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concluding that each defendant must participate in the conduct of the enterprise
Summary of this case from Conte v. Newsday, Inc.Opinion
02 Civ. 8074 (GEL)
September 30, 2003
John C. Klotz, New York, NY, for Plaintiff's Thomas Zito et al.
Andrew P. Fishkin, Edwards Angell, LLP, New York, NY, for defendants Leasecomm Corp., Microfinancial, Inc., Peter von Bleyleben, Richard Latour, and Carol Salvo.
Steven M. Bierman, Sidley Austin Brown Wood LLP, New York, NY, for defendant Cardservice International, Inc.
Kenneth J. King, Patterson Belknap Webb Tyler LLP, New York, NY, for defendant E-Commerce Exchange, Inc.
James A. Saville, Jr., Hill Rivkins Hayden LLP, New York, NY, for defendants On-Line Exchange and Paul Schneider.
Andrea J. Pollack, Quinn Emanuel Urquhart Oliver Hedges, LLP, New York, NY, for defendant Richard Karn Wilson.
OPINION AND ORDER
In this civil RICO action, 167 plaintiff's sue Leasecomm Corporation and its parent Micro financial Inc. ("MFI/Leasecomm"), three of its officers (Peter R. von Bleyleben, Richard F. Latour, and Carol Salvo) (the "MFI Officers"), three of its alleged "dealers and vendors" (Compl. ¶ 39) (Cardservice International, E-Commerce Exchange, and Online Exchange), and several shareholders of those or other dealers (Patrick Rettew and Richard Karn Wilson, shareholders of non-defendant Themeware, Inc.; Medtrak Corporation, a shareholder of defendant On-Line Exchange; and Paul Schneider, the principal shareholder of Medtrak), for damages arising from alleged fraudulent schemes involving the leasing of e-commerce services and products. All defendants except Rettew and Medtrak (who have not responded to the complaint) have moved to dismiss. Plaintiff's, in addition to opposing those motions, have asked leave to amend their complaint to correct any deficiencies and to name as an additional defendant Chuck Burtzloff, former president of defendant Cardservice International.
BACKGROUND
The following facts are taken from the Complaint, the allegations of which must be assumed true for purposes of these motions to dismiss. Prior to 1999, MFI/Leasecomm was engaged in the business of leasing or financing the purchase of "tangible business machine products including credit card validators." (Compl. ¶ 46.) Those products were actually marketed by other entities, including defendant Cardservice International ("Cardservice"). (Id.) In 1999, MFI began a program in which it leased intangible e-commerce services, "such as access to web sites, 'virtual web sites' and future services." (Id. ¶ 48.) These products were marketed by, among others, defendants E-Commerce Exchange ("ECX"), Cardservice, and Online Exchange ("OX"), and by non-defendant Themeware. (Id. ¶ 49.) MFI/Leasecomm entered into "strategic alliances" with these entities, which plaintiff's refer to as MFI/Leasecomm's "dealers." (Id. ¶¶ 41-44.)
The complaint focuses on two kinds of conduct by the defendants. The first is the deceptive marketing practices of the MFI/Leasecomm dealers, who plaintiff's allege used deceptive advertising and unfair "bait and switch" tactics to corral vulnerable customers into leasing their overpriced and ineffective products. The dealers, however, did not themselves execute lease agreements with the customers; rather, the dealers, by prior arrangement with MFI/Leasecomm, had the customers sign a form lease provided by MFI/Leasecomm, which MFI/Leasecomm later executed. The second type of conduct is the aggressive, and allegedly fraudulent and extortionate, enforcement tactics subsequently used by MFI/Leasecomm against defaulting lessees — tactics enabled in part by the leases' allegedly one-sided, unconscionable terms. The complaint alleges that the dealers and MFI/Leasecomm constituted a single "enterprise" by virtue of an arrangement between the dealers and MFI/Leasecomm under which the dealers immediately received a one-time payment of between 40 and 60% of the face value of the leases from MFI/Leasecomm through an automated "no human intervention" process. (Id. ¶¶ 54, 56.)
I. Marketing Practices of the Dealers
Plaintiff's' allegations of deceptive and unfair marketing practices involve two separate marketing campaigns, each perpetrated by a different set of dealers. The first campaign was conducted by non-defendant Themeware, whose shareholders include defendants Richard Karn Wilson (generally referred to in the complaint, and therefore in this Opinion, as "Karn") and Patrick Rettew. (Compl. ¶¶ 22-23.) Karn is also described as Themeware's "principal spokesman." (Id. ¶ 22.) The second campaign involved dealer defendants OX and ECX, as well as OX's principal shareholder Medtrak. The Complaint alleges that these campaigns were not only intrinsically fraudulent for the reasons described below, but that each also constituted an offer of a franchise under applicable state and federal laws, and was unlawful because the dealer failed to make required disclosures pursuant to those laws.
A. The iPage Builder Scheme: Themeware, Cardservice. and the "Karn Infomercial"
In 1997, Themeware began marketing, through a television "infomercial" hosted by Karn, a "bundle of products called the Internet Tool Box," at a price of $49.95. (Compl. ¶¶ 68-71, 77(f).) The infomercial referred to the product as the "Internet Business Tool Box," and led the viewer "to believe that [it] contained software and services worth as much as $800" which would "give them the facility to accept credit cards on their web pages" and enable them to "make money on the Internet immediately." (Id. ¶¶ 77, 78(b).) It promised a "30-day money back guarantee." (Id.) The Tool Box actually consisted of items "many of [which] were readily available for no or nominal charge." (Id. ¶ 77(c).) It did not permit purchasers to accept credit cards on their web pages without purchasing additional services from Cardservice "at a cost of many thousands of dollars." (Id. ¶ 77(f).) Furthermore, the internet connection provided as part of the Tool Box software "specifically stated it was for non-commercial use." (Id. ¶ 77(h).)
In 1999, Themeware developed "iPage Builder," a "high-priced" product that "linked together services of many providers" and would enable customers to "sell products for various providers" through web pages controlled by Themeware and maintained using Themeware's "software and procedures." (Id. ¶¶ 72, 78(c)-(h).) To market this set of services, Themeware broadcast the Karn infomercial, which made no mention of iPage Builder, as "bait," pressuring callers who expressed interest by calling its toll-free number into purchasing iPage Builder instead of the Internet Tool Box. (Id. ¶¶ 74, 77(e), (i).) The iPage Builder services themselves were defective in certain ways; more importantly, iPage Builder was much more expensive and "was financed by a 'non-cancellable lease' purchased through" MFI/Leasecomm. (Id. ¶ 77(d), (g).)
B. The "Merchant Account" Scheme: ECX. OX, and Medtrak
Plaintiff's make a much more confusing series of allegations about a marketing scheme conducted by ECX, OX (which is controlled by Medtrak), and non-defendant National Entrepreneur Support Association ("NESA"). The scheme involved selling exclusive-territory distributorships or "merchant accounts" for unspecified products. The complaint describes the products in one place as ECX's products (Compl. ¶ 88) and at another as OX's (id. ¶ 90). The merchant accounts were sold using an allegedly "unfair and deceptive" videotape of a seminar sponsored by NESA; the complaint variously describes that video as the "ECX Video" (id. ¶ 92), the "NESA video" (id. ¶ 92(d)), and the "Online [OX] video" (id. ¶ 92(m)). Attendance at the seminar itself was promoted by a direct-mail campaign. The seminar was allegedly deceptive in that it promised that distributors could, with minimal time commitment, skills, or risk, earn a "positive cash flow" (id. ¶ 92(b)) and revenues in the "hundreds of thousands [of] dollars" (id. ¶ 92(e).) It promised that OX would "conduct an extensive infomercial campaigns [sic]" for the products and that participants would receive "extensive training." (Id. ¶ 92(1), (m).) The investment necessary was "either $1450 . . . or 89.95 a month for four years." (Id. ¶ 92(e).) These payments were to be made to Leasecomm, under the same form lease that was used in the iPage Builder scheme.
II. The Leasecomm Leases
When individuals signed up for either the Themeware or the ECX/OX program, they were asked to sign a form lease from Leasecomm. The lease is headed "Non Cancellable Lease Agreement" and states, in bold capitals, that "NEITHER SUPPLIER NOR ANY SALESPERSON IS AN AGENT OF LESSOR NOR ARE THEY AUTHORIZED TO WAIVE OR ALTER THE TERMS OF THIS LEASE." (Compl. Ex. D.) Yet the dealer defendants, according to the complaint, told customers that "the contracts were cancellable." (Id. ¶ 127(i).) The complaint alleges that the dealer defendants pressured plaintiff's to sign the leases using illusory inducements such as "waiver of usual fees and rebate coupons for the usual fees." (Id. ¶ 112 Ex.E.)
The lease includes a space for filling in the lessee's bank account information to permit automatic withdrawals. (Id. Ex. F.) In smaller type, the lease permits Leasecomm not only to automatically debit the lease charges, but also to charge an additional S5.00 per month if it becomes "necessary to switch to statement billing due to insufficient funds," to continue the lease on a month-to-month basis if the lessee fails to notify Leasecomm sixty days prior to its expiration that he or she opts to terminate the lease, to charge a late fee of fifteen percent of any amount past due, and to charge collection costs (including charges for collection letters and phone calls, and for locating lessee's other assets). The lease states that "lessee fully recognize[s] [Leasecomm's] right to enforce the lease free from any defenses, offsets counterclaims [sic]," that lessee has not received any express or implied warranties for the products leased and has "unconditionally waive[d] any claims . . . against Leasecomm." It also provides for "the exclusive jurisdiction of the Courts of . . . Massachusetts" and waives "any objection to venue" there. Plaintiff's allege improprieties in the execution of the leases, including forging of some lessees' signatures, the use of "witnesses" who did not in fact witness lessees' signatures, failure to fill out essential terms of the lease, and failure to provide copies of leases to lessees. (Id. ¶¶ 127.)
Finally, plaintiff's allege that Leasecomm used extortionate means to collect on the leases, such as
insulting, harassing and intentionally harmful rhetoric including disparaging personal remarks, embarrassing messages left with third parties about sending debtors to jail, taunting debtors about their credit and threatening to destroy their credit unless payment was made without objection for each and every charge.
(Id. ¶ 148.) They allege that Leasecomm made unauthorized withdrawals from plaintiff's' bank accounts and that Leasecomm inflated its charges by (1) making "frequent, duplicative contacts" such as multiple collection calls on the same day, and then "charging for each contact" (Id. ¶ 151), and (2) presenting bad checks for payment multiple times on the same day (id. ¶ 152 Ex. G). Plaintiff's also allege that Leasecomm "obtained thousands of default judgements [sic] in Massachusetts and . . . sought enforcement of the same" while "conceal[ing] from the court the nature of the contract between Leasecomm and the debtors." (Id. ¶ 155.)
