Appeal from a judgment of the United States District Court for the Eastern District of New York, Charles P. Sifton, Judge, dismissing plaintiff-appellant-cross-appellee's complaint alleging (1) a violation of RICO, 18 U.S.C.A. §§ 1964(c) (West 1984) and 1962(a)-(d) (West 1984 & Supp. 1989), by the commission of predicate acts of mail fraud in contravention of 18 U.S.C. § 1341 (1982); and (2) various claims under state law. Affirmed.
Oakes, Chief Judge, and Kearse and Mahoney, Circuit Judges.
The Superintendent of Insurance of the State of New York (the "Superintendent") brought this civil action as liquidator of two insurance companies, American Fidelity Fire Insurance Company ("AFFI") and American Consumer Insurance Company ("ACI").*fn1 The Superintendent's complaint alleged that a former parent company of AFFI and ACI, American Plan Corporation ("APC"), and certain officers, directors and shareholders of APC, AFFI and ACI stole millions of dollars from AFFI and ACI and concealed the thefts, thereby violating the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C.A. §§ 1964(c) (West 1984) and 1962(a)-(d) (West 1984 & Supp. 1989), through predicate acts of mail fraud in contravention of 18 U.S.C. § 1341 (1982). The complaint also alleged state law claims for common law fraud, waste of corporate assets, breach of fiduciary duties and negligence against all defendants, and for the imposition of a constructive trust upon defendants APC, Abe Jay Lieber, Marcia E. Lieber and Marc D. Lieber with respect to assets fraudulently transferred from AFFI and ACI.
The district court dismissed the complaint pursuant to Fed.R.Civ.P. 12(b)(6), holding that the Superintendent did not adequately plead predicate acts of mail fraud to sustain his RICO claim. Since the RICO claim was plaintiff's sole basis for federal jurisdiction, the district court also dismissed the pendent state law claims.
In reviewing a motion to dismiss under Fed.R.Civ.P. 12(b)(6), we must accept the allegations of plaintiff's complaint as true. Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972); Cooper v. Pate, 378 U.S. 546, 546, 12 L. Ed. 2d 1030, 84 S. Ct. 1733 (1964). We therefore proceed to summarize those allegations.
Defendants' looting of AFFI and ACI is alleged to have occurred between late 1982, when Abe Jay Lieber acquired control of APC, and September 6, 1985, when the Supreme Court of the State of New York, County of Nassau, placed AFFI and ACI in rehabilitation. At all relevant times, AFFI and ACI were property/casualty insurance companies. The stock of ACI was wholly owned by AFFI. In turn, APC owned all of the preferred stock, and ninety-four percent of the common stock, of AFFI.
The complaint sets forth three basic schemes undertaken by defendants pursuant to their plan to drain AFFI and ACI of their assets. The first involved charging AFFI and ACI grossly excessive management fees. Under N.Y. Ins. Law § 1505(a) (McKinney 1985) and the management agreements between APC and its subsidiaries, APC was permitted to charge reasonable actual operating expenses incurred in managing the businesses of AFFI and ACI, exclusive of debt service costs, as "management fees" to AFFI and ACI. APC is alleged, however, to have taken grossly excessive, unreasonable and unjustified monies from AFFI and ACI as so-called "management fees." Specifically, in 1984 the combined premiums earned and net investment income of AFFI and ACI amounted to $17,292,164; between August, 1984 and September, 1985, APC took at least $9,621,536 from AFFI and ACI as management fees. These fees were used to pay expenses or salaries not properly attributable to AFFI and ACI, including the entire salary of defendant Abe Jay Lieber, part of which should have been charged to other companies controlled by Lieber.
The second scheme alleged in the complaint was a "loan fraud" involving approximately $6,800,000 which APC borrowed from ACI (over and above the management fees). The Supreme Court of the State of New York, County of Nassau, ordered APC to repay these monies. Purportedly to comply with this order, APC transferred a real estate lien note with a face value of $6,446,696 to ACI, secured by a deed of trust on a warehouse property in Collin County, Texas (the "Amdall Property"), fraudulently representing that it had a net equity in the Amdall Property of at least $6,400,000, despite the fact that defendants knew that APC had virtually no equity therein.
The third scheme was a "capital fraud" relating to a state court order which required APC to transfer assets worth at least $2,000,000 to AFFI in order to meet minimum capital requirements imposed upon insurance companies by state law. APC transferred real estate assets (the "McCarty Properties") in purported compliance with this order, falsely representing their worth to the state court and others, despite the fact that APC's net equity in the transferred assets was worth only approximately $270,000.
It is alleged that misrepresentations were made to the Insurance Department of the State of New York (the "Department"), of which the Superintendent is the head, see N.Y. Ins. Law § 201 (McKinney 1985), by means of monthly and annual reports of AFFI and ACI mailed to the Department from Piano, Texas. These mailings are claimed to have violated 18 U.S.C. § 1341 (1982), thereby qualifying as RICO predicate acts pursuant to 18 U.S.C.A. § 1961(1)(B) (West 1984 & Supp. 1989). Specifically, it is alleged that various monthly and annual reports did not reveal the excessive nature of the management fees, an annual report falsely represented that the approximately $6,800,000 loan from ACI to APC was fully secured as of February 1, 1984 by the Amdall Property, and that various monthly and annual reports fraudulently represented that the transfer of the McCarty Properties constituted a $2,000,000 contribution to the surplus of AFFI and ACI.*fn2
This action commenced on May 21, 1986. Soon thereafter, several of the defendants moved to dismiss or in the alternative for summary judgment, which motions were denied by the district court by order entered February 6, 1987. In a memorandum and order entered November 8, 1988, however, the district court granted the defendants' renewed motion to dismiss, based upon the intervening authority of McNally v. United States, 483 ...