USCA1 Opinion
United States Court of Appeals
For the First Circuit
____________________
No. 95-1997
PETER M. SCHULTZ AND PAMELA A. SCHULTZ,
Plaintiffs, Appellants,
v.
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, N.A., ET AL.,
Defendants, Appellees.
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No. 95-2113
BOWDOIN CONSTRUCTION CORP.,
Plaintiff, Appellant,
v.
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, N.A., ET AL.,
Defendants, Appellees.
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No. 95-2172
ALLENBY ENTERPRISES, INC., ET AL.,
Plaintiffs, Appellants,
v.
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, N.A., ET AL.,
Defendants, Appellees.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
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[Hon. Robert E. Keeton, U.S. District Judge]
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[Hon. Patti B. Saris, U.S. District Judge]
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Before
Torruella, Chief Judge,
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Campbell, Senior Circuit Judge,
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and Lynch, Circuit Judge.
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Edwin A. McCabe, with whom McCabe Brown Sutherland, Joseph P.
________________ ________________________ __________
Davis III, and Lane, Altman & Owens were on brief, for plaintiffs-
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appellants.
Joseph L. Kociubes, with whom Peter Alley, Denise Jefferson
____________________ ____________ ________________
Casper, and Bingham, Dana & Gould were on brief, for Rhode Island
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Hospital Trust National Bank.
Allen N. David, Elizabeth Z. Holmes, and Peabody & Arnold, on
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brief for Federal Deposit Insurance Corp. as receiver of Coolidge Bank
and Trust Co.
Robert D. Cultice, Louis J. Scerra, Jr., and Goldstein & Manello,
_________________ ____________________ _____________________
P.C., on brief for Chrysler First Business Credit Corp.
____
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August 22, 1996
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LYNCH, Circuit Judge. These three actions,
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consolidated for appeal, arise out of a failed real estate
venture involving the purchase and redevelopment of the Sea
Crest Hotel in Falmouth, Massachusetts ("the Sea Crest"). In
a federally registered public offering, investors purchased
condominium unit deeds and "pooled income" interests in the
Sea Crest project. One of the offering's features, as
disclosed in the prospectus, was that the offering would be
terminated and all investor deposits refunded if the
aggregate amount of investments sold did not reach a minimum
subscription level ("MSL") by a set deadline. Plaintiffs
asserted that Rhode Island Hospital Trust National Bank
("RIHT"), the lender that financed the developer's purchase
of the Hotel and served as the escrow agent responsible for
holding investor deposits, was liable to them for purportedly
failing to determine that the MSL requirement had not in fact
been satisfied by the requisite date. The district courts
concluded, as a matter of law, that the plaintiffs' claims
against RIHT for fraud, negligent misrepresentation, breach
of contract, and violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO"), 18 U.S.C. 1961 et
__
seq., were all deficient. We agree that plaintiffs have
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established no legal basis for holding RIHT liable for their
losses. Accordingly, we affirm.
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I.
Factual Background
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In the mid-1980's, Eugene Marchand developed a plan to
purchase and renovate the Sea Crest Resort and Conference
Center, a large beach resort on Cape Cod. Marchand sought to
revitalize the hotel as a convention-oriented facility. The
plan involved converting the Sea Crest into a condominium,
and then selling the individual condominium units to
investors, together with interests in the pool of income to
be generated from the resort. The condominium units and
these "pooled income" interests were to be sold as registered
securities in a public offering. The issuer of the
securities would be Marchand's development company, Laurel-
Sea Crest Realty Sales Corp. ("Laurel"), of which Marchand
was the sole shareholder. Laurel's purchase of the Sea
Crest, for $19.4 million, would be financed through sales to
investors and a bank loan from RIHT. With projected expenses
of $40.5 million and total expected gross proceeds from the
offering projected at $45 million, Laurel stood to make a net
profit of $4.5 million.
On September 12, 1986, Laurel filed a registration
statement and prospectus with the SEC, describing the
proposed offering of 266 "condominium hotel interests." The
prospectus stated that the offering would be conditioned upon
a minimum level of investor participation:
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Unless 60 Hotel Interests are subscribed for by
qualified investors ("Minimum Subscription
Level") within 60 days of the effective date of
the Registration Statement of which this
Prospectus is a part, but in no event later than
December 31, 1986, this offering will be
withdrawn and all funds will be returned
promptly to subscribers.
The prospectus also stated that every investor would be
required to "pay a down payment of 10% of the purchase price
of the Hotel Interest (the 'Escrow Deposit')," which would be
"deposited . . . in a segregated, federally insured, interest
bearing account . . . at the Rhode Island Hospital Trust
National Bank . . . on behalf of Investor." The prospectus
named RIHT as escrow agent for the offering.
As Laurel waited for the registration statement to be
declared effective by the SEC, it secured the financing it
needed to purchase the Sea Crest. On November 14, 1986, RIHT
issued a commitment letter to Laurel approving a fourteen
million dollar first mortgage construction loan to be used by
Laurel in acquiring and renovating the Sea Crest facility.
