Antitrust Law Daily Wrap Up, RICO—11thCir.: Florida District Court is Proper Venue for Bahamas Real Estate RICO Claim, Despite Forum Selection Clause, (Jan 28, 2013)

By Tobias J. Gillett, J.D., LLM.

Venue was proper in a Florida federal district court for RICO disputes between buyers of lots in a Bahamas subdivision and a mortgage lender over alleged appraisal fraud and between the buyers and Bahamian real estate developers over alleged fraud related to a loan transaction, the U.S. Court of Appeals in Atlanta has ruled in reversing the decision of the district court (Bailey v. ERG Enterprises, LP, January 25, 2013, Cox, E.). A forum selection clause in the purchase contracts that specified that disputes should be litigated in the Bahamas did not apply to the buyers’ claims, and equitable estoppel did not alter this conclusion, in the court’s view.

The buyers had purchased undeveloped lots in a planned resort in the Bahamas from the developer, Ginn-LA West End Limited (Ginn-LA), with many of them financing their purchases through mortgage loans obtained through the mortgage lender, Bahamas Sales Associate, LLC. The marketing materials for the resort promised a variety of amenities, including golf courses, a twenty-story palace, and a mega-yacht marina.

The purchase contracts contained forum selection clauses stating that the Bahamas would serve as the exclusive venue for any disputes “related in any way to” the purchase contracts, and choice of law provisions requiring application of Bahamian law. Only the buyers and Ginn-LA signed the contracts. The buyers that obtained mortgages through Bahamas Sales also signed mortgage notes with forum selection clauses requiring disputes to be litigated in Florida under Florida law.

The buyers who obtained mortgages through Bahamas Sales sued the company and related individuals and entities (“the Mortgage Entities”), asserting that they had violated the Racketeer Influenced and Corrupt Organizations (RICO) Act by engaging in a scheme to produce fraudulent lot appraisals that caused the buyers to buy lots that they otherwise would not have purchased.

All of the buyers sued various Ginn-LA entities and Lubert-Adler Management Company entities (“the Credit Suisse Entities”) claiming that they had violated the RICO Act by engaging in fraud related to a loan transaction. The buyers alleged that the entities had committed fraud by obtaining a $675 million loan from Credit-Suisse with a loan schedule that required payments to Credit Suisse that made construction of the promised amenities impossible, and that the buyers would not have purchased the lots had they known of the loan.

The defendants to both sets of claims filed motions to dismiss, asserting that venue was only proper in the Bahamas pursuant to the forum selection clauses. The district court granted the motions to dismiss, finding that the buyers’ claims fell within the scope of the forum selection clauses, and that the various entities, even though not signatories to the contracts, could nonetheless enforce the clauses through the doctrine of equitable estoppel.

Forum Selection Clauses

The court of appeals reversed, disagreeing with the district court on both conclusions. The court did conclude that the forum selection clauses in the mortgage notes did not bind Bahamas Sales as a party on the notes to a Florida venue, because the court’s prior decision in Bahamas Sales Assoc., LLC v. Byers, No. 11-11664, Dec. 4, 2012, had determined that the clauses only bound “obligors,” and Bahamas Sales was “the party to which an obligation is owed.”

However, the court also concluded that the Byers decision, which had determined that the forum selection clauses did not cover identical appraisal fraud claims, had “foreclosed” the Mortgage Entities’ argument that the claims in the present case did fall within the scope of the clauses.

Moreover, the claims against the Credit Suisse Entities also did not fall within the scope of the clauses. The court explained that under prior Eleventh Circuit precedent a claim would have to “occur[] as a fairly direct result of the performance of contractual duties,” not merely occur in a manner that would not have happened “but for” the existence of the agreement, in order to fall within the scope of a forum selection clause. The loan transaction dispute here was not a “fairly direct result of the performance of contractual duties” under the contracts, and the contracts did not create the relationship between the buyers and the Credit Suisse Entities. The court distinguished its 2011 decision in Liles v. Ginn-LA West End, Ltd., 631 F.3d 1242, which addressed the same purchase contracts, noting that the claims in that case had arisen “as a result of the defendants’ alleged failure to perform various contractual duties.”

Furthermore, the court rejected the argument that “claims of fraudulent inducement necessarily relate to the allegedly fraudulently induced contracts,” noting that the buyers had not alleged any such inducement. Despite the presence of the mortgage notes, the claims also were not “related in any way to…any other agreement or instrument executed in connection with” the lot purchase contracts, as specified in the forum selection clause, because the claims did not relate to those notes.

Equitable Estoppel

The court also followed its opinion in Byers to find, as it had held in that case, that the Mortgage Entities could not invoke equitable estoppel to bind the buyers to the forum selection clause, because the claims did not “allege concerted misconduct between the Mortgage Entities and Ginn-LA,” nor did they “rely on the lot purchase contracts.”

Moreover, the court determined that the Credit Suisse Entities also could not invoke equitable estoppel. The court explained that equitable estoppel permitted a non-signatory to enforce the provisions of an agreement when (1) “the signatory to the contract relies on the terms of the contract to assert his or her claims against the nonsignatory” and (2) “the signatory raises allegations of interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract.”

Despite an argument that the scheme alleged in the Credit Suisse claims depended on Ginn-LA’s sale of the lots, the court concluded that the buyers had not alleged “concerted misconduct” between Ginn-LA and the Credit-Suisse Entities. In addition, the buyers had not named Ginn-LA as a party. Therefore, the second circumstance did not apply, in the court’s view.

The court also concluded that the first circumstance did not apply. Application of equitable estoppel required that the “the party must actually depend on the underlying contract to assert the claims.” As with the scope of the forum selection clauses, a “simple but-for relationship” did not suffice. Here, the fact that the buyers suffered damages that they would not have suffered if they had not entered into the purchase contracts only amounted to a “but-for” relationship. The buyers did not “seek to hold the Credit Suisse Entities to the terms of the purchase contracts,” and did not “rely on any terms of the lost purchase contracts” to establish their liability.

Therefore, the court reversed the district court’s decision, and remanded for further proceedings.

The case is No. 3:10-cv-00422-TJC-JRK.

Attorneys: Dana Louise Ballinger (Ballinger Law Office) for Mark F. Bailey. Robert Philip Alpert (Morris Manning & Martin, LLP) for ERG Enterprises, LP. Stephen Kastenberg (Ballard Spahr Andrews & Ingersoll, LLP) for Lupert-Adler Management Company, LP.

Companies: Bahamas Sales Associate, LLC; ERG Enterprises, LP; Ginn-LA West End Limited; Lubert-Adler Management Company; Credit Suisse

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