Full opinion text
OPINION AND ORDER GENE CARTER, Chief Judge. Plaintiffs here seek recovery for losses they suffered after buying a condominium sold to them by Defendant Kearns and financed by Defendant First NH Banks. Plaintiffs have alleged violations of both federal and state securities laws, 15 U.S.C. § 77l (1) and (2); 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; 32 M.R.S.A. § 10101 et seq.; N.H.Rev.Stat.Ann. § 421-B:1 et seq.; Mass.Gen.Laws Ann. ch. 110A, and the Racketeer Influenced and Corrupt Organizations Act [RICO], 18 U.S.C. § 1962(c). They also allege common law actions for fraud, negligence, breach of fiduciary duty and breach of contract. A jury trial was commenced on November 8, 1991. Following the Court’s' denial of a motion for a mistrial after four days of testimony, the jury was discharged, and the trial continued, by agreement of the parties, before the Court alone. The Court makes the following findings of fact and conclusions of law. I. GENERAL FINDINGS OF FACT Plaintiffs Linda and Gerard Lavery are residents of Tyngsboro, Massachusetts. Mr. Lavery is a firefighter and Mrs. Lav-ery an elementary school teacher. Defendant Kearns is a resident of Kennebunk, Maine. Although trained as a lawyer, in the mid 1980’s he became a real estate developer in partnership with James Waterman. Waterman was initially a Defendant in this suit, but after he filed a Chapter 7 bankruptcy petition, proceedings against him were stayed. Defendant First NH Banks is a New Hampshire bank corporation which acquired Granite State National Bank of Rochester, New Hampshire in the early 1980’s. In 1985 Defendant Kearns, Waterman and James Ackroyd formed a corporation to buy the Bellevue Inn near Wells Beach in Maine. They planned to buy the motel, improve it, convert it to condominiums, and sell the individual units. The purchase and improvements were financed with a loan of $550,000 from Granite State National Bank. In 1986 Plaintiffs bought unit B-15 at the Bellevue for $54,900 to use as a vacation home and as an income-producing property. Plaintiffs borrowed the full purchase price of the condominium from a Massachusetts bank using the equity in their Massachusetts home as collateral for the mortgage. In order to rent the Belle-vue unit when they were not using it, Plaintiffs entered into a management contract with Roger Sibley. They received about $3000 annually in rental income and paid about 35% to 40% of the gross income received on the unit to Sibley in the period from 1986 to 1987. Around the same time,- Kearns and Waterman were also developing a number of other projects. These included the Shawmut Inn, the Inn at Goose Rocks and Ocean 18, a development planned around a golf course. These developments were financed with numerous loans, letters of credit, mortgages and other financing devices provided primarily by Granite State and First NH Mortgage Company, a separate lending entity that is a subsidiary of First NH Banks. In November 1987 Plaintiffs were invited by Atlantic Hospitality Co., a Kearns and Waterman enterprise established to manage their hotels, condominiums and restaurants, to attend a presentation at the Shawmut Inn concerning conversion of the Bellevue condominium units to “quarter shares”. The condominium market had slowed on the southern coast of Maine, and Kearns and Waterman saw quartersharing, a system which they had read about and viewed an example of in South Carolina, as a way of stimulating sales of the remaining unsold units. Plaintiffs attended the meeting with a number of other Bellevue owners. No one from Defendant First NH was present. During the presentation Plaintiffs learned about the quarter share concept, under which a condominium is divided into four equal fee simple estates, which are then sold separately. Each quarter share owner has use of the unit for thirteen weeks on a revolving schedule. Plaintiffs also learned about a similar project at another Kearns and Waterman development, the Inn at Goose Rocks. Plaintiffs were told that for quartersharing to be available at the Belle-vue, all of the members of the Bellevue Condominium Association would have to consent to amendment of the condominium declaration.- Ultimately, the Laverys and all but one of the other owners agreed to the amendment, and full consent was achieved after Waterman and Kearns bought out the one dissenting owner. A number of possible management plans for the developments were described at the meeting by Kearns and Waterman. The one that has become pivotal in this suit provided an opportunity for condominium purchasers to lease the units back to Atlantic Hospitality and to sell the units back to Kearns and Waterman at the end of a fixed period for a fixed price. It was plain from the presentation and from the written materials provided to Plaintiffs that the lease/buyback management plan was optional. At the presentation Plaintiffs also received a booklet entitled “Quarter Share Analysis”, prepared by real estate analyst John Lane. The analysis made various projections concerning the profits to be achieved through sales of quarter shares and purchase . of the units under the lease/buyback option. Under one scenario, after a twenty percent down payment, there would be no out-of-pocket expenses associated with the purchase of the condominium because the lease payments would cover all costs. At the time of the buyback, purchasers could sell the unit for a price representing the purchase price plus a return of 15% of the downpayment per year. As a result of the presentation by Waterman and Kearns, Plaintiffs decided in November 1987 to purchase an additional unit at the Bellevue, B-23, to convert their original unit to quarter shares, and to buy a unit at the Inn at Goose Rocks. They chose to enter into lease agreements on all three units and buybacks on the two new units. There is no dispute that Plaintiffs, who owned both a home and a condominium for their retirement in Massachusetts, purchased Bellevue unit B-23 and the Goose Rocks unit for investment purposes. In January 1988, the Laverys received a letter from James Kavanagh, a salesperson for Waterman and Kearns, introducing Ocean Sales, Inc., another Kearns and Waterman development project. The letter mentioned “the substantial return on your initial investment” available as a result of the lease/buyback agreements and indicated that in-house closings and completion of loan applications and related documentation would be available for purchasers of condominiums. James Kavanagh suggested that the Laverys apply for a loan from Peoples Heritage Bank, and he sent them an application form for that bank. The Laverys filled out the Peoples Heritage application and signed a blank application form for Granite State National Bank, Defendant’s predecessor. Despite the suggestions and assistance of Kavanagh, the Laverys knew that they could seek financing at whatever bank they might choose. The loan request was ultimately sent to and processed by Granite State. At the time Plaintiffs had a good credit rating and a net worth of $227,630, and the loan application was ■ approved. Sometime before the closing, Plaintiffs saw at the Bellevue a First NH publication, the “First Report” which featured an article about the ongoing enterprises and development plans of the Bank’s customers Kearns and Waterman. The “First Report” was also observed by the