RIHT's commitment, like the offering, was conditioned upon
the "presale" of a minimum number of Sea Crest interests
prior to December 29, 1986, the expiration date of RIHT's
commitment letter.1
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1. RIHT's presale requirement was, in fact, more stringent
than the MSL requirement. The commitment letter specified
that "[p]rior to closing, a minimum of 80 units must be under
written agreement of purchase-sale with a 10% non-refundable
deposits [sic]," and that those 80 units must account for "no
less than $13.6 million" in gross proceeds.
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As of the date that RIHT issued its commitment letter
to Laurel, however, the SEC had yet to approve Laurel's
registration statement. In fact, the registration statement
was not declared effective by the SEC until December 12,
1986, leaving just two and a half weeks for Laurel to achieve
the MSL set in the prospectus and the minimum number of
presales required by RIHT. It was clear that Laurel needed
more time. Laurel sought to restructure the offering and
obtain a new commitment agreement from RIHT, with a new
timetable for meeting the minimum presale requirement. RIHT
agreed to renegotiate.
As Laurel and RIHT neared agreement on a new loan
commitment, Laurel filed, on March 2, 1987, a post-effective
amendment to its original registration statement. The
amendment established a new deadline for Laurel to meet the
MSL requirement. It also restructured the requirement to
condition the offering on a minimum dollar amount of
aggregate sales, rather than a minimum number of unit sales.
The amended prospectus explained:
Unless Hotel Interests of $6,000,000 in
aggregate purchase price are subscribed for by
qualified investors ("Minimum Subscription
Level") within 120 days of the effective date[2]
of the Registration Statement of which this
Prospectus is a part, this offering will be
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2. The 120th day after December 12, 1986, the effective date
of the registration statement fell on April 11, 1987, a
Saturday.
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withdrawn and all funds will be returned
promptly to subscribers.
The amended prospectus left unchanged the original
prospectus's representation that each investor would be
required to tender a down payment equal to ten percent of the
selling price of the unit to be purchased, which would be
deposited in an escrow account held by RIHT.
RIHT issued a new commitment letter to Laurel on March
30, 1987. This time, RIHT agreed to give Laurel an 18.3
million dollar loan, conditioned upon the presale of only 40
units with a minimum aggregate selling price of $6 million,
each presale requiring a ten percent nonrefundable investor
deposit. Laurel was required to satisfy the new 40-unit
presale condition by no later than April 10, 1987, the
expiration date of the new commitment letter.
Apart from RIHT's lending relationship with Laurel,
the bank's only role in the Sea Crest offering was to act as
escrow agent. RIHT did not sign the registration statement.
Nor did it participate in promoting the offering or in
selling or soliciting subscriptions. RIHT's duties as escrow
agent were to be governed by a written escrow agreement
between Laurel and RIHT, addressed to the investor. A copy
of the agreement, annexed as an exhibit to Laurel's
registration statement, was to be provided to each
subscribing investor. As will be discussed, there is some
dispute as to the particular form of agreement by whose terms
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RIHT agreed to be bound. It is clear, however, that RIHT
assumed at most a duty to hold investors' deposits in escrow
until "[Laurel] shall verify to the Bank that . . .
$6,000,000 in aggregate purchase price for Hotel Interests
have been subscribed for and received as required under the
Registration Statement . . . ."
As the offering proceeded, Laurel, through its selling
agent (Broad Reach Capital), collected purchase and sale
agreements for individual Sea Crest condominium units ("unit
sale agreements"). Notwithstanding the prospectus's
representations that investors would be required to tender a
ten percent non-refundable "escrow deposit" upon subscribing
to the offering, Laurel and Broad Reach Capital accepted
promissory notes for ten percent of the purchase price -- in
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lieu of cash deposits -- from almost half of the investors
who signed unit sale agreements prior to the MSL deadline.
Such cash deposits as were tendered by the investors were
placed in an escrow account at RIHT. But as the deadline for
meeting the MSL approached, only a total of some $309,000 had
been deposited into the RIHT escrow account.
RIHT and Laurel conducted their loan closing on April
9, 1987, just prior to the expiration date of the March
commitment letter. At the closing, RIHT was provided with
copies of the unit sale agreements that had been executed.
An officer of the bank counted the sale agreements to verify
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that there had been at least 40 units sold (as required in
RIHT's loan commitment letter) and tallied the aggregate
amount of sales to verify that the six million dollar MSL
requirement had been met (as set forth in the agreement and
the prospectus). No one at RIHT undertook to verify whether
there was a ten percent deposit in escrow for each unit
subscription. Having satisfied itself that at least 40
subscriptions and $6 million in aggregate sales had been
achieved, RIHT proceeded to close its loan with Laurel and
thereafter released the escrowed investor deposits to Laurel.
Laurel purchased the Sea Crest and separately closed on its
sales of individual condominium units to investors.
In May 1987, Laurel hired Bowdoin Construction Corp.
("Bowdoin") to serve as the general contractor for the
renovation of the Sea Crest. Pursuant to a letter of intent
from Laurel, Bowdoin began construction work and arranged the
necessary subcontracts. Based on a decision by Marchand,
Bowdoin continued its construction work through the 1987
summer season, causing a fall-off in revenues to the resort
and putting a wrinkle into Laurel's ongoing sales efforts.
