Consolidated Appeals from the United States District Court for the Northern District of Indiana, Hammond Division. No. 87 CV 732--Andrew P. Rodovich, Magistrate Judge.
Before FLAUM, ROVNER, and EVANS, Circuit Judges.
DECIDED FEBRUARY 27, 1996
The recent advent of direct satellite television, with its seemingly limitless access to hundreds of different channels, makes it somewhat hard to believe that just a short time ago most Americans only had access to the three major television networks and PBS. However, as cable television (CATV) grew from its infancy in 1949 in rural America (where broadcast signals were too faint to receive) to most urban areas in the late 1970's and early 1980's, so did the variety and number of television channels, thereby changing forever the television-watching options for American viewers. The ensuing race to wire the country with cable television spurred numerous CATV business ventures. This case arises from one such undertaking; the investment by the plaintiff, James L. Gagan, in a cable television limited partnership, known as South Hesperia, in 1982. In 1987, after Gagan's investment turned sour, he filed a complaint against 14 individuals, corporations, and limited partnerships alleging claims under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. secs. 1961-1968, and other claims under state law.
When the case was filed it was assigned to Chief Judge Allen Sharp of the United States District Court for the Northern District of Indiana. Judge Sharp ordered bifurcation of the RICO claims from the state law claims, and a trial began in September 1990. At the conclusion of the plaintiff's evidence, Judge Sharp directed a verdict in the defendants' favor on the substantive RICO claims under sec. 1962(b) and sec. 1962(c). The remaining RICO conspiracy claim under sec. 1962(d) was submitted to a jury, which deliberated but could not reach a verdict. A mistrial was declared, and the case was transferred, with the consent of the parties, to Magistrate Judge Andrew P. Rodovich for a second trial.
Prior to the start of the second trial in 1994, Judge Rodovich issued an order defining the scope of Judge Sharp's prior ruling on the RICO claims. Judge Rodovich would not allow relitigation of the substantive RICO claims (secs. 1962(b) and (c)), and he ordered that the sec. 1962(d) conspiracy claim be limited to a charge that the defendants violated RICO when South Hesperia's assets were sold. The judge also ordered that all other claims, including Gagan's state law claims and the defendants' counterclaims, be tried at the same time to the new jury. Finally, he settled a state choice of law issue, ordering that Indiana law apply to the fraud claim and that the law of Arizona govern the contract claim.
After a two-week trial, the jury returned a verdict in favor of Gagan on the RICO claim and most of the state law claims. The jury also shut the defendants out on their counterclaims. This appeal followed.
Losers in a trial can go hunting for relief on appeal with a rifle or a shotgun. The rifle is better. As we have noted, the shotgun approach may hit the target with something but it runs the risk of obscuring significant issues by dilution. United States v. Levy, 741 F.2d 915, 924 (7th Cir.), cert. denied, 469 U.S. 1021 (1984). The defendants here, apparently not impressed with our statement in Levy, have brought their shotgun to Chicago.
In the hope of finding error, either by the judge or the jury, the defendants raise many arguments, several of which are either undeveloped or waived. First, they assert that Gagan lacked RICO standing and, generally, that the evidence is insufficient to support the RICO finding. They allege insufficiency of evidence to support the state law claims and resulting inconsistencies in the verdict. They contend the district court erred in granting Gagan's motion in limine which sought to exclude certain evidence. They assert further error by the court in denying their summary judgment motion, and they challenge the verdict against them on their counterclaim. Finally, defendant Hans D. Theurer, who proceeded at trial pro se, challenges the verdict against him on the breach of fiduciary duty claim and the court's refusal to grant him leave to plead the affirmative defense of discharge in bankruptcy.