Laverys to be available in the lobby of the Bank on April 8, 1988, the day Plaintiffs closed their mortgage loan. Before the closing Mrs. Lavery had prepared a list of questions concerning the transaction into which they were entering. She asked the questions of Dorothy Ward, the loan officer who represented the Bank at the closing, and testified that the questions were answered satisfactorily. There is dispute about what was asked and what the replies were. At the April 8 closing, Plaintiffs borrowed a total of $158,000 to purchase unit B-23 at the Bellevue and unit 5 at the Inn at Goose Rocks. The Bellevue unit, which is the subject of this suit, cost $58,000. Plaintiffs gave the Bank a first mortgage on their B-15 unit at the Bellevue as well as on the two new units. The loan documents were prepared by the Bank, and the mortgage rate was in excess of that generally available for residential property. The lease and buyback agreements, which Plaintiffs also signed at the closing, were prepared by Waterman and Kearns. At the time of the closing, Waterman and Kearns had substantial loans outstanding to both Granite State and the First NH mortgage company. They were current on their loans, however, and paid them according to their terms. In March of 1988, Kearns and Waterman discussed with Granite State officials the possibility of developing a ten or twelve million dollar project at Moosehead Lake. The Bank declined to finance the project finding it not to “make sense” for either Kearns and Waterman or for itself. Tr. V, at 315. Although the Bank was concerned about the debt to be incurred, a bank official testified that it was more concerned about the likelihood that from a managerial standpoint Kearns and Waterman would spread themselves too thin if the project were approved. Tr. VI, at 553. The Bank did loan more money to Kearns and Waterman on April 11, 1988 for purchase of land at Lands End. In November 1988, seven months after Plaintiffs bought their new units, Kearns defaulted on the lease payments. In order to make mortgage payments to the Bank during the following year, Plaintiffs borrowed money from Mr. Lavery’s ICMA retirement fund and another IRA and took a home equity loan, from another bank.. They defaulted on the mortgage in late December, 1989 and the Bank began foreclosure proceedings in January 1990. The foregoing are the basic facts detailing the transactions underlying Plaintiffs’ lawsuit. The Court will make further findings as necessary in its discussion of the legal issues raised by Plaintiffs’ claims. II. APPLICATION OF THE SECURITIES ACTS Plaintiffs allege that Defendants have violated the Securities Act of 1933, 15 U.S.C. § 77l(1), by failing to register the sale of the Bellevue condominium with its attendant lease/buyback program as a “security” and to provide potential investors with the information required by the Securities and Exchange Commission for the sales of securities. They also allege that Defendants have violated provisions of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), 17 C.F.R. § 10b-5, which in essence prohibit fraud in connection with the sale of securities, and 15 U.S.C. § 77l (2), prohibiting provision of materially misleading information to purchasers of securities. Plaintiffs also seek recovery under the Massachusetts, Maine and New Hampshire analogs of the federal securities laws, asserting that “the liability of Kearns and First NH Bank, under the federal laws should also render them liable for violations of these three states’ securities laws.” Plaintiffs’ Post Trial Memorandum of Law, at 33. In order to apply any of these laws to Defendants, the Court must first determine whether the transaction in which Plaintiffs bought the. Bellevue unit with the lease/buyback program constitutes a security. Under the federal securities laws, “security” is defined to include an “investment contract.” 15 U.S.C. § 78c(a)(10). The classic definition of an investment contract was set forth long ago by the Supreme Court in S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). It includes “any contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third person.” Id. at 298-99, 66 S.Ct. at 1102-03. In deciding whether a transaction is an investment contract, the Supreme Court has enjoined lower courts to look at the economic reality of the situation presented, rather than taking a formalistic approach to the facts. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 848, 95 S.Ct. 2051, 2058, 44 L.Ed.2d 621 (1975). Applying the Howey test to the transaction at issue here, the Court finds no dispute over the first element. Everyone agrees that Plaintiffs invested money to buy the Bellevue condominium. The second prong of the Howey test is more difficult to apply, in part because the circuit courts of appeal are not in agreement concerning what is meant by the term, “common enterprise.” Some courts require “horizontal commonality,” i.e., the pooling of assets from two or more investors into a single investment fund, usually combined with a pro rata sharing of profits. Hocking v. Dubois, 839 F.2d 560, 566 (9th Cir.1988), approved en banc, 885 F.2d 1449, 1459 (9th Cir.1989). Other courts require that there be “vertical commonality,” which focuses not on whether there is an enterprise common to the aggregate of investors, but rather on whether there is a venture common to the dyad of the promoter and the investor. There are two tests for vertical commonality, however. To establish so-called “broad vertical commonality,” a plaintiff must show merely a link between the investor’s fortunes and the promoter’s efforts. SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir.1974). Another test for “narrow commonality,” which is a compromise approach between requiring horizontal commonality and broad vertical commonality, finds a common enterprise when the investment manager’s fortunes rise and fall with those of the investor. Savino v. E.F. Hutton & Co., 507 F.Supp. 1225, 1237 (S.D.N.Y.1981); SEC v. Glenn Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.1973). In Xaphes v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 597 F.Supp. 213, 216 (D.Me.1984), this Court, agreeing with a number of other district courts in this circuit, noted that the test for broad vertical commonality was the functional equivalent of the third Howey test, that the investor is led to expect profits solely from the efforts of the promoter. See, id; Holtzman v. Proctor, Cook & Co., 528 F.Supp. 9, 16 (D.Mass.1981) (McNaught, J.). Therefore, this Court as well as the others rejected the broader view of vertical commonality since it essentially eliminates the common enterprise element of the Howey test. The Court of Appeals for the First Circuit, like the United States Supreme Court, has not yet spoken on what the appropriate test for a common enterprise under Howey should be. Most of the District Courts in this circuit have required narrow vertical commonality for a finding of common enterprise. See Sampson v. Invest America, Inc., 754 F.Supp. 928, 933 (D.Mass.1990). The most recent case addressing the common enterprise issue, however, adopts the horizontal commonality requirement in the context of a land sales and development project, without extensive discussion of the other standards. Rodriguez v. Banco Central, 777 F.Supp. 1043, 1057 (D.P.R.1991). In the case currently before the