Opinion
10 Civ. 6264 (JPO)
01-24-2013
PAUL BORITZER et al., Plaintiffs, v. ALBERT L. CALLOWAY, JR. et al., Defendants.
MEMORANDUM AND ORDER
:
Plaintiffs Paul Boritzer ("Boritzer") and Pamela Wolf ("Wolf") bring this action against Defendants Albert L. Calloway, Jr. ("Calloway"), Lesly Bernard ("Bernard"), and Bernard-Calloway 2008, L.L.C. (the "Company"), alleging a violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, together with state law claims for fraud, conversion, and breach of contract. Calloway has moved to dismiss Plaintiffs' Complaint, contending, inter alia, that Plaintiffs have failed to state a RICO claim under § 1962(c). For the reasons that follow, Calloway's motion is granted.
I. Background
For the purposes of this motion, all facts are taken from Plaintiffs' Complaint and presumed true. All inferences are drawn in favor of Plaintiffs. Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir.1993).
Plaintiffs allege that together Defendants formed an association-in-fact, which they utilized primarily for the purpose of defrauding Plaintiffs. (First Amended (Corrected) Complaint ("Compl."), Dkt. No. 29, at ¶ 12.) During the spring of 2008, Bernard and Calloway approached Boritzer with a business proposition. (Id. at ¶ 34.) Defendants—acquaintances of Boritzer—encouraged Boritzer to invest in their plan to open several new restaurants in New York City, including one located at 95 Avenue A in Manhattan. (Id. at ¶¶ 32-34.)
Citing the success of Bernard's restaurant, Tilman's Bar and Lounge in Chelsea, Defendants explained to Boritzer that their newest restaurant venture was a "guaranteed success." (Id. at ¶ 37.) Defendants allegedly represented to Boritzer that the opportunity to invest in Bernard's next venture would yield a substantial return, potentially doubling any initial investment within eighteen months. (Id. at ¶ 45.) Defendants also allegedly told Plaintiffs that other investors were "begging" Defendants to invest in similar ventures. (Id. at ¶ 39-40.)
Defendants further represented to Boritzer that they had created a limited liability corporation (the Company) "for the express purpose of funding the purchase of the alleged restaurants in New York City" (id. at ¶ 46), explaining that any funds invested in the venture "would have to be wired to a bank account [Defendants] had opened for [the Company]." (Id.)
A few weeks after this initial meeting, in May 2008 Bernard and Calloway approached Boritzer again, asking for a $300,000 investment. Defendants represented to Boritzer that he needed to invest the monies immediately, as "they were ready to move forward with their plan to purchase restaurants," and wanted to ensure that Boritzer remained a part of this "great opportunity." (Id. at ¶ 47-48.) At this time Defendants also provided Boritzer with information on how to effectuate a wire transfer of the $300,000 into an account at Commerce Bank, which they had opened in the Company's name. (Id. at ¶ 48.)
Apprehensive about the "immediacy" of these requests, Boritzer asked for a written plan detailing the venture and also reiterated his concern that the investment double within two years of its execution. (Id. at ¶ 49.) In response to Boritzer's concerns, Defendants explained that their lawyer in Washington, D.C. was preparing those documents and that they would provide Boritzer with the documents at a later date. They also discouraged Boritzer from consulting his own lawyer for advice regarding the transaction. (Id. at ¶ 50.)
Although he never received the requested plans or details of the venture (id. at ¶ 51), in May 2008 Boritzer borrowed $300,000 from his business partner, Wolf. (Id. at ¶ 52.) In keeping with Defendants' request, Wolf wired this investment money from her UBS Bank account to the Company's account at Commerce Bank. (Id.) Approximately two weeks after this transfer, on or around June 3, 2008, Defendants executed a "Secured Purchase Money Promissory Note" (the "Note"), in the amount of $600,000 and payable to Boritzer. (Id. at ¶ 53.) Defendants stated that Boritzer would never see a return on his investment of $300,000 without signing the Note, so Boritzer signed it. (Id.)
In the wake of the Note's execution, Defendants persisted in requesting further investments from Boritzer, representing that they required the additional funds to "complete some purchases and to take advantage of new opportunities for [the Company]." (Id. at ¶¶ 56, 58.) Again, Defendants represented to Boritzer that he was in danger of losing his original $300,000 unless he invested another $300,000. (Id. at ¶ 57.)
According to Plaintiffs, throughout June, July, and August, Defendants "harassed" Boritzer, urging him to invest another $300,000, which they contended was necessary for the Company to "take advantage of new opportunities." (Id. at ¶ 58.) Concerned about his original investment, Boritzer contacted his friend, Jacob Goldsmith ("Goldsmith"), and asked him for the money to proceed with the investment. (Id. at ¶ 59.) To discuss this potential investment, and also to induce Goldsmith to loan Boritzer the money, Defendants had Boritzer bring Goldsmith to Tilman's for a meeting. (Id. at ¶ 60.) After this meeting, which took place in September 2008, Defendants "insisted that Boritzer wire [Goldsmith's] $100,000 into the [Company's] account at Commerce Bank." (Id. at ¶ 62.)
On September 16, 2008—again fearing for the soundness of his initial investment—Boritzer wire-transferred $65,000 to the Company from his joint account with Wolf at HSBC. (Id. at ¶ 63.) Later, on October 1, 2008, Boritzer wire-transferred the additional $35,000 to the Company, also from his joint HSBC account. (Id. at ¶ 64.) This last transfer brought Boritzer's total investment in Defendants' venture to a total of $400,000. (Id. at ¶ 65.)
