They allege that he has wrongfully refused to wind up the
affairs of the Estate, in furtherance of his plan to maintain
control over its assets for the rest of his life.
It is fair to say that all these disputes have been the
subject, over a number of years, of litigation in the
Because defendant's motion to dismiss turns upon the
viability of plaintiffs' federal claims, I consider them in
The § 10(b) claim
In his initial motion papers and at oral argument, defendant
raised three issues concerning the legal sufficiency of
plaintiffs' § 10(b) claim: whether the business interests
involved constitute a "security" within the meaning of §
3(a)(10) of the 1934 Act; whether plaintiffs have standing to
assert a § 10(b) claim; and whether the facts pleaded in the
complaint demonstrate a "purchase or sale" of a security within
§ 10(b), assuming that a security is present at all.
Subsequent to the initial submissions and oral argument,
counsel for the parties have dealt in a series of letter
exchanges with Lampf, Pleva, Lipkind, Prupis & Petigrow v.
Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321
(1991), which the Supreme Court decided on June 20, 1991. Lampf
holds that § 10(b) and Rule 10b-5 claims are governed by a
uniform federal limitations period which bars them unless suit
is brought within one year after the discovery of the facts
constituting the violation and within three years after the
violations. The three-year limitation serves as a cutoff and
hence is not subject to equitable tolling.
The parties at bar appear to agree that application of these
periods of limitation would bar plaintiffs' § 10(b) claims.
Plaintiffs faintly protest that "there is no pending motion to
dismiss by the defendant based on statute of limitations
grounds." Letter of counsel dated July 2, 1991 at 1. But
defendant's counsel raised the issue in prior correspondence;
if it be said that the formal motion papers do not assert the
defense, I would permit an amendment. There is no need to
generate further paper work. I will consider defendant's
statute of limitations defense on the basis of the present
record, supplemented by the most recent letter briefs.
In their submissions the parties debated the retroactive
effect of Lampf. The Second Circuit, which in Ceres Partners v.
GEL Associates, 918 F.2d 349 (2d Cir. 1990), anticipated Lampf
by articulating a one-year/three-year uniform federal statute
of limitations in § 10(b) cases, subsequently held in Welch v.
Cadre Capital, 923 F.2d 989 (2d Cir. 1991) that the rule would
not be applied retroactively on the facts of that case.
However, that issue is now foreclosed in favor of defendant
at bar. The Supreme Court granted certiorari in Welch, vacated
the Second Circuit's judgment, and remanded the case for
further consideration in light of Lampf (which applied
retroactively the limitations rule it announced) and James B.
Beam Distilling Co. v. Georgia, ___ U.S. ___, 111 S.Ct. 2439,
115 L.Ed.2d 481 (1991) (holding that in the civil context it is
error not to apply retroactively to all cases pending on direct
review a rule of federal law previously applied retroactively
in the case announcing the rule.) On remand in Welch the
Second Circuit, after analyzing Lampf and Beam, concluded "that
the retroactive ruling in Lampf is to be applied retroactively
to all cases not finally adjudicated on the date when Lampf was
decided." 946 F.2d 185, 188 (2d Cir. 1991). Since the case at
bar falls within that category, plaintiffs' § 10(b) claims are
The RICO Claim
Plaintiffs' alternative source of federal subject matter
jurisdiction is the civil RICO statute. The parties' voluminous
briefs address the legal sufficiency of that claim. Defendant's
94-page main brief and 64-reply argue that plaintiffs have
failed to allege racketeering acts on the part of defendant
causing them direct injury; that the alleged predicate acts of
mail and wire fraud do not satisfy Rule 9(b) pleading
requirements; and that the requisite continuity for a RICO
claim is not present.
Plaintiffs' 168-page brief-in opposition takes issue with those
But there is a threshold issue: that of abstention. Defendant
stresses that the parties have been litigating these issues for
years in the New York County Surrogate's Court; and that in
Tafflin v. Levitt, 493 U.S. 455, 110 S.Ct. 792, 107 L.Ed.2d
887, reh'g denied, ___ U.S. ___, 110 S.Ct. 1942, 109 L.Ed.2d
305 (1990), the Supreme Court held that state courts have
concurrent jurisdiction to adjudicate RICO claims. Defendant
contends that even if plaintiffs state a viable RICO claim,
this court should abstain and permit the claim to be
adjudicated by the surrogate's court. Plaintiffs resist
abstention. If abstention is appropriate, it would be
inappropriate to reach the merits of the RICO claim.
Accordingly I turn to the abstention issue.
Tafflin arose out of the failure of a Maryland savings and
loan association and the attendant collapse of that state's
nonprofit corporation created to insure accounts in Maryland
savings and loan associations that were not federally insured.
Plaintiffs, nonresidents of Maryland holding unpaid
certificates of deposits issued by the failed savings and loan
association, commenced an action in federal court against
individuals previously involved with both entities as well as a
law firm, an accounting firm, and the state-created successor
to the failed insurer. Plaintiffs alleged various state law
causes of action as well as claims under the Securities
Exchange Act of 1934 and RICO.