By late September 1987, Laurel was under severe
financial strain. It had stopped making payments to Bowdoin,
even though Bowdoin continued construction. On October 1,
RIHT downgraded the credit status of its loan to Laurel. The
stock market crash later that month only worsened matters,
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and in November 1987, Laurel defaulted on the RIHT loan.
Laurel and RIHT discussed restructuring or refinancing the
loan. Bowdoin inquired about the status of Laurel's funding.
After allegedly being assured that it would be paid through
new financing from RIHT, Bowdoin continued with construction.
In the meantime, restructuring negotiations between Laurel
and RIHT had ended unsuccessfully.
By January 1988, when Bowdoin finally ceased
construction, it had incurred unreimbursed expenses of over
$1 million. A month later, Laurel filed a Form 8-K with the
SEC disclosing that the Sea Crest offering would be
indefinitely suspended, with only 58 of the total 266
condominium units having been sold. Soon afterward, a number
of lawsuits were filed. In April 1988, RIHT sued Laurel to
collect on its loan. In July 1988, Bowdoin filed an action
for breach of contract and enforcement of a mechanic's lien
in state court, but then voluntarily dismissed the action
based, allegedly, on Laurel's representation that doing so
was Bowdoin's best chance of recovering any of its unpaid
debts.3 Ultimately, Bowdoin collected only a fraction of the
amount owed to it by Laurel. Laurel, RIHT, and others were
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3. After Bowdoin dropped the state court lawsuit and
discharged the lien, RIHT sold its interest in the Sea Crest
loan, at a $5.7 million loss, to Coolidge Bank (who had to
that point owned a participation interest in the loan).
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named in suits filed by investors, as well as in a newly
instigated action by Bowdoin.
II.
Procedural Background
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A. District Court Proceedings
__ __________________________
Three separate cases have been consolidated for
purposes of this appeal. Two of the cases, Schultz v. RIHT
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and Allenby Enterprises, Inc. v. RIHT, are brought by
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investors in the Sea Crest offering.4 The third case,
Bowdoin Constr. Corp. v. RIHT, is brought by Bowdoin. The
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Schultz and Allenby plaintiffs asserted claims against
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Laurel, RIHT and several others for alleged violations of the
federal securities laws and civil RICO, and for common law
fraud, negligent misrepresentation, breach of contract, and
breach of the covenant of good faith and fair dealing. The
Bowdoin complaint asserted claims against Laurel, RIHT, and
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others for violations of civil RICO, breach of contract, and
breach of the covenant of good faith and fair dealing.
In October 1993, before the Schultz action was
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scheduled to go to trial, the plaintiffs in all three actions
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4. The plaintiffs in the Schultz action purchased a total of
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five condominium units in April 1987 (prior to the MSL
deadline), at an aggregate purchase price of approximately $1
million. There are 38 plaintiffs in the Allenby action.
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Collectively, they purchased 33 condominium units at an
aggregate purchase price of some $5 million. Approximately
$1.5 million of the Allenby plaintiffs' purchases were made
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after the MSL deadline (April 10, 1987) had passed.
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reached a settlement agreement with Laurel, Marchand, and
certain other affiliated parties, and dismissed all claims
against them, with prejudice. In exchange, the plaintiffs
received a promise from the settling defendants to waive the
attorney-client privilege and to provide interviews and trial
testimony as requested by the plaintiffs. No money changed
hands.
The Schultz action proceeded to trial against RIHT and
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the other remaining defendant (a bank that had provided
financing to some of the investors) in January 1994, before
Chief Judge Tauro. The plaintiffs presented twelve days of
testimony, including the testimony of Eugene Marchand. At
the end of the plaintiffs' case, the defendants moved for
judgment as a matter of law. In its memorandum of decision,
the district court concluded that Central Bank v. First
_____________ _____
Interstate Bank, 511 U.S. 164 (1994), required the dismissal
________________
of the plaintiffs' claims for aiding and abetting securities
fraud under Section 10(b) of the Securities Exchange Act of
1934. The court also concluded that the plaintiffs had
failed to present adequate evidence on any of their common
law claims or their RICO claim, and granted the motion for
judgment as a matter of law.
Thereafter, Judges Keeton and Saris granted summary
judgment motions filed by RIHT in the Allenby and Bowdoin
_______ _______
actions, respectively. In deciding the Allenby motion, Judge
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Keeton, discerning no material difference between the issues
in Allenby and Schultz, followed Judge Tauro's decision,
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based both on an independent assessment of the case and as a
matter of stare decisis. In Bowdoin, in which the plaintiff
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asserted RICO violations predicated upon allegations of
aiding and abetting securities fraud, Judge Saris entered
summary judgment in favor of RIHT, on the dual grounds that
such a claim could not be viable after Central Bank, and that
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plaintiffs had, in any event, failed to adduce sufficient
evidence of a "pattern" of racketeering activity.
B. Posture on Appeal
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The parties informed us at oral argument that the only
remaining defendant in all three of these cases, at least for
purposes of this appeal, is RIHT.5 We limit our review,
therefore, to those claims seeking to hold RIHT responsible
for the plaintiffs' alleged injuries.