Boritzer alleges that Defendants never invested his money in restaurant purchases, and that he has not received any return on his investment as promised. (Id. at ¶ 65.) Moreover, Boritzer claims that, throughout the past two years, he has "repeatedly and urgently requested[] that defendants Bernard and Calloway return the $400,000." (Id. at ¶ 66.) Additionally, Plaintiffs contend that Defendants have continually harassed Boritzer for additional funds for their ventures, despite their failure to produce a return on Boritzer and Wolf's initial investment, using Tilman's "as an example of what the restaurant could become if a further investment was made." (Id. at ¶ 68-69.)
According to Plaintiffs, Defendants have "operated a continuing long-term association over at least a five-year period to lure investors to invest in various restaurants." (Id. at ¶ 41.) Plaintiffs allege that over the course of the past five years Defendants have solicited monies from investors, purportedly for the purpose of opening New York City restaurants. However, Plaintiffs contend, after receiving these investments, Defendants failed to open the restaurants, or, alternatively, immediately shut the restaurants down, retaining investors' monies for themselves. (Id.) In their Complaint, Plaintiffs specifically name five such restaurants: Mr. Jones Restaurant; La Otra and Nightcap; Permanent Brunch; Steak Shoppe; and Village Tart. (Id. at 42.)
B. Procedural History
Plaintiffs filed their Complaint in this case on August 20, 2010. (See generally Compl.) The Company, as an entity, never responded to Plaintiffs' Complaint, despite service. Accordingly, in April 2012, this Court entered a judgment of default in favor of Wolf and Boritzer as to the Company, whereas Calloway and Bernard remained as individual parties to the case. (Default Judgment, Dkt. No. 50.) While Bernard answered Plaintiffs' Complaint in April 2012, Calloway instead filed the instant motion to dismiss on August 20, 2012. (Defendant's Motion to Dismiss (Def.'s Mot.), Dkt. No. 54.)
The operative complaint for purposes of this motion is the (Corrected) First Amended Complaint, filed on October 17, 2011, as the Motion to Dismiss addresses this Complaint, rather than the original Complaint filed in August. (See Motion to Dismiss Plaintiffs (Corrected) First Amended Complaint, Dkt. No. 54.)
II. Discussion
A. Legal Standard
When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a court is obliged to "accept as true all of the factual allegations contained in the complaint," Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 572 (2007), drawing "all inferences in the light most favorable to the non-moving party's favor." In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007). Federal Rule of Civil Procedure 8(a) requires only a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). However, it is also well settled that the complaint must do more than plead facts that "do not permit the court to infer more than the mere possibility of misconduct." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).
At bottom, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678; see also Twombly, 550 U.S. at 555 (noting that a court is "not bound to accept as true a legal conclusion couched as a factual allegation" (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986))). In other words, in order to properly state a claim and avoid dismissal, a plaintiff must state "the grounds upon which his claim rests through factual allegations sufficient 'to raise a right to relief above the speculative level.'" ATSI Comm., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Twombly, 550 U.S. at 546).
In sum, to survive a motion to dismiss, a plaintiff's facts must give rise to a plausible narrative supporting his claim. See Twombly, 550 U.S. at 570 ("Here, in contrast, we do not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face. Because the plaintiffs here have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.").
Additionally, all claims sounding in fraud—including those under RICO—must comply with Rule 9(b)'s heightened pleading standard. See Fed. R. Civ. P. 9(b). To meet the strictures of Rule 9(b), "the complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir.2006) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993)). Rule 9(b) also dictates that while the circumstances of the fraud must be pleaded with particularity, "intent, knowledge, and other conditions of a person's mind may be alleged generally."
B. The RICO Statute
RICO was enacted in 1970 as a facet of the Organized Crime Control Act, "to seek the eradication of organized crime in the United States." Pub. L. No. 91-452, Title IX, § 901(a) (Oct. 15, 1970). RICO § 1962(c), the section under which Plaintiffs' claim is brought, declares it "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 enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt." 18 U.S.C. 1962(c). As a general rule, to establish a RICO claim, a given plaintiff must show: "(1) a violation of the RICO statute, 18 U.S.C. § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962." DeFalco v. Bernas, 244 F.3d 286, 305 (2d Cir. 2001) (quotations omitted). More specifically, in order to properly plead a civil RICO claim under § 1962(c), a plaintiff "must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Purchase Real Estate Grp. Inc. v. Jones, No. 05 Civ. 10859, 2010 WL 1837809, at *5 (S.D.N.Y. Apr. 30, 2010) (internal quotations omitted). Moreover, the four elements of a § 1962(c) claim must be pleaded as to every, individual defendant. DeFalco, 244 F.3d at 306.
