Pacific Harbor Capital v. Barnett Bank

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
MAY 30, 2001
_________________________
THOMAS K. KAHN
CLERK
No. 00-14405
__________________________
D.C. Docket No. 97-00416 CV-FTM-29A
PACIFIC HARBOR CAPITAL, INC.,
successor to Pacific Corp Credit, Inc.,
Plaintiff-Appellant,
versus
BARNETT BANK, N.A., MORTON A. GOLDBERG,
Defendant-Appellee.
__________________________
Appeal from the United States District Court
for the Middle District of Florida
__________________________
(May 30, 2001)
Before CARNES, COX and NOONAN*, Circuit Judges.
NOONAN, Circuit Judge:
*
Honorable John T. Noonan, Jr., U.S. Circuit Judge for the Ninth Circuit, sitting by
designation.
Pacific Harbor Capital, Inc., (PHC) appeals the judgment of the district court
for the middle district of Florida holding on partial summary judgment that PHC’s
civil RICO suit against Barnett Bank, N.A. (Barnett) is barred by the statute of
limitations. PHC’s remaining state law claims were dismissed with prejudice
pursuant to an agreement between the parties. The sole issue on appeal is whether
partial summary judgment was justifiably given against PHC on its contention that
the statute of limitations was equitably tolled. Guided by Rotella v. Wood, 528
U.S. 549 (2000), we affirm the judgment of the district court.
FACTS
For purposes of this appeal, we state undisputed facts and also facts alleged
by PHC which we accept as true only to determine whether if true these facts
prevent summary judgment for Barnett. Where a fact is noted as disputed, we take
it here as PHC contends it to be.
PHC, the subsidiary of a power company, is a financial institution whose
headquarters are in Portland, Oregon. In 1987 its interest in investments and the
need of a Florida land developer, John Santini, led PHC to consider making a
major investment in Lee County, Florida. Unfamiliar with the territory, PHC
wanted local participation in the financing. Santini secured the cooperation of
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Barnett, a bank from which he had borrowed for other projects. Barnett agreed to
participate in the amount of $2,500,000 and to act as PHC’s disbursing agent.
PHC agreed to lend Santini’s development company, Fiddlesticks, Ltd.,
$5,700,000, taking a mortgage on land to be developed by Fiddlesticks as an
upscale residential community with a golf club available to members of the
community. PHC also agreed to provide Fiddlesticks $4,300,000 as a construction
loan. Barnett was to take a quarter share in this financing and, as disbursing agent
for PHC, to certify for each disbursement under the construction loan that Santini
was in compliance with the terms of that loan and with the terms of the mortgage
loan and that no adverse financial changes had occurred in his creditworthiness or
the collateral. It is a disputed fact whether from the start Santini was not
creditworthy and known by Barnett to be in desperate financial need.
In making these arrangements, Harvey Goldberg of the Goldberg Law Firm
in Fort Meyers represented both the developer, Santini, and the local lender,
Barnett. Harvey’s brother, Morton, was the president of the law firm and a director
of Barnett. Unbeknownst to PHC at the time, Santini gave Harvey Goldberg a
heavily discounted lot in the Fiddlesticks development. It is disputed whether
Barnett knew of this transaction and whether the transaction influenced Barnett’s
behavior in relation to PHC.
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The financing was to close August 19, 1987. On the day of the closing,
Barnett declined to participate in the loan, giving as a reason that it had discovered
a discrepancy in the loan papers as to the amount of “the release price” Barnett
would receive on sale of a residential unit. It is disputed whether this reason was
pretextual and whether Barnett withdrew because it believed PHC would go ahead
and fund Santini anyway, as in fact PHC did. In early 1988, at PHC’s insistence,
Barnett participated in the Fiddlesticks financing in the amount of $1,000,000.
