Opinion
03 CV 1725 (NG).
January 24, 2005
OPINION AND ORDER
Plaintiffs' Complaint asserts claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962(c), 1962(d), 1964(c), ("RICO") against defendants Hasida Molnar, Ferenc Molnar and Expert Realty, as well as state law claims for fraud, negligence, and breach of contract. The Complaint also asserts RICO claims against defendants David Fox and John Doe(s), as well as state law claims against Fox for breach of contract and negligence. Defendant Fox and, separately, defendants Expert Realty, Hasida Molnar, and Ferenc Molnar have moved to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim under RICO. For the reasons detailed below, the court dismisses all claims against all defendants.
BACKGROUND
The following facts are alleged in the Complaint:
Plaintiffs Gil and Dorit Kadouri are the owners of residential property located at 75-09 177th Street in Fresh Meadows, New York. Defendant Expert Realty is a real estate brokerage in New York that employed defendants Hasida and Ferenc Molnar. In the summer of 2000, plaintiffs enlisted Expert Realty for assistance in finding a tenant for the Fresh Meadows property. If Expert Realty could identify a suitable tenant, the contemplated agreement would position Expert Realty as the manager of the property while plaintiffs were away for an extended trip to Israel. Realty agreed to find a suitable tenant, conduct a financial investigation of the tenant, collect rent, periodically inspect the premises, and handle various administrative tasks related to the property such as collecting plaintiffs' mail.
In August of 2000, Expert Realty, through the Molnars, presented defendant Fox to plaintiffs as the proposed tenant. According to the Complaint, Hasida Molnar made numerous favorable representations to plaintiffs about Fox's background and financial stability. Plaintiffs allege that these representations were false and that defendants H. Molnar and F. Molnar were aware of their falsity. Relying on the representations of defendants, plaintiffs ultimately accepted Fox as the tenant.
In September of 2000, Fox sublet the Fresh Meadows property to an unidentified individual ("John Doe"), who immediately began to use the property for growing, processing, and selling marijuana. Converting the property to suit this enterprise caused substantial damage, as did the actual process of growing marijuana. According to the Complaint, the Molnars and Expert Realty did not sufficiently monitor the premises; in particular they did not adequately investigate the excessive water consumption. Plaintiffs allege that the defendants engaged in numerous telephone calls in which they concealed the deteriorating situation in Fresh Meadows and that the Molnar defendants made numerous misrepresentations to plaintiffs via the telephone and mails which induced plaintiffs to remain in Israel as their property was being damaged. These telephone calls and mailings took place between July of 2000 and July of 2002.
DISCUSSION
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) should be granted only where it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998). Plaintiffs' factual allegations must be accepted as true, Zinermon v. Burch, 494 U.S. 113, 118 (1990), and the court must draw all inferences in favor of plaintiffs. Thomas v. City of New York, 143 F.3d 31, 37 (2d Cir. 1998).
RICO provides a private right of action to a "person injured in his business or property by reason of a violation of section 1962." 18 U.S.C. § 1964(c). Section 1962(c) states:
It shall be 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). RICO's definition of "racketeering activity" includes dealing in a controlled substance, as well as "any act which is indictable under" 18 U.S.C. § 1343 (wire fraud) or 18 U.S.C. § 1341 (mail fraud). See 18 U.S.C. § 1961(1)(b). Under the mail and wire fraud statutes, "any scheme or artifice to defraud or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises," which involves use of the mails or wire is indictable. See 18 U.S.C. §§ 1341, 1343. RICO defines an enterprise 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." See 18 U.S.C. § 1961(4). At least two acts of racketeering activity are required to establish a "pattern" under RICO. See 18 U.S.C. § 1961(5). However, plaintiffs must also show that the two acts are (1) related and that (2) they amount to, or pose a threat of, continuing criminal activity. See Schlaifer Nance Co. v. Estate of Warhol, 119 F.3d 91, 97 (2d Cir. 1997); United States v. Indelicato, 865 F.2d 1370, 1381 (2d Cir. 1989), cert. denied, 493 U.S. 811 (1989).
