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finding that the plaintiff could not state a cause of action under § 1962(b) because “the [c]omplaint does not even attempt to allege any injury arising from the acquisition or maintenance of an enterprise....”
Summary of this case from Westchester Cnty. Independence Party v. AstorinoOpinion
No. 04 Civ. 6589 (LTS) (AJP).
July 16, 2009
MEMORANDUM OPINION AND ORDER
This case arises out of a dispute concerning distributions of profits and equities from real estate properties in which Plaintiff and Defendants had ownership or management interests. The Complaint asserts that defendants Theodore R. Sayers ("Ted Sayers"), Mark H. Sayers ("Mark Sayers") (collectively "the Sayers"), Al Rodriguez ("Rodriguez"), EMES Management Corp., Paramount Louisiana Realty Corp., Paramount Realty of Texas, Inc., Lauren Real Estate Company, Neydis Associates Limited Partnership, and Castle Court Associates (collectively, "Defendants") employed various schemes to defraud Peter Fischbein ("Fischbein" or "Plaintiff"). Plaintiff originally brought this action in New York State Court, alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and state law. Defendants removed the action to this Court pursuant to 28 U.S.C. § 1441(c) and 28 U.S.C. § 1331. Defendants have moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, Defendants' motion is granted in part and denied in part.
BACKGROUND
The Complaint proffers the following pertinent allegations. In the mid-1970s, Fischbein, Ted Sayers, and other investors jointly purchased and developed various real estate projects structured as limited partnerships. (Compl. at ¶ 17). Pursuant to each limited partnership agreement, Fischbein and Ted Sayers were to share equal portions of the annual cash flow from and, upon sale or refinancing of a project, equal shares of equity in the properties. (Id. ¶ 19.) Their real estate equity consisted of general partner interests, or Class II and Class III limited partner interests, or both. (Id. ¶ 18.)
In the late 1970's, Ted and Mark Sayers formed EMES to manage the various projects, and appointed Rodriguez as controller. (Id. ¶ 21.) EMES opened a bank account designated "the CRT Account," in which revenues from the various projects were deposited and commingled. (Id. ¶ 23.) In the early 1990's, Peter Fischbein agreed, at Ted Sayer's request, to withdraw as general partner for Corpus Christi, Chase Hill, The Place and Lake Charles, leaving Ted and Mark Sayers, or one of the corporations they formed, as general partner. (Id. ¶ 25.) According to a June 18, 1991, letter and a September 16, 1991, letter, the general partnership interests that Fischbein had held in those properties were being held by Ted Sayers instead. (See Compl. Ex. A.) In return, Fischbein was entitled to continue receiving annual cash flows and equity distributions equivalent to the amount he would have received if he "continued as General Partner, subject to the cumulative obligations of the partnerships." (Id. ¶ 25.)
From about 1993 until 2003, Ted and Mark Sayers, aided and abetted by Rodriguez, engaged in a series of ongoing schemes to steal from and defraud Fischbein and other limited partners of their interests. (Id. ¶¶ 86-87.) Plaintiff's allegations of wrongdoing in connection with the alleged schemes include the following. In connection with refinancing Corpus Christi, Ted Sayers created and falsely recorded on the books and records of Corpus Christi, its general partner or EMES, a fictitious promissory note for approximately $1,050,000. (Id. ¶¶ 90-95.) The transfer of $1,300,000 from Corpus Christi's refinancing proceeds, representing the amount of the fictitious note plus accrued interest, to Ted and Mark Sayers employed domestic mail, telephone calls, and/or wire transfer of funds. (Id. ¶¶ 93-96.)
In 1993 Ted Sayers "advised," by letter, that the partnership had foreclosed on High Vista after a purchaser defaulted. (Id. ¶ 99.) Ted Sayers subsequently refinanced High Vista, but concealed from investors that he and Mark Sayers, through other entities owned or controlled by them, had retained the proceeds and the property itself and, in a February 15, 1994, letter to the limited partners, included checks representing only their shares of the original wrap mortgage note. (Id. ¶¶ 102-05, 106.)
The Complaint does not identify the addressee(s) of the letter.
In 1993 and 1994, the Sayers and Rodriguez caused approximately $700,000 in improper and excessive "special fees" to be paid to EMES from refinancing of some of the real estate projects. (Id. ¶¶ 110-11.) The fees were later converted for the personal use of the Sayers and Rodriguez. (Id. ¶ 110.) To perpetrate the scheme, they made false entries in books and records and utilized domestic mail, telephone calls, and wire transfers. (Id. ¶¶ 112-113.)