Court, it is not necessary to predict whether one of the common enterprise tests will be adopted over the other by the Court of Appeals because Plaintiff has failed to show either horizontal or narrow vertical commonality. The facts as presented at trial show that Plaintiffs agreed to buy a condominium at the Bellevue. The lease and buyback agreements were set forth in written contracts, signed by Plaintiffs on April 8, 1988 when they closed the purchase of the Bellevue unit. Under the lease agreement, Plaintiffs leased unit B-23 at the Bellevue to Atlantic Hospitality, Inc., a Kearns and Waterman entity, for a term of five years. The agreement provided that the unit would be rented to customers at rates and under conditions exclusively determined by Atlantic Hospitality. PX 17A. It also provided that Atlantic Hospitality would pay all the costs associated with rental of the unit, including those for promotion, reservations, accounting, personnel, electricity, condo fees, real estate taxes, insurance, cable tv, and materials such as linens. Id. Atlantic Hospitality also assumed responsibility for cleaning and maintenance of the unit and for damage to the furniture and contents of the unit. Atlantic Hospitality agreed to pay Plaintiffs $416.18 monthly. This figure coincided with the amount that Plaintiffs had to pay for their mortgage on the unit. The lease provided that if Plaintiffs decided to sell quarter shares, Ocean Sales, Inc., another Waterman and Kearns entity, would have the right to market them. If a quarter share of the unit were sold, the monthly rental would be decreased by one third, and Atlantic Hospitality would give up any rights in that quarter share. The lease provided that Plaintiffs could occupy the unit for up to 14 days per year at a reduced rate. The final provision in the lease allowed termination by Plaintiffs at any time upon thirty days notice. The buyback agreement, titled “Contract for the Purchase and Sale of Real Estate,” provided that Plaintiffs would sell unit B-23 at the Bellevue to Kearns and Waterman on April 8, 1993 for $67,476. PX 18A. Plaintiffs could cancel the contract at any time upon thirty days notice. Id. A. Vertical Commonality In light of the provisions of these contracts governing the relationship between the parties, the Court cannot find that there was a common enterprise in which either the fortunes of Plaintiffs and a group of investors were joined or the fortunes of Plaintiffs and the promoters were intertwined. The lease, with its fixed payment term, makes it contractually impossible for Plaintiffs to share profits or losses with anyone. Under the contract Plaintiffs are to. receive $416.18 per month. This amount does not vary with the amount of rental money received by Atlantic Hospitality. If more than $416.18 is received in a given month, Plaintiffs do not receive more because the unit has been more profitable. If less than $416.18 is received, Plaintiffs do not receive less. By virtue of the contract’s limitations, Atlantic Hospitality, the Kearns and Waterman entity, reaps any extra profits and absorbs any losses generated by the rental of the B-23 unit. There is, therefore, no vertical commonality, for the fortunes of Plaintiffs are not intertwined with those of the promoters. The buyback contains similarly fixed amounts, insulating Plaintiffs from the vagaries of the market if they chose tq exercise it. Any risk of loss was placed by the buyback contract on Waterman and Kearns because they were obligated to pay $67,476 for the condo in April 1993 no matter what the prevailing market price might be. If Plaintiffs had chosen to terminate the buyback agreement and make a substantial profit because of soaring market prices, Waterman and Kearns would not have shared in that profit. Both the lease and the buyback, the documents governing the terms of Plaintiffs’ transaction with Defendants, indicate quite plainly that the parties were not engaged in a common enterprise characterized by vertical commonality. In Sampson v. Invest America, Inc., 764 F.Supp. at 934, the court found vertical commonality where the plaintiff investors bought solar hot water systems and entered into a service contract which provided for the lease, installation and management of the solar units to Nevada homeowners: In the present case, the homeowner lessee sends all payments to Starlite. Starlite, in turn, sends a portion of these monies to the investor; here the Sampsons. The contract explains that this revenue derives from two sources. First — for a period of two years — the Sampsons are to receive a forty dollar monthly payment resulting from the sale of parts incident to the Solar unit’s installation. If Starlite fails to lease the Solar units or if the customer defaults on her obligation to pay for these parts, then the source of this revenue evaporates and the Sampsons cannot, by the terms of their contract, receive this revenue. The Sampsons’ second source of revenue also depends for its existence on the success of Starlite’s ability to find (and collect money from) lessees.... The more units Starlite leases, then the greater the revenue for investor and broker alike. The Court in Sampson relied on the terms of the contract to establish the nature of the transaction between the parties. In Sampson the contract specified what the source of payments to the investor would be and made such payments contingent upon income from that source, thus creating the necessary interdependence between the fortunes of the investor and of the promoter. Here, despite Plaintiffs’ urgings, the lease simply says that Atlantic Hospitality must pay; it does not state that Atlantic Hospitality will pay out of specific funds. Payment under the lease is thus not conditioned upon successful rental of the units, and rental of the unit beyond what is necessary to pay the lease amount results in greater revenue for Atlantic Hospitality, the broker, only. Plaintiffs urge the Court to apply a broader perspective and find that Plaintiffs’ prospect of receiving lease payments and recouping their investment with the buyback was dependent on Kearns’s success in obtaining construction financing for the Shawmut Inn and on the success of all of the Kearns and Waterman projects. The Court agrees with Defendants, however, that this approach would merely collapse the second prong of the Howey test into the third, which requires that Plaintiffs have expected profits solely from the efforts of the promoter. The court in Elson v. Geiger, 506 F.Supp. 238, 243 (E.D.Mich.1980), a case dealing with a partnership and a sale-leaseback, addressed and rejected an argument similar to that raised by Plaintiffs here. Although the Elson court treated the argument as one under the reliance prong of Howey, its reasoning makes sense in evaluating the common enterprise element as well. The court stated: The return on investment that had been promised to the purchasers was the lessee’s fixed rent payment, which was totally independent of its profits or managerial expertise. Although the Plaintiffs argued that seller-lessee’s managerial ability was requisite to a continuation of the timely rental payments, this contention alone does not meet the Howey test. Every lessor, in some measure, is reliant upon his commercial lessee’s ability to manage the business profitably; however such reliance will not render every commercial lease