DISCUSSION
I. Legal Standards
A. Dismissal under Rule 12(W6)
On a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court must accept "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) (citations omitted); see also Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (when adjudicating motion to dismiss under Fed.R.Civ.P. 12(b)(6), the "issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims" (internal quotation marks and citations omitted)). When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents attached to the complaint as exhibits or incorporated in it by reference. Brass v. American Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993). All reasonable inferences are to be drawn in the plaintiff's favor, which often makes it "difficult to resolve [certain questions] as a matter of law." In re Independent Energy Holdings PLC, 154 F. Supp.2d 741, 747 (S.D.N.Y. 2001).
B. Civil RICO
Plaintiff's RICO claim, the only federal claim and therefore the basis of federal jurisdiction for the case, is based on 18 U.S.C. § 1962(c), which makes it unlawful for "any person employed by or associated with any [interstate] enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity," and 18 U.S.C. § 1962(d), which penalizes conspiracy to violate, inter alia, § 1962(c).
Thus, in order to state a substantive cause of action under RICO, the plaintiff must allege that a defendant engaged in "(1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity" (5) resulting in (6) injury to business or property. Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 89 (2d Cir. 1999), quotingSedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496(1985).
A RICO "enterprise" can be "any individual, partnership, corporation, association, or other legal entity, [or] any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). The enterprise cannot, however, be the very defendant that is itself charged with being the "person . . . associated with" and "participat[ing] in the conduct of the enterprise; that is, the enterprise must be distinct from each of the "persons" conducting it. Riverwoods Chappaqua Corp. v. Marine Midland Bank. N.A., 30 F.3d 339, 343-44 (2d Cir. 1994). Here, plaintiff's allege an "association in fact" consisting of Themeware, Cardservice, OX, ECX, and MFI/Leasecomm. (Compl. ¶ 51.) They also allege, in passing, that "Leasecomm was itself an enterprise conducted by MFI and its defendants Bleyleben, Latour, and Salvo, all officers and shareholders of MFI." (Id. ¶ 52.)
The "pattern of racketeering activity" must consist of at least two "predicate acts" of racketeering activity within ten years, § 1961(5), where the "acts" are certain violations of state or federal law as set forth in § 1961(1). Plaintiff's here allege predicate acts consisting of wire fraud, 18 U.S.C. § 1343, mail fraud, 18 U.S.C. § 1341, and violations of the Hobbs Act, 18 U.S.C. § 1951. (Compl. ¶¶ 171-182.)
Courts in this district, in agreement with the holdings of several Courts of Appeals, have carefully scrutinized civil RICO claims at the dismissal stage, since the statute was "enacted expressly, as set forth in the preamble to the Act, 'to seek the eradication of organized crime in the United States'" and therefore "mere assertion of a RICO claim . . . has an almost inevitable stigmatizing effect on those named as defendants." Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 654-55 (S.D.N.Y. 1996) (quoting Figueroa Ruiz v. Alegria, 896 F.2d 645, 650 (1st Cir. 1990)): see also Schmidt v. Fleet Bank, 16 F. Supp.2d 340, 346 (S.D.N.Y. 1998) (citing Katzman and dismissing RICO claims); Goldfine v. Sichenzia, 118 F. Supp.2d 392, 397 (S.D.N.Y. 2000) (stating that "[t]his Court looks with particular scrutiny at Civil RICO claims to ensure that the Statute is used for the purposes intended by Congress" and dismissing RICO claim).
II. Plaintiff's' RICO Claims
RICO is a complex statute, whose defining elements consist of abstract conceptions (the "enterprise" and the "pattern of racketeering" activity) that must exist in specified, also highly abstract relationships. (In § 1962(c), for example, the enterprise must be "conduct[ed] . . . through" a pattern of racketeering.) This abstract and complex structure permits the use of the statute to combat a wide variety of substantive criminal activities, from official corruption to business fraud to terrorist acts, but also renders it difficult for plaintiff's to plead the elements of a cause of action with clarity and concision.
Like many civil RICO complaints, the complaint here recites a large number of facts about the business practices of MFI/Leasecomm, its dealers, and certain individuals who are involved with them, and then draws the general conclusion that these facts constitute violations of RICO. Curiously, although federal prosecutors have over the years developed pleading conventions that facilitate the presentation of RICO violations in a coherent way, civil RICO plaintiff's rarely make use of criminal RICO indictments as models, and instead persist in presenting confusing pleadings that make it extremely difficult to identify which defendants are charged with committing which predicate acts, or how the alleged pattern of racketeering is related to the enterprise.
Given the notice pleading standards of the Federal Rules of Civil Procedure, even as supplemented by the requirement that fraud be pleaded with particularity, the lack of clarity in plaintiff's' pleading will not necessarily defeat their claims. To the extent the Court can identify the elements of a RICO violation, the complaint will be held to state a claim on which relief can be granted. But the broad-brush, imprecise approach to pleading exemplified by this complaint challenges the defendants' ability to understand what they are being sued for, the Court's ability to understand the plaintiff's' theories, and the plaintiff's' ability to survive judicial scrutiny that may misperceive the plaintiff's' true intentions. In formulating any amended complaint, plaintiff's are encouraged to spell out more clearly the nature of the enterprise alleged, the specific predicate acts that constitute the pattern of racketeering, and the persons who are alleged to have committed each of those predicate acts.
A. The Alleged RICO Enterprises
As noted above, plaintiff's appear to allege two different RICO enterprises: one an "association in fact" consisting of MFI/Leasecomm and four of its dealers (Compl. ¶ 51), the other consisting only of Leasecomm itself (Id. ¶ 52). The latter theory can support only a portion of the superstructure of the complaint. As a corporation, Leasecomm may constitute an enterprise as defined in § 1961(4). On such a theory, however, neither Leasecomm nor MFI can be defendants charged with conducting the enterprise, for Leasecomm cannot itself be both the enterprise and a defendant charged with operating the enterprise, and a corporation and its wholly-owned subsidiary are not "distinct" for the purposes of RICO when they are acting "within the scope of a single corporate structure, guided by a single corporate consciousness." Discon. Inc. v. NYNEX Corp., 93 F.3d 1055, 1063-64 (2d Cir. 1996).
Although the defendants correctly point out that plaintiff's' careless terminology at several places in the complaint creates potential confusion about exactly which persons or entities plaintiff's seek to include in the enterprise (Leasecomm/MFI Mem. 4-5), ¶ 51 is the only place in the complaint that purports to define an "association-in-fact" enterprise, and is clearly intended by plaintiff's as the authoritative definition of the larger enterprise being alleged.
Nor can the enterprise allegation be saved by defining it as an association in fact of Leasecomm and its employees, since "where employees of a corporation associate together to commit a pattern of predicate acts in the course of their employment and on behalf of the corporation, the employees in association with the corporation do not form an enterprise distinct from the corporation" and the enterprise element is not satisfied. Riverwoods Chappaqua, 30 F.3d at 343-44.
The dealer defendants and their officers are not alleged to have participated in the conduct of Leasecomm itself. Accordingly, the only defendants who can be sued for conducting the enterprise consisting of Leasecomm itself are its officers, von Bleyleben, Latour and Salvo. As will be further discussed below, the allegations of conduct by these individuals themselves are both sparse and vague, and the complaint extensively details actions committed by other defendants who are alleged to be part of the broader "association in fact" enterprise, which are apparently intended to constitute aspects of patterns of racketeering activity," through which those defendants are alleged to have conducted the alleged enterprise. It is therefore dopubtgul that the plaintiff's intend to rely on the narrower theory that these three individual defendants conducted the affairs of Leasecomm itself in a manner that violates RICO.
In light of this ambiguity, and because the plaintiff's' memorandum of law focuses primarily on the broader enterprise, the enterprise alleged here will be analyzed only as an "association in fact" enterprise consisting of MFI/Leasecomm and its dealers Themeware, Cardservice, OX and ECX. Since the plaintiff's seek permission to amend their complaint, and, as noted below, will have to do so in order to state a claim against most of the defendants, it would be desirable for them to clarify the nature of the enterprise they intend to plead. For the present, however, the Court must address whether the alleged broader enterprise constitutes a viable RICO enterprise.
Courts have struggled with the potentially amorphous concept of the "association in fact." On the one hand, criminal organizations are not noted for their compliance with the niceties of corporate form; in enacting RICO, Congress clearly intended to address the conduct of loose associations of persons who conduct their criminal business outside the formal structures of corporations, partnerships or other legal entities. On the other hand, courts have been careful to prevent plaintiff's or prosecutors from using RICO to "str[ing] together all of the defendants and label them an association-in-fact enterprise." Nasik Breeding Research Farm Ltd. v. Merck Co., 165 F. Supp.2d 514, 539 (S.D.N.Y. 2001). The Supreme Court identified the hallmarks of an association-in-fact enterprise in United States v. Turkette, 452 U.S. 576 (1981), noting that to constitute a RICO enterprise, a group of malefactors must be "associated together for a common purpose of engaging in a course of conduct," and must show "evidence of an ongoing organization, formal or informal, and . . . evidence that the various associates functioned as a continuing unit." Id. at 583.
Whether a group of individuals or corporations exhibit such organization and common purpose is ordinarily a question of fact. At the same time, a complaint must allege facts that permit an inference that such an association exists. Defendants variously argue that the facts alleged in the complaint "do not support any hierarchy or organization required for an enterprise, but rather disclose separate and distinct 'e commerce businesses' . . . entirely lacking continuity in personnel, structure, or 'common purpose" (Cardservice Mem. 10), or that the complaint "simply allege[s] that a number of different corporations engaged in different activities, sometimes together and sometimes apart, over a finite period of time" (Leasecomm/MFI Mem. 7). These objections are not well taken.
Plaintiff's clearly allege that although MFI/Leasecomm ostensibly does nothing more than provide financing for the various vendors of goods and services who are its customers, in reality it operates an integrated enterprise in which, through "strategic alliances" (Compl. ¶ 43) with vendors that it has carefully vetted and selected (id. ¶ 40), the vendors utilize "heavy-handed, high-powered mass marketing" of dubious and misrepresented services to induce consumers to enter leases that are then instantly and automatically transferred to MFI/Leasecomm (id. ¶¶ 53-55). Plaintiff effectively claim that this system — allegedly touted by von Bleyleben and Latour as "unique and apart from the normal standards of the leasing and credit industry" (id. ¶ 53) — was designed to create a steady flow of lease income to MFI/Leasecomm by putting the vendors out front to engage in fraudulent marketing, while allowing Leasecomm to collect the profits free of recourse by defrauded customers, as an ostensibly independent financing institution that operated merely as the assignee of the leases. Fairly read, the complaint alleges that MFI/Leasecomm's primary customers were marketers of dubious products by fraudulent means, and that the supposedly independent businesses defendants reference in their argument functioned as an integrated system for fleecing the unwary. Of course, it remains to be seen whether plaintiff's can prove this claim. But at this stage of the case, it cannot be said that plaintiff's have failed to allege that the enterprise exists.
