Opinion
00 Civ. 7352 (GEL)
March 20, 2001
Morton J. Turchin, Turchin Hoffman, PC, New York, NY, for Plaintiff Sterling National Bank.
David M. Blum, New York, NY, for Defendants A-1 Hotels. et al.
OPINION AND ORDER
Plaintiff Sterling National Bank ("plaintiff" or "Sterling") alleges that defendants submitted over two hundred fraudulent and unauthorized credit card charges in the course of a scheme to purposeflully defraud plaintiff and a third-party credit card processor. Sterling brings this action under the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. § 1961, et seq., New York common law, and N.Y.U.C.C. § 3-3802(b). Defendants move to dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, the motion is granted as to Count II of the Complaint, and denied in all other respects.
Background
I. Parties
Sterling is in the business of providing, among other services, "credit card services to merchants." (Compl. ¶ 2, 11.) Defendant Jacob Laufer ("Laufer") is the President and sole or majority shareholder of defendant A-1 Hotels International Inc. ("A-1 Hotels") (id. ¶ 4), a New York corporation engaged in the principal business of booking hotel reservations for corporations and individuals throughout the United States and in resort areas outside the United States (id. ¶ 10). Defendant Norman Goldstein is the operating and managing officer and Vice President of A-1 Hotels. (Id. ¶ 5.) Defendant Mattie Goldstein is the wife of defendant Norman Goldstein, the son of defendant Laufer, and sole or majority shareholder of defendant 78th Realty Corporation ("78th Realty"). (Id. ¶ 6.)
2. Facts
Except where noted, the following material facts are alleged in plaintiff's Complaint and accepted as true for purposes of defendant's motion. In December 1996, A-1 Hotels entered into a Merchant Agreement ("Agreement") with Sterling. (Id. ¶ 11.) The Agreement provided that A-1 Hotels would accept customer charges on Visa and MasterCard, reserve hotel rooms for customers, and pay the hotel. (Id. ¶ 12.) Sterling agreed to process and purchase the debt resulting from such customer charges. (Id.) Pursuant to the Agreement, Sterling contracted with a third-party transaction processor, First Data Corporation ("First Data"), to process all Visa and MasterCard transactions submitted to Sterling by A-1 Hotels. (Id. ¶ 13.) The Agreement guaranteed the validity of all charges presented by A-1 Hotels to plaintiff Sterling and then to Sterling's transaction processor. (Id. ¶ 14.)
Sometime in 1998, defendants Laufer and Norman Goldstein began intentionally to submit charges they knew to have been unauthorized by customers of A-1 Hotels. (Id. ¶ 17.) These charges, submitted through mail, wire, and other instrumentalities of interstate commerce (id.), included charges for inter alia unauthorized or nonexisting hotel reservations, amounts in excess of valid charges, and services not provided by the hotel or already paid for by the customer (id. ¶ 18 Ex. 1). Laufer and Norman Goldstein submitted in excess of two-hundred such charges to Sterling over the course of approximately two years. (Id.) When the holders of the cards objected to unauthorized charges, defendants failed to justify the charges to Sterling. (Id. ¶ 21.) As a result, Sterling alleges it was defrauded in an amount exceeding $750,000. (Id. ¶ 22.)
The Complaint further alleges that in March 1999, to provide security for the payment of a portion of A-1 Hotels' obligation to Sterling and to keep open its account in furtherance of its scheme to defraud Sterling, defendant Matti Goldstein signed a $100,000 check on the account of 78th Realty. This check was returned to Sterling unpaid for insufficient funds. (Id. ¶ 24.)
3. The Complaint
Sterling filed its complaint on September 28, 2000. The instant motion to dismiss was fully submitted, after a prolonged period of delay on the part of the defendants, as of March 12, 2001.
Sterling's first cause of action ("Count I") alleges a violation of RICO, 18 U.S.C. § 1962 (c), against all defendants except A-1 Hotels. Specifically, it alleges that defendants participated in the conduct of A-1 Hotels' affairs through a pattern of racketeering activity, by intentionally using the mails and wires to further a scheme to defraud Sterling for their own gain, in violation of 18 U.S.C. § 1341 and 1343, and thereby caused Sterling damages in excess of $750,000. (Id. ¶¶ 26-32.)