a security. Id. Plaintiffs also argue that Savino v. Hutton, 507 F.Supp. at 1237, establishes a relatively relaxed standard for vertical commonality, by requiring merely a “correlation” between the success or failure of the investment manager and the profit or loss of the investor. The court in Savino, however, found vertical commonality in a situation where Defendants were to earn a bonus equal to ten percent of the profits shown by the Plaintiffs accounts. Id. at 1239. The court explained that it understood “correlation” to mean that “the investment manager’s fortunes rise and fall with those of the investor.” Here, the relationship between Plaintiffs and Kearns and Waterman was structured through the contracts to preclude such a correlation. In Rodriguez v. Banco Central, 777 F.Supp. at 1059, the court admonished that it is necessary to look beyond the four corners of the written documents in determining the existence of an investment contract: “Promotional materials, oral assurances, and merchandising approaches are all relevant.... ‘Characterization of the inducement cannot be accomplished without a thorough examination of the representations made by the defendants as the basis of the sale.’ ” Id. (quoting Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1039 (10th Cir.1980); see also Hocking v. Dubois, 885 F.2d at 1457 (also citing Aldrich)). Of course, as Defendants here argue, the transaction must be characterized at its inception, not as it develops, for registration of securities must occur before their sale. See SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 352-53, 64 S.Ct. 120, 124, 88 L.Ed. 88 (1943) (“The test ... is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect.”); Danner v. Himmelfarb, 858 F.2d 515 (9th Cir.1988) (the nature of an instrument as a security is determined at the time of issuance). Here the evidence shows that Plaintiffs were offered the purchase, lease and buyback of a condominium in a complex owned by Kearns and Waterman and to be managed by their affiliated company, Atlantic Hospitality. The offer of sale of the Bellevue unit did not tie Plaintiffs’ profits or losses to those of Waterman and Kearns. Mrs. Lavery testified that Plaintiffs were told that “if [they] were to buy a whole unit at the Bellevue and if the plan for the Bellevue permitted quarter sharing, [they] could recover some or all of [their] money or perhaps make a profit by reselling [their] unit to other people in quarter shares.” Tr. III, at 213-14. Kearns also testified that he had marketed the units on the premise that purchasers would make money through market appreciation and that they would be their own developers. Tr. VII, at 1138. This testimony clearly does not describe the type of interweaving of interests with Kearns and Waterman necessary to establish vertical commonality. Similarly, the Lane Report does not link the fortunes of the investors with those of Kearns and Waterman. It merely projects what returns might be for any given individual purchaser. The letter from Kavanagh, while filled with “puffing” language, in essence simply describes a buyer/seller relationship between letter recipients and Ocean Sales and discusses what services Ocean Sales plans to offer its buyers. At one point Kav-anagh describes the buyers as an asset to Ocean Sales, Inc. It is plain, however, that the asset foreseen is not any formal arrangement intertwining the fortunes of the buyers and Ocean Sales, but merely the possibility that buyers who are able to successfully market their condominiums may buy more properties from Ocean Sales. The Court cannot find that the quarter share program was offered in any way which significantly linked the fortunes of the investors with those of the promoters. Similarly, the lease and buyback were not offered as transactions which linked the fortunes of the investors and promoters. When the Laverys purchased the condo, Mrs. Lavery saw the purchase as an investment that would yield the fixed sums provided by the lease and buyback agreements. The evidence plainly demonstrates that Plaintiffs did not desire or plan to enter a common vertical enterprise with Atlantic Hospitality: Q. Did you have any interest at all in buying a unit and having the management company giving you sort of a 60/40 or 70/30 split of the proceeds from the rental? A. Absolutely not, it would not have made any sense. Q. And what was the thing that attracted you to this, if anything? A. Okay. It was 100 percent. We, by getting involved in this program, I would not have to pay any mortgage payments, I would not have to pay any taxes, I would not have to pay any condo fees and I would not have to pay any maintenance fees, I would not have to pay any insurance fees, absolutely nothing, everything was 100 percent covered. So why would I want to do that? Why would I want anything other than that? Q. And if we talk for a moment about the buy back components here, what was the interest you had in the buy back component? A. Buy back was, I would not have to have sold any quarters at all. If I just sat on the unit for five years, five year lease, five year lease, I would make a significant profit by just sitting on it and letting Mark and Jimmy [Kearns and Waterman] handle my own property, just by giving it over to them, the only thing I was giving up was the vacation I had been spending with my kids and that was the decision. Q. What was your expectation as to what you would use the money for? A. Everything was meant towards education for the kids. The perfect timing, my son will be graduating in 1991, my first son, that that’s what this five years was going to be, 1991. Tr. II, at 39-40. It is clear from this exchange that Plaintiffs were relying on the contractual provisions and that they did not want to share the profits and losses with Defendant Kearns and his affiliated entities on a pro rata basis. Mrs. Lavery specifically rejected any percentage-based sharing arrangement similar to the bonus found to constitute a common enterprise in Savino, and she was explicit in stating that she wanted the fixed returns promised by the contracts, not anything more that would entail greater risk. Not only did Plaintiffs not desire or expect a common enterprise, but Mrs. Lav-ery’s testimony on direct examination demonstrates that Defendants did not present the venture as such: Q. For both of these units, the Inn at Goose Rocks unit number 5 and Bellevue unit number 23, and also the B 15, for the leaseback period, was there any representation to you by anybody Kearns/Waterman, Kavanagh or anybody else that said, we will only pay you these lease back payments if the real estate sales market stays good? A. No. It made little or no difference to us, it was a 5 year, 60 month lease. We didn’t have to worry about that, that was their business. Q. Let’s talk about the 2 units where you signed buy backs, that is the B-23 and Goose Rocks, on those two units did Kearns/Waterman or anybody working for them represent to you that, well, we’re promising to buy these back from you in 5 years if the market stays good. A. No, it was a guaranteed buy back. Tr. II, at 47 (emphasis added). Mrs. Lav-ery obviously made an explicit distinction between her agreement and the risks attendant to Defendant’s business. Examination of the contracts themselves, and the understandings and representations concerning them when the