United States District Court, Southern District of New York
August 7, 1991
BROWNING AVENUE REALTY CORP., INDIVIDUALLY AND ON BEHALF OF CROSS COUNTY SQUARE ASSOCIATES, A JOINT VENTURE, PLAINTIFFS,
BERNARD J. ROSENSHEIN AND ROSENSHEIN ASSOCIATES, IRA RUBIN, KRASNOW, COHEN, GAFT & RUBIN, ALFRED WILNER AND ALFRED WILNER, INC., DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
Defendants Ira Rubin and his accounting firm, Krasnow, Cohen,
Gaft & Rubin (collectively "Rubin") and defendants Alfred
Wilner and Alfred Wilner, Inc. (collectively "Wilner") have
moved under Rules 9(b) and 12(b)(6), Fed.R.Civ.P., to dismiss
the complaint of plaintiffs Browning Avenue Realty Corp.
("Browning") on behalf of the joint venture Cross County Square
Associates (the "joint venture") of which Browning is general
partner. Because materials outside the pleadings have been
considered, pursuant to Rule 9(b), the motions will also be
treated as summary judgment motions under Rule 56, Fed.R.Civ.P.
Lenczycki v. Shearson, Lehman, Hutton, Inc., 1990 WL 151137
(S.D.N.Y. 1990). Upon the findings and conclusions set forth
below, the motions to dismiss the complaint are granted.
This action was commenced on February 8, 1988 in the Supreme
Court of the State of New York, County of New York, Index No.
9369/88, against Bernard J. Rosenshein and Rosenshein
Associates (collectively "Rosenshein"). Wilner and Rubin were
not named as defendants in the original action.
On October 10, 1990, Browning sought leave to amend its
complaint for a second time to add a claim for violations of
the Racketeer Influenced and Corrupt Organizations Act,
18 U.S.C. § 1961, et seq. ("RICO") and on November 13, 1990,
Browning's application was granted by an order entered in the
Supreme Court of the State of New York, which stated:
The newly asserted [RICO] claim properly states a
claim for relief, as the pleaded facts are almost
identical to the RICO claim upheld in Proctor
[Procter] & Gamble Co. v. Big Apple Industrial
Buildings, Inc., 879 F.2d 10 (2d Cir. 1989).
The Second Amended Complaint, the first pleading in which
Wilner and Rubin are named as defendants, was served on Rubin
and Wilner on December 6, 1990 and on that date Rosenshein
filed a voluntary petition under Chapter 11 of the Bankruptcy
Code in the United States Bankruptcy Court in the Southern
District of New York.
On December 19, 1990, Wilner removed the action to this
court, alleging federal jurisdiction arising out of the RICO
claim. Discovery has been had, including depositions of all the
principals except Wilner, interrogatories have been answered,
and documents produced.
Browning, a wholly owned subsidiary of Alexander's Inc., and
Rosenshein entered into a Joint Venture Agreement (the
"Agreement") dated May 8, 1984. Pursuant to the Agreement, they
formed an entity entitled Cross County Square Associates
("Associates") to construct a strip shopping center in Yonkers,
New York (the "Project") on land owned at the time by Browning.
Pursuant to the Agreement, Browning received $2.9 million for
the property, which contained a substantial amount of rock in
Rosenshein was considered the "rock king" as a result of his
professed ability to develop properties despite topographical
problems, which appeared to be present on the site for the
Rosenshein was the managing venturer and the construction
manager with responsibility to provide a final construction
budget to Browning for approvals. As "managing venturer"
Rosenshein was required to notify each venturer promptly of any
deficiency, to keep the joint venture's books and records, to
prepare and deliver (at least quarterly) reports on the status
of the joint venture, including balance sheets and comparisons
to the operating budget, to provide a summary of all itemized
disbursements from each construction loan advance, and to
According to the Second Amended Complaint, Rosenshein was
involved in three additional projects at the time of this
Project and used these projects to divert funds from
In May 1984 Rosenshein and Associates entered into a separate
construction contract. On July 23, 1985 Browning and Rosenshein
modified the Agreement increasing the strip shopping center
from 100,000 square feet to 212,000 square feet and increasing
the projected construction costs from $8 million to $25
Rubin and Rosenshein have a long personal and professional
relationship and Rubin has functioned as an accountant for
Rosenshein and his business. Employees of the Rubin firm made
on-site visits to review Rosenshein's books at least six times
a year or more. The Rubin employees (i) prepared summaries from
the journals created by Rosenshein's bookkeeping staff from the
check books, (ii) reconciled the bank accounts; and (iii)
prepared Associate's tax returns, and Rubin sent financial
reports directly to Browning. During the course of
construction, and immediately thereafter, at least six
financial summaries, in addition to the annual tax returns,
were prepared by Rubin and were mailed to Browning and to
The Agreement, of which Rubin was aware, imposed the duty
upon Rosenshein of:
preparing and delivering to each of the Venturers,
not less frequently than quarter-annually,
periodic reports of the state of the business and
affairs of the Venture, including balance sheets,
statements of earnings including comparisons to
the operating budget, which reports shall be
submitted not less than forty-five (45) days after
the end of the period covered therein.
The Agreement further provided:
Books; Statements. The Venture shall keep accurate,
full and complete books and accounts showing
exclusively its assets and liabilities, operations,
transactions, and financial condition. All
financial statements (including, but not limited to
balance sheets, earnings statements, statements of
"change in financial position" and statements of
"change in owner's equity" shall be generally
accepted according principles. The Venturers shall
determine the methods to be used in the preparation
of financial statements and federal, state, county
and municipal income and other tax returns for the
Venture including, but not limited to, valuation of
assets, the method of depreciation, elections,
credits and accounting procedures. However, the
actual preparation of the foregoing shall be
undertaken by Developer.