In each of the three cases, we review de novo the
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district court's entry of judgment as a matter of law.
Because the appeals largely raise the same dispositive issues
(albeit on somewhat different records), we distinguish them
only as necessary. We look to whether, viewing the record in
each case in the light most favorable to the plaintiffs, any
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5. Plaintiffs' counsel stated at oral argument that,
although one other party nominally remains in the case,
plaintiffs would be content to have this court's decision
turn solely upon a determination of the merits of the claims
against RIHT.
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reasonable jury could find in the plaintiffs' favor. See
___
Fed. R. Civ. P. 50(a) (Schultz); Fed. R. Civ. P. 56(c)
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(Allenby; Bowdoin). Having assessed the merits of each of
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the plaintiffs' theories of liability under this standard of
review, we now affirm.6
III.
Breach of Contract
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RIHT's only relationship with the investor
plaintiffs arose out of the bank's role as escrow agent in
the Sea Crest offering. The Schultz and Allenby plaintiffs
_______ _______
assert that RIHT failed in that capacity, acting in breach of
the terms of the written escrow arrangement, in accordance
with which RIHT agreed to hold the deposits to be tendered by
investors. More specifically, the plaintiffs contend that
RIHT violated the terms of the escrow agreement when, on
April 9, 1987, it released all escrowed funds to Laurel, even
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6. RIHT broadly argues, as a basis for affirmance
independent of the underlying merits of these actions, that
the plaintiffs' claims in all three cases are barred as a
result of their settlement with, and prejudicial dismissal of
their claims against, the Laurel defendants. RIHT further
contends that the judgment entered by the district court in
Schultz, if affirmed, constitutes res judicata in relation to
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the plaintiffs' claims in the Allenby and Bowdoin actions,
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and that the latter two actions are barred on a theory of
non-party claim preclusion. See Gonzalez v. Banco Central
___ ________ _____________
Corp., 27 F.3d 751, 755 (1st Cir. 1994); see also Becherer v.
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Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 F.3d 1054,
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1069-70 (6th Cir.), cert. denied, 116 S. Ct. 296 (1995). We
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decline the invitation to venture into this complex and
unsettled area of the law, and rest our affirmance on the
merits of the three cases before us.
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though, allegedly, the offering's MSL requirement had not
been satisfied.7
There is a threshold dispute as to the particular
escrow agreement that governs. Plaintiffs contend that RIHT
was in breach of the terms of an agreement referred to by the
parties as the "long-form" escrow. RIHT replies that it was
bound only by the terms of the so-called "short-form" escrow,
but argues, in the alternative, that even if it was bound by
the long-form escrow, the record establishes that no breach
occurred.
The short-form escrow agreement was attached as an
exhibit to the registration statement that Laurel filed with
the SEC in September 1986, and had been signed by RIHT in
November 1986. The short-form provided, in pertinent part:
TO PROSPECTIVE PURCHASERS OF HOTEL INTERESTS IN
SEA CREST CONDOMINIUM
Rhode Island Hospital Trust National Bank
(the "Bank") . . . having been requested to act
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7. The district court in the Schultz action reasoned that
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only those investors whose funds were actually deposited into
the escrow account had standing to challenge RIHT's
compliance with the escrow agreement. The record shows that
the two plaintiffs in the Schultz action did not pay a ten
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percent cash down payment, instead signing a promissory note
to Laurel for that amount. Most of the plaintiffs in the
Allenby case, on the other hand, did pay a ten percent
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deposit, but a number of the units -- representing about
$975,000 in aggregate sales -- were sold without a cash
deposit having been tendered. Furthermore, some of the
Allenby plaintiffs purchased their units after the MSL
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deadline had passed. While we find the district court's
point to be forceful, we need not rely on it, given our
disposition of the merits of the issue.
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as escrow agent ("Escrow Agent") for deposits to
be made by prospective purchasers ("Buyer") of
Hotel Interests in the above-referenced
Condominium from Laurel-Sea Crest Realty Sales
Corp. ("Seller") . . . does hereby accept such
request and agrees to hold deposits made payable
to the Sea Crest Condominium Escrow Account, and
received by it, upon the following terms and
conditions to which Buyer and Seller agree to be
bound by executing the Unit Sale Agreement
("Agreement") for Buyer's Hotel Interest, to
which acopy of this escrowletter will be annexed.
1. The Bank agrees to maintain such deposit
(the "Deposit") at its bank for the benefit of
Buyer and Seller . . . .
2. In the event the [Unit Sale] Agreement
is consummated, as evidenced by Buyer's
acceptance of a deed to the Hotel Unit, or by
written statement to that effect executed by or
on behalf of Buyer and Seller, Escrow Agent
shall pay over the Deposit to Seller, and shall
pay such interest as may have accrued thereon,
to Buyer. . . .