According to the loan agreement, Fiddlesticks was to use $4,400,000 of the
mortgage to pay off an existing mortgage held by Goldome Federal Savings Bank
(Goldome). By letter of August 11, 1987, eight days prior to the closing, Goldome
informed the Goldberg law firm that it would accept $2,355,000 to release its
mortgage. Joseph Barta, an employee of PHC, became aware of this difference of
over $2,000,000 in the uses of the loan proceeds in late 1987 or early 1988. PHC
made no objection, although it then knew that the loan proceeds had not and would
not be disbursed in accordance with the loan agreement.
From September 1987 to October 1991, Barnett provided PHC with the
monthly certificate required by Barnett’s duties as disbursing agent. In all, Barnett
provided 51 such certifications. It is PHC’s position that each of these certificates
was untruthful as to Santini’s creditworthiness and stable financial condition.
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Many, if not all, of these certifications must have been untruthful as to the
disbursements being made in accordance with the loan agreement. Not only was
Goldome’s mortgage paid off for less than planned, $1,700,000 of the loan was
diverted to other projects of Santini, a fact disclosed by Santini on August 2, 1991
and brought to PHC’s attention in November or December 1991. As PHC also
came to learn later, $50,000 of the loan proceeds were diverted to Harvey
Goldberg and $50,000 to Morton Goldberg. Where the rest of the difference went
between the money scheduled to pay off Goldome and the money actually paid to
Goldome is not clear; but wherever it went, the disbursing agent could not have
truthfully reported that the loan agreement was being followed.
On February 3, 1989, Fiddlesticks asked PHC for an advance from the
construction loan to pay real estate taxes on the project. Barnett certified the use.
PHC made the advance. In fact, as PHC learned in May 1990, the advance was
used to pay taxes on a different project. Despite knowing of this diversion by
Santini and of Barnett’s inaccurate certification, PHC on June 5, 1990 amended
and restated its financing agreement with Fiddlesticks. In the same month, Barnett
loaned Santini $100,000 to pay tax delinquencies. The loan was not disclosed to
PHC.
On October 1, 1990, Fiddlesticks defaulted and PHC declared the full
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amount due. PHC appointed Gerry McHale, an accountant and workout specialist,
to see what could be done. On October 18, 1990, McHale met with Santini and
with Harvey Goldberg, who came as the representative of Barnett. Although
Barnett’s representative, Goldberg answered No for Santini when PHC asked if it
could have a second mortgage on the Enclave, another real estate development
where Barnett held a first. Goldberg made the decision, and his “answer was so
quick and firm that it certainly made one think there was a hidden agenda that had
already been played out between Barnett Bank and the Santinis under which this
scenario had been discussed.” McHale noted that it appeared that Barnett had lied
or misled PHC as to Barnett’s relation as a lender to Santini. He also noted that
Santini was represented by another director of the Barnett Bank.
On July 2, 1991, PHC foreclosed its mortgage and ultimately, on October 1,
1991, obtained a final judgment of $7,653,155. In September 1992, PHC sued
Santini, Fiddlesticks, Harvey Goldberg and the Goldberg law firm, alleging
conspiracy, fraud, professional negligence, breach of fiduciary relationship, breach
of trust, and breach of contract in connection with the financing of Fiddlesticks;
that case was settled in late 1994. Morton Goldberg in November 1995 pled guilty
to federal charges of mail fraud and money laundering; some of the violations he
admitted are, disputably, among the acts charged against Barnett in this suit.
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On December 9, 1996, PHC and Barnett entered a tolling agreement by
which they agreed that, if any applicable statute of limitations had not expired by
December 9, 1996, it would be tolled until March 31, 1997.
PROCEEDINGS
On February 14, 1997, PHC filed the present suit against Barnett in the
district of Oregon; on August 28, 1997, the case was transferred to the middle
district of Florida. The suit alleged violations by Barnett of the Racketeering
Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 (RICO) and breaches
of contract, breaches of fiduciary duty and common law fraud. Individual
defendants associated with Barnett were also named but subsequently dismissed by
PHC. Damages over $13 million were alleged.
On July 1, 1999, Barnett filed motions for summary judgment on all of
PHC’s claims; the motions were referred to Magistrate Judge Howard T. Snyder.
