United States District Court, Southern District of New York
October 22, 1990
O & K TROJAN, INC., A DELAWARE CORPORATION, PLAINTIFF,
MUNICIPAL & CONTRACTORS EQUIPMENT CORPORATION, A NEW YORK CORPORATION, MUNICIPAL MACHINERY CO., INC., A NEW YORK CORPORATION, JOSEPH MURATORE, JR., AND JOSEPH MURATORE, DEFENDANTS. JOSEPH MURATORE, THIRD-PARTY PLAINTIFF, V. CITY OF NEW YORK, THIRD-PARTY DEFENDANT.
The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge.
MEMORANDUM & ORDER
Plaintiff, O & K Trojan, Inc. ("Trojan"), seeks, inter alia,
general and punitive damages from defendants Municipal &
Contractors Equipment Corporation ("Contractors"), Municipal
Machinery Company, Inc. ("Machinery Co."), Joseph Muratore Jr.,
and Joseph Muratore Sr. (collectively, "Municipal defendants"),
based on alleged violations of: (1) the Racketeer Influenced
and Corrupt Organizations Act, ("RICO") 18 U.S.C. § 1961 et
seq.; (2) New York's Consumer Protection Act, N.Y.Gen.Bus.L.
Art. 22-A § 349 (McKinney's 1988); (3) common law fraud; and
(4) breach of contract arising from payments made into an
escrow fund on forged documents. After issue was joined as to
Muratore Sr., he impleaded the City of New York ("the City")
for contribution.*fn1 Default judgment was entered on July 24,
1989 against Contractors, Machinery Co., and Muratore Jr. based
on a failure to answer or move with respect to the complaint.
On October 19, 1989, a hearing on Muratore Sr.'s order to show
cause was conducted before me in order to determine whether
Muratore Sr.'s litigation position would be compromised should
he be found to be jointly and severally liable with the
defaulters.*fn2 Trojan assured the court at that hearing that
Muratore Sr. would not be held accountable to pay any part of
the defaulter's judgment. The City now moves pursuant to
Fed.R.Civ.P. 12(b)(1) and (b)(6) to dismiss the third-party
Trojan is a manufacturer of construction equipment.
Contractors and Machine Co. are corporations engaged in the
business of selling, distributing, servicing, repairing, and
modifying construction equipment and other large commercial
vehicles and equipment. Complaint ¶¶ 2, 3. Muratore Jr. is the
president of Contractors and vice-president of Machinery Co.
Complaint ¶ 4. Muratore Sr. is president of Machinery Co. and
vice-president of Contractors. From January 1986 until June
1987, Trojan entered into a series of agreements with the City
in which Contractors agreed to provide certain construction
equipment to the City. Complaint ¶¶ 15-21. The equipment was to
be manufactured by Trojan in compliance with the City's
specifications. Complaint ¶¶ 15-21. Thus, two separate sets of
contracts were created, one between Trojan and Contractors
("the Trojan/Contractors agreement") for the manufacture of the
equipment, and one between Contractors and the City ("the
Contractors/City agreement") for the sale of the equipment.
Because Trojan had previous dealings with Machinery Co. which
resulted in payment problems, it insisted on further payment
assurances in the above mentioned contracts. Complaint ¶¶
10-14, 59. Therefore, under the Contractors/Trojan agreements,
Trojan, Contractors, and Marine Midland Bank, N.A. ("Bank"),
entered into a series of escrow agreements whereby the Bank
would act as escrowee for the funds of the Contractors/City
contracts. Complaint ¶¶ 15-21. Distributions by the Bank from
the escrow accounts were to be made only in accordance with
letters of instruction signed by both Trojan and Contractors.
The escrow agreements provided that Trojan require the City to
mail the disbursements due and owing under the Contractors/City
contracts directly to an escrow account at the Bank. Trojan
alleges that it would have refused to manufacture the equipment
required to fulfill Contractor's contractual obligations to the
City without this agreement. Complaint ¶¶ 10-14, 59.
Disbursements were properly made under the escrow arrangement
for the City's purchase of the first 36 front end loaders.
Trojan was properly paid. With respect to its purchase of an
additional 22 units, however, the City made payments directly
to Contractors and it, in turn, failed to remit payment to
Trojan for the manufacture of the units. Specifically, Trojan
avers that the Municipal defendants: (1) executed escrow
agreements with the knowledge that they did not intend to
perform pursuant to the agreements; (2) forged letters to
Trojan, purporting to set forth agreements by the City to remit
its payments to the Bank with the knowledge that the signatures
of the Bank's Deputy of Accounts and Audits of the Department
of General Services of the City, Joaquin Capestany, would also
be forged thereon; (3) accepted and used the disbursements sent
by the City without advising Trojan that the payments from the
City had been received and without paying Trojan the purchase
price due on the equipment; and (4) concealed their fraudulent
acts by representing to Trojan that any attempt by it to
contact the City of New York would jeopardize the
Contractors/City contracts. Complaint ¶¶ 28-68.
