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Beck v. Manufacturers Hanover Trust Co.

decided: June 1, 1987.

HUBERT PARK BECK, DOROTHY FAHS BECK, ROBERT J. BECK AND OTTO WEINMANN, PLAINTIFFS-APPELLANTS,
v.
MANUFACTURERS HANOVER TRUST COMPANY; MILBANK, TWEED, HADLEY & MCCLOY; KELLEY DRYE & WARREN; DONALD B. HERTERICH; ISAAC SHAPIRO; AND EDWARD ROBERTS, III, DEFENDANTS-APPELLEES



Appeal from a judgment of the District Court for the Southern District of New York (Robert W. Sweet, Judge) dismissing plaintiffs' action alleging violations by the defendants of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68 (1982 & Supp. III 1985). 645 F. Supp. 675 (S.D.N.Y. 1986); 650 F. Supp. 48 (S.D.N.Y. 1986). Affirmed.

Author: Newman

Before: MESKILL and NEWMAN, Circuit Judges and METZNER, District Judge.*fn*

JON O. NEWMAN, Circuit Judge:

This appeal raises the recurring question whether a complaint adequately pled a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-68 (1982 & Supp. III 1985). Plaintiffs appeal from a judgment of the District Court for the Southern District of New York (Robert W. Sweet, Judge) dismissing their complaint alleging civil RICO violations by Manufacturers Hanover Trust Co. and other defendants. The complaint was dismissed for failure to plead adequately the scienter was dismissed for failure to plead adequately the scienter element of the alleged predicate acts of mail fraud, 18 U.S.C. § 1341 (1982), and wire fraud, 18 U.S.C. § 1343 (1982), and, in the alternative, for failure to plead the "pattern" requirement of RICO, 18 U.S.C. §§ 1961(5), 1962(c). 645 F. Supp. 675 (S.D.N.Y. 1986); 650 F. Supp. 48 (S.D.N.Y. 1986). Because we conclude that the amended complaint does not adequately plead the "enterprise" element of RICO, 18 U.S.C. §§ 1961(4), 1962(c), we affirm the judgment of the District Court.

Background

The Circumstances alleged in the amended complaint are complex. In 1902, National Railroad Company of Mexico ("National"), a Utah corporation, issued $23,000,000 principal amount of 4-1/2 % Prior Lien Bonds ("Prior Lien Bonds") and $27,289,000 First Consolidated Mortgage Bonds ("Consolidated Mortgage Bonds"). As security for the bonds, National pledged to the trustee certain of its railway properties ("U.S. collateral"). The Prior Lien Bonds represented a first mortgage against the U.S. collateral and certain collateral in Mexico; the Consolidated Mortgage Bonds were subordinated to the prior Lien Bonds. Article Four, Section Five of the Prior Lien Trust Indenture states that

the holders of seventy-five (75) per cent. in amount of the prior liens bonds outstanding from time to time, shall have the right to direct and to control the method and place of conducting any and all proceedings for any sale of the premises hereby conveyed, mortgaged or pledged, or for the foreclosure of this indenture . . . .

Plaintiffs Hubert Park Beck, Dorothy Fahs Beck, Robert J. Beck, and Otto Weinmann hold $1,500 principal amount of Prior Lien Bonds and $153,500 of Consolidated Mortgage Bonds. Manufacturers Hanover Trust Company ("MHT"), defendant, is the successor trustee for both series of bonds. The other defendants are Donald B. Herterich, a senior vice-president of MHT; Kelley Drye and Warren ("Kelley Drye"), counsel to MHT; Edward Roberts III, a Kelley Drye partner; Milbank, Tweed, Hadley & McCloy ("Milbank"), counsel to Mexico; and Isaac Shapiro, a Milbank partner at the time of the events alleged.

In 1908, Ferrocarriles Nacionales de Mexico ("Ferrocarriles"), a publicly owned Mexican corporation which owns and operates Mexico's railroads, took over National. Through this transaction, Ferrocarriles assumed all of National's liabilities and ownership of National's property, including the U.S. collateral securing the bonds.

National defaulted on interest payments on the bonds in 1914. In 1942, Mexico issued a decree ("the Registration Decree") requiring holders of certain Mexican securities, including the Prior Lien Bonds and Consolidated Mortgage Bonds, to register their bonds to establish non-enemy ownership. In 1951, Mexico promulgated the "Law on the Fate of Enemy Bonds" under which Mexico acquired ownership of all unregistered bonds.

Approximately 96 % of the issued and outstanding Prior Lien and Consolidated Mortgage Bonds were registered under the Registration Decree. Plaintiffs' bonds were never registered. Pursuant to a 1946 Debt Readjustment Agreement with the International Committee of Bankers on Mexico and through open market purchases from bondholders, Mexico had by November 1982 acquired all Prior Lien and Consolidated Mortgage Bonds registered under the Registration Decree. Plaintiffs allege that bonds redeemed by Mexico pursuant to the Debt Readjustment Agreement were to have been retired by January 1, 1975.

Between 1942 and 1981, MHT, as indenture trustee, made numerous distributions of accrued and unpaid interest to holders of Prior Lien Bonds. Despite the Law on the Fate of Enemy Bonds, MHT treated the holders of unregistered bonds as legal owners of the bonds entitled to receive distributions. In addition, MHT treated Mexico as the owner of the approximately 96 % of the bonds it had acquired, notwithstanding plaintiffs' objections that Mexico was not entitled to receive distributions as a bondholder in view of the Debt Readjustment Agreement.

Mexico, acting pursuant to Article Four, Section Five of the Prior Lien Trust Indenture, instructed MHT to foreclose the Prior Lien Mortgage and to sell the U.S. collateral at a public auction on November 2, 1982. Following appraisal of the U.S. collateral, an upset price of $31 million was determined. The public auction and the upset price were publicized in a notice of sale dated August 10, 1982. At the auction, Mexrail, Inc., the sole bidder, purchased the U.S. collateral for the upset price. The sale was consummated on November 29, 1982. In December 1982, MHT published and mailed to known bondholders a notice stating that it would distribute $1,355 of accrued and unpaid interest from the proceeds of the sale of U.S. collateral on each $1,000 Prior Lien Bond presented.

In March 1983, plaintiffs instituted an action in Supreme court, New York County, alleging that MHT breached its fiduciary responsibilities in its administration of the indenture trust. Beck v. Manufacturers Hanover Trust Co., No. 12896/83 ("Beck I"). Plaintiffs later instituted a second lawsuit in New York alleging that MHT breached its fiduciary responsibilities ...


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