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FIRST CITY NAT. BANK v. FEDERAL DEP. INS.

January 16, 1990

FIRST CITY NATIONAL BANK AND TRUST COMPANY, PLAINTIFF,
v.
FEDERAL DEPOSIT INSURANCE COMPANY, AS RECEIVER FOR FIRST INTER-COUNTY BANK OF NEW YORK, TIBERIU HOROVITZ, JAMES HURTIG, LUIS ELECTRICAL CONTRACTING CORP., DOMENICO RABUFFO, ROADWORKS INDUSTRIES, INC., RICHARD CAPLAN, GEORGIAN MOTEL CORP., ORVAL PENROSE, PHILIP WOLITZER, MICHAEL ZINMAN, MARVIN J. LEVINE, MARVIN J. MEYER, AVERELL H. FISK, STEVEN A. SANDERS, PAUL A. SCHWARTZ, JACK GRAFF AND BARD & GLASSMAN, DEFENDANTS.



The opinion of the court was delivered by: McLAUGHLIN, District Judge.

    MEMORANDUM AND ORDER

Defendants move pursuant to: (i) Fed.R.Civ.P. 12(b)(6) to dismiss RICO claims under Count One for failure to state an actionable claim; (ii) Fed.R.Civ.P. 12(b)(1) to dismiss common law fraud claims under Count Two for lack of subject matter jurisdiction; (iii) Fed.R.Civ.P. 9(b) to dismiss the Complaint for failure to plead fraud with sufficient particularity; (iv) Fed.R.Civ.P. 12(f) to strike portions of the complaint as immaterial, impertinent or scandalous; (v) Fed.R.Civ.P. 12(g) to amend prior motions; (vi) Fed.R.Civ.P. 21 for misjoinder; (vii) Fed.R.Civ.P. 42(b) for separate trials; and (viii) Fed.R.Civ.P. 11 for sanctions against plaintiff. Plaintiff requests leave to replead in the event portions of the Amended Complaint are dismissed.

FACTS

On August 8, 1987, Irwin Schiff was assassinated while dining at the Bravo Sergio restaurant in New York City. An investigation into his murder peeled back layers of criminal fraud like the skin of an onion. One of these skins involved First Inter-County Bank of New York ("First Inter-County"), a federally chartered banking association that is owned outright by GHW Associates, a bank holding company. Schiff, a convicted felon, was a partner at GHW who subsequently sold his interest to Domenico Rabuffo, a defendant named in the complaint.

Although Schiff sold his partnership interest in First Inter-County, he apparently never lost his influence. Working through First Inter-County's president, Tiberiu Horovitz, Schiff secured excess financing for various corporations — most of which Schiff controlled through disclosed and undisclosed interests. The investigation into Schiff's murder suggested that he was profoundly corrupt, involved in check kiting, fraud, money laundering and organized crime.

Plaintiff alleges that, for his role in the lending scheme, Horovitz was showered with lavish gifts from clients — a yacht, a chauffeur and car. As president of First Inter-County, Horovitz allegedly sought to spread the costs of this excess financing by encouraging other banks to participate through direct loans or participation agreements.

Plaintiff is a bank. Based upon what it alleges were outright lies and misrepresentations, principally by Horovitz, it lent over two million dollars to two of Schiff's rogue corporations and participated in an existing loan worth one and a half million dollars to a third Schiff corporation, all of which are named as defendants. Because the keystone of Schiff's financing empire, First Inter-County, became insolvent early in 1988, the Federal Deposit Insurance Corporation ("FDIC") took over as receiver, and it too is a defendant.*fn1

In its sixty-six page Amended Complaint, plaintiff First City National Bank and Trust Company ("FCNB") alleges that First Inter-County, its directors, officers and accountants, along with several other First Inter-County clients, committed common law fraud and conducted a fraudulent lending scheme in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The hub of the charge is that, in early summer 1986, the president of First Inter-County, defendant Tiberiu Horovitz, embarked on his elaborate scheme to obtain excess financing from FCNB for three corporate defendants named in the Amended Complaint.

