Rodriguez v. Banco Central ( 1993 )

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 91-2220
RAUL F. RODRIGUEZ, ET AL.,
Plaintiffs, Appellants,
v.
BANCO CENTRAL CORPORATION, ET AL.,
Defendants, Appellees.
ERRATA SHEET
The opinion of this Court issued on March 30, 1993 is
amended as follows:
On page 4, line 1: "finansite" should be "site".
March 30, 1993 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 91-2220
RAUL F. RODRIGUEZ, ET AL.,
Plaintiffs, Appellants,
v.
BANCO CENTRAL CORPORATION, ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jose Antonio Fuste, U.S. District Judge]
Before
Breyer, Chief Judge,
Aldrich, Senior Circuit Judge,
and Boudin, Circuit Judge.
Harry E. Woods with whom Fernando L. Gallardo was on brief for
appellant.
James G. McLaughlin Torres with whom Luis Sanchez-Betances,
Ivonne Cruz-Serrano, and Luis A. Melendez-Albizu were on brief for
appellee.
March 30, 1993
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
1RICO is the Racketeering Influenced and Corrupt
Organizations chapter of the Organized Crime Control Act of
1970, 18 U.S.C. 1961-68. The real estate company was J.C.
Investments, Inc. The original financing was by Banco
Economias and a group of investors. Banco Central succeeded
Banco Economias.
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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,
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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),
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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 Rodriquez 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
2The Land Sales Act and Securities Exchange Act claims
were dismissed on statute of limitations grounds. The RICO
claim under 1962(a), charging use of racketeering derived
income, was dismissed for lack of standing.
3In addition to the claim of securities fraud under the
Securities Act of 1934, the original complaint had also
mentioned securities fraud as part of the improvident RICO
claim under 18 U.S.C. 1962(a).
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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
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to include "investment contracts."4 Rodriquez, 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 (1946) (interest
in citrus enterprise a security); and United Housing
Foundation, Inc. v. Forman, 421 U.S. 837 (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
4The courts have construed the term "securities" in
light of the definitions of the term provided by the
Securities Act of 1933, 15 U.S.C. 77a et seq., and the
Securities Exchange Act of 1934, 15 U.S.C. 78a et seq. See
Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985). The
definitions appear respectively in the 1933 Act, section
2(1), 15 U.S.C. 77b(1), and the 1934 Act, section
3(a)(10), 15 U.S.C. 78c(a)(10).
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for direct distribution or as an increase in the value of the
investment. Howey, 328 U.S. at 298-99; Forman, 421 U.S. at
852-53.
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. 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 (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
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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) (en banc), cert. denied, 494 U.S. 1078(1990). Even if bought for investment, the land itself does
not constitute a business enterprise, and "securities" are
interests in an enterprise. Howey, 328 U.S. at 298-99.
Thus, one who buys raw land or even a building, hoping to
profit from rents or the natural increase in the value of
property, is not under normal circumstances treated as
purchasing a "security." Aldrich v. McCulloch Properties,
Inc., 627 F.2d 1036, 1039 n. 1 (10th Cir. 1980).
Conventional incidentals, such as the seller's promise to
install a road or electricity, is similarly not enough to
elevate an ordinary real estate transaction to the status of
a security. Id. at 1040.
At some point, however, the commitments and promises
incident to a land transfer, and the network of relationships
related to the project, can cross over the line and make the
interest acquired one in an ongoing business enterprise. See
Howey, 328 U.S. at 299-300. At that point, the interest may
be treated as a security, even if not so labeled. Id. at
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300. And in making this appraisal, the promoter properly is
held to his representations as to what he is selling, Joiner,
320 U.S. at 353, even where those promises go well beyond the
legal terms of the contracts and the fine print of the
disclaimers.
In this case the promoters offered the land primarily as
an "investment." A number of buyers testified at trial that
the salespeople emphasized the investment value of the
project, a contention supported by a company sales' manual
introduced into evidence, stressing capital appreciation as a
prime selling point. Compare Rice v. Branigar Organization,
Inc., 922 F.2d 788, (11th Cir. 1991) (promotional materials
emphasized personal use over investment). A complication is
now introduced: while the lots were offered as an investment
by the seller, most buyers intended to live on the property
and purchased primarily for use. A purchase for use or
consumption, it is said, is not a security or investment
contract. Forman, 421 U.S. at 852-53. We need not sort out
the problem of opposing buyer and seller viewpoints, nor
search out buyers who had investment in mind, because another
aspect of the matter decides the case.
In our view even if every buyer bought for investment,
what was purchased in this case was not a share of a business
enterprise and so not a security. Taking the evidence most
favorably to the buyers, they were sold land in individual
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parcels with strong and repeated suggestions that the
surrounding area would develop into a thriving residential
community. But apart from the promise of an existing lodge
or a new country club, the evidence did not show that the
promoter or any other obligated person or entity was
promising the buyers to build or provide anything. A few
scraps of evidence, usually ambiguous, may point the other
way but we do not think that a reasonable jury could conclude
on this record that the defendants were promising to
construct a community.
