IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
LEON R. DONGELEWICZ, et al., : 3:CV-95-0457
Plaintiffs : JUDGE McCLURE
vs. :
FIRST EASTERN BANK, et al., :
Defendants :
M E M O R A N D U M
December 29, 1995
BACKGROUND
Plaintiffs in this action are all lot-owners in a
3856-acre recreational housing development called the Valley of
Lakes which is located in Schuykill and Luzerne Counties near
Hazleton, Pennsylvania.(1) Plaintiffs initiated this action by
filing a 157 page, 403-paragraph complaint. Without detailing
each and every allegation plaintiffs make, suffice it to say that
they allege numerous improprieties on the part of individuals and
entities associated with or having an ownership interest in
Valley of Lakes. Plaintiffs allege numerous acts of fraud and
deception on the part of those allegedly responsible for
marketing, developing and maintaining Valley of Lakes over the
years.
The defendants named in this action are: 1) Frank M.
Cedrone, a New Jersey resident; 2) C.B.G., Ltd., a New Jersey-
1
__________________
based partnership (CBG); 3) Oneida Water Company (Oneida);
3) Valley Utilities Company, Inc. (Valley Utilities); 4) First
Eastern Corporation (First Eastern Corp.), a Pennsylvania-based
banking holding company; 5) First Eastern Bank, N.A. (First
Eastern); 6) MLA Management Associates, Inc. (MLA); 7) Ralph
Conte, a New Jersey resident; 8) Arlene Reiness, a New Jersey
resident; 9) the Property Owners Association of the Valley of
Lakes (POA), a Pennsylvania-based unincorporated association
whose board members are: a) George Denke, Jr.; b) Dianne
French; c) Ronald Kichline; d) Thomas Pierson; and 10) PNC Bank
Corp., a Pennsylvania-based bank holding company (Plaintiffs'
complaint, ¶ 17-28)
Valley of Lakes has changed hands several times since the
subdivision plan was first filed by High Vista, Inc. (High
Vista), a Pennsylvania corporation in 1971. (Plaintiffs'
complaint, exhibit 1-1 to 1-4). Jack Halperin and Philip Cohen
purchased High Vista in 1974 and marketed lots under the name
"Valley of Lakes." (Plaintiffs' complaint, ¶ 41 and exhibit 2-1
to 2-29)
A property owner's association known as the Valley of Lakes
Civic Association (VOLCA) was organized in December, 1976.
(Plaintiffs' complaint, ¶ 45 and exhibits 4B-1 to 4b-24.)
On August 4, 1980, Halperin was indicted on federal charges
of mail fraud, 18 U.S.C. § 1341, and of violating the Interstate
Land Sales Full Disclosure Act, 15 U.S.C. § 1701-1720. The
charges arose out of Halperin's activities in connection with
2
Valley of Lakes. He was charged with, inter alia, charging
maintenance fees for services not rendered and with failing to
follow through on representations that a lake, a road and sewer
system and other amenities would be built at Valley of Lakes.
(Plaintiffs' complaint, ¶¶ 42, 43, 68 and exhibits 3-1 to 3-24).
Following Halperin's indictment, the mortgage on the
property was foreclosed. Meridian Bank purchased the land at a
Sheriff's Sale.
In September, 1986, CBG, a New Jersey-based partnership,
purchased land in the development. The original general partners
of CBG were defendant Cedrone and a Sicilian construction
company, SILEC SPA of Torino. (Plaintiffs' complaint, ¶ 46).
Plaintiffs alleged that although CBG subsequently held itself out
as the successor to High Vista, it was not High Vista's
successor, and that it was in fact only another purchaser of land
in the development, no more entitled to assume a position of
management or control over the subdivision than any other
property owner. (Plaintiffs' complaint, ¶ 47)
CBG filed a Chapter 11 petition in bankruptcy in March,
1992, but continues to maintain control over the Valley of Lakes
as debtor-in-possession through its association with First
Eastern and through the affiliated companies of Oneida Water and
Valley Utilities. (Plaintiffs' complaint, ¶ 49)
Plaintiffs allege a long history of mismanagement and broken
promises and outright fraud on the part of those in management
and ownership positions at Valley of Lakes over the years.
