The opinion of the court was delivered by: CONNER
Perhaps enticed by the lure of a treble damage recovery, private litigants have attempted increasingly to utilize the civil remedies
of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., in a variety of factual settings ostensibly within the broadly-worded provisions of the statute but arguably far beyond the original contemplation of the framers of the legislation. The instant action presents yet another example of that trend. Plaintiff Bankers Trust Company ("Bankers") seeks to invoke the RICO remedies to recover treble damages plus attorney's fees for injuries suffered substantially as a consequence of defendants' alleged bankruptcy frauds. The case is currently before the Court on the motions of defendant Herman Soifer ("Soifer") and defendants Daniel Rhoades ("Rhoades"), Milton Braten ("Braten"), Brookfield Industries, Inc. ("Brookfield Industries"), Bennington Court, Ltd. ("Bennington Court"), Braxton Ltd. ("Braxton"), Aura By Laurie, Ltd. ("Aura"), Erwin Commercial Corp. ("Erwin"), Michael B. Marks, Inc. ("Marks"), Timely Textiles, Inc. ("Timely Textiles"), Todd Equipment Leasing Co., Inc. ("Todd") and Capital Aid Corporation ("Capital") for judgment on the pleadings dismissing the complaint.
Rule 12(c), F.R.Civ.P. All defendants contend that the complaint is insufficient to state a civil claim under RICO, while Soifer further argues that the claims against him are barred by the statute of limitations or, if not, may only be asserted in pending bankruptcy proceedings. For the reasons stated below, the motions to dismiss the complaint are granted.
For purposes of this motion, plaintiff's version of the events will be accepted as true. See 2A J. Moore, Moore's Federal Practice para. 12.15 at 2343 (2d ed. 1983). The genesis of this action lies in a $4,000,000 debt allegedly owed to Bankers by the Braten Apparel Corporation ("BAC"). In August 1974, at a time when it had recently sustained severe financial losses and owed substantial debts to Bankers and others, BAC acquired all the stock of Brookfield Clothes Inc. ("Brookfield Clothes"), which at that time had a net worth of more than $3,000,000. Complaint para. 11. Feldesman, Braten and Soifer allegedly made a secret agreement to conceal this acquisition for the purpose of obtaining a favorable discharge of BAC's debts by pursuing Chapter XI proceedings in the bankruptcy court. Complaint para. 13.
To effectuate this plan, Braten and Soifer executed a sham "Shareholder's Agreement," drafted by Feldesman, which purported to require Braten or BAC to furnish a $250,000 loan to Brookfield Clothes by a specified date or else the Brookfield Clothes stock owned by BAC would be transferred to Soifer. At the time they entered into that agreement, Braten and Soifer knew that the condition would not be met, but instead intended that Soifer would hold the Brookfield Clothes stock in a secret trust during the pendency of BAC's Chapter XI proceedings. Complaint paras. 15-17. On September 5, 1974, BAC filed a petition for relief under Chapter XI of the now repealed 1898 Bankruptcy Act. The petition omitted BAC's ownership of the Brookfield stock, which was transferred to Soifer that same day. Complaint para. 18. Through a series of omissions and misrepresentations, conveying the erroneous impression that BAC had no ownership interest in Brookfield Clothes, Feldesman, Soifer, Braten and Rhoades, counsel to Braten and BAC in the Chapter XI proceeding, induced BAC's creditors, including Bankers, to approve an arrangement under which Bankers would receive 17-1/2% of its claims. Complaint paras. 18-21. The approval of that arrangement by the bankruptcy court on March 12, 1976 had the effect of relieving BAC of more than $4,300,000 in debts. Complaint para. 22. Had BAC's ownership of Brookfield Clothes been revealed, however, a liquidation of BAC would have provided funds sufficient to satisfy in full the debt owed to Bankers. Complaint para. 24.