A defendant cannot obtain contribution for RICO liability.
Minpeco, S.A. v. Conticommodity Services, Inc., 677 F. Supp. 151,
155-56. (S.D.N.Y. 1988). This prohibition against
contribution follows from the omissions in the statute. In
enacting RICO, Congress created a comprehensive list of civil
remedies available to a plaintiff for a defendant's violation
of the Act. See 18 U.S.C. § 1961 et seq. (1982). Contribution
is not listed among the remedies. This is significant in that
Congress did explicitly provide an extensive list of remedies
within the statute, thus, any omissions therein are indicative
of an intent to preclude. See Seminole Electric Cooperative,
Inc. v. Tanner, 635 F. Supp. 582, 583 (M.D.Fla. 1986) ("Nothing
in RICO's statutory language or legislative history suggests
that Congress intended federal courts to expand the civil
remedies already created by RICO").
Moreover, the common-law remedy of contribution is
antithetical to the statute's purpose. Section 1964(c)
authorizes private suits by "[a]ny person injured in his
business or property by reason of a violation. . . ." 18 U.S.C. § 1964(c)
(emphasis added). Muratore, Sr. was never injured by
any purported acts or omissions by the City. Section 1962 makes
it unlawful for any person to use money derived from a pattern
of racketeering activity to invest in an enterprise, to acquire
control of an enterprise through a pattern of racketeering
activity or to conduct an enterprise through a pattern of
racketeering activity. 18 U.S.C. § 1962(a)-(c). If such a
violation occurs, § 1964 authorizes such injured persons to
recover treble damages. 18 U.S.C. § 1964(c). Because Muratore
Sr.'s liability to Trojan, under its first and second causes of
action, are predicated upon the Muratores' having committed
RICO violations, permitting Muratore Sr. to receive
contribution would have the effect of ameliorating the
liability of a wrongdoer and necessarily align the wrongdoer
with the class that Congress intended to protect. Furthermore,
the right to seek contribution would serve to dilute the impact
of assessing treble damages against the RICO violator. Treble
damages are to punish past unlawful conduct. To allow
contribution under the circumstances would soften the
punishment in contravention of Congressional intent.
Standing for civil RICO relief requires that the plaintiff
demonstrate the defendant has committed a predicate offense as
delineated in 18 U.S.C. § 1961. In Re Citisource, Inc. Secur.
Litigation, 694 F. Supp. 1069, 1079 (S.D.N.Y. 1988). This
mandates that the plaintiff prove the defendant had the
requisite scienter for the underlying predicate offense. United
States v. Scotto, 641 F.2d 47, 55-56 (2d Cir. 1980), cert.
denied, 452 U.S. 961, 101 S.Ct. 3109, 69 L.Ed.2d 971 (1981). To
the extent that Muratore, Sr. claims the City is liable for
negligently and inadvertently paying Contractors instead of
remitting payment to escrow is of no moment and does not rise
to the level of scienter anticipated under the statute.
Moreover, the City, a municipal corporation, is incapable of
having the criminal intent to support RICO's predicate offense
requirement. See In Re Citisource, Inc. Secur. Litigation, 694
F. Supp. at 1079. As a final note on this issue, Murature Sr.'s
argument for impleader defies logic because it presumes that
blame should be laid on the City for the City's failure to
trust the Muratores to pay for work that they had commissioned
and that liability for failure to place money in escrow is
attributable to the City.
b. ANCILLARY JURISDICTION
The only federal claims asserted in Trojan's complaint are
predicated upon RICO violations. Since contribution is not
available for RICO liability, there is no federal question
jurisdiction over the third-party action. In addition, since
Muratore is a citizen of New York State, there is no diversity
jurisdiction over the third-party action and, thus no
independent basis for subject matter jurisdiction over the
impleader. However, the doctrine of ancillary jurisdiction
allows a federal court to entertain a claim asserted after a
complaint is filed, even if the claim may lack an independent
basis for the exercise of federal jurisdiction, provided the
court has jurisdiction over the subject matter of the action.
See Harris v. Steinem, 571 F.2d 119, 122 n. 7 (2d Cir. 1978).
This court has no jurisdiction over the subject matter of the
action once the federal claims fall.