Sterling's second cause of action ("Count II") alleges a violation of RICO, 18 U.S.C. § 1962 (a), against all defendants. It states that defendants constitute an "enterprise" as defined by 18 U.S.C. § 1961 (4) engaged in interstate commerce, that they knowingly engaged in a pattern of racketeering activities, and that in furtherance of those activities they utilized various instrumentalities of interstate commerce to defraud Sterling and derive a profit therefrom. (Id. ¶ 33-38.)
Sterling's third cause of action ("Count III") alleges common law fraud against all defendants on grounds that defendants made material false representations as to the authenticity and accuracy of customers' charges with the intent of deceiving Sterling and First Data and causing Sterling to make payment to First Data in the amount of the unauthorized charges. (Id. ¶¶ 39-43.)
Sterling's fourth cause of action ("Count IV") alleges breach of contract against defendant A-1 Hotels, Laufer and Norman Goldstein on grounds that those defendants are in breach of their agreement to reimburse plaintiff for unauthorized charges. (Id. ¶¶ 44-51.)
Defendants do not seek dismissal of Count IV.
Sterling's fifth cause of action ("Count V") alleges that Mattie Goldstein and 78th Realty are liable for $100,000, the amount of the unpaid check submitted to Sterling in March, 1999. (Id. ¶¶ 52-53.)
Discussion
In the context of a motion to dismiss, the Court accepts "as true the facts alleged in the complaint," Jackson Nat'l Life Ins. Co. v. Merrill Lynch Co., 32 F.3d 697, 699-700 (2d Cir. 1994), and may grant the motion only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir. 1998) (internal citations omitted). The "issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (internal quotation marks and citations omitted).
1. Section 1962(c) RICO Claim (Count I)
To state a claim under 18 U.S.C. § 1962 (c), a plaintiff must allege that the defendants "conduct[ed] or participat[ed], directly or indirectly, in the conduct of [an] enterprise's affairs through a pattern of racketeering activity." An "enterprise" is defined 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). Courts in this Circuit construe the enterprise element of RICO liberally. See, e.g., United States v. Indelicato, 865 F.2d 1370, 1382 (2d Cir. 1989) ("the language and the history suggest that Congress sought to define that term as broadly as possible") (construing 18 U.S.C. § 1961 (4)). A "pattern of racketeering activity" consists of "at least two acts of racketeering activity" within a ten-year period. 18 U.S.C. § 1961 (5); GICC Capital Corp. v. Technology Finance Group, Inc., 67 F.3d 463, 465 (2d Cir. 1995) ("The plaintiff must plead at least two predicate acts . . . and must show that the predicate acts are related and that they amount to, or pose a threat of, continuing criminal activity") (citing 18 U.S.C. § 1961 (5)). Any indictable acts of mail fraud or wire fraud constitute "acts of racketeering activity." 18 U.S.C. § 1961 (1).
The elements of mail or wire fraud are "(1) the existence of a scheme to defraud involving money or property; and (2) the use of the mails or wires in furtherance of the scheme." In re Sumitomo Copper Lit., 995 F. Supp. 451, 455 (S.D.N.Y. 1998) (citing United States v. Trapilo, 130 F.3d 547, 551-52 (2d Cir. 1997) (discussing 18 U.S.C. § 1341, 1343)).
