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BROWNING AVE. REALTY CORP. v. ROSENSHEIN
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 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, 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
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, 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 ...