Two other arguments must be addressed. First, it can be argued that the facts alleged in the complaint suggest two separate enterprises, one linking MFI/Leasecomm to Cardservide and Themeware, the other tying MFI/Leasecomm to ECX, OX, and Medtrak. In their initial description of the "MFI/Leasecomm Enterprise," plaintiff's allege that Themeware, ECX, Cardservice and OX "all functioned as dealers for Leasecomm in obtaining customers" such as plaintiff's. (Compl. ¶ 39.) With these four dealers, MFI/Leasecomm "entered into special relationships . . . which it called 'strategic alliances.'" (Id. ¶ 43.) This could be read to suggest separate "associations in fact" between MFI/Leasecomm and each of the dealers, or at least two distinct enterprises, one devoted to the Themeware scheme and another involved in the ECX/OX scheme, in what is called in the conspiracy case law a hub-and-spokes structure. See, e.g., Kotteakos v. United States, 328 U.S. 750 (1946). As ECX argues, the complaint thus alleges "two separate fraudulent schemes . . . neither of which involves all of the entities alleged . . . to be part of the enterprise." (ECX Mem. 12-13.)
There are only two references in that description to any direct connection among the four dealers: a statement that they "cooperated with each other in conducting trade shows, infomercials and web page advertisements" (Compl. ¶ 49), and a statement that Cardservice and ECX (in its former incarnation as Card Service Laguna), were, at least in 1997 and 1998, "affiliates." (Id. ¶ 47.) The former statement is unspecific, and the latter assertion is irrelevant, inasmuch as Card Service Laguna was a different predecessor corporation distinct from ECX, organized under the laws of a different state, and is not alleged to have played any role in the RICO enterprise. (Compl. ¶¶ 18-19.) The alleged "cooperation]" among the "strategic partners" appears to refer to cooperation within, but not between, the two distinct marketing campaigns described later in the complaint: On the one hand, Themeware's development and marketing "in cooperation with Cardservice and Leasecomm" of the "Internet Tool Box" and iPage Builder products (id. ¶¶ 72, 75), and on the other hand ECX's and OX's involvement in the marketing of "merchant accounts" using a videotaped seminar (id. ¶¶ 88-96).
It does not follow, however, that the plaintiff's have failed to allege an enterprise under RICO. It is commonplace in RICO enterprises for the members of the enterprise to engage in separate schemes or conspiracies, not all of which involve all of the participants in the enterprise.See, e.g., United States v. Mauro, 80 F.3d 73, 77 (2d Cir. 1996); United States v. Coonan, 938 F.2d 1553, 1560-61 (2d Cir. 1991). As described above, plaintiff's' complaint alleges that MFI/Leasecomm operated an organized and integrated scheme by which in would recruit companies making similar sorts of fraudulent pitches for different products, who in turn would induce customers to enter leases with MFI/Leasecomm that would then be aggressively enforced by it despite the customers' anticipated dissatisfaction with the products and services provided. Whether plaintiff's can prove that this enterprise really existed, that is, that it had a sufficiently coherent hierarchy, organization or structure to demonstrate that it had a genuine existence as an association, rather than being simply a series of opportune ad hoc agreements between MFI/Leasecomm and other independent companies, must await discovery and trial. But the complaint alleges a single enterprise, even if, as is commonly the case in such criminal associations, every participant was not involved in or even specifically aware of the activities of the other participants.
Second, various defendants argue that "the enterprise's lifespan [as alleged in the complaint] was not long enough to fall within the purview of RICO." (MFI/Leasecomm Mem. at 7-8.) The only authority cited for this proposition is Schmidt v. Fleet Bank, 16 F. Supp.2d 340, 351 (S.D.N.Y. 1998). But that authority is unpersuasive, since (1) as a decision of a parallel court, Schmidt does not bind this Court; (2) the discussion cited by defendants was effectively labeled as dictum by the Schmidt court itself, see Id. (noting that "the continuity issue is not dispositive here"); and (3) the question of "continuity" is properly an attribute of the pattern of racketeering, and not of the enterprise.
B. Predicate Acts
After a series of allegations describing the alleged enterprise (Compl. ¶¶ 34-52), the complaint proceeds to describe a variety of alleged "deceptive practices" of the enterprise (id. ¶¶ 59-155) and alleged "financial manipulation" by MFI (id. ¶¶ 156-170). The complaint then proceeds to allege, in conclusory terms, a number of alleged predicate acts of mail fraud, wire fraud, and extortion (id. ¶¶ 171-182). The somewhat chaotic organization of the complaint makes it difficult or impossible to understand what predicate acts are alleged to have been committed by which defendants, or even clearly to understand what the predicate acts are.
The principal predicate acts relied upon by plaintiff's are acts of mail and wire fraud. In order to allege a violation of the mail or wire fraud statutes, a plaintiff must allege the elements of the offense: "(i) a scheme to defraud (ii) to get money or property, (iii) furthered by the use of interstate mail or wires." United States v. Autuori, 212 F.3d 105, 115 (2d Cir. 2000). A scheme to defraud "has been described as a plan to deprive a person of something of value by trick, deceit, chicane or overreaching." Id., quoting McNallv v. United States, 483 U.S. 350, 358 (1987), and Hammerschmidt v. United States, 265 U.S. 182, 188 (1924) (internal quotation marks omitted).
Plaintiff's' complaint contains allegations that appear to suggest that the defendants schemed to defraud the customers of the dealers by misrepresenting the nature of the products and services being offered. The complaint, however, describes so many diverse and overlapping schemes and activities of the various defendants that it is often impossible to identify which of these activities are attributed to whom, and which are alleged to constitute the scheme or schemes to defraud in furtherance of which the mails are alleged to have been used. For Associates" (defined in ¶ 41 as "Themeware, ECX, Cardservice and [OX]"). The individual defendants and Medtrack are not alleged to have committed any of these offenses. The failure to attribute any predicate acts, let alone a pattern of them, to several of the defendants not only dooms the complaint as to those defendants, but further complicates the task of assigning any particular alleged mailing or wire transmission to any particular scheme to defraud.
This disorganized pleading in itself requires dismissal of the RICO cause of action, since the complaint fails coherently to identify the predicate crimes the defendants are alleged to have committed. Nevertheless, the Court will briefly discuss what appear to be the allegations against various particular defendants, for such guidance as that may provide in connection with potential repleading.
1. MFI/Leasecomm
Plaintiff's appear to allege that Leasecomm committed numerous predicate acts by (1) committing mail fraud in directing plaintiff's to return the Leasecomm leases by mail and by mailing statements "for monies allegedly due on account of [its leases]"; (2) committing wire fraud by making phone calls demanding payment on the leases; and (3) violating the Hobbs act by using "threats and intimidation" to "collect monies" due under the leases. (Compl. ¶¶ 173-182.) Characteristically, the Complaint attributes these predicate acts only to Leasecomm, while many of the factual allegations that appear to support them are attributed to MFI or to "MFI/Leasecomm." For purposes of this discussion, the Court makes no attempt to distinguish the two corporations. Any amended complaint, however, will have to identify which entity or entities plaintiff's intend to charge with which acts.
While plaintiff's fail to identify the particular scheme or schemes the mailings and wire transmissions are alleged to have furthered, it appears that they believe that Leasecomm was a knowing participant in several schemes to defraud consumers by misrepresenting to them the value of various products and services and the terms of the leases. Such a scheme would constitute a scheme or artifice to defraud within the meaning of the mail and wire fraud statutes, because it would seek to deprive the consumers who are its targets of money and property by the making of false representations. If plaintiff's intend to make such an allegation, they must provide a plain statement of each scheme they allege that these defendants participated in, by clearly defining the nature of the scheme, the misrepresentations they allege constituted the fraud, and the mailings that they allege furthered each scheme. It appears likely that such a scheme or scheme can be defined from the various jumbled allegations made against these defendants.
MFI/Leasecomm also argues that the allegations of extortion fail adequately to allege violations of the Hobbs Act. The Hobbs Act makes it a crime "in any way . . . [to] affect commerce . . . by . . . extortion." 18 U.S.C. § 1951(a). "Extortion" is defined as "the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right." § 1951(b)(2). Leasecomm argues that plaintiff's have not stated a claim under the Hobbs Act because "a threat to cause economic loss is not . . . wrongful [unless] it is used to obtain property to which the threatener is not entitled," United States v. Jackson, 180 F.3d 55, 70 (2d Cir. 1999), and that it was entitled, by virtue of the leases, to the property it obtained.
This argument fails because plaintiff's accuse Leasecomm of more than just threats "to cause economic loss" and because plaintiff's allege that Leasecomm was not "entitled" to the example, Leasecomm is alleged to have offered "unconscionable" contracts of adhesion that "included in fine print information and clauses required to be conspicuous'" (Compl. ¶¶ 97-101), and that contained provisions "disadvantageous to plaintiff's" (id. ¶ 102). It is unclear, however, whether and how these one-sided contract terms are alleged to have constituted misrepresentation or fraud; merely proposing an unconscionable contract term is not a crime. Similarly, the RICO portion of the complaint contains lengthy allegations of violations of state civil consumer protection laws (id. ¶¶ 59-67), which do not constitute RICO predicates, and still other paragraphs (id. ¶¶ 78-87) alleging that certain of the leased services constituted franchises, a concept irrelevant to RICO though relevant to some of the plaintiff's' other claims. In addition, von Bleyleben and Latour are alleged to have engaged in "pumping" the stock price of MFI (id. ¶¶ 161-170); it is unclear to what extent if any this activity is alleged to constitute a part of any scheme to defraud the plaintiff's. Nowhere is there a clear statement of the fraudulent schemes any particular defendant is alleged to have participated in on behalf of the enterprise, and used the mails or wires to further.
This confusing morass of schemes and plots is then followed by a series of alleged mailings and wire transmissions. (Compl. ¶¶ 171-180.) The complaint does not specify which if any of the various schemes to defraud arguably described in the preceding portions of the complaint these mailings and wire transmissions were intended to further. For example, it can be inferred that plaintiff's intend to allege that the wire transmission of the Karn infomercial was in furtherance of a scheme to defraud purchasers of the "Internet Tool Box" described in paragraphs 68 through 77, though this is not expressly stated. At any rate, the infomercial would appear to have nothing to do with the various other schemes set forth in the complaint. The mailing and return of contracts and account statements, and the making of dunning phone calls, could be construed as having been intended to further any of several of the schemes. However, no connection between any particular scheme and these alleged mailings and wire communications is stated.
Moreover, the complaint largely fails to identify which defendants engaged in any of these alleged predicate acts. This is a critical omission. RICO makes it a crime for a "person" associated with an enterprise to conduct the enterprise through a pattern of racketeering. In other words, it is not the enterprise in general that must engage in the pattern of racketeering, but each defendant who must somehow participate in the conduct the enterprise by means of a pattern of racketeering acts. Thus, to state a cause of action against any particular defendant, a complaint under § 1962(c) must charge each named defendant with engaging in specific racketeering acts, constituting a pattern within the meaning of the statute, committed by that defendant in the course of conducting the affairs of the enterprise. Alleging, as this complaint does, that a variety of defendants engaged in a variety of different schemes, and that somebody used the mails or wires in furtherance of at least some of those schemes, does not adequately charge particular defendants with violating the statute.
