(S.D.N.Y. 1979). The Court cannot find that plaintiffs have
demonstrated a need for the remedy they seek. Defendants have
substantial assets in their leases at 461 Park Avenue South.
Plaintiffs have not shown that even if the assets of Rose Hill
were to be dissipated, that the assets of the corporate
defendants, in their current fixed state, could or would be
harmed in any way. Accordingly, the request for an order of
attachment is denied.
C) Appointment of a Receiver
Plaintiffs have further requested the Court to appoint a
receiver to operate Rose Hill during the pendency of this action.
"[T]he appointment of a receiver is an extraordinary remedy,
which `should be employed with the utmost caution and granted
only in cases of clear necessity to protect plaintiff's interests
in the property.'" Republic of the Philippines v. New York Land
Co., 852 F.2d 33, 36 (2d Cir. 1988), quoting Wright & Miller,
Federal Practice and Procedure § 2983. Plaintiffs look to the
actions of the District Court in New York Land for support of
their request that a receiver be appointed. This reliance is
misplaced. The District Court in that case appointed a special
property advisor to monitor the operations of the property, not
to actually take over control of the management. New York Land,
supra, at 35-36. Indeed, the Second Circuit explicitly
distinguished between the appointment of a receiver, and the
action taken by the District Court, and noted that "here the
district court's order was far less intrusive." Id. at 36.
There is substantial dispute regarding the financial management
of Rose Hill, particularly during 1988 and the first half of
1989. The books and records of Rose Hill were not well
maintained, and there are discrepancies among the various
documents presented by the parties regarding the financial status
of Rose Hill. However, the Court does not find that the situation
has reached the point of requiring that which the plaintiffs
admit is an extreme remedy. Plaintiffs' Memorandum of Law at 24.
The rent roll of the property has improved dramatically under
defendants' management. The evidence of discrepancies is just
that: evidence of discrepancies. That evidence does not show, by
itself, that the discrepancies are part of an effort to dissipate
the assets of Rose Hill. Similarly, the evidence that Rose Hill
is losing money is also not conclusive. It is certainly not
appropriate for a court to appoint a receiver every time a
company loses money, particularly where there is evidence, as
there is here, that the management in place has improved the
situation of the corporation in question. Accordingly, the
request for the appointment of a receiver is denied.
D) Defendants' Motion to Dismiss
Defendants have moved to dismiss the action on a number of
grounds. A motion to dismiss must be denied "unless it appears
beyond a doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief." Scheuer
v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90
(1974), citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct.
99, 102, 2 L.Ed.2d 80 (1957). See Morales v. New York State
Department of Corrections, 842 F.2d 27, 30 (2d Cir. 1988). For
the purposes of a motion to dismiss, the Court must accept the
plaintiffs' allegations of facts as true together with such
reasonable inferences as may be drawn in their favor. Murray v.
City of Milford, Connecticut, 380 F.2d 468, 470 (2d Cir. 1967).
See also Scheuer, supra, 416 U.S. at 236, 94 S.Ct. at 1686.
"The function of a motion to dismiss `is merely to assess the
legal feasibility of the complaint, not to assay the weight of
the evidence which might be offered in support thereof.'" Ryder
Energy Distribution Corp. v. Merrill Lynch Commodities, Inc,
748 F.2d 774, 779 (2d Cir. 1984) (citations omitted). "Dismissal of a
complaint . . . is a `drastic step.'" Meyer v. Oppenheimer
Management Corp., 764 F.2d 76, 80 (2d Cir. 1985) (citations
Defendants assert that plaintiffs have failed to assert grounds
relief can be granted under RICO.*fn8 Defendants' attack on
plaintiffs' RICO claims are numerous. First, defendants assert
that plaintiffs have failed to allege that they were injured by
defendants' alleged conduct as required under 18 U.S.C. § 1964.
Reading plaintiffs allegations in the light most favorable to
them, as the Court must in this situation, this challenge must
fail. Regardless of the viability under RICO of plaintiffs'
claims of diminution of the value of their shares, plaintiffs
also allege that they were fraudulently induced into loaning
money to Rose Hill and defendants, and that that fraudulent
inducement was a part of the alleged RICO enterprise.
Second, defendants claim that plaintiffs have failed to assert
that the alleged RICO enterprise has engaged in or affected
interstate commerce as required by 18 U.S.C. § 1962. Again, the
Court must look to the amended complaint in the light most
favorable to plaintiffs. Plaintiffs allege at least two actions
which affect interstate commerce: the transfer of funds to
foreign corporations, and the unauthorized purchase and sale of
securities through the alleged Kidder Peabody accounts. These are
transactions which, as alleged, affect interstate commerce and
are thus cognizable under RICO.*fn9 Cf. Beauford v. Helmsley,
865 F.2d 1386 (2d Cir.), vacated and remanded, ___ U.S. ___,
109 S.Ct. 3236, 106 L.Ed.2d 584 (1989), reaffirmed, by order
dated Sept. 15, 1989, 893 F.2d 1433 cert. denied, ___ U.S. ___,
110 S.Ct. 539, 107 L.Ed.2d 537 (1989).
Third, defendants assert that "[p]laintiffs [sic] complaint
fails to allege a `person' distinct from an `enterprise'."
