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BETH ISRAEL MED. CTR. v. SMITH

December 8, 1983

BETH ISRAEL MEDICAL CENTER, BRONX-LEBANON HOSPITAL CENTER, JEWISH HOSPITAL AND MEDICAL CENTER OF BROOKLYN, JOINT DISEASES NORTH GENERAL HOSPITAL, HOSPITAL FOR JOINT DISEASES ORTHOPAEDIC INSTITUTE, LONG ISLAND JEWISH-HILLSIDE MEDICAL CENTER, MAIMONIDES MEDICAL CENTER, MONTEFIORE HOSPITAL AND MEDICAL CENTER, THE MOUNT SINAI HOSPITAL, ALBERT EINSTEIN COLLEGE OF MEDICINE OF YESHIVA UNIVERSITY, BEACH YM & YWHA, BORO PARK YM & YWNA, BROOKDALE VILLAGE HOUSING CORPORATION ISRAEL SENIOR CITIZEN HOUSING CORPORATION, JEWISH ASSOCIATION FOR SERVICES FOR THE AGED, JEWISH BOARD OF FAMILY AND CHILDREN SERVICES, METROPOLITAN JEWISH GERIATRIC CENTER AND FOJP SERVICE CORPORATION Plaintiffs, against CHARLES E. SMITH, MELVIN BLOCK, MARK KRESSNER, IRVING MANDELL, GEORGE SCHLOSSMAN, MICHAEL SCHULMAN, and JOHN DOES 1 THROUGH 100, Defendants.


The opinion of the court was delivered by: LASKER

LASKER, D.J.

I.

 In this action seeking treble damages under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), *fn1" and alleging pendent state law claims, defendants Charles Smith, George Schlossman, Mark Kressner and Michael Schulman move to dismiss the complaint or portions of it on various grounds, most importantly for failure of the RICO allegations to state a claim upon which relief can be granted. The allegations of the complaint are accepted as true for the purposes of these motions. It asserts that the defendants engaged in a scheme by which the chief legal officer responsible for handling legal claims against a large group of nonprofit institutions in New York City sold confidential legal information about those claims to various attorneys and that the attorneys used the information in representing claimants in litigation against the institutions. The particulars of the complaint are as follows.

 FOJP Service Corporation ("FOJP") is a not-for-profit corporation established by the Federation of Jewish Philanthropies of New York ("Federation") to investigate incidents of potential medical malpractice or personal injury involving the teaching hospitals and other public service institutions (together, the "charities") that make up the Federation, and to direct the defense or settlement of lawsuits brought before the charities. In carrying out its duties FOJP gathers information as to potential or actual legal claims which includes the opinions and conclusions of physicians, hospital personnel and trial counsel about the facts of the cases, the legal strategies to be pursued in defending the claims, and the potential settlement value of the claims.

 Between October 1979 and June 1981, the defendant Charles Smith acted as Director of Legal Claims Services for FOJP. As Director, Smith was responsible for oversight of the legal services FOJP provided for the charities, and had full access to the information gathered and maintained by FOJP in carrying out its function. Beginning immediately after he was hired, Smith began selling this information to lawyers engaged in representing plaintiffs in medical malpractice and personal injury suits. The said information included copies of the actual files maintained by FOJP on the actual or potential claims of hundreds of patients of the plaintiff hospitals, which were used by the attorneys who purchased them to solicit clients to bring suit against the charities, and to prosecute their claims. Besides providing copies of files, Smith directly advised the attorneys about defense strategies and settlement estimates in the cases that led to the filing of a lawsuit. Smith received thousands of dollars from attorneys as a result of these activities at the very time he served as FOJP's Director of Legal Claims Services. Among the attorneys who bought information from Smith were Schlossman, Kressner, and Schulman, along with the two other named defendants (who are not movants herein) and an unknown number of other attorneys who are named as John Does in the complaint.

 As a result of a complaint by a patient solicited to file a lawsuit against one of the plaintiff hospitals, Smith was arrested and, along with Schlossman, Kressner, Schulman, and Irving Mandell, was indicted by a state grand jury. Smith ultimately pled guilty to Commercial Bribe Receiving in the First Degree, Schlossman to Commercial Bribery in the First Degree, and the others to unlawful solicitation of business on behalf of an attorney.

 The present suit was filed October 29, 1982, seeking treble damages under the civil RICO provisions. As predicate RICO acts the complaint alleges violations of the federal mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343 (1976), and of a state-law criminal fraud provision, New York Penal Law ("N.Y.P.L.") § 190.65 (McKinney, Supp. 1982-83). The complaint also alleges pendent state-law claims of common law fraud, breach of fiduciary duty, breach of contract, tortious interference with contract and business relations, commercial bribery and bribe receiving, and violation of Section 487 of the New York Judiciary Law.

 RICO's substantive prohibitions state, in relevant part:

 "(b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.

 (c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

 (d) It shall be unlawful for any person to conspire to violate any of the provisions of subsections (a), (b), or (c) of this section."

 18 U.S.C. § 1962(b)-(d) (1976). In support of their motions to dismiss the RICO claim (the complaint's first cause of action) movants argue that the allegations of predicate RICO violations do not constitute a "pattern of racketeering activity" within the meaning of the statute, that the complaint does not adequately allege either the existence of a statutory "enterprise" or the requisite connection between the enterprise and the alleged racketeering activity, and that the alleged injury suffered by plaintiffs is not an injury "by reason of" a violation of the racketeering statute. As further grounds for dismissal of various portions of the complaint movants contend that the federal mail and wire fraud and common-law fraud allegations (set forth in the first and second causes of action) are not pleaded with sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure, ("F.R.Civ.Pr." that the common-law fraud allegations (second cause of action) fail to state a cause of action because no affirmative misrepresentations are alleged, and that the commercial bribery claim (ninth cause of action) is barred by the statute of limitations. Finally, in the event the complaint is not dismissed, movants seek permission not to answer the factual allegations of the complaint on Fifth Amendment grounds, and move to strike paragraphs 1, 2, and 3 of the complaint as scandalous and prejudicial.

 II. The RICO Allegations

 A. Pattern of Racketeering Activity

 Movants argue that the complaint's allegations of mail and wire fraud, 18 U.S.C. §§ 1341, 1343 (1976) and of state-law criminal fraud, N.Y.P.L. § 190.65 (McKinney, Supp. 1982-1983), do not adequately allege a "pattern of racketeering activity" as defined under RICO. 18 U.S.C. § 1961(5) (1976). A "racketeering activity" consists of any act which is indictable under specified provisions of federal law, including the mail and wire fraud statutes, or any act involving bribery, which is punishable by imprisonment for more than one year. *fn2" A "pattern of racketeering activity" consists of the commission of two or more such acts within ten years of each other. *fn3"

 Movants contend that, because the complaint's charges of mail and wire fraud arise out of a common nucleus of facts, they comprise only one predicate act under RICO and cannot be considered separate acts comprising a pattern of racketeering activity. They further argue that N.Y.P.L. § 190.65 is not among the state-law offenses which can constitute predicate RICO acts. They claim that § 190.65 is not a crime involving bribery, but instead simply a crime of fraud, *fn4" and that the allegations that defendants' violation of § 190.65 was accompanied by an act of bribery does not bring the charge within the scope of RICO. They also argue that the fraud alleged in the complaint is not the type of fraud to which § 190.65 ...


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