The long-form escrow agreement was filed with the SEC and
signed by RIHT at some later time, the precise date being in
dispute. The first paragraph of the long-form agreement was
the same as that in the short-form, but the body was
substantially different. The long-form agreement provided,
in relevant part:
1. The Bank agrees to maintain such deposit
(the "Deposit") at its bank for the benefit of
Buyer and Seller . . . . The Deposit shall be
held by the Bank until the Seller shall verify
to the Bank that (a) $6,000,000 in aggregate
purchase price for Hotel Interests have been
subscribed for and received as required under
the Registration Statement (the "Minimum
Subscription Level") and thereafter disbursed
. . . or (b) such Minimum Subscription Level has
not been achieved within 120 days of the
effective date of the Registration Statement
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with the Securities and Exchange Commission. In
the event the Minimum Subscription Level is not
achieved within such 120 day period, all
deposits and interest accrued thereon shall be
promptly returned to Buyer.
2. In the event the Minimum Subscription
Level is achieved and the [Unit Sale] Agreement
is consummated, as evidenced by Buyer's
acceptance of a deed to the Hotel Unit, or by
written statement to that effect executed by or
on behalf of Buyer and Seller, Escrow Agent
shall pay over the Deposit to Seller, and shall
pay such interest as may have accrued thereon,
to Buyer. . . .
Both the long- and short-form escrow agreements ended with
the following clauses:
8. Escrow Agent assumes no obligations or
responsibility hereunder other than to make
delivery of the Deposit, and any earnings
thereon, as herein provided. . . .
It is understood and agreed that a copy of
this instrument will be annexed as an exhibit to
the [Unit Sale] Agreement. Buyer shall be
entitled to rely upon this escrow agreement,
with the same force and effect as if the Bank
had contracted directly with Buyer. . . .
The crucial difference between the two agreements lies
in the description of the conditions that were to trigger
RIHT's duty to release any escrowed funds to Laurel. The
long-form agreement linked RIHT's duty to release funds from
escrow upon the meeting of the MSL requirement; the short-
form agreement did not.
There is no dispute that RIHT at some point signed
both the short- and long-form agreements. The question is
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when. The plaintiffs argue that RIHT became bound by the
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long-form agreement before the April 1987 MSL deadline, and
that RIHT therefore had a duty of "verif[ication]" with
respect to the satisfaction of the MSL requirement before
releasing the funds in escrow. RIHT, on the other hand,
concedes that it signed the long-form agreement at some
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point, but not before June 1987. Thus, RIHT asserts that, as
of April 1987, it was bound only by the short-form agreement,
which makes no mention of the MSL requirement.8 Even
accepting the plaintiffs' rendition of the record, however,
we conclude that no rational trier of fact could find that
RIHT committed a breach.
We look first to the express terms of the long-form
escrow agreement.9 Under that agreement, RIHT was required
to "hold deposits made payable to the Sea Crest Condominium
Escrow Account, and received by it" until "[Laurel] shall
verify to the Bank that (a) $6,000,000 in aggregate purchase
price for Hotel Interests have been subscribed for and
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8. On the one hand, RIHT has provided an unrebutted
attestation that the only escrow agreement on record with the
SEC as of April 1987 was the short-form agreement. On the
other hand, there is some evidence (albeit circumstantial) to
suggest that RIHT had agreed to be bound by the long-form
agreement prior to April 1987. For example, a copy of the
long-form agreement (lacking RIHT's signature) was attached
to a letter from Marchand's attorney to RIHT dated March 16,
1987, in which the attorney proposed to RIHT a particular
procedure for dealing with interest accruing to the Sea Crest
escrow account.
9. The parties appear to agree that Massachusetts law
governs.
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received as required under the Registration Statement (the
'Minimum Subscription Level') . . . ." This language
unambiguously limits RIHT's obligations as escrow agent to
holding deposits "received by it" until Laurel "verifi[ed]"
that $6 million in subscriptions had been received.
The record before us permits no genuine dispute that
RIHT satisfied its limited duties under the agreement. The
evidence is clear that RIHT did not release any funds that
had been deposited into the Sea Crest escrow account until it
had been provided by Laurel (prior to the MSL deadline) with
copies of executed unit sale agreements with an aggregate
face value in excess of $6 million. Plaintiffs concede that
there is uncontradicted testimony to this effect.
Plaintiffs' argument is that RIHT was required to do
more. They contend that RIHT should have refused to release
funds in escrow on April 9, 1987 on the grounds that: (i)
many of the unit sales counted toward the MSL were not backed
by ten percent cash deposits; (ii) Laurel had pledged seven
Sea Crest units as collateral for a "bridge" loan that it had
obtained from Wedgestone Realty Investors Trust, the proceeds
of which were applied to Laurel's purchase of the Sea Crest;
and (iii) the $6 million in unit sales that were applied to
the MSL computation had not actually been received by Laurel
before the MSL deadline.
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The response is that the escrow agreement cannot
fairly be read to say that any one of these circumstances
created a bar to the disbursement of the escrowed funds.
Under the terms of its escrow agreement, RIHT's role in the
Sea Crest offering was a limited one, narrowly defined in a
written agreement. The escrow agreement did not impose on
RIHT a generalized duty to police the offering. To the
contrary, the agreement disclaimed any duty to the parties in
escrow "other than to make delivery of the [escrowed funds],
and any earnings thereon."