On December 8, 1999, he filed a report noting many of the facts already recited
and noting that PHC “knew it had sustained an injury” when Fiddlesticks defaulted
in October 1990.
To these facts the magistrate judge applied the then current rule in the
Eleventh Circuit that the statute of limitations on RICO claims begins to run only
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when the plaintiff not only knows or should have known of the existence and
source of its injury but also knows or should have known the injury was “part of a
pattern of racketeering.” Bivens Gardens Office Bldg, Inc. v. Barnett Bank of
Florida, Inc., 906 F.2d 1546, 1554-55 (11th Cir. 1990). As the magistrate judge
construed the tolling agreement between Barnett and PHC, PHC was barred if it
had known, or should have known, of a RICO pattern before December 9, 1992.
The magistrate judge held that PHC had not known and should not have known by
this date and consequently was not barred.
Barnett objected to the report of the magistrate judge. Less than three
months after the report was made, the United States Supreme Court decided
Rotella. The district court recognized that Rotella altered the legal landscape and
asked for briefing on Rotella’s impact on the case before it. On March 31, 2000,
the district court upheld the magistrate-judge’s conclusion that PHC’s injury
occurred in October 1990, applied Rotella to the undisputed facts of this case and
held that PHC had notice of its injury within the limitations period. Summary
judgment was entered against PHC on its RICO claims. On motion for
reconsideration, the district court held that PHC had not shown that it “acted with
reasonable diligence” to discover the RICO pattern. PHC’s motion was denied.
PHC appeals.
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ANALYSIS
The Statute of Limitations. We assume, without needing to decide, that the
statute of limitations period starts from the date of discovery of the injury. Under
the injury discovery rule, unless tolled, the statute of limitations under RICO is
four years from the date the plaintiff knew it was injured. Rotella, 528 U.S. 549,
552-53 (2000). PHC knew it was injured when Santini defaulted on October 1,
1990. Unless tolled, the statute of limitations barred a RICO suit by PHC after
October 1, 1994. The December 9, 1996 tolling agreement referred to by the
magistrate is irrelevant because the statute would have run by the time it was made.
Facts First. To recapitulate the relevant facts bearing on whether PHC knew
or should have known of a RICO pattern before October 1, 1994: PHC knew that
Barnett had pulled out of its original commitment to lend Santini $2,500,000 on
grounds that, whether pretextual or not, would have justified PHC in calling off the
deal; that one of the major purposes of PHC’s mortgage loan had not been carried
out because the full amount scheduled had not been needed and that at least
$1,700,000 of it had been diverted to other Santini enterprises; that Barnett had not
faithfully certified disbursements in accordance with its agency as the disbursing
bank; that construction loan funds intended as payment for taxes on the project had
been used to pay taxes on other projects; that Barnett had not only failed to be
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faithful as a disbursing agent but had failed to report the Santini financial
difficulties that the diversions from the PHC financing signaled; that, after the
Fiddlesticks’ default, PHC’s workout specialist had noted Barnett’s lawyer
speaking for Santini and had thought that a hidden agenda had been followed by
the local bank with the local developer; that the fingerprints of the Goldberg firm
were all over the financing of Santini and that, as the saying goes, the Goldbergs
and Barnett were thick as thieves; and that PHC had a cause of action against
Harvey Goldberg, the Goldberg firm, Santini, and several high executives of
Barnett.
PHC discovered the pattern of RICO predicate acts only in 1995 when
Morton Goldberg pled guilty to federal crimes and Barnett ceased to use Harvey
Goldberg and the Goldberg law firm.
Tolling. A “pattern of predicate acts may well be complex, concealed, or
fraudulent,” Rotella observes and PHC argues here; but those characteristics of
RICO predicates are not enough to toll the statute of limitations. Rotella, 528 U.S.