I. RICO claims against Hasida Molnar and Expert Realty
Claims 1 and 2 of the Complaint allege violation of RICO through wire fraud and mail fraud, respectively. Plaintiffs' RICO claims fail because their allegations of wire and mail fraud are insufficient. Allegations of mail and wire fraud, subject as they are to the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure, must include facts sufficient to create a "strong inference" of fraudulent intent. See First Capital Asset Management Inc. v. Satinwood, 385 F.3d 159, 178-179 (2d Cir. 2004); McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992); Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990); Cosmas v. Hassett, 886 F.2d 8, 12 (2d Cir. 1989). Here, plaintiffs' wire fraud allegations suggest, at worst, negligence and not fraud. Plaintiffs assert that Hasida Molnar told them over the telephone that "she knew Fox, that Fox owned his own construction company . . . and that Fox was a suitable and reliable tenant for the Premises." Complaint ¶ 35(a). The only other wire fraud allegations against Hasida Molnar involve telephone calls in which plaintiffs allege that H. Molnar "failed to provide the Kadouris with a full account of ongoing events and transactions at the Premises." See Complaint ¶ 37. Plaintiffs' conclusions regarding this activity, outlined in their brief, reach far beyond inferences that reasonably can be drawn from the facts alleged in the Complaint. The logic of plaintiffs' argument is that, because illegal activity was occurring at their house, the management company was necessarily engaging in fraud when it did not inform plaintiffs of the illegal activity. However, there are no allegations in the Complaint that suggest that defendants H. Molnar and Realty were aware of the illegal activity, much less that they fraudulently concealed it. Indeed, the very information that plaintiffs argue should have put the Molnars and Realty on notice was communicated to plaintiffs by Hasida Molnar in the allegedly fraudulent telephone conversations. Thus, plaintiffs allege that among the acts of wire fraud were calls made by defendant H. Molnar to plaintiffs advising them that the "water and sewer bill" was "very high." See Complaint ¶ 35(b). Plaintiffs also allege that H. Molnar alerted them to the presence of "John Doe," Fox's alleged accomplice in the marijuana-growing scheme. See Complaint ¶ 35(c)(I). Such communications weigh against an inference that H. Molnar was attempting to defraud plaintiffs by concealing the nature of the activities occurring at the Fresh Meadows property. Put another way, plaintiffs' allegations cannot create a "strong inference" of fraudulent intent when they allege that defendant H. Molnar alerted them to suspicious activity that it was within her power to conceal.
Plaintiffs have also failed to state a claim of mail fraud. Plaintiffs allege only that defendants induced them to allow Expert Realty to receive their mail in order to be able to conceal from plaintiffs any information that "might have aroused suspicion." See Complaint ¶ 45(a). However, apart from plaintiffs' conclusory assertion of defendants' purpose, they include no facts suggesting that defendants actually concealed any information through the mails, or that their stated purpose for receiving plaintiffs' mail was false. Plaintiffs inexplicably cite defendants' receipt of "water and sewer bills that showed water consumption far in excess of the customary water usage at the Premises," as evidence of mail fraud. Complaint ¶ 45(b). As discussed above, that defendants communicated this fact to plaintiffs weighs against a finding of fraudulent intent. Thus, plaintiffs' allegations of wire fraud and mail fraud cannot constitute the predicate acts of racketeering activity required by RICO.