3
Plaintiff allege, inter alia, that:
1) representations that an 80-acre lake, "Lake Algonquin", an
Arnold-Palmer designed and managed golf course, and other
business amenities, such as restaurants and-shops would be built
on the premises were never fulfilled; 2) representations that
road systems, and water and sewer systems would be built and
adequately maintained for lot owners were never carried out;
3) defendants incurred substantial advertising and promotional
costs in their efforts to promote the sale of lots to other
purchasers, which they then passed on to property owners, citing
as proof of the same a statement in statements filed with the
Department of Housing and Urban Development (HUD) that
"approximately 35%" of closing costs represented such costs
incurred on the part of the promoters; and 4) defendants, acting
illegally and without proper authority, imposed covenants and
restrictions on Valley of Lakes property owners which unduly,
illegally, and unconstitutionally interfere with their right of
ownership.
Based on the foregoing allegations, plaintiffs assert: 1) a
RICO claim under 18 U.S.C. § 1962 against all defendants (Count
I);2 2)a claim under the Interstate Land Sales Full Disclosure
Act (Land Disclosure Act), 15 U.S.C. § 1701, against CBG,
Cedrone, First Eastern Bank, and MLA (Count II); 3) a section
4
1983 claim, 42 U.S.C. § 1983 (Count III) against CBG, Cedrone,
First Eastern Bank and MLA ;3 4) a claim under the New Jersey
Real Estate Sales Full Disclosure At, N.J.S.A. § 45:15-16.47,
against First Eastern, CBG, Cedrone and Conte (Count IV); and 5)
supplemental state law claims of fraud and deceit asserted
against First Eastern, MLA, CBG, Cedrone, Valley Utilities and
Oneida Water under New Jersey law. (Count V).
Defendant POA moves to dismiss plaintiffs' RICO
and section 1983 claims (Counts I and III) on the grounds that
no cause of action has been alleged against it. For the reasons
which follow, POA's motion will be denied.
DISCUSSION
Rule 12(b)(6) standard
In deciding defendant's motion, we are "required to accept
as true all allegations in the complaint and all reasonable
inferences that can be drawn from them after construing them in the
light most favorable to the non-movant." Jordan v. Fox,
Rothschil-d. O'Brien & Frankel, 20 F.3d 1250, 1261 (3d Cir. 1994).
"In determining whether a claim should be dismissed under Rule
12(b)(6)," we look " only to the facts alleged in the complaint
and its attachments without reference to other parts of the
record." Id. Dismissal is not appropriate unless "it clearly
5
appears that no relief can be granted under any set of facts that
could be proved consistently with the plaintiff's allegations."
Id.
RICO
Generally, RICO makes it unlawful for any person to:
1) use or invest income obtained from a pattern of racketeering
activity in an enterprise engaged in interstate commerce, 18
U.S.C. § 1962(a); 2) control any enterprise engaged in
interstate commerce through a pattern of racketeering, 18 U.S.C.
§ 1962(b); 3) any person associated with any enterprise engaged
in interstate commerce to conduct the affairs of the enterprise
through a pattern of racketeering activity, 18 U.S.C. § 1962(c);
or 4) to conspire to violate sections 1962(a), (b), or (c),
18 U.S.C. § 1962(d).
"Racketeering activity" is defined by the act to include any
act which is indictable under any of the enumerated provisions of
Title 18 of the United States Code, 18 U.S.C. § 1961(l).
Section 1964(c) provides that:
Any person injured in his business or property by
reason of a violation of section 1962 of this chapter may
sue therefor in any appropriate United States district court
and shall recover threefold the damages he sustains and the
cost of the suit, including a reasonable attorney's fee.
18 U.S.C. § 1964(c).
"Common to all of the substantive RICO provisions are the
requirements that there be a 'pattern of racketeering activity'
in which defendants engaged... and that there be one or more
"enterprises" involved which engage in or the activities of which
6
affect interstate commerce. Dent Manufacturing Inc. v. Zafir,
1995 WL 605501 at * 2 (E.D.Pa. Oct. 12, 1995) citing Tabas v.
Tabas, 47 F.3d 1280 (3d Cir.), cert. denied, 115 S.Ct. 2269
(1995) and United States v. Turkette, 452 U.S. 576 (1981).
In order to state a civil RICO claim pursuant to 18 U.S.C. §
1962(c), the plaintiff must allege: 1) the existence of an
enterprise affecting interstate commerce; 2) that the defendant
was employed by or associated with the enterprise; 3) that the
defendant participated, either directly or indirectly, in the
conduct or the affairs of the enterprise and 4) that defendant
participated through a pattern of racketeering activity that must
include the allegation of at least two racketeering acts. Reves
v. Ernst & Young, 113 S.Ct. 1163, 1172-74 (1993).
