The opinion of the court was delivered by: SWEET
In this action brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., defendants move to dismiss the amended complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6) and to plead fraud with particularity under Fed.R.Civ.P. 9(b) and because the action is barred by the applicable statute of limitations. In addition, defendants move to recover costs and attorneys' fees pursuant to Fed.R.Civ.P. 11 and 28 U.S.C. § 1927. For the following reasons the motion to dismiss is granted, and the motion to recover costs and fees is denied.
In 1902, the National Railroad Company of Mexico ("National") issued $23,000,000 principal amount 4-1/2% Prior Lien Bonds (the "Prior Lien Bonds") and $27,289,000 First Consolidated Mortgage Bonds (the "Consolidated Mortgage Bonds"). Plaintiffs purportedly hold $1,500 principal amount of Prior Lien Bonds and $153,000 of Consolidated Mortgage bonds. Defendant Manufacturers Hanover Trust Company ("MHT") is the successor trustee for both series of bonds. The other defendants are Donald B. Herterich ("Herterich"), a senior vice-president of MHT; Kelley Drye and Warren ("Kelley Drye"), counsel to MHT; Edward Roberts III ("Roberts"), a Kelley Drye partner; Milbank, Tweed, Hadley & McCloy ("Milbank"), counsel to Mexico; and Isaac Shapiro ("Shapiro"), a Milbank partner at the time of the events alleged.
National is a Utah corporation which in 1902 owned and operated railway lines in Mexico. National also owned certain railway properties in and around Laredo, Texas (the "U.S. collateral"), which it pledged to the trustee as security for, among other issues, the Prior Lien and Consolidated Mortgage Bonds. The Prior Lien Bonds represented a first mortgage against the U.S. collateral and certain collateral located in Mexico; the Consolidated Mortgage Bonds were subordinated to the Prior Lien bonds.
In 1908, under a plan of readjustment and union, National was taken over by Ferrocarriles Nacionales de Mexico ("Ferrocarriles"), a publicly-owned corporation which owns and operates Mexico's railroads. As a result, Ferrocarriles assumed all of National's liabilities, as well as ownership of National's property, including the U.S. collateral securing the bonds.
The bonds have been in default since 1914. In 1942, Mexico issued a decree ("the Registration Decree") requiring holders of certain Mexican securities, including the Prior Lien and Consolidated Mortgage Bonds, to present their bonds for registration to establish non-enemy ownership. In 1951, Mexico promulgated the "Law on the Fate of Enemy Bonds" under which ownership of all bonds not registered was deemed to be vested as property of Mexico.
Approximately 96% of the issued and outstanding Prior Lien and Consolidated Mortgage Bonds were registered under the Registration Decree. The bonds held by plaintiffs were never registered. Pursuant to a 1946 Debt Readjustment Agreement with the International Committee of Bankers, or through direct purchases from bondholders, Mexico acquired all Prior Lien and Consolidated Mortgage Bonds registered under the Registration Decree.
Between 1942 and 1981, MHT, as indenture trustee, made numerous distributions of accrued and unpaid interest to holders of Prior Lien Bonds. In these and all other distributions, MHT treated the holders of unregistered bonds (including plaintiffs) as the legal owners of the bonds entitled to receive distributions and treated Mexico as the owner of the approximately 96% of the bonds which Mexico had acquired, notwithstanding plaintiffs' objections that Mexico was not entitled to receive distributions as a bondholder.
MHT read Article Four, Section Five of the Prior Lien Trust Indenture to empower a holder of more than 75% of the issued and outstanding Prior Lien Bonds to instruct MHT to foreclose the Prior Lien Mortgage and sell the collateral securing the bonds. Mexico, as holder of approximately 96% of the Prior Lien Bonds, directed MHT to foreclose on the mortgage and sell the U.S. collateral.
The collateral was sold at public auction in Laredo, Texas on November 2, 1982 to Mexrail, Inc. for the upset price of $31 million. Mexrail, Inc. was the only bidder. The closing for the sale of collateral took place on November 29, 1982. In December, 1982, MHT published and mailed to known bondholders a notice stating that it would distribute, upon presentment of Prior Lien Bonds, $1,355 of accrued and unpaid interest on each $1,000 Prior Lien Bond from the proceeds of the sale of the collateral.
The claims asserted in plaintiffs' complaint are based on alleged wrongdoing in connection with the distribution of interest payments to Mexico between 1942 and 1981 ("Phase I"), the sale of the U.S. collateral ("Phase II"), and the disposition of the proceeds of that sale ("Phase III"). In Phase I, defendants allegedly defrauded plaintiffs and similarly situated holders of Prior Lien Bonds by unlawfully treating Mexico as a holder of those bonds with respect to seven distributions of accrued interest from April 1, 1972 through December 31, 1981. Through this treatment defendants allegedly wrongfully permitted more than ninety percent of each such distribution to be siphoned off to Mexico, to the detriment of plaintiffs and other individual holders of Prior Lien Bonds.
In Phase II, defendants allegedly defrauded plaintiffs and similarly situated holders of both series of bonds by depriving them of substantially the entire value of the collateral held by MHT as indenture trustee through (a) the sale of the collateral at a fraudulently low price, and (b) the treatment of Mexico as a bond holder entitled to 95.83% of the fraudulently low proceeds of the sale.
In Phase III defendants allegedly defrauded the government and people of Mexico by depriving them of their purported share of the proceeds of the sale of collateral through (a) the sale of the collateral at a fraudulently low price; (b) the failure to disclose to the government of Mexico that it was being defrauded by corrupt Mexican nationals, some of whom were government officials, and that Mexico could have appeared at the sale and purchased the collateral for little or no cash outlay; and (c) the acceptance by MHT of a fraudulent and legally ineffective assignment from the purchaser, in payment of 95.83% of the sale price, given without consideration of Prior Lien Bonds previously recognized by MHT as validly held by Mexico.
Two prior actions based on these facts are now pending against MHT in the Supreme Court of New York County, Beck v. Manufacturers Hanover Trust Co., No. 12896/83 ("Beck I "), and Beck v. Manufacturers Hanover Trust Co., No. 15145/85 ("Beck II "). In Beck I, plaintiffs allege that MHT breached its fiduciary responsibilities to plaintiffs as bondholders in its administration of the indenture trust. In Beck II, plaintiffs allege that MHT ...