Accounting. As soon as practicable after the end of
each fiscal year of the Venture, an audit shall be
made of the books and records of the Venture for
which fiscal year, in accordance with generally
accepted auditing standards, by an independent
certified public accounting firm of recognized
standing, selected by Developer and retained by the
Venture, covering the financial statements
described in paragraph 10.1. The certified
financial statement shall be furnished to each
Venturer no later than sixty (60) days after the
end of each fiscal year. The Venturers agree that
different accounting procedures may be used for
book and tax purposes.
Rubin prepared summaries of costs, one such summary of costs
reflecting only costs paid during the period of construction at
a time when the construction was completed.
A mortgage loan with European American Bank ("EAB") in the
amount of $25 million for the construction of the Project was
obtained. In the fall of 1985, EAB contacted Wilner and
retained him as the inspecting engineer on behalf of EAB for
the Project. Prior to this time, Wilner had a business
relationship with EAB that spanned approximately fifteen years.
Wilner's responsibilities were to prepare monthly inspection
reports for EAB, which summarized the status of the work and
commented on the monthly requisitions. EAB required that Wilner
send the monthly reports solely to the bank. These reports were
not disclosed to the joint venture or either of the
Wilner reviewed the available preliminary plans, visited the
site on December 4, 1985, and submitted an initial report to
EAB evaluating the proposed Project and reviewing the
preliminary plans. Thereafter Rosenshein made the monthly
requisitions for loan disbursements in writing to EAB.
Thereafter, Wilner visited the premises to review the Project's
hard cost requests such as funds for escalators, paving,
concrete, roofing and plumbing costs (collectively "line
items"), and to determine the percentage of the construction
that had actually been completed for each line item. Wilner's
responsibility with regard to these requisitions was to
ascertain the percentage of construction that had been
completed at the time that the requisitions were made.
On January 28, 1987, Rosenshein submitted a revised
requisition based upon an approved increase in the mortgage
loan from $25 million to $28.4 million. Wilner's subsequent
report on February 5, 1987 noted this change and stated that it
was largely due to an increase in the hard costs for the
Project. The report also noted that Wilner was first informed
of a loan amount change by EAB when he reviewed Rosenshein's
On February 26, 1987, Rosenshein submitted a requisition that
noted that the loan had been increased from $28.4 million to
$30 million. Wilner noted in this report that the increase
reflected new line items and cost increases.
On August 28, 1987, Wilner submitted the final site
inspection report to EAB. The report indicated that the
construction was complete. Wilner made no further site
inspections in connection with this Project, and the August 28,
1987 report was Wilner's final contact with this Project. All
loan negotiations were conducted solely between Associates and
On November 30, 1987 Rosenshein informed Browning that the
total cost of construction was $38,764,200.00. As the permanent
financing obtained was only $34,000,000.00, Rosenshein made a
"capital call" upon Browning, requesting the payment of
one-half of the cost overrun beyond the permanent financing.
Browning refused to honor the capital call. Because of this
failure to supply additional capital, Rosenshein has denied
Browning its one-half participation in the Project, the cause
for the underlying action between Browning, Associates and
I. The Complaint Fails To State A RICO Claim Against Rubin
The Second Amended Complaint asserts that Rubin either
performed or aided and abetted violations of RICO, specifically
18 U.S.C. § 1962(b) through (d).
The Second Circuit Court of Appeals has outlined the various
components of any § 1962 RICO violation:
(1) that the defendant (2) through the commission
of two or more acts (3) constituting a "Pattern"
(4) of "racketeering activity" (5) directly or
indirectly invests in, or maintains an interest
in, or participates in (6) an "enterprise" (7) the
activities of which affect interstate or foreign
Moss v. Morgan Stanley, Inc., 719 F.2d 5
, 17 (2d Cir. 1983),
cert. denied sub. nom., Moss v. Newman, 465 U.S. 1025
S.Ct. 1280, 79 L.Ed.2d 684 (1984) ("Moss").