In a July 10, 1996, letter to the limited partners, including Fischbein, Ted Sayers claimed that The Place required $550,000 for improvements and that the general partners would provide these funds unless the limited partners participated in a loan to the property. (Id. ¶ 115.) The general partners did not make this loan, but did make false entries in books and records reflecting a purported cash funding. (Id. ¶¶ 116-17.) The purported cash funding improperly diluted Fischbein's limited partner share in The Place. (Id. ¶ 118.)
In a March 2003 telephone conversation, Fischbein asked Ted Sayers for a written financial statement valuing all of Fischbein's real estate interests with Ted Sayers. (Id. ¶ 119.) In a subsequent phone call with Mark Sayers, Fischbein was informed that he no longer had any cash flow and equity distribution interest in The Place because Mark Sayers' deceased mother had paid money for rehabilitation of the property after bankruptcy. (Id. ¶ 120.) In a July 29, 2003, meeting the Sayers told Fischbein that his interest in The Place was extinguished because Ted Sayers had loaned $230,000 to the project which was repaid in 1994, and had also used money from the CRT Account to rehabilitate the property. (Id. ¶ 121.)
The Sayers failed to distribute any portion of the Waterside/Cottonwood cash flow to Fischbein, and instead, deposited some or all of the funds into the CRT Account. (Id. ¶ 125-26.) At various times between 1999 and March 2003, the Sayers and Rodriguez each told Fischbein that they were not distributing shares of the cash flow to him in order to accumulate a reserve for contingencies for the property. (Id. ¶ 127.) The Sayers and Rodriguez converted these cash flows for their personal use by making false entries in books and records and transferring cash using domestic mail, telephone calls and wire transfer of funds. (Id. ¶ 128-30.)
Additionally, the Sayers and Rodriguez deposited and commingled revenues from the various projects into the EMES CRT Account. (Id. ¶ 132-33.) They used revenues from the CRT Account for their own purposes and to pay off bank loans for various projects for which they were personally responsible. (Id. ¶ 135-37.) Around November 1999, Ted Sayers purchased furniture using EMES' resale number and paying with a $68,500 EMES CRT Account check (id. ¶ 139), and on numerous occasions between 1995 and 2002, the Sayers and Rodriguez used EMES to purchase particular items of art, furniture, and antiques for their personal use while representing that those purchases were made by EMES for the benefit of various properties managed by EMES (id. ¶ 142). These purchases were made using funds that belonged to the various partnerships and were accomplished through mailing checks using United States mail. (Id. ¶ 145.) Ted Sayers also transferred High Vista and The Place into new partnerships — Neydis Associates and Castle Court Associates, respectively — as part of a scheme to defraud Fischbein, and other investors in the original entities. (Id. ¶¶ 161-62.)
DISCUSSION
Standard of Review
In deciding a motion to dismiss for failure to state a claim, the Court accepts the non-conclusory factual allegations in the complaint as true, and draws all reasonable inferences in Plaintiff's favor. Roth v. Jennings, 489 F.3d 499, 501 (2d Cir. 2007); see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). "A pleading that offers labels and conclusion or a formulaic recitation of elements of a cause of action will not do." Iqbal, 129 S. Ct. at 1949. Rather, a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007). "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." Iqbal, 129 S. Ct. at 1949 (internal quotation marks and citations omitted).
Allegations of fraudulent predicate acts under RICO are subject to the heightened pleading standard of Rule 9(b). First Capital Asset Management, Inc. v. Satinwood, Inc., 385 F.3d 159, 178 (2d Cir. 2004); Fed.R.Civ.P. 9(b). Under Rule 9(b), "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). A party must allege the contents of fraudulent communications, the speaker, when and where the communications occurred and why they were fraudulent. Spool v. World Child Intern. Adoption Agency, 520 F.3d 178, 185 (2d Cir. 2008).
RICO Violation
A plaintiff asserting a claim under RICO must allege: "(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); see also 18 U.S.C.A. § 1964(c) (West 2000) ("Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee."). Plaintiff asserts that Defendants have violated Sections 1962(a), 1962(b), 1962(c) and 1962(d).
