In September, 1985, plaintiff Norstar agreed to lend Portjeff
Development Corporation fourteen million dollars for the
construction of condominium units as part of a real estate
development called Fox Meadow. Defendant Pepitone is the
president of Portjeff Development Corporation.
This "Fox Meadow loan" involved plaintiff making two
advancements, the first in October, 1985 and the second in
December, 1985. Both advances are secured by mortgages on the
real property owned by Portjeff Corporation. The mortgages
create a lien in plaintiff's favor in each condominium unit to
be built and sold at the project. Defendant Pepitone signed the
documents underlying the loan in his capacity as President.
The loan was to be repaid, in part with the closing proceeds
from the sale of the condominium units. Pending the closing of
an individual condominium unit, plaintiff was to deliver a
release of its lien on that unit to defendant Rivkin, Radler,
Dunne, and Bayh, ("Rivkin Radler") which was to hold the
release in escrow pending the closing. After the closing,
defendant Rivkin Radler was to pay plaintiff a portion of the
sales price as repayment on the loan. Following this procedure,
Portjeff has repaid over eighty percent of the loan.
In March, 1989, certain creditors of Portjeff filed an
involuntary bankruptcy petition against Portjeff. In April,
1989 that proceeding was converted into a voluntary Chapter 11
proceeding by Portjeff.
In December, 1989, plaintiff filed this suit. In its
complaint, plaintiff alleges that beginning in June, 1987,
defendants Pepitone and Amaturo got defendant Rivkin, Radler to
permit Portjeff to obtain the full closing proceeds without
simultaneously making a loan payment to Norstar. The payment
was delayed from a few days to a couple of weeks. The complaint
alleges that this occurred approximately 60 times. According to
the complaint, in the interim between the closing and the
payment, defendants Pepitone and Amaturo would divert the funds
to defendant Pepitone's other businesses, defendant Marina Del
Mar, Inc. and Hampton Bays.
The complaint further alleges that between September, 1988
and February, 1989, closings on 22 condominium units had
occurred for which releases were given but for which the loan
payments were never received. According to the complaint,
defendants permanently converted 2.5 million in loan payments
which belongs to plaintiff.
Defendants move pursuant to Federal Rules 12(b)(6) and 9(b)
of Civil Procedure to dismiss plaintiff's RICO claims.
Defendants argue that plaintiff has failed to state any RICO
claim because (i) its complaint does not allege a "pattern of
racketeering" and (ii) the predicate acts of fraud have not
been sufficiently pled. Defendants further argue that even if
plaintiff has stated claims under the RICO statute, they must
be dismissed because the RICO statute is unconstitutional.
A complaint may be dismissed pursuant to Federal Rule
12(b)(6) for failure to state a claim, only if, taking the
allegations of the complaint in the light most favorable to the
plaintiff, the Court nonetheless concludes that "no relief
could be granted under any set of facts that could be proved
consistent with the allegations." H.J. Inc. v. Northwestern
Bell Telephone Co., ___ U.S. ___, 109 S.Ct. 2893, 2906, 106
L.Ed.2d 195 (1989) (quoting Hishon v. King & Spalding,
467 U.S. 69, 73, 104 S.Ct. 2229, 2232-33, 81 L.Ed.2d 59 (1984)); see
also Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686,
40 L.Ed.2d 90 (1974); Conley v. Gibson, 355 U.S. 41, 45-46, 78
S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). As the Third Circuit
recently emphasized, "this standard of review does not
distinguish between RICO and non-RICO claims." Rose v. Bartle,
871 F.2d 331, 355 (3rd Cir. 1989).
The RICO statute renders civilly liable persons (i) who use
or invest income derived from a "pattern of racketeering
activity" to acquire an interest in or operate the enterprise
engaged in interstate commerce,
18 U.S.C. § 1962(a)*fn3, (ii) who acquire an interest in or
control such an enterprise "through a pattern of racketeering",
18 U.S.C. § 1962(b), (iii) who as employees or associates of
such an enterprise, conduct or participate in the conduct of
that enterprise's affairs "through a pattern of racketeering
activities", 18 U.S.C. § 1962(c)*fn4, or (iv) who conspire to
violate any of those prohibited activities, 18 U.S.C. § 1962(d).
