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PANOS v. ISLAND GEM ENTERPRISES

March 16, 1995

CONSTANTINE and CARLA PANOS, Plaintiffs, against ISLAND GEM ENTERPRISES, LTD., N.V., et al., Defendants. ROBERT WOHL and AIDA WOHL, Plaintiffs, - against - ISLAND GEM ENTERPRISES, LTD., N.V., et al., Defendants.

William C. Conner, U.S.D.J.


The opinion of the court was delivered by: WILLIAM C. CONNER

CONNER, SENIOR D.J.

 Plaintiffs Constantine and Carla Panos and Robert and Aida Wohl bring this action against Island Gem Enterprises ("Island Gem"), Bankers Life Insurance Company of Nebraska ("Bankers Life"), *fn1" Yorkshire, N.V. ("Yorkshire"), Chase Manhattan, N.A. ("Chase"), International Sales Management, Ltd. ("International Sales"), and various individual defendants (the "Individual Defendants") for damages resulting from plaintiffs' purchases of certain apartment leases (the "Leases") through International Sales during the 1970's. Plaintiffs contend that defendants' fraudulent concealment of a potential adverse title claim against the property on which the apartments were constructed and two post-purchase amendments of the lease agreements (the "Acceptance and Guarantees" or "A&Gs") violated § 17 of the Securities Act of 1933, 15 U.S.C. § 77(q)(a); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5; and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-64. In addition, plaintiffs claim that defendants' conduct constituted common law fraud, and ultimately led to Island Gem's breach of the A&Gs through its wrongful imposition of the amendments. Plaintiffs are seeking compensatory damages and punitive damages on their securities fraud, common law breach of contract, and common law fraud claims, RICO treble damages, and attorneys fees. In addition, the Panoses are seeking rescission of their A&Gs.

 I.

 Although this motion relates solely to plaintiffs' benefit-of-the-bargain damages and, for purposes of this motion, we will assume defendants' liability, we must first summarize plaintiffs' allegations to set the stage for evaluating their claims of loss. Plaintiffs assert that in 1957 and 1966, Eric Lawaetz transferred certain parcels of land on the Dutch side of St. Maarten to Island Gem, a company he controlled. He had obtained title to the property from the children of Charles Daniel Esprit Beauperthuy (the "Seven Transferors") who had declared in their deeds of transfer to Lawaetz that they had obtained the land by deed from their father in 1943. Shortly after the transfer, Island Gem adopted a plan to develop the land into the Mullet Bay Beach Club Resort (the "Resort") comprising a group of apartment buildings, a hotel, a golf course, restaurants, and a casino. To finance the construction in part, Island Gem planned to sell the apartments to investors who would share in profits from renting the units to third parties.

 Between 1972 and the end of 1977, Constantine and Carla Panos purchased three such Mullet Bay apartments: the first two directly from Island Gem for $ 82,500 and $ 54,500, respectively, and the third from Stephen Gott, who had originally purchased the apartment from Island Gem, for $ 38,500. In each case, the sales were consummated through International Sales, Island Gem's sales agent, and Island Gem provided financing for approximately 75% of the purchase prices. Subsequently, in 1977, the Panoses purchased an undeveloped lot from Island Gem in an area known as Mount Rouge, located on the French side of the island, for $ 50,000, They planned to build a rental house on that property from the proceeds of the sale of their Mullet Bay apartments. Having never sold their apartments, allegedly because defendants' actions rendered them worthless, the lot remains undeveloped.

 In 1978, Robert and Aida Wohl purchased a twin-bedded Mullet Bay apartment from Vincent DeFalco, who had originally purchased the apartment from Island Gem, through International Sales for $ 39,500 in cash. In late 1979, however, they decided to sell the apartment and purchase a two-bedroom suite under construction at a neighboring resort, Cupecoy Beach Club Condominium Resort ("Cupecoy"). Although they signed preliminary sale papers on the Cupecoy condominium and obtained a Chase mortgage for $ 78,000 of the $ 130,000 purchase price, International Sales, which had agreed to market the Mullet Bay apartment, was unable to procure a buyer, allegedly because Island Gem's inability to obtain additional financing for the Resort from Chase had depressed the market for these apartments. While assuring them that a Chase financing package was forthcoming, International Sales informed the Wohls that, as an alternative, it had procured a purchaser for the Cupecoy condominium for the current market price, allegedly $ 153,000, of which International Sales would receive a $ 13,000 commission. Having no success selling their Mullet Bay apartment on their own or through International Sales, and being unable to maintain both investments, the Wohls agreed to sell their Cupecoy property.

 Over the next few years, the Wohls continued to attempt to sell their Mullet Bay apartment in order to locate elsewhere, and in March 1981 agreed to purchase a town house in California. In that same month, however, they received a copy of Island Gem's certified financial statements which disclosed, allegedly for the first time to the Wohls, an ongoing title litigation involving the Mullet Bay property. Therefore, realizing that they would be unable to sell their apartment, they backed out of the California sale.