Defendants' Memorandum of Law at 35. Defendants are correct that
a defendant in a RICO action may not at once be a "person"
allegedly associated with the alleged enterprise and that
enterprise itself. This is a somewhat metaphysical requirement,
but one that, upon examination of the case law, is quite clear. A
plaintiff may not claim that a corporation is the "person"
associated with the enterprise taking the illegal actions and at
the same time allege that that corporation is the enterprise
taking the illegal actions. For example, in Bennett v. United
States Trust Co. of New York, 770 F.2d 308 (2d Cir. 1985),
cert. denied, 474 U.S. 1058, 106 S.Ct. 800, 88 L.Ed.2d 776
(1986), plaintiff asserted that U.S. Trust was the "person"
acting unlawfully under RICO and also the enterprise through
which the illegal actions were taking place. The Court held "that
under section 1962(c) a corporate entity may not be
simultaneously the `enterprise' and the `person' who conducts the
affairs of the enterprise through a pattern of racketeering
activity." 770 F.2d at 315. Additionally, the fact that the
alleged enterprise is not itself an organized business is not
fatal to plaintiffs' claims. Ocean Energy II v. Alexander &
Alexander, 868 F.2d 740, 748 (5th Cir. 1989). See also, Jim
Forno's Continental Motors, Inc. v. Subaru Distribs. Corp.,
649 F. Supp. 746, 750 (N.D.N.Y. 1986) (distributor and group of
dealers who associated for the purpose of falsifying sales report
constituted a RICO enterprise).
The issue for the Court, then, is whether the persons and the
enterprise alleged are distinct. The Court finds that, based on
the amended complaint, plaintiffs have made the sort of
distinction required by the law. The defendants individually are
the "persons" required under 18 U.S.C. § 1962(c). None of those
persons are also the alleged enterprise. Indeed, under
plaintiffs' theory of the case as the Court
understands it, these "persons" have joined together to defraud
plaintiffs through a pattern of racketeering activity including
mail, wire and tax fraud. This "enterprise" was allegedly
separate and distinct from the legitimate actions of the
defendants. A RICO enterprise need only be "a group of persons
associated together for a common purpose of engaging in a course
of conduct . . . [and] . . . is proved by evidence of an ongoing
organization, formal or informal, and by evidence that the
various associates function as a continuing unit." United States
v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d
246 (1981). Plaintiffs have made just such an allegation on the
face of their amended complaint. They allege that the various
defendants have acted together as a continuing unit to dissipate
the assets of Rose Hill and to defraud plaintiffs. Accordingly,
the Court finds that for the purpose of this motion, plaintiffs'
RICO claims cannot be dismissed.
Defendants also assert that plaintiffs have both failed to join
an indispensable party and have failed to state a claim
sufficient for a derivative action. Defendants' challenge of
plaintiffs' standing to bring a derivative action is two-fold.
First, defendants assert that the only reason plaintiffs have
come to federal court, and thus fall under the ambit of
Fed.R.Civ.P. 23.1 regarding derivative actions, is to avail
themselves of the treble damages remedy available under RICO.
This is nothing more than a repeat of defendants' argument that,
absent the RICO claim, this Court would not have jurisdiction.
That assertion needs no further comment from the Court.*fn10
Defendants' second contention is that plaintiffs no where
indicated that they had made a demand on the corporation prior
filing their derivative action.*fn11 Defendants are correct
that, in general, shareholders must make a demand on the Board of
Directors prior to bringing a derivative action. N.Y.Bus.Corp.L.
§ 626 regulates the use of derivative actions in New York State.
Section 626(c) requires that "[i]n any such action, the complaint
shall set forth with particularity the efforts of the plaintiff
to secure the initiation of such action by the board or the
reason for not making such an effort." Defendants appear to read
this as an absolute requirement. It is not. "It has long been
established . . . that such a demand may be excused if it would
be an idle gesture . . . where it would be directed to the very
persons against whom relief is sought. A demand would be
particularly futile where `[a]cting officially, the board, qua
board, is claimed to have participated or acquiesced in
assertedly wrongful transactions.'" Norlin Corp. v. Rooney, Pace
Inc., 744 F.2d 255, 262 (2d Cir. 1984), quoting Barr v.
Wackman, 36 N.Y.2d 371, 379, 368 N.Y.S.2d 497, 506,
329 N.E.2d 180, 187 (1975). The Board of Directors consists only of Silver
and Brown. Plaintiffs have supplied an affidavit from Silver
indicating her support of the instant action. A demand on Brown,
arguably the lead defendant in this action, would fall in the
category of just the sort of futile demand considered unnecessary
by the Second Circuit. Thus, the Court cannot find at this time
that plaintiffs' failure to make a demand upon the corporation to
be fatal to their pleading a derivative action.