It bears mentioning that courts examining RICO claims must do so in light of its congressional purpose: "[the protection of] legitimate businesses from infiltration by organized crime." Nightingale Group, LLC v. CW Capital Mgmt., LLC, No. 11 Civ. 9293, 2012 WL 2674539, at *5 (S.D.N.Y. July 5, 2012) (quotations omitted). With this goal in mind, the Supreme Court has underscored that "the RICO statute provides that its terms are to be 'liberally construed to effectuate its remedial purposes.'" Boyle v. United States, 556 U.S. 938, 944 (2009) (citing § 904(a), 84 Stat. 947, note following 18 U.S.C. § 1961). It is well understood that the "true civil RICO plaintiff," as a crusader against fraud, "may well provide a laudatory societal service." Rosenson v. Mordowitz, No. 11 Civ. 6145, 2012 WL 3631308, at *5 (S.D.N.Y. Aug. 23, 2012). At the same time, however, "all too frequently, plaintiffs attempt to mold their claims to the RICO form even though their injuries do not fall within those intended to be addressed by the Act." Id. at *2.
The "allure" of the RICO statute lies in the prospect of "treble damages, attorney's fees, and federal jurisdiction," which together "present[] a powerful incentive for plaintiffs" to plead all standard fraud claims under the guise of RICO. Id. Thus, courts' approaches to RICO claims must remain cabined by very real concerns about the "stigmatizing effect" of such an accusation. See id. at *5 ("Consequently, courts have an obligation to scrutinize civil RICO claims early in the litigation—to separate the rare complaint that actually states a claim for civil RICO from that more obviously alleging common law fraud."); see also Goldfine v. Sichenzia, 118 F. Supp. 2d 392, 397 (S.D.N.Y. 2000) ("Because the mere assertion of a RICO claim . . . has an almost inevitable stigmatizing effect on those named as defendants, . . . courts should strive to flush out frivolous RICO allegations at an early stage of the litigation. To this end, a court's focus must be to ensure that RICO's severe penalties are limited to enterprises consisting of more than simple conspiracies to perpetuate the acts of racketeering. Thus, courts must always be on the lookout for the putative RICO case that is really nothing more than an ordinary fraud case clothed in the Emperor's trendy garb." (citation omitted)).
C. Plaintiffs' RICO Claim
The Court turns to Plaintiffs' RICO claims with a keen awareness of the inherent tension between a statute, whose purpose is to combat the deleterious effects of organized racketeering activity, and a pleading standard that mandates an acknowledgment of the dangers posed by that legislation's manipulation, on the part of those who would exploit its aim. Plaintiffs assert a claim under RICO § 1962(c), contending that Calloway and Bernard utilized wire transactions to effectuate an "illegal scheme[]" to defraud Boritzer of his investment. (Compl. at ¶ 73.)
As noted above, a violation of 18 U.S.C. § 1962(c) requires a showing of "(1) conduct; (2) of an enterprise; (3) through a pattern; (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985) (footnote and quotations omitted).
1. Enterprise
A RICO enterprise is defined by statute as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). "Under section 1962(c), a defendant and the enterprise must be distinct." DeFalco, 244 F.3d at 306. The Supreme Court has held this distinctiveness requirement to mean "that to establish liability under § 1962(c) one must allege and prove the existence of two distinct entities: (1) a 'person'; and (2) an 'enterprise' that is not simply the same 'person;' referred to by a different name." Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). However, an employee who "conducts the affairs of a corporation through illegal acts," id. at 163, is itself separate from the corporation, meaning that RICO "applies [even] when a corporate employee unlawfully conducts the affairs of the corporation of which he is the sole owner—whether he conducts those affairs within the scope, or beyond the scope, of corporate authority." Id. at 166. "Thus, the RICO enterprise may be a lawful entity or an association-in-fact," Rosenson, 2012 WL 3631308, at *5, the latter of which refers to "'a group of persons associated together for a common purpose of engaging in a course of conduct.'" Boyle, 556 U.S. at 946 (quoting United States v. Turkette, 452 U.S. 576, 583 (1981)).
Calloway's memorandum in support of his motion to dismiss is devoid of any contention that the Complaint is deficient in its allegation of a RICO enterprise. (See generally Memorandum of Law in Support of Defendant's Motion to Dismiss, Dkt. No. 55; Def.'s Rep.) This Court concludes that the Complaint adequately states the existence of a RICO enterprise. Plaintiffs allege that Calloway and Bernard formed an association-in-fact with the Company to solicit investments for their restaurant ventures. (Compl. at ¶ 12.) It is true that Calloway and Bernard were in "direct control" of the Company. (Compl. at ¶ 75.) However, under the Supreme Court's approach in King, even though Defendants were "part of, not separate from, the corporation," the three could nevertheless form an enterprise for RICO purposes. King, 533 U.S. at 161. Since Plaintiffs have adequately alleged the existence of an association-in-fact under § 1961(4), the validity of their claim will turn on whether they have sufficiently pleaded the additional requirements of (1) RICO predicate acts; and (2) a pattern of racketeering activity.
2. Predicate Acts
Calloway seeks to dismiss Plaintiffs' Complaint on several grounds, one of which is the contention that Plaintiffs failed to plead their RICO claim with sufficient particularity. In this vein, Calloway argues that the pleadings are devoid of allegations that provide a basis for a plausible inference of either wire fraud or a long-term scheme to defraud. (Defendant's Reply Memorandum of Law (Def.'s Rep.), Dkt. No. 59 at 4-6.)