transaction took place shows quite plainly that there was no vertical common enterprise between Plaintiffs and Defendant Kearns. B. Horizontal Commonality Plaintiffs argue that this case deals with securities because the facts in this case establish the requisite horizontal common enterprise as well. They point to evidence that the rental income from all the Kearns and Waterman projects went into Atlantic Hospitality accounts for payment of expenses at all sites, that purchase proceeds were pooled to pay down a line of credit used to finance the Bellevue, and that the sales of the Bellevue units were marketed with an emphasis on the enhancement of their value as a result of the development of the Shawmut Inn. Plaintiffs also argue that the investors were clearly linked because the conversion to quarter shares needed a unanimous vote, that the leases were needed to free the units for rental by Kearns’s and Waterman’s companies, and the leases were made available to all of the Bellevue owners or none. Plaintiffs have defined horizontal commonality as requiring a pooling of the interests of the investors, arguing that the nature of the pool is less important than the actual reality of whether the investors’ interests are tied together through rental arrangements. There was, however, no traditional pooling of interests by Plaintiffs and other owners at the Bellevue. In How-ey itself, the investors each bought a narrow strip of land in an orange grove and consigned the management of the land to a service company. All of the oranges from the grove were pooled and sold, and the individual strip owners received a share in the profits equal to their share in the land. Howey, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Certainly, as demonstrated by the fixed payment leases and buybacks, the transaction in this case did not contemplate an allocated sharing of profits among the owners as in Howey. In the context of a discretionary commodities trading account, admittedly a different sphere than that presented by the facts here, Justice Stevens, in an opinion as a circuit judge, declined to find horizontal commonality. He noted that “the success or failure of other [buyers’] contracts had no direct impact on the profitability of plaintiffs’ contract.” Milnarik v. M-S Commodities, Inc., 457 F.2d 274, 276 (7th Cir.1972). While the customers might have been represented by a common agent, they were not joint participants in the same investment scheme. Id. Justice Stevens adopted the District Court’s explanation of why the discretionary account did not create a common enterprise: In essence, this contract creates an agency-for-hire rather than constituting the sale of a unit of a larger enterprise. No matter how many different persons Nelson became an agent for under similar or even identical discretionary contracts, his relationship with each would remain as that of agent and principal. Each contract creating this relationship is unitary in nature and each will be a success or failure without regard to the others. Some may show a profit, some a loss, but they are independent of each other. No matter how many discretionary trading-accounts Nelson may have had with other principals, the “security” “issued” to the plaintiffs, their discretionary trading account, could not be offered to anyone else. Id.; Curran v. Merrill Lynch, Pierce, Fenner and Smith, Inc., 622 F.2d 216, 222 (6th Cir.1980) (also quoting Milnarik). Despite the widely different context, the Court finds instructive similarities between the situation presented here and that presented in .Milnarik. Each unit purchaser here bought his or her own condominium and made a type of agency arrangement with Kearns and Waterman through one of their business entities, Atlantic Hospitality. Here, Plaintiffs point to the fact that Defendants presented the quarter share lease/buyback plan to potential customers by saying they would advertise jointly and that there would be a shuttle bus to take overflow customers from the Shawmut Inn to the Bellevue and the Inn at Goose Rocks, thus benefitting the Bellevue owners. Tr. VII, at 655. Mrs. Lavery made it clear, however, that she did not care whether the room was rented out or not because she would receive the lease payment in any event. The contractual agreement, with its insulation of Plaintiffs and other buyers from the vagaries of the trade and the fortunes of the other investors, governed the transaction. Similarly, although the lease included an agreement that Ocean Sales would do the marketing of the quarter shares, this again was in the nature of an agency. There was no common venture with other Belle-vue buyers by which Plaintiffs received more profits if other owners were successful in selling their quarters or received less if the other owners or the group as a whole were unsuccessful. Each owner had his own unit, with its separate contracts with Kearns and Waterman, and each owner could make profits or sustain losses independent of the fortunes of the other purchasers. In Rodriguez v. Banco Central, the court described horizontal commonality as meaning that “the fates of the investors are intertwined through the pooling of common funds to be used for the common development to benefit all. The fate of each investor must rise or fall together.” Rodriguez v. Banco Central, 777 F.Supp. at 1058. In SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, the seminal case in this field predating Howey, the defendant offered investors leaseholds and promised to drill an oil well located so as to test the oil producing capability of the leaseholds. The Supreme Court found that the investors had joined in a common venture to drill an oil well. Clearly, this is the type of common development to benefit all that was intended by the court in Rodriguez, or as the Supreme Court described it, “the thread on which everybody’s beads were strung.” Joiner, 320 U.S. at 348, 64 S.Ct. at 122. In this case, the overwhelming thrust of the evidence is that no such common enterprise or venture existed. As the court stated in Hart v. Pulte Homes, 735 F.2d 1001, 1005 n. 2 (6th Cir.1984), “commonality must be essential to the venture offered by the developer.” Although ultimately Kearns and Waterman did pool the receipts from both sales and rental of the units, that was not part of an initial development plan that included Plaintiffs and the other purchasers. In Woodward v. Terracor, 574 F.2d 1023 (10th Cir.1978), the Court of Appeals for the Tenth Circuit found that no common enterprise existed where Defendants sold lots in what was billed as a planned residential community to include recreational opportunity, transportation facilities, shopping centers and health and cultural facilities. As the stated: Terracor itself was involved in a business venture. Terracor was developing a new residential community. As part of its venture Terracor sold lots to persons who either intended to build a house thereon, or intended to resell to others who would so build. But the mere fact that the plaintiffs bought lots from Ter-racor does not mean that by such acquisition they were thereafter engaged in a common venture or enterprise with Ter-racor. The only contractual agreement between plaintiffs and Terracor was the Uniform Real Estate Contract. Terracor was under no contractual obligation to the plaintiffs other than to deliver title once purchase