Thus, although the fact that Laurel sold a number of
Sea Crest units without taking a ten percent deposit from the
purchaser was arguably at odds with the prospectus, there is
no language in the escrow agreement conditioning the release
of any escrowed funds upon RIHT's having received deposits
totalling a full ten percent of the six million dollar
minimum sales amount. Similarly, there was nothing about
Laurel's "bridge" loan from Wedgestone that obligated RIHT,
under the escrow agreement, to determine that the MSL had not
been met, or that funds in escrow were otherwise required to
be returned to investors.
Finally, the plaintiffs' argument that $6 million in
actual funds had not been "received" prior to RIHT's closing
of escrow goes nowhere. To the extent that plaintiffs argue
that RIHT itself was required to be in receipt of the $6
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million, the argument is inconsistent with the language of
the escrow agreement. To the extent that the agreement can
be read to require that the $6 million have been "received"
at all, the agreement plainly envisions that it would be
Laurel who would receive the funds, and who would thereafter
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verify the same to RIHT.
In any event, RIHT's alleged failure to verify the
satisfaction of the purported "receipt" requirement does not
help the plaintiffs' case. The purported "receipt"
requirement is necessarily separate and distinct from the MSL
requirement, and satisfaction of the latter did not depend on
satisfaction of the former.10 The only circumstance
specified in the escrow agreement as requiring RIHT to return
escrow deposits to investors was the failure to attain the
MSL; Laurel's alleged non-receipt of $6 million in sales
proceeds did not require investor funds to be refunded or the
___
offering to be withdrawn. At most, the logic of plaintiffs'
theory is that RIHT released escrowed funds too early, and
_____
____________________
10. The prospectus itself states that "[c]losings [on the
individual unit sale agreements] will commence once the
Minimum Subscription Level has been satisfied." This
language clearly contemplates that the MSL would be satisfied
before the actual consummation of the unit sale agreements.
______
And because the proceeds from the unit sale agreements that
were counted toward the MSL could not have been "received" by
Laurel until after the closings on those units, it follows
_____
that the satisfaction of the MSL could not have depended upon
any such "receipt."
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21
not that RIHT wrongfully failed to call for termination of
___
the offering.11
The question remains whether RIHT, in its capacity as
escrow agent, owed any duties to plaintiffs other than those
spelled out in the agreement. The Supreme Judicial Court of
Massachusetts has recently indicated that there is an absence
of discussion in Massachusetts law of whether an escrow
agent's duties may extend beyond satisfying the literal terms
of the escrow agreement. See In re Discipline of Two
___ __________________________
Attorneys, 421 Mass. 619, 626 (1996) ("Massachusetts cases
_________
have not discussed whether an escrow holder has any duty
beyond fulfilling the terms of the escrow.").12 But we find
no support for plaintiffs' broad arguments that RIHT, which
is not alleged to have been in a conflict of interest, was
required, in effect, to actively root out fraud of which it
had no knowledge and to police Laurel's conduct in the Sea
____________________
11. This is not a case involving the fabrication of "sham"
transactions designed to create the mere illusion that sales
had been generated. The apparent absence of some deposits
notwithstanding, there has been no suggestion that any of the
unit sale agreements that were counted toward the MSL in this
case were anything other than bona fide, binding contracts of
purchase and sale.
12. But cf. Schmid v. National Bank of Greece, 622 F. Supp.
_______ ______ ________________________
704, 710 (D. Mass. 1985) ("The escrow agreement or
instructions constitute the full measure of the obligation
assumed by the escrow holder and owing to the parties."),
aff'd, 802 F.2d 439 (1st Cir. 1986) (tbl.).
_____
-22-
22
Crest offering.13 See Two Attorneys, 421 Mass. at 626-27
___ _____________
(citing Maganas v. Northroup, 663 P.2d 565 (Ariz. 1983) (duty
_______ _________
to disclose known fraud); Collins v. Heitman, 284 S.W.2d 628
_____ _______ _______
(Ark. 1955) (duty not to engage in self-dealing); Kitchen
_______
Krafters, Inc. v. Eastside Bank of Mont., 789 P.2d 567 (Mont.
______________ ______________________
1990) (duty to disclose material facts relevant to escrow),
overruled on other grounds by Busta v. Columbus Hosp. Corp.,
_____________________________ _____ ____________________
916 P.2d 122 (Mont. 1996); American State Bank v. Adkins, 458
___________________ ______
N.W.2d 807 (S.D. 1990) (duty to avoid self-dealing and
conflicts of interest)).
IV.
Other Common Law Claims
_______________________
A. Breach of Covenant of Good Faith and Fair Dealing
__ _________________________________________________
The plaintiffs have not pointed to any record evidence
that would permit a finding that RIHT's release of the escrow
funds to Laurel was done other than under a good faith belief
that the MSL requirement had been satisfied, and that all of
____________________
13. Despite plaintiffs' contrary suggestion, SEC Rule 10b-9
does not warrant the importation into the escrow agreement of
a generalized duty to ensure that the offering as a whole
complied with the securities laws. Rule 10b-9 makes it a
violation of Section 10(b) of the Securities Exchange Act of
1934 for any person to make a representation, in connection
with an offering, that securities are being offered on any
"basis whereby all or part of the consideration paid for any
such security will be refunded to the purchaser if all or
some of the securities are not sold," unless the offering is
structured in a specified way. 17 C.F.R. 240.10b-9. Here,
however, there is no support for a finding that the Sea Crest
offering did not comply with Rule 10b-9 or, even more
basically, that RIHT ever made any "representation" covered
by the Rule.
