Rodriguez v. Banco Cent.

Decision Date10 October 1991
Docket NumberNo. Civ. 82-1835 (JAF).,Civ. 82-1835 (JAF).
Citation777 F. Supp. 1043
PartiesRaul F. RODRIGUEZ, et al., Plaintiffs, v. BANCO CENTRAL, et al., Defendants.
CourtU.S. District Court — District of Puerto Rico



Francisco López-Romo, Harry Woods, Woods & Woods, San Juan, P.R., for plaintiffs.

Luis Sánchez-Betances, Sanchez-Betances & Sifre, San Juan, P.R., for Banco Cent.

James McLoughlin IV, Ricardo Rodriguez-Padilla, San Juan, P.R., for Carlo Bros.


FUSTE, District Judge.

After eight years of litigation and a seven-week jury trial, the court now faces defendants' motion for a directed verdict pursuant to Fed.R.Civ.P. 50. A full history of the case can be culled from two published opinions, Rodriguez v. Banco Central, 727 F.Supp. 759 (D.P.R.1989), and Rodriguez v. Banco Central, 917 F.2d 664 (1st Cir.1990). Two unpublished opinions, docket entries numbers 535 and 566, will assist the reader in getting the pulse of the case. See Appendices A and B to this Opinion and Order. At the close of evidence, and after the court allowed adequate time for preparation, both sides argued extensively on the motion.

One hundred and fifty-two plaintiffs claim that an unscrupulous development company, along with the banks and individuals who financed the deals, promised them a chance to buy a lot in a beautiful residential subdivision near Disney World in Florida. Plaintiffs claim that the property was to be developed with schools, churches, and recreational facilities. What they were actually sold were one and one-quarter acre parcels of unimproved acreage, or what was described by witnesses as undeveloped swampland. It was perhaps a classic case for recovery under the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701 et seq., which prohibits false statements made in connection with the sale of subdivided lots. It might also have made a cognizable contract, fraud, or unjust enrichment case under the Puerto Rico Civil Code, 31 L.R.P.A. §§ 3741-3891. But the Land Sales Act case fell to the statute of limitations, and the Puerto Rico law claims were never pled.1 The case which finally made it before the jury was under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), fraud in the sale of securities, in which plaintiffs alleged violations of section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10(b)(5), 17 C.F.R. § 240.10b-5, as the "predicate acts" making up the pattern of racketeering. Proceeding in this manner requires that plaintiffs prove as a threshold matter that the lots purchases in this case were "securities" within the meaning of the securities laws, and then that the defendants here all participated in the fraudulent misrepresentations connected to the sale of those securities, or at least knowingly aided and abetted in those misrepresentations. Plaintiffs have tried every twist and contortion to fit their round peg into a square hole, often with the help and indulgence of the court.2 Ultimately, plaintiffs had the burden of proving a case consistent with the legal constraints of the law under which the case was actually tried, and not under a theory predicated on impermissible twists and bends to reach a deep pocket among otherwise judgment-proof defendants.

Events Leading Up to the Purchase of the Land

In 1969, Miguel and Jaime Carlo, brothers, along with Jorge Palacios, incorporated a company known as JC Investments, Inc. ("JC Investments") for the purpose of selling land in Florida. In early 1970, Jaime Carlo approached Luis Martinez Almodóvar ("Martinez Almodóvar"), then president of Banco Economias, with a request for financing from Banco Economias which would allow JC Investments to acquire certain properties in Florida which could then be subdivided and resold, primarily to persons living in Puerto Rico. At first the parties expected that the bank might be willing to provide a half million dollars in startup money for the project, but later the amount was reduced, since JC Investments could not provide the kind of security that the bank would require on a loan of that size. Instead, Martinez Almodóvar steered Carlo to an investors group in which he, Martinez Almodóvar, participated. The group, known as Empresa Financiera ("Empresa"), was a group of wealthy individuals willing to make highrisk, high-return investments to entrepreneurs in need of capital. Empresa was made up of Jorge Colón Nevares ("Colón Nevares"), Juan Martinez Echevarria ("Martinez Echevarria"), William de la Cruz ("de la Cruz"), Martinez Almodóvar, and others. At the time, Colón Nevares was a director of Banco Economias, Martinez Echevarria was Executive Vice-President of the bank, and, as stated above, Martinez Almodóvar was president.