The resolution of these issues requires a rather lengthy review of the facts which we review in the light most favorable to Gagan, who prevailed at the trial of this case. We start with the South Hesperia limited partnership, which we divide into three phases: organizational, operational, and sale. The "organizational" phase began in 1981 when defendant Victor Sharar was contacted by Paul Skulsky. Skulsky proposed setting up a bunch of tax-sheltered limited partnerships to fund, build, and operate cable television systems in Hesperia, an unincorporated area of San Bernardino County, California. Skulsky gave Sharar $225,000 in "seed money" to get the venture moving. In exchange, Skulsky was given a 25 percent share of profits to be realized. An associate of Skulsky's, Marc Pozner, *fn1 instructed Sharar to set up about a dozen Nevada corporations, including Security Cable Consulting Company, Inc. and defendant Allwave Cable Construction Company, Inc. Skulsky contacted defendant James Monroe, Sharar's sonin-law, and got him involved in the CATV limited partnerships. Monroe became the general partner of South Hesperia.
Meanwhile, investors were solicited for the South Hesperia CATV limited partnerships. Ultimately, 20 limited partnership units were sold, including 3 to Gagan. The purchase of each unit required $40,000 in cash and short-term notes, and an $85,000 long-term note payable to South Hesperia on December 31, 1992. Gagan's investment for three units consisted of $120,000 in cash paid in three installments over two years, plus execution of a $255,000 long-term note. The total investment from all unit holders in South Hesperia was $2,500,000--$800,000 in cash and short-term notes and $1,700,000 in noninterest-bearing, long-term notes. One of the investors dropped out early in 1982, reducing the number of limited partnerships to 18. Gagan's three units gave him a 16.6 percent ownership interest in South Hesperia.
The second or operational phase of the venture related to the actual construction and operation of South Hesperia. It covered the period from late 1981 to June of 1986. In 1981, South Hesperia signed a construction contract with Allwave for $1,800,000 ($100,000 cash and $1,700,000 in long-term notes) to construct South Hesperia as a turnkey operation. Despite the contract price, the actual cost to build South Hesperia was no more than $600,000. Allwave, a shell company lacking the equipment and resources to construct a CATV system, subcontracted all construction work to defendant American Cablevision, Inc. (ACI) for cost plus $340,000 (20 percent of the $1,700,000 in long-term notes). ACI was a related entity owned entirely by Sharar, Charles Trimble, and James Gouyd. Like its affiliate Allwave, ACI lacked the resources to build the CATV system and so it subcontracted the work out. On December 15, 1991, Monroe appointed ACI as the managing agent for South Hesperia.
Starting in 1982, Monroe, the general partner, periodically informed the limited partners, including Gagan, of South Hesperia's ongoing activities. He sent them a series of reports describing the success of the partnership. Despite these favorable reports, the $1,700,000 contract with Allwave, coupled with interest on that amount, left no cash flow for the limited partners.
From the inception of South Hesperia in 1981, and with Monroe's knowledge and consent, Pozner directly controlled the operations, and particularly all financial operations, of South Hesperia, Allwave, Security Cable, and the other Hesperia limited partnerships *fn2 and construction companies. Skulsky was in on the deal with Pozner, and together they controlled all facets relating to the limited partnerships, including the issuance of directives to Sharar to sign construction contracts with all of the Hesperia limited partnerships and assignment of those contracts to ACI. In September 1984, Skulsky and Pozner told Sharar that the Hesperia cable operation was in shambles. They asked Sharar to help salvage it. Pozner withdrew from further participation in the Hesperia partnerships at this time, citing personal reasons. Sharar's initial efforts to salvage the Hesperia operation included the November 15, 1984, hiring of Theurer as a financial consultant. Theurer came to represent not only the Hesperia entities, but also Allwave, ACI, and Sharar, Trimble, and Gouyd personally.
The third and last phase of South Hesperia, the period from 1985 to 1988, relates to the sale of the partnership assets and the distribution of the sale proceeds. The decision to sell South Hesperia came as early as May 1985 when the defendants agreed that they would sell the entire Hesperia cable system, and that Sharar, Trimble, and Gouyd would keep the proceeds. Theurer sent out a number of feelers in 1985, and the defendants seriously considered a number of proposals. In October of 1985, the defendants began negotiating a sale of all the Hesperia CATV limited partnerships, including South Hesperia, to Falcon Cable Systems.