Each of these RICO sections requires a showing of, among other things, a "pattern of racketeering." Under the RICO statute, a "pattern of racketeering" is defined as at least two acts of racketeering activity. 18 U.S.C. § 1961(5). "Racketeering activity" includes, among others, any act that is indictable under 18 U.S.C. § 1341, the mail fraud statute, or under 18 U.S.C. § 1343, the wire fraud statute. 18 U.S.C. § 1961(1)(B). "The essential elements of a mail or wire fraud violation are (1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of the mails or wires to further the scheme."U.S. v. Shellef, 507 F.3d 82, 107 (2d Cir. 2007). Plaintiff alleges schemes involving common participants with a purpose to defraud Plaintiff and others of money or property. Plaintiff has identified specifically several communications and related transactions that he contends are predicate acts of racketeering.
Plaintiff's specific allegations include that the Sayers and Rodriguez transferred approximately $1,300,000.00 from Corpus Christi refinancing proceeds to the Sayers though the instrumentalities of interstate commerce, while purporting to lend to Corpus Christi (and creating a fictitious promissory note payable to Ted Sayers in the amount of) approximately $1,050,000.00. (Compl. ¶¶ 91-96, 174.) Plaintiff also alleges that in a March 15, 1993, letter, Ted Sayers advised the partnership that High Vista had been foreclosed on, that he was seeking refinancing, and possibly sale of the property. (Compl. ¶ 100.) A February 15, 1994, letter from Ted Sayers to the High Vista limited partners purported to include checks representing the limited partners' share following the foreclosure on and refinancing of the property; Plaintiff alleges that the refinancing actually produced funds in excess of those distributed. (Compl. ¶¶ 103-106, 174.) In a March 2003 telephone call, Plaintiff alleges that Ted Sayers made misrepresentations to Fischbein about his interest in The Place. (Id. at ¶¶ 119-121, 176.) In a July 10, 1996, letter to limited partners, including Fischbein, Ted Sayers, as President of Paramount Texas, General Partner of The Place, represented that The Place required $550,000 in additional funding, and that the General Partner, Paramount Texas, would provide the necessary funding if the limited partners did not provide a loan, providing the General Partner with a larger ownership stake in the property; Defendants never made the loan but recorded it on the books, thereby diluting Plaintiff's interest. (Compl. ¶¶ 115-18, 174.) These allegations, which identify the alleged underlying fraudulent schemes and specific mail or wire communications in furtherance thereof, are sufficient to frame the essential elements of predicate mail and wire fraud acts as required by RICO and Rule 9(b).
Plaintiff also cites 18 U.S.C. § 1957 (relating to engaging in monetary transactions in property derived from specified unlawful activity) as a predicate act for the pattern of racketeering, however, the Court need not reach the sufficiency of Plaintiff's allegations that Defendant's racketeering activity included predicate acts of money laundering in violation of Section 1957 on this Rule 12(b)(6) motion, in light of the Court's conclusion as to the sufficiency of the pleading of predicate acts of mail and wire fraud.
Section 1962(a)
Section 1962(a) provides that "[i]t shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce." 18 U.S.C.A. § 1962(a) (West 2000). "To state a RICO claim under Section 1962(a), a plaintiff must allege (1) that the defendants used or invested racketeering income to acquire or maintain an interest in the alleged enterprise, and (2) injury by reason of defendants' investment of racketeering income in an enterprise, as distinct from injury traceable simply to the predicate acts of racketeering alone or to the conduct of the business of the enterprise." Moses v. Martin, 360 F. Supp. 2d 533, 544 (S.D.N.Y. 2004) (internal quotation marks and citations omitted) (dismissing a Section 1962(a) claim where defendants only alleged injuries that arose out of predicate acts themselves). "Using funds for personal purposes, however, is not using or investing racketeering income to acquire or maintain an interest in the alleged enterprise." Id. (internal quotation marks and citations omitted). Nor are allegations of reinvestment of racketeering proceeds in the enterprise sufficient to make out a claim for Section 1962(a) purposes. Id. at 544-45; see also Globe Wholesale Tobacco Distributors Inc. v. Worldwide Wholesale, No. 06 Civ. 2865, 2007 WL 2826630, at *5 (S.D.N.Y. Sep. 28, 2007) ("Where reinvestment of racketeering proceeds back into the same RICO enterprise is alleged, the injuries stem proximately not from the investment, but from the predicate acts that make up the racketeering activity." (internal quotation marks and citations omitted)).
