Rodriguez v. Banco Cent. Corp.

• Decision Date: 02 September 1992
• Docket Number: No. 91-2220,91-2220
• Citation: 990 F.2d 7
• Parties: , Fed. Sec. L. Rep. P 97,398, RICO Bus.Disp.Guide 8260, 38 Fed. R. Evid. Serv. 564 Raul F. RODRIGUEZ, et al., Plaintiffs, Appellants, v. BANCO CENTRAL CORPORATION, et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 7

990 F.2d 7

61 USLW 2644, Fed. Sec. L. Rep. P 97,398,

RICO Bus.Disp.Guide 8260,

38 Fed. R. Evid. Serv. 564

Raul F. RODRIGUEZ, et al., Plaintiffs, Appellants, v. BANCO CENTRAL CORPORATION, et al., Defendants, Appellees.

No. 91-2220.

United States Court of Appeals, First Circuit.

Heard Sept. 2, 1992.

Decided March 30, 1993.

Harry E. Woods, Hato Rey, PR, with whom Fernando L. Gallardo, San Juan, PR, was on brief, for plaintiffs-appellants.

Luis Sanchez-Betances, Ivonne Cruz-Serrano, and Luis A. Melendez-Albizu, Hato Rey, PR, were on brief, for Banco Central.

Before BREYER, Chief Judge, ALDRICH, Senior Circuit Judge, and BOUDIN, Circuit Judge.

BOUDIN, Circuit Judge.

In the district court, 152 buyers of lots of undeveloped real estate in Florida charged the real estate company, the bank that financed the company, and certain individuals with securities fraud under RICO, 18 U.S.C. § 1962(c). ¹ Describing their land sale contracts as "securities," the buyers claimed that their purchases were induced by false representations that the land was suitable for home sites and that the surrounding areas would develop into a thriving community. In fact, the property turned out to be worthless swamp land unfit for development. After a lengthy jury trial, the district court directed a verdict for the defendants, ruling that the land sale contracts were not securities. The buyers appeal. We affirm the district court.

I. BACKGROUND

The underlying facts, viewing the evidence in the light most favorable to the buyers, can be briefly stated. The buyers, most of whom are residents of Puerto Rico, acquired their lots in Florida beginning in the early 1970's after being approached by the real estate company's sales representatives. During these meetings, the prospective buyers were offered the opportunity to purchase subdivided lots in an undeveloped site that would eventually, they were told, include roads, schools, churches, stores and elaborate recreational facilities. The project was touted as an excellent investment due not only to prospective development, but also to its close proximity to Disney World. These oral assurances were bolstered by promotional brochures depicting sporting activities at nearby locations and other literature informing buyers of the development's progress.

A cautionary statement, written in small print in one of the promotional brochures, advised that the development was "not a homesite offering." Another pamphlet warned that "[i]mprovements such as roads and drainage are not presently on the property and are not contemplated." Yet another warning, this one prominently featured in a Florida Land Sales Board Offering Statement and included as well in a brochure, advised buyers that the property was not usable for building purposes, that the seller neither promised nor contemplated any improvements, and that 35% of the land was "marshy or swampy" and subject to flooding.

Most buyers did not read these warnings and those who did were often told that the warnings were standard boilerplate required for all Florida land sales. Another response was that the swampy sites would be drained and the water diverted to form ponds and lakes. The buyers, according to their testimony, were assured that their land could be used as a home site or for any other purpose. Several chose their lots from a map which divided the development into "residential" and "commercial" sections. The vast majority of buyers, many of whom hoped to retire to Florida, purchased their lots with the intention of building a home. According to their testimony, only a few were concerned solely with the re-sale value of their property and had no intention of residing on or developing the lots themselves.

The projected improvements were not made. The buyers eventually learned, some through a local newspaper, that they were the owners of swamp land worth a fraction of the purchase price. At trial, the buyers produced experts who testified that, as a result of zoning restrictions applicable to flood-prone areas, few of the lots could be built on legally. The experts said that, even absent the restrictions, the area was physically unsuitable for any broad-scale development.