Section 1962(c) provides, in relevant part:
It shall be unlawful for any person employed by or
associated with any enterprise engaged in, or the activities
of which affect, interstate or foreign commerce, to conduct
or participate, directly or indirectly, in the conduct of
such enterprises affairs through a pattern of racketeering
activity or collection of unlawful debt
18 U.S.C. § 1962(c).
Section 1962(d) makes it illegal to conspire to violate any
of the provisions of subsection (a), (b), or (c). To state a
claim under section 1962(d), the plaintiff must allege:
1) agreement to commit the predicate acts of fraud, and
2) knowledge that those acts were part of a pattern of
racketeering activity conducted in such a way as to violate
section 1962(a), (b), or (c). Rose v. Bartle, 871 F.2d 331, 367
(3d Cir.1989), citing odesser v. Continental Bank, 676 F.Supp.
1305, 1312 (E.D.Pa. 1987). See also: New Tech Voting Systems,
Inc. v. Danaher, 1995 WL 710607 at *7 (E.D.Pa. Nov. 27, 1995).
RICO Allegations
Plaintiffs allege that defendants CBG, Cedrone, First
Eastern, MLA and others:
through a pattern of racketeering activity acquired control
of the enterprise of illegally operating and managing High
Vista's subdivision ... Valley of Lakes... in violation of 18
U.S.C. [sic] (b), (c) and (d). The defendants knowingly
and willfully devised a scheme and artifice to defraud lot
owners and prospective lot owners in the defunct subdivision
through numerous false and fraudulent pretenses,
representations and promises...
(Plaintiffs' complaint, ¶ 50)
POA's alleged involvement in the racketeering enterprise is
that it violated:
a. 18 U.S.C. [§] 1962(c) by conducting or
participating directly in the conduct of the racketeering
enterprise through a pattern of racketeering activity
consisting of numerous violations of 18 U.S.C. [§] 1341... ;
and/or
b. 18 U.S.C. [§] 1962(d) by conspiring to violate any
of the provisions of 18 U.S.C. [§] 1962; and/or
c. aided and abetted in the commission of at least
two predicate offenses which were part of the pattern of
racketeering in violation of the common law doctrine of
aiding and abetting.
(Plaintiffs' complaint, ¶ 363)
Plaintiffs allege that POA committed predicate acts of mail
fraud under 18 U.S.C. § 1341.4 Defendants argue that
8
plaintiffs' allegations on this point are insufficient because it
is alleged to have committed only one predicate act: a mailing
made to property owners in June, 1994.
Plaintiffs allege that:
Commencing or about May 24, 1994 ... Cedrone, CBG... [and
POA]... knowingly and wilfully devised a scheme to continue
to use the fraudulent covenants and restrictions recorded by
CBG... for the purpose of continuing the patter (sic] of
racketeering....CEDRONE made a mass mailing, on or about
July 10, 1994, announcing the formation of a "property
owners association" authorized to control the subdivision
until he ... Cedrone is "able to resume full operations"....
In furtherance of this scheme, on or about June 10,
1994, the following letter, in the name of FRANK CEDRONE,
was mailed as a group mailing to all of the property
owners... Exhibit 211.
In furtherance of this scheme...[POA]...mailed the
following group mailing to all property owners, on or about
June 10, 1994...Exhibit 212-1 to 212-4.
(Plaintiffs' complaint, ¶¶ 247-49) Plaintiffs assert that the
POA mailing went out to thousands of Valley of Lakes property
owners who reside across the United States and abroad. (Record
9
document no. 5, p. 16)
The mailings are, they further assert, part of a continuing
scheme to exercise illegitimate control over the Valley of Lakes
development and to continue extracting money from property owners
under false and fraudulent pretenses, through, inter alia,
illegally imposed dues and fees and by enforcing Cedrone's
fraudulently imposed covenants and restrictions. (Plaintiffs'
complaint, exhibits 211 and 212)
Plaintiffs correctly assert that under Third Circuit
precedent each mailing constitutes a distinct RICO predicate
offense separately punishable. Kehr Packages v. Fidelcor, Inc.,
926 F.2d 1406 (3d Cir. 1991), cert denied, 501 U.S. 1222 (1991).
Under this standard, plaintiffs' allegations are plainly
sufficient to allege the requisite commission of predicate acts.