549 at 556. A “considerable effort may be required before a RICO plaintiff can tell
whether a pattern of racketeering is demonstrable.” Id. Exactly our case, chimes
in PHC. But the need for a considerable effort to break open the pattern does not
place the RICO plaintiff “in a significantly different position from the malpractice
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victim” who seeks to sue for malpractice. Id. The malpractice victim who knows
he has been injured must promptly take steps to discover the pattern producing his
injury; he cannot wait for events fortuitously to make clear to him that inadequate
treatment was involved in his injury. Id. at 556. The financial fraud victim is also
not allowed to wait for time, the mother of truth, to make manifest a prohibited
pattern. True, fraud by its nature means that the truth has been concealed. But “the
occurrence of fraud in RICO patterns” is not a good reason to put off the running
of the statute. Id. at 559-560.
Equitable principles of tolling are not “unsettled” by Rotella, the opinion in
its penultimate paragraph asserts. Id at 560. But “the very nature of such tolling”
is that it be “the exception, not the rule.” Id. at 561. PHC has pointed to no facts
that make its case exceptional. PHC does, for example, point to testimony by
Santini that, in 1991 or 1992, he was given $5,000 in cash by Harvey Goldberg
and, later $10,000 to $15,000 arranged by Harvey’s brother, Morton, to “make this
whole Pacific Harbor matter go away.” If these bribes were offered, the Goldbergs
and the Barnett Bank employing them were attempting to conceal the fraud. But
we need not decide these disputed factual matters. Such attempts did not prevent
PHC from knowing of Santini’s 1991 admission of the large diversion of the loan
funds; nor would such bribes have hidden from PHC the facts it already knew that
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put PHC on notice that it had been injured and that it had been injured by its
disbursing agent, Barnett, acting in complicity with Santini and using a lawyer who
acted for both Barnett and Santini.
Equitable tolling is defeated, even on summary judgment, when it is shown
that indisputably the plaintiffs “had notice sufficient to prompt them to investigate
and that, had they done so diligently, they would have discovered the basis for
their claims.” Morton’s Market, Inc. v. Gustafson’s Dairy, Inc., 198 F.3d 823, 832
(11th Cir. 1999); Osterneck v. E.T. Barwick Industries, Inc., 825 F.2d 1521 (11th
Cir. 1987). It is true that under Morton’s Market, a Clayton Act case, even “non-
diligent” plaintiffs are protected if there is a “veil of fraudulent concealment.” Id.
at 832. The protection of the non-diligent plaintiff is not the rule in RICO cases.
Rotella, 528 U.S. at 556-57.
When, in September 1992, PHC sued Santini, Harvey Goldberg, the
Goldberg law firm and the Barnett executives for fraud and conspiracy, PHC
should have pressed harder, investigated more vigorously, drawn more inferences
and reached the conclusion about Barnett which PHC arrived at tardily in 1995 —
that is, it should have reached this conclusion if its untried allegations now against
Barnett are true. The reasons why PHC is held to this standard of diligence are the
reasons of Rotella. First, the period of limitations permitted by RICO’s focus on
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predicate acts is long. On PHC’s theory that it could not have discovered the
pattern until 1995, PHC could have brought this suit in 1999, twelve years after the
first predicate act. That is too long for a RICO suit to hang in the air. Rotella at
555. Second, PHC as a RICO plaintiff was offered the reward of triple damages.
That reward was meant to stimulate its vigilance as a private attorney general. Id.
at 557-558. It was not eligible for the reward when it was not vigilant enough to
get a full report from McHale on his inferences about Barnett; it received his diary
only in March 1997 although it was bound by all the knowledge he had in October
1990. Third, the RICO statute of limitations is modeled on the Clayton Act. The
corporations affected by violations of either law will typically face complex sets of
facts requiring sustained legal analysis. Id. at 557. The RICO plaintiff, like the
Clayton Act plaintiff, is expected to promptly get the legal advice necessary to
discern the wrong, if wrong there be. PHC did not. Without conceding liability
under RICO, Barnett has executed the difficult but not impossible task of showing
beyond dispute that, before October 1, 1994, PHC had such notice of possible
wrongdoing by Barnett that diligent investigation would have furnished the
information that justified the allegations of PHC’s complaint of February 14, 1997,
by which time the statute of limitations had expired.
For these reasons, the judgment of the district court is AFFIRMED.
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