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Seward v. Devine

decided: November 1, 1989.


Appeal from judgment entered in the United States District Court for the Northern District of New York (McCurn, 2Ch. J.) dismissing RICO, contract, fraud, and malpractice claims arising out of purported scheme to deprive plaintiffs of their farm. Affirmed in part, reversed in part and remanded.

Miner and Altimari, Circuit Judges, and Kelleher, District Judge.*fn*

Author: Miner

MINER, Circuit Judge

Plaintiffs-appellants Aaron R. Seward and Connie G. Seward (the "Sewards") appeal from a judgment entered on September 20, 1988, in the United States District Court for the Northern District of New York (McCurn, Ch. J.) dismissing their amended complaint on various grounds. The action arose principally in connection with the activities of defendant-appellee Philip J. Devine, the Sewards' attorney and a director of defendant-appellee Wilber National Bank ("WNB" or the "bank"). Essentially, the Sewards alleged that Devine, with the knowledge and consent of the named defendants, was responsible for devising a joint venture and limited partnership to acquire control over the Sewards' farm for the sole purpose of obtaining tax shelter benefits for the investor defendants. The Sewards asserted eight claims in their amended complaint -- three RICO claims, two claims based on breach of written contracts, one claim based on breach of an oral agreement, a fraud claim, and a malpractice claim -- all arising from a purported scheme designed to wrest control of the farm from them.

The district court dismissed the action in two stages. First, the court dismissed the contract claims for lack of jurisdiction, Fed.R.Civ.P. 12(b)(1), in accordance with forum selection clauses providing for venue in the New York State Supreme Court, Delaware County. Next, the court dismissed the RICO claims as legally insufficient, Fed.R.Civ.P. 12(b)(6), for failure to plead adequately RICO's "continuity plus relationship" requirement. In the absence of an independent basis for federal jurisdiction, the court then dismissed the fraud and malpractice claims and the claim that the bank breached its oral agreement not to foreclose on the farm, pursuant to Fed.R.Civ.P. 12(b)(1), declining to exercise pendent jurisdiction. The court thereafter entered an order dismissing the amended complaint, and on September 20, 1988, judgment was entered.

On appeal, the Sewards contend that the district court erred in dismissing their RICO claims, arguing that the predicate acts pleaded were neither isolated nor sporadic, and thus satisfied RICO's pattern of racketeering activity requirement; that because the fraud and malpractice claims, as well as the breach of oral agreement claim asserted against the bank only, arose out of the same nucleus of operative facts, the court should have entertained those claims under its pendent jurisdiction; and that because the forum selection clauses contained in the relevant agreements did not bestow exclusive jurisdiction upon the state court, the contract claims were within the district court's subject matter jurisdiction. For the reasons that follow, we affirm the judgment of the district court insofar as it dismissed the contract claims pursuant to the forum selection clauses, but reverse and remand on the remaining claims for proceedings consistent with this opinion.


According to the complaint, the Sewards, husband and wife, were joint owners of two farm properties (hereafter the "farm") located in Franklin, New York. The farm was encumbered by a mortgage, in the amount of $340,000, held by the bank.

Pursuant to a Purchase Agreement, the Sewards sold 99% of the equity in their farm for $120,000 to Rocky Top Vu Farms, a joint venture created under a Joint Venture Agreement and comprised of the individual defendants named in this action. Philip Devine, acting as attorney for both the Sewards and the joint venture, in addition to his roles as a director of the bank and a participant in the joint venture, informed the Sewards that in addition to the $120,000 purchase price, the mortgage debt would be assumed or paid off by the joint venture. Devine also represented that the $120,000 would be paid immediately, in one lump sum, and used to pay off unsecured debts incurred by the Sewards in connection with the affairs of the farm. Prior to entering into the agreement for sale of the farm, Devine had returned, without the knowledge or consent of the Sewards, a down payment that another party had made in connection with an offer to purchase the farm.

The Sewards and the joint venture subsequently executed a Limited Partnership Agreement, pursuant to which each party contributed its interest in the farm to a limited partnership, also named Rocky Top Vu Farms. Under this agreement, the Sewards were to be general partners of the partnership with management authority. This agreement never was filed with the State of New York, and thus the partnership never was duly formed under New York law. See N.Y. Partnership Law § 91 (McKinney 1988).

According to the Sewards, the representations made to induce them to execute these three agreements were only part of defendants' scheme to deprive them of their farm and to use the farm as a tax write-off for the members of the joint venture; other misdeeds also are alleged. Devine, for example, assumed management and control of the farm after the execution of the agreements, even though he had represented that the Sewards would retain such functions. He expended funds of the partnership "for unnecessary equipment and capital improvements while accruing arrears in current obligations" and ignoring needs of the farm. Moreover, Devine did not expend monies for proper care and feeding of the cows; he cut back milk production in order to qualify for government subsidies; and he charged expenses to the partnership for grain and other supplies, but arranged for those supplies to be delivered elsewhere. The Sewards contend that, in each of these endeavors, Devine acted on "behalf of and with the knowledge and concurrence of the other defendants."

Because the Purchase Agreement provided that the $120,000 purchase money was to be paid in installments, rather than in a lump sum as represented by Devine, the Sewards could not pay their unsecured debts. Furthermore, the partnership did not pay off the Sewards' mortgage. The Sewards defaulted on their obligations to WNB and, despite a specific agreement with the bank that it would forgo collection of the mortgage debt so that the partnership could concentrate on its "operational needs," WNB foreclosed upon the farm.

In August of 1983, the Sewards filed a petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of New York. On January 6, 1986, the matter was converted to a Chapter 7 proceeding, which apparently remains pending. Among the assets of which the bankruptcy trustee took control were a counterclaim and cross-claims asserted by Aaron Seward in the foreclosure action, which had been commenced by the bank against the Sewards and the joint venture in the New York State Supreme Court, Delaware County (Robert A. Harlem, J.), in June of 1985.*fn1 The counterclaim and cross-claims included many of the same factual allegations made here concerning the defendants' scheme to deprive the Sewards of their interest in the farm property. In the state court action, Justice Harlem entered a judgment of foreclosure and sale, dated February 10, 1986, directing that the farm be sold at public auction. The bank bought the farm at the auction, which was held in March 1986. On June 24, 1987, the bank also purchased Aaron Seward's counterclaim (asserted in the foreclosure action) from the trustee in bankruptcy for $3000.

The Sewards commenced this action on March 31, 1988, asserting in their amended complaint causes of action for: violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(b), (c) & (d) (1982); fraud; breach of contract; breach by the bank of an oral agreement not to foreclose on the farm; and malpractice on the part of Devine. Numerous predicate acts were alleged in connection with the RICO claims, including: several instances of mail fraud, 18 U.S.C. § 1341 (1982); the solicitation of funds by Devine for the purchase of the farm by a second group of investors in violation of sections 12 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77l & 77q (1982); the filing by Devine of a false claim in the Sewards' Chapter 11 proceedings, a racketeering act under 18 U.S.C. § 1961(1)(D) (1982); and Devine's representation of the Sewards in an action concerning the collapse of a silo on the farm while he had cross-claims pending against the Sewards in the foreclosure ...

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