Beginning in August 1976, the individual defendants began to consummate the secret trust through a complicated sequence of stock transfers. First, Soifer acquired from Braten 50% of the stock of Brookfield Industries, to which a substantial portion of the assets of Brookfield Clothes was conveyed. Feldesman then delivered the stock of Brookfield Clothes to Soifer who in turn delivered the stock to Rhoades on behalf of Braten and BAC. Then, in October 1976, Soifer purchased 45% of the stock of BAC from Braten. As part payment for that purchase, Soifer delivered to Braten a $450,000 note in July 1977. That note was subsequently assigned by Braten to Rhoades. Complaint paras. 25-27.
Upon learning of the alleged fraud, Bankers in September 1976 commenced a proceeding in this Court to revoke the approval of the bankruptcy arrangement. While that revocation action was pending, Rhoades and Braten instituted a series of lawsuits in New York against Bankers in order to hinder and delay Bankers' collection of the debt owed to it. The complaint in each of those actions alleged that Bankers had breached a commitment to extend additional credit to BAC and sought millions of dollars in damages. All of those suits were, however, summarily dismissed. Complaint para. 29.
In August 1977, BAC commenced suit in South Carolina against Bankers seeking $195,000,000 in damages on the basis of allegations similar to those previously advanced in the New York lawsuits. BAC was represented in that matter by a South Carolina law firm to which Rhoades was of counsel. In a contemporaneous action, Braten, represented by the same South Carolina law firm, asserted claims superior to Bankers' claims to funds in an escrow account derived from the sale of machinery in which Bankers had a security interest. Both of these cases were presided over by Judge William H. Ballenger. Complaint paras. 30-31.
At the end of 1978, Rhoades, through a South Carolina corporation formed by him, assumed a mortgage debt on which Judge Ballenger was personally liable to the extent of $100,000. Because of that undertaking, Judge Ballenger was induced to render decisions in the two South Carolina cases favorable to BAC and Braten, including the appointment of a special referee in the escrow action having business ties to Rhoades and the denial of Bankers' motion to dismiss the damage action. Complaint paras. 32-33. This prejudice to Bankers' rights continued until Judge Ballenger recused himself from the escrow action and until his decision denying Bankers' motion to dismiss the damage action was reversed by the South Carolina Supreme Court as an abuse of discretion. By that time, however, Bankers had incurred attorney's fees in excess of $100,000. Complaint para. 34.
In January 1982, Bennington Court obtained advances of more than $8,900,000 from KB Business Credit Inc. ("KBBC") by means of wire transfers of funds, which were then disbursed to the bank accounts of several of the corporate defendants. When these defendants failed to repay the funds so obtained, KBBC instituted a RICO action in this Court seeking to recover treble the amount of its damages. Complaint paras. 36-38.
On February 1, 1982, trial of Bankers' application to revoke the bankruptcy arrangement was completed. While the parties were awaiting the Court's decision in that matter, BAC, in April 1982, conveyed its stock in Brookfield Clothes to Todd for little or no consideration. Complaint para. 39. Thereafter, BAC caused Todd to pledge its Brookfield Clothes stock to KBBC in order to induce KBBC to discontinue its lawsuit and thereby relieve the individual defendants of possible personal liability for the advances which had not been repaid to KBBC. Despite this pledge, Todd was not a defendant in the action brought by KBBC. Complaint para. 40. Moreover, in addition to the Brookfield Clothes stock transfer, BAC secreted and conveyed without consideration other of its assets during the pendency of the revocation proceeding as a further impediment to satisfaction of the claims of Bankers and other creditors. Complaint para. 41. Finally, on June 25, 1982, the Bankruptcy Court for this District revoked the Chapter XI plan, finding, inter alia, that confirmation of the plan had been procured by fraud. See In re Braten Apparel Corp., 21 Bankr. 239, slip op. at 51 (S.D.N.Y. 1982)(Babitt, J.), aff'd, 26 Bankr. 1009 (S.D.N.Y. 1983).
RICO's civil damage remedy ...