UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF NEW YORK
November 10, 1986
GEORGE KOVIAN, Plaintiff,
THE FULTON COUNTY NATIONAL BANK AND TRUST COMPANY, CHARLES MOYSES, JOHN VALERIUS, VINCENT SALLUZZO, ROBERT SALLUZZO, JOHN GLEASON, GLEASON AND SALLUZZO, ADIRONDACK HOMESITES, INC., CAPITAL MEDICAL LEASING CORPORATION, HOYE & HOYE, and THEODORE E. HOYE, JR., Defendants
The opinion of the court was delivered by: MUNSON
HOWARD G. MUNSON, C.J.
MEMORANDUM-DECISION AND ORDER
Defendant's motion pursuant to F. R. Civ. P. 12(b)(6) to dismiss the amended complaint in the above-captioned action raises difficult questions concerning the extent to which the civil remedies provided by the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968 (1982), are available in disputes arising out of complex business transactions. Plaintiff's inartfully pleaded amended complaint, organized into six "claims," essentially raises seventeen separate possible bases of liability under RICO, all arising out of a single business transaction which transferred plaintiff's stock in a corporation he formed some years earlier to one of the defendants. Because of uncertainty concerning the scope of civil RICO in the aftermath of the Supreme Court's opinion in Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985), the court feels compelled to discuss defendant's motion at length in this opinion.
Plaintiff alleges that he and defendant John Valerius formed Adirondack Homesites, Inc. ["Adirondack"] in 1977. The corporation was apparently formed to facilitate the completion of a construction project. Valerius was in charge of the corporation's financial matters, while plaintiff was in charge of the construction work on an apartment complex which came to be known as the Fonda Project. Plaintiff was the sole stockholder in Adirondack, purportedly at Valerius's request.
Valerius arranged permanent financing for the Fonda Project by obtaining a mortgage from the Farmers Home Administration ["FmHA"]. Adirondack obtained interim financing through construction loans from defendant Fulton County National Bank and Trust Company ["the Bank"]. Plaintiff was the guarantor of those loans. Defendant Charles Moyses was the Vice-President of the Bank who negotiated the loans.
In 1981 plaintiff and Valerius agreed to discontinue their business relationship and sell Adirondack, but were unable to locate a buyer until 1983. In 1983 a buyer was found, apparently through the plaintiff's accountants, defendant Gleason & Salluzzo, or through defendant Robert Salluzzo individually. The buyer was defendant Capital Medical Leasing Corporation ["Capital"], whose president was defendant Vincent Salluzzo. At the time of the sale, Adirondack's principal asset was the Fonda Project itself, which had an estimated value of $950,000 and an outstanding FmHA mortgage of about $850,000.
On April 19, 1983 the closing was held in the law offices of defendant Hoye & Hoye. Plaintiff and defendants Valerius, Moyses, Robert Salluzzo, Vincent Salluzzo, Theodore Hoye, and John Gleason were all present. Plaintiff signed four agreements. The first two agreements effectuated the sale of Adirondack's stock to Capital. (Amended Complaint Exs. A and B). In a third agreement Capital and Adirondack, through Vincent Salluzzo, now the president of both corporations, acknowledged a debt to plaintiff in the amount of $118,000. (Amended Complaint Ex. C). A fourth agreement obligated plaintiff to manage the Fonda Project for six years, with plaintiff guaranteeing up to $50,000 against any deficit occurring during this period. (Amended Complaint Ex. D). Cashier's checks in the amounts of $15,000 and $20,000 were issued by the Bank to Gleason & Salluzzo and Robert Salluzzo, respectively, apparently as finder's fees. Plaintiff approved payment on both checks. (Amended Complaint Exs. E and F). A promissory note bearing plaintiff's signature and made out in the amount of $88,328.76 was also dated April 19, 1983, though plaintiff denies knowledge of how this note came into existence. (Amended Complaint Ex. G). By that note plaintiff assumed a prior obligation owed by Adirondack of $50,000 plus interest, and also assumed liability for the $35,000 that the Bank had paid out to Gleason & Salluzzo and Robert Salluzzo.
The defendants claim that plaintiff did not honor the agreement struck by the parties, failing to manage the Fonda Project without a deficit. Adirondack ceased payment to plaintiff, claiming that plaintiff's breach of the fourth agreement relieved it of its obligations under the third. Thereafter, the Bank brought an action in state court to recover on certain notes bearing plaintiff's signature. This state court action is still pending. Plaintiff then brought his RICO claims in this court.