 The Rental Agreement

 Pursuant to each direct purchase from Island Gem, the Panoses signed an "Acceptance and Guarantee of your Rights, Privileges, Purchase Price & Terms" (the "A&G"). Likewise, pursuant to their secondary market purchases the Panoses assumed Gott's A&G and the Wohls assumed DeFalcos's. The A&Gs, identical in all four sales, granted a 999-year lease to the purchaser which was "for all practical purposes" a sale of "full and clear property rights." *fn2" In addition, it provided that the apartment owner would receive a pro-rata share of 50% of the gross rental revenue of all the Mullet Bay apartment units (the "Rent Pool"). Under the "NO-MONTHLY-PAYMENT" financing system, Island Gem would credit an owner's Rent Pool share to an account against which it would draw his monthly purchase price payments, an annual maintenance fee, pro-rata expenses (e.g. taxes, telephone, and bookkeeping fees), and furniture and furnishings expenses. Although the owner was required to pay any deficit in this Rent Pool account on demand, assuming sufficient rental revenue, after an initial down payment the owner would not have to make any further payments to Island Gem. On December 1 of each year, Island Gem would disburse any surplus in the Rent Pool account to the apartment owner. Finally, the agreement provided that Island Gem could amend the A&G's provisions, other than the purchase price, lease term, or payment terms, at any time with the consent of 75% of the lease owners.

 The Title Claim

 In 1971, as a step in providing financing to Island Gem to develop the Resort, Chase hired Dr. Jacob Schiltkamp, local St. Maarten counsel, to provide a title opinion on the property. Schiltkamp's investigation uncovered a potential flaw in the chain of title: the Seven Transferors obtained title not by deed but, if at all, by prescription. After persuading the Seven Transferors to execute a "rectification" deed indicating that they had obtained title by prescription, Schiltkamp issued an opinion stating that in spite of the potential title chain flaw, he believed that Island Gem had full and clear rights to the property. Although Chase went ahead with the financing and Island Gem with the construction in light of this report, the potential title flaw allegedly was not disclosed to the SEC until years later and not revealed to the plaintiffs prior to their purchases.

 As the Schiltkamp opinion had contemplated, in May 1973 a group of the Beauperthuy heirs filed a notice of a claim of ownership to the Mullet Bay property and demanded that Island Gem vacate. Although they later withdrew that claim without prejudice, in November 1973 Island Gem entered into a "Letter Agreement" with its four major creditors assigning to them its right to compensation for improvements to the land in the remote case that any ensuing litigation stripped them of title. *fn3" In November 1976, twenty-seven of the heirs renewed their title assertions by filing suit in the Court of First Instance in St. Maarten, and in April 1981 the court ruled in favor of the heirs, ordering Island Gem to vacate the property. Although that decision was reversed by the Netherlands Antilles appellate court in 1982, and in 1983 The High Court of the Netherlands in The Hague affirmed the reversal, plaintiffs contend that the title cloud had a significant financial impact on Island Gem and the Resort.

 Like the Panoses, the Wohls claim that when they purchased their apartment unit neither the defendants nor documents that they received from the defendants made mention of the title cloud. They assert that their first notice also came in March 1981 when they received Island Gem's certified financial statements for the year ending August 30, 1980 which disclosed the litigation in a note following the report.

 The Title Claim's Effect

 Plaintiffs contend that the ongoing title litigation from 1976 until 1982 prevented Island Gem from offering its stock publicly in the United States as planned and severely impeded its ability to obtain other financing. As a result, Island Gem was unable to finish developing the resort into a profitable enterprise as planned. In the face of dwindling revenues, in May 1981 Island Gem proposed an amendment to the A&Gs whereby certain expenses previously paid out of Island Gem's portion of the Rent Pool were to be paid from the gross rental revenues. Under this scheme, Island Gem would receive 50% of the net rental revenue and the owners their pro-rata share of the other 50% for three years, after which the income would be split 45% to 55% in favor of the owners. Despite Island Gem's urging, the owners did not approve the amendment, and in May 1991 Island Gem closed the Resort. Subsequently, in an effort to reopen, Island Gem proposed yet another amendment (the "First Amendment"), this time backed by a newly formed Mullet Bay Apartments Association (the "Association")--an organization representing the apartment owners. This amendment was approved by over 75% of the owners in October 1981. *fn4" Like the earlier proposed amendment, this amendment decreased the owners' share of the rental revenues of their apartments. It mandated a similar splitting of the Rent Pool between Island Gem and the owners only after certain resort expenses were paid, but at the end of the three-year term of Chase's $ 5.5 million line of credit to Island Gem, the pool would be split 70%/30% in favor of the apartment owners. Although the amendment also restricted the owners' right to file legal actions against Island Gem or Chase (if any actions were filed they were to be stayed for the three-year term of the loan), after its adoption, the Association commenced a class action on behalf of the lease owners against Island Gem and others for securities law violations and common law fraud. Plaintiffs contend this action was merely a gesture to appease irate lease owners. *fn5" In 1984, before taking any action in the case, such as moving for class certification, the Association dismissed the suit.


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