Plaintiffs' allegations are also sufficiently specific under
Fed.R.Civ.P. 9(b). See: Seville Indus. Mach. Corp. v. Southmost
Mach. Corp., 742 F.2d 786, 791 (3d Cir.1984), cert. denied, 469
U.S. 1211 (1985) (allegations must be such as "to place the
defendants on notice of the precise misconduct with which they
are charged"). Cf. Saporito v. Combustion Englq Inc., 843 F.2d
666, 673-76 (3d Cir.1988), vacated on other crrounds, 489 U.S.
1049 (1989) (blanket allegation of mail and wire fraud in RICO
case, without indicating who made or received fraudulent
representation, is insufficient under Rule 9(b)).
10
Allegations of a pattern of racketeering
Defendant also challenges plaintiffs' allegations that
POA engaged in a "pattern of racketeering activity." A "pattern
of racketeering activity" is defined as the commission of at
least two acts of racketeering activity within a ten-year period.
18 U.S.C. § 1961(5). Proof of more than simply two predicate
acts, however, is necessary. Sedima, S.P.R.L. v. Imrex Co., 473
U.S. 479, 496 n. 14 (1985). Plaintiff must show that the
predicate acts are related and that they pose a threat of
continued criminal activity. H.J., Inc. v. Northwestern Bell
Tel. Co., 492 U.S. 229, 239 (1989).
To demonstrate that the predicate acts are related, the
plaintiff must prove that they have the same or similar purposes,
end-results, victims or methods of commission or are otherwise
interrelated and are not merely isolated events. Id. at 239-42.
"The relatedness test will nearly always be satisfied in cases
alleging at least two acts of [wire] fraud stemming from the same
fraudulent transaction--by definition the acts are related to the
same 'scheme or artifice to defraud.'" Kehr Packages, 926 F.2d
at 1414.
There is also a requirement of continuity. Under RICO,
continuity is "both a closed and open-ended concept." H.J.,
Inc., 492 U.S. at 241. It can refer either to a closed period of
repeated conduct, or to past conduct that by its nature projects
into the future with a threat of repetition." Id., citing
11
Barticheck v. Fidelity Union Bank/First National State, 832 F.2d
36, 39 (3d Cir. 1987). If the scheme is "closed-ended," related
predicate acts were committed repeatedly over a defined, but
substantial, period of time. If it is "open-ended," past conduct
carries a threat of future repetition. Tabas, 47 F.3d at 1295.
Plaintiffs can prove this element in one of two ways. The
first is by demonstrating
continuity over a closed period by proving a series of
related predicates extending over a substantial period of
time. Predicate acts extending over a few weeks or months
and threatening no future criminal conduct do not satisfy
this requirement: Congress was concerned in RICO with
longterm criminal conduct.
H.J., Inc., 492 U.S. at 242.
The second is by demonstrating that the past conduct alleged
"by its nature projects into the future with a threat of
repetition." H.J., Inc.., 492 U.S. at 253.
Determining whether the predicate acts alleged or proven
"establish a threat of continued racketeering activity depends on
the specific facts of each case," requiring a case-by-case
analysis of the facts and issues presented. H.J., Inc., 492 U.S.
at 253.
The length of time over which the predicate acts were
allegedly committed is only one of six factors identified by the
Third Circuit as indicative of whether a pattern of racketeering
activity has been established in a given case. The other five
are: 1) the number of unlawful acts; 2) the similarity of the
acts; 3) the number of victims; 4) the number of perpetrators;
and 5) the character of the unlawful activity. Tabas, 47 F.3d at
12
1295, citing Barticheck, 832 F.2d at 38-39. See also: H.J., Inc.
492 U.S. at 242 and Hindes v. Castle, 937 F.2d 868, 873 (3d Cir.
1991).
If there are allegations of an ongoing-scheme, the
continuity requirement can be satisfied by proof that the alleged
predicate acts are a recjular way of conducting defendant's
legitimate, ongoing business or of conducting an ongoing RICO
enterprise. H.J., Inc., 492 U.S. at 243.