Assuming for purposes of this analysis that Plaintiff has identified the requisite pattern of racketeering, the Complaint is nonetheless insufficient to state a claim under 18 U.S.C. § 1962(a) because it fails to allege any investment injury to Fischbein arising from the purported schemes. The allegations relating to the Corpus Christi scheme concern only the transfer of money from Corpus Christi to the Sayers, rather than the investment of money into any enterprise. Any injuries allegedly arising from the High Vista scheme resulted only from Defendants' failure to distribute proceeds from the refinancing of High Vista rather than from any investment of the proceeds into a separate entity. The alleged schemes concerning the fictitious special fees, the conversion of Waterside/Cottonwood profits, and the purchase of art, furniture, and antiques using EMES account likewise do not involve the investment of funds into an enterprise, but rather the misappropriation of funds for Defendants' personal use. The allegedly fictitious crediting to General Paramount of financing that was not actually provided for The Place, similarly, only diluted the interests of investors in The Place; none of the allegations relating to the transaction are indicative of any separate injury arising from the gain in the General Partner's share, rather than injuries resulting from any investments. Finally, the allegations of mismanagement of the CRT account concern only the misuse, not the investment, of funds. Accordingly, Plaintiff's Section 1962(a) claim will be dismissed.
Section 1962(b)
Section 1962(b) provides that "[i]t shall be unlawful for any person through a pattern of racketeering activity . . . to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce." 18 U.S.C.A. § 1962(b) (West 2000). To state a cause of action under Section 1962(b), "plaintiffs must allege an `acquisition' injury, analogous to the `use or investment injury' required under § 1962(a) to show injury by reason of a § 1962(b) violation."Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1063 (2d Cir. 1996),vacated on other grounds, 525 U.S. 128 (1998) (internal quotation marks and citations omitted). Here, the Complaint does not even attempt to allege any injury arising from the acquisition or maintenance of an enterprise, but instead merely alleges injuries indistinct from those arising from the commission of alleged predicate acts. Without a distinct "acquisition injury," Plaintiff cannot state a cause of action under Section 1962(b).See Discon, 93 F.3d at 1063. Therefore, Plaintiff's Section 1962(b) claim is dismissed.
Section 1962(c)
Plaintiff also alleges that Defendant violated Section 1962(c). Section 1962(c) makes 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.A. § 1962(c) (West 2000). Thus, "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 [the conduct of the business of] an enterprise, the activities of which affected interstate or foreign commerce." DeFalco, 244 F.3d at 306. Defendants argue that Plaintiff's Section 1962(c) claim must be dismissed because he has failed to allege a pattern of racketeering activity, has failed to plead predicate acts with the requisite particularity, and has failed to plead reliance. Having reviewed the Complaint for factual allegations that, if accepted as true, plausibly suggest a Section 1962(c) violation, the Court finds that Plaintiff has "nudged [his] claims across the line from conceivable to plausible." Twombly, 550 U.S. at 570.
A pattern of racketeering activity requires that "the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989). Plaintiff has alleged that Ted Sayers and the other defendants engaged in schemes to defraud him of his promised general partner-type distributions, and rights appurtenant to his limited partnership interests, by engaging in false bookkeeping, the crediting and satisfaction of fraudulent loans and payments, diversion of monies to personal use, and misrepresentations concerning the value of interests or payments due, and that they used the mails and/or wires in furtherance of the scheme. The Complaint describes particular actions and omissions, and depicts a related group of individuals and entities as involved in the transactions with a common fraudulent purpose and a common victim or set of victims (i.e., Plaintiff and/or other limited partners in the real estate entities). The specific predicate acts of mail and wire fraud described in the Complaint are alleged to have been committed within the context of the ongoing set of schemes.
The Court finds that these allegations are sufficient to satisfy the relatedness requirement. H.J. Inc., 492 U.S. at 240 (predicate acts are related if they "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events" (citations omitted)); see also U.S. v. Daidone, 471 F.3d 371, 376 (2d Cir. 2006) ("To form a pattern of racketeering activity, predicate acts must be related to each other and to the enterprise."). Plaintiff's allegations are also sufficient to plead closed-ended continuity. Plaintiff has alleged predicate acts of mail and wire fraud spanning a period of over a decade. See H.J. Inc., 492 U.S. at 242 ("A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time."); see also Kurins v. Silverman, No. 08 Civ. 6886, 2009 WL 321011, at *4, (S.D.N.Y. Feb. 10, 2009) (presence or absence of other non-dispositive factors that courts have considered, including the number and variety of acts, the number of participants, the number of victims, and the presence of separate schemes, is less critical where the allegations span a period of significantly more than two years). Thus, Plaintiff has sufficiently alleged a pattern of racketeering activity as required under Section 1962(c).