Plaintiff in its complaint alleges that defendants Pepitone
and Amaturo (i) used income derived from a pattern of
racketeering activity to operate an enterprise engaged in
interstate commerce in violation of Section 1962(a)*fn5, (ii)
were employees and associates of an enterprise engaged in
interstate commerce and conducted that enterprise's activities
through a pattern of racketeering in violation of Section
1962(c)*fn6, and (iii) conspired to violate Sections 1962(a)
and (c)*fn7. Defendants argue that plaintiff's complaint fails
to allege a "pattern of racketeering" and hence fails to state
any RICO claim. Specifically, defendants contend that plaintiff
has not alleged evidence of continuity or threat of continuity
as required by the recent Supreme Court case of H.J. Inc. v.
Northwestern Bell Co., ___ U.S. ___, 109 S.Ct. 2893, 106
L.Ed.2d 195 (1989) and thus can not allege a pattern of
As this Court has recently explained in Morrow, et al. v.
Black, et al., 742 F. Supp. 1199 (E.D.N.Y. 1990), the Supreme
Court in H.J. Inc. held that only those "predicate acts
extending over a few weeks or months and threatening no future
criminal activity" are unable to constitute a RICO violation
and thus, related predicate acts which in actuality extend only
over a few weeks but at the time of their occurrence threaten
any future criminal activity will satisfy the continuity
requirement. Morrow, at 1206. This Court also explained that
the threat may be either explicit or implicit and may be proven
in a variety of ways. Morrow, at 1206.
Here, plaintiff's complaint adequately alleges a threat of
future criminal activity to survive a motion to dismiss. The
complaint alleges eleven predicate acts of mail fraud between
the dates of July 15, 1987 and January 24, 1989. Defendants
maintain that the mailings which occurred between July, 1987
and August, 1988 should not be considered because plaintiff
concedes that these mailings did not foster a scheme to defraud
plaintiff of its money permanently but only to temporarily
misappropriate the money and hence the predicate acts could
only extend at most from August, 1988 to December, 1988. This
Court is inclined to view the earlier temporary
misappropriations as setting the groundwork for the later
misappropriations and hence mailings in furtherance of the
temporary misappropriations were also in furtherance of the
later permanent misappropriations. However, even if the earlier
mailings were not considered predicate racketeering acts, it
seems to this Court that plaintiff has alleged sufficient
evidence of continuity to survive a motion to dismiss. As
stated above, when the predicate acts only last a few weeks in
but at the time of their occurrence threaten future criminal
activity, the continuity requirement is met. Here, plaintiff's
complaint alleges that defendants were regularly
misappropriating the loan payments due on the condominium units
that had closed and that this activity implicitly threatened to
continue until each and every condominium unit had been sold.
Further, the complaint alleges that defendants were involved in
other business transactions with other victims in which they
engaged in this type of activity*fn8; such allegations if
proven would also demonstrate an implicit threat of future
criminal activity. While plaintiff may not be able to prove
these allegations, on a motion to dismiss this Court must
accept them as true.*fn9 That defendants are presently in
bankruptcy court in no way alters the conclusion that the
racketeering acts may have threatened future criminal activity
at the time they occurred. See Barticheck v. Fidelity Union
Bank/First National State, 832 F.2d 36, 39 (3rd Cir.
1987)*fn10. Therefore, plaintiff has sufficiently alleged a
threat of continuity to constitute a pattern of racketeering
and hence plaintiff's RICO claims may not be dismissed pursuant
to Federal Rule 12(b)(6) of Civil Procedure.