A close reading of the mail and wire fraud allegations will clarify the problem. The allegation regarding the transmission of the Karn infomercial is stated in the passive voice ("the Karn infomercial described above was transmitted by electronic means . . . in violation of [ 18 U.S.C. § 1343]"). (Compl. ¶ 171.) No particular defendant is said to have committed this alleged crime. The other predicate acts are for the most part attributed to Leasecomm, except for the mailing of lease contracts to plaintiff's, which is attributed in ¶ 172 to the "Leascomm monies it collected or attempted to collect. Plaintiffs allege threats to "have various plaintiff's put in jail" and to "embarrass and humiliate plaintiff with his/her business associates, family and friends." (Compl. ¶ 181.) These were threats to plaintiffs' dignity and liberty, not just threats of economic loss. Plaintiff's also allege that the leases were not valid contracts because of the fraudulent conduct of Leasecomm's dealers and their agents, the unconscionability of the lease terms, the forging of some lessees' signatures and the omission in some cases of essential terms. (Id. ¶ 127(d), (e).) If plaintiff's are correct on any of these grounds, Leasecomm would not have been "entitled" to the monies it demanded, and may not even have had reason to believe that it was so entitled. Thus, the Hobbs Act allegations could satisfy the predicate act requirement as to MFI/Leasecomm.
Once again, however, the allegations are hardly models of clear pleading. The Hobbs Act paragraph fails to allege an effect on interstate commerce, does not use the word extortion, and does not specify that MFI/Leasecomm intended to obtain property to which it was not entitled. As a consequence, the theory set forth above is at best a guess by the Court at the theory plaintiff's might intend. Any amended complaint must clearly allege all elements of a Hobbs Act violation.
2. The MFI/Leasecomm Officers
MFI/Leasecomm officers von Bleyleben, Latour, and Salvo correctly argue that plaintiff's have failed to allege any predicate acts attributable to them. (Von Bleyleben Mem. 3-4.) At most, the Complaint can be interpreted to state that these defendants were the principal officers of MFI/Leasecomm and that they were involved in the decision to seek revenue through the aggressive collection practices alleged. (Compl. ¶¶ 14-16, 164-169.) To violate 18 U.S.C. § 1962(c), however, a defendant must have committed two or more predicate acts of racketeering, each of which is itself a serious crime. The predicate racketeering acts of mail fraud, wire fraud, and Hobbs Act extortion in the complaint are directly attributed only to the corporate defendant Leasecomm and to unspecified "agents," and not to the three defendant officers. (Compl. ¶¶ 175-180.)
Plaintiff's do, however, make other allegations that suggest that this gap could be bridged in a proper pleading. First, the Complaint alleges that von Bleyleben, Latour and Salvo "were the officers of MFI principally responsible for the design and implementation of Leasecomm's UDAP practices." (Id. ¶ 187.) Although "UDAP" is earlier defined as "unfair and decpetive acts and practices" in violation of the Federal Trade Commission Act and various similar state regulatory statutes (id. ¶ 59) — none of which are themselves RICO predicates — this may suggest that plaintiff's intend to allege or could allege that the MFI/Leasecomm officers were personally responsible for whatever schemes to defraud they believe MFI or Leasecomm engaged in, and for the mailings and wire transmissions in furtherance of those schemes that the corporate defendants are accused of causing to be made. An amended pleading should specifically allege which predicate acts each defendant is accused of committing.
Second, the complaint alleges, in the briefest and most conclusory of terms, that "each of the defendants conspired to violate" § 1962(c), in violation of § 1962(d). It is possible to violate § 1962(d) by conspiring with others, even without committing or agreeing to commit any predicate acts oneself. Salinas v. United States, 522 U.S. 52 (1997). Plaintiff's, however, nowhere describe the nature of any such alleged conspiracy, or the role of any defendant in it, or how the conspiracy, as distinct from the substantive violations of RICO, caused them injury. It is certainly not clear that plaintiff's intend to allege that the MFI/Leasecomm officer defendants were guilty of conspiring to participate in the affairs of the enterprise by a pattern of racketeering acts committed by others, without themselves being responsible for the commission of any racketeering acts. To the extent that any such theory is intended, it should be spelled out in any amended complaint.
Plaintiff's fail to comprehend that in making allegations under RICO, they are charging the defendants with having committed serious criminal offenses. It is not enough to allege that predicate acts were committed by somebody, in furtherance of an enterprise in which the defendants were involved. Rather, to state a violation of § 1962(c) by any defendant, plaintiff's must allege that that defendant personally committed two or more predicate acts. The present complaint does not allege that von Bleyleben, Latour or Salvo participated in any predicate acts at all.
3. OX, ECX, Medtrak, and Schneider
The complaint fails adequately to allege that any of the defendants associated with the OX/ECX "merchant account" scheme committed any predicate acts of racketeering. None of the "predicate acts" specifically identified as such in the complaint (Compl. ¶¶ 171-178) are more than vaguely attributed to any of these defendants, or indeed are expressly connected to the "merchant account" scheme. Medtrak and Schneider are not mentioned at all in these sections. It can be inferred that OX and ECX, under the rubric of "Leasecomm Associates," are accused of causing Leasecomm contracts to be mailed to certain plaintiff's. (Id. ¶ 172.) As previously discussed, however, the failure to clearly articulate a connection between these mailings and any particular scheme or artifice makes it difficult to identify who is alleged to be responsible for which criminal acts.
The complaint does refer (in sections not identified as defining alleged predicate acts) to other acts that could constitute mailings and wire communications in furtherance of the "merchant account" scheme, such as the mailing of the videotaped seminar (id. ¶ 91) and of direct mail solicitations (id. ¶ 92(a)), and the making of "follow-up marketing telephone calls" (id. ¶ 93). But claims based upon fraud, including claims of wire or mail fraud as predicate acts to a RICO claim, must be pleaded with particularity. Fed.R.Civ.P. 9(b); McLaughlin v. Anderson, 962 F.2d 187, 190-91 (2d Cir. 1992). The complaint does not satisfy this requirement, due to the vague and inconsistent description of the roles played by the participants in that scheme. Plaintiff's equivocate as to who authored the video (and therefore the alleged misrepresentations it contained), and do not clearly specify which entity or entities mailed the video, mailed the Leasecomm leases, and made the marketing telephone calls.See id. at 191 (a fraud complaint must "identify those responsible for the [false] statements") — Indeed, the complaint appears to attribute most of the fraudulent activities undertaken in connection with this scheme to a non-defendant, NESA. Thus, the RICO claims against OX and ECX must be dismissed, subject to a repleading specifying who was responsible for which fraudulent communications.
The only allegations involving Medtrak and Schneider arise from the facts that Medtrak was Online's "controlling shareholder and controlling principal" that "controlled [OX's] operations" (id. ¶ 25), that OX "was described as 'backed' by Medtrak" in certain promotional materials (id. ¶ 92(c)), and that Schneider in turn controlled both Medtrak's and OX's operations (id. ¶ 26). The RICO claims against Medtrak and Schneider are therefore entirely dependent on the claims against OX, and these defendants are even more remote from any allegation of personal responsibility for any predicate acts of racketeering. The complaint thus must be dismissed as to them, notwithstanding the fact that Medtrak is in default.
4. Cardservice, Rettew, and Karn
The complaint's allegations concerning the Themeware bait-and-switch scheme are more clearly stated and adequately allege acts of wire fraud on the part of Themeware — which is not a defendant. The authorship and misrepresentations of the infomercial, and the circumstances under which the bait-and-switch was effected, are clearly spelled out, satisfying the requirements of Rule 9(b). (Compl. ¶ 77.)
Karn argues that since his role was only to make the Internet Tool Box infomercial, which itself did not mention iPage Builder (and was produced before iPage builder was developed), plaintiff's have failed to make "allegations of acts from which [specific intent to defraud] can be inferred." But with respect to the element of fraudulent intent, the requirements of Rule 9(b) are relaxed when "the allegations lie peculiarly within the opposing parties' knowledge and are accompanied by information that raises a strong inference of fraud." Ouaknine v. MacFarlane, 897 F.2d 75, 81 (2d Cir. 1990). plaintiff's have alleged that the infomercial, even as a marketing device for the Internet Tool Box alone, contained material misrepresentations by Karn (see id. ¶ 77(b), (c), (f), (h)), including his calling the product the "Internet Business Tool Box" and thereby implying that the product was appropriate for conducting a business through the Internet. While Karn is correct that this fraud is not the wire fraud upon which the RICO claim is based (as it did not involve the Leasecomm leases), the presence of fraudulent statements in the infomercial itself supports an inference that the infomercial was intended to be used for fraudulent purposes. Furthermore, it can be inferred from the allegations of the complaint that Karn, as shareholder and "principal spokesperson" for Themeware "[a]t all pertinent times" (id. ¶ 22), remained involved in its marketing efforts and in the particular acts of wire fraud involved in the alleged "bait and switch" scheme. Since Karn's actual role, if any, is particularly within his knowledge, and since the circumstances cited raise a strong inference of some fraud, plaintiff's have sufficiently alleged that he was responsible for committing predicate acts in furtherance of the scheme.
Whether the complaint sufficiently attributes any predicate acts to Cardservice is a closer question. The complaint alleges that Cardservice "expended substantial sums of money in developing the iPage Builder program with Themeware and in marketing the bait and switch Tool Box." (Id. ¶ 75.) The allegation that Cardservice simply funded the marketing effort is insufficient to support an inference that it had any control over the fraudulent use made of the infomercial, and more generally is insufficient to support an inference of fraudulent intent. There is no allegation that Cardservice had anything to do with the development of the Internet Tool Box or the content of the Karn infomercial, or that it had any input into the way responses to the infomercial were handled. Therefore, the RICO claim against Cardservice, as currently framed, fails to allege fraudulent conduct by it. However, as plaintiff's have in any event moved for leave to amend their complaint to add claims against Cardservice's former president Chuck Burtzloff, they will be permitted to amend their complaint to more clearly allege, if they can, any culpable role Cardservice played in the alleged scheme to defraud and the mailings in furtherance of it.
Finally, Themeware's alleged "shareholder and . . . principal officer" Rettew has neither answered the complaint nor moved for dismissal, and is therefore in default. However, the complaint does not allege that Rettew personally participated in any alleged predicate acts' of racketeering. The present complaint therefore does not state a RICO claim against him.
C. Pattern of Racketeering Activity
To establish a "pattern of racketeering activity," a plaintiff must show that a defendant's predicate acts "themselves amount to, or that they otherwise constitute a threat of, continuing racketeering activity." H.J., Inc. v. Northwestern Bell Tel Co., 492 U.S. 229. 241 (1989). As the Second Circuit summarized this requirement:
The continuity necessary to prove a pattern can be either "closed-ended continuity," or "open-ended continuity." See id. at 239, 241. 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. Predicate acts extending over a few weeks or months . . . do not satisfy this requirement." Id. at 242. . . . To satisfy open-ended continuity, the plaintiff need not show that the predicates extended over a substantial period of time but must show that there was a threat of continuing criminal activity beyond the period during which the predicate acts were performed. Id. at 242-43. 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. See Schlaifer Nance Co. v. Estate of Andy Warhol, 119 F.3d 91, 97 (2d Cir. 1997); GICC Capital Corp. [v. Technology Finance Group. Inc., 67 F.3d 463,] 466 [(2d Cir. 1995)]. Where the enterprise is engaged primarily in racketeering activity, and the predicate acts are inherently unlawful, there is a threat of continued criminal activity, and thus open-ended continuity. See H.J. Inc., 492 U.S. at 242-43 ("[T]he threat of continuity is sufficiently established where the predicates can be attributed to a defendant operating as part of a long-term association that exists for criminal purposes."). However, where the enterprise primarily conducts a legitimate business, there must be some evidence from which it may be inferred 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. at 243.Cofacredit, S.A. v. Windsor Plumbing Supply Co., 187 F.3d 229, 242-43 (2d Cir. 1999).