A. The Predicate Acts Requirement
The Second Amended Complaint alleges one act by Rubin: the
preparation of a summary of construction costs through August
31, 1984 made known to Browning and to Associates. However, in
their opposition papers, Browning and Associates refer to a
series of communications between Rubin and Rosenshein relating
to the projects, document which were also sent to the
The Second Amended Complaint alleges that all of the
defendants, including Rubin, performed or aided and abetted the
performance of violations of the mail fraud and wire fraud
statutes (18 U.S.C. § 1341, 1343), and also performed
violations of the New York Penal Law (§ 155.42 — Grand Larceny
in the first degree; and § 175.10 — falsifying business
records in the first degree).*fn1
1. New York Penal Law Violations Not "Racketeering Activity"
However, the violations of the New York Penal Law alleged by
Browning do not satisfy the definition of a "racketeering
activity" as defined in § 1961 of the RICO statute. Thus, as to
those purported violations, Browning has not set forth a
predicate act, a required element of a RICO claim. See
18 U.S.C. § 1962(a)-(d).
2. Mail And Wire Fraud As Alleged Do Not Constitute
To plead mail and wire fraud violations, Browning must allege
"(1) participation in a scheme to defraud and (2) knowing use
of the interstate mails or interstate wires to further the
scheme." Connors v. Lexington Ins. Co., 666 F. Supp. 434, 450
(E.D.N.Y. 1987) (citing United States v. Gelb, 700 F.2d 875
879 (2d Cir. 1983), cert. denied, 464 U.S. 853
, 104 S.Ct. 167
78 L.Ed.2d 152 (1983)); see also U.S. v. Pearlstein,
576 F.2d 531
, 534 (3d Cir. 1978) (the essential elements are (1) the
existence of a scheme to defraud, (2) the use of the mails in
furtherance of the fraudulent scheme, and (3) culpable
participation by the defendant) and that Rubin, for the purpose
of executing a scheme to defraud, "either placed, took,
received, or knowingly caused to be delivered by mail any
matter or thing whatever." Sellers v. General Motors Corp.,
590 F. Supp. 502, 505 (E.D.Pa. 1984).
Similarly, to establish wire fraud, Browning must allege that
Rubin, "transmitted or caused to be transmitted by means of
wire or writing or sound for the purpose of executing a scheme
or artifice to defraud." Id. In other words, the Second Amended
Complaint must show a scheme to defraud coupled with facts
demonstrating that Rubin used the mail or wires to further the
"scheme." See In re Gas Reclamation, Inc. Securities
Litigation, ("GRI"), 659 F. Supp. 493, 512 (S.D.N.Y. 1987); see
also River Plate Reinsurance Co., Ltd. v. Jay-Mar Group, Ltd.,
588 F. Supp. 23, 27 (S.D.N.Y. 1984).
The Second Amended Complaint states that "[t]he September
KCGR [Rubin] costs summary revealed to Browning for the first
time the shocking truth . . ." Second Amended Complaint ¶ 87.
Thus, Browning has failed to allege any factual assertions
evincing "misrepresentations" in the Rubin report to
3. Rule 9(b) Applies To Allegations Of Mail And Wire Fraud
For Purposes Of Racketeering Activity
As discussed above, proper pleading of mail and wire fraud
predicate acts requires an allegation of an underlying
fraudulent scheme. See GRI, 659 F. Supp. at 512. Moreover,
where, as here, the predicate acts of a RICO claim sound in
fraud, the pleading of those predicate acts must satisfy the
requirements of Fed.R.Civ.P. 9(b). See Morin v. Trupin,
711 F. Supp. 97, 111 (S.D.N.Y. 1989) ("Morin"); see also the
Limited, Inc. v. McCrory Corp., 645 F. Supp. 1038, 1041
(S.D.N.Y. 1986); Equitable Life Assurance Society v. Alexander
Grant & Co., 627 F. Supp. 1023, 1028 (S.D.N.Y. 1985)
("Equitable Life"). The time, place, speaker and content of the
alleged fraudulent misrepresentations must be specified in the
Second Amended Complaint. See Luce v. Edelstein, 802 F.2d 49
54 (2d Cir. 1986); see also Morin, 711 F. Supp. at 111;
Equitable Life, 627 F. Supp. at 1029; Velis v. D.H. Blair & Co.,
Inc., No. 88 Civ. 8866,
1989 WL 135379 (S.D.N.Y. Oct. 30, 1989). Browning must also
allege the manner in which the alleged misrepresentations were
fraudulent, see, e.g., Todd v. Oppenheimer & Co., 78 F.R.D.
415, 420 (S.D.N.Y. 1978), as well as fraudulent intent. See
Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46
, 49-51 (2d
Cir. 1987), cert. denied, 484 U.S. 1005
, 108 S.Ct. 698
L.Ed.2d 650 (1988); see also Anitora Travel, Inc. v. Lapian,
677 F. Supp. 209, 214 (S.D.N.Y. 1988). Lastly, the Second
Amended Complaint must delineate the specifics of Rubin's
purported use of the mails and wires. Frota v. Prudential-Bache
Securities, Inc., 639 F. Supp. 1186, 1192 (S.D.N.Y. 1986).
The Second Amended Complaint fails to provide the time,
place, speaker and content of the alleged fraudulent
misrepresentations; indeed, the September 1987 summary is
stated to be accurate.
Conclusory allegations that Rubin's conduct was fraudulent
and deceptive are insufficient to satisfy the particularity
requirement of Fed.R.Civ.P. 9(b). See Eickhorst v. American
Completion and Development Corp., 706 F. Supp. 1087, 1091
(S.D.N.Y. 1989); see also Segal v. Gordon, 467 F.2d 602, 608
(2d Cir. 1972) ("Segal").
While Fed.R.Civ.P. 9(b) allows Browning to plead intent
generally as long as the Second Amended Complaint alleges facts
sufficient to support an inference of fraudulent intent,
see, e.g., Stern v. Leucadia National Corp., 844 F.2d 997, 1003
(2d Cir.), cert. denied, 488 U.S. 852, 109 S.Ct. 137, 102
L.Ed.2d 109 (1988); Segal, 467 F.2d at 608, "[t]he `mere
assertion that wrongful statements were made, without more, is
wholly insufficient to support a claim of fraud.'" Zuckerman v.
Harnischfeger Corp., 591 F. Supp. 112, 117 (S.D.N.Y. 1984)
[quoting Juster v. Rothschild, Unterberg, Towbin, 554 F. Supp. 331,
334 (S.D.N.Y. 1983)]. In addition, where, as here, more
than one defendant is charged with fraud, the Second Amended
Complaint must particularize each defendant's alleged
participation in the fraud. See DiVittorio v. Equidyne
Extractive Indus., 822 F.2d 1242, 1247 (2d Cir. 1987) ("Where
multiple defendants are asked to respond to allegations of
fraud, the complaint should inform each defendant of the nature
of his alleged participation in the fraud."); see also Bingham
v. Zolt, 683 F. Supp. 965, 973 (S.D.N.Y. 1988); Leslie v.
Minson, 679 F. Supp. 280, 284 (S.D.N.Y. 1988); Equitable Life,
627 F. Supp. at 1028; Natowitz v. Mehlman, 542 F. Supp. 674,
676 (S.D.N.Y. 1982).
The Second Amended Complaint states simply that Rubin made
"documentary and oral misrepresentations regarding actual
construction costs" without facts to support an inference of
fraudulent intent on the part of Rubin as distinguished from
that of the other defendants.