Activities lasting only a matter of months are too short to
qualify as a "substantial period of time," when there is no
threat of continued harm. See, e.g., Banks v. Wolk, 918 F.2d
418, 422-23 (3d Cir. 1990) (Attempts to defraud an investor of
his interest in a single piece of real estate, which occurred
over an eight-month period, were insufficient, there being no
indication that the acts alleged threatened future harm to
anyone.); Marshall-Silver Construction Co., Inc. v. Mendel, 894
F.2d 593, 597 (3d Cir. 1990) (on remand from 109 S.Ct. 3233)
(Predicate acts occurred over a period of less than seven months,
and the facts alleged "posed no threat of additional repeat
criminal conduct over a significant period.").
However, in Shearin v. E.F. Hutton Group, Inc., 885 F.2d
1162, 1166 (3d Cir. 1989), the Third Circuit held that a scheme
which lasted a minimum of two years and involved three
corporations and an illicit plan to defraud investors and to
mislead honest employees satisfied the requirement that a
"pattern of racketeering activity" be demonstrated.
13
Defendant POA argues that plaintiffs cannot establish the
requisite pattern of RICO conduct with respect to it. On the
issue of continuity, plaintiffs allege that:
The predicate acts of racketeering activity began on or
about September 30, 1986.
The pattern of racketeering activity is currently
ongoing and open ended, and threatens to continue
indefinitely unless this Court enjoins the racketeering
activity.
Numerous schemes have been completed involving repeated
criminal conduct that by its nature projects into the future
with a threat of repetition.
The predicate acts have the same or similar purposes,
results, participants, victims, and methods of commission.
(Plaintiffsf complaint, ¶¶ 350-353)
POA did not enter the picture until very recently. As we
noted in briefly chronicling the long and tortuous history of
Valley of Lakes, POA was formed within a month of the filing of
this action.5 Given its recent vintage, it is not surprising
that only a few of the RICO allegations refer specifically to POA
or its activities. Most of the events which give rise to
plaintiffs' claims occurred before POA came into existence.
Plaintiffs allege, however, that POA is simply yet another
tool of Cedrone and CBG to maintain control over Valley of Lakes,
control, which plaintiffs allege, defendants have no right to
exercise. Plaintiffs' assertion that POA is merely the latest
14
incarnation of CBG, Cedrone and his associates brings it within
the scope of RICO. If, as plaintiffs allege, defendants are
merely continuing their long-established alleged pattern of fraud
through the recently minted POA, POA may be-held liable under
RICO for its role in the continuing pattern of events.
If this were not the case, RICO defendants accused of
ongoing illegal conduct could simply continue their enterprise
under a different guise: precisely the result RICO was enacted
to prevent.
Citing Pyramid Securities Limited v. IB Resolution, Inc.,
924 F.2d 1114 (D.C.Cir. 1991), cert. denied, 112 S.Ct. 85 (1991),
POA further argues that there is no threat of future violations,
since the alleged pattern of subterfuge has now been discovered
and this action. We disagree.
According to the allegations before us, Cedrone and CBG are
using POA as an instrument to continue doing business through the
same illegal practices which they used for years and which are
challenged in this action. Plaintiffs allege that POA is only
the latest incarnation of a line of entities and enterprises
created or used for the purpose of furthering CBG'S, Cedrone's
and others' illegal scheme of defrauding and illegally extracting
money from Valley of Lakes property owners under the guise that
they are the rightful successor to High Vista. Taking these
allegations as true, as we must at this stage, plaintiffs have
alleged a continuing threat of further RICO violations.
Pyramid securities is not applicable to the facts before us.
15
In that case, the threat of continued criminal activity, namely
the churning of securities accounts, ended as soon as the scheme
was discovered by plaintiffs. Plaintiffs removed their account
from defendants' control as soon as they learned of the illegal
conduct. Nothing similar occurred here. According to
plaintiffs' allegations, CBG and Cedrone continue to exercise and
assert the authority to exercise control over Valley of Lakes.
Their efforts are on-going, according to plaintiffs' allegation
that POA is nothing but a front for Cedrone and CBG.
Allegations of control or management
POA argues that plaintiffs cannot prevail against it on a
RICO claim, because there is no allegation that it manages or
controls the affairs of the alleged RICO enterprise.
We disagree. It can be reasonably inferred from plaintiffs'
allegations that POA was formed to serve as the alter-ego of
Cedrone, CBG and the others allegedly involved in a long-term
scheme to defraud and extract money from Valley of Lakes property
owners. The suggestion is that POA is only the latest
incarnation of the various entities which have been used over the
years to unlawfully control Valley of Lakes and extract money
from property owners.
