Dongelewicz v. PNC Bank National Ass'n

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
7-23-2004
Dongelewicz v. PNC Bank Natl Assoc
Precedential or Non-Precedential: Non-Precedential
Docket No. 03-1045
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 03-1045
___________
LEON R. DONGELEWICZ; MARGARET J. DONGELEWICZ,
Husband and Wife; FRANCIS X. BURNS; LAURA BURNS;
LOIS A. BURNS; GEORGE M. DE PERSIA; SHARON M.
DE PERSIA, Husband and Wife; JOHN B. KNOX; BETSY
C. KNOX, Husband and Wife; *ESTATE OF JOHN T. MIELE;
FRANK J. RACHUBINSKI; HELEN A. RACHUBINSKI, Husband
and Wife; SENTA M. SHERIDAN; GER D.J. SMIT; WACLAW
SZCZESNIAK; DANUTA SZCZESNIAK, Husband and Wife, For
Themselves and on Behalf of all Others Similarly Situated,
Appellants
v.
*PNC BANK NATIONAL ASSOCIATION, Successor by Merger
to First Eastern Bank,** BANKSHARES REALTY COM PANY,
Successor to First Eastern Corp.; FRANK M . CEDRONE;
C.B.G. LIMITED, A Pennsylvania Limited Partnership;
ONEIDA WATER COM PANY, A Company Organized Under the
Laws of Pennsylvania; VALLEY UTILITIES COMPANY, INC.,
A Pennsylvania Corporation; MLA MANAGEM ENT ASSOC,
A Pennsylvania Corporation; RALPH CONTE; ARLENE REINESS;
THE PROPERTY OWNERS ASSOCIATION OF THE VALLEY
OF LAKES, An Unincorporated Association
*(Amended Per Clerk's Order dated Janaury 17, 2003)
**(Amended Per Court Order dated April 23, 2003)
___________
On Appeal from the United States District Court
for the Middle District of Pennsylvania
District Court Judge: The Honorable James F. McClure
(D.C. Civil No. 95-cv-00457)
___________
Argued on January 26, 2004
Before: NYGAARD, FUENTES, and STAPLETON, Circuit Judges.
(Opinion Filed: July 23, 2004)
Roger S. Antao (argued)
Enna Chuang
Antao & Chuang
2337 Lemoine Avenue
Suite 101A
Fort Lee, NJ 07024
Attorneys for Appellants
Steven A. Arbittier (argued)
Darryl J. May
Thomas B. Roberts
Michael N. Gordan
Ballard, Spahr, Andrews &
Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103
Attorneys for Appellees
PNC Bank, N.A. and
Bankshares Realty
Company
________________________
OPINION OF THE COURT
________________________
2
FUENTES, Circuit Judge:
This appeal involves a real estate development known as Valley of the Lakes
("VOL") located near the Poconos in Hazleton, Pennsylvania and developed by CBG
Limited ("CBG"), a Pennsylvania Limited Partnership. On June 17, 1994, Leon R.
Dongelewicz and ten other sets of VOL lot owners (“Dongelewicz”) commenced a class
action against the owners and managers of VOL as well as First Eastern Bank, N.A., the
development’s primary source of financing, alleging years of fraud and broken promises.1
As of the date of this appeal, First Eastern is the only remaining defendant. 2 Dongelewicz
appeals a September 30, 1999 decision of the District Court which decertified the class
action, granted summary judgment to First Eastern, and denied appellants’ motion for
leave to supplement the complaint. We agree with the District Court and affirm.
I. Background
The facts, as exhaustively recounted in Dongelewicz’s 157-page complaint, are
well known to the parties. We only discuss those that are relevant to our discussion of the
issues on appeal. In September of 1986, CBG acquired VOL, a 4000 acre tract of land
1
We will refer to First Eastern Bank, N.A. and its parent, First Eastern Corporation,
collectively, as “First Eastern.” First Eastern was acquired by PNC Bank, N.A. and by an
Order dated January 17, 2003, PNC was substituted for First Eastern. However, because
the events at issue here occurred primarily before 2003, we will refer to the relevant party
as First Eastern.