Minot Tripp, an attorney, was hired to represent the seller-parties with respect to the Falcon sale. Not only did Tripp represent ACI, the managing agent for the six Hesperia partnerships in the Falcon sale, he also represented Sharar, Trimble, and Gouyd with regard to their purchases of the limited partners' interests. Sometime prior to January 29, 1986, Sharar had asked Tripp to advise him on the tax ramifications of selling the Hesperia system and acquiring the limited partners' interests. Tripp prepared a memorandum dated January 29, 1986, in which he advised Sharar to buy the limited partners' interests first and then sell the system.
Although the partnership agreement required the prior written consent of all the limited partners before sale of the limited partnership's assets, Tripp expressed the opinion that Monroe, in his capacity as the South Hesperia general partner, could sell the assets without obtaining consent. Tripp advised Sharar, Trimble, and Gouyd that a distribution of the proceeds from the Falcon sale would be best accomplished by a program whereby they acquired all of the limited partners' long-term promissory notes. The plan called for a buy-out offer to the limited partners consisting of cash and cancellation of the long-term notes. Tripp said this offer would minimize tax consequences for both the principals and limited partners.
Theurer proceeded next to draft a plan to carry out the Tripp recommendations. On April 26, 1986, Theurer circulated to Sharar, Trimble, and Gouyd a step-by-step plan for acquiring the ownership interests of the Hesperia limited partners, cautioning that "[n]either this letter, nor the enclosed analysis formally exist." One key part of the plan was that Sharar, Trimble, and Gouyd would purchase the partners' long-term notes from Allwave at ten cents on the dollar. On April 25, 1986, Theurer sent Monroe ten categories of financial material: the first three gave unfavorable financial results for South Hesperia; the last seven dealt with the sale of the system, the tax consequences to the limited partners, and the proposed buyout by Sharar, Trimble, and Gouyd. On April 30, 1986, Theurer had already drafted the buy-out letter to send to the limited partners following the Falcon sale. Theurer told Monroe on May 12, 1986, to send the limited partners only the first three categories of materials he had sent him.
On June 30, 1986, Theurer gave Tripp the written buyout offers, which were then mailed to all Hesperia limited partners, including Gagan. The cover letters, which referred to the financial information sent the month before, noted that "the Partnership's performance . . . has fallen far short of projections." The letters enclosed an offer of cash in an amount approximating that tax liability plus forgiveness of the limited partner's long-term note. The buy-out proposals were accepted by all Hesperia limited partners except Gagan, who refused to go along with the program.
Meanwhile, the sale of the assets of all the Hesperia partnerships, including South Hesperia, closed on July 1, 1986, for a price of $6,680,000. Upon closing the sale, Falcon wired $3,400,000 into a bank account, denominated "Hesperia Escrow Account." The real purpose of the account, which was established and controlled by ACI, was to receive the proceeds of the Falcon sale and make them available to Sharar, Trimble, and Gouyd for acquiring the limited partners' interests in South Hesperia. The remaining $3,280,000 balance was paid by Falcon in installments in 1988 and 1989.
Significantly, the July 2, 1986, mailings to the Hesperia limited partners failed to disclose a number of significant matters. For example, it was not disclosed that the proposed purchasers were related parties, that the construction companies had never intended to collect the long-term notes in the first place, and that the cash portion of the consideration being offered to the limited partners for the purchase of their interests was actually the limited partners' own money realized on the sale to Falcon which had been deposited into ACI's account.
Over a year after the sale of partnership assets, Sharar, Trimble, and Gouyd purported to acquire the $1,530,000 of the limited partners' long-term notes from Allwave for ten cents on the dollar. Following the sale, the defendants made numerous interstate phone calls and over 40 mailings of Falcon proceeds in interstate commerce to various Hesperia limited partners in connection with acquiring their partnership interests.
At the trial, Gagan offered evidence that he sustained close to $750,000 in damages as a result of what he alleged to be unlawful conduct by the various defendants. Specifically, he alleged that he sustained $352,713 in damages as a result of the erroneous allocation of the Falcon sales proceeds; $128,877 in damages as a result of the excessive disbursements paid by South Hesperia to related "insider" parties; and $264,710 in damages as a result of excessive construction costs and interest paid by South Hesperia. On the question of damages, the jury awarded Gagan $562,500, which the trial court trebled pursuant to 18 U.S.C. ...