Plaintiff asserts that Valerius had assured him that his Adirondack stock would be sold to Capital for $118,000, with the purchase price going to pay debts the plaintiff had accrued by guaranteeing the Bank's loans to Adirondack. Plaintiff contends that on the day of the closing, however, he was "forced" into signing the four agreements and approving the cashier's checks given to Gleason & Salluzzo and Robert Salluzzo. Plaintiff claims that when he voiced his objection to the terms of the agreements on the day of the closing, defendant Moyses, in the presence of the other defendants, threatened to call in all of Adirondack's outstanding notes and to refuse to extend plaintiff credit in the future. At this point plaintiff admits he signed the four agreements and approved the two checks.
Plaintiff also denies knowledge of how certain promissory notes bearing his signature and held by the Bank came into existence. Plaintiff claims that when he originally went to the Bank for loans needed to finance the construction of the Fonda Project, Moyses, pursuant to Bank policy, required him to sign four blank promissory notes. Plaintiff claims that one of these notes was completed by the Bank and Moyses without his authorization at an unknown time and place in the amount of $88,328.76. That note is dated April 19, 1983. Plaintiff further alleges that he did not authorize the completion of three other notes bearing his signature. One such note, dated September 23, 1983, is in the amount of $46,691.97 and signed by plaintiff in his capacity as president of Adirondack. Plaintiff notes that as of that date he no longer held any corporate office with Adirondack. A second note, dated September 27, 1983, is made out for $98,800.35 and is signed by plaintiff in his individual capacity. A third, in the amount of $118,000 and dated October 3, 1983, was also signed by plaintiff in his individual capacity. Some of these notes were apparently used to cancel out the others, and after October 3, 1983 only this last note remains outstanding.
Finally, plaintiff complains that he never received any payments under the third agreement signed by Vincent Salluzzo as President of Capital and Adirondack. Instead, payments went directly to the Bank and were applied to reduce the unauthorized notes dated April 19, September 27 and October 3. Since August 20, 1984 Adirondack has refused to pay on the debt acknowledged by the third agreement.
Plaintiff's amended complaint sets out these allegations and is organized into six "claims" defining six distinguishable "enterprises" affecting interstate commerce.
Within five of the six "claims" plaintiff identifies three distinct bases for liability under civil RICO: the conduct of an enterprise affecting interstate commerce through a "pattern of racketeering activity" in violation of 18 U.S.C. § 1962(c)(1982); the conduct of an enterprise through the collection of an "unlawful debt" in violation of § 1962(c); and conspiracy to violate the provisions Of § 1962(c) in violation of § 1962(d). A sixth claim is predicated on § 1962(c) only. The defendant Bank has moved to dismiss the amended complaint pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted, and all other defendants named in this action have joined in this motion. For the disposition of this motion all of plaintiff's allegations are presumed to be true and the facts are construed in a light most favorable to plaintiff's cause of action. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974).
II. PLAINTIFF'S ALLEGATIONS OF A "PATTERN OF RACKETEERING ACTIVITY"
Among the remedies created by the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (1982), is a private cause of action for treble damages, costs and attorneys' fees for injuries to one's "business or property by reason of a violation" of § 1962. 18 U.S.C. § 1964(c)(1982). Among other things, § 1962 prohibits any person employed by or associated with an "enterprise"
from conducting its affairs through a "pattern of racketeering activity." 18 U.S.C. § 1962(c)(1982).
Section 1961(5) requires a showing of at least two "acts of racketeering activity" occurring within ten years of each other in order to establish a "pattern of racketeering activity."
"Racketeering activity" is defined by § 1961(1) to include a variety of state and federal offenses.
In the present case, the predicate acts alleged by plaintiff vary slightly in each of the six "claims" set forth. Of these, the only acts of racketeering that can be sustained
on the face of the pleadings are a number of alleged violations of the Federal Mail Fraud Statute, 18 U.S.C. § 1341 (1982).
At issue is whether these allegations of mail fraud, if true, demonstrate a "pattern of racketeering activity" sufficient to support a RICO action.