2
CBG, Frank Cedrone (a general partner of CBG), Oneida Water Company and Valley
Utilities Company, Inc. (two CBG-related corporations that provided water and utilitites
to VOL) defaulted, and MLA Management Associates, Inc. (“MLA”), Ralph Conte,
Arlene Rainess, and the Property Owners Association of VOL settled with Dongelewicz.
3
partially subdivided for residential and recreational development. From the registration
of the lots in 1987 until about 1989, the VOL development did well, selling lots to
individual purchasers and beginning to construct amenities. Potential lot purchasers were
told that the development would eventually include roads, a central sewer system, an 18-
hole golf course and “Lake Algonquin.” Dongelewicz claims that CBG never intended to
complete the promised amenities.
As CBG’s primary source of financing, First Eastern Bank made its initial loans to
CBG in 1988: a $5 million revolving development loan and a $2 million receivable line
of credit. These amounts were increased and by the end of 1989, the Development Loan
was at $11,500,000 and the Receivable Line at $10,000,000. The Development Loan was
secured by a first mortgage on the property owned by CBG. The primary collateral for
the Receivable Line were CBG's accounts receivable on notes secured by purchase money
mortgages, ("Lot Paper") which lot owners in VOL provided to CBG when buying lots.
CBG financed up to 90% of the lot price, and First Eastern advanced 90% of the financed
amount to CBG. When mortgage payments were made to C&E Credit, the funds would
be wired to First Eastern as payment on the receivable line.
Although First Eastern advanced the entire Development Loan to CBG, their
inspectors found that the improvements described in the Property Reports filed by CBG
with HUD were not completed by the dates specified in those reports. In November
1990, CBG failed to meet obligations under the terms of its loans from First Eastern
because mortgagors were no longer making enough payments on CBG's purchase money
4
mortgages for the receivables to constitute adequate payment on the receivable loan.
CBG attempted to sell or re-finance the development with no success.
Dongelewicz contends that during this period between November 1990 and CBG's
declaration of bankruptcy in 1992, First Eastern undertook a scheme to conceal the
insolvency of CBG. VOL was having cash-flow difficulties and First Eastern made cash
infusions and loans to CBG to keep the development alive and thereby preserve their
collateral. Dongelewicz characterizes these actions as a scheme designed to allow CBG
to appear solvent to purchasers, property owners, mortgagors, participant banks, bank
regulators and HUD, and to continue to perpetrate its land fraud.
On March 30, 1992, CBG filed for Chapter 11 bankruptcy in the Middle District of
Pennsylvania, claiming it was necessary in order to complete the development. CBG
became debtor-in-possession, and entered into an agreement with MLA Management
Associates to monitor their actions. Dongelewicz contends that, after CGB's declaration
of bankruptcy, First Eastern concealed the income stream on the receivables from the
Bankruptcy court, in effect siphoning millions of dollars of the bankruptcy estate's
receivables. Dongelewicz also alleges that, during this period, First Eastern mailed out
mortgage coupon booklets to the mortgagors, naming themselves and not CBG as payee,
and hired MLA Management Associates to act as their representative at VOL to closely
monitor the collection and expenditure of funds, and to develop a budget for CBG. In
response, First Eastern argues that the actions it took, including the cash advances and
5
loans, were done to preserve its collateral and therefore provided for by an order of the
bankruptcy court dated October 22, 1992.
In February 1995, CBG was removed as debtor-in-possession and a trustee was
appointed. In 1996, a joint venture of Double Diamond Inc. and the Valley of the Lakes
Civic Association ("VOLCA") acquired VOL. First Eastern had by this time been
acquired by PNC, and PNC released its interests in VOL for less than $1,200,000,
resulting in a loss of over $20 million.
On June 17, 1994, Dongelewicz commenced this action in the U.S. District Court
for the District of New Jersey against CBG, Frank M. Cedrone, Oneida Water, Valley
Utilities, First Eastern, MLA, Ralph Conte, and Arlene Rainess. On First Eastern’s
motion to dismiss, the District Court dismissed all counts except two, one filed pursuant
to the Racketeer Influenced and Corrupt Organizations Act (RICO) 18 USC §§ 1961-
1968, and the other filed under the common law of New Jersey for fraud and deceit. The
case was thereafter transferred to the Middle District of Pennsylvania by a March 15,
1995 order. A class and subclasses were certified on June 19, 1996. About two years
later, Dongelewicz filed a motion to supplement the Complaint asserting new RICO
claims against First Eastern based on the allegation that during CBG’s bankruptcy, the
bank received mortgage payments due to CBG and fraudulently concealed receipt of
those payments from the bankruptcy court.