Section 1961(1) of the RICO statute "defines 'racketeering activity' by listing numerous predicate acts." In re Par Pharmaceutical, Inc. Sec. Litig., 733 F. Supp. 668, 683 (2d Cir. 1990). Thus, in order to state a RICO claim, Plaintiffs must allege that Defendants have committed one of the § 1961(1) predicate acts, which include, inter alia, mail fraud and wire fraud. 18 U.S.C. § 1961(1)(B). A violation of mail or wire fraud requires a showing of (1) a scheme or artifice to defraud and (2) a mailing or wire transmission in furtherance of that scheme. 18 U.S.C. §§ 1341, 1343. In other words, "[a] proper pleading of predicate acts based on mail and wire fraud requires an allegation of an underlying fraudulent scheme," Morin v. Trupin, 711 F. Supp. 97, 105 (S.D.N.Y. 1989), which, in turn, constitutes (1) the existence of a scheme to defraud; (2) fraudulent intent on the part of the defendant; and (3) the materiality of the representations. United States v. Autuori, 212 F.3d 105, 115 (2d Cir. 2000).
While the wire fraud statute itself fails to define the phrase "scheme to defraud," courts have interpreted it as a "plan to deprive a person 'of something of value by trick, deceit, chicane or overreaching,'" id. (quoting McNally v. United States, 483 U.S. 350, 358 (1987), superseded by statute, 18 U.S.C. § 1346, as recognized in Skilling v. United States, 130 S.Ct. 2896, 2927 (2010)), meaning a "departure from community standards of 'fair play and candid dealings.'" Id. (quoting United States v. Ragosta, 970 F.2d 1085, 1090 (2d Cir. 1992)). In order for the deceit implicit in fraud to rise to the level of wire fraud in particular, "defendants must have used the . . . wires as a means to obtain money or property by means of false or fraudulent pretenses, representations, or promises or for purposes of executing a scheme to defraud." Drexel Burnham Lambert, Inc. v. Saxony Heights Realty Assoc., 777 F. Supp. 228, 238 (S.D.N.Y. 1991) (quotations omitted).
Here, Plaintiffs have pleaded with particularity the existence of several—at least three—wire transfers that were indispensable to Defendants' acquisition of investment funds. (Compl. at ¶¶ 52, 63, 64.) If there is a scheme here, it is clear that these transfers were in furtherance of it. What is less clear, however, is whether these transfers were integral aspects of fraud, as Plaintiffs contend, or rather, simply the means by which a bad investment was made. The fraud, as Plaintiffs characterize it, was Defendants' solicitation of funds, which was accomplished by means of the material misrepresentation that such monies would be dedicated to the creation of new, successful restaurants, when, in fact, Defendants kept the funds for themselves. (See Compl. at ¶¶ 26, 29, 30, 73, 82, 83.)
"In a wire fraud case, the government must prove the use of interstate wire communications in furtherance of the scheme to defraud. It is not necessary, however, to prove that the defendant himself personally performed the fraudulent wire transfer in order to satisfy the element of causing a wire transmission in furtherance of the fraudulent scheme. Rather, this element can be satisfied by showing that the defendant acted with knowledge that a wire transfer would follow in the ordinary course of business or that such use could reasonabl[y] be foreseen." 1 White Collar Crime § 8:5 (2d ed.) (internal footnotes and quotations omitted).
Calloway makes a strong case that the "fraud" Plaintiffs allege is no more than a breach of contract—an unpaid debt, generated by bad investments and unsuccessful restaurant ventures. (See Def,'s Rep. at 1-2.) Plaintiffs do not dispute that Boritzer entered into an agreement with Defendant and executed a promissory note, in which Defendants promised to pay Plaintiff Boritzer, or his assignee, $600,000. (Compl. ¶¶ 27, 53, 54.) It is evident from the pleadings that (1) Plaintiffs invested in Defendants' supposed restaurant ventures; (2) Defendants gained access to these monies via wire transfers; (3) Defendants promised a return on these funds; and (4) Plaintiffs, to date, have not received any return on their investment. However, whether such allegations are sufficient to plead RICO predicate acts of wire fraud under Rule 9(b) is another matter entirely.
In his Reply Memorandum, Calloway states that the promissory note was in the amount of $300,000, but it appears he is quoting from the original Complaint, Dkt. No. 1, which is not the operative Complaint for the purposes of this motion. (Def.'s Rep. at 2.)
Plaintiffs do assert that Defendants never intended to pay them back, and instead took their money in bad faith, with no concrete plans to open the claimed Manhattan restaurants. (Compl. at ¶ 18; see also Plaintiffs' Memorandum in Opposition ("Pl's Opp."), Dkt. No. 56 at 14-15 ("Defendants 'operated as part of a long term association for a criminal purpose with the practice of defrauding investors by making false representations that Defendants would open certain restaurants that Defendants never intended to open, or that Defendants intended only to open for a short period to obtain investors funds and then close down immediately, with the sole intent of defrauding the investors out of their invested monies.'").) To bolster their claim, Plaintiffs use both the fact that their monies were never repaid, together with the assertion that five other Bernard-Calloway restaurant ventures failed under suspicious circumstances. (Compl. at ¶¶ 41, 42, 67.) While this claim may indeed be plausible, Rule 9(b) does require some specificity regarding the circumstances of an alleged fraud. See, e.g., United States Fire Ins. Co. v. United Limousine Serv., Inc., 303 F. Supp. 2d 432, 443-44 (S.D.N.Y. 2004) ("Rule 9(b) requires that a complaint (1) specify the statements that the plaintiff contends were fraudulent; (2) identify the speaker[;] (3) state where and when the statements were made; and (4) explain why the statements were fraudulent. While knowledge of defendant's fraud or intent to defraud may be averred generally under Rule 9(b), such allegations of scienter must be supported by facts 'giving rise to a strong inference that the defendant knew the statements to be false and intended to defraud the plaintiff' at the time they were made." (internal citations omitted) (quoting Wight v. Bankamerica Corp., 219 F.3d 79, 92 (2d Cir. 2000))).