The Supreme Court has noted that "two isolated acts of racketeering activity do not constitute a pattern." Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S. Ct. 3275, 3285, 87 L. Ed. 2d 346 n.14 (1985). Unfortunately, there seems to be little agreement among the courts on what does constitute a "pattern." There are cases suggesting that a "pattern" can be established by "two acts occurring on the same day in the same place and forming part of the same criminal episode." United States v. Moeller, 402 F. Supp. 49, 58 (D. Conn. 1975); see United States v. Parness, 503 F.2d 430 (2d Cir. 1974), cert. denied, 419 U.S. 1105, 42 L. Ed. 2d 801, 95 S. Ct. 775 (1975). One court has recently held that two related acts of mail fraud in a single scheme dealing with a single transaction can constitute a "pattern of racketeering activity." R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350 (5th Cir. 1985); see also Illinois Dept. of Revenue v. Phillips, 771 F.2d 312 (7th Cir. 1985) (mailing of nine fraudulent tax returns over nine month period constitutes "pattern of racketeering activity"); Soper v. Simmons International, Ltd., 582 F. Supp. 987 (N.D.N.Y. 1983) (Munson, C.J.) (separate incidents of mail and wire fraud in furtherance of single scheme to defraud plaintiffs sufficient to establish "pattern").
Other recent cases, however, have required a greater showing to establish a "pattern" sufficient to support a cause of action under RICO. These cases reason that
"pattern" . . . connotes a multiplicity of events: Surely the continuity inherent in the term presumes repeated criminal activity, not merely repeated acts to carry out the same criminal activity. It places a real strain on the language to speak of a single fraudulent effort, implemented by several fraudulent acts, as a "pattern of racketeering activity."
Northern Trust/O'Hare, N.A. v. Inryco, Inc., 615 F. Supp. 828, 831 (N.D.Ill. 1985) (emphasis in original) (several mailings in furtherance of an ongoing kickback scheme did not establish RICO "pattern"); see also Superior Oil Co. v. Fulmer, 785 F.2d 252 (8th Cir. 1986); Professional Assets Management, Inc. v. Penn Square Bank, N.A., 616 F. Supp. 1418 (W.D.Okla. 1985) (preparation of audit report by accounting firm, although involving numerous constituent acts, was a single unified transaction and not a "pattern of racketeering activity"); Allington v. Carpenter, 619 F. Supp. 474, 478 (C.D.Cal. 1985) ("[A] 'pattern' of racketeering activity must include racketeering acts sufficiently unconnected in time or substance to warrant consideration as separate criminal episodes"); Morgan v. Bank of Waukegan, 615 F. Supp. 836 (N.D.Ill. 1985) (allegations of repeated acts to carry out same criminal activity do not constitute "pattern of racketeering activity"); Teleprompter of Erie, Inc. v. City of Erie, 537 F. Supp. 6 (W.D.Pa. 1981) (numerous alleged bribes relating to single fundraising event did not constitute a "pattern" but instead "constitute[d] one single act of unlawful activity").
The law in this Circuit is unsettled. In United States v. Weisman, 624 F.2d 1118 (2d Cir.), cert. denied, 449 U.S. 871, 66 L. Ed. 2d 91, 101 S. Ct. 209 (1980), the Court of Appeals indicated that any two acts of racketeering by the same enterprise, no matter how unrelated, can establish a "pattern." Id. at 1121-23. In United States v. Parness, 503 F.2d 430 (2d Cir. 1974), cert. denied, 419 U.S. 1105, 42 L. Ed. 2d 801, 95 S. Ct. 775 (1975), the court found that allegations of two acts of interstate transportation of stolen property and one act of "causing a person to travel in interstate commerce in furtherance of a scheme to defraud," all occurring within five days of each other in furtherance of the same criminal episode, was sufficient to establish a "pattern of racketeering activity." See also Bankers Trust Co. v. Rhoades, 741 F.2d 511, 524 (2d Cir. 1984), vacated,473 U.S. 922, 105 S. Ct. 3550, 87 L. Ed. 2d 673 (1985) ("Two acts in the same criminal episode may establish a pattern of racketeering").