Even if plaintiffs had sufficiently alleged fraud, their claims would fail because they have not alleged sufficient continuity under RICO. The alleged activity of defendants cannot constitute a pattern under RICO because it neither amounts to, nor poses a threat of, continuing criminal activity. "[A] plaintiff in a RICO action must allege either an open-ended pattern of racketeering activity (i.e., past criminal conduct coupled with a threat of future criminal conduct) or a closed-ended pattern of racketeering activity (i.e., past criminal conduct extending over a substantial period of time)." See First Capital, 385 F.3d at 180 (quoting GICC Capital Corp. v. Tech. Fin. Group, Inc., 67 F.3d 463, 466 (2d Cir. 1995), cert. denied, 518 U.S. 1017 (1996)). Plaintiffs' allegations are insufficient to support the existence of either open-ended or closed-ended continuity.
In order to constitute a closed-ended pattern of racketeering activity, defendants' activities would have to have extended over "a substantial period of time." See id. In this Circuit, the alleged racketeering activity generally must have extended over at least two years in order to be considered a substantial period of time. See id. However, while such a temporal allegation is necessary, allegations that the activity extended over more than two years are not sufficient in themselves for the court to find a closed-ended pattern of racketeering activity. See id. The determination of whether or not there is closed-ended continuity depends on several factors, including "the length of time over which the alleged predicate acts took place, the number and variety of acts, the number of participants, the number of victims, and the presence of separate schemes." See GICC, 67 F.3d at 467. Consideration of these factors weighs against a finding of a closed-ended pattern. There are only two victims of the alleged racketeering activity, Gil and Dorit Kadouri, a married couple whose interests are conjoined. The two victims were not harmed by separate schemes. Only one scheme is alleged, and plaintiffs were simultaneously injured by the same activity. Plaintiffs have alleged neither a great variety, nor a great number of acts of wire fraud and mail fraud, the only two racketeering activities alleged. There appears to be only one alleged participant in the wire and mail fraud, Hasida Molnar.
Furthermore, plaintiffs' allegations suggest that the racketeering activity took place over a time period barely constituting two years. According to the Complaint, the first act of wire fraud committed by defendants occurred in July of 2000, when defendant H. Molnar allegedly misrepresented the background of defendant Fox over the telephone. See Complaint ¶ 35(a). The last alleged act of wire fraud took place in July of 2002, when H. Molnar allegedly fraudulently placated plaintiffs about the state of their property. See Complaint ¶ 35(c)(v). The alleged mail fraud took place over an even shorter period of time that was completely subsumed by the alleged period of the wire fraud. The Complaint asserts that "from in or about September 2000 to in or about December 2001," mail was sent from H. Molnar and Expert Realty to plaintiffs for the purpose of maintaining Expert Realty's status as monitor of the Fresh Meadows property and to conceal the criminal activity occurring on the premises. See Complaint ¶ 45. Thus, plaintiffs' allegations make clear that the alleged racketeering activity extended for, at most, two years. This is the bare minimum of what might constitute a "substantial period of time" in this circuit. See First Capital, 385 F.3d at 181 (noting that the Second Circuit has never found a closed-ended pattern where the predicate acts spanned fewer than two years). In light of the Complaint's failure to allege the other aspects of a RICO pattern, the duration of the alleged racketeering activity is insufficient for a finding of a closed-ended pattern.
In order to constitute an open-ended pattern of racketeering activity, defendants' activities must threaten to continue into the future. Plaintiffs "must show that there was a threat of continuing criminal activity beyond the period during which the predicate acts were performed." Defalco v. Burns, 244 F.3d 286, 323 (2d Cir. 2001) (quoting Cofacredit S.A. v. Windsor Plumbing Supply Co., 187 F.3d 229, 242 (2d Cir. 1999)), cert denied, 534 U.S. 891 (2001). Because it cannot be inferred from plaintiffs' allegations that such a threat existed, defendants' activities cannot constitute an open-ended pattern of racketeering activity. The contract to manage the property was for a fixed period and the lease was for a fixed period of two years. Though plaintiffs allege that the lease could have been renewed indefinitely, this appears inconsistent with the explicitly fixed arrangement between the plaintiffs and defendants. More importantly, that the lease could have continued beyond two years is not sufficient to create open-ended continuity. "In assessing whether or not the plaintiff has shown open-ended continuity, the nature of the RICO enterprise and of the predicate acts are relevant." Defalco, 244 F.3d at 323. Expert Realty is not alleged to be an enterprise "engaged primarily in racketeering activity," and therefore plaintiffs must allege facts supporting either that "the predicate acts were the regular way of operating that business, or that the nature of the predicate acts themselves implies a threat of continued criminal activity." See id. On the basis of the facts alleged in the Complaint, no inference supporting either of these conclusions is possible. The alleged predicate acts were omissions limited to a highly particularized situation. Plaintiffs have not alleged that defendants similarly defrauded any other parties, or that they were defrauded beyond the one scenario described in the Complaint. It is not alleged that Expert Realty is a sham company, set up to facilitate the acquisition of facilities for drug dealers. Plaintiffs have failed to demonstrate open-ended continuity.