A deal was worked out around January 15, 1970, whereby Banco Economias agreed to lend $238,000 and Empresa agreed to lend $100,000 to finance the JC Investments project. The loans were to be used for the down payment on the first parcel of land to be bought and was secured by a first mortgage for the portion of the land actually purchased by the lent money (assuming segregation and, therefore, an unencumbered portion of the land), and an additional mortgage on the rest of the land. In exchange for the agreement to make the loan, Empresa received 33% of the stock of JC Investments, which was distributed to the principals in Empresa.3 In addition, JC Investments was required to accept two of its five directors from the Empresa group.4 Colón Nevares and Martinez Almodóvar took the two JC Investments directorships.

The Land Itself — At Purchase Time and Throughout the Sales Period

JC Investments purchased the land which consisted of three tracts. Sunrise Acres was purchased first, followed by Sunrise East and Sunrise West. An architect/land-use planner testified for plaintiffs that as of 1970 in all of Florida there existed a regulation requiring that homes could not be built in flood prone areas since septic tanks could not be authorized in such areas. In view of this, flood prone areas needed extensive draining and water control infrastructure development before homes could be constructed. The experts seemed to agree that this is standard procedure in Florida, where draining land for homesite use is the rule rather than the exception. In 1971, Polk County, where the subject properties lie, adopted an ordinance requiring that property, before it could be built on, have frontage on highway or a county road. The ordinance applied to all property sold on or after June 25, 1971. The buildable lots, therefore, were reduced from all those not in the flood prone area to only those lots not in the flood prone area which also abutted a county road. In September 1974, Polk County adopted an ordinance specific to property in the Green Swamp areas (where all the subject properties lie) requiring that septic tanks, if such an alternative was considered in lieu of trunk sewer, would be limited to one per ten acres.

The combined result of these restrictions meant that at the time of the purchase of the first parcel, Sunrise Acres, only the lots not in a flood prone area could even conceivably have been built on as is, which amounted to only about 25% of the total. Each successive restriction reduced the number of buildable lots. According to plaintiffs' experts, at present only about 145 out of 2,400 lots could be built on in Sunrise Acres legally, 15 out of 282 in Sunrise West, and 4 out of 167 in Sunrise East. A second expert testified that even absent a legal prescription against building, it would be completely unfeasible, from a purely engineering standpoint, to attempt any kind of broad-scale housing, roads, or commercial development, since the water table in the area is so close to the surface.

One of the experts who testified was primarily engaged in the business of assisting developers with the physical, engineering, zoning, and other requirements for a given project. After examining the steps taken by JC Investments, and in light of the normal preparation that one would expect from a developer serious about planning a major development, it was the expert's opinion that no one involved with JC Investments at any time seriously considered providing roads, recreational facilities, schools, shopping centers or even the basic infrastructure to make a housing development possible.

The sales campaign

A third Carlo brother, Ralph, joined JC Investments to assist with the sales campaign. The brothers carried out the campaign through a Puerto Rico corporation called JC Properties, Inc. (as opposed to the parent Florida corporation of JC Investments, Inc.). The sales people were set up as independent "brokers" who were paid commissions for the sales of lots.

Testimony regarding the sales campaign was remarkably similar. Most persons were approached by a relative, friend or coworker who introduced them to a JC Properties salesperson. Often the friend or relative had recently purchased a lot and was enthusiastic about the project. The potential buyer was then told about the virtues of the project. Plaintiffs testified that they were told that streets would be built, that tennis, riding stables, water sports, schools, shopping facilities, and other improvements would be provided in the project, and that the buyer could build a home there.

The slick promotional materials used by the salespeople show golfing, boating, hiking, fishing, tennis, and shopping. The court's own review of the promotional material reveals that while it is true that the materials give a generally rosy view of the area, and show people engaging in sports, going to water shows, and the like, each of these photos is clearly marked as depicting a place near but not on the subject land, along with a notation of the mileage to the touted site from Sunrise Acres. Plaintiff's Exhibit No. 6, for instance, is a glossy 11" by 14"...

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