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Bankers Trust Co. v. Rhoades

July 26, 1984


Appeal from a judgment of the United States District Court for the Southern District of New York, William C. Conner, Judge, dismissing complaint for failure to state a claim under the civil provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982), on the ground that the complaint failed to allege the requisite "distinct RICO injury."

Meskill, Kearse, and Cardamone, Circuit Judges.

Author: Kearse

KEARSE, Circuit Judge

Bankers Trust Company ("Bankers") appeals from a judgment of the United States District Court for the Southern District of New York, William C. Conner, Judge, dismissing pursuant to Fed. R. Civ. P. 12(c) Bankers's complaint which sought, inter alia, treble damages pursuant to the civil provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982), for injuries suffered principally as a result of defendants' bankruptcy frauds. The district court, in an opinion reported sub nom. Bankers Trust Co. v. Feldesman, 566 F. Supp. 1235 (S.D.N.Y. 1983), found that the complaint failed to state a claim under 18 U.S.C. § 1964 ("civil RICO") because the statute provides relief only for "distinct RICO injury," i.e., injury caused by the pattern of racketeering activity rather than by the predicate acts that constitute the pattern. On appeal Bankers challenges the court's interpretation of the statute. As set forth below, we are in substantial agreement with the district court's interpretation, and we affirm the dismissal of the complaint.


The complaint alleges a scheme by the defendants to defraud Bankers through, inter alia, the concealment of assets subject to distribution in bankruptcy and the bribery of a judge. Since the case comes to us on an appeal from entry of judgment on the pleadings pursuant to Rule 12(c), we set forth the facts as alleged in the complaint. Many of the allegations have been thoroughly detailed in the bankruptcy court's opinion in In re Braten Apparel Corporation, 21 Bankr. 239 (Bankr. S.D.N.Y. 1982), and the district court's opinion affirming the bankruptcy court's order, see 26 Bankr. 1009 (S.D.N.Y. 1983), familiarity with which is assumed.

The principal actors in the scheme were Braten Apparel Corp. ("BAC"), a corporation that owed Bankers some $4,000,000; defendant Milton Braten ("Braten"), an officer and principal shareholder of BAC; defendant Daniel Rhoades, an officer, director, and/or shareholder of BAC, and an attorney for BAC and Braten; defendant Herman Soifer, a shareholder of BAC; and Walter Feldesman, an attorney who represented BAC, Soifer, and defendant Brookfield Clothes, Inc. ("Brookfield").*fn1 Braten, Rhoades, and Soifer were also officers, directors, and/or shareholders of all of the other corporate defendants named in the complaint in the present action.

A. The Initial Bankruptcy Fraud

The initial fraud consisted of a complex scheme devised in 1974 by Braten, Feldesman, and Soifer to enable BAC to eliminate, without payment, much of its $4,000,000 indebtedness to Bankers while retaining valuable assets. In August 1974, BAC acquired all of the stock of Brookfield, an entity then having a net worth of more than $3 million. Prior to the acquisition, Feldesman, Braten, and Soifer agreed that Soifer would be given the apparent ownership of the Brookfield stock but would hold the stock in a secret trust for BAC while BAC filed a bankruptcy petition and gained a discharge of its indebtedness under Chapter XI of the then-applicable Bankruptcy Act of 1898 ("Bankruptcy Act"), 11 U.S.C. §§ 1-1103 (1976). To implement the plan, Braten and Soifer executed a sham "Shareholder's Agreement," drafted by Feldesman, which provided that if BAC or Braten did not furnish a $250,000 loan to Brookfield by a specified date, BAC's stock in Brookfield would automatically be transferred to Soifer. At the time this agreement was entered into, Braten, Feldesman, and Soifer knew that the funding condition would not be met; they intended that Soifer would hold the stock of Brookfield, safe from the claims of BAC's creditors, only during BAC's bankruptcy proceedings. Soifer was to return the stock to BAC following its discharge in bankruptcy.

On September 5, 1974, BAC's stock in Brookfield was transferred to Soifer; on that day BAC filed its petition in bankruptcy. BAC did not list the Brookfield stock as an asset. Braten, Rhoades, Soifer, and Feldesman thereafter affirmatively misrepresented to Bankers and the bankruptcy court that BAC had, through failure to meet the Shareholder's Agreement's funding condition, lost its ownership of the stock. Through this and related misrepresentations, Feldesman and the individual defendants induced BAC's creditors, including Bankers, to approve a plan of arrangement under which Bankers would receive payment of only 17-1/2% of its claims and BAC would be relieved of more than $4.3 million of its debts. Had BAC's stock in Brookfield been included in BAC's plan of arrangement, BAC would have had assets sufficient to satisfy Bankers's claims in full.

BAC's plan of arrangement was approved by the court in March 1976. In August 1976, Soifer returned the Brookfield stock to BAC. Soifer, Braten, and Rhoades then revealed to Brookfield's auditors that BAC had in fact owned this stock all along.