II. RICO Claim against David Fox
Plaintiffs assert a separate RICO claim against defendants Fox and Doe, in Claim 3 of the Complaint. Other than alleging that the defendants engaged in a marijuana production and distribution enterprise, they make no attempt to set forth the requirements of an enterprise, nor do they ever identify what conduct was engaged in by Fox in furtherance of the enterprise other than that he knowingly sublet the home to Doe, whose purpose was to grow marijuana there.
A RICO enterprise is a group connected by common activity and a common purpose, "the existence of which is proven `by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit.'" First Capital, 385 F.3d at 173 (quoting United States v. Turkette, 452 U.S. 576, 583 (1981)). Plaintiffs have failed to allege the existence of an ongoing organization with regard to the alleged marijuana growing and dealing. The Complaint is devoid of facts describing Fox's role in the alleged enterprise, and it fails to include any specific allegations regarding the ongoing activities of the enterprise. There is no allegation from which to infer that Fox was one of "various associates function[ing] as a continuing unit." See id.
Moreover, even if the enterprise allegations were sufficient, the Complaint cannot meet the requirement of alleging a pattern of racketeering activity by Fox. Under 18 U.S.C. 1962(c) it is "unlawful for any person employed by or associated with any enterprise . . . to conduct or participate . . . in the conduct of such enterprise's affairs through a pattern of racketeering activity." Plaintiffs in a civil RICO suit must specify what activities comprise the alleged racketeering. See DeJesus v. Sears, Roebuck and Co., Inc., 87 F.3d 65, 70 (2d Cir. 1996), cert. denied, 519 U.S. 1007 (1996). Plaintiffs have asserted only one act of racketeering that was the proximate cause of the harm, i.e., the conversion of plaintiffs' property into a marijuana growing facility. However, one "act" of converting a premises to a drug manufacturing facility cannot be divided into multiple acts of racketeering. Cf. United States v. Biaggi, 909 F.2d 662, 686 (2d Cir. 1990) ("If the commission of an offense and its false denial could establish a `pattern,' then every offense related to a criminal enterprise would be eligible for inclusion in a pattern whenever the offender falsely denied its commission. That is not what Congress intended."), cert. denied, 499 U.S. 904 (1991). Our Court of Appeals has cautioned that "courts must take care to ensure that the plaintiff is not artificially fragmenting a singular act into multiple acts simply to invoke RICO." See Schlaifer, 119 F.3d at 98.
The "two acts" requirement is a component of RICO's requirement that a pattern of racketeering activity be demonstrated. The legislative history of RICO indicates that Congress did not intend to include potentially isolated acts of criminal behavior. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985). Though plaintiffs loosely reference "the production, manufacture, sale and other dealings in marijuana and controlled substances," there are no specific allegations of such activity on the part of Fox beyond involvement in the conversion of plaintiffs' property to the illegal purpose. In sum, plaintiffs have failed to allege a pattern with regard to defendant Fox.