terms were met. Unlike Howey, Terracor was not under any collateral management contract with the purchasers of its land. In short, the record ... simply shows the purchase by plaintiffs of lots in a real estate development. Id. at 1025. Although the Court in Terra-cor refers to the relationship between the developer and the investor, it is helpful in framing the inquiry for horizontal commonality because it focuses on whether the investors were offered part of a development project in which they would all jointly participate. The Court is satisfied from all the evidence presented in this case that Kearns and Waterman may have had a plan by which they would use the capital from the Bellevue sales for their other projects. The Bellevue owners were not a part of that plan, however. Kearns and Waterman sold to purchasers like Plaintiffs who then could hold on to their property, using or renting it, or resell it. Each purchaser had a separate agreement with Defendants and they had not subscribed to any plan making themselves dependent on the success of their fellow owners’ investment or on the success of either the Bellevue or all of Kearns’s and Waterman’s projects. Although there was a collateral management contract with the purchasers of the condominiums, it was very restricted, as explained at great length above. Kearns clearly represented to purchasers at all the developments that he was going to develop the Shawmut Inn. The evidence does not convince the court, however, that Plaintiffs and the other purchasers at the Bellevue were jointly buying into that development in any significant sense. The promise of a joint reservation system or the possibility of overflow referrals was not the crux of the prospective value of Plaintiffs’ investment. The court in Pulte Homes, 735 F.2d at 1005, failed to find a horizontal common enterprise when model homes were offered for sale with a lease similar to that offered Plaintiffs here. The court stated that even if individual purchasers were assured of development, “the mere fact that an assurance of development to each investor may have come from the same seller does not satisfy the requirement of horizontal commonality.” Id. at 1004. While Kearns and Waterman also promised to finish a health club at the Bellevue, this is similar to the situation addressed by Judge Fuste in Rodriguez. Relying on a decision by Justice Powell sitting in the Eleventh Circuit, Rice v. Branigar Organization, Inc., 922 F.2d 788, 790-91 (11th Cir.1991), the court held that sale of undeveloped land with the promise that there would be a country club for the use of purchasers did not turn an ordinary land sales contract into an investment. Rodriguez, 777 F.Supp. at 1060. Similarly, the promise to purchasers to finish renovations on the individual rooms, was not a promise of significant development that would be the basis of profits for all the owners. The Court notes that the Bellevue itself was virtually fully developed when the units were sold. The sales price included improvements to the individual rooms that were in progress at the time of closing. The Court is fully satisfied from the evidence that while Kearns and Waterman had extensive development plans for themselves, they did not incur any significant development obligations vis-a-vis the group of purchasers as a whole, and there was no agreement to engage in wide scale development through the use of common funds that would then generate a return on investment to the purchasers. See Rodriguez, 777 F.Supp. at 1058 (explaining Terracor). Mark Kearns’s testimony on this point was highly credible. When asked what he told prospective buyers about where they might realize a profit from their purchase of a unit, he replied: Any of these projects that we have been discussing here, the whole thrust of the investment side, the profit side to the purchase was the appreciation of the value of the property through general economic good time, so to speak, plus the fact that they were near or at the ocean. And then, secondly, at the Bellevue, the increased value was going to be the fact that someone could own a whole unit and could in a way, be their own developer. They could then choose to sell one unit this year, one unit next year and they could set whatever price they wished, set a high price, say I’ll wait until someone comes along and purchases the quarter; they could sell some quarters and not some quarters, that was the whole thrust of how people were going to really make money at any of these projects. Tr. VII, at 1137; see also, Tr. VI, 845. The “thread on which [Plaintiffs’] beads were strung” was their own ownership of a condominium on the ocean and their individual contracts with Atlantic Hospitality. The transaction was not one in which the purchasers were invited to or did provide funds that went for a common development. They purchased their own units to rent for a fixed return or to resell. Since Plaintiffs did not enter into either a vertical or horizontal common enterprise when they purchased unit B-23 at the Bellevue, they have not shown that there was an investment contract here. Thus, the federal securities laws do not apply, Howey, 328 U.S. at 299, 66 S.Ct. at 1103, and Plaintiffs are entitled to no relief on Counts I, II, and III. III. STATE SECURITIES LAWS Plaintiffs argue that Defendants have also violated the state securities laws of Maine, New Hampshire and Massachusetts. They suggest that the test for a security is the same in those states as it is under federal law. Each state's laws define securities as including investment contracts. 32 M.R.S.A. § 10501(18); Mass.Gen.Laws Ann. ch. 110A, § 401(k); N.H.Rev.Stat.Ann. ch. 421-B:2(XX). The Maine Law Court has asserted that it takes guidance from, but is not controlled by, federal law when construing state securities legislation. Bahre v. Pearl, 595 A.2d 1027, 1032 n. 5 (Me.1991). In Bahre, however, the Law Court relied almost exclusively on federal law in determining whether the partnership interest at issue there was a security interest. The Court sees nothing in the discussion of investment contracts in Bahre indicating that the Law Court would not be guided by federal law and reach the same conclusion reached by this Court if it were called upon to decide whether the sale of a condominium with a lease and buyback such as the one presented here is an investment contract. In Morgan v. Financial Planning Advisors, 701 F.Supp. 923, 926 (D.Mass.1988), the United States District Court for the District of Massachusetts held specifically that the decision whether an investment in rare coins was an investment contract was the same under both federal and Massachusetts securities laws. The New Hampshire Supreme Court has also looked to Howey for guidance in deciding if a transaction is an investment contract. State v. Heneault, 121 N.H. 497, 431 A.2d 142 (1981). Under New Hampshire law the definition of an investment contract is more restrictive than that prescribed by Howey, requiring that investment contracts be in the form of a bill of sale in order to be regulated by state securities law. Id. That difference, however, would not affect the Court’s decision here. Thus, as Plaintiffs’ argument for the opposite result suggested, the Court’s determination that the transaction here was not an investment contract under federal law precludes recovery under the securities laws of