On September 30, 1999 the District Court decertified the class action, granted
summary judgment to First Eastern, and denied appellants’ motion for leave to
6
supplement the complaint. The District Court originally certified issues for an
interlocutory appeal on February 8, 2000, however this court denied permission to appeal
at that time. This court’s jurisdiction is pursuant to a Fed.R.Civ.P. 54(b) certification
issued by the District Court and 28 U.S.C. § 1291.
II. DISCUSSION
A. Leave to Amend and Supplement
We first address Dongelewicz’s motion to amend the complaint to include
allegations that the mortgage payments received by First Eastern from lot owners were
fraudulently concealed from the bankruptcy court. (App 2341) The District Court denied
Dongelewicz’s motion to amend holding that the supplemental RICO claims were barred
by the statute of limitations and therefore “amendment would be futile." (App 171) We
review this decision for abuse of discretion.
The four-year statute of limitations for RICO claims begins to run when a plaintiff
knew or should have known that he has been injured. Mathews v. Kidder, Peabody Co.,
260 F.3d 239, 247 (3d Cir. 2001). In the proposed supplement, Dongelewicz alleges that
First Eastern violated RICO, injuring the bankruptcy estate and the lot owners by
receiving payments on the mortgage notes after CBG had filed for bankruptcy. These
allegations do not arise from the same conduct alleged in the Complaint, so the
supplement cannot relate back under Fed.R.Civ.P. 15(c)(2) to the date of filing.
However, as the District Court found, all of the allegations made in the proposed
7
supplement concern conduct which came to the attention of the lot owners over six years
before they moved for leave to supplement in 1998. The supplemental claims were
therefore untimely. The lot owners knew that CBG was in bankruptcy as of its filing on
March 30, 1992. By April 1992, the lot owners’ mortgage checks were made payable to
and endorsed for deposit by First Eastern (App 5558-61), and the bankruptcy stay, which
they now allege First Eastern was violating by cashing their checks, was issued on March
30, 1992. Because we agree that the supplemental claims were untimely, we affirm the
District Court’s denial of leave to amend.
B. Decertification
We review a class decertification for abuse of discretion. See Holmes v. Pension
Plan of Bethlehem Steel Corp. 213 F.3d 124, 136 (3d Cir. 2000). Abuse of discretion is
found “where the district court's decision rests upon a clearly erroneous finding of fact, an
errant conclusion of law or an improper application of law to fact." Id. (internal quotation
omitted)
The District Court decertified the class, holding that the application of the "injury
plus pattern discovery rule," in evaluating the statute of limitations defense, would require
individualized inquiries into differing factual circumstances and therefore decertification
is appropriate. Under the injury plus pattern rule, the limitations period begins when the
plaintiff knew or should have known that the defendant engaged in a pattern of
racketeering activity and that the plaintiff was injured by the pattern of racketeering
activity.” See, e.g., Perlberger v. Perlberger, 1999 WL 79503, *3 (E.D. Pa. Feb. 12,
8
1999). Dongelewicz correctly notes that the injury plus pattern discovery rule is no
longer the law in this circuit. Shortly after the District Court’s decertification order, in
Rotella v. Wood, 528 U.S. at 549 (2000), the Supreme Court abrogated the injury plus
pattern rule and replaced it with the “injury discovery” rule of Forbes v. Eagleson, 228
F.3d 471, 484 (3d Cir. 2000), cert denied, 533 U.S. 929 (2001). Under the injury
discovery rule, a RICO claim accrues when the plaintiff knew or should have known of
his injury.