Here, Plaintiffs contend there is a strong inference of fraud because their money was never returned and restaurants were not successful, as promised. Plaintiffs do specifically aver (1) the dates of the wire transfers; (2) the dates of the meetings with Defendants; and (3) the statements Defendants made, including those in which Defendants insisted upon wire transfers to the Company account. In other words, Plaintiffs plead the "where," "why," and "who" of the RICO predicate acts; however, their Complaint is noticeably light on the "how" aspect of the alleged fraud. Put another way, Plaintiffs never specifically allege how in fact Defendants' statements and representations were part of a scheme to defraud, rather than merely bad business advice. But see id. at 444 (holding that Plaintiffs had sufficiently pleaded fraud in a RICO action as to certain defendants where Plaintiffs alleged over 100 instances of wire fraud "comprised of documents which were fraudulently prepared with incorrect and purposely misleading information, including policy change request forms, corporate board minutes and other documents all telefaxed to plaintiff's office").
At bottom, Plaintiffs' assertions of a scheme to defraud are rooted in speculation about the circumstances of their lost investment and Defendants' unpaid debt, rather than allegations sounding in a particularized narrative of wrongdoing. Moreover, as a general rule, even where a complaint directly references various wire or mail transactions, if the allegations of a scheme to defraud are themselves deficient, there will be no plausible claim sounding in fraud—a necessary element of the RICO predicate act of 18 U.S.C. § 1343. See, e.g., Drexel, 777 F. Supp. at 239 ("These references fail to provide facts to support allegations that defendants knowingly used the interstate mails or wires to defraud the Banks, for the simple reason that the Amended Complaint does not properly allege a scheme to defraud."). To simply claim, as Plaintiffs have here, that Defendants never intended to return Plaintiffs' funds—citing as evidence the fact that the funds were never returned to Plaintiffs and other restaurant ventures were not successful—is not clearly plausible, and indeed, flirts with the speculative.
Despite the generalized nature of Plaintiffs' averments concerning the alleged scheme at hand, it does well to note that courts may, in certain circumstances, employ some leniency when confronted with the strictures of Rule 9(b). For example, though allegations based solely on information and belief do not generally satisfy Rule 9(b), there are exceptions for when "the facts are peculiarly within the knowledge of the defendants, in which case the complaint must allege facts demonstrating the basis for the information and belief." Am. Buying Ins. Serv., Inc. v. S. Kornreich & Sons, Inc., 944 F. Supp. 240, 249 (S.D.N.Y. 1996) (quotations omitted); see also DiVittorio v. Equidyne Extractive Indust., Inc., 822 F.2d 1242, 1248 (2d Cir. 1987). However, even where a given set of facts may very well be within the Defendants' particular knowledge, if a complaint nevertheless fails to "put forward facts demonstrating plaintiffs' basis for the information and belief," a plaintiff's pleadings will remain insufficient. Konreich, 944 F. Supp. at 249.
Here, Calloway correctly points out that many of Plaintiffs' allegations concerning the purported scheme at hand are pleaded "upon information and belief" (see, e.g., Compl. at ¶¶ 16, 18, 41, 42), and yet, the Complaint is largely devoid of pleadings that explain why such facts might be unavailable to Plaintiffs and solely in the hands of Defendants. Construing Plaintiffs' allegations liberally, this Court surmises that Plaintiffs' position is that the details of Defendants' purported scheme rest with Defendants alone because only Defendants presumably would have access to the type of documentation that would reveal they never pursued any of their restaurant ventures in good faith. The Complaint does state that Boritzer "learned that neither defendants, Bernard, Calloway or Bernard-Calloway 2008 ever purchased any restaurants with the $400,000 they fraudulently obtained from him." (Compl. at ¶ 65.) However, Plaintiffs fail to plead the basis for this information. It is not sufficient for purposes of a fraud pleading that Boritzer and Wolf never received a return on their investment, or that the Avenue A restaurant never opened. Neither of these facts—alone or together—provides any contextual details of the alleged scheme to use proposed restaurants as a front for fraud. Moreover, even Plaintiffs' examples of other Calloway-Bernard restaurants that failed for one reason or another in 2009 and 2010 are devoid of any allegations regarding other lost funds or similar investment solicitations. (See Compl. at ¶ 42; Def.'s Opp., Ex. A, at ¶ 46.) To put it bluntly, there are any number of reasons that a cadre of Manhattan upstart restaurants might fail, and to survive a motion to dismiss, fraud must constitute more than a speculative explanation for what is plausibly no more than a failed business venture.
In response to Calloway's contentions, Plaintiffs note that their Complaint repeatedly alleges the existence of a scheme to defraud, whose purpose was to obtain money. (See Pl.'s Opp. at 14; Compl. at ¶ 18 ("Upon information and belief, Defendants Calloway and Bernard operated as part of a long term association for a criminal purpose with the practice of defrauding investors by making false representations that Defendants would open certain restaurants that Defendants never intended to open.").) However, a conclusory allegation—without more—of the existence of a scheme to defraud is insufficient as a matter of law.