Plaintiff's allegations concerning the fraudulent scheme and certain specific acts of mail and wire fraud are also sufficient to meet the Rule 9(b) requirement that fraud-based RICO allegations be plead with particularity. He has identified the alleged participants in the schemes, the nature of the allegedly fraudulent activity (e.g., failing to pay over full proceeds of refinancing while representing that payment amount is appropriate, improper diminution of value of interests on books, and insufficient distributions by reason of credits for fictitious loans and capital contributions) and has identified particular mail or wire fraud communications or transactions and the role of those activities in the fraudulent schemes. See Spool v. World Child Intern. Adoption Agency, 520 F.3d 178, 185 (2d Cir. 2008) ("Allegations of predicate mail and wire fraud acts should state the contents of the communications, who was involved, and where and when they took place, and should explain why they were fraudulent." (internal quotation marks and citations omitted)).
Nor is Plaintiff's failure to plead first-party reliance a basis for dismissing his 1962(c) claim. First-party reliance is not an element of a RICO claim based on predicate acts of mail fraud. Bridge v. Phoenix Bond Indem. Co., 128 S. Ct. 2131, 2139 (2008).
Furthermore, although Plaintiff must allege an injury to his business or property that was caused by the Section 1962 violation, see DeFalco, 244 F.3d at 305, Plaintiff need only allege facts sufficient to demonstrate that Defendants' violation was the proximate cause of his injury. Bridge, 128 S. Ct. at 2142; see also Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006) ("When a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff's injuries."). Here, Plaintiff has alleged that Ted Sayers held general partnership interests for him pursuant to which Sayers was obliged to make distributions in appropriate amounts, and that Plaintiff also held limited partnership interests in certain of the entities. (Compl. ¶¶ 18, n. 1, 25, Ex. A.) He claims to have suffered injury by reason of fraudulent diminution or denial of the value of those interests pursuant to actions undertaken in furtherance of the alleged pattern of racketeering. The Court finds that Plaintiff has sufficiently alleged that Defendants' Section 1962(c) violations were the proximate cause of his injury. Defendant's motion to dismiss Plaintiff's Section 1962(c) claim is, accordingly, denied.
Section 1962(d)
Section 1962(d) prohibits any person from conspiring to violate any of the provisions of § 1962(a)-(c). See 18 U.S.C. § 1962(d). Thus, "to establish a RICO conspiracy, a plaintiff must show a conspiracy to commit a substantive RICO violation." Spool, 520 F.3d at 184; see also Baisch v. Gallina, 346 F.3d 366, 376-77 (2d Cir. 2003) ("A conspirator must intend to further an endeavor which, if completed, would satisfy all of the elements of a substantive [] offense, but it suffices that he adopt the goal of furthering or facilitating the [scheme].") A plaintiff must also allege that he was injured by an overt act that was independently wrongful. Beck v. Prupis, 529 U.S. 494, 506-7 (2000).
The Complaint alleges concerted action by the individual and entity defendants in aid of the mail and/or wire fraud schemes upon which the Section 1962(c) racketeering allegation is predicated, and injury by reason of acts undertaken in furtherance of the alleged racketeering conspiracy. Thus, Defendants' motion to dismiss Plaintiff's Section 1962(d) claim at this stage of the proceeding is also denied.
State Law Claims
The Court has carefully considered all of the parties' arguments in connection with Plaintiff's state law claims. The Court finds that the claims are plead sufficiently and, accordingly, denies Defendants' motion to dismiss them.
CONCLUSION
Defendants' motion to dismiss Plaintiff's RICO claims pursuant to Rules 12(b)(6) of the Federal Rules of Civil Procedure is granted with respect to Plaintiff's 18 U.S.C. § 1962(a) and Section 1962(b) claims and is denied in all other respects. The parties shall prepare for and appear at a pretrial conference in accordance with the separate Order entered today.
SO ORDERED.