Thus, closed-ended continuity is "centrally a temporal concept" which may be demonstrated by "proving a series of related predicates extending over a substantial period of time." H.J., Inc., 492 U.S. at 242. The only enlightenment H.J. provides as to what constitutes a "substantial period of time" is its statement that "Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement." Id. However, the Second Circuit has emphasized that duration is not the only relevant issue: "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." Cofacredit, 187 F.3d at 242.
Leasecomm (as well as ECX and Cardservice) argues that "the enterprise's lifespan was not long enough to fall within the purview of RICO," since "the Second Circuit has never found sufficient continuity for RICO purposes where the predicate acts all occurred within two years" (MFI/Leasecomm Mem. at 7), and the maximum length of the patterns of racketeering alleged here was eighteen months (id. at 7-8, citing Compl. ¶¶ 172-173). The Second Circuit itself has noted that since H.J. was decided it has not found "closed-ended continuity" in an alleged pattern of racketeering acts that lasted less than two years. DeFalco v. Bernas, 244 F.3d 286, 321 (2d Cir. 2001). But such statistics do not make binding law; the Second Circuit has never set a rigid floor for the "substantial period" requirement.
Prior to the Supreme Court's decision in H.J., decision, the Second Circuit had found racketeering acts committed over a "period of nearly two years" sufficient to constitute a pattern of racketeering activity. Procter Gamble Co. v. Big Apple Indus. Bldgs., Inc., 879 F.2d 10, 18 (2d Cir. 1989). Procter Gamble has not been overruled or reconsidered in light of H.J.
Even as a statistical fact, the observation about the Circuit's prior decisions supports little weight, considering that it is derived from an extremely small sample of cases: GICC Capital Corp., 67 F.3d at 467 (finding one year insufficient); Metromedia v. Fugazy, 983 F.2d 350, 369 (2d Cir. 1992) (finding two years sufficient); Jacobson v. Cooper, 882 F.2d 717, 720 (2d Cir. 1989) (finding eight-year period sufficient). In DeFalco itself, the Second Circuit declined to find "closed-ended continuity" in a scheme that lasted only eighteen months, but (1) that discussion was essentially dictum, since the Court found that a pattern of racketeering had been proved on a theory of "open-ended continuity," and (2) inDeFalco, the alleged pattern being discussed was a pattern of extortionate acts directed essentially at a single victim, and is thus distinguishable from the present case.
The Second Circuit has explicitly held (consistent with the Supreme Court's statement that continuity "may" be shown by the temporal extent of the predicate acts) that duration is but one of several factors to be considered in determining whether a pattern of racketeering activity had the requisite continuity. GICC Capital Corp., 67 F.3d at 467 (court must "weigh a variety of non-dispositive factors, including, inter alia, 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.") There is no authority for a pleading requirement involving a minimum duration of two years, and the predicate acts described here are certainly alleged to have stretched out over much longer than "a few weeks or months."
Moreover, plaintiff's might well be able to establish, at least as to Leasecomm, a pattern of racketeering activity that exhibits "open-ended continuity." Although the enterprise alleged here was involved in apparently legitimate business and is not an entirely illegitimate association such as a criminal gang, the complaint appears to allege that Leasecomm at least committed the predicate acts charged that the predicate acts as a "regular way of operating that business,"Cofacredit, 187 F.3d at 243, that conceivably extended beyond the particular "strategic partners" named in the complaint. Further discussion of this possibility is unnecessary at the present time, since it is unnecessary to the resolution of the motion as to the present complaint.
Under these circumstances, where the complaint alleges that predicate acts continued for a period of time that is (at least) close to long enough to establish continuity solely on grounds of duration, and where at least some participants in the alleged enterprise are alleged to have engaged in at least two different fraudulent schemes with a large number of individual victims, it cannot be said as a matter of law, simply based on the limited duration of the alleged schemes, that the complaint fails to allege sufficient continuity to establish a pattern of racketeering.
As to most of the defendants, however, the present complaint does not sufficiently allege a pattern of racketeering in any case. As noted above, duration or continuity is a required attribute not of the enterprise, but of the pattern of racketeering. In order to plead a claim under § 1962(c), plaintiff's must allege that each defendant participated in the conduct of the enterprise through a pattern of racketeering, which pattern must consist of at least two racketeering acts that exhibit the necessary continuity and relatedness to constitute a pattern. Because, for reasons set forth above, it is not clear what predicate acts, if any at all, are alleged against most of the defendants, it is impossible to decide whether those acts constitute a pattern. Thus, the incoherence of the pleading with respect to the nature of the predicate acts alleged against the defendants precludes a finding that a pattern has in fact been alleged. Nevertheless, since defendants' argument that there can be no pattern that lasts as short as eighteen months must be rejected, and since the allegations in the complaint appear to contain facts that may prove sufficient to state a RICO claim against at least some of the defendants, plaintiff's will be granted permission to replead.
D. Conduct of the Enterprise
1. Leasecomm and its Officers
Leasecomm and its officers argue that plaintiff's fail to allege that any of them "conduct[ed] or participate[d], directly or indirectly, in the conduct of the enterprise. (Leasecomm Mem. at 8, quoting 18 U.S.C. § 1962(c); Von Bleyleben Mem. 2.) The argument derives from the Supreme Court's decision in Reves v. Ernst Young, 507 U.S. 170 (1993), which held that in order to satisfy this requirement, a defednant must participate in the management or operation of the enterprise, since to "conduct" the affairs of an enterprise "one must have some part in directing those affairs." Id. at 179. Leasecomm points specifically to plaintiff's' failure to allege "that Leasecomm or MFI had any involvement in the other defendants' marketing efforts, solicitation of customers, selection of customers, or in formulating the transactions in question." (MFI/Leasecomm Mem. at 11.)
This argument is unpersuasive. Leasecomm is alleged to have formulated the transactions, for the complaint charges that Leasecomm's leases were the linchpin of the schemes and Leasecomm determined both the content of those leases and the means by which they were enforced. Leasecomm also purchased the leases for forty to sixty percent of their face value through an automated system that Leasecomm itself touted as "unique" and "not in accord with industry standards." (Compl. ¶ 133;see also id. ¶ 138 (detailing unique practices claimed by MFI in SEC filings, including some of those alleged to be fraudulent).) Thus, Leasecomm is not alleged to have simply "supplied financing" to the other defendants (MFI/Leasecomm Mem. at 11); it is charged with constructing and executing an entire method of doing business that enabled and encouraged dealers with which it had established "strategic partnerships" to sign up lessees on a wholesale basis, at a large markup from the dealers' costs, without concern for the lessees' business and computer acumen, ability to pay, or creditworthiness The complaint thus sufficiently alleges that Leasecomm "conducte[d] or participate[d], directly or indirectly, in the conduct of [the] enterprise's affairs." 18 U.S.C. § 1962(c).
Von Bleyleben, Latour, and Salvo call "thin" and insufficiently detailed the complaint's allegation that they "principally responsible for the design and implementation of the [unfair and deceptive] practices" and that they "developed the Leasecomm unconscionable contracts [and] its marketing system . . . and regularized the extortionate, unfair and deceptive collection practices." (Von Bleyleben Mem. 2, quoting Compl. ¶¶ 185, 187.) However, there is no heightened pleading requirement for the "conduct" element of a RICO claim. Indeed, it is hard to imagine what more plaintiff's could allege at this stage, when the precise role of these defendants is information peculiarly within their knowledge and not the plaintiff's'. As the alleged principal officers of MFI and Leasecomm, who are alleged to have designed the entire overall scheme and to have directed the activities of the companies at the center of the alleged enterprise, these defendants have surely been alleged to have participated in the conduct of the affairs of the alleged enterprise.
2. Karn
Karn argues that, as an actor who simply provided professional services to Themeware by participating in the production of the infomercial "later used by the . . . enterprise," the actions attributed to him cannot satisfy the "conduct" requirement of RICO. (Karn R. Mem. at 3.) The complaint, the allegations of which must be accepted as true for purposes of this motion, does not allege that Karn was an "actor," but rather that he was one of Themeware's shareholders and its "principal spokesperson." Nevertheless, the complaint falls short of stating facts that would suggest Karn participated, directly or indirectly, in conducting the alleged RICO enterprise. It alleges that Karn "participated in the . . . scheme when he knew, or . . . should have known that his statements were being used" for fraudulent purposes. (Compl. ¶ 189.) However, to simply allege that Karn participated in the enterprise, or was guilty of predicate crimes, is insufficient; the statute makes it illegal to "participate . . . in the conduct of [enterprise] affairs," where the noun "conduct" is used in the sense of "operation or management." Reves, 507 U.S. at 179. Thus plaintiff's must allege that Karn had "some part in directing [the enterprise's] affairs." Id. Neither making statements knowing that they will be exploited by an enterprise, nor being a shareholder of an entity involved in that enterprise, constitutes a "part in directing" it. Thus the RICO claims against Karn will be dismissed, subject to a repleading that sufficiently alleges facts supporting an inference that Karn conducted the enterprise's affairs.
E. Injury
Leasecomm argues that plaintiff's have failed to allege any cognizable injury traceable to its alleged racketeering acts since (1) plaintiff's fail to specify "what the purported damages consist of; (2) there can be no recovery for emotional distress under RICO; (3) the complaint does not specify "whether any particular plaintiff made a single lease payment or paid anything on a judgment," and (4) any payments that plaintiff's made voluntarily cannot be claimed as damages.
These assertions, to the extent they are accurate, do not justify dismissal. plaintiff's' allegation that each plaintiff suffered damages "as a . . . result of the foregoing violations [of RICO] . . . in such amount as may be determined but at least in the amount of $50,000" is sufficient to withstand a motion to dismiss; it is unnecessary for plaintiff's to provide factual detail, such as which plaintiff's made lease payments or paid judgments, a this stage. See Cantor v. Life Alert, Inc., 655 F. Supp. 673, 681 (S.D.N.Y. 1987). Leasecomm's challenge to the recovery sought for emotional distress ignores the fact that the claims for emotional distress damages are based on independent, state-law causes of action, not RICO. The RICO count specifies that the damages inflicted were damages to plaintiff's' "business or property." (Compl. ¶ 196.) Whether or not some plaintiff's made their lease payments voluntarily is an issue of fact, especially where plaintiff's allege extortion, so Leasecomm's argument concerning such payments is premature.