Browning's assertion that it is not required to plead facts
demonstrating mail and wire fraud with particularity is based
upon the limited exception which permits fraud to be alleged
upon information and belief as to facts peculiarly within the
opposing parties' knowledge. See DiVittorio, 822 F.2d at 1247;
Stern, 844 F.2d at 1003.
Here, Browning has conducted the depositions of Rubin and
Rosenshein, and already has obtained the pertinent documents
and received answers to interrogatories. The necessary facts
are not unknown to Browning. Further, in order to make use of
that limited exception, Browning's allegations must be
accompanied by a statement of the facts upon which the belief
is based. DiVittorio, 822 F.2d at 1247; Stern, 844 F.2d at
Browning provides a partial quote from Connecticut National
Bank v. Fluor Corp., 808 F.2d 957, 960 (2d Cir. 1987)
("Connecticut National Bank"), asserting that it demonstrates
that it need not plead scienter with specificity. Actually, in
Connecticut National Bank the court found that a plaintiff's
inability to plead a defendant's actual state of mind:
. . does not mean, however, that plaintiffs are
relieved of their burden of pleading circumstances
that provide at least a minimal factual basis for
their conclusory allegations of scienter. "It is
reasonable to require that the plaintiffs
specifically plead those events" which "give rise
to a strong inference" that the defendants had an
intent to defraud, knowledge of the falsity of
reckless disregard for the truth.
Connecticut National Bank, 808 F.2d at 962 [quoting Ross v.
A.H. Robins Co., 607 F.2d 545
, 558 (2d Cir. 1979), cert.
denied, 446 U.S. 946
, 100 S.Ct. 2175
, 64 L.Ed.2d 802 (1980)].
The facts alleged in the Second Amended Complaint do not lead
to a "strong inference" that Rubin had an intent to defraud or
knowledge of any falsity. Indeed, the vast majority of the
Second Amended Complaint alleges purportedly fraudulent
representations (both oral and written) by Rosenshein, never
once alleging that Rubin had knowledge that representations
were made; knowledge of the contents of such representations;
or knowledge of the falsity of such representations. Moreover,
Browning has not pleaded facts demonstrating that Rubin
recklessly disregarded the truth.
4. The Aiding And Abetting Claim
Browning alleges in the alternative that Rubin aided and
abetted the wire and mail fraud RICO violations. In order to
state properly that claim, however, Browning must allege that
Rubin consciously assisted the commission of the mail or wire
fraud in some active way. See e.g., Laterza v. American
Broadcasting Co., 581 F. Supp. 408, 412 (S.D.N.Y. 1984). In
addition, to allege properly its claim for aiding and abetting,
Browning must show:
(1) the existence of a . . . violation by the
primary (as opposed to the aiding and abetting)
party; (2) "knowledge" of this violation on the
part of the aider and abettor, and (3)
"substantial assistance" by the aider and abettor
in the achievement of the primary violation.
Samuel M. Feinberg Testamentary Trust v. Carter, 652 F. Supp. 1066,
1082 (S.D.N.Y. 1987). Further, Browning must also
properly allege that its injury was "a direct or reasonably
foreseeable result" of the conduct complained of. See Bloor v.
Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57
, 63 (2d
Cir. 1985); see generally Morin, 711 F. Supp. at 112.
Moreover, in order to satisfy the elements of its aiding and
abetting claim, Browning must meet the requirements of
Fed.R.Civ.P. 9(b). See Morin, 711 F. Supp. at 112 ("[t]o the
extent that the underlying primary violations are based on
fraud, allegations of aider-abettor liability must meet the
requirements of Fed.R.Civ.P. 9(b)."); see also Dickens v.
Chemical Bank, 573 F. Supp. 1129 (S.D.N.Y. 1983).
Browning's aiding and abetting claim against Rubin consists
of conclusory assertions of aider and abettor liability
referring to the general charges of wrongdoing, see Decker v.
Massey-Ferguson, Ltd., 681 F.2d 111, 119 (2d Cir. 1982), and as
such does not satisfy Fed.R.Civ.P. 9(b).
B. Other RICO Elements Have Not Been Pled
Browning attempts to satisfy the RICO "enterprise"
requirement by asserting that Rosenshein and his company were
"a group of individuals associated in fact" and thus an
enterprise under 18 U.S.C. § 1961(4), but has not adequately
alleged facts showing a nexus between, and the continuity of,
the purported frauds — in other words, no RICO "pattern."
Section 1961(5) provides:
[a] pattern of racketeering activity requires at
least two acts of racketeering activity, one of
which occurred after the effective date of this
chapter and the last of which occurred within ten
years (excluding any period of imprisonment) after
the commission of a prior act of racketeering
18 U.S.C. § 1961(5).
The United States Supreme Court has interpreted § 1961(5) to
require, in addition to a showing of "at least two acts of
racketeering activity," allegations supporting continuity plus
relationship. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105
S.Ct. 3275, 87 L.Ed.2d 346 (1985) ("Sedima"). In this regard,
the Court in H.J. Inc. v. Northwestern Bell Telephone Co.,
("Northwestern Bell"), 492 U.S. 229, 109
S.Ct. 2893, 106 L.Ed.2d 195 (1989) has held that continuity:
is both a closed and open-ended concept, referring
either to a closed period of repeated conduct, or
to past conduct that by its nature projects into
the future with a threat of repetition.
Id. 109 S.Ct. at 2902. The Court further explained that:
[a] party alleging a RICO violation may
demonstrate continuity over a closed period by
proving a series of related predicates extending
over a substantial period of time. Predicate acts
extending over a few weeks or months and
threatening no future criminal conduct do not
satisfy this requirement. Congress was concerned
in RICO with long-term criminal conduct. Often a
RICO action will be brought before continuity can
be established in this way. In such cases,
liability depends on whether the threat of
continuity is demonstrated.