Defendants' final contention in that plaintiffs have failed to
name an indispensable party, namely Rose Hill. It is the first
portion of defendants' argument that in an action in which relief
is sought that will be imposed on the corporation, it is
essential that that corporation be a party to the action in order
to be subject to the orders of the Court. Given the Court's
refusal to dismiss the derivative portion of the complaint,
defendants' assertion is moot. Rose Hill is a party to this
action, aligned as a plaintiff, and is thus subject to the orders
of the Court.
Defendants also claim that when equitable relief is sought
against an entity, it must be named as a party defendant.
Defendants rely on Mutual Shares Corp. v. Genesco, 266 F. Supp. 130
(S.D.N.Y.), aff'd in part, rev'd in part, 384 F.2d 540 (2d
Cir. 1967), for this proposition. In Genesco, plaintiff
shareholders sued the new owners of a corporation alleging fraud
on the shareholders. The action was not brought as a derivative
action. The District Court found that no federal question
existed, and that as a diversity action, the underlying
corporation was an indispensable party. Since plaintiffs did not
allege a derivative action, the corporation was aligned as a
party defendant. Genesco is inapplicable here, since there is
federal question jurisdiction, and the corporation, Rose Hill, is
in the action on derivative status. The Court thus finds that the
action cannot be dismissed for failure to join and indispensable
party pursuant to Fed.R.Civ.P. 12(b)(7) and 19.
Based on the above findings and discussion, the order of the
Court in this matter entered into the record on January 3, 1990,
the transcript of which is attached as Appendix A, is confirmed
in its entirety.
The parties are ordered to proceed with discovery on the case
in chief in a regular manner.
The parties are further ordered to appear for a regular status
conference before the Court on March 16, 1990 at 2:00 pm in
Courtroom 36 of the United States Courthouse, Foley Square, New
York, New York.
DECISION OF THE COURT
January 3, 1990
I. Preliminary Injunction:
With respect to the case-in-chief, plaintiffs requested an
injunction which would, in essence, freeze the assets of Rose
Hill Property Assoc. Inc. ("Rose Hill") and prevent their
dissipation. Such a broad and intrusive preliminary injunction
appears unwarranted under the circumstances of this case. I
earlier indicated that preliminary injunction is an extraordinary
and drastic remedy which should not be routinely granted.
Medical Society of the State of New York v. Toia, 560 F.2d 535,
538 (Second Circuit 1977); see Buffalo Courier-Express, Inc. v.
Buffalo Evening News, Inc., 601 F.2d 48, 59 (Second Circuit
Thus, the court hereby orders a narrower injunction similar to
the temporary restraining order entered by Judge John E. Sprizzo
and confirmed and extended by this court, as follows:
1) All checks from Rose Hill in amounts greater than $1,500 be
countersigned by Howard Adler;
2) Howard Adler and all members of the Rose Hill board of
directors should be notified in writing of all proposed leases,
sales, and opening of all banking or other transactional accounts
involving Rose Hill, including investment accounts;
3) Howard Adler should be given ten days from receipt of
notification to object to any of the above actions referred to in
4) Howard Adler should not unreasonably withhold approval of
the above actions and transactions; and
5) any violations of the above order shall subject the
violators in this action to possible sanctions, including
possible payment of the other side's attorney's fees, and a
possible finding of contempt of court.
II. Request for attachment:
Plaintiffs' demands for order of attachment of defendants'
property should be denied.
III. Request for receiver:
Plaintiffs' request for the appointment of a receiver to
operate Rose Hill should be denied. Similar to the considerations
denying the preliminary injunction request, the Second Circuit
has given guidance to the district courts that the appointments
of receivers are an extraordinary remedy which should be employed
with the utmost caution and granted only in cases of clear
necessity to protect plaintiff's interests in property. Republic
of the Philippines v. New York Land Co., 87-7498 [852 F.2d 33]
(Second Circuit 1988) quoting Wright and Miller, Federal Practice
and Procedure, Section 2983.
IV. Motion to dismiss:
Defendants' motion to dismiss should be denied on the present
Within a few days I will be issuing a written opinion which
will fulfill my responsibilities under Rule 52(a) to recite the
findings of fact and conclusions of law so that the order I have
entered today will have a foundation in law and fact. I merely
entered it today because of our restrictions with regard to
further extensions of the temporary restraining order, either by
stipulation or by the court. I thought it was appropriate for me
to do something today. So that's where we are.
Is there anything counsel wishes to put on the record?
MR. GUILLORN: Your Honor, just a minor point to clarify. As far
as the motion for a temporary receiver, that is denied without
prejudice to bring a new one if new facts come up, is that
THE COURT: I think that any order is necessarily subject to
unexpected developments which would cause the court to
reconsider, and that would be within a year under Rule 60,
All right. Good.
MR. GUILLORN: Thank you, your Honor.
THE COURT: I will so order the transcript.