Leasecomm confuses ripeness doctrine with pleading requirements. While "a cause of action does not accrue under RICO until the amount of damages becomes clear and definite," nothing in the complaint indicates that the amount of damages for any defendant is not now "clear and definite." The damage amounts simply have not been described in great detail in the complaint, which, under the Federal Rules, need not be that specific.
F. Causation
Leasecomm argues that Zito's allegation cannot meet the requirement that its actions be the "but for" and proximate cause of plaintiff's' injuries.
Leasecomm confuses "but for" causation with direct or proximate causation, claiming that since the "conduct of defendants other than Leasecomm and MFI was the direct, intervening cause" of damages, the requirement is not met. Even accepting arguendo Leasecomm's essentially factual allegation that the direct and intervening cause of plaintiff's' injuries was the dealers' marketing conduct, not Leasecomm's actions, the requirement of "but for" causation is not defeated. "But for" causation means only that absent the alleged RICO violations — "but for" them — no injury would have been suffered. To the extent that the dealers' marketing conduct was largely motivated by the way Leasecomm structured its relationship with the dealers, Leasecomm's actions would still be a "but for" cause of plaintiff's injuries.
But here, plaintiff's allege more than that; they allege that they were damaged by (1) being enticed to sign the Leasecomm leases by the various Leasecomm associates, and by subsequently (2) being forced, by Leasecomm's "unique" collection practices, to make payments under those leases. But for the existence of the leases and the enforcement of their terms by Leasecomm, there could have been no injury to plaintiff's. Thus, the "but for" causation requirement is satisfied whether or not the enticement to sign them is considered the more direct cause. Put another way, there can be multiple "but for" causes of varying degrees of directness, and here, both (1) and (2) were, at least according to the complaint, "but for" causes of plaintiff's damages.
The requirement of proximate causation is the stricter one. If, as Leasecomm claims, the damages here were alleged to have "flow[ed] from [plaintiff's'] voluntary decisions to enter into business transactions that they now regret" or from their "decision not to make the required lease payments" (Leasecomm Mem. 28), Leasecomm would be entitled to prevail on the RICO claim. Of course, this is not what plaintiff's allege, and it is the allegations that must be accepted as true at this state, not Leasecomm's version of the facts. The complaint attributes plaintiff's' damages to the fraudulent misrepresentations made by the Leasecomm associates and the extortionate collection practices engaged in by Leasecomm. Thus whether the plaintiff's' actions in signing the leases, making payments, or refusing to make payments were completely voluntary or were procured by the defendants so as to create liability under RICO depends upon the factual truth of plaintiff's claims, and thus cannot be resolved prior to discovery.
Finally, to the extent that Leasecomm argues that any losses were caused by its strategic partners, and not by it, that argument too is simply a denial of the facts alleged by the plaintiff's. However unclear the complaint may be in other particulars, it clearly alleges that Leasecomm's methods of doing business were designed to facilitate and profit from high-pressure and deceptive marketing practices by its "strategic partners." plaintiff's may not be able to prove that, but they have alleged it and are entitled to present evidence in support of their theory.
G. RICO conspiracy
1. The iPage Builder Scheme
Leasecomm and Cardservice argue that plaintiff's' claim of a RICO conspiracy under 18 U.S.C. § 1962(d) must be dismissed because the complaint fails to allege that Leasecomm itself agreed to commit predicate acts as required in Morin v. Trupin, 832 F. Supp. 93, 99 (S.D.N.Y. 1993). Since Morin, however, the Supreme Court has made it clear that there is no such requirement: "The RICO conspiracy statute . . . did not . . . work the radical change [in conspiracy law] of requiring the Government to prove each conspirator agreed that he would be the one to commit two predicate acts." Salinas, 522 U.S. at 64. It is sufficient that the alleged conspirator "intend[ed] to further [the] endeavor" or "adopt[ed] the goal of furthering or facilitating" it. Id. at 65. For the same reasons that the complaint adequately alleges that Leasecomm conducted the affairs of the enterprise, it adequately alleges that it conspired to further or facilitate those affairs.
As to Cardservice, the complaint alleges that "On information and belief, Cardservice expended substantial sums of money in developing the iPage Builder program with Themeware and in marketing the bait and switch Tool Box." (Compl. ¶ 75.) Economic support for the RICO activities of another defendant could support an inference that a party agreed to further or facilitate those activities and therefore conspired with that defendant to violate RICO. As noted above, however, the conspiracy claim is set forth only in brief and conclusory terms, and cannot save the complaint's failure to articulate the alleged predicate acts on which it is based. Since the complaint fails adequately to detail what crime was intended to be committed — that is, who is alleged to have engaged in what predicate acts in furtherance of the enterprise's objectives — it does not adequately charge a conspiracy.
Karn moves to dismiss the RICO conspiracy claim on the grounds that plaintiff's have "alleged nothing more than the conclusion that 'each of the defendants conspired to violate'" RICO, and that the most plaintiff's assert with respect to Karn is that he "knew or should have known of the bait and switch scheme." (Karn Mem. 10 (quoting Compl. ¶ 195.)) But "should have known" is not enough to establish conspiracy, which is a crime of specific intent. To prove a conspiracy, a plaintiff must show that a defendant joined the conspiracy with the intent to commit the offenses that are its object, that is, with the affirmative intent to make the conspiracy succeed." United States v. Ceballos, 340 F.3d 115, 123-24 (2d Cir. 2003). The complaint does not allege facts supporting an inference that Karn "adopt[ed] the goal of furthering or facilitating" the larger RICO enterprise encompassing the acts of Leasecomm/MFI and Themeware; therefore, the RICO conspiracy claim against him will be dismissed without prejudice to a repleading sufficiently alleging facts supporting his participation in a conspiracy.
2. The Merchant Account Scheme
As plaintiff's have failed to adequately allege any predicate acts involving ECX, OX, Medtrak, and Schneider with respect to the merchant account scheme, the RICO conspiracy claim must also be dismissed against those defendants, without prejudice to a repleading that corrects the deficiencies already noted and also adequately alleges the existence of and participation in a conspiracy by some or all of those defendants.
H. Summary
Plaintiff's have failed adequately to allege specific predicate acts attributable to the defendants. Accordingly, its RICO claim will be dismissed without prejudice to a repleading that cures the various defects discussed in this opinion. In particular, a repleading should (1) clarify the structure and organization of the enterprise alleged; (2) identify, as to each defendant, the predicate acts of racketeering that it is alleged to have committed, by defining the nature of any fraudulent schemes each defendant is alleged to have devised and the mailings or wire transmissions that it caused to be made in furtherance of that scheme (or whatever other predicate crimes constituting the pattern of racketeering that defendant is alleged to have committed); and (3) provide allegations supporting the claim that any named defendant participated in the conduct of the affairs of the enterprise.
Because the RICO claim provides the only basis of federal jurisdiction, dismissal of that cause of action entails dismissal of the entire complaint. See 28 U.S.C. § 1367(c)(3) (permitting dismissal of pendent state claims when "the district court has dismissed all claims over which it has original jurisdiction"). However, because of the likelihood that plaintiff's will be able to replead successfully alleging a RICO claim against at least some defendants, it is appropriate to address the other issues raised by the motions to dismiss.
III. Personal Jurisdiction
At the motion to dismiss stage, "plaintiff need make only a prima facie showing of jurisdiction through its own affidavits and supporting materials . . . notwithstanding any controverting presentation by the moving party." Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981). Facts alleged by the plaintiff may be provisionally accepted as true. Credit Lyonnais Securities (USA). Inc. v. Alcantara, 183 F.3d 151, 153 (2d Cir. 1999).
Ultimately, of course, plaintiff will be required to establish personal jurisdiction by a preponderance of the evidence.Id.
Karn and the Leasecomm officer defendants move to dismiss the complaint against them on the basis of lack of personal jurisdiction. Since the RICO claims against Karn will be dismissed, as discussed above, on the grounds that he is not alleged to have participated in the conduct of the enterprise, and any amended complaint asserting claims against him will necessarily supplement in significant ways the factual allegations already asserted, it would be unproductive for the Court to address his personal jurisdiction arguments at this stage.
OX and Schneider have asserted lack of personal jurisdiction as a defense in their answers, but have not moved for dismissal on those grounds at this stage. The Court notes that they have preserved this defense, but will defer any determination of whether it has jurisdiction over OX and Schneider until the issue is fully presented by the parties.
The Leasecomm officers contend that neither New York's long-arm statute, N.Y. C.P.L.R. § 302, nor RICO's nationwide service provision, 18 U.S.C. § 1965(b), justifies jurisdiction over them by a court in New York. Plaintiff responds by arguing that (1) under New York law, "when a foreign resident conspires to cause tortious damages in New York, New York courts have long-arm jurisdiction even if the acts performed in New York are performed by another conspirator" (P. Mem. 43, citing Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 467 (1988)); and (2) RICO's nationwide service provision applies when, as here, "no single forum [exists] where all the [RICO] defendants either reside or may be found" (K Mem. 45).
Kreutter did not, as plaintiff's suggest, state any rule about alleged conspirators in tort actions. It did, however, hold that where a company "engaged in purposeful activities in this State in relation to [plaintiff's] transaction for the benefit of and with the knowledge and consent of [out-of-state individual] defendants," and where those individual defendants "exercised some control over [the] Company in the matter," jurisdiction in New York over the individual defendants is supported under that provision of the long-arm statute, C.P.L.R. § 302(a)(1), relating to a defendant's doing business in the state. Kreutter, 71 N.Y.2d at 467.
The factual allegations here meet the requirements ofKreutter. The affidavit of plaintiff's attorney states that defendant von Bleyleben, in 1998, "signed a stipulation with the Attorney General for the State of West Virginia that essentially promised to cease and desist from several of the practices involved in this litigation," and that a "former systems analyst for MFI . . . identified [von] Bleyleben as . . . the author of the Leasecomm lease," (Klotz Decl. ¶¶ 14-17.) The same systems analyst "identified . . . Salvo as the person in charge of collections on the leases." (Id. ¶ 18.) The complaint alleges that von Bleyleben and Latour "own stock options and shares of stock in MFI" and that they touted the fact that MFI/Leasecomm's revenues generated by "Late Fees, Loss and Damage Fees . . . enhance[d] [MFI's] returns dramatically." (Compl. ¶ 167.) These facts, if true, would establish that the officer defendants exercised control over the acts of MFI/Leasecomm at issue here, and that they benefitted from them. Since it is not disputed that those acts involved both the "transact[ion of] . . . business within the state," N.Y. C.P.L.R. § 302(a)(1), and since it is alleged that they constituted "tortious act[s] without the state causing injury to person or property within the state,"id. § 302(a)(3), jurisdiction over the officer defendants is proper, at least provisionally, under the rationale ofKreutter. It is thus unnecessary to address the applicability of § 1965(b) to this case.
IV. State-law Claims
As noted above, with the dismissal of plaintiff's' RICO claim, there is no basis for subject-matter jurisdiction over any state-law claims arising from that scheme. Nevertheless, as noted above, the Court will address defendants' arguments against the likely possibility that the same issues will arise in connection with plaintiff's' anticipated amended complaint.