The first corporate defendant, Luis Electrical Contracting Corp. ("Luis Electrical"), is wholly owned by Luis Equipment Corp. ("Luis Equipment"). Defendant Domenico Rabuffo owns 48% of Luis Equipment and he served as the corporation's secretary-treasurer.

The second corporate defendant, Roadworks Industries, Inc. ("Roadworks"), is engaged in leasing luxury automobiles. Defendant Richard Caplan was both president and principal shareholder of Roadworks.

Defendant Georgian Motel Corp. ("Georgian") is the third corporate defendant allegedly involved in the fraud. Defendant Orval Penrose is the principal owner of Georgian, although it is alleged that Rabuffo and Luis Electrical have a multi-million dollar interest in the motel.

The first two corporate defendants borrowed substantial sums directly from FCNB; and the third, Georgian, benefited from FCNB's participation in an existing loan. Upon discovering that all three corporations had fallen behind in scheduled payments, plaintiff notified First Inter-County of the delinquent loans and demanded that First Inter-County repurchase the loans and also repay the amounts borrowed under the participation agreement, as orally promised during earlier negotiations. Soon after, in August 1987, defendant Horovitz allegedly offered Robert Reddington, a senior vice president of plaintiff FCNB, a $30,000 bribe. Amend. Complaint at 39. Subsequently, the loans fell into default, and this action followed.

Most of the remaining defendants are former members of First Inter-County's board of directors. They are defendants Zinman, Levine, Meyer, Fisk, Sanders and Schwartz. The Amended Complaint also names as defendants former Inter-County board chairman Philip Wolitzer, former bank president Jack Graff and former bank vice president James Hurtig. Defendant Bard & Glassman ("B & G"), a certified Public Accounting firm, performed professional services for First Inter-County and for Luis Electrical.

For purposes of these motions the Court must accept as true all factual allegations in the Amended Complaint. Procter & Gamble Co. v. Big Apple Industrial Bldgs. Inc., 879 F.2d 10, 18 (2d Cir. 1989). Jurisdiction rests upon a federal question involving the RICO statute and pendent jurisdiction over predicate acts involving common law fraud.

I. MOTION TO DISMISS RICO CLAIMS

Defendant FDIC, as receiver for First Inter-County, moves to dismiss the entire complaint. All but three remaining defendants — Hurtig, Luis Electrical and Rabuffo — move pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss Count One of the Amended Complaint for failure to state a claim. Movants argue that FCNB has failed to plead the statutory elements of civil RICO.

RICO prohibits all of the following: (i) using or investing income derived from a pattern of racketeering activity to acquire an interest in an enterprise engaged in interstate commerce, (ii) acquiring or maintaining an interest in an enterprise through a pattern of racketeering activity, (iii) participating in the conduct of an enterprise affecting interstate commerce through a pattern of racketeering activity, and (iv) conspiring to do any of the above. 18 U.S.C. § 1962(a)-(d). Predicate acts alleged in the Amended Complaint to establish a pattern of racketeering activity include mail fraud, wire fraud, and commercial bribery. 18 U.S.C. § 1341, 1343; N.Y. Penal Law § 180.03 (McKinney 1988).

  A.  Investing Income And Acquiring Interests In A RICO
      Enterprise

RICO section 1962(a) renders criminally and civilly liable "any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity . . . to use or invest . . . such income . . . in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in interstate or foreign commerce." 18 U.S.C. § 1962(a). Section 1962(b) proscribes the acquisition of an interest in or control of any such enterprise through a pattern of Racketeering activity.*fn2 Section 1962 is intended to prevent racketeering activity from infiltrating legitimate business enterprises, as well as to halt the investing or reinvesting of income derived from a pattern of racketeering in illegal enterprises. See United States v. Turkette, 452 U.S. 576, 584, 101 S.Ct. 2524, 2529, 69 L.Ed.2d 246 (1981); Moll v. U.S. Life Title Ins. Co., 654 F. Supp. 1012, 1033 (S.D.N.Y. 1987).