This is far different from the circumstances in the cases
cited by POA, (See, e.g., University of Maryland v. Peat,
Marwick, Main & Co., 996 F.2d 1534 (3d Cir. 1993) and Gilmore v.
Berg, 820 F.Supp. 179 (D.N.J. 1993), in which unaffiliated
parties who did no more than render a service to those allegedly
16
involved in the enterprise were held not to be part of the
enterprise solely on the basis of that link.
In University of Maryland, the Third Circuit stated that:
Simply because one provides goods or services that
ultimately benefit the enterprise does not mean that one
becomes liable under RICO as a result. There must be a
nexus between the person and the conduct in the affairs of
an enterprise. The operation or management test goes to
that nexus. In other words, the person must knowingly
engage in 'directing the enterprises affairs' through a
pattern of racketeering activity.
Id. at 1539.
Further, plaintiff is not required to show that all
defendants named in a RICO claim acted at the management level,
as defendant's argument would suggest. The allegations are
sufficient if they demonstrate that defendant played an active
role in the alleged predicate acts. The allegations here meet
that threshold. Plaintiffs allege, inter alia, that the June,
1994 mailing which went out under POA's name was a predicate act
of mail fraud, and that, as we have discussed in more detail
elsewhere in this memorandum, POA is merely the alter-ego of
Cedrone and CBG and the successor to Friends of the Valley,
another allegedly Cedrone-controlled association.
Section 1962(d) claim
Plaintiffs' allegations against POA are also sufficient to
survive Rule 12(b) scrutiny under 18 U.S.C. § 1962(d). To
establish a conspiracy claim under section 1962(d),
the plaintiff must establish: 1) the period of the conspiracy;
2) the object of the conspiracy; 3) the actions of the alleged
conspirators taken to achieve that purpose; and 4) that the
17
defendants agreed to commit the predicate acts and that they knew
the acts were part of a pattern of racketeering activity.
Greenberg v. Tomlin, 816 F.Supp. 1039, 1048 (E.D.Pa. 1993),
citing Glessner v. Kenny, 952 F.2d 702, 714-(3rd Cir. 1991),
rev'd in part on other grounds, Jaguar Cars, Inc. v. Royal Oaks
Motor Car Company, Inc., 46 F.3d 258 (3d Cir. 1995).
Plaintiffs have alleged these elements. Defendant POA's
motion to dismiss plaintiffs' RICO conspiracy claim will,
therefore, be denied.
Section 1983 claim
Defendant POA challenges the viability of plaintiffs'
section 1983 claim. Section 1983 applies only to the conduct
performed under color of state law. Private citizens, i.e. non-
governmental actors may be held liable under section 1983 if they
conspired with a state official to violate the plaintiff's civil
rights, Dennis v. Sparks, 449 U.S. 24 (1980), or if their
actions may be "fairly attributable to the State," Lugar v.
Edmondsori Oil Co., 457 U.S. 922, 937 (1982).
Considering the prolixity of the plaintiffs' complaint in
general, Count III, plaintiffs' section 1983 claim, is
exceedingly brief. Its substantive provisions consist of two
paragraphs, which provide:
By virtue of owning property in the "Valley of Lakes"
subdivision, the plaintiffs have a property interest and
liberty interests secured by the Constitution and laws of
the United States.
The defendants have systematically deprived plaintiffs
of property interests and\or liberty interests under color
of statute, ordinance, regulation, or usage.
18
(Plaintiffs' complaint, ¶¶ 386-87) Plaintiffs' brief fleshes out
the alleged factual and legal basis for the section 1983 claim
against POA. See: record document no. 5, pp. 25-34.
None of the defendants named is a state actor. Plaintiffs
allege, however, that defendants acted in a quasi-governmental
fashion by, inter alia, imposing zoning regulations and other
restrictions on the Valley of Lakes resort community and its
residents and owners and by establishing a security force which
purports to enforce community rules and regulations, etc.
The Supreme Court has held that state action exists for
section 1983 purposes if: 1) there is a symbiotic relationship
between private and state actors, see, e.g. Burton v. Wilmington
Parking Authority, 365 U.S. 715 (1961); 2) there is a close
nexus between a state actor and the private action in question,
see, e.g. Jackson v. Metropolitan Edison Co., 419 U.S. 345
(1974); and 3) if the private actor carries out a public
function, see, e.g, Evans v. Newton, 382 U.S. 296 (1966) and
Marsh v. Alabama, 326 U.S. 501 (1946).