Under Airlines Reporting Corp. v. Aero Voyers, Inc.,
721 F. Supp. 579, 584 (S.D.N.Y. 1989) ("Airlines Reporting"), there
are five elements to consider in determining closed-ended
continuity: (1) the length of time of the racketeering acts;
(2) the number of alleged racketeering acts; (3) the complexity
of the scheme; (4) the number of participants; and (5) the
number of victims. Id. at 584.
Under these criteria, the Second Amended Complaint alleges no
facts to establish continuity. References to other
communications in Browning's opposition papers notwithstanding,
the Second Amended Complaint alleges only one purported
racketeering act by Rubin that occurred sometime in the month
of September 1987. In addition, Browning (although it also
purports to sue on behalf of Associates) is the only "victim,"
if indeed there truly is a victim at all in this case.
Accordingly, the Second Amended Complaint does not satisfy
the closed-ended concept of continuity, and therefore has not
pleaded facts that meet the fundamental requirement of
continuity of a racketeering pattern. Moreover, since only one
RICO act has been alleged against Rubin, the "relatedness"
requirement established in Sedima has also not been satisfied.
Therefore, Browning's RICO claim against Rubin must be
C. Failure To Plead Violations Of §§ 1962(b)-(d)
A RICO conspiracy requires plaintiffs to allege an agreement
to violate one of RICO's substantive provisions. United States
v. Benevento, 836 F.2d 60
, 72 (2d Cir. 1987).
RICO § 1962(b) prohibits acquiring or maintaining an interest
in or control of an enterprise through a pattern of
racketeering activity. Therefore, that subsection of RICO
requires proof of a nexus between the alleged pattern of
racketeering activity and the interest or control obtained
thereby. E.g., Litton Industries, Inc. v. Lehman Brothers Kuhn
Loeb Inc., 709 F. Supp. 438, 452 (S.D.N.Y. 1989). In addition,
it also requires evidence of a "causal connection" between the
defendant's interest or control and the plaintiff's injuries.
The Second Amended Complaint fails to plead the necessary
elements of a § 1962(b) claim against Rubin and fails to allege
that Rubin acquired or maintained an interest in the purported
enterprise through a pattern of racketeering activity.
In McCain v. Phoenix Resources, Inc., 1989 WL 146212
(S.D.N.Y. 1989) (Kram, J.), the court found that § 1962(b) is,
"directed toward illicit takeovers of preexisting businesses .
. ." Id. at 16. Here, Browning has not — indeed cannot —
allege that Rubin was engaged in an illicit takeover or the
maintenance of control over an alleged RICO "enterprise."
Section 1962(c) prohibits conducting or participating in an
enterprise's affairs through a pattern of racketeering
activity. In order to state a claim under this RICO section,
Browning must allege, among other things, that its injuries
were proximately caused by Rubin's alleged racketeering
activity. See Hecht v. Commerce
Clearing House, Inc., 897 F.2d 21, 23 (2d Cir. 1990) ("Hecht").
Here, Browning does not allege facts which demonstrate its
losses or that they were caused by Rubin as opposed to
The Second Amended Complaint also alleges a violation of
§ 1962(d) in that Rubin and the other defendants "conspired" to
violate § 1962(b) and/or (c). As one court observed:
to be convicted as a member of an enterprise
conspiracy, an individual by his words or actions,
must have objectively manifested an agreement to
participate, directly or indirectly, in the
affairs of an enterprise through the commission of
two or more predicate crimes.
Laterza, 581 F. Supp. at 413 [quoting, United States v. Elliott,
571 F.2d 880
, 903 (5th Cir.), cert. denied, 439 U.S. 593, 99
S.Ct. 349, 58 L.Ed.2d 344 (1978) (emphasis omitted)].
Thus, to state a conspiracy claim under RICO, Browning must
set forth facts showing the existence of an agreement to commit
two predicate acts. See United States v. Ruggiero,
726 F.2d 913, 921 (2d Cir.), cert. denied, 469 U.S. 831, 105 S.Ct. 118,
83 L.Ed.2d 60 (1984). Here, Browning has not alleged the
existence of any agreement by Rubin to commit prohibited
conduct. Browning does not allege facts which would even
remotely suggest a conspiracy by Rubin.
In sum, Browning has not properly pleaded a claim against
Rubin under § 1962.
RICO confers standing on "any person injured in his business
or property by reason of a violation of section 1962."
18 U.S.C. § 1964(c). Consequently, in order to have standing,
Browning must show: (1) a violation of Section 1962; (2) injury
to business or property; and (3) causation of the injury by the
violation. See Hecht, 897 F.2d at 21; see also O'Mally v.
O'Neill, 887 F.2d 1557
, 1561 (11th Cir. 1989), cert. denied,
___ U.S. ___, 110 S.Ct. 2620
, 110 L.Ed.2d 641 (1990). Even when
the factual allegations of the Second Amended Complaint are
construed in the light most favorable to Browning, Scheuer v.
Rhodes, 416 U.S. 232
, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90
(1974), not one of the three elements set forth in Hecht is
The Second Amended Complaint fails to allege injury to the
business or property of Browning caused by Rubin. Browning
admits that it refused to honor the capital call and therefore
Browning does not allege facts which show that its losses were
caused by Rubin.
Accordingly, having failed to allege a § 1962 violation,
injury and causation, Browning's RICO claim against Rubin must
be dismissed for lack of standing.
E. Browning's Discussion Of Accountants Standard Of Care For
Negligence No Meaningful Guidance Here
Browning has cited authorities relating to accountant
liability for negligence. However, here the claims against
Rubin are for violations of RICO based upon mail and/or wire
fraud and/or aiding and abetting mail and/or wire fraud.
