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dismissing RICO mail fraud claim because plaintiff failed to delineate "the who, what, why, where, and when" of the alleged misrepresentation
Summary of this case from G-I Holdings, Inc. v. Baron Budd;Opinion
99-CV-1476
April 27, 2000.
Louis T. Brindisi, Esq. of Brindisi, Murad Brindsisi-Pearlman, Utica, N.Y. for Plaintiffs.
Walter Meagher, Jr., Esq. and Eric C. Nordby, Esq., of Hancock Estabrook, LLP., Syracuse, N.Y., For Defendants.
Thomas D. Keleher, Esq. and Brian J. Butler, Esq., of Bond, Schoeneck King, LLP., Syracuse, N.Y., For Defendants.
MEMORANDUM-DECISION and ORDER
Currently before the Court are three motions. Both the Herkimer defendants and the Werner defendants move for judgment on the pleadings as to plaintiffs' federal claims, which plaintiffs oppose. Plaintiffs, in turn, move to amend their complaint, which defendants oppose. For the reasons that follow, the Court grants defendants motions, denies plaintiffs' motion to amend as futile, and declines to exercise supplemental jurisdiction over plaintiffs' state law claims.
For brevity's sake, the Court refers to defendants as two groups: the Herkimer defendants and the Werner defendants. The Herkimer group consists of the Herkimer County Trust ("HCT"); GROUPinsure Brokerage Holdings, Inc. ("GROUPinsure"); Bill Burrows; Laura B. Marcantonio; Stanley K. Dickson; Stanley Smith; and The Manhattan Group ("TMG"). The remaining defendants comprise the Werner group, who are Werner Kennedy ("Werner"), John T. Buckley, Charles E. Chromow, Robert K. Fulton, Michael A. Knoerzer, John N. Nonna, Larry P. Schiffer, Francine Levitt Semaya, and Richard T. Kennedy. Donald L. Sharpe, who had been part of the Werner defendants, was dismissed from this action on January 14, 2000.
BACKGROUND
Plaintiffs' instant action is a superlative example of why some legal minds posit that the civil provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-1968, et seq., are the most misused statutes in the federal corpus of law.
For the purposes of deciding defendants' motions, the following allegations are assumed to be true. Plaintiff Alan T. Spoto was a shareholder in Friedlander, Spoto, Miller and Maloff Agency, Inc. ("FSM M"), an insurance agency in Utica, New York. During 1995 or 1996, defendant Laura B. Marcantonio, President of HCT, approached Spoto "concerning the bank's interest in the insurance industry to increase its profit margin." Compl. ¶ 17. Commencing "in or about 1997," HCT and Spoto "entered into discussions and negotiations for the purchase of the FSM M Agency and the establishment of a new corporation, GROUPINSURE, for the purchase and sale of insurance products through the GROUPadvantage franchises." Id. ¶ 23. Spoto alleges that to induce him to sell his share in FSM M, he was promised employment with HCT and, after the new corporation was formed, he would become President and Chief Operating Officer of GROUPinsure. Spoto was to own a forty-nine percent interest of the newly-formed enterprise and have full authority over its day-to-day operation, without interference from HCT. Spoto also was to have his interest in the new venture protected by a shareholder and employment agreement, and would be paid $12,500 per month. Id. ¶ 24. Defendant Bill Burrows, who wanted to establish HCT in the insurance industry, "assured [Spoto] that he would become very wealthy and successful in the future if he consummated this deal with the bank." Id. ¶ 25.
In 1998, plaintiffs explain, defendants Stanley Smith, TMG Peter Bickford and Werner were retained to assist in establishing the new corporation. In February 1999, Smith and TMG appraised FSM M. The appraisal represented a sum "far lower" than Spoto had anticipated — a valuation between $685,000 and $985,000. Id. ¶ 34. Following the valuation, HCT bought FSM M for $425,000. Id. ¶ 36. Further negotiations ensued. After "many days," Spoto received a twenty percent interest in the newly-formed GROUPinsure, as well as the right to purchase an additional twenty percent share. As promised, he was named President and Chief Operating Officer of the corporation and given a five-year employment contract. Id. ¶¶ 37-39.
Apparently, all was not rosy. Despite assurances that he would be able to manage GROUPinsure as he saw fit, Marcantonio — who "continually and publicly harassed and ridiculed" Spoto — interfered with his operation of the company. Id. ¶¶ 39-40. Eventually, following a period of further harassment, GROUPinsure terminated Spoto on July 23, 1999. On account of his termination, Spoto's option to buy an additional twenty percent of GROUPinsure expired. Id. ¶¶ 45-46.
Ostensibly, these facts might lead one to conclude that the issue before the Court is an ordinary breach of contract or fraud claim. Indeed, plaintiffs raise several common law causes of action, including fraud and breach of contract; however, by plaintiffs' estimation, the remedy most appropriate to redress defendants' alleged malfeasance is RICO, the statute Congress enacted to eradicate organized criminal racketeering activity.