Under section 1962(a) and (b), plaintiff must allege that defendants invested, acquired or maintained interests in an enterprise through a pattern of racketeering activity. Bingham v. Zolt, 683 F. Supp. 965, 971 (S.D.N.Y. 1988). Additionally, plaintiff must allege injury to his business or property by reason of the racketeering activity. Id. at 971; Anitora Travel, Inc. v. Lapian, 677 F. Supp. 209, 218 (S.D.N Y 1988); DeMuro v. E.F. Hutton, 643 F. Supp. 63, 66 (S.D.N Y 1986).

Plaintiff makes only conclusory allegations that each defendant violated section 1962(a) and (b). Amend. Complaint at 54-64. Plaintiff does not allege that any defendant invested racketeering income in an enterprise through racketeering activity. DeMuro, 643 F. Supp. at 66. Consequently, the Amended Complaint does not state an actionable claim under section 1962(a) and must be dismissed.

FCNB alleges that a pattern of racketeering activity furthered an enterprise's common purpose through arranging "additional financing for Luis Electrical, Roadworks, Georgian and others." Clearly, this constitutes acquisition or maintenance of an interest in or control of an enterprise as required under section 1962(b). Amend. Complaint at 22. The Amended Complaint also alleges that plaintiff suffered a resultant injury in that the loans are now in default. Thus, if it is sufficiently alleged that defendants engaged in a pattern of racketeering activity, as discussed below, I conclude that the Amended Complaint also alleges a sufficient claim for acquiring an interest in an enterprise under section 1962(b).

  B.  Participation In The Conduct Of A RICO
      Enterprise

Section 1962(c) prohibits the conduct of an enterprise through a pattern of rack-eteering activity. H.J. Inc. v. Northwestern Bell Telephone Co., ___ U.S. ___, 109 S.Ct. 2893, 2897, 106 L.Ed.2d 195 (1989). Section 1962(c) specifically provides that:

  It shall be unlawful for any person employed by
  or associated with any enterprise engaged in, or
  the activities of which affect, interstate or
  foreign commerce, to conduct or participate,
  directly or indirectly, in the conduct of such
  enterprise's affairs through a pattern of
  racketeering activity or collection of unlawful
  debt.

An "enterprise," includes a union or group of individuals "associated in fact although not a legal entity." 18 U.S.C. § 1961(4). The enterprise is generally a group of persons associated together for the common purpose of engaging in a course of conduct. Procter & Gamble Co. v. Big Apple Industrial Bldg., 879 F.2d at 15. Taken together, defendants' actions in the three transactions — Luis Electrical, Roadworks, and Georgian — demonstrate the "association in fact" needed to establish an enterprise as defined in section 1961(4). Based solely on the pleadings, one may reasonably conclude that defendants Horovitz, Hurtig, Luis Electrical, Rabuffo, Roadworks, Caplan, Georgian and Penrose associated with each other for the common purpose of engaging in a course of conduct — an enterprise.

A pattern of "racketeering activity" is typically a series of criminal acts as defined in section 1961(1). Procter & Gamble, 879 F.2d at 15. The racketeering or predicate criminal acts must occur within ten years of each other. 18 U.S.C. § 1961(5). In this case the predicate acts alleged include instances of mail fraud, wire fraud, and attempted bribery. See 18 U.S.C. § 1341, 1343, 1961(1); N.Y.Penal Law § 180.03 (McKinney 1988). Amend. Complaint at 36, 43-44.

Case law establishes that "for a pattern to exist, the alleged criminal acts should be characterized by their relatedness and continuity." Procter & Gamble, 879 F.2d at 15. In H.J. Inc. the Court stated that "[f]or analytic purposes these two constituents of RICO's pattern requirement must be stated ...


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