Under the latter approach, the federal courts have found
"state action present in the exercise by a private entity of
powers traditionally exclusively reserved to the State." Jackson,
419 U.S. at 352, citing Evans, 382 U.S. 296 (1966) (municipal
park); Terry v. Adams, 345 U.S. 461 (1953) (election); and Marsh
(company town).
In Evans, for example, the Supreme Court held that the
trustee of a property, which had formerly been overseen by the
19
City of Macon, Georgia, was a state actor for section 1983
purposes in reviewing plaintiffs' challenge to the restriction
imposed by the settlor that the park be racially segregated.
Evans, 382 U.S. at 299. The Court found that "mass recreation
through the use of parks is plainly in the public domain." Id. at
302.
In Marsh, the Court considered whether the constitutional
right of Free Speech exists in the context of actions taken in a
company-owned town. Id. at 509. The issue before the Court was
"whether a State can, consistently with the First and Fourteenth
Amendments, impose criminal punishment on a person who undertakes
to distribute religious literature on the premises of a
company-owned town contrary to the wishes of the town's
management." Id. at 502. Other than the fact that the town, a
suburb of Mobile, Alabama, known as Chickasaw, was owned by the
Gulf Shipbuilding Corporation, it had "all the characteristics of
any other American town." Id. at 502.
Grace Marsh, a member of Jehovah's Witnesses, posted herself
on a town sidewalk, near the post-office, and began distributing
religious literature. She was approached, told that she could
not do so without a permit, and told that no permit would be
issued to her. Marsh was convicted of violating Code Ala.1940,
Tit. 14, s 426, making it a crime to enter or remain on the
premises of another after being warned not to do so. She
appealed her conviction to the United States Supreme Court, which
granted certiorari.
20
The Supreme Court reversed Marsh's conviction, holding that
"[i]nsofar as the State has attempted to impose criminal
punishment on...[her] for undertaking to distribute religious
literature in a company town, its action cannot stand." Id. at
510. In so holding, the Court stated:
Ownership does not always mean absolute dominion. The more
an owner, for his advantage, opens up his property for use
by the public in general, the more do his rights become
circumscribed by the statutory and constitutional rights of
those who use it.
. . . .
.... Whether a corporation or a municipality owns or
possesses the town the public in either case has an
identical interest in the functioning of the community in
such manner that the channels of communication remain free.
Id. at 506-07.
The power to impose zoning restrictions is a police power of
the state. Village of Belle Terre v. Boraas, 416 U.S. 1, 4,
(1974). Plaintiffs rely on the district court ruling in Pitt v.
Pine Valley Golf Club, 695 F.Supp. 778, 783 (D.N..J. 1988) as
further support for their argument that imposition of zoning
restrictions constitutes state action. In that case, the
plaintiff challenged restrictions imposed by defendant Pine
Valley Golf Club (the club), a private golf club, which required
all residents of the Borough of Pine Valley (the borough) to be
members of the club. The club owned all land in the borough.
In denying the club's Rule 12(b) motion to dismiss
plaintiff's section 1983 claim, the district court stated:
The Club rule in fact functions as a zoning ordinance even
though the rule was neither promulgated nor enforced under
[New Jersey] enabling act procedures. The rule conditions
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residency in the Borough on membership in the Club. Because
residential zoning is a power "exclusively reserved to the
state," Jackson v. Metropolitan Edison Co., 419 U.S. [345,
352 (1974)...this court finds that a private entity's rule,
which functions as a residential zoning restriction for an
entire Borough, is state action.
Id. at 783.
Here, plaintiffs' allegations are sufficient to bring them
within the "public function" exemption to non-liability for non-
state actors. Plaintiffs allege, inter alia, that defendants:
1) imposed building and land use restrictions via the covenants
and restrictions imposed on Valley of Lakes property owners
(plaintiffs' complaint, exhibits 10-10 to 10-12); 2) adopted a
building code which barred any "construction, digging, clearing
or any [other construction] activity ... within Valley of lakes
[sic] development, unless a Building Permit has previously been
secured from the Developer, C.B.G. Limited." (plaintiffs'
complaint, exhibit 11-2); and 3) the same building code advises
owners to direct any questions to the "Building Inspector" Id..
