Schwarz v. Bluegreen

Winter Capriola Zenner’s commercial litigation attorneys, Richard J. Capriola and David B. Weinberg, secured a significant victory on behalf of long-time client, Bluegreen Corporation (NYSE: BXG) and its subsidiary Bluegreen Communities of Georgia, LLC.  In a summary judgment issued September 2, 2011, U.S. District Court Judge Lisa Godbey Wood dismissed the plaintiffs’ putative class action alleging violations of Georgia’s Racketeer Influenced and Corrupt Organizations (RICO) statute premised on mail fraud and wire fraud.  The case focused on sales of undeveloped lots in a resort community developed by Bluegreen.  Plaintiffs, on behalf of a putative class of approximately 700 lot purchasers, sought treble damages, punitive damages, and attorneys’ fees totaling in excess of $100,000,000.00.  The decision reinforces the value of a well-crafted merger clause in real estate sales contracts and the importance of distinguishing between reliance and proximate cause in RICO actions premised on mail or wire fraud.

The case is Paul A. Schwarz, et. al. v. Bluegreen Communities of Georgia, LLC, et. al., United States District Court for the Southern District of Georgia, Case No: 2:10-cv-0035.

The case, originally filed September 8, 2008, in the Superior Court for Camden County, Georgia, and later removed to federal court, is one of only a few cases throughout the nation addressing the issue of first-person reliance where Plaintiffs allege a RICO violation premised on mail fraud and/or wire fraud after the landmark Supreme Court case Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2008).   In Bridge, the Supreme Court held that first-person reliance is not an element of a prima facie RICO case where the predicate acts are mail or wire fraud.  The Schwarz plaintiffs relied heavily on Bridge contending that they need not show reliance as an element of their claim.  Schwarz conceded that the merger clause barred them from relying on the alleged misrepresentations, but, pursuant to Bridge, reliance was not an element of their claim.

Notwithstanding Bridge’s seemingly adverse effect on Bluegreen’s defense, counsel for Bluegreen successfully showed that the merger clause barred Plaintiffs from showing the element of proximate cause.  The Georgia RICO act creates a private right of action for Plaintiffs injured “by reason of” a violation of a RICO prohibited act.  See O.C.G.A. § 16-14-6.  State and Federal Courts have interpreted the “by reason of” language to mean proximate cause.  In order for a misrepresentation to proximately cause damage, someone must rely on it.  Bridge, at 658.  In this case, Schwarz alleged they themselves relied on the misrepresentation, i.e. first person reliance.

To that end, Schwarz alleged that they purchased their lot at an inflated price only after being misled by alleged misrepresentations made directly to them.  Accordingly, Bluegreen argued that the only way for the alleged misrepresentations to proximately cause Schwarz’s alleged harm was for Schwarz to have relied on the alleged misrepresentations but that the merger clause barred such reliance.  Consequently, the merger clause barred Plaintiffs from showing proximate cause.  In other words, reliance is the vehicle by which the Schwarz Plaintiffs sought to show proximate cause.  The merger clause bars reliance, and therefore, it bars a showing of proximate cause.

So, while several Courts and commentators have opined on the effects of Bridge, it should be clear that plaintiffs bringing RICO claims alleging their own first-person reliance on mail or wire fraud will still need to prove their reliance, not as an element of the case in and of itself, but as a vehicle to show proximate cause.  Furthermore, anything that vitiates such reliance, such as a valid merger clause, should bar Plaintiffs RICO claims.