Sterling has sufficiently pled the elements required to support a RICO claim under Section 1962(c). As a corporation. A-1 Hotels is an enterprise as defined in 18 U.S.C. § 1961 (4). The Complaint alleges that defendants schemed to defraud Sterling by submitting credit card charges which the defendants knew had not been authorized by customers of A-1 Hotels. (Compl. ¶ 17.) The defendants allegedly submitted to Sterling in excess of two hundred such fraudulent and unauthorized charges by way of the mails, wire communications, and other instrumentalities of interstate commerce (Id.), and falsely confirmed the authenticity of these charges (id. ¶ 18). These alleged multiple acts of mail and wire fraud, all in furtherance of a common scheme or plan, plainly display the "relationship" and "continuity" necessary to constitute a RICO "pattern" See e.g, Cosmos Forms Ltd. v. Guardian Life Ins. Co., 113 F.3d 308, 310 (2d Cir. 1997) ("approximately seventy acts spread over almost two years" sufficient to constitute a RICO pattern) (internal citations omitted); Alfie's Original Souhers. Inc. v. Fleet Bank, No. 95 Civ. 8741 (RPP), 1996 WL 263004, at *4 (S.D.N.Y. May 17, 1996) ("factors of relationship and continuity combine to produce a pattern of [racketeering] activity") (construing 18 U.S.C. § 1961 (5)).
The defendants' assertion that the Complaint lacks specificity is without merit. "In [civil RICO] cases, Rule 9(b) requires only that the plaintiff delineated, with adequate particularity in the body of the complaint, the specific circumstances constituting the overall fraudulent scheme." In re Sumitomo Copper Litigation, 104 F. Supp.2d 314, 319 (S.D.N.Y. 2000). As stated above, the Complaint in this case alleges over two-hundred fraudulent transactions spread over a two year period, establishes a pattern of the fraud by way of nine specific examples in an attached exhibit (Compl. Ex. 1), and alleges the participation of each member in the scheme. The use of mail, wire other instrumentalities of interstate commerce is also alleged and is otherwise self-evident from the face of the Complaint. Rule 9(b) requires no more of Sterling at this stage of the litigation.
Defendants' claim that plaintiff's somehow "acquiesced or ratified" defendants' conduct (Ds' Mem. at 3) at best raises a factual issue by controverting the allegations in the Complaint, which for purposes of this motion must be accepted as true. See Hamilton Chapter of Alpha Delta Phi v. Hamilton College, 128 F.3d 59, 63 (2d Cir. 1997).
Nor may Count I be dismissed as to Laufer and Norman Goldstein on grounds that they did not participate in the conduct of A-1 Hotels' affairs sufficiently to satisfy Reves v. Ernst Young, 507 U.S. 170 (1993). (Ds' Mem at 3-5.) The Complaint alleges that Laufer and Norman Goldstein "participated directly" in the conduct of A-1 Hotels (Compl. ¶¶ 4, 5, 28, 30), and at this stage of the litigation nothing more is required. See, e.g., Sumitomo Copper, 104 F. Supp. 2 d at 318 (allegation that defendant played "some part in directing the enterprise's affairs" states a claim under Section 1962(c)) (citing Reves).
2. Section 1962(a) RICO Claim (Count II) 18 U.S.C. § 1962 (a) prohibits
any person who has received any income, directly or indirectly, from a pattern of racketeering activity . . . to use or invest, directly or indirectly, any part 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; any enterprise which affect interstate or foreign commerce.
(Emphasis added.) Count II alleges only that the defendants were engaged in a pattern of racketeering (Compl. ¶ 35), and that they derived income there from (id. ¶ 36). It does not allege that any defendant, let alone all of them, used or invested the income in acquiring or operating A-1 Hotels or any other enterprise engaged in interstate commerce. Accordingly, Sterling fails to state any cause of action under Section 1961(a). Even if the requisite elements of investment of the proceeds of the fraud in an enterprise were alleged, it is difficult to understand how Sterling could be harmed, not by the fraud, but by A-1 Hotels' investment of its proceeds. Leave to rep lead is therefore denied, without prejudice to any properly-supported motion by Sterling to amend its Complaint, explaining how Sterling has been injured and what this cause of action adds to the Complaint that is not already present in the Section 1962(c) claim.
Although defendants do not raise this point in their motion papers, "the Court has discretion to dismiss claims sua sponte pursuant to Rule 12(b)(6) . . . where it is clear that a plaintiff could not have prevailed on the facts as alleged in the complaint." Fitzgerald v. Feinberg, No. 98 Civ. 8885 (RWS), 1999 WL 619584, at *5 (S.D.N.Y. August 16, 1999) (citations omitted).