Dongelewicz argues that the injury discovery rule presents none of the
complexities that led the District Court to decertify the class under the injury plus pattern
rule. However, this argument defies common sense because, as the court explained in
Forbes, the new rule "alter[s] the judicial landscape unfavorably to the plaintiffs from the
shape in which it existed when this case was before the district court" and requires us to
"consider the case under an accrual rule more adverse to plaintiffs than that the district
court applied." 228 F.3d at 424. In fact, as First Eastern points out, the new rule may
mean that all class members' claims are barred by the statute of limitations. Dongelewicz
argues that even if the new rule is "stricter" than the old, it does not require the same
individualized inquiry that compelled the District Court to decertify, but there is no reason
to believe that the District Court's conclusion regarding the need for individualized
inquiry is no longer true under the new rule. Under the injury discovery rule, the court
must still determine when each lot purchaser, by the exercise of diligence, should have
discovered she was injured. With respect to the fraud claims, the District Court held that
9
March 30, 1992 was the latest date any reasonable person would have discovered her
injury. However, setting the precise date for each plaintiff, given the differing
circumstances of their purchase and ownership of the lots, still requires an "extremely
fact-specific" individualized inquiry. Mathews v. Kidder, 260 F.3d 239, 250 (3d Cir.
2001). The District Court's application of the injury discovery rule to the fraud claim is
not an apt analogy here because, as this court explained in Mathews, "the focus of accrual
in a RICO action is different from that for a fraud claim where the focus is on the acts of
the defendants" which are common to all plaintiffs – "a RICO claim accrues when the
plaintiffs should have discovered their injuries." Id, at 251. The District Court was well
within its discretion decertifying the class in light of the statute of limitations defense, and
that decertification remains valid under the new injury discovery rule.
C. Summary Judgment
1. RICO Claim
To establish a RICO violation under § 1962, plaintiffs must prove (1) the conduct
(2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v.
Imrex Co., 473 U.S. 479, 496 (1985). To recover under civil RICO, an injury to
plaintiff’s business or property must have been proximately caused by the § 1962
violation. The "conducted the affairs of an enterprise" elements of § 1962(c) are satisfied
by showing that a defendant "participate[d] in the operation of management of the
enterprise itself." Reves v. Ernst & Young, 507 U.S. 170, 183 (1993).
10
In granting summary judgment to First Eastern, the District Court relied primarily
on Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644 (3d Cir. 1998). Rolo
involved a residential land development scheme in which lot purchasers alleged that the
developer, GDC, committed RICO predicate acts by making promises concerning future
development they never intended to keep. The lot purchasers also sued secondary
defendants, who were not alleged to have participated in the fraudulent sales, but were
alleged to have enabled GDC to perpetuate its fraud by continuing to finance the
development despite knowledge of the fraud, and by their concealment of it. Plaintiffs
also alleged that the financiers, by doing the same sorts of things alleged against First
Eastern here, had exercised control over the enterprise. The district court dismissed the
complaint, finding that the activity did not constitute operation and management of the
enterprise as required by Reves. We affirmed, holding that the allegations against the
financiers made out an aiding and abetting claim, which was no longer viable after the
Supreme Court's decision in Central Bank of Denver v. First Interstate Bank of Denver,
511 U.S. 164 (1994).
Dongelewicz is correct to point out that Rolo does not control here because
although those facts are appealingly similar to those we face here, in that case, we did not
discuss the District Court's ruling concerning the "operation and management" test.
However, in his denial of motions for reconsideration, Judge McClure clarified his
invocation of Rolo. He explained that he did not hold that Rolo controlled on the Reves
issue, but rather noted that "First Eastern's role was analogous to that played by the
11
‘secondary defendants' in Rolo" and held that "since First Eastern did not participate
directly in the affairs of the enterprise and cannot be held civilly liable (under Rolo) as an
aider and abettor, it cannot be liable."
In Univ. of Md. v. Peat, 996 F.2d 1534 (3d Cir. 1993), policyholders claimed that
Peat's provision of accounting and other financial services to an insurer satisfied the
Reves standard. We explained, however, that "[s]imply because one provides goods or
services that ultimately benefit the enterprise does not mean that one becomes liable
under RICO as a result." Id, at 1539. We have also stated, albeit in the fraud context,
that "we are unwilling to hold that merely because a lender requires security and approval
of aspects of construction, the lender thereby takes ‘control' of the project. To do so
would wreak havoc on the lending industry, for any lender who reasonably wished to
protect itself would be forced to run the risk of being sued for the unknown fraudulent
acts of its borrowers." Bhatla v. U.S. Capital Corp., 990 F.2d 780, 778 (3d Cir. 1993).