Defendants' alleged imposition of zoning and building code
restrictions plainly bring them within the public function
standard as applied in Evans, Terry, Marsh, Pitt, and other
cases. Although POA protests being tagged with the actions of
the other defendants, as we have stated before, the allegations
are, that POA is merely a continuation of Friends of the Valley
and represents nothing more than a further attempt by Cedrone and
CBG to control, illegally and without authority, the acts of
property owners and derive a profit therefrom.
Plaintiffs offer a second justification for the imposition
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of section 1983 liability against POA and its co-defendants:
defendants' entry of judgments by confession against more than
200 Valley of Lakes property owners in favor of CBG, Oneida and
Valley Utilities for their non-payment of utilities and other
fees assessed. Plaintiffs point to a confession of judgment
clause in CBG's covenants and restrictions which serves as the
alleged justification for defendants' confession of judgment
against property owners.
Participation in state court proceedings does not render a
private individual a state actor for section 1983 purposes. See:
Torres v. First State Bank of Sierra Countv, 588 F.2d 1322 (10th
Cir. 1978); Luria Bros. & Co. v. Allen, 672 F.2d 347, 354 (3d
Cir. 1982); and Henderson v. Fisher, 631 F.2d 1115, 1119 (3d Cir.
1980). Although the Third Circuit has not ruled specifically on
this issue, it has held that "a judgment creditor who uses
Pennsylvania's procedure for executing on a confessed judgment
acts under color of law and becomes a state actor under Lugar."
Jordan, 2O F.3d at 1267. There are no allegations here that
defendants have executed on any of the judgments confessed
against property owners, bringing into question whether the
critical threshold hinted at in Jordan, i.e. inducing state
actors to execute on the confessed judgment, has been crossed
here. This is an issue which we need not, however, decide at
this juncture. It is clear, under the allegations before us,
that plaintiffs have stated a viable section 1983 claim against
POA.
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For that same reason, we do not address plaintiffs' argument
that their allegations that POA conspired with co-defendant
Cedrone, offered as a third justification for their section 1983
action against POA, other than to note that we are skeptical that
conspiracy allegations can be bootstrapped in this fashion to
bring in a second non-state actor on the basis of allegations
that another private actor acted under color of state law by
carrying out a public function.
Summary
In summary, plaintiffs have alleged the fundamental
prerequisites for a RICO claim and for a section 1983 claim
against POA. POA's Rule 12(b) motion will, therefore, be denied.
/s/ _____________________________
James F. McClure, Jr.
United States District Judge
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Footnotes
(1) Plaintiffs bring this action under Fed. R. Civ. P. 23.
Plaintiffs' motion for class certification is currently pending
before the court and will be addressed in a separate memorandum.
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(2) Plaintiffs allege that defendants committed predicate acts of
mail and wire fraud under 18 U.S.C. § 1341 and 1343 and violated
federal securities laws.
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(3) Although paragraph 29 of plaintiffs' complaint states that
Count III is alleged only as against defendants CBG, Cedrone, First
Eastern Bank and MLA, it now appears that plaintiffs are pursing a
section 1983 claim against defendant POA as well. See: plaintiff's
brief filed in opposition to defendant's Rule 12(b) motion, record
document no. 5 at pp. 25-34.
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(4) Section 1341 provides that:
Whoever, having devised or intending to devise any
scheme or aritifice to defraud, or for obtaining money or
property by means of false or fraudulent pretense,
representations, or promises, or to sell, dispose of, loan,
exchange, alter, give away, distribute, supply, or furnish or
procure for unlawful use any counterfeit or spurious coin,
obligation, security, or other article, or anything
represented to be or intimated or held out to be such
counterfeit or spurious article, for the purpose of executing
such scheme or artifice or attempting so to do, places in any
post office or authorized depository for mail matter, any
matter or thing whatever to be sent or delivered by the Postal
Service, or takes or received therefrom, any such matter or
thing, or knowingly causes to be delivered by mail according
to the direction thereon, or at the place at which it is
directed to be delivered by the person to whom it is
addressed, any such matter or thing, shall be fined not more
that $1,000 or imprisoned not more than five years, or both.
If the violation affects a financial institution, such person
shall be fined not more than $1,000,000 or imprisoned not more
than 30 years, or both.
18 U.S.C. § 1341.
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(5) We note that plaintiffs take issue with the contention that POA
was created only days before this action was filed. They contend
that POA is the successor to "Friends of the Valley," a group which
plaintiffs allege has assisted in "Frank Cedrone's illegal operations
in the Valley of Lakes" since at least October 1, 1992. (Record document
no. 5, p. 19)
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