This Court is well aware of the importance of the RICO statute and the seriousness of the conduct against which it is aimed. See In re Sumimoto Copper Litig., 995 F. Supp. 451, 456 (S.D.N.Y. 1998) ("However, while Rule 9(b) may be construed strictly in the context of civil RICO actions, it should not be applied in a manner which would, in effect, obstruct all plaintiffs, including those with valid claims, from initiating civil RICO actions. RICO clearly provides for civil remedies to benefit victims of racketeering, and in the absence of congressional action, these provisions should not be ignored."). Nevertheless, Rule 9(b) demands, at the very least, some context for such sweeping allegations. See id. ("In cases in which the plaintiff claims that the mails or wires were simply used in furtherance of a master plan to defraud, the communications need not have contained false or misleading information themselves. In such cases, a detailed description of the underlying scheme and the connection therewith of the mail and/or wire communications, is sufficient to satisfy Rule 9(b)." (internal citation omitted)); cf. Calabrese v. CSC Holdings, Inc., 283 F. Supp. 2d 797, 808 (E.D.N.Y. 2003) ("Under these circumstances, Rule 9(b) only requires the plaintiff to delineate, with adequate particularity, the specific circumstances constituting the overall fraudulent scheme." (emphasis added)).
Here, unlike in Sumitomo—where the plaintiffs alleged a "detailed fraudulent master plan involving coordinated efforts by Global Defendants and Sumitomo to manipulate copper prices," In re Sumimoto, 995 F. Supp. at 456—the contours of Calloway and Bernard's scheme remain indefinitely alleged, with only the speculation concerning the failure of several restaurants in 2009 and 2010 to bolster Plaintiffs' claim of fraud. And while Plaintiffs correctly assert that Rule 9(b) must be read in harmony with Rule 8(a), which requires only a short and plain statement of the facts and allegations, Ctr. Cadillac, Inc. v. Bank Leumi Trust Co., 808 F. Supp. 213, 228 (S.D.N.Y. 1992), even in the context of Rule 8, Twombly and Iqbal require plausibility premised on some reasonable specificity. See Iqbal, 556 U.S. at 678 ("A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.'" (internal quotations and citations omitted) (quoting Twombly, 550 U.S. at 557)).
Accordingly, Plaintiffs' pleadings of the RICO predicate acts of fraud are insufficient as a matter of law.
3. Pattern of Racketeering Activity
Even assuming, arguendo, that Plaintiffs' allegations concerning Defendants' scheme to defraud are sufficient to state a viable claim as to wire fraud, Plaintiffs' claims nevertheless fail, as RICO also requires that these predicate acts occur within a "pattern of racketeering activity." 18 U.S.C. § 1962(c). Such a "pattern of racketeering activity" necessitates at least two such acts, committed within ten years of each other. 18 U.S.C. § 1961(5); see also DeFalco, 244 F.3d at 306 ("In short, to establish a violation of 18 U.S.C. § 1962(c), a plaintiff must establish that a defendant, through the commission of two or more acts constituting a pattern of racketeering activity, directly or indirectly participated in an enterprise, the activities of which affected interstate or foreign commerce."). Furthermore, to establish a pattern, a plaintiffs must "make a showing that the predicate acts of racketeering activity by a defendant are 'related, and that they amount to or pose a threat of continued criminal activity.'" Cofacredit, S.A. v. Windsor Plumbing Supply Co. Inc., 187 F.3d 229, 242 (2d Cir. 1999) (quoting H.J., Inc. v. NW Bell Tel. Co., 492 U.S. 229, 239 (1989)). The continuity required to make this pattern showing may be of the "closed-ended" or "open-ended" variety, either of which is sufficient under the statute. Id; see also Purchase, 2010 WL 1837809, at *9 ("Continuity may be closed- or open-ended, with closed-ended referring to a pattern of criminal activity extending over a substantial period of time and open-ended referring to past criminal conduct that projects into the future with a threat of repetition.").
Plaintiffs allege the existence of both closed-ended and open-ended continuity. (See Pl.'s Opp. at 19-22.) Calloway, however, asserts that Plaintiffs have properly alleged a pattern under neither, moving to dismiss the Complaint on these grounds as well. (Def.'s Rep. at 6-8.)
a. Continuity
i. Closed-Ended Continuity
Closed-ended continuity requires a showing by Plaintiff of "a series of related predicates extending over a substantial period of time." H.J., Inc., 492 U.S. at 242. In fact, predicate acts that occur within a few weeks or months will generally never rise to the level necessary for closed-ended continuity; and in the years since the Supreme Court decided H.J., Inc., the Second Circuit has "never held a period of less than two years to constitute a 'substantial period of time.'" Cofacredit, 187 F.3d at 242; see, e.g., Spool v. World Child Int'l Adoption Agency, 520 F.3d 178, 184 (2d Cir. 2008). While this two-year guidepost is not necessarily a "bright-line" rule, it is "rare" conduct indeed that will occur over the course of a period less than two years, and yet still rise to the level of a closed-ended continuity pattern. Purchase, 2010 WL 1837809, at *9.
