The opinion of the court was delivered by: GOETTEL
Before the Court are motions by the various defendants pursuant to Rules 12(b)(6), 9(b), and 12(f) of the Federal Rules of Civil Procedure. For the reasons stated below, these motions are denied.
The amended complaint alleges the following facts which we deem true for the purpose of evaluating the defendants' motions to dismiss.
Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
From 1975 until mid-1984, Carla Leather, Inc. ("Carla"), a New York corporation, manufactured, distributed, and sold women's leather apparel. Beginning in 1976, Meritum Corporation ("Meritum") acted as Carla's factor. Meritum held a continuing security interest in Carla's present and after-acquired inventory, products, and the proceeds thereof. Carla's two owner-principals, Washington Druker and Aron Vaisman, and their wives, personally guaranteed all of Carla's obligations to Meritum.
Despite increased sales throughout its operating history, Carla sustained substantial and steady operating losses. In early 1982, it became apparent that Carla could not repay its substantial Meritum debt nor could it survive without additional financing. Meritum and Carla jointly sought financing from an outside source and engaged in extensive negotiations to that end with another factor, defendant Brancorp Factors, Inc. ("Brancorp"). Defendant Jack Lindner, Brancorp's controlling officer, represented Brancorp in those negotiations. (Brancorp and Lindner are sometimes collectively referred to as "Brancorp".) Although Brancorp was willing to inject new funds into Carla, the negotiations broke down because Brancorp was unwilling to recognize Meritum's position as senior creditor. Carla was thus unable to locate a new source of financing. Carla considered commencing bankruptcy proceedings but rejected that alternative because it believed such proceedings would ultimately result in the liquidation of its assets for Meritum's benefit.
In May 1982, following Carla's and Meritum's unsuccessful joint efforts, Carla ceased operating and began liquidating its inventory and other assets. Carla's creditors, the largest of which was Meritum, were left with several million dollars in outstanding loans to Carla.
During the same period, Carla and others allegedly arranged for the creation of another entity -- Carla Maglia ("Maglia")
-- to carry on Carla's business purportedly free of Carla's debts. Maglia was incorporated on or about May 25, 1982. Washington Druker and Aron Vaisman allegedly engaged Washington Druker's brother, Bernardo Druker, to assume nominal ownership of Maglia. Maglia commenced operations managed by the same persons, making the same products, selling them to the same customers, purchasing goods from the same suppliers, operating out of the same premises, employing substantially the same personnel, and utilizing the same trade names as Carla. As part of this arrangement, Carla transferred to Maglia, for little or no consideration, the tangible and intangible assets necessary for the uninterrupted continuation of Carla's business. Within weeks of its inception, Maglia completed the successful accession to Carla's business by obtaining financing from defendant Brancorp.
Defendant Kalish, Rubinroit & Co. ("the Rubinroit firm") and its member Hyman Rubinroit were key participants in this allegedly fraudulent scheme. The Rubinroit firm, through Hyman Rubinroit, (collectively "Rubinroit") provided accounting and financial advisory services to Carla and has provided the same services to Maglia since its inception. Hyman Rubinroit was Carla's principal negotiator, spokesman, and accountant. He attended all or substantially all of the spring 1982 meetings between Carla and Meritum, Carla and Brancorp, and Carla and Meritum's banks. Thereafter, Rubinroit performed the same tasks for Maglia. During the time that Carla liquidated and transferred its assets, Rubinroit was simultaneously retained by Carla and Maglia. Rubinroit allegedly advised Washington Druker, Aron Vaisman, and Bernardo Druker on how to conduct such transfers to avoid detection of the fraudulent scheme and arranged for Brancorp to finance Maglia.
Meritum filed a voluntary reorganization petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 1101-1174 (1982), on May 28, 1982. The bankruptcy court converted that Chapter 11 proceeding into a Chapter 7 proceeding, see U.S.C. §§ 701-766 (1982), on September 27, 1982. Following his appointment and confirmation as trustee of the Meritum estate, Elliot H. Lumbard (the "Meritum Trustee") commenced a one-year investigation into Meritum's affairs.
In January 1984, the Meritum Trustee brought this action against Maglia, Brancorp, Rubinroit, Vaisman, Washington Druker and others on claims arising out of those defendants' allegedly fraudulent scheme to transfer the income, assets, and business of Carla to Maglia. The Meritum Trustee sought recovery of Carla's debt to Meritum, which had allegedly grown to $12.2 million. Carla, by then an assetless shell, was joined as a nominal defendant.
