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FERNDALE CORP. v. SCHULMAN URBAN DEV.

November 1, 1990

FERNDALE CORPORATION, PLAINTIFF,
v.
SCHULMAN URBAN DEVELOPMENT ASSOCIATES, SCHULMAN MASTER LIMITED PARTNERSHIP I, SCHULMAN MANAGEMENT CORPORATION, LOWELL SCHULMAN, ROBERT SCHULMAN, H. GUY LEIBLER, DOUGLAS RAMSEY, JOHN DOE, AND RICHARD DOE, DEFENDANTS. SCHULMAN MASTER LIMITED PARTNERSHIP I, PLAINTIFF, V. FERNDALE CORPORATION, DEFENDANT.



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

OPINION

I. FACTS

Schulman Urban Development Associates, whose successor in interest is Schulman Master Limited Partnership I,*fn1 entered into a commercial lease agreement with Ferndale Corporation ("Ferndale") on March 31, 1984. This contract provided that Ferndale would lease a portion of the third floor of a commercial building located at 170 Hamilton Avenue, White Plains, New York, for approximately a ten-year term. The lease's payment provisions provided for a set monthly rent, plus a percentage of certain enumerated costs of operating the premises. The lease stated that the tenant could request documentation from the landlord as to any of these additional "costs of operation." Moreover, to the extent any disagreement over these costs arose, either party could seek a ruling by an independent accountant/arbitrator appointed by the Westchester County Bar Association.*fn2

In December 1986, Ferndale received one such operating costs invoice. Ferndale wrote to Schulman later that month complaining about the invoice and requested documentation regarding the expenses listed. At that time, Ferndale actually paid the amount due pursuant to the invoice, but specifically reserved its rights to challenge the bill.*fn3 Schulman responded to the letter by outlining the various charges, but allegedly failed to provide Ferndale with any actual documentation. Unsatisfied with Schulman's response, on April 8, 1987 Ferndale again wrote to Schulman requesting documentation for review by an independent certified public accountant ("CPA") whom Ferndale would pay. In addition, Ferndale stated that, if necessary, the explicit lease procedures for the appointment of an independent CPA/arbitrator would be implemented.

Notwithstanding Ferndale's contentions, Robert Rimberg, a CPA, was appointed by the Westchester County Bar Association to arbitrate the dispute. On March 9, 1990, after inspecting Schulman's books, Rimberg issued an award of approximately $40,000 in favor of Schulman. Ferndale did not participate in the hearing conducted by Rimberg even though it clearly had notice of the proceedings. Instead, Ferndale continued to alternatively argue that Schulman had waived its right to arbitration and that Steinfink, if anyone, was the CPA who was to conduct the inquiry. Shortly after the award was issued, Schulman wrote to Rimberg requesting an increase in the award to approximately $85, 000, contending that Rimberg had miscalculated the lease's penalty provisions. Rimberg denied this request.

Before Rimberg had rendered his initial decision, however, Ferndale sued the Schulman defendants, alleging that they had violated the federal Racketeer Influenced and Corrupt Organizations ("RICO") statute. 18 U.S.C. § 1961-1968 (1988). Specifically, Ferndale alleged that defendants engaged in a scheme to defraud plaintiff and other tenants out of significant funds through its "costs of operation" clauses and that defendants used both mail and wire fraud to perpetrate this scheme. Plaintiff also asserts causes of action based on state law theories of fraud, rescission, breach of contract, and tortious interference with contract.

Thereafter, Schulman petitioned the Supreme Court of the State of New York, County of Westchester, pursuant to articles 75 and 76 of the Civil Practice Law and Rules ("CPLR"), for a judgment confirming the arbitration award, in part, and modifying it, in part, to reflect the alleged deficiency. Ferndale then removed this second proceeding to federal court and it was assigned to us as a related case. It appears that on March 31, 1990, Ferndale abandoned the leased premises and moved its offices to New Jersey.*fn5 Since Ferndale remained incorporated in Delaware, the case was removed on the basis of diversity jurisdiction.

II. DISCUSSION

We now have motions before us in each of the two actions and will address them in turn.

A. Ferndale Action

The Schulman defendants have moved to dismiss Ferndale's RICO action on a number of grounds. First, they contend that plaintiff has no standing to assert a RICO action because it has not been injured by reason of the alleged racketeering predicate acts. Moreover, defendants argue that plaintiff has not adequately alleged a "pattern of racketeering activity" as recently interpreted by the United States Supreme Court. Finally, defendants claim that Ferndale has failed to plead fraud with particularity pursuant to Federal Rule of Civil Procedure 9(b). If the RICO claim is dismissed, defendants suggest that we should also dismiss the pendent state claims. Alternatively, defendants suggest that this action should be stayed pending resolution of the articles 75 and 76 proceedings.*fn6

Plaintiff responds to these arguments as follows. With respect to the standing argument, Ferndale contends that it relied on the invoices and actually made two payments, even though these specific payments are not alleged in the complaint. Moreover, plaintiff claims that a "pattern of racketeering activity" was pled since the complaint alleges numerous invoices being mailed to hundreds of tenants, including plaintiff, and that these mailings occurred over a period of time and would continue to occur until the leases expired or the tenants were evicted. Finally, with respect to the rule 9(b) argument, plaintiff alleges that it has pled fraud to the extent possible, noting that most of the relevant documents are in defendants' hands. ...


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