Here, Plaintiffs have failed to adequately plead closed-ended continuity. Plaintiffs are correct in their assertion that "multiple schemes are not essential for demonstrating continuity." (Pl.'s Opp. at 19); see also H.J., Inc. 492 U.S. at 240. However, their pleadings are lacking in specifics that suggest Defendants' scheme extended beyond the few months in which the wire transfers were made to the Company account. Plaintiffs do allege, in a conclusory fashion, that Calloway and Bernard—through the Company—operated their purported scheme for many years. (See Compl. at ¶¶ 18, 19, 44.) In their proposed amended complaint, submitted as an exhibit with their opposition memorandum, Plaintiffs do add some detail to the failed openings of several other Calloway-Bernard restaurant ventures, fleshing out the dates in 2009 and 2010 that these other restaurants closed. (See Pl.'s Opp., Ex. A at ¶ 46.) However, Plaintiffs do not allege any similar acts of wire transfers over the course of this more extended period of time—the predicate acts relevant to the "continuity calculation." H.J., Inc., 493 U.S. at 242-43 ("[Continuity] is, in either case, centrally a temporal concept—and particularly so in the RICO context, where what must be continuous, RICO's predicate acts or offenses, and the relationship these predicates must bear one to another, are distinct requirements."). Nor do Plaintiffs allege, with any specificity, the sources of the investments for the other named restaurants or the reasons for their respective closures. Perhaps if Plaintiffs had pleaded, with particularity, the basis for their knowledge that none of their $400,000 was ever invested toward the opening of a Calloway-Bernard restaurant, and a similar pattern occurred from 2008-2010, closed-ended continuity would be more apparent. Instead, they merely aver that (1) they never received their money and (2) the restaurant at Avenue A, like other Bernard-Calloway restaurants, never opened. This is insufficient to show closed-ended continuity. Cf. Cofacredit, 187 F.3d at 242 ("Closed-ended continuity is demonstrated by predicate acts that 'amount to continued criminal activity,' by a particular defendant. To satisfy closed-ended continuity, the plaintiff must prove 'a series of related predicates extending over a substantial period of time. . . .'" (quoting H.J., Inc., 492 U.S. at 242)); see also id. ("Although closed-ended continuity is primarily a temporal concept, other factors such as the number and variety of predicate acts, the number of both participants and victims, and the presence of separate schemes are also relevant in determining whether closed-ended continuity exists."). At most, Plaintiffs have pleaded the existence of a two-year scheme—taking into account the restaurant closures that occurred in 2010. Yet, there is no specific allegation that wire fraud was the regular means by which the scheme operated, nor that any other wire transfers—other than the specific instances alleged in 2008—ever occurred at all.
ii. Open-Ended Continuity
In the alternative, Plaintiffs assert that the alleged scheme exhibited the requisite open-ended continuity necessary in a § 1962(c) action. (Pl.'s Opp. at 21-22.) In one sense, the concept of open-ended continuity is more flexible than its closed-end counterpart, because to satisfy the former, a plaintiff "need not show that the predicates extended over a substantial period of time." Cofacredit, 187 F.3d at 242. Instead, the existence of open-ended continuity depends on whether "there was a threat of continuing criminal activity beyond the period during which the predicate acts were performed." Id. In analyzing an allegation of open-ended continuity, courts will look to both the "nature of the RICO enterprise" and the numerosity, type, and form of the predicate acts themselves. Id. The likelihood of open-ended continuity is most strong where the enterprise involved has no legitimate purpose, and instead, is engaged "primarily in racketeering activity." Id. at 243. Moreover, where predicate acts are "inherently unlawful," a continuing threat of criminal activity is likely to be found. Id; see also GICC Cap. Corp. v. Tech. Finance Group, Inc., 67 F.3d 463, 466 (2d Cir. 1995) ("[A]n inherently unlawful act performed at the behest of an enterprise whose business is racketeering activity would automatically give rise to the requisite threat of continuity").
In examining open-ended continuity, courts will first look to the "nature of the predicate acts alleged or the nature of the enterprise at whose behest the predicate acts were performed." GICC Cap., 67 F.3d at 466. Where the conduct or enterprise is not alone indicative of a racketeering pattern, courts will examine "external factors." Id. For example, in Azrielli v. Cohen Law Offices, 21 F.3d 512 (2d Cir. 1994), the court held that open-ended continuity had been sufficiently alleged where Plaintiffs had shown that two defendants had sold securities containing the alleged misrepresentation several times, and had been continuing to market those securities, in an attempt to sell them. Id. at 521. For the Azrielli court, the "repeated sales of [the specific] shares suffice[d] to permit a jury to find a RICO pattern." Id.
Here, without more, the three wire transfers in 2008 are insufficient to suggest an open-ended pattern of racketeering. Though Plaintiffs contend that the continued solicitations on the part of Defendants show the threat of continued criminal activity (Pl.'s Opp. at 22), there is no specific indication that Defendants have continued to obtain funds from Plaintiffs or any other putative investors. While Plaintiffs point to the other failed restaurants—allegedly fraudulently originated by Calloway and Bernard—to support this allegation, Plaintiffs offer nothing more than the dates of these establishments' respective closures, which alone is insufficient to give rise to anything more than the barest of speculation. (See, e.g., Pl.'s Opp., Ex. A, at ¶ 46.)
Moreover, whereas Plaintiffs' allegations concerning the 2008 meetings are extremely detailed—including dates, locations, and topics discussed—their assertion that Defendants have continued to pursue them for money is a sweeping, conclusory allegation. (Compare Pl.'s Opp., Ex. A, at ¶¶ 50, 51, 56, 57, 62, 65, 67, 68, with id. at ¶ 73-74.) Based on three wire transfers that Plaintiffs made in 2008, together with the information concerning other Bernard-Calloway restaurant failures, this Court cannot conclude that Plaintiffs' allegations support a sufficient showing of the threat of continued criminal activity, as required by RICO's open-ended continuity requirement.