Carla filed a voluntary petition for liquidation under Chapter 7 of the Bankruptcy Code on May 8, 1984, four months after the commencement of the Meritum action. The amended complaint alleges that Washington Druker and Brancorp arranged for this bankruptcy filing for the primary purpose of obstructing the Meritum action. They allegedly anticipated that the Carla bankruptcy trustee (the "Carla Trustee"), by virtue of a provision of the bankruptcy law, would displace the Meritum Trustee as the party in control of the claims in Meritum's action. Since the Carla estate had no assets, the defendants anticipated that the Carla Trustee would pursue these claims less effectively than would the Meritum Trustee.
On May 8, 1984, David M. Green was appointed by the United States Trustee to serve as interim trustee of the Carla estate.
On June 22, 1984, after completing a one month investigation into Carla's affairs, Green, on behalf of the Carla estate, reached a settlement with the Meritum estate. The settlement provides that the Carla and Meritum Trustees will jointly prosecute the Meritum action dividing the eventual proceeds.
In conjunction with the settlement, the Meritum complaint has been amended to add the Carla Trustee as a joint plaintiff.
The amended complaint contains sixteen claims for relief, the first thirteen of which are the subject of motions now before us. The first claim seeks to recover Carla's debt to its creditors from Maglia, as Carla's successor. In the second and third claims, the plaintiffs seek to hold Rubinroit, Brancorp, Washington Druker, Aron Vaisman, and Bernardo Druker liable for Carla's debt for aiding and abetting and conspiring in the scheme to avoid Carla's creditors.
The fourth through seventh claims arise under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-65 (1982). These claims seek to recover treble the amount of Carla's debts from Maglia and from those who helped to transfer Carla's business to Maglia.
Claims eight through ten arise under Article 10 of New York's Debtor and Creditor Law, N.Y. Debt. & Cred. §§ 270-81 (McKinney 1945), and under Section 544(b) of the Bankruptcy Code, 11 U.S.C. §§ 544(b) (1982). These claims seek to recover the property transferred to Maglia -- or its monetary equivalent. Claim eight is asserted against Maglia. The ninth and tenth claims are for conspiracy and aiding and abetting and are asserted against the defendants named in the second and third claims. Claims eleven and thirteen seek the turnover to the Carla estate of the Carla property that Maglia and Brancorp now possess. See 11 U.S.C. § 542 (1982). The twelfth claim alleges that Brancorp tortiously converted to its own use property in which Meritum had a security interest.
The moving defendants have directed a variety of motions at the amended complaint. Washington Druker has moved, pursuant to Fed. R. Civ. P. 12(b)(6), to dismiss the RICO claims in the amended complaint for failure to state a claim on which relief can be granted. Rubinroit joins in this motion. In the event that the RICO claims are dismissed, the moving defendants ask the Court to dismiss the remaining claims for lack of subject matter jurisdiction, or, alternatively, to abstain from hearing those claims. Defendant Brancorp moves to dismiss the second and third claims for failure to state a claim, and Brancorp moves to dismiss so much of the eleventh through thirteenth claims as rely on Meritum's security interest taking precedence over Brancorp's current interest in Maglia's property. Rubinroit joins in these motions, as does Washington Druker, to the extent that they apply to allegations of the amended complaint directed against him. Brancorp and Rubinroit also move pursuant to Fed. R. Civ. P. 9(b) to dismiss the fraud claims and the related aiding and abetting and conspiracy claims for failure to plead fraud with particularity. Brancorp and Rubinroit also move to strike certain allegations in the amended complaint or to disqualify the plaintiffs' litigation counsel pursuant to Model Code of Professional Responsibility DR 5-102(A) if these allegations are not stricken. Finally, the defendants variously challenge each trustee's standing to bring this action.
The defendants originally moved to dismiss each of the amended complaint's RICO counts. They asserted that the plaintiffs had not shown a distinct "racketeering injury" as required by Sedima S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir. 1984), rev'd, 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985), and by Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir. 1984), vacated, 473 U.S. 922, 105 S. Ct. 3550, 87 L. Ed. 2d 673 (1985). They also maintained that the plaintiffs had failed to establish another prerequisite to a civil RICO suit, a prior criminal conviction. See Sedima S.P.R.L. v. Imrex Co., supra, 741 F.2d at 496-504. The Supreme Court has since struck down both of these requirements. In Sedima S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985), the Court found "no support in the statute's history, its language, or considerations of policy for a requirement that a private treble damages action under § 1964(c) can proceed only against a defendant who has already been criminally convicted." Id. at 3284. It also held that "[t]here is no room in the statutory language for an additional, amorphous racketeering injury requirement." Id. The defendants' original objection to the RICO claims is deemed withdrawn.
In a letter dated August 29, 1985, the defendants raised a new objection to those claims. They asserted that the Second Circuit's recent decision in Bennett v. United States Trust Co., 770 F.2d 308, 315 (2d Cir. 1985), vitiated those claims.
The Bennett decision construed section 1972(c) of the RICO statute. That section states that
[i]t 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 ...