Plaintiffs theorize that the aforementioned actions, perpetrated through fairly unspecific acts of mail and wire fraud, amount to "a fraudulent scheme and conspiracy for the purposes of defrauding [Spoto] of his experience, knowledge and stature in the insurance industry, and his ownership interest in [FSM M]." Plfs' Mem. of Law at 1. Defendants deny these accusations and catalog a host of fatal deficiencies with plaintiffs' RICO claims: failure to plead a pattern of racketeering activities; failure to plead two predicate acts; failure to plead a conspiracy; failure to plead a RICO enterprise; failure to plead an investment injury; and failure to comply with Local Rule 9.2 of this district, which unequivocally requires a RICO statement to be filed within thirty days from the filing of the complaint. Defendants further insist that plaintiffs' proposed amended complaint suffers from the same defects. Accordingly, defendants ask the Court to dismiss the instant RICO claims, deny plaintiffs' motion to amend, and remand the remaining common law claims to state court.
DISCUSSION
I. Standard for Judgment on Pleadings
The standard for deciding a motion pursuant to Rule 12(c) is the same as the one applicable to a motion to dismiss under Rule 12(b)(6). See Irish Lesbian and Gay Org. v. Giuliani, 143 F.3d 638, 644 (2d Cir. 1998). "Under that test, a court must accept the allegations contained in the complaint as true, and draw all reasonable inferences in favor of the non-movant."Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir. 1994). A court "should not dismiss the complaint unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (internal quotation marks omitted). In making this determination, the Court also may consider exhibits attached to the complaint or documents incorporated into the complaint by reference. See Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991).
II. Lack of Service on the Werner Defendants
The Werner defendants complain that defendants Kennedy, Knoerzer, Fulton and Buckley have not been served with summons and complaint in this matter. Aff. of Thomas D. Keleher, Esq. ¶ 28. Accordingly, they ask the Court to dismiss the complaint as to those defendants pursuant to Rules 12(b)(1) and (5). As plaintiffs do not contend otherwise, the Court grants defendants' instant motion.
III. RICO and its Requirements
As may be commonly known, RICO makes it a crime "to conduct" an "enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962 (c); see also McLaughlin v. Anderson, 962 F.2d 187, 190 (2d Cir. 1992). RICO, however, also contains a civil provision permitting "[a]ny person injured in his business or property by reason of a violation" of its criminal components to recover treble damages and attorney's fees. 18 U.S.C. § 1964 (c).
Plaintiffs' complaint alleges civil RICO violations under §§ 1962(a), (c) and (d), while his proposed amended adds a claim under § 1962(b). Section 1962 prohibits, under subsections (a) through (d), the following: (a) the use of income "derived . . . from a pattern of racketeering activity" to acquire an interest in, establish, or operate an enterprise engaged in or whose activities affect interstate commerce; (b) the acquisition of any interest in or control of such an enterprise "through a pattern or racketeering activity"; (c) the conduct or participation in the conduct of such an enterprise's affairs "through a pattern of racketeering activity"; and (d) conspiring to do any of the above. 18 U.S.C. SS 1962(a)-(d); see also GICC Capital Corp. v. Technology Finance Group. Inc., 67 F.3d 463, 465 (2d Cir. 1995), cert. denied, 518 U.S. 1017, 116 S.Ct. 2547, 135 L.Ed.2d 1067 (1996)
To state a viable claim for damages under the act, plaintiffs must allege that defendants violated the substantive RICO statute, 18 U.S.C. § 1962. In so doing, they must claim the existence of seven constituent elements: (1) that the defendants (2) through the commission of two or more acts (3) constituting a "pattern" (4) of "racketeering activity" (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an "enterprise" (7) the activities of which affect interstate or foreign commerce. See Pinnacle Consultants v. Leucadia Nat'l Corp., 101 F.3d 900, 904 (2d Cir.
The Court agrees with defendants that plaintiffs' complaint, as well as their proposed amended complaint, suffers from a variety of defects, any one of which dooms their RICO cause of action. Here the court focuses on two: lack of continuity and failure to plead mail fraud predicate acts with specificity.
Indeed, the Court would be justified to dismiss plaintiffs' complaint based upon their very untimely filing of their Local Rule 9.2 RICO statement. See Gagliardi v. Ward, 967 F. Supp. 67, 69 (N.D.N.Y. 1997).