-23-
23
the conditions for releasing the funds had been met. The
record supports no conclusion that RIHT acted with the sort
of dishonest purpose or conscious wrongdoing necessary for a
finding of bad faith or unfair dealing. See Anthony's Pier
___ ______________
Four, Inc. v. HBC Assoc., 411 Mass. 451, 471-72 (1991);
___________ ___________
American Employers' Ins. Co. v. Horton, 35 Mass. App. Ct.
_____________________________ ______
921, 923 (1993). The district court did not err in summarily
disposing of the plaintiffs' claims for the breach of the
covenant of good faith and fair dealing.
B. Fraud and Negligent Misrepresentation
__ _____________________________________
Plaintiffs do not seriously argue that RIHT made any
affirmative material misrepresentations to them concerning
the Sea Crest offering. RIHT did not sign the registration
statement, and there is no evidence that RIHT had any
involvement in the preparation of the registration statement
or other offering materials for the Sea Crest project. Nor
did RIHT participate in Laurel's marketing or sales efforts.
The only communication between plaintiffs and RIHT appears to
have been through the escrow agreement, which was addressed
to investors and was to have been annexed to each unit sale
agreement.
Absent allegations of affirmative misrepresentations
or misstatements by RIHT, the question becomes whether RIHT
was guilty of any actionable omissions. Absent a duty to
speak, RIHT's silence could not have been fraudulent. See
___
-24-
24
Royal Business Group, Inc. v. Realist, Inc., 933 F.2d 1056,
___________________________ _____________
1064 (1st Cir. 1991). RIHT's role in the offering was to
hold funds deposited with it until Laurel verified that
certain conditions had been met. Even assuming that RIHT, as
escrow agent, had a duty to disclose known fraud on the part
_____
of Laurel, see, e.g., Maganas, 663 P.2d at 565 (cited in Two
____ ____ _______ _____ __ ___
Attorneys, 421 Mass. at 626-27), plaintiffs point to no
_________
evidence that would show that RIHT was aware of fraudulent
conduct by Laurel or any other party involved in the
offering.
It is true that RIHT might have had reason to realize
that a number of investors had provided promissory notes in
lieu of ten percent cash deposits upon execution of their
unit sale agreements. But there is no reason why RIHT should
have suspected that this was the result of fraud. Indeed,
_____
the plaintiffs do not allege that the promissory notes were
fraudulently made or procured; rather, they were facially
valid, enforceable instruments. Furthermore, Laurel's
acceptance of bona fide promissory notes, instead of
deposits, was not so obviously inconsistent with the
prospectus that RIHT should have concluded that a fraud was
being perpetrated. Finally, plaintiffs fail to argue that
any nondisclosure by RIHT on this issue would have affected
their decision to invest; nor do they explain how any such
nondisclosure could have been the cause of their losses.
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25
See, e.g., Damon v. Sun Co., Inc., 87 F.3d 1467, 1471-72 (1st
___ ____ _____ _____________
Cir. 1996) (elements of fraud include proof of reliance and
causation).
C. Aiding and Abetting Fraud
__ _________________________
The plaintiffs' common law claim of aiding and
abetting fraud fares no better. To establish a common law
cause of action for aiding and abetting, plaintiffs must at
least demonstrate some measure of "active participation" and
the knowing provision of substantial assistance by RIHT to
the principal's (here, Laurel's) alleged fraud. See Spinner
___ _______
v. Nutt, 417 Mass. 549, 556 (1994). Plaintiffs point to
____
nothing in the record that would satisfy these basic
elements. Indeed, the evidence is to the contrary. In his
testimony in the Schultz trial, Marchand himself expressly
_______
disavowed the existence of any sort of association between
Laureland RIHT otherthan anarm's lengthbusiness relationship.
V.
RICO Violations
_______________
In order to prevail on a RICO claim, a plaintiff must
prove, inter alia, that the defendant engaged in a "pattern
__________
of racketeering activity." See 18 U.S.C. 1962. Here, RIHT
___
argues that the district court correctly granted judgment in
its favor on plaintiffs' RICO claims, because plaintiffs have
failed to establish that RIHT's conduct falls within any of
the categories of "racketeering activity" described in the
-26-
26
statute, see 18 U.S.C. 1961(1), and because plaintiffs have
___
failed to adduce evidence of the requisite "pattern" of
predicate acts necessary to trigger RICO liability, see 18
___
U.S.C. 1962(b)-(c).
A. Establishment of a Predicate Act
__ ________________________________
Plaintiffs argue that, on the record, a rational trier
of fact could find that RIHT engaged in three racketeering
predicates: (i) aiding and abetting securities fraud; (ii)
mail fraud; and (iii) wire fraud. The district court found
that "aiding and abetting securities fraud" cannot be a RICO
predicate, in light of the Supreme Court's decision in
Central Bank, 511 U.S. at 164 (1994) (no private right of
____________
action for aiding and abetting under Section 10(b) of the
Exchange Act), and that the record supports no finding of
mail or wire fraud by RIHT.