A security might exist if the defendants had promised,
along with the land sales, to develop the community
themselves. Then each buyer might be acquiring an interest
not only in land but in a package of commitments that, taken
together, could comprise a business venture harnessing the
entrepreneurship of the promoter. Each parcel of land would
still have a different value, unlike the typical share of
stock, but most of the potential gain might depend on the
development of the community as a whole. Cf. Joiner, 320
U.S. at 348-49 (promised oil well gave mineral leases "most
of their value and all of their lure"). The promoter's
commitment to build the community, in turn, could constitute
the "common enterprise" financed jointly by the buyers.
Howey, 328 U.S. at 299. Several decisions have taken this
view, and we think they may be correct in principle. E.g.,
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McCown v. Heidler, 527 F.2d 204 (10th Cir. 1975); Miller v.
Woodmoor, CCH Fed. Secur. L. Rep. 96,109, 91,998-999 (D.C.
Colo. 1976); Aldrich, 627 F.2d at 1038-1040.
In this case, however, the most that can be said is that
the promoter left the distinct, and distinctly false,
impression that a community was going to develop through
natural forces. Many buyers were told that Disney World's
presence nearby would spur growth. Others were shown
pictures of specific sports facilities already existing at
specific distances. But aside from the lodge or country
club, there was little testimony that specific promises were
made by anyone to do specific things.5 Accordingly, what we
have is sales of property based on false representations as
to its prospects, but there is no pretence of a "common
enterprise" managed by the promoter and hence no "security."
See, e.g., Woodward v. Terracor, 574 F.2d 1023, 1025 (10th
Cir. 1978); Happy Investment Group v. Lakewood Properties,
Inc., 396 F. Supp. 175, 180-81 (N.D. Cal. 1975).
One might ask why the absence of a security should
matter. The property was made attractive by the promoter's
5The promoter proposed to convey an existing house to
the community for use as a lodge by buyers visiting their
land and offered memberships in a to-be-constructed country
club. The latter offer was accepted by none of the 152
buyers who are plaintiffs in this case. In any case,
scattered references to these limited amenities would not
transform the purchase of a lot into a share in a development
venture. See Rice, 922 F.2d at 790-91.
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claims that a community would arise, and those claims were
blatantly false, or so a jury could find. But this is not a
simple "fraud" case: the buyers, seemingly through delay,
have apparently lost their fraud remedies, except for their
RICO claim based on supposed predicate acts of securities
fraud. Without securities, this RICO claim evaporates. It
is disagreeable for a court to turn away victims who have
been wronged. But we cannot disregard controlling Supreme
Court decisions or distort the securities laws to rescue
plaintiffs who have themselves cast their legitimate remedies
away.
Puerto Rico law provides ample remedies for defrauded
buyers of land. See 31 L.P.R.A. 3408-3409. The Interstate
Land Sales Full Disclosure Act, 15 U.S.C. 1701 et seq.,
offers a broad gauged federal remedy, modeled in part on the
Securities Act of 1933. Indeed, RICO itself makes mail fraud
a predicate act, 18 U.S.C. 1961(1)(A), but the buyers here
delayed too long in asserting this claim. All of these
possible claims, federal and local, could have been asserted
in a timely filed complaint in this case. Sometimes the law
itself is at fault; this time the fault is with the lawyers.
III. MISCELLANY
Ignoring their own defaults, the buyers' lawyers instead
assail the district judge. They devote the first thirty
pages of argument in their brief (no reply brief was filed)
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not to the difficult legal issues of RICO and securities law,
but to claims that the district judge barred leading
questions, helped certain defendants with their answers, and
otherwise misconducted the trial.
There is some reason to believe that the district judge,
far from tilting against the buyers, took steps to preserve
what claims he could for the buyers. One effort he made to
expedite the case through certified questions was frustrated
in part by the buyers' neglect to follow a simple procedural
rule. See Rodriguez v. Banco Central, 917 F.2d at 668-69. He
also permitted the buyers to go to trial on their marginal
RICO security claim, allowing them to flesh out their
"securities" allegation through evidence of actual
representations; many other judges, we are confident, would
have dismissed the securities claims before trial in light of
the Supreme Court decisions already discussed.
In all events, the instances offered to show error and
partiality by the district judge in his conduct of the trial
are close to trivial. Trial judges are constantly making
judgments about the use of leading questions, the need to
clarify witness answers, and similar matters of trial
management. In this realm the widest possible latitude is
given to the judge on the scene. Borges v. Our Lady of the
Sea Corp., 935 F.2d 436, 442 (1st Cir. 1991). We have
examined the many examples and transcript citations provided
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in the buyers' brief. Almost all are routine "calls" by the
district judge, who must make hundreds of snap judgments in
the course of a long trial, and are well within the bounds of
propriety.