A. Choice of Law
Leasecomm argues that pursuant to a choice-of-law provision in the leases (Compl. Ex. D), Massachusetts law applies to the state-law claims. Although the complaint references the law of numerous jurisdictions, in responding to the motions to dismiss plaintiff's do not address this issue, and appear to concede that Massachusetts law applies. (See, e.g., P. Mem. 47 ("Massachusetts courts in dealing with [the concept of unfair and deceptive practices] have not hesitated to look to New York courts for guidance.")) Therefore, the Court will apply the statutory and common law of Massachusetts to the state law claims asserted.
B. Fraud on the Court
Count Two of the complaint, which names only Leasecomm (Compl. ¶ 200), asserts that Leasecomm fraudulently obtained default judgments in Massachusetts courts against certain plaintiff's by concealing from those courts that the judgments "were the product of a racketeering conspiracy, were the fruits of unfair and deceptive acts and practices, contained . . . charges for which there was no legal justification and were in execution of . . . unconscionable contract[s]." (Compl. ¶¶ 201-203.) Leasecomm moves to dismiss this claim under Fed.R.Civ.P. 9(b), which requires that fraud be pled with particularity. Leasecomm argues that "piaintiffs do not interpose particularized pleadings that describe the purported 'frauds.'" (MFI/Leasecomm Mem. at 33.)
Each of the four "facts" that Leasecomm is alleged to have concealed in obtaining these judgments actually constitutes or includes a legal conclusion: The existence of a racketeering conspiracy, the unfairness and deceptiveness of the practices, the legal justification for Leasecomm's charges, and the unconscionability of the leases are not "facts" in the sense required by Rule 9(b), since "conclusory averments of the existence of fraud made on information and belief and unaccompanied by a statement of clear and convincing probative facts which support such belief do not serve to raise the issue of the existence of fraud." Madonna v. U.S., 878 F.2d 62, 66 (2d Cir. 1989) (quoting Di Vito v. Fidelity Deposit Co. of Maryland, 361 F.2d 936, 939 (7th Cir. 1966)). Therefore plaintiff's fraud on the court claim will be dismissed without prejudice to its renewal in an amended complaint satisfying the requirement articulated inMadonna.
Leasecomm's alternative argument that this claim should be dismissed because "only a Massachusetts state court can fairly review its own judgments" is unpersuasive. (MFI/Leasecomm Mem. 32.) As Leasecomm admits, "there is no absolute bar to undoing a preexisting, final judgment of a state court in federal court." Id. The consideration that such relief should "ordinarily" be sought in the rendering court "where possible" is outweighed here by the efficiency interest in having the entire dispute adjudicated in one forum.
C. Massachusetts Unfair and Deceptive Practices Act
Plaintiff's allege in Count Three that the conduct described in the complaint "constituted unfair and deceptive [acts] and practices as [such] conduct is defined by state UDAP statutes and regulations set forth in schedule Two [of the complaint.]" (Compl. ¶ 210.) Count Three is asserted against "all defendants jointly and severally." (Id. ¶ 209.)
1. Leasecomm/MFI
Leasecomm and MFI state, and plaintiff's do not deny, that only Section 9 and Section 11 of the Massachusetts Unfair and Deceptive Practices Act ("UADPA"), Mass. Gen. Laws ch. 93 A, § 9(3), are conceivably applicable to the conduct alleged here. Leasecomm argues that any claim under § 9 must be dismissed because the plaintiff's failed to "mail a written demand letter to [the] prospective defendants" as required by that section. (MFI/Leasecomm Mem. 34.) plaintiff's offer no response to this claim; the point will therefore be deemed conceded, and any claim based on § 9 is dismissed.
As to § 11, Leasecomm laboriously analyzes eight "categories of 'acts'" which plaintiff's allege violated the Act. (MFI/Leasecomm Mem. 35.) Its attacks on the complaint's allegations can themselves be categorized, and dealt with collectively, as follows:
Leasecomm's Lack of Involvement
Leasecomm moves for dismissal of claims based upon certain of the alleged acts on the grounds that neither Leasecomm nor MFI are claimed to have engaged in these acts. (MFI/Leasecomm Mem. 36.) However, since plaintiff's have adequately alleged that Leasecomm and the other defendants were participating in a common scheme, it is a question of fact whether the control exercised by Leasecomm over the tactics used by its dealers is sufficient to support a claim of liability against Leasecomm. Therefore, Leasecomm's claim of lack of involvement does not justify dismissal of the UADPA claims against it. Insufficient Factual Detail
Leasecomm also repeatedly suggests that plaintiff's' allegations are ??? "vague" or "conclusory" or "insubstantial" to withstand a motion to dismiss, or points to specific facts that plaintiff's fail to allege though they are assertedly required to do so to state a claim. (MFI/Leasecomm Mem. 37, 40, 41, 42, 43, 44.) Of course, calling allegations "conclusory" does not make them so. Indeed, the 234-paragraph complaint does much more than simply aver in conclusory fashion that the defendants engaged in unfair or deceptive practices: It alleges numerous specific unfair and/or deceptive acts by the various defendants and even attaches supporting documentation where appropriate. The complaint, while hardly a model of clarity in its presentation of the underlying facts and resulting claims, gives each of the defendants fair notice as to what acts or omissions are alleged to have been wrongful and the legal bases for relief. This is all that is required at the pleading stage.See Fed.R.Civ.P. 8(a) (requiring pleading to "contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief); Conlev v. Gibson, 355 U.S. 41, 47 (1957) ("[A]ll the [Federal] Rules require is 'a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests.")
Factual Arguments
Leasecomm also attempts to justify dismissal of certain UADPA claims by making its own averments of facts. With respect to the claim that the leases contained unconscionable provisions rendering them unfair or deceptive, Leasecomm asserts that the lease provisions in question "are all standard, garden variety provisions found in typical lease agreements" and that certain provisions "benefit[ ] plaintiff's at least as much, if not more, than . . . Leasecomm." (MFI/Leasecomm Mem. 37.) With respect to the circumstances under which the leases were executed, Leasecomm argues that "it is absurd for plaintiff's to suggest that they relied on attributed promises that the leases were concellable when the Leasecomm contract states right up front, in large, bold letters, that it is a "NON-CANCELLABLE LEASE AGREEMENT." (Id. at 40.) With respect to Leasecomm's allegedly unfair collection practices, Leasecomm argues that the complaint is factually inconsistent because the plaintiff's, who describe themselves as "moderate-income consumers" (Compl. ¶ 3), also claim that Leasecomm "expressly targeted individuals with poor credit ratings." (Id. ¶ 144.)
"At this stage, the Court may not undertake to determine which version of the facts to credit; rather, the Court is obligated to accept the plaintiff's version." Bear Stearns Merchang Fund Corp. v. Modern Technologies Corp., Dkt. No. 02 Civ. 6084 (GEL), slip op. at 2 (S.D.N.Y. Jan. 14, 2003), citing Jackson Nat'l Life Ins. Co., 32 F.3d at 699-700. Whether the lease provisions are "standard" or "garden variety," whether they benefitted or harmed the plaintiff's, whether the plaintiff's, notwithstanding the leases' headline to the contrary, relied on representations that the leases were cancellable, and whether "moderate-income consumers" sometimes have poor credit ratings, are all factual issues. To the extent those issues are material to the claims, Leasecomm's assertions are inconsistent with those in the complaint and the reasonable inferences that may be drawn from it. Leasecomm's motion to dismiss the UADPA claims will be denied, and so the claims survive against von Bleyleben, Latour, and Salvo as well.
2. Cardservice and Karn
Cardservice moves to dismiss the UADPA claim against it on the grounds that the complaint alleges only that it helped develop the iPage product and that it "expended . . . money" in marketing the Internet Tool Box. Since neither of these activities is, by itself, an unfair or deceptive act, Cardservice's motion will be granted.
Karn does not seek dismissal of any of the UADPA claims, and, as the "primary spokesperson" for Themeware, is alleged to have participated in the making of the deceptive Internet Tool Box infomercial. As discussed above, the allegations of the complaint support an inference that he played a role in the manner in which the infomercial was used in promoting iPage Builder. Accordingly, there is no basis for dismissing the UADPA claims against him.
C. Unlawful Franchise Offerings Claim
Plaintiff's allege that the Karn infomercial constituted "an offer of a franchise as that term is defined by federal regulation and state statutes and regulations" (Compl. ¶ 78), and that, with respect to the "merchant accounts" scheme, "Leasecomm was a principal in the sale of franchises by OX and ECX" (Id. ¶ 96). Since, under federal and state law, franchisers must "make detailed disclosures to purchasers of franchises" (Compl. ¶¶ 80-81; see also id. ¶ 82 (listing information required to be disclosed)), and since defendants did not make those disclosures, plaintiff's claim that all defendants are liable "jointly and severally" to the plaintiff's for damages (id. ¶ 215), and that plaintiff's are entitled to rescission of the Leasecomm leases and to an injunction "directing the defendants to cause credit reporting agencies to delete all references to the plaintiff's respective dealing [sic] with Leasecomm." (Id. ¶¶ 217-218.)
All defendants move to dismiss the unlawful franchise offering claim as relevant to each of them on the basis that plaintiff's have failed to adequately allege that what was offered was a "franchise." They analyze the claim under New York's definition of a franchise offering, as that is the statute singled out in the complaint (id. ¶ 211;but see id. ¶ 81 (listing 30 states with franchise statutes or regulations requiring disclosures)), and, more convincingly, as New York's statute is considered "the broadest and most plaintiff-friendly in the nation" (ECX Mem. 20, citing David J. Kaufman, The New York Franchise Act, 823 PLI/Comm. 100, 205 (2001)). plaintiff's do not challenge this characterization of New York's law, and in fact single it out again in their opposition brief (P. Mem. 50), so the Court will proceed on the assumption that if plaintiff's' franchise-related claims fail under New York law, they also fail under any other relevant state or federal law.
New York defines a "franchise" to be
a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:
(a) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchiser, and the franchisee is required to pay, directly or indirectly, a franchise fee, or
(b) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchiser's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchiser or its affiliate, and the franchisee is required to pay, directly or indirectly, a franchise fee.
N.Y. Gen. Bus. L. § 681(3).
Defendants' principal argument is that they cannot have offered franchises because the only contract or agreement referenced in the complaint is the Leasecomm case. That contract purports only to grant the lessee a "license" for an unspecified "item," which could be "any combination of tangible assets, rights to access or use services, software, documentation and manuals, etc." (Compl. Ex. D.) Thus, defendants claim, the offer of the lease by any of the defendants cannot constitute the offer of a franchise, since the lease makes no reference to lessee's right to engage in any business. Furthermore, the money collected under the lease was not a "franchise fee" as required by the statute, since the lease explicitly states that the monies due were license fees for use of an "item."