The district court dismissed the complaint. It held that
plaintiffs had failed to state a claim under the Exchange Act.
As for RICO, the district court concluded that state courts had
concurrent jurisdiction over civil RICO claims, and that
federal abstention was appropriate for the other causes of
action because they had been raised pending litigation in state
court. The Fourth Circuit affirmed, 865 F.2d 595 (4th Cir.
1989), relying on the abstention point upon its prior decision
in Brandenburg v. Seidel, 859 F.2d 1179 (4th Cir. 1988), in
which it concluded that "a RICO action could be instituted in a
state court and that Maryland's `comprehensive scheme for the
rehabilitation and liquidation of insolvent state-chartered
savings and loan associations', 859 F.2d at 1191, provided a
proper basis for the district court to abstain under the
authority of Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct.
1098, 87 L.Ed. 1424 (1943)." 865 F.2d at 600 (citations
The Supreme Court granted certiorari only on the RICO issue,
490 U.S. 1089, 109 S.Ct. 2428, 104 L.Ed.2d 985 (1989), and
affirmed the Fifth Circuit's conclusion that state courts have
concurrent jurisdiction over civil RICO actions. The practical
consequence was that the district court's abstention was also
upheld. Tafflin therefore stands for the propositions that
state courts are competent to adjudicate RICO claims; and that
the assertion of a RICO claim in federal court does not mandate
federal adjudication if a recognized basis for abstention
The Second Circuit, citing Colorado River Water Conservation
District v. United States, 424 U.S. 800, 814-16, 96 S.Ct. 1236,
1244-46, 47 L.Ed.2d 483 (1976), has said:
Roughly, the three categories of abstention are:
(1) avoiding a federal constitutional issue by
seeking a state determination of state law; (2)
deferring to state resolution of difficult state
law questions that involve important public policy
or where federal review would be disruptive of
state regulation or administration; and (3)
declining to restrain state criminal proceedings,
collection of state taxes and the like.
Giardina v. Fontana, 733 F.2d 1047, 1052 n. 1 (2d
Burford abstention of the sort presented in Tafflin is an
example of the second of these three categories. The first
category is founded upon Railroad Commission of Texas v.
Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941),
and the third upon Younger v. Harris, 401 U.S. 37, 91 S.Ct.
746, 27 L.Ed.2d 669 (1971).
In addition to these three traditional abstention categories,
the Supreme Court in Colorado River identified an additional
basis for abstention which has come to be known as the
doctrine. When there are concurrent federal and state court
suits involving the same subject matter, "considerations of
`[w]ise judicial administration, giving regard to conservation
of judicial resources and comprehensive disposition of
litigation' . . . may be appropriate ground for the federal
court to abstain in exceptional circumstances." Colorado River
at 817-18, 96 S.Ct. at 1246-47 (citing and quoting Kerotest
Mfg. Co. v. C.O. Two Fire Equipment Co., 342 U.S. 180, 183, 72
S.Ct. 219, 221, 96 L.Ed. 200 (1952)).
Colorado River states generally that "[a]bstention from the
exercise of federal jurisdiction is the exception, not the
rule," id. at 813, 96 S.Ct. at 1244 and prefaced its discussion
of the "exceptional circumstances" extension of the abstention
doctrine by noting that "the pendency of an action in the state
court is no ban to proceedings concerning the same matter in
the federal court having jurisdiction," citing and quoting
McClellan v. Carland, 217 U.S. 268, 282, 30 S.Ct. 501, 505, 54
L.Ed. 762 (1910), and that the federal courts have a "virtually
unflagging obligation . . . to exercise the jurisdiction given
to them." Colorado River at 817, 96 S.Ct. at 1246.
Having expressed those generalities, the Court in
Colorado River then discussed four specific factors which
district courts should consider in determining whether
exceptional circumstances exist which warrant abstention: (1)
whether either court has assumed jurisdiction over property;
(2) inconvenience of the federal forum; (3) avoidance of
piecemeal litigation; and (4) the order in which the courts
obtained jurisdiction. 424 U.S. at 818, 96 S.Ct. at 1246. Will
v. Calvert Fire Insurance Co., 437 U.S. 655, 667, 98 S.Ct.
2552, 2559, 57 L.Ed.2d 504 (1978), added a fifth factor:
whether federal or state law provides the substantive rule to
determine the merits. The Supreme Court reaffirmed and further
explicated those five factors in Moses H. Cone Hospital v.
Mercury Construction Corp., 460 U.S. 1, 15-16, 23, 103 S.Ct.
927, 936-37, 941, 74 L.Ed.2d 765 (1983). See generally
Arkwright-Boston Manufacturers Mutual Insurance Co. v. City of
New York, 762 F.2d 205, 209-210 ("the Supreme Court found in
Colorado River that certain exceptional circumstances will
justify federal-court abstention even when the requirements for
the three categories of abstention . . . are not satisfied.")