The viability of these holdings has been drawn into question, however, by dicta in the Supreme Court's recent decision in Sedima,
and more fundamentally by concerns expressed by the Second Circuit itself that RICO "is being far more frequently used for purposes totally unrelated to its expressed purpose." Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482, 487 (2d Cir. 1984), rev'd, 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985). Thus, several recent lower court cases in this Circuit have indicated that multiple predicate acts alleged to have been committed in connection with a single business transaction or in furtherance of a single criminal episode are not sufficient to establish a "pattern of racketeering activity." See Richter v. Sudman, 634 F. Supp. 234, 239 (S.D.N.Y. 1986); Soper v. Simmons International, Ltd., 632 F. Supp. 244 (S.D.N.Y. 1986); Anisfeld v. Cantor Fitzgerald & Co., Inc., 631 F. Supp. 1461, 1467 (S.D.N.Y. 1986); Frankart Distributors, Inc. v. RMR Advertising, Inc., 632 F. Supp. 1198 (S.D.N.Y. 1986); Utz v. Correa, 631 F. Supp. 592 (S.D.N.Y. 1986); Modern Settings, Inc. v. Prudential-Bache Securities, Inc., 629 F. Supp. 860 (S.D.N.Y. 1986); cf. Rush v. Oppenheimer & Co., Inc., 628 F. Supp. 1188, 1198-1200 (S.D.N.Y. 1985) (questions whether "pattern" can be comprised of "predicate act segments of one criminal project"). Other courts, however, adhere to the view that separate predicate acts committed in furtherance of a single scheme to defraud constitute a "pattern." See, e.g., First Federal Savings and Loan Assn. of Pittsburgh v. Oppenheim, Appel, Dixon & Co., 629 F. Supp. 427, 445 (S.D.N.Y. 1986); Conan Properties, Inc. v. Mattel, Inc., 619 F. Supp. 1167 (S.D.N.Y. 1985).
The Supreme Court's observation that "two isolated acts of racketeering activity do not constitute a pattern" directly contradicts the implications of United States v. Weisman. Further, a requirement of "continuity" would bring the holding in Parness in doubt.
This court believes that the more restrictive approach advocated in Northern Trust Bank/O'Hare closer approximates the intentions of the drafters of RICO. The Racketeer Influenced and Corrupt Organizations Act, enacted as Title IX of the Organized Crime Control Act of 1970, Pub.Law 91-452 (1970), was designed "to seek the eradication of organized crime in the United States . . . by providing new remedies to deal with unlawful activities of those engaged in organized crime." 116 Cong.Rec. 35191 (1970). The statute was enacted to combat the pervasive influence of organized mobsters on American economic and social life, not to subject ordinary criminals to the heightened punishment provided by the Act, United States v. Lemm, 680 F.2d 1193, 1198 (8th Cir. 1982), cert. denied, 459 U.S. 1110, 74 L. Ed. 2d 960, 103 S. Ct. 739 (1983), nor to "federaliz(e) broad areas of state common law of frauds." Sedima, 105 S. Ct. at 3292 (Marshall, J., dissenting). In recent years, however, courts have expressed concern that an expansive reading of the civil provisions of RICO would displace the remedial schemes created by Congress for the federal crimes listed as predicate acts in § 1961(1), as well as "federalize" certain causes of action previously considered within the domain of state courts, particularly business fraud, bank fraud, and "garden variety" securities fraud. Sedima, 741 F.2d at 486-88, rev'd, 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985).
The Supreme Court suggested in Sedima that "[t]he 'extraordinary' uses to which civil RICO has been put appear to be . . . [in part] the result of . . . the failure of Congress and the courts to develop a meaningful concept of 'pattern.'" 105 S. Ct. at 3287. Looking to the legislative history of RICO itself, the Court suggested in dicta that it is a showing of "'continuity plus relationship which combines to produce a pattern.'" Id. at 3285 n.14 (emphasis in original), quoting S.Rep. No. 91-617, p. 158 (1969). In the present case there is no doubt that the predicate acts alleged by plaintiff are related to one another, since they arise out of the same business transaction. Plaintiff has failed, however, to allege facts demonstrating that any combination of the defendants had ever engaged in racketeering activity before or after the allegedly fraudulent business deal that is the subject of this suit, nor are any facts alleged supporting the conclusion that any combination of the defendants were engaged in criminal activities elsewhere. Thus, plaintiff has failed to allege facts evidencing the "'continuity' sufficient to form a 'pattern of racketeering activity.'" Superior Oil Co. v. Fulmer, 785 F.2d 252, 257 (8th Cir. 1986).
A series of predicate acts arising out of a single business transaction are not sufficient to constitute a "pattern of racketeering activity" within the meaning of the Act.
Consequently, plaintiff's claims based upon the conduct of an enterprise through a "pattern of racketeering activity" must be dismissed.