Maine, New Hampshire, and Massachusetts as well. Plaintiffs, therefore, are entitled to no relief on Counts V, VI, VII and VIII of their complaint. IV. RICO Plaintiffs also seek treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1964(c), which provides: “Any person injured in his business or property by reason of a violation of section 1962 of this Chapter may sue ... and shall recover threefold the damages he sustains and the cost of suit, including a reasonable attorney’s fee.” Plaintiffs have alleged a violation of 18 U.S.C. § 1962(c), which prohibits 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 enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt. In Sedima, S.P.R.L. v. Imrex Co., 478 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985) the Supreme Court explained that a plaintiff seeking treble damages under section 1964(c) must show “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity, and (5) that the racketeering activity caused injury to the plaintiff’s business or property.” Plaintiffs argue that Defendants are liable under RICO for conducting the business of the Shawmut Inn through a pattern of racketeering activity consisting of securities fraud and mail and wire fraud. It has been established above that no securities were involved here. Therefore, securities fraud cannot serve as a predicate offense for the RICO charge. Plaintiffs’ theory of mail and wire fraud is that the condominium packages at the Bellevue, the Inn at Goose Rocks and the Shawmut Inn with the accompanying leases and buybacks were fraudulent schemes which were put together and marketed with the aid of the mails and telephone. In broad terms Plaintiffs argue that the condominium marketing was fraudulent because Plaintiffs and other buyers were told that these were guaranteed investments and were not informed that return on the investment was dependent on the ability of Kearns and Waterman, who were already heavily leveraged, to continue to receive bank financing. In McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786 (1st Cir.1990), a RICO case in which the alleged predicate racketeering activities were mail and wire fraud, the Court stated: To establish that the appellees violated the mail and/or wire fraud statutes, McEvoy must show that the appellees engaged in a scheme to defraud with the specific intent to defraud and that they used the United States mails and/or the interstate wires in furtherance of the scheme.... In McNally v. United States, 483 U.S. 350 [107 S.Ct. 2875, 97 L.Ed.2d 292] (1987), the Supreme Court held that to come within the compass of the mail fraud statute, the scheme to defraud must be intended to deprive another of money or property. Id. at 790. The Court finds that Plaintiffs have not established mail or wire fraud by a preponderance of the evidence adduced at trial. Although the scope of fraud is broader under the wire and mail fraud statutes than it is under the common law, the scheme must still be intended to deceive another, by means of false or fraudulent pretenses, representations, promises, or other deceptive conduct. Id. at 791. To make clear what is meant by “deceive,” the court in McEvoy cited the Webster’s Dictionary definition of defraud: “to take or withhold from (one) some possession, right or interest by calculated misstatement or perversion of truth, trickery, or other deception.” Id. The Court of Appeals has long recognized that specific intent for mail fraud may also be proved by showing that a defendant consciously avoided knowing the truth by not determining the accuracy of his statements. United States v. Brien, 617 F.2d 299 (1st Cir.1980). Plaintiffs assert various affirmative misrepresentations and failures to disclose facts as having deceived them. Having had the opportunity at trial of closely observing Kearns and Waterman and the representatives of Defendant First NH Banks, and having had the opportunity to review carefully that testimony in preparation for writing this opinion, the Court cannot on the record before it find the requisite specific intent to deceive on the part of either Defendant or their agents. The evidence presented shows Kearns and Waterman as young entrepreneurs who, like many others, were “on a roll” with the booming real estate market in Maine during the 1980s. Kearns and Waterman made extensive plans to develop property on the Maine coast, and they were very successful over a relatively lengthy period in getting financing to bring their plans to fruition. They were genuinely enthusiastic about their plans and the possibility of making lots of money in this booming area of the economy. As Kearns very credibly testified, he thought of himself as a good, astute businessman, Tr. VI, at 773-74, and he believed that “all you have to do, for example, on the Shawmut Inn is walk on the property, to see that property, those units were sold because they’re on a fabulous piece of real estate.” He further testified, and the Court believed him, that he thought the lease agreement “was a good deal, no question about it.” Tr. VI, at 868. At the time Plaintiffs closed on their Bellevue unit, Kearns was optimistic about his development future. He testified that he was expecting to market new units at the Shawmut within six months and to have them built in the winter of 1989-90. His estimation of his prospects was reasonable, given his past ability to put together deals. Moreover, based on financial analy-ses he and his accountants had done before taking on development projects at the Bellevue, the Shawmut Inn and Inn at Goose Rocks, he was sanguine about the possibility of meeting all his obligations: Doing the cash flow certainly gave us a comfort level that we could meet all our obligations under the leases. However, we also were reducing our debt because we were, we were taking the net proceeds of every sale and reducing our debts which was a little uncommon and many developers would say take 75 percent of the net sales proceeds of reduced debt and keep putting in their pocket the balance. We went the more conservative route and took net proceeds to reduce debt. Thirdly, we were putting what we thought at the time, tremendous value in all of the projects that we owned by getting them approved and putting the plans together. And, fourthly, we selected projects that we determined were in unique areas, and the old saying — location, location, location, we took to heart and that’s why we were called the Ocean Group because all of our projects had something to do with the ocean. We believed in the ocean as really a conservative approach to development because our experience had been that properties near the ocean did not have the volatility in price that other real estate had. Tr. VII, at 1120-21, see also Tr. VII, at 1112-1120. Obviously, in hindsight, Waterman’s and Kearns’s plans and expectations proved to be unsound. The Court is fully convinced after hearing their testimony, however, that at the time they were marketing the units at the Shawmut Inn and the Bellevue, Kearns and Waterman planned to meet their obligations and believed that the projects were indeed “good deals” both for them and for the unit purchasers. The Court also finds that they had a reasonable, considered basis for their plans and beliefs. The Court, therefore, finds that there was no intent on the part of Waterman and Kearns to deceive Plaintiffs or other