Defendant next argues that plaintiff's RICO claims should be
dismissed pursuant to Federal Rule 9(b) of Civil
Procedure*fn11 because plaintiff failed to allege the
predicate acts of mail fraud with sufficient particularity and
without pleading the predicate acts with sufficient
particularity, plaintiff can not state a claim. The Courts of
this Circuit have generally held that when the predicate
racketeering acts are acts of fraud as they are here,*fn12
they must be pled in accordance with the higher pleading
requirements of Rule 9(b). See e.g. In re Crazy Eddie
Securities Litigation, 1989 Fed. Sec. L.Rep. (CCH) 94,507
(E.D.N.Y. 1989); Gregoris Motors v. Nissan Motor Corporation,
630 F. Supp. 902, 912 (E.D.N.Y. 1986). Further, the Second
Circuit, in Moss v. Morgan Stanley, 719 F.2d 5 (2d Cir. 1983)
has held that in order to state a claim under Section 1962(c),
a plaintiff must allege, inter alia, that a defendant has
committed two or more predicate acts. See also H.J. Inc. v.
Northwestern Bell Telephone Co., ___ U.S. ___, 109 S.Ct. 2893,
2897, 106 L.Ed.2d 195 (1989) (where the Court explained that
although the RICO statute does not define what is meant by a
"pattern" of racketeering activity, it does provide that a
pattern "requires" at least two predicate acts of racketeering
activity. 18 U.S.C. § 1961(5)).
Here, plaintiff's complaint sufficiently alleges several
predicate acts of mail fraud. Defendants' arguments to the
contrary seem based on the premise that the higher pleading
requirements of Rule 9(b) apply with equal force to the state
of mind of the one committing the fraud as it does to the
circumstances of the fraud. However, Rule 9(b) clearly provides
that while the "circumstances constituting fraud or mistake
shall be stated with particularity, malice, intent, knowledge
and other condition of mind may be averred generally."
In Beck v. Manufacturers Hanover Trust Company, 820 F.2d 46,
50 (2d Cir.
1987), the Second Circuit ruled that while plaintiffs who
allege fraud must provide factual allegations which give rise
to a `strong inference' that the defendants possessed the
requisite fraudulent intent, "a common method for establishing
a strong inference of scienter is to allege facts showing a
motive for fraud and a clear opportunity for doing so." The
Court explained that "where motive is not apparent, it is still
possible to plead scienter by identifying circumstances
indicating conscious behavior by the defendant." Id. Here,
plaintiff has pled facts which not only indicate motive*fn13
and opportunity but also conscious behavior by defendant
The circumstances*fn15 of sufficient predicate acts of mail
fraud are pled with sufficient particularity. Mail fraud
requires proof of (1) a scheme or artifice to defraud or obtain
money by means of false pretenses, representations, or
promises; (2) a use of the mails for the purpose of executing
the scheme; and (3) a specific intent to defraud either by
devising, participating in or abetting the scheme. 18 U.S.C. § 1341.
The Second Circuit, in U.S. v. Bortnovsky, 879 F.2d 30,
36 (2d Cir. 1989), recently explained that to establish mail
fraud a plaintiff must prove: 1) that the defendants "caused"
the mailing, i.e, acted "with knowledge that the use of the
mails will follow in the ordinary course of business, or where
such use can reasonably be foreseen, even though not actually
intended," citing Pereira v. United States, 347 U.S. 1, 8-9, 74
S.Ct. 358, 362-63, 98 L.Ed. 435 (1954), and 2) that the mailing
was for the purpose of executing the scheme or, in other words
"incident to an essential part of the scheme," id. at 8, 74
S.Ct. at 362-63. Here, the complaint specifically alleges the
circumstances of several acts of mail fraud.*fn16 Since these
mailings were certainly foreseeable and incidental to carrying
out what plaintiff alleges to be defendants' fraud, plaintiff's
complaint specifically alleges sufficient predicate acts of
Finally, defendants argue that plaintiff's RICO claims must
be dismissed because the RICO statute is unconstitutional.
Justice Antonin Scalia in his concurrence in the H.J. Inc., ___
U.S. ___, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989) did invite
such a challenge to the constitutionality of the RICO statute.
It seems Justice Scalia strongly disapproves of the majority's
use of legislative history to clarify the RICO statute.
However, Courts have often relied on legislative history to
interpret broad statutory language. Indeed, a majority of
Supreme Court justices did just that in the H.J. Inc. decision.
Therefore, this Court believes that it would be presumptuous
for it to hold the RICO statute unconstitutional at this time.