Claiming that Rubin had a fiduciary relationship with
Browning (a "fact" that is not alleged in the Second Amended
Complaint), Browning quotes Beck v. Manufacturers Hanover Trust
Co., 645 F. Supp. 675 (S.D.N.Y. 1986), for the proposition that
the mail or wire fraud statutes "are violated when a fiduciary
conceals `material information which he is under a duty to
disclose to another under circumstances where the nondisclosure
could or does result in harm to the other.'" Id. at 680
[quoting United States v. Bronston, 658 F.2d 920, 926 (2d Cir.
1981), cert. denied, 456 U.S. 915, 102 S.Ct. 1769, 72 L.Ed.2d
174 (1982)]; see also Browning's Memorandum of Law at p.
However, there are no facts alleged in the Second Amended
Complaint demonstrating that Rubin owed Browning any duty
whatsoever nor any factual allegations that Rubin in any way
concealed anything from Browning.
F. The Grant Of Browning's Motion To Amend In State Court
Is Not Dispositive
Browning urges that Justice Davis' decision permitting the
Second Amended Complaint containing the RICO claims is
dispositive of this motion. Browning's motion to amend, filed
in the state court, made but brief references to the Rubin and
Wilner defendants. Justice Davis' order by its terms simply
permitted the addition of a RICO claim against the existing
Upon the foregoing papers it is ordered that this
motion of plaintiff to amend the amended
complaint, to add a claim of iolation [sic] of the
Racketeering Influenced and Corrupt Organizations
Act (RICO), 18 U.S.C. § 1961, et seq., is granted.
The state court then concluded that Browning' RICO claim is
almost identical to that found in Procter & Gamble, apparently
not recognizing the pleading problems relating to Rubin and
Procter & Gamble v. Big Apple Indus. Bldgs., Inc.,
879 F.2d 10 (2d Cir. 1989), cert. denied, 493 U.S. 1022, 110 S.Ct. 723,
107 L.Ed.2d 743 (1990) ("Procter & Gamble"), is similar to this
action as to the Rosenshein defendants. However, Procter &
Gamble did not involve RICO allegations against an accountant
or an engineer hired by a third party. In addition, Procter &
Gamble did not involve allegations against the engineer hired
by the bank providing the construction loan to ensure phases of
construction were complete before further funds would be
released. The only professional named as a defendant was a
lawyer who made affirmative misrepresentations to the
plaintiff. Procter & Gamble does not support Browning's claims
against Rubin or Wilner.
II. The Complaint Fails To State A RICO Claim Against Wilner
A. Browning Does Not Satisfy Predicate Acts Requirement
As already set forth, to find violations of the mail and wire
fraud statutes that satisfy the "predicate acts" requirement of
RICO, Browning must satisfactorily allege: (1) participation in
a scheme to defraud, and (2) knowing use of the interstate
mails or interstate wires in furthering the scheme.
Connors, supra, Part I.2, 666 F. Supp. at 450; see also
18 U.S.C. § 1341.
The Second Amended Complaint alleges only that Wilner did not
send the monthly reports he prepared for EAB to Browning.
Browning has not alleged that Wilner used the mails to further
the alleged conspiracy or that Wilner consciously aided and
abetted any mail fraud perpetrated by Rosenshein. In addition,
the Second Amended Complaint does not allege that Wilner's
reports to EAB contained any intentional misrepresentations but
only that they contained information substantially different
from the inaccurate reports Rosenshein sent to Browning (Second
Amended Complaint at ¶ 65). Wilner's reports to EAB, presumably
delivered by mail, are not alleged either to be fraudulent or
intended to defraud Browning.
Browning has stated a new basis for scienter, namely that
Wilner "should have reasonably anticipated" or "foreseen that
his actions would result in use of the mails or wires"
(Browning's Memorandum of Law at 16-20). Even this contention,
that the mails or wires would be used, does not satisfy the
statutory requirements of mail fraud in the absence of false or
misleading information or knowing participation in the fraud.
Section 1341 of the Mail and Wire Fraud statute mandates that
plaintiffs assert and prove:
The specific intent to defraud by either devising,
participating in or abetting the scheme.
18 U.S.C. § 1341. Not only does Wilner allege his monthly
inspection reports were required by EAB to be forwarded only to
the bank, but by unrebutted affidavit he denies being aware of
Browning's existence at the time of the events in question.
1. Browning Fails To Meet 9(b) Requirements
As stated above, where the predicate acts of a RICO claim
sound in fraud, the
pleading of those predicate acts must satisfy the requirement
of Fed.R.Civ.P. 9(b). Morin, 711 F. Supp. at 111.
To comply with the requirements of Fed.R.Civ.P. 9(b),
plaintiffs must state the time, place, content of the
fraudulent misrepresentations, and the individual roles of each
party to the fraud. Luce, 802 F.2d at 58.
The allegations in the Second Amended Complaint fail to
supply a definite identification of any fraudulent
misstatements, inaccuracies, omissions or non-disclosures
supposedly made by Wilner. Indeed, there are absolutely no
allegations in the Second Amended Complaint that there were
false statements in any of Wilner's reports or elements to set
forth a claim of fraud. Moreover, allegations that Wilner "knew
or should have known" and "could not have been unaware" are
insufficient to show Wilner's specific intent to defraud
plaintiffs. See Morin v. Trupin, 711 F. Supp. at 110-11; see
also Beauford v. Helmsley, 865 F.2d 1386, 1392 (2d Cir. 1989)
(on remand to district court, RICO complaint must comply with
In the Second Circuit, a statement of facts upon which belief
is founded must accompany fraud allegations that are stated
generally or where plaintiffs maintain that facts are
peculiarly within the opposing party's knowledge. Stern v.