This characterization, however, ignores the entire thrust of the plaintiff's' complaint, which is that the lease arrangement was simply a way for Leasecomm and its "strategic partners" to profit from the underlying fraudulent transactions in which the "Leasecomm Associates" solicited consumers to purchase worthless products or enter dubious business relationships. plaintiff's assert that the leases were simply financing devices by which the victims' promises to pay for the goods or services or business opportunities offered by the dealers were transferred for cash payments to an aggressive collection agency that purported to be free of responsibility for the misrepresentations allegedly made by the dealers. In short, it is the underlying agreement between the dealers and the consumers that, on plaintiff's' theory of the case, determines whether a franchise has been offered, not the generic lease provided by Leasecomm. Nor can Leasecomm escape from these charges by claiming that it, at least, did not offer any franchises, since the complaint alleges that Leasecomm was intimately involved in the recruitment its partners and the design of their collective business model. Whether these allegations are true is to be determined, but the complaint cannot be dismissed as a matter of law because the defendants dispute plaintiff's' allegations.
The complaint, however, clear what exactly the defendants were offering. The ECX/OX scheme seems quite literally to fit within the statutory definition of a franchise. The defendants' decision to characterize the payments required of plaintiff's as a "lease" rather than a "franchise fee" cannot obscure the reality that, at least as alleged in the complaint, ECX and OX offered consumers a "business opportunity" to obtain "distributorships" of products apparently provided by ECX or OX, which would be supported by informercials created and transmitted by those companies. Those infomercials would constitute the principal marketing effort on behalf of the products, and defendants and NESA, not the plaintiff's, "would be responsible for the promotion of the web site and the training of customers and sub-distributors." (Compl ¶ 92.) In exchange, the customer would have to pay either a one-time fee or a monthly payment over a four-year period. (Id. ¶ 92(e).) These allegations adequately assert that the customers were being asked to enter an agreement in which they are "granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchiser, and the franchisee is required to pay, directly or indirectly, a franchise fee." N.Y. Gen. Bus. L. § 681(3)(a).
The Themeware scheme less clearly fits this model. Although plaintiff's allege that "[purchasers [of the "Internet Tool Box"] were offered the opportunity to sell products for various purchasers" (Compl. ¶ 78(d)), there is no allegation that these were specific products that would be offered "under a marketing plan or system prescribed in substantial part" by the defendants. While the complaint alleges that "web pages created by iPage Builder were required to carry the iPage logo" ( id. ¶ 78(f)), there is no indication that the products to be sold would carry any trademark or logo of the defendants, as required under N.Y. Gen. 3 us. L. § 681(3)(b). For all of plaintiff's' efforts to cast the service offered by the Karn infomercial as a franchise, the thrust of the complaint seems rather to be that customers were being offered a package of internet services and products that would enable them to operate a business of their choice, not a business being provided to them in franchise form.
These conclusions would dictate dismissal of the franchise claims against Leasecomm, Cardservice, Karn, and Rettew regarding the iPageBuilder/Internet Tool Box scheme, and denial of the dismissal motions of Leasecomm, ECX and OX regarding the "merchant account" scheme. However, given the lack of clarity of the complaint, the very cursory briefing of these claims by the parties, and the need for repleading in any event, plaintiff's will be granted leave to replead the claims regarding the Themeware scheme; a fuller record and fuller briefing addressed to an amended complaint could lead to different conclusions.
D. Common-Law Fraud
Cardservice's motion to dismiss the common-law fraud claims against it will be granted for the same reasons cited above with respect to the UADPA claim.
Leasecomm argues that plaintiff's' common-law fraud claims must be dismissed because they are not pleaded with particularity as required by Fed.R.Civ.P. 9(b); specifically, Leasecomm argues that the "allegations in the complaint completely fail the 'time, place, and manner' requirement for a fraud claim," fail to identify the "speaker" of the fraudulent statements, and fail to specify the nature of the misrepresentations. (Leasecomm Mem. 49.) While as a general rule, it is indeed necessary for the time and place of a fraudulent representation to be specified in the complaint, Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990), this requirement has been relaxed where the complaint describes the "nature and operation of the scheme in which the defendants are alleged to have participated."Beth Israel Medical Center v. Smith, 576 F. Supp. 1061, 1070-71 (S.D.N.Y. 1983) (finding that "[i]n view of the complaint's detailed description of the defendants' scheme . . . the failure to describe particular letters or telephone calls is not fatal to the complaint.");see also Center Cadillac. Inc. v. Bank Leumi Trust Co. of New York, 808 F. Supp. 213, 229 (S.D.N.Y. 1992) ("[T]he complaint need not specify the time, place and content of each mail communication where the nature and mechanics of the underlying scheme is sufficiently detailed."). The essential requirement is that plaintiff's state "what the alleged fraud consists of specifically." Beth Israel, 576 F. Supp. at 1071 (quoting Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972)).
Plaintiff's have met this requirement. They state that the Karn video and the representations made by the dealers at the time plaintiff's signed the leases all contained specific misrepresentations that plaintiff's relied upon in signing the Leasecomm leases. A copy of the infomercial is attached to the complaint as an exhibit. (Compl. Ex. A.) plaintiff's identify numerous particular representations in it which they allege were fraudulent. (Id. ¶¶ 77, 92.) With respect to the "pressure to sign documents," plaintiff's have identified the misrepresentations (id. ¶¶ 112-113) they rely on and attached copies of the documents involved (id. Ex. E). This is sufficient to give defendants notice of "what the alleged fraud consists of specifically."
Leasecomm further states that "none of the core 'fraud' claims . . . are specifically attributed to either Leasecomm and MFI individually, but rather are laid at the door of defendants collectively." (MFI/Leasecomm Mem. 50.) It then argues that this violates the requirement of particularity since the complaint fails to "give notice to each defendant of its alleged misconduct." (Id., quoting In re Blech Securities Litigation, 961 F. Supp. 569, 580 (S.D.N.Y. 1997.)) This, however, is a mischaracterization of the complaint, which clearly attributes the fraudulent statements to certain defendants, and claims that all defendants are liable as principal or co-conspirator." (Compl. ¶ 224.) Furthermore, the requirements of Rule 9(b) do not apply to an allegation of conspiracy to defraud, but only to the underlying allegations of fraud. Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 26 n. 4 (2d Cir. 1990).
Finally, Leasecomm argues that plaintiff's fail to plead with particularity facts from which its intent to defraud can be inferred. This misstates the law, in that the complaint, to satisfy Rule 9(b), need not plead with particularity facts showing fraudulent intent, but must only "allege facts which give rise to a strong inference that the defendants possessed the requisite fraudulent intent." Kramer v. Time Warner Inc., 937 F.2d 767, 776 (2d Cir. 1991). This plaintiff's have done, for the following factual allegations support a strong inference that Leasecomm intended to force vulnerable lessees to pay thousands of dollars for products or services worth no more than $300:
— MFI/Leasecomm's business had always involved "financing tangible business machine products including credit card validators sold by defendant CARDSERVICE" (Compl. ¶ 46); such validators have a value of "no more than $300" (id. ¶ 103).
— In 1999 Leasecomm began aggressively seeking business involving the leasing of "intangible services such as access to web sites" (id. ¶ 48); the services involved "were of no, or inconsequential, value" (id. ¶ 102(a)).
— These services were "marketed by [Leasecomm's] strategic partners" who were supervised by Leasecomm. (Compl. ¶¶ 40, 49).
— MFI purchased the leases from its dealers for 40 to 60% of their face value, "creating an annualized return on its investment of in excess of 25 percent." (Id. ¶ 56.)
— The leases were non-cancellable even in the event of failure of service," and they provided for automatic debiting from lessees bank accounts. (Id. Ex. D.)
— MFI/Leasecomm's business plan included "Persistent, Innovative Collections." (Compl. ¶ 166.) Specifically, Leasecomm intended to "pursue debtors who other companies would write-off [sic]" using "a network of over 100 law firms nationwide," and it intended to derive a large portion of its profits from the additional collection fees it imposed on defaulting lessees, and it in fact charged lessees for multiple collection calls made on the same day. (Id. ¶¶ 138-139, 151, 153, Ex. G.)
The allegations of the complaint satisfy Rule 9(b) in that from them, each defendant can determine exactly what statements or conduct is being labeled fraudulent, and the nature of the fraud or misrepresentation alleged. The common-law fraud claims will therefore not be dismissed against Leasecomm, its officers, or Karn.
E. Intentional Infliction of Emotional Distress
Under Massachusetts law, a claim of intentional infliction of emotional distress ("IIED") requires the following four elements:
(1) that the actor intended to inflict emotional distress or that he knew or should have known that emotional distress was the likely result of his conduct, (2) that the conduct was extreme and outrageous, was beyond all possible bounds of decency and was utterly intolerable in a civilized community, (3) that the actions of the defendant were the cause of the plaintiff's distress; and (4) that the emotional distress sustained by the plaintiff was severe and of a nature that no reasonable man could be expected to endure it.Agis v. Howard Johnson Co., 371 Mass. 140, 145 (1976). Although the complaint does not specify what specific conduct by defendants was so "extreme and outrageous" that it caused the requisite "severe emotional distress," plaintiff's' opposition brief cites the collection tactics of Leasecomm, in particular, the allegations contained in ¶ 148 of the complaint:
Leasecomm's collection representatives used insulting, harassing and intentionally harmful rhetoric including disparaging personal remarks, embarrassing messages left with third parties about sending debtors to jail, taunting debtors about their credit and threatening to destroy their credit unless payment was made without objection for each and every charge including unjustified credit fee charges.
Leasecomm and Cardservice argue that the IIED claim fails because the complaint, with respect to the fourth element, "merely 'parrots the requisite element of the claim but lacks factual support for [its] wholly conclusory allegations." (MFI/Leasecomm Mem. 52, quotingKurker v. Hill, 649 N.E.2d 833, 839 (Mass.App.Ct. 1998.)) The Court agrees with this characterization of the complaint. The complaint alleges generally that "[d]efendant's actions did cause severe emotional distress to plaintiff's the amount of $20,000," and that a group of 48 specified plaintiff's, "due to pre-existing medical conditions and other aggravating circumstances including especially mean-spirited and intended harassment[,] suffered aggravated damages." (Compl. ¶¶ 232-233.)Cf. Harrison v. Loyal Protective Life Ins. Co., 396 N.E.2d 987, Mass., 1979 (allegation that plaintiff "lost all hope to live and to continue as an active person after he recovered from his illness" sufficient); Brown v. Nutter, McClennen Fish, 696 N.E.2d 953, 955 (Mass.App.Ct. 1998) (allegation that plaintiff had been "unable to return to work for the next week[,] remained confined to her bed, suffering from nightmares, anxiety attacks, and uncontrollable crying[, and] suffers still from nightmares and anxiety attacks as a result of [defendant's] actions" was sufficient). As presently framed, the complaint alleges inadequate facts to support a claim of IIED, and that claim will be dismissed.
CONCLUSION
Because the complaint fails to allege a violation of RICO, which is the only federal claim asserted by plaintiff's, the entire complaint must be dismissed. However, because the facts alleged in the complaint make it sufficiently likely that the plaintiff's can assert a valid RICO claim against at least some of the defendants, plaintiff's motion for leave to amend the complaint is granted. The amended complaint shall be filed no later than November 3, 2003.
SO ORDERED.