3. Common Law Fraud (Count III)
To state a claim for common law fraud under New York law, a plaintiff must allege (1) that the defendant made a material false representation, (2) that the defendant intended to defraud the plaintiff thereby, (3) that the plaintiff reasonably relied upon the representation, and (4) that the plaintiff suffered damage as a result of such reliance. See Chanayil v. Gulati, 169 F.3d 168, 171 (2nd Cir. 1999). Here, Sterling claims that defendants intentionally made material false representations as to the authenticity and accuracy of customers' credit card charges with the intent of deceiving Sterling and causing Sterling to make payments to First Data, on behalf of defendant A-1 Hotels, in the amount of the unauthorized charges. (Compl. ¶ 40.) Sterling further alleges it made such payments to First Data in reliance upon defendants' representations as to the authenticity and accuracy of submitted charges. (Id. ¶ 40.) Sterling finally alleges that it suffered damages in excess of $750,000 as a result of defendants' fraud. (Id. ¶ 42.) These allegations are sufficient to meet the particularity requirement of Rule 9(b). See e.g., Lee v. Kim, 93 Civ. 8280 (KTD), 1994 WL 586436, at *6 (S.D.N.Y. October 25, 1994)) ("To satisfy the requirements of Rule 9(b), the complaint need only give particulars regarding the fraudulent content of the speech, the time and place at which the statements were made, and the identity of individuals making the fraudulent statements"). Defendants' motion to dismiss Count III pursuant to Rule 9(b) is therefore denied.
Nor is there merit to defendants claim that Counts I and III fail to state a claim against Mattie Goldstein and 78th Realty. The Complaint alleges that Mattie Goldstein, wife of defendant Norman Goldstein and daughter of defendant Laufer, signed a check drawn on 78th Realty's account as security for A-1 Hotels' unpaid charges which was returned to Sterling for insufficient funds. (Compl. ¶ 24.) The Complaint further alleges that the purpose of that check was to knowingly and intentionally enable the continuation of fraudulent activity. (Id. ¶¶ 24, 29, 30, 39, 40.) These allegations fairly state allegations specifically attributable to Ms. Goldstein and 78th Realty and the motion to dismiss Counts I and III as applied to them is accordingly denied. See, e.g., Epstein v. Haas Securities Corp., 731 F. Supp. 1166, 1177 (S.D.N.Y. 1990) ("[c]omplaints which assert allegations of fraud against multiple defendants should inform each defendant of the nature of his alleged participation in the fraud") (citation omitted). Defendants' vague arguments as to veil-piercing are inherently fact specific and otherwise irrelevant at the pleading stage of the instant litigation. The Complaint alleges that all individual and corporate defendants participated in the fraudulent scheme and nothing in it suggests that any veil-piercing is required.
4. N.Y.U.C.C. § 3-802(1)(b) (Count V)
The fifth cause of action against Mattie Goldstein and 78th Realty is based on UCC § 3-802(1)(b) which in pertinent part states "if the instrument is dishonored action may be maintained on ether the instrument or the obligation." Thus this case of action is based on the check itself, which was signed by Ms. Goldstein and drawn on the account of 78th Realty. Nothing more is required to state a claim under N.Y.U.C.C. § 3-802(1)(b). See, e.g., Fidelity Funding v. Reinhold, 79 F. Supp.2d 110, 131 (E.D.N.Y. 1997) ("Under the New York Uniform Commercial Code, a plaintiff may pursue an action to recover for a dishonored check `on either the instrument or the obligation'") (quoting N.Y.U.C.C. § 3-802(1)(b) (McKinney 1991)).
Conclusion
For the reasons stated herein, the defendants' motion to dismiss the Complaint is denied, except as to Count II, which is dismissed for failure to state a claim. The parties are to proceed with pretrial proceedings in this action as directed by the Court's Order of March 8, 2001.
SO ORDERED: