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Procter & Gamble Co. v. Big Apple Industrial Buildings Inc.

decided: June 22, 1989.


Procter & Gamble Co. and Riverview Productions, Inc. appeal from the March 20, 1987 judgment of the United States District Court for the Southern District of New York (Leval, J.) dismissing their complaint alleging a violation of RICO, 18 U.S.C. §§ 1961-1968, against Big Apple Industrial Buildings, Inc., Arol Buntzman, Martin Halbfinger, Esq., George A. Fuller Co., and John Does 1-10 and dismissing various state law claims against the Arkhon Corporation and Haines Lundberg Waehler. Reversed and remanded.

Cardamone, Winter and Miner, Circuit Judges.

Author: Cardamone

CARDAMONE, Circuit Judge

In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 500, 87 L. Ed. 2d 346, 105 S. Ct. 3275(1985), the Supreme Court challenged Congress and the lower federal courts to develop a "meaningful concept" of the quintessential insignia of a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) -- "pattern of racketeering activity." The Court provided some instruction in its oft-quoted footnote 14. Id. at 496. The problem is of serious consequence because a RICO trial often becomes a "megatrial" with large numbers of unrelated defendants -- charged with unconnected wrongs -- tried together under the rubric of a single conspiracy. A RICO conviction subjects a defendant to a possible 20-year prison term and a fine of $25,000. 18 U.S.C. § 1963(a). In two recent cases considered and decided en banc, we accepted the Supreme Court's challenge. See Beauford v. Helmsley, 865 F.2d 1386 (2d Cir. 1989) (en banc); United States v. Indelicato, 865 F.2d 1370 (2d Cir. 1989) (en banc).

The present appeal was argued a considerable time ago on September 18, 1987. Decision has been delayed awaiting the resolution of the two above en banc cases that were decided on January 13, 1989. Subsequently, the parties, at our suggestion, rebriefed the instant appeal in March 1989 in light of Beauford and Indelicato.


The facts alleged in plaintiffs' complaint relate to the lease and construction of the "Riverview Studio Complex," a high-tech television and motion picture production facility. In 1983, plaintiff the Procter & Gamble Company (P&G) and its advertising agency D'Arcy Masius Benton & Bowles, Inc. (Benton & Bowles) began looking for new studio space for the production of P&G's three soap operas. After considering at least eight sites in the New York metropolitan area, their search settled on the Washburn Wire Factory, an abandoned manufacturing plant located in Manhattan between East 116th and 119th Streets and owned by defendant Big Apple Industrial Buildings, Inc. (Big Apple). Defendant Arol Buntzman, president of Big Apple, and his attorney, defendant Martin W. Halbfinger, approached P&G with a plan to convert the factory into a state-of-the-art production complex, misrepresenting Big Apple's experience and expertise in conducting major renovation projects and exaggerating the completed site's potential as a tourist attraction.

During the course of negotiations beginning in the spring of 1984 Buntzman repeatedly stated that "hard" construction costs would not exceed $18 million and that the total project would cost approximately $25 million. The $18 million figure was supported by a letter Buntzman had received from the proposed general contractor, defendant George A. Fuller Co. (Fuller), estimating actual construction costs at $17,612,000. It later turned out that Fuller made this estimate simply by multiplying costs per square foot of comparable projects by the subject project's approximate square footage. Fuller did not determine actual construction costs based upon plans and specifications for building the project on this site. Hence, the estimate was unrealistic.

In January 1985, plaintiff Riverview Productions, Inc. (Riverview) -- a wholly-owned subsidiary of Benton & Bowles formed to act for P&G in the studio project and whose obligations P&G guaranteed -- entered into a ten-year lease and lease guaranty with Big Apple. The lease was for the three as yet unbuilt studios -- the Riverview Studio Complex -- at an annual rental of $1.2 million, plus Big Apple's annual debt service, including amortization over ten years of a loan for the entire construction cost of the project. As the transaction was originally structured, Big Apple as owner was to obtain a construction loan based on P&G's lease guaranty, but P&G and Riverview were to have no further role in securing construction financing.

Nonetheless, because Big Apple had difficulty obtaining a construction loan, it asked P&G to guarantee the loan. P&G initially refused. Meanwhile, Riverview was pressing Big Apple for more precise cost estimates. Plaintiffs allege that when Fuller conducted a more thorough cost survey and placed "hard" construction costs in the vicinity of $40 million, Big Apple squelched this estimate and hired an outside consultant who -- on the basis of inaccurate information -- computed "hard" costs at $22.7 million. At that time, Buntzman as head of Big Apple assured P&G and Riverview that their resulting calculation of $30 - 35 million for the project's total cost was too high. On the basis of the new $22.7 million "hard" cost figure, P&G eventually agreed to guarantee the construction loan.

In a June 6, 1985 "Tri-Party Agreement" between P&G, Riverview, and Big Apple, P&G agreed to guarantee financing up to $25 million to be provided by Citibank N.A. ($22 million in "hard" costs, $3 million in "soft" costs). The $25 million limit was reached in early 1986. Thereafter, P&G extended its guaranty on a requisition-by-requisition basis until April 1986, when the loan totalled $32 million. Throughout the months of financing, Big Apple continued to mislead plaintiffs regarding the Riverview Studio Complex's actual costs and to conceal the second, more accurate Fuller estimate.

On May 2, 1986 plaintiffs P&G and Riverview filed a complaint asserting various state law causes of action for fraud and conversion as well as violation of the Racketeer Influenced and Corrupt Organizations (RICO) statute, 18 U.S.C. §§ 1961-1968 (1982 & Supp. IV 1986). The RICO defendants are Big Apple, Halbfinger, Buntzman, and Fuller. Plaintiffs' claims against Haines Lundberg Waehler, an architectural, engineering, and planning firm, allege essentially architectural malpractice; plaintiffs charge the Arkhon Corporation, a construction manager of building projects, with breach of its management contract and of an implied warranty. Plaintiffs seek treble damages based on the RICO violations and rescission of the Lease, the Lease Guaranty, and the Tri-Party Agreement.

In addition to alleging that the RICO defendants fraudulently convinced plaintiffs to lease and guarantee financing for the studio complex, plaintiffs accuse the RICO defendants of repeated illegal siphoning of project funds. Plaintiffs allege that Big Apple improperly and excessively requisitioned millions of dollars over a nine-month period, including $657,000 in fees and disbursements to Halbfinger for 13 months' legal services, a $625,000 construction manager's fee to defendant Arkhon Corporation, and other excessive, duplicative, or unauthorized expenditures. Moreover, defendants Big Apple and Halbfinger are claimed to have fraudulently abused escrow accounts by inflating requisitions in order to "cushion" them against the possibility that plaintiffs would detect their fraud. Finally, plaintiffs contend that defendants repeatedly and falsely blamed P&G and Riverview for construction delays so that they could justify charging "interim rent" for unproductive periods.

On motions to dismiss the complaint under Fed. R. Civ. P. 9(b), 12(b)(1), and 12(b)(6), Judge Leval of the United States District Court for the Southern District of New York ruled that the alleged racketeering activity was not sufficiently continuous or related to constitute a RICO violation. Because the RICO claim was the only basis for federal jurisdiction, Judge Leval dismissed the complaint without prejudice to permit repleading of the state law claims in an appropriate forum. Procter & Gamble Co. v. Big Apple Indus. Buildings, Inc., 655 ...

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