While it is certainly true that a major creditor of a corporation can have “substantial
persuasive power” and some legal authority over management, alone, such power is “not
equivalent to having the power to conduct or participate directly or indirectly in the
conduct in the affairs of those corporations." Strong & Fisher Ltd. v. M axima Leather,
Inc., 1993 WL 22705, *1 (S.D.N.Y., July 22, 1993).
We agree with that analysis. First Eastern was merely a lender - it supplied
financing for a development that failed, and then took steps to preserve its collateral.
Such involvement does not support a finding that it “conducted” the affairs of any
12
“enterprise” under Reves (be it CBG, VOL, or an association in fact of the various
defendants). We therefore affirm the District Court’s grant of Summary Judgment as to
the § 1962(c) claims.
Although § 1962(c) was the focus of Dongelewicz’ original claim, in this appeal
his emphasis shifts. Based on the District Court's characterization of First Eastern’s
actions as "aiding and abetting", Dongelewicz argues that the bank’s conduct violates §
1962(a) and § 1962(d).
Section 1962(a) prohibits the investment of income derived from a pattern of
racketeering activity, by a "principal" in any racketeering activity that affects interstate or
foreign commerce. Dongelewicz correctly notes that "principal" is defined in 18 U.S.C. §
2 as anyone who "aids, abets, counsels, commands, induces or procures" a RICO
violation. However, contrary to Dongelewicz’ assertions, the District Court did not err
"as a matter of law," simply by granting summary judgment as to § 1962(a) while
simultaneously noting that the evidence, at best, might be sufficient to establish aiding
and abetting. Although First Eastern may have reinvested the income received from the
Mortgages into VOL, the lot owners had contractual obligations to pay their mortgages,
and such payments do not constitute the proceeds of racketeering activities.
Section 1962(d) of RICO makes it “unlawful to conspire to violate [§§ 1962(a), (b)
or (c)]." In Smith v. Berg, 247 F.3d 532 (3d Cir. 2001), we adopted the Supreme Court's
analysis in Salinas, which held that § 1962(c) liability is not a prerequisite to § 1962(d)
liability. Rather, conspiracy liability under § 1962(d) does not require satisfaction of the
13
Reves test, but is governed by the "general principles of criminal conspiracy law" which
requires only that the defendant "share[s] a common purpose" with his co-conspirators
and "knowingly agrees to facilitate a scheme, which includes the operation or
management of a RICO enterprise." Smith 247 F.3d at 538. As First Eastern argued in its
motion for summary judgment, the fact that First Eastern provided financing to CBG in
no way gives rise to an inference (i) that First Eastern agreed to commit predicate acts; or
(ii) that First Eastern knew that the predicate acts were part of racketeering activity, two
necessary elements of a RICO conspiracy.
Dongelewicz additionally argues that the District Court erred as a matter of law
because it erroneously imposed the “conducting the affairs of the enterprise” element of §
1962(c) onto § 1962(d). We agree with the District Court, however, that, at best,
Dongelewicz "could prove nothing more than that First Eastern facilitated the conduct of
CBG's business by providing financing, which it had a contractual obligation to do." This
conduct does not violate § 1962(d). Accordingly, we agree with the District Court that
"there is no evidence to support a claim that First Eastern directly participated in fraud or
extortion…nor does it support a claim of conspiracy." We therefore affirm the District
Court’s decision on this issue.
2. Common Law Fraud Claim
The statute of limitations for fraud in Pennsylvania is two years. A claim accrues
when injury is suffered and the statute begins to run when the injured person knows or
reasonably should know that he has been injured and that his injury has been caused by
14
another party's conduct. Ingenito v. AC&S, Inc., 633 A.2d 1172, 1174 (Pa. Super. 1993).
Dongelewicz’s primary fraud theory is that First Eastern failed to disclose the precarious
financial condition of CBG to plaintiffs prior to CBG’s bankruptcy. Even assuming
arguendo that this claim could support a cause of action for fraud, we agree with the
District Court that Dongelewicz and his fellow lot owners were injured when they
purchased lots in VOL and their claims therefore accrued by 1990. Therefore, CBG's
filing of bankruptcy on March 30, 1992 was the latest point at which the statute of
limitations was triggered for all plaintiffs because it gave any reasonable person cause to
know of the financial status of CBG and of the fact that First Eastern had not disclosed
that financial status to Dongelewicz.