Furthermore, even if Plaintiffs had pleaded, in detail, the circumstances of the further solicitation for money, these solicitations are not predicate acts of racketeering, and only represent a threat of continued criminal activity if Defendants' original fraud is part of a scheme that uses, as its "regular way of operating business," the criminal acts alleged. Cofacredit, 187 F.3d at 243. Here, the Court agrees with Calloway that this case is based on nothing more than a "single transaction gone sour." Passini v. Falke-Gruppe, 745 F. Supp. 991, 993 (S.D.N.Y. 1990). As in Passini, where Plaintiffs alleged "no facts tending to show that defendants make a practice of defrauding designers in order to gain control of potentially promising designs," id., here, Plaintiffs' allegations of a longstanding pattern of criminal activity are largely limited to a single paragraph alleging that other restaurants owned by Defendants failed. (See Compl. at ¶ 42; Pl.'s Opp., Ex. A, at ¶ 46.)
b. Relatedness
Additionally, to state a RICO cause of action in this Circuit, the alleged pattern of racketeering activity must satisfy a "relatedness" requirement, meaning that the "'racketeering acts must be related to each other ('horizontal' relatedness), and they must be related to the enterprise ('vertical' relatedness).'" Rosenson, 2012 WL 3631308, at *5 (quoting United States v. Minicone, 960 F.2d 1099, 1106 (2d Cir. 1992)). Here, it is unnecessary to reach the issue of relatedness, as Plaintiffs have failed to allege sufficiently the RICO predicate acts of wire transfers and the existence of a pattern of racketeering activity.
4. RICO Standing
Calloway also contends that Plaintiffs lack standing to assert a RICO claim, citing a lack of proximate cause as grounds for dismissal. (Def.'s Memo. at 14-15.) "The RICO statute grants standing to '[a]ny person injured in his business or property by reason of a violation of section 1962 . . . .'" Lerner, 318 F.3d at 120 (quoting 18 U.S.C. § 1964(c)). Thus, "[t]o demonstrate standing, a plaintiff must plead, at a minimum," (1) a defendant's violation of § 1962; (2) cognizable injury to Plaintiffs' business or property; and (3) causation. Id. Here, as Plaintiffs have not adequately pleaded a RICO violation, the first element is not met. Accordingly, Plaintiffs lack standing due to their failure to plead a RICO violation. The Court does not reach the issues of injury or causation.
5. RICO Conspiracy
Calloway also argues that the Complaint must be dismissed for failure to adequately plead RICO conspiracy under 18 U.S.C. § 1962(d). (Def.'s Memo. at 16-17.) Plaintiffs concede that the Complaint does not allege a cause of action under § 1962(d). (Pl.'s Opp. at 26-27.) Accordingly, Calloway's discussion of RICO conspiracy is moot.
D. State Law Claims
Having dismissed Plaintiffs' only federal claim, this Court declines to exercise supplemental jurisdiction over the remaining claims in the Complaint, which are all state law claims. (See Compl. at ¶¶ 80-109.) Plaintiffs are free to pursue these claims in state court.
The additional claims are fraud, unjust enrichment, conversion, and breach of contract.
E. Amended Complaint
Plaintiffs have included as an exhibit to their opposition memorandum another proposed amended complaint, which they urge this Court to allow them to file in lieu of dismissal. (See Pl.'s Opp. at 28.) Where relevant, this Court has considered the additional allegations set forth in this fourth Complaint and has determined that they do not cure the defects at the heart of Plaintiffs' allegations.
F. Claims against Bernard
While Bernard answered the Complaint, rather than move to dismiss, the Court dismisses the Complaint as to Bernard as well, because the conclusion that the Complaint fails to state a RICO claim applies with equal force to both defendants. Plaintiffs' claims against Bernard are identical to those asserted against Calloway.
G. Default Judgment
In April 2012, this Court entered a default judgment against Defendant Bernard-Calloway LLC in an amount to be determined at a later date by inquest. (Dkt. No. 50.) While Plaintiffs cannot receive treble damages under RICO, as this Court has determined that the Complaint fails to state a RICO claim, the contract claim relating to the executed promissory note is in the amount of a sum certain. (See Compl., at ¶ 109(e).) Moreover, Defendant Bernard admitted that he executed the promissory note, in the amount of $600,000, in his capacity as a principal for the Company, payable to Boritzer. (Answer to Compl., at ¶¶ 27, 54.) Thus, an inquest on damages is unnecessary, as the amount of damages available to Plaintiffs on the breach of contract claim is $600,000—a sum certain. Accordingly, default judgment will be entered against Bernard-Calloway LLC in the amount of $600,000.
III. Conclusion
For the foregoing reasons, Calloway's motion to dismiss is GRANTED, and the claims against Defendants Albert Calloway and Lesly Bernard are dismissed.
The Clerk of Court is directed to enter default judgment against Defendant Bernard-Calloway LLC and in favor of Plaintiffs (see Dkt. No. 50) in the amount of $600,000.
The Clerk is directed to close the docket entry at number 54; and to close this case.
SO ORDERED. Dated: New York, New York
January 24, 2013
/s/_________
J. PAUL OETKEN
United States District Judge