state law for breach of contract (the parties agree that Illinois law controls). Because most parties are citizens of Illinois, the diversity jurisdiction does not authorize litigation in federal court. To get around this problem--and to treble the stakes--Perlman contended that he is a victim of "racketeering" entitled to collect under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. sec.sec. 1962(c), (d), 1964. Recovery under RICO depends on proof that the defendants (Zell, Lurie, and partnerships they controlled) operated an "enterprise" (Equity) through a "pattern of racketeering activity" or at least conspired to do so. Section 1961(1) defines "racketeering activity"; mail fraud is the principal form alleged, although the possibility of securities fraud lurks in the background. Partnership interests may be securities, and the case began before Congress conditionally removed securities fraud from the list in sec.1961. See Fujisawa Pharmaceutical Co. v. Kapoor, 115 F.3d 1332, 1337-38 (7th Cir. 1997). State-law claims then came to federal court under the supplemental jurisdiction. 28 U.S.C. sec.1367. Perlman presented under sec.1367 not only breach of contract but also several flavors of consumer fraud.

Defendants performed their promises until Perlman's departure, which could have knocked out most of his fraud claims. Breach of contract is not fraud; only making a promise with the intent not to keep it deserves that epithet. Bower v. Jones, 978 F.2d 1004, 1012 (7th Cir. 1992); Restatement (2d) of Torts sec.530(1) (1977). When the substance of the promise is fairly debatable (and the participation program, at least, merits that label), and many promises are kept for extended periods before a dispute breaks out, it is hard to see how it could be said that the defendants never intended to keep their bargains. But Perlman had other theories of fraud, and the district judge concluded that all should be tried. 938 F. Supp. 1327 (N.D. Ill. 1996). The jury awarded him approximately $700,000 for the value of his participations and another $700,000 for his partnerships, and it ruled in Perlman's favor under RICO. The jury also found that the $300,000 was a loan rather than a bonus (vindicating defendants' setoffs) and rejected Perlman's state-law fraud claims.

On post-judgment motions, the district court concluded that the RICO judgment could not be sustained, even viewing the evidence in the light most favorable to the verdict, because Perlman failed to establish a "pattern" of racketeering. The court held that Perlman is entitled to prejudgment interest on the $1.4 million and that defendants are not entitled to prejudgment interest on the $300,000. The net judgment in Perlman's favor is approximately $1.8 million. Both sides have appealed, raising many issues, most with multiple subparts. This opinion addresses only the more substantial of the disputes; the judgment is affirmed with respect to the rest substantially for the district court's reasons.

I

Breach of contract is not fraud, and a series of broken promises therefore is not a pattern of fraud. It is correspondingly difficult to recast a dispute about broken promises into a claim of racketeering under RICO. Uniroyal Goodrich Tire Co. v. Mutual Trading Corp., 63 F.3d 516, 522-23 (7th Cir. 1995); J.D. Marshall International, Inc. v. Redstart, Inc., 935 F.2d 815, 821 (7th Cir. 1991). Difficult is not impossible. Sometimes the evidence shows outright lies and a plan not to keep one's promises-- enough of them to meet RICO's continuity-plus-relationship formula for a "pattern." H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (1989); see also Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985). But the burden of proving this is on the plaintiff, and like the district court we conclude that Perlman did not adduce evidence from which a trier of fact properly could find a pattern of predicate acts. Indeed, the jury itself seems to have been of this view; it rejected each of the explicit fraud claims Perlman leveled against the defendants. This leaves its RICO verdict as something of a puzzle, but one best resolved as the district court did. In an effort to avoid the conclusion that this case is more than just a dispute about the meaning of the partnership and participation contracts, Perlman has advanced so many different theories of fraudulent schemes that it would be tedious to discuss them all. A sample will show the flavor of the claims, and why they fail.

Zell and Lurie were (through an intermediary) the general partners of Four Lakes Village Associates, in which Perlman Marketplace Investors owned a 4% interest as a limited partner. Perlman maintains that the documents concerning Four Lakes misrepresented some facts about that venture, and that Zell and Lurie fraudulently appropriated the partnership's value by shifting its assets to a real estate investment trust (REIT) that Zell and Lurie controlled. Perlman contends that Zell and Lurie deceived other investors about both the purpose and the consequences of the transfer to the REIT, obtaining their approval for the transaction under false pretenses that amounted to mail fraud. A separate claim in the complaint demanded compensation for the value of the 4% interest, and misrepresentations concerning the Four Lakes transaction also formed the centerpiece of a contention that defendants committed consumer fraud in violation of Illinois law.

Defendants responded to these contentions by noting, first, that the supposedly fraudulent transaction was set up by Perlman himself. If deceit occurred, defendants observed, then Perlman was the author of the fraud--but it would be strange to find fraud when Perlman, who must have known the truth, bought 4% of the units. Was Perlman such a good liar that he deceived himself?, defendants inquire. They concede that the general partners caused the restructuring of Four Lakes, and that the REIT ended up with its assets, but they say that the partnership received fair value and that the limited partners were told exactly what had been done and why. Zell lent the Four Lakes partnership approximately $6 million to finance its operations, but it was unable to make a profit and defaulted on the loan, which Zell then foreclosed. By using the foreclosure to transfer the partnership's assets to the REIT, Zell and Lurie were able to produce tax benefits for the limited partners that compensated them for the financial reverse. The general partners sent the limited partners a description of the transaction that revealed both the partnership's financial distress and the plan of restructuring. This notice was sufficiently ominous that a limited partner other than Perlman had his accountant investigate whether anything was amiss--and the accountant concluded that everything was on the up-and-up.

After hearing these conflicting versions of events, the jury decided that defendants did not owe Perlman Marketplace Investors any money on account of the 4% interest, a verdict that necessarily rejects any claim that the restructuring fraudulently...