On August 2, 1982, the buyers brought suit in the district court, making claims against the real estate company, the financing bank, and a number of individuals. The complaint asserted claims under the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701 et seq., the Securities Exchange Act, section 10(b), 15 U.S.C. § 78j(b), and RICO, 18 U.S.C. § 1962(a) (use of racketeering derived income). Much time was consumed with class action disputes, discovery, statute of limitations issues, and various attempts to amend the complaint. Eventually, the district court in November 1989 dismissed all these claims but allowed the buyers to amend in order to allege a RICO claim charging securities fraud as predicate acts. ² Rodriguez v. Banco Central, 727 F.Supp. 759 (D.P.R.1989), aff'd in part and vacated in part, 917 F.2d 664 (1st Cir.1990).

On January 25, 1990, the district court refused to dismiss the new RICO claim based on predicate acts of securities fraud introduced by the new amended complaint. At the same time the court declined to allow the buyers to allege mail fraud under RICO. The distinction, the district court explained, was that securities fraud had been an issue in some form from the outset; ³ mail fraud, in the court's view, had not been alleged until after seven years of litigation, including extensive discovery.

Trial commenced on August 5, 1991, and concluded on September 24, 1991. The evidence submitted has already been described briefly and is discussed further below. At the conclusion of the evidence, the court on October 10, 1991, granted a motion for judgment as a matter of law and ordered judgment for all defendants, Rodriguez v. Banco Central, 777 F.Supp. 1043 (D.P.R.1991), giving rise to the present appeal. In its lengthy opinion, the district court held inter alia that the land sale contracts were not securities under the federal securities laws. In consequence, the buyers' RICO claim failed for lack of the necessary predicate acts.

II. THE RICO CLAIMS

RICO makes it unlawful for a person to conduct an enterprise in or affecting interstate commerce through a pattern of "racketeering activity." 18 U.S.C. § 1962(c). "Racketeering activity" is defined to include "fraud in the sale of securities." Id. § 1961(1)(D). For a "pattern," there must be at least two acts of racketeering activity within ten years of each other, id. § 1961(5), here, fraud in the sale of securities. In this case, the buyers had a sufficient case of fraud to put before a jury. The question is whether it was fraud in the sale of "securities."

The district court concluded that no reasonable jury could find the land sale contracts in this case to be "securities," a term that the federal securities laws define to include "investment contracts." ⁴ Rodriguez, 777 F.Supp. at 1060-61. Our analysis on appeal therefore begins by parsing the terms "securities" and "investment contracts," distinguishing them from other forms of property or contractual arrangements. This legal furrow has been well plowed in prior opinions, but imaginative promoters are constantly devising new lures and promises to tempt investors and perplex the courts.

The definition of "investment contract" has been bracketed by a set of Supreme Court decisions which, while they involve facts quite different than ours, mark out our path. SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) (interest in citrus enterprise a security); and United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975) (interest in apartment cooperative not a security). In essence, we have been told by these cases that in defining securities, substance governs form, and the substance of an investment contract is a security-like interest in a "common enterprise" that, through the efforts of the promoter or others, is expected to generate profits for the security holder, either for direct distribution or as an increase in the value of the investment. Howey, 328 U.S. at 298-99, 66 S.Ct. at 1102-03; Forman, 421 U.S. at 852-53, 95 S.Ct. at 2060-61.

Each component in the concept matters. There are many investments obtained by contract, such as one's home, that are not an interest in an enterprise. Forman, 421 U.S. at 858, 95 S.Ct. at 2063. One may have an interest in an enterprise--an employment contract, for example--that is not an entitlement to profits or increased value. Conversely, in a sole proprietorship the owner could have a claim on all profits of the enterprise but there might be no contract or security involved. Further, the Supreme Court cases mark out a concept, not a precise definition. The term "securities," we are told, must be flexibly applied to capture new arrangements comprising the essence of securities, however they may be named. SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 123, 88 L.Ed. 88 (1943). But not all property is a security, and fuzzy edges do not mean that the concept is unbounded.

In this case, apart from the generality of the statutory language, a further, two-fold problem exists in applying the concept to the land sale contracts at issue. First, what the contracts say is not all that the buyers were told by the salespersons; the evidence reveals that many buyers were shown materials and given oral assurances that went beyond or even contradicted the formal legal documents. Second, what the buyers were shown or told, and what their own understandings and intentions were, varied from buyer to buyer. We start with some legal rules of thumb.

A simple sale of land, whether for investment or use, is not a "security." E.g., Hocking v. Dubois, 839 F.2d 560, 564 (9th Cir.1988), modified on reh'g en banc, 885 F.2d 1449 (9th Cir.1989)...