The only legal point worth mentioning is the buyers'
complaint that the trial judge limited or forbade leading
questions when the buyers as part of their direct case called
certain defendants as witnesses. The buyers urge that the
judge erred by refusing to declare the witnesses "hostile"
and to allow the use of leading questions on direct. On this
point they themselves err. A "hostile" witness, in the
jargon of evidence law, is not an adverse party but a witness
who shows himself or herself so adverse to answering
questions, whatever the source of the antagonism, that
leading questions may be used to press the questions home.
See United States v. Brown, 603 F.2d 1022, 1025-26 (1st Cir.
1979).
The buyers are on stronger ground in arguing that the
rules generally permit leading questions to be used against
an opposing party. Fed. R. Evid. 611(c). This is not
because that party is a hostile witness in the technical
sense but because, however cooperative, the witness has a
built-in incentive to slide away from the question or slant
the answer. But Rule 611(c) is arguably subject to the
overriding command of Rule 611(a) that the court "shall
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exercise reasonable control over the mode . . . of
interrogating witnesses" to elicit truth, avoid delay and
protect against harassment. Fed. R. Evid. 611(a). We cannot
believe, for example, that a district judge would be
compelled to allow leading questions to an adverse party
where the judge found that this mode was distorting the
testimony of a suggestible adverse-party witness.
In all events we need not decide whether the trial judge
in this case misread Rule 611(c) or precisely when and how it
may be overridden. There can be no reversal on such a ground
without a showing of prejudice, Fed. R. Evid. 103(a), and no
showing of prejudice without a proffer, ordinarily one in the
record. Fed. R. Evid. 103(a)(2). In this case there is no
showing of any specific information that might have been
elicited, pertinent to the dispositive securities issue, if
the buyers' counsel had been permitted to ask the defendants
leading questions. Without some notion of where a leading
question might have led, any error (if error there was) is
harmless. See Ellis v. City of Chicago, 667 F.2d 606, 613
(7th Cir. 1981).
The buyers' final claim is that the trial judge abused
his discretion in refusing the buyers' requests to amend
their complaint. The amendments would have alleged mail
fraud as predicate acts under RICO and stated separate fraud
or like claims under Puerto Rican law. Each of these
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attempted amendments has a somewhat different history.
Neither history bears out the charge that the trial judge
erred.
The original complaint in this case was filed on August
2, 1982. No RICO count asserting mail fraud was included.6
On May 1, 1985, the magistrate ordered that the buyers "will
move to amend the complaint"; for almost two years it appears
that no amendments were proposed.7 Then amendments were
proposed by the buyers on April 10, 1987, and on June 10,
1988, but no mail fraud predicate acts under RICO were
asserted in either instance. On December 18, 1989, over
seven years after the start of the case and after extensive
discovery, the buyers for the first time sought to add mail
fraud under RICO to the case.
As for fraud claims under Puerto Rican law, no mention
was made of such claims in the original complaint. Contrary
to the buyers' brief in this court, the first amended
complaint, filed in 1987, did not assert such claims; all
that appears is a brief reference to unidentified violations
6The buyers' brief says that "averments concerning the
fraudulent use of the U.S. mails were made" in this
complaint. In fact, the complaint refers to the use of the
mails in the securities fraud claim, interstate commerce
being an element of securities fraud, but no charge of mail
fraud appears.
7The buyers' brief asserts, without record citation,
that the magistrate asked them to delay moving until after
the class certification was settled. The defendants' brief
says this is untrue.
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of "the Civil Code of Puerto Rico and Law 145 of June 18,
1980," in the "jurisdiction and venue" portion of the
complaint. The Puerto Rican law claims were first made in
the second amended complaint submitted June 10, 1988,
purportedly tendered pursuant to a court order permitting a
new caption to identify plaintiffs. The district court
understandably rejected this attempt to smuggle in new
allegations, and the Puerto Rican claims were not raised in
the third motion to amend filed December 18, 1989.
This corrected version of events speaks for itself. No
reason is offered in the buyers' brief why mail fraud and
local-law claims, which should have been evident
possibilities in 1982, were not asserted straightforwardly
and in timely fashion. The further along a case is toward
trial, the greater the threat of prejudice and delay when new
claims are belatedly added. The district court did not abuse
its considerable discretion in denying leave to add new
claims years after the case began, after much discovery, and
without any adequate excuse for the delay. See generally
Tiernan v. Blyth, Eastman, Dillon & Co., 719 F.2d 1, 4-5 (1st
Cir. 1983).
The judgment of the district court is affirmed.
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