In the case at bar, defendant relies upon Younger abstention,
Burford abstention, and Colorado River "exceptional
As for Younger abstention, the Supreme Court has made it
plain that the applicability of the principles of federalism
and comity that underline that case apply to civil as well as
criminal proceedings. See Pennzoil Co. v. Texaco Inc.,
481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987). The first premise of
the Younger decision was "the basic doctrine of equity
jurisprudence that courts of equity should not act . . . when
the moving party has an adequate remedy at law." 401 U.S. at
43, 91 S.Ct. at 750. The second premise of Younger is that an
important state interest be involved. But Pennzoil gives that
element an expanded reading. "This Court repeatedly has
recognized that the States have important interests in
administering certain aspects of their judicial systems." 481
U.S. at 12-13, 107 S.Ct. at 1526-27.
In Ganoe v. Lummis, 662 F. Supp. 718 (S.D.N.Y. 1987), aff'd,
841 F.2d 1116 (2d Cir.), cert. denied, 487 U.S. 1206, 108 S.Ct.
2848, 101 L.Ed.2d 886 reh'g denied, 487 U.S. 1250, 109 S.Ct.
13, 101 L.Ed.2d 964 (1988), Judge Ward cited Younger and
Pennzoil in abstaining from adjudicating an action brought by
alleged relatives of Howard Hughes seeking injunctive and
monetary relief against the defendant, the fiduciary of the
Hughes estate. In abstaining, Judge Ward said at 662 F. Supp. at
In light of the significant state interest in
efficiently administering the estates of its
decedents in a single proceeding and in view of
the opportunity to pursue federal challenges to
those proceedings within the state courts, the
principle of comity bids restraint here.
That analysis applies to the case at bar, given plaintiffs'
opportunity, declared by the Supreme Court in Tafflin, to
their federal RICO claim in the surrogate's court.
Younger abstention requires an effort by a plaintiff to
restrain state court proceedings. That element is provided in
the case at bar by plaintiffs' demand for the imposition of a
constructive trust on the 20 percent limited partnership
interests acquired by Cohn through the purchase and sale
agreement, coupled with a demand for the conveyance of those
interests to plaintiffs and/or the estate. Plaintiffs request
that relief in Count II of the complaint, which is the RICO
count. The imposition of a constructive trust, like an
injunction, is an equitable remedy. See In re Howard's
Appliance Corp., 874 F.2d 88, 93 (2d Cir. 1989) ("a
constructive trust . . . `confers on the true owner of the
property an equitable interest in the proper superior to the
trustee's'", citing and quoting Quality Holstein Leasing,
752 F.2d 1009, 1012 (5th Cir. 1985)); In re N.S. Garrott & Sons,
772 F.2d 462, 467 (8th Cir. 1985) ("a constructive trust is an
equitable remedy imposed under circumstances where it would be
unfair for the owner of the property to enjoy the beneficial
interest and would result in his unjust enrichment.") The
imposition of a constructive trust by this court in the case at
bar would preempt the surrogate's court's effort to administer
the Estate for which that court is responsible under state law.
That is equally true of the constructive trusts for which
plaintiffs pray on Counts III, IV, V and VI, those being the
pendent state law claims.
Accordingly I conclude that Younger abstention is appropriate
in this case.
Alternatively, Burford abstention is appropriate. In Bassler
v. Arrowood, 500 F.2d 138 (8th Cir. 1974), the executors of the
estate of a Mrs. Bush brought a diversity action against the
executors of the estate of Mr. Bush, the Bush Foundation and
the Foundation's directors and former directors, two of whom
were executors of the estate of Mr. Bush. The cause of action
was basically for fraud in the distribution of the husband's
estate and in the operation of the Bush Foundation. The
district court abstained and the Eighth Circuit affirmed,
stating at 500 F.2d at 142:
Federal courts choose not to exercise their
jurisdiction for numerous reasons. See cases cited
in Wright Federal Courts § 52 (1970). One of those
instances is when the federal court action would
needlessly interfere with the state's
administration of its own affairs. Alabama Public
Service Commission v. Southern Railroad Company,
341 U.S. 341, 349, 71 S.Ct. 762, 95 L.Ed. 1002
(1951); Burford v. Sun Oil Company, supra; Tomiyasu
v. Golden, 358 F.2d 651, 655 (CA9 1966). We believe
that the instant case presents a situation fitting
the mold for abstention.
The area of probate and decedents' estates
presents many varied problems. State courts deal
with these problems daily and have developed an
expertise which should discourage federal court
intervention. These local problems should be
decided by state courts.
In the case at bar, plaintiffs append to their federal claims
causes of action for common law fraud (Count III), breach of
fiduciary duty (Count IV), breach of contract, including breach
of an implied covenant of fair dealing (Count V), unjust
enrichment (Count VI), and corporate waste (Count VII). All
these claims are presently pending before the surrogate's court
under Tafflin, the RICO claim may also be presented in that
forum. To superimpose the jurisdiction of this Court upon the
surrogate's court would "needlessly interfere with the state's
administration of its own affairs" in an area where the
surrogate's court has particular expertise. Accordingly
abstention is appropriate under the Burford rule.