In September 1976 Bankers commenced a proceeding in the bankruptcy court under Bankruptcy Act § 386, 11 U.S.C. § 786 (1976),*fn2 to revoke the confirmation of BAC's plan of arrangement because of the fraudulent concealment of BAC's ownership of the Brookfield stock. Following lengthy proceedings including a trial, the bankruptcy court revoked the confirmation in 1982, see In re Braten Apparel Corporation, supra, 21 Bankr. 239, finding that the individual defendants had devised and carried out a scheme to defraud by making false statements and oaths in BAC's listing of the assets of the estate, and by intentionally concealing property of BAC. The bankruptcy court ordered BAC to "offer a plan which is realistic . . . in light of the fact that the debtor owns a valuable asset -- Brookfield." Id. at 263. This decision was affirmed by the district court, see 26 Bankr. 1009, and the district court's decision was affirmed by this Court by summary order entered on September 1, 1983.

B. The 1982 Bankruptcy Fraud

In the meantime, however, BAC had entered into a new scheme to protect many of its assets from its creditors. Its principal action, again, was to transfer its stock in Brookfield. In January 1982, defendant Bennington Court Ltd. ("Bennington") borrowed more than $8.9 million from a financing company called KB Business Credit, Inc. ("KBBC"). Bennington then gave these funds to several of the other defendants in this case. When the funds were not repaid, KBBC brought a civil RICO action for treble damages against BAC, Braten, Rhoades, and others. The defendants quickly settled the lawsuit by having BAC convey its stock in Brookfield -- for little or no consideration -- to defendant Todd Equipment Leasing Co., Inc., which in turn pledged the stock to KBBC. As a result, BAC was able to frustrate Bankers's attempt in bankruptcy court to obtain some benefit from BAC's earlier ownership of the stock of Brookfield.

C. The Frivolous Lawsuits and the Bribery of a Judge

The complaint also alleges that during the perpetration of BAC's initial bankruptcy fraud, BAC and the individual defendants instituted several frivolous lawsuits against Bankers in New York State court, alleging that Bankers had breached a commitment to extend additional credit to BAC and seeking millions of dollars in damages. The only purpose of these suits was to hinder Bankers's collection of the debt owed to it by BAC. Each suit was summarily dismissed, but not without Bankers's having to incur substantial legal expenses.

In August 1977, BAC instituted an action against Bankers in South Carolina based on claims similar to those asserted in the New York actions, seeking $195 million in damages. Braten brought another action in South Carolina, asserting claims, allegedly superior to those of Bankers, to funds in an escrow account derived from the sale of machinery in which Bankers had a security interest. Rhoades acted as counsel to a South Carolina law firm representing BAC and Braten in these actions and, according to the complaint, proceeded to bribe the judge before whom they were pending.

In 1978, while the actions were pending before Judge William H. Ballenger, Rhoades used a South Carolina corporation formed by him to assume a mortgage debt on which Judge Ballenger was personally liable to the extent of $100,000. Rhoades thereafter made payments on the debt as installments came due. Rhoades's actions induced Judge Ballenger to render at least two decisions favorable to Braten and BAC: (1) in Braten's action to collect from the escrow account, he appointed a former partner of the law firm to which Rhoades was counsel as a "special referee" with the power to deny Bankers a jury trial; and (2) in BAC's $195 million damage action, he arbitrarily denied Bankers's motion to dismiss. Judge Ballenger eventually recused himself from the escrow account action after citing a "possible conflict of interest," and his special referee resigned. In the BAC action, the South Carolina Supreme Court reversed Judge Ballenger's denial of Bankers's motion to dismiss as an abuse of discretion. In the meantime, however, Bankers had expended more than $100,000 in defending the South Carolina cases.

D. The District Court's Opinion

Bankers's complaint alleged that the defendants constituted or formed a RICO "enterprise" within the meaning of 18 U.S.C. § 1961(4); that their actions were criminal offenses involving, inter alia, bankruptcy fraud, perjury, and bribery; that each of the offenses was a "racketeering activity" within the meaning of § 1961(1); that any two such offenses constituted a "pattern of racketeering activity" within the meaning of § 1961(5); that defendants' formation, control, and conduct of the enterprise through their pattern of racketeering activity violated §§ 1962(a), (b), and (c); and that defendants' conspiracy to do such acts violated § 1962(d). Bankers demanded, inter alia, treble damages and attorney's fees pursuant to civil RICO, § 1964(c). Defendants moved for judgment on the pleadings principally on the ground that the complaint was insufficient to state a claim under civil RICO.

In deciding the defendants' motion, the district court stated that the facts alleged by Bankers "strongly suggest a sinister scheme to defraud the bank and other creditors of the monies they lent in good faith to BAC," 566 F. Supp. at 1242, and that, "based solely upon the language of the statute, one could hardly contend that [Bankers] has not adequately alleged a violation of § 1962," the criminal provisions of RICO, id. at 1239. The court concluded, however, that the complaint did not state a valid claim for relief under civil RICO. Construing § 1964(c)'s requirement that a civil plaintiff be injured "by reason of a violation of section 1962," the court reasoned that to satisfy this requirement a civil plaintiff must "allege that he has suffered a distinct RICO injury as opposed merely to a direct injury from the underlying predicate acts." 566 F. Supp. at 1240. Although finding it unnecessary to define what such "distinct RICO injury" would entail, the court opined that the provisions of civil RICO should be limited to the redress of "competitive ...

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