We reserve to another day the issue of whether Central
_______
Bank necessarily implies that aiding and abetting securities
____
fraud cannot be a "racketeering activity" within the meaning
of 1961(1). Even assuming that aiding and abetting
securities fraud can be a RICO predicate act, we find the
___
record support for such a claim to be lacking, as we do with
respect to the plaintiffs' allegations that RIHT engaged in
mail or wire fraud.
As for the aiding and abetting allegation, we agree
with the district court that the record contains not a
-27-
27
scintilla of evidence that would support the requisite
finding that RIHT "consciously shared" in the principal
wrongdoer's (Laurel's) specific intent to defraud the
plaintiffs. See United States v. Loder, 23 F.3d 586, 590-91
___ _____________ _____
(1st Cir. 1994) (describing the elements of criminal aiding
and abetting). The lack of evidence of fraudulent intent on
the part of RIHT similarly dooms plaintiffs' allegations that
the bank committed mail or wire fraud. There is no basis in
the record from which a rational trier of fact could conclude
that the mailings or wires by RIHT (described in the
plaintiffs' brief in only a fleeting fashion) constituted
communications "in furtherance" of a scheme "intended to
____________
deceive another, by means of false or fraudulent pretenses,
_______________
representations, promises, or other deceptive conduct."
__________________
McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d
__________________________ _____________________
786, 791 (1st Cir.) (emphases added), cert. denied, 498 U.S.
_____________
992 (1990).
We conclude that the record contains insufficient
evidence to raise a triable issue as to whether RIHT
committed any of the RICO predicate acts alleged by the
plaintiffs.
-28-
28
B. The "Pattern" Requirement
__ _________________________
The plaintiffs' RICO claims fail for an additional,
independent reason. For the plaintiffs to prevail, they must
establish not only that RIHT engaged in some "racketeering
activity," but that the bank's conduct constituted a
"pattern" of such activity. See 18 U.S.C. 1962(b)-(c).
___
The RICO statute by its terms specifies that a "pattern"
entails at least two predicate racketeering acts. See 18
___
U.S.C. 1961(5). However, while two predicate acts are
necessary to form a RICO "pattern," they may not be
sufficient unless they are both "related" and "amount to or
pose a threat of continued criminal activity." See H.J. Inc.
___ _________
v. Northwestern Bell Tel. Co., 492 U.S. 229, 239-40 (1989);
___________________________
Fleet Credit Corp. v. Sion, 893 F.2d 441, 444 (1st Cir.
___________________ ____
1990). "In other words, a RICO pattern consists of
'continuity plus relationship.'" Sousa v. BP Oil, Inc., 1995
_____ ____________
WL 842003, *13 (D. Mass. 1995) (quoting H.J., 492 U.S. at
____
239).
This court has remarked upon the elusiveness of any
helpful, talismanic definition of a RICO "pattern." See
___
Apparel Art Int'l Inc. v. Jacobson, 967 F.2d 720, 722 (1st
_______________________ ________
Cir. 1992). But, as then-Chief Judge Breyer explained,
courts have consistently held that a "single episode" of
criminal behavior, even if it involves the commission of
multiple related acts, does not constitute a "pattern." See
___
-29-
29
id. at 723. Instead, courts have tended to find RICO
___
"patterns" only where the defendant's conduct consists of
"multiple criminal episodes" extending over long periods of
time. Id. at 724; see also H.J., 492 U.S. at 242 ("Congress
___ ________ ____
was concerned in RICO with long-term criminal conduct.").
Here, the alleged instances of wrongful conduct by
RIHT all constituted part of a single "episode." Like the
______
multiple predicate acts that were described in Apparel Art as
___________
"compris[ing] a single effort" to achieve one goal (obtaining
and keeping a Defense Department contract), see 967 F.2d at
___
723, the alleged racketeering acts attributed to RIHT in this
case, "taken together, . . . comprise a single effort" to
facilitate a single financial endeavor: the purchase and
renovation of the Sea Crest resort. Id.
___
If the mailings and wires RIHT transmitted in the
course of its involvement in the Sea Crest offering could
amount to a RICO "pattern," then virtually every claim
asserted under the federal securities laws could spawn a
companion RICO cause of action, because "[i]n today's
integrated interstate economy, it is the rare transaction
that does not somehow rely on extensive use of the mails or
the telephone." Roeder v. Alpha Indus., Inc., 814 F.2d 22,
______ __________________
31 (1st Cir. 1987) (internal quotation omitted). We conclude
that the instances of RIHT's conduct identified by plaintiffs
as constituting RICO predicate acts did not form a "pattern"
-30-
30
of racketeering activity and are more "appropriately
characterized as separate parts of a single [allegedly]
criminal episode." Apparel Art, 967 F.2d at 723.
___________
VI.
Conclusion
__________
The three separate judgments entered by the district
court in these consolidated cases are affirmed.
________
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31