purchasers like them. Plaintiffs urge the Court to find that Defendant Kearns and his agents misrepresented the Bellevue as a guaranteed investment and that these misrepresentations influenced their decision to buy the Bellevue unit. At the presentation at the Shawmut Inn, Plaintiffs were given a document describing Ocean Quarters, or quartershar-ing, “A UNIQUE FORM OF REAL ESTATE OWNERSHIP AND INVESTMENT.” That document included a multi-page description of the quarter share system and a report by real estate analyst John Lane in which he presents a financial analysis of the quarter share sales plan for the Inn at Goose Rocks and the Bellevue. On direct examination Mrs. Lavery testified that she relied on two specific representations in the report. First, on page 3 the report says: “The agreement states that the investor will have no out of pocket expenditure other than the down payment. The lease back of the unit will cover all ownership costs.” (Emphasis added). Second, on page 4 the report states: “The objective is to arrive at a lease that will create a zero cash flow for the wholesale buyer during the period of ownership.” The Court finds that these statements in the Lane report were not misrepresentations. They represented the intentions of Kearns and Waterman and were in fact the basis of the lease agreement signed by Plaintiffs and Atlantic Hospitality. What Plaintiffs now view as a misrepresentation is really Defendants’ failure to fulfill their business expectations. As the Court explained in Hilton Sea, Inc. v. DMR Yachts, Inc., 750 F.Supp. 85, 37 (D.Me.1990), failure to perform as promised without more does not constitute fraud. “If the opposite were true, then every breach of contract would present a colorable claim for fraud and perhaps a RICO violation.” Id; McEvoy, 904 F.2d at 791. Plaintiffs also urge the Court to find that Defendants made misrepresentations in a letter sent to them after they had decided to buy the Bellevue unit. In the letter James Kavanagh introduced and described Ocean Sales Inc., the new Waterman and Kearns entity which would market and sell their properties. The letter explained the quarter share program, which had first been presented to Plaintiffs at the Shaw-mut Inn a few months before, stating: These motel/hotel condominium units are available immediately at a wholesale investor level with management options that allow for a break-even cash flow situation plus a compounded annual rate of return guaranteed and the potential for a very substantial return on your initial investment. PX 418A. Although Plaintiffs urge the Court to find that the letter promised an investment that would guarantee “a very substantial return on your initial investment,” close examination of the letter shows that it merely mentions a “potential” for substantial returns. The Court is satisfied that this was not a misrepresentation for Kearns and Waterman actually believed that the sales of quarter shares would generate significant returns for the whole unit buyer. Their belief was reasonable since each quarter would be sold for more than one quarter of the price of the single unit and since the concept of allowing purchasers to have a relatively low-cost coastal vacation condo home has a patent marketing appeal. The Kavanagh letter also describes a program with a guaranteed, compounded annual rate of return. This was not a misrepresentation, however, for in fact, the buyback agreement between Plaintiffs and Kearns and Waterman provided a contractual guarantee that at the end of five years Plaintiffs could sell the Bellevue unit, recouping a certain percentage on their initial downpayment. Again, the fact that Defendants might breach the agreement because of unanticipated adverse business conditions, is not, without more, a basis for a finding of fraud. McEvoy, 904 F.2d at 791. Kearns and Waterman did not disclose their financial data and the amount of their overall debt to Plaintiffs. The Court cannot find, however, that this nondisclosure amounted to an intent to deceive. Neither can the Court find that this nondisclosure was a reckless or negligent concealment from Plaintiffs of facts material to their business decisions. It is clear from the testimony at trial that real estate development is conducted by means of ever renewed financing. Borrowed money supports purchase and improvement of property, and debt service is paid through income from the property, sale of the property or through further borrowing. Ultimately, the improved property is available to pay off the debt. Kearns credibly explained that he believed he had enough property to pay off his debt. Based on all the evidence presented at trial, the Court cannot find that Kearns’s and Waterman’s debt or their mode of operation was unusual for their type of business. Moreover, they were not unreasonable or reckless in failing to foresee their downfall. The Court believes Kearns’s explanation of the financial difficulties his enterprises encountered: [Unfortunately, not really intentionally [we got] all our eggs in the Shawmut Inn basket.- And we had put into that project all kinds of costs, all of the profits that we made anywhere else and in the end when that was not financed and was not built, that was the primary reason that it came to an end. Tr. VII, at 1151. Based on all evidence and on Kearns’s experience in the field, the Court thinks this is a reasonable assessment of what happened. Obviously, once the project was not financed, Kearns and Waterman were not able to pay off the development debts already incurred because they did not have a developed property to sell or the other anticipated incomes from the developed property. Kearns testified, however, and the Court was fully convinced by his testimony, that the first time he began to have any doubt about getting the Shawmut Inn financed was in August, 1988. Tr. VII, at 1162. Based on their successful performance record in obtaining loans from the Bank and the mortgage company, which continued up to and beyond the time of Plaintiffs’ closing, Kearns and Waterman would not have had any reason to believe that they were in financial jeopardy before then. Moreover, the Shawmut Inn project had already passed some regulatory hurdles, and with its prime location on the water and near the vacation White House, promised to be a very profitable venture. Although Plaintiffs have tried mightily to portray Kearns and Waterman as marginally qualified or unqualified borrowers always skating dangerously near the precipice of financial disaster, the record does not support that finding. Only very soon before the collapse of their enterprises did Kearns and Waterman ever see themselves as anything othér than successful, hardworking real estate developers who were consistently able to put together intricate financing packages to support their developments. The Court is satisfied that their perceptions were reasonable and that they did not blind themselves to the financial realities of their situation. The record supports the conclusion that Kearns and Waterman were not trying to deceive Plaintiffs either by representations about the transactions or by not disclosing the inner workings of their development business. Plaintiffs have also failed to prove that Defendant First NH Banks had a specific intent to deceive them. The initial portion of Plaintiffs’ theory in that respect is that the