Muratore Sr. avers that federal courts have long recognized
that a defendant's claim for contribution and indemnity against
a third-party defendant, pursuant to Fed.R.Civ.P. 14(a), are
deemed within the court's ancillary jurisdiction. Oneida Indian
Nation v. County of Oneida, 719 F.2d 525, 542 (2d Cir. 1983).
This proposition is short-sighted and not reconcilable with the
current trend, for all practical purposes, towards limiting
pendent party jurisdiction and restricting ancillary
jurisdiction. Finley v. United States, 490 U.S. 545, 109 S.Ct.
2003, 104 L.Ed.2d 593 (1989); Staffer v. Bouchard
Transportation Co., 878 F.2d 638, 643 n. 5 (2d Cir. 1989);
Bruce v. Martin, 724 F. Supp. 124, 129 (S.D.N Y
1989). Rule 14(a) cannot confer the federal court with subject
matter jurisdiction, regardless that it contemplates the type
of claim raised here. "The Rules provide for many things,
liberality of joinder included, but the Rules only apply to
disputes within the court's subject matter jurisdiction."
Aetna Casualty & Surety Insur. Co. v. Spartan Mechanical Corp.
v. Brendan Sexton, et al., 738 F. Supp. 664 (S.D.N.Y. 1990); see
also Finley, 109 S.Ct. at 2008 (added claims involving added
parties over whom no independent basis of jurisdiction exists
weigh heavily against the exercise of subject matter
jurisdiction) (emphasis added).
Federal courts are courts of limited jurisdiction. The
prospect of haling into court new parties over whom there is no
independent basis for subject matter jurisdiction, compels the
conclusion that ancillary jurisdiction can no longer be so
broadly construed as to include third-party state law claims
for indemnity or contribution against non-diverse persons.
Finley v. United States, 490 U.S. 545, 109 S.Ct. 2003, 104
L.Ed.2d 593 (1989). "[I]n a narrow class of cases a federal
court may assert authority over such a claim `ancillary' to
jurisdiction otherwise properly vested — for example, when an
additional party has a claim against contested assets within
the court's exclusive control, or when necessary to give effect
the court's judgment. . . ." Aetna Casualty & Surety Insur. Co.
v. Spartan Mechanical Corp. v. Brendan Sexton, et al., 738
F. Supp. at 673 (citing Finley, 109 S.Ct. at 2008). Such is not
the case at bar. Here, Muratore, Sr. seeks to add the City as a
new party. There is no diversity jurisdiction and no federal
question. Furthermore, Muratore, Sr. has no right to an asset
in the District Court's possession. "'[N]either the convenience
of the litigants nor considerations of judicial economy can
suffice to justify the extension of the doctrine of ancillary
jurisdiction'" under the circumstances. Finley, 109 S.Ct. at
2008 (quoting Owen Equipment and Erection Co. v. Kroger,
437 U.S. 365, 376-77, 98 S.Ct. 2396 at 2404, 57 L.Ed.2d 274); see
also Community Coffee Co. v. M/S Kriti Amethyst, 715 F. Supp. 772,
774 (E.D.La. 1989) ("it appears that ancillary
jurisdiction may no longer cover Rule 14(a) indemnity and
Finally, it is within my discretion to decline this claim for
contribution in that a District Court should refuse to exercise
discretion over a third-party complaint relating only to the
complaint's pendent state law causes of action. See Seminole
Electric Cooperative, Inc. v. Tanner, 635 F. Supp. 582, 584-85
(M.D.Fla. 1986). This is especially true where the merits of
the claim are questionable at best. Trojan contends that as
part and parcel of a scheme to defraud it, the municipal
defendants gained control of the funds by, unbeknownst to the
City, forging the requisite letters prompting the City to
release contract disbursements into the escrow account at the
Bank. Allegedly in reliance on the validity of the letter
agreements, Trojan manufactured and delivered all the equipment
as required under the Contractors/Trojan contracts, the Bank
remitted payment to Contractors directly and Trojan was never
paid for its work. Complaint ¶¶ 17, 20, 25, 60. Furthermore,
Trojan's complaint charges that Murature Sr. defrauded Trojan
by wrongfully diverting funds, otherwise slated for escrow by
agreement among the parties, for private unanticipated uses not
in accordance with the agreements and that the City was unaware
that funds were being improperly diverted. Complaint ¶¶ 28, 47.
I find that all claims arise from dealings between Trojan and
Contractors and as such Contractors has made no claim for
contribution sufficient to withstand this motion to dismiss. In
sum, because I decline to assert ancillary jurisdiction, all
state law claims must fall.
For the foregoing reasons, motion to dismiss the third party
complaint is granted. The third-party complaint is therefore
dismissed in its entirety as against the City.