Even if plaintiffs had alleged more than one act of racketeering by Fox, their claims would fail because they have not alleged sufficient continuity under RICO. As described above, plaintiffs' allegations set forth one scheme, involving one identified defendant and one unidentified defendant, and two related victims, and plaintiffs have not demonstrated that there was a "threat of continuing criminal activity beyond the period during which the predicate acts were performed." Defalco, 244 F.3d at 323 (quoting Cofacredit, 187 F.3d at 242). That the lease was limited to two years evidences that plaintiffs and defendant Fox foresaw and scheduled a termination of Fox's interest in the Fresh Meadows property. Plaintiffs' allegations indicate that the activity taking place on the property caused plaintiffs to be suspicious about what was occurring at their property. Given these facts, the court cannot accept plaintiffs' assertion that Fox could have expected that plaintiffs would allow their property to be so utilized for an indefinite amount of time without inspection. Nor have plaintiffs alleged a threat of continuing criminal activity beyond this particular scheme. There are no allegations that Fox has engaged in similar activity before or since the incidents detailed in the Complaint.
Even if the court accepted plaintiffs' argument that it must be presumed that Fox engaged in a pattern of drug distribution subsequent to the property conversion, plaintiff's allegations do not support the conclusion that Fox's conduct was the proximate cause of their injuries. See Ideal Steel Supply Corp. v. Anza, 373 F.3d 251, 257 (2d Cir. 2004) (civil RICO plaintiff "must plead and prove that the violation not only was the logical, or `but for,' cause of the injury but also was its legally cognizable, or proximate, cause"); Lerner v. Fleet Bank, N.A., 318 F.3d 113, 124 (2d Cir. 2003) ("we have repeatedly emphasized that the reasonably foreseeable victims of a RICO violation are the targets, competitors and intended victims of the racketeering enterprise."), cert. denied, 540 U.S. 1012 (2003). While plaintiffs were injured by the conversion of their house for illegal purposes, the actual "racketeering activity" was the production, packaging and distribution of marijuana, not the conversion. Plaintiffs have failed to demonstrate that they were the targets, competitors, or intended victims of the inherently illegal racketeering activity, the dealing in marijuana. In sum, the causal link between Fox's alleged conversion of the property and the plaintiffs' injury is simply too weak for plaintiffs to base a RICO claim upon it. For all of these reasons, plaintiffs' substantive RICO claim against Fox is dismissed.
III. RICO Conspiracy
Claim 4 of the Complaint alleges conspiracy in violation of RICO between H. Molnar, F. Molnar, and Fox. Because plaintiffs have not adequately alleged a substantive violation of RICO against these defendants, the court also dismisses the RICO conspiracy claim against all of them. See First Capital, 385 F.3d at 182; see also Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996), vacated on other grounds, 525 U.S. 128, 119 (1998).
IV. Supplemental Jurisdiction
The federal claims being dismissed, the court declines to exercise supplemental jurisdiction over the remaining state claims against all defendants. See 28 U.S.C. § 1367. Claims 5, 6, 7, 8, 9, and 10, for common law fraud, breach of contract, and negligence, are therefore dismissed.
V. Leave to Replead
Federal Rule of Civil Procedure 15(a) directs that leave to amend should be "freely given." However, particularly in the case of pleading a claim under a statute such as RICO, which sets forth exacting pleading requirements, leave to replead can be denied where granting it would be futile. See, e.g., In re American Express Co. Shareholders Litig., 39 F.3d 395, 402 (2d Cir. 1994) (affirming district court's denial of leave to replead RICO claim where "(a)ppelants have not indicated how they could satisfy RICO's proximate cause requirement"). Such futility is present here. There is no reason to conclude that plaintiffs can add allegations which could overcome the multiple deficiencies in the existing pleading. Leave to replead is therefore denied.
Conclusion
The motions to dismiss of plaintiffs Hasida Molnar, Ferenc Molnar, Expert Realty, and David Fox are granted. The Complaint is dismissed.
SO ORDERED.