III. PLAINTIFF'S ALLEGATIONS OF "COLLECTION OF UNLAWFUL DEBT"
RICO prohibits any person from conducting or participating in the conduct of an enterprise through the "collection of unlawful debt." 18 U.S.C. § 1962(c) (1982). "Unlawful debts" under the statute include debts "incurred in connection with . . . the business of lending money or a thing of value at a rate usurious under State or Federal law, where the usurious rate is at least twice the enforceable rate." 18 U.S.C. § 1961(6) (1982). Under New York law a bank or trust company may not "take, receive, reserve or charge on any loan or discount made, or upon any note, bill of exchange or other evidence of debt . . . interest . . . at a rate greater than the rate prescribed by the banking board pursuant to (N.Y. Banking Law § 14-a (McKinney 1971 & Supp. 1986))." N.Y. Banking Law § 108 (McKinney 1971 & Supp. 1986). On April 19, 1983 the maximum rate established by the banking board was 16%. N.Y. Admin. Code tit. 3, § 4.1 (1984).
Plaintiff alleges that the promissory note dated April 19, 1983 running from plaintiff to the defendant Bank in the amount of $88,328.76 is usurious. Plaintiff claims that although the note on its face purports to charge interest of only 12%, this is but a subterfuge designed to conceal an actual rate exceeding 40%, more than twice the enforceable rate under New York's usury laws. Apparently, $35,000 of the $88,328.76 total covered by the note was for money paid by the Bank to Gleason & Salluzzo and Robert Salluzzo as finder's fees, some or all of which plaintiff contends was "kicked back" to Vincent Salluzzo and Bank Vice-President Charles Moyses. (Amended Complaint § 31(e)). Plaintiff argues that this $35,000 should not be considered part of the principal but instead 'as interest, and therefore the note is usurious.
In determining the amount of the principal of a loan, courts must look to the actual consideration given by the lender. Any "bonus" retained by the lender and not made available to the borrower cannot be considered part of the principal of the loan for purposes of determining whether a loan is usurious. See, e.g., Schwarz v. Sweitzer, 202 N.Y. 8, 94 N.E. 1090 (1911); cf. Valley National Bank of Long Island v. Levy, 45 A.D.2d 771, 356 N.Y.S.2d 1003 (2d Dept. 1974) ("A mortgage may only be enforced to the extent of the actual consideration"). It is well established, however, that "[a] lender cannot be charged with usury on account of any commission or bonus paid by the borrower to his own agent, or to an independent broker, for services in negotiating or procuring the loan, if the lender had . . . no interest in . . . such payment." 32 N.Y. Jur. Interest and Usury § 68 (1963); Kaufman v. Schwartz, 183 A.D. 510, 170 N.Y.S. 318 (1st Dept. 1918). Therefore, plaintiff cannot rely on the payments made by the Bank to plaintiff's accountants, Gleason & Salluzzo and Robert Salluzzo, as a basis for his claim that the April 19 note was usurious. Support for plaintiff's allegation of usury must be found, if at all, in his assertion that Vice-President Moyses received "kick-backs" from the money paid by the Bank to the accountants.
As a general rule, a loan is not rendered usurious when the lender's agent, without the knowledge, consent, or authorization of the lender, collects a commission or fee for his own benefit. Annot., 52 A.L.R.2d 703, 737 (1957); 3 N.Y. Jur. 2d Agency § 252 (1980); Robertson v. Merwin, 154 A.D. 723, 139 N.Y.S. 726 (2d Dept. 1913). Even if plaintiff's allegation of kick-back payments was true, plaintiff has failed to plead facts indicating that Moyses acted with the Bank's authorization, actual or apparent, or that the Bank benefitted from monies received by Moyses, if any. Therefore, plaintiff's claims based upon the "collection of unlawful debt" must be dismissed.
Plaintiff also makes five separate claims predicated on § 1962(d), which provides that "[i]t shall be unlawful for any person to conspire to violate any of the provisions" of § 1962(a), (b), or (c). This court's conclusion that plaintiff has failed to plead facts sufficient to support a finding of a "pattern of racketeering activity" or "collection of unlawful debt" also precludes a finding of conspiracy to violate § 1962(c). See Rush v. Oppenheimer & Co., Inc., 628 F. Supp. 1188, 1198 n.5 (S.D.N.Y. 1985). Therefore, plaintiff's conspiracy claims must also be dismissed.
Plaintiff's amended complaint is dismissed with leave to file a second amended complaint within 30 days. Plaintiff is admonished to carefully draft his complaint in accordance with this opinion, eliminating the repititious or irrelevant matter that pervades the original and amended complaints filed in this action.