Leucadia Nat. Corp., 844 F.2d 997, 1003 (2d Cir.), cert.
denied, 488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988),
citing, Luce, 802 F.2d at 54 n. 1. Plaintiffs also do not
allege in the Second Amended Complaint that the information is
solely within the scope of Wilner's knowledge. See, e.g.,
Decker v. Massey-Ferguson, Limited, 534 F. Supp. 873, 877
Here, as in the amended complaint, Stern, 844 F.2d at 1004,
the allegations did not pass muster under Fed.R.Civ.P. 9(b)
because it does not "suffice to assert conclusory suspicions as
to defendants' motives." Id. at 1004.
In its Memorandum of Law at 23, Browning states:
Wilner almost certainly knew that plaintiffs were
joint venturers in the project and that they would
rely upon the Bank's reports on the construction
costs. Moreover, Wilner knew or had reason to know
that the data in the reports was inaccurate.
Nowhere does Browning allege a factual foundation for the
conclusory allegations of scienter, nor any motive nor basis to
infer intent by Wilner to participate in any alleged fraud.
2. Browning Fails To Plead Aiding And Abetting Liability
Browning also seeks to allege in the alternative the Wilner
aided and abetted the mail and wire fraud RICO violations,
[I]n conducting and participating in the affairs
of the enterprise and conspiring to do so,
defendants Rosenshein, . . . Rubin, KCGR, [and]
Wilner . . . performed or aided and abetted the
performance of two or more predicate acts under
the federal wire fraud statutes . . .
(Second Amended Complaint at ¶ 107).
However, in opposition to Wilner's motion, Browning states:
It cannot be disputed that Wilner either
deliberately or recklessly through tortious
behavior, aided and abetted Rosenshein by
approving Rosenshein's fraudulent reports.
A proper pleading of "aiding and abetting" a principal in the
furtherance of a crime or predicate act requires an allegation
of some specified, knowing, affirmative action to assist the
unlawful act. See Laterza, 581 F. Supp. at 412. In the Second
Amended Complaint none such is pleaded.
Here, not only does Browning fail to allege that Wilner had
actual and specific knowledge of Rosenshein's purported
"primary violations" but the Second Amended Complaint also
fails to identify what, if any, assistance Wilner gave to
Rosenshein or the manner in which Wilner's inspection reports
to EAB lent assistance to the purported fraud.
B. Browning Does Not Meet Other Elements of RICO
Furthermore, Browning does not allege that Wilner knowingly
and wilfully engaged in or aided and abetted a scheme to
intentionally defraud plaintiffs that gave rise to the
existence of a "pattern of racketeering activity."
As stated above, in Northwestern Bell, 492 U.S. at 229, 109
S.Ct. at 2893, the Court held that the harm to plaintiff as a
consequence of defendants' activities must have either occurred
repeatedly during a defined period of time in the past (i.e.,
"closed-ended"), or as the result of acts that threaten future
harm (i.e. "open-ended").
The allegations in the Second Amended Complaint fall far
short of meeting either definition of continuity. One paragraph
refers to Wilner's limited participation in the project:
EAB retained an engineering firm, Alfred Wilner
Inc. . . . to conduct monthly inspections of the
site. The monthly inspections were conducted by
Wilner . . . and Wilner . . . prepared monthly
reports regarding the progress of construction.
Second Amended Complaint at ¶ 69.
After 1987 when the project was complete, Wilner had no
association with the project. There could not be any further
participation by Wilner in any scheme to defraud and,
therefore, Wilner's activities do not conform to an open-ended
Browning has not alleged any nexus known to Wilner between
his reports to EAB and Rosenshein's reports to Browning of
which Wilner was unaware. Consequently, Browning has not pled
any activity of continual fraud by Wilner over a closed period
For the first time in response to Wilner and Rubin's motions,
Browning states that:
[A]ll of the predicate acts alleged in plaintiff's
[sic] complaint were committed in furtherance of
one main purpose: theft; and a single victim:
Browning. The predicate acts were systematically
committed in a predetermined manner.
(Plaintiffs' Memorandum of Law at 28). Yet, elsewhere Browning
states that it cannot be "absolutely precise with respect to
the details of [Wilner's] predicate acts . . ."
Nor do Browning's allegations satisfy the criteria for
relatedness necessary for establishing a pattern as summarized
in Procter & Gamble in terms of similarity of goals, methods of
accomplishing those goals, repetitiousness and closeness of
temporal proximity between Rosenshein and Wilner's acts in
furtherance of some goal. See also, United States v.
Indelicato, 865 F.2d 1370, 1382 (2d Cir. 1989). Allegations
about what Wilner "should have known," or "knew" or "must have
known" fail to establish a pattern of racketeering activity
within the meaning of the RICO statute.
In Procter & Gamble, on which Browning also relies as to its
claim against Wilner, the plaintiff's allegations directly
refuted the view that defendants' fraudulent activities were
unrelated or disconnected. 879 F.2d at 18. Here, Rosenshein's
progress reports to Browning and Wilner's reports to EAB,
appear on their face to be disconnected (Second Amended
Complaint at ¶ 65, ¶ 66 and ¶ 67).
Moreover, the Second Amended Complaint fails to satisfy
RICO's enterprise requirement. Wilner has not been shown by
Browning's allegations to have been in any way "associated
together" with Rosenshein within the meaning of United States
v. Turkette, 452 U.S. 576, 101 S.Ct. 2524, 69 L.Ed.2d 246
(1981) in an enterprise according to 18 U.S.C. § 1962.
Turkette requires there be allegations that individuals
associated with the enterprise functioned as a "continuing
unit." 452 U.S. at 583, 101 S.Ct. at 2528. In the Second
Amended Complaint, Browning does not indicate how, where or in
what capacity Wilner functioned as a unit along with
Rosenshein. The Second Amended Complaint merely states that:
Wilner . . . knew or should have known, at each
time that Rosenshein's monthly application for a
payment was approved by them, that the project
could not be completed for the balance of the
construction loan remaining . . .