To demonstrate a pattern of racketeering activity, "a plaintiff must plead at least two predicate acts, show that the acts are related and that they amount to, or pose a threat of, continuing criminal activity." H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989). RICO targets "racketeering activity," which the statute generally defines as certain acts indictable under Federal law, including mail and wire fraud, and violations of the Hobbs Act. 18 U.S.C. § 1961 (1)(B)
A "pattern" requires at least two acts of "racketeering activity," occurring within ten years of each other. See 18 U.S.C. § 1961 (5). Again, those predicate acts must be crimes under state or federal law. See United States v. Angelilli, 660 F.2d 23 (2d Cir. 1981), cert. denied, 455 U.S. 910, 102 S.Ct. 1258, 71 L.Ed.2d 449, rehearing denied, 456 U.S. 939, 102 S.Ct. 1998, 72 L.Ed.2d 460 (1982); Mathon v. Marine Midland Bank, N.A., 875 F. Supp. 986, 995 (E.D.N.Y. 1995)
Both the Supreme Court and Second Circuit have held that an allegation of two acts of "racketeering activity," without more, is not sufficient to establish a pattern. See H.J. Inc., 492 U.S. at 238-44, 109 S.Ct. at 2893; United States v. Indelicato, 865 F.2d 1370, 1381 (2d Cir.) (en banc), cert. denied, 493 U.S. 811, 110 S.Ct. 56, 107 L.Ed.2d 24 (1989). Moreover, and importantly, to constitute a "pattern" of racketeering activity, the predicate acts must be related and constitute a threat of continued racketeering activity and this determination is to be made on a case-by-case basis. H.J. Inc., 492 U.S. at 238-44, 109 S.Ct. 2893; see also United States v. Alkins, 925 F.2d 541, 551 (2d Cir. 1991) (predicate acts must be related and amount to or pose a threat of continued criminal activity). In addressing what constitutes a "pattern" of racketeering activity the Second Circuit noted that "[a]n interrelationship between acts, suggesting the existence of a pattern, may be established . . . [by] proof of their temporal proximity, or common goals, or similarity of methods, or repetitions." Indelicato, 865 F.2d at 1382.
Moreover, plaintiffs must allege "continuity" as a prerequisite for the existence of a "pattern of racketeering activity." H.J Inc., 492 U.S. at 230. In other words, the predicate acts must be related, and must constitute or threaten long-term criminal activity. See Id. Such continuity can be either "closed" or "open-ended." Id. Closed-ended continuity is established by proving a series of related predicate acts extending over a substantial period of time, while open-ended continuity requires the threat of long-term racketeering activity. See Id. A threat is indicated when the predicate acts themselves involve a distinct threat of future racketeering activity, are part of the regular way of doing business for an ongoing entity (be it a criminal association or legitimate business), or are a regular means of conducting or Participating in an ongoing RICO enterprise. See Id.
Plaintiff's allegations clearly do not constitute a open-ended continuity; rather, if they allege any kind of continuity, they suggest a closed-ended continuity. Ordinarily, courts will not find a threat of future racketeering in "cases concerning alleged racketeering activity in furtherance of endeavors that are not inherently unlawful, such as frauds in the sale of property." United States v. Aulicino, 44 F.3d 1102, 1111 (2d Cir. 1995). Here, defendants' alleged wrongdoing is not "inherently unlawful." Rather, their wrongdoing sounds more in the nature of fraud, as is evidenced by plaintiffs' alternate state law cause of action brought under that theory. See Compl. ¶¶ 105-11. For this reason alone, their RICO cause of actions fail. Yet, their RICO claim clearly is defective for at least one other reason: their allegations of mail and wire fraud are too vague.
Both the plaintiffs' complaint and proposed amended complaint allege that the predicate acts in support of the RICO claim are the defendants violations of the mail and wire fraud statutes. That statute, in relevant part, provides that a person is guilty of mail fraud if:
having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises ... for the purpose of executing such scheme or artifice or attempting so to do, [the person] places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service.18 U.S.C. § 1341.
The crux of mail fraud and wire fraud is "an intent to defraud." United States v. Bouyea, 152 F.3d 192, 194 (2d Cir. 1998); U.S. v. Gabriel, 125 F.3d 89, 96 (2d Cir. 1997) (holding same). To establish an intent to defraud, the plaintiffs must adequately allege that the "defendants contemplated some actual harm or injury to their victims. Only a showing of intended harm will satisfy the element of fraudulent intent." UnitedStates v. Dinome, 86 F.3d 277, 283 (2d Cir. 1996) (mail fraud and wire fraud) ( quoting United States v. Starr, 816 F.2d 94, 98 (2d Cir. 1987)); see also In re Registry Publishing, 68 F.3d at 580 ("In order to establish that the defendant acted with an intent to defraud, the Government must show that some actual harm or injury was contemplated by the schemer.") (internal quotation marks omitted); United States v. D'Amato, 39 F.3d 1249, 1257 (2d Cir. 1994)
Similarly, the wire fraud statute requires a scheme devised "to defraud, or for obtaining money or property by means of false or fraudulent pretenses, or promises," and the use of interstate wires or communications to execute the scheme. 18 U.S.C. § 1341, 1343.
