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August 7, 1991


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.

Prior Proceedings

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.

The Facts

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 its subsurface.

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 Project.

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 oversee construction.

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 Associates.

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 million.

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 Associates.

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 co-venturers.

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 revised requisition.

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 EAB.

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 Rosenshein.

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, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984) ("Moss").

A.  The Predicate Acts Requirement

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
                      Racketeering Activity

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 Rosenshein.

   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, 98 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 ...

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