(Second Amended Complaint at ¶ 70). Such an allegation does not
set forth that Wilner acted in any manner as a "continuing
unit" with any other defendant.
According to Wilner's unrebutted affidavit, he, as inspecting
engineer, was not required to certify any costs to EAB but to
report the percentage of construction completed. The loan
between EAB and Rosenshein and any subsequent increases were
negotiated between those parties alone. EAB notified Wilner
after these increases were approved. Moreover, Wilner had no
information concerning the amount of equity or capital
contributed to the construction project nor amounts paid
subcontractors. There is, therefore, no allegation tending to
suggest that Wilner was functioning as a unit with Rosenshein.
C. Failure To Plead Statutory Violations
As stated above, a RICO conspiracy requires plaintiffs to
allege an agreement to violate one of RICO's substantive
provisions. Benevento, 836 F.2d at 72. Browning has failed to
allege Wilner violated or committed any underlying intentional
tort or predicate act as defined in 18 U.S.C. § 1962(a), (b) or
(c), and has failed to allege that Wilner committed any fraud.
Therefore, as a matter of law, any conspiracy claim whether
under New York law or RICO must fail.
Subsection 1962(d) of the RICO statute embodies the standard
for determining whether plaintiffs have adequately pled a claim
for RICO conspiracy against Wilner. That provision requires
that plaintiffs allege with specificity that defendants agreed
to commit a predicate act defined in § 1962(d). As the Second
Circuit has stated:
Because the core of a RICO civil conspiracy is an
agreement to commit predicate acts, a RICO civil
conspiracy complaint, at the very least, must
allege specifically such an agreement.
Hecht, 897 F.2d at 25; Morin, 711 F. Supp. at 111-12 (under §
1962(d), mere allegations of agreement to commit predicate acts
are insufficient to support a charge of RICO conspiracy). Here,
no "meeting of the minds" or agreement is alleged, nor can any
be reasonably inferred from the allegations concerning Wilner
in the Second Amended Complaint. With regard to Wilner, the
allegations are merely that:
Wilner . . . abetted Rosenshein and Rosenshein
Associates in their fraud on Browning by approving
Rosenshein's request for payment each month . . .
Wilner and AW knew or should have known, at each
time that Rosenshein's monthly application for
payment was approved by them, that the project
could not be completed for the balance of the
construction loan remaining . . .
(Second Amended Complaint at ¶ 70). Browning insufficiently
alleges that Wilner "knew or should have known" in the absence
of any allegations that Wilner agreed or knowingly entered into
an agreement to commit any predicate act or defraud plaintiffs.
The acts in the Second Amended Complaint alleged to have been
undertaken by Wilner do not give rise to a circumstantial
inference of conspiracy.
Instead of satisfying the well-established RICO requirement
of pleading a specific agreement, Browning states simply that:
The requests for payment, submitted by Rosenshein,
contain blatant falsities and inconsistencies, of
which Wilner could not have been unaware.
(Browning's Memorandum of Law at 5). Therefore, Browning has
failed to plead a violation of § 1962(d) with respect to
D. Browning Fails To Plead Injury With Respect To Wilner
Wilner also urges dismissal of the Second Amended Complaint
in the absence of injury to Browning resulting from his acts.
As stated above, Browning must plead an injury in order to have
standing to assert a RICO claim. 18 U.S.C. § 1964(c).
Browning now seeks to establish that it sustained injury by
loss of interest in the venture, stating:
[D]efendants' acts resulted in not only the
acquisition of a substantial interest
in the joint venture through the theft of millions
of dollars of the funds designated for the
project, but in the acquisition of the entire
project by fraudulently depriving plaintiffs of
its share in the Venture . . .
Browning's Memorandum of Law at 30. However, this claim is not
pled; moreover, Browning had no obligation to guarantee
construction financing and was paid $2.9 million for its
interest in the property, according to the terms of the
Agreement. No link is alleged between the alleged loss and the
acts of Wilner.
Further, with respect to the conspiracy claim, it is
well-settled law in New York that a plaintiff, when alleging
either a civil or RICO conspiracy, must properly plead an
underlying intentional tort. Justice Edward Weinfeld succinctly
[T]he gravamen of a claim of conspiracy is the
underlying independent tort, and if the
independent tort has not been adequately pleaded,
the conspiracy claim will also fail.
Demalco Ltd. v. Feltner, 588 F. Supp. 1277, 1278 (S.D.N Y
Therefore, for all the above reasons the Second Amended
Complaint fails to state a RICO claim against Wilner.
III. Leave To Replead Is Not Appropriate
This action has been pending against Rosenshein for over two
years, discovery has been extensive and the depositions of the
principals, other than Wilner, have been taken. At the heart of
the action is the dispute between the co-venturers, Browning
and Rosenshein. On the record submitted thus far there is no
basis to believe further discovery would supply the basis for
Although leave to replead is not granted for the reasons
stated, it may be sought by way of an appropriate motion.
IV. The Conversion Of The 12(b)6 Motion
Since all parties submitted evidentiary material outside the
pleadings by way of affidavits and deposition citations, the
12(b)(6) motion of Rubin and Wilner has been converted,
pursuant to Rule 12(b), to a motion for summary judgment to
dismiss the complaint which is granted on the findings of fact
and conclusions of law as set forth above.
Browning is therefore granted leave to submit any appropriate
factual materials and memorandum by way of a further submission
with respect to the grant of summary judgment to Rubin and
The motions by Rubin and Wilner to dismiss the complaint
under Rules 12(b)(6), 9(b) and 56, Fed.R.Civ.P., are granted.
Settle judgment on notice.
It is so ordered.