Herein lies the problem for plaintiffs: in their attempt to dress a common law breach of contract or fraud claim as a RICO claim, their allegations of mail fraud are conclusory and extraordinarily vague, which makes it impossible for them to demonstrate the required "pattern" of racketeering. Defendants correctly note that these underlying counts of mail and wire fraud must be pled with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, e.g., Rule 9(b) requires that in all averments of fraud, "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). This heightened pleading requirement is in place for three reasons: (1) to provide defendants notice to enable them to prepare proper defenses; (2) to protect defendants against harm to their reputation or goodwill; and (3) to deter strike suits. See DiVittorio v. Equidyne Extractive Indus. Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).
Rule 9(b) requires plaintiffs to go on the record as to the specific nature of the fraud, Carlucci v. Owens-Corning Fiberglas Corp., 646 F. Supp. 1486, 1489 (E.D.N.Y. 1986), and therefore to fulfill Rule 9(b) "s particularity requirements, plaintiffs' complaint must specify the time, place, speaker, and content of the alleged misrepresentation. DiVittorio, 822 F.2d at 1247 ( citing Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir. 1986)). Certainly, in pleading a defendant's state of mind, Rule 9(b) provides that "[m]alice, intent, knowledge and other condition of mind of a person may be averred generally." Fed.R.Civ.p. 9(b). Yet, this relaxation of Rule 9(b)'s particularity requirement is not a "license to base claims of fraud on speculation and conclusory allegations." Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995). Scienter may be averred generally, but "plaintiffs are still required to plead the factual basis which gives rise to a strong inference of fraudulent intent." Fischer v. Tynan, No. 90 Civ. 7587, 1993 WL 213025 at *2 (S.D.N.Y. Jun. 16, 1993) (citation omitted).
Construing both the complaint and proposed amended complaint generously and drawing all inferences in favor of the pleader, as the Court must do under Rule 9(b), see Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989), the Court finds plaintiffs have failed completely to plead fraudulent intent and the content of the alleged misrepresentation with sufficient particularity. Plaintiffs, for example, aver mail and wire fraud — the sole predicate acts that are the basis for their claim — without ever delineating the who, what, why, where and when. Accordingly, plaintiffs' RICO claims are dismissed in their entirety because they have not pled mail fraud with specificity. Moreover, as their proposed amended complaint fails in this respect as well, it would be futile to allow the amendment, therefore plaintiffs' cross-motion to amend is denied. See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) (describing reasons for denying leave to amend). Finally, having dismissed plaintiffs' civil RICO claims, the Court declines to exercise supplemental jurisdiction over Plaintiffs' numerous claims under New York state law. See 18 U.S.C. § 1367 (c)(3).
Paragraphs 71 to 76 of plaintiffs' complaint "detail" the alleged mail and wire fraud. Those paragraphs reciting the mail fraud, for example, read as follows:
71. The individual and corporate Defendants for the purpose of executing the scheme and artifice to defraud the Plaintiff of the amount due and owing to him under the agreement and sale of the FSM M AGENCY and transfer of the GROUPadvantage franchises included, without limitation, the following:
a. The mailing of documents from the individual and corporate Defendants to the Plaintiff.
b. The mailing of correspondence and other documents by Defendants, GROUPINSURE, HERKIMER COUNTY TRUST, BILL BURROWS, LAURA MARCANTONIO, STAN DICKSON, STAN SMITH, THE MANHATTAN GROUP, PETER BICKFORD and WERNER KENNEDY, to and from each other.
72. The use of the mail on each and every occasion in furtherance of the Defendants' and the other individuals (sic) scheme and conspiracy and artifice to defraud the Plaintiff constitutes a separate offense.
76. The use of the mails and wires for the purposes of effectuating the aforesaid scheme to defraud the Plaintiff, which occurred on more than one occasion in the last ten years, constitutes a pattern of racketeering activity in violation of 18 USCS § 1962, for which treble damages, costs of suit and attorneys' fees may be sought under 18 USCS § 1964(c).
CONCLUSION
Wherefore, based upon the foregoing, the Court GRANTS the Werner defendants' motion to dismiss against defendants Kennedy, Knoerzer, Fulton and Buckley pursuant to Rules 12(b)(1) and (5); GRANTS the Herkimer defendants' motion for judgment on the pleadings as to plaintiffs' RICO claims against them; GRANTS the Werner defendants' motion for judgment on the pleadings as to plaintiffs' RICO claims against those defendants of the Werner group who received proper service; DENIES plaintiffs' cross-motion to amend their complaint; and DECLINES to exercise supplemental jurisdiction over plaintiffs' claims raised pursuant to New York state law.
IT IS SO ORDERED.
DATED: April 20, 2000 Syracuse, New York