Dongelewicz relies on EBS v. Barclay's, 304 F.3d 302, 306 (3d Cir. 2002), but that
case is not dispositive here. In EBS, we held that the filing of bankruptcy does not alert a
reasonable plaintiff to the cause of the insolvency and does not trigger the running of the
statute of limitations as to that fraudulent cause. Here, it is not the cause but the fact of
the insolvency that is in issue – a fact that was allegedly concealed from the plaintiffs by
the actions of First Eastern, but was made plain upon filing of bankruptcy.
Seeking to escape the statute of limitations problem, Dongelewicz suggests that,
after CBG filed for bankruptcy, First Eastern engaged in a “massive bankruptcy fraud.”
To the extent that plaintiffs suggest that the statute of limitations with respect to their pre-
bankruptcy failure to disclose claim should be tolled because an alleged fraud upon the
bankruptcy court lulled them into not pursuing their claim, that argument fails. As the
15
District Court noted, this alleged fraud would “not alter the notice of financial troubles”
plaintiffs received when CBG filed for bankruptcy and would not operate to conceal First
Eastern’s alleged failure to disclose CBG’s financial condition to the lot owners before
the bankruptcy. See Beauty Time, Inc. v. VU Skin Systems, Inc., 118 F.3d 140, 146 (3d
Cir. 1997) (explaining the doctrine of fraudulent concealment).3
Dongelewicz has also suggested that, during CBG’s bankruptcy, CBG and MLA
made various misrepresentations to the lot-owners. Dongelewicz alleges that First
Eastern had knowledge of these misrepresentations, but, as the District Court properly
concluded, “plaintiffs’ attempts to place liability for the actions of MLA [and CBG] on
First Eastern based on agency simply are not supported by the record; ‘approval’ of an
action is not agency.” (App. 203.) Plaintiffs “had the burden of proving an agency
relationship before [MLA’s or CBG’s] actions could be attributed to and binding on”
First Eastern. Bolus v. United Penn Bank, 525 A.2d 1215, 1221 (Pa. Super. Ct. 1987).
Simply put, Dongelewicz has not met that burden. No evidence of an agency relationship
4
has been offered
3
We do not examine whether any alleged "fraud upon the bankruptcy court" amounted
to a new, actionable fraud claim. As we noted above in addressing the 1998 proposed
supplement to plaintiffs' RICO claims, plaintiffs' complaint as filed does not allege such
events or allegations with respect to First Eastern having engaged in a "fraud upon the
bankruptcy court."
4
Dongelewicz also briefly argues in his opening brief that mortgage coupon books
mailed by C&E Credit to mortgagors amounted to fraud because they requested that
payment be made to First Eastern Bank as opposed to CBG, thereby “misrepresenting”
First Eastern as the entity mortgage payments were owed to. Additionally, Dongelewicz
takes issue with one tax statement mailed to one mortgagor–detailing the amount of
interest that mortgagor paid in 1993–because the statement indicated that it was from
16
Accordingly, we agree with the District Court that First Eastern is entitled to
summary judgment on Dongelewicz’ claim of common law fraud and we therefore
affirm.
III. CONCLUSION
For the reasons discussed above, we find that the District Court was within its
discretion to deny Dongelewicz leave to file a supplement to the complaint and to
decertify the class action. Furthermore, we find that the District Court properly granted
summary judgment on Dongelewicz’ RICO claims and correctly dismissed the fraud
claim as untimely. We therefore affirm the judgment of the District Court in its entirety.
First Eastern Bank and not CBG. These theories of fraud, however, were not advanced in
Dongelewicz’s complaint. Of course, “a contention in a brief” “clearly . . . may not” be
used to “substitute for an allegation in a complaint,” Williams v. New Castle County, 970
F.2d 1260, 1266 n.4 (3d Cir. 1992), especially in the context of a fraud claim, which must
be pled with particularity under Fed. R. Civ. P. 9(b).
17