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November 18, 1991


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

  Zaro Bake Shops, Inc. ("Bake Shops"), Zaro Licensing, Inc. ("Licensing"), Zaro Franchise Realty Corp. ("Realty"), Phillip Zaro, Stuart Zaro, Andrew Zaro, Joseph Zaro, Albert Firstman and Seymour I. Friedman ("Friedman; collectively "Zaro") and additional defendants Harold Kestenbaum ("Kestenbaum"), Richard M. Glazer ("Glazer") and Glazer Lustig & Glazer (the "Glazer Firm"; all collectively the "Movants") have moved under Rules 8, 9(b), 12(b)(6) and 56 of the Federal Rules of Civil Procedure to dismiss the counterclaims and third-party claims of Cinmar, Inc. ("Cinmar"), Steven Chiappa, Ximena Chiappa, John Hogan, Margaret Hogan, Peter M. Gandolfo, Garden State Bake Shops, Inc. ("Garden State"), Roy Knofla and Nancy J. Knofla (collectively "Franchisees"). The motions are granted in part and denied in part as set forth below.

Prior Proceedings

On November 6, 1989, Licensing and Realty brought an action in the United States District Court for the District of New Jersey seeking, among other things, monetary damages for Cinmar's failures to meet certain of its obligations under a franchise agreement and a related sublease Cinmar had signed with Licensing and Realtor, including the failure since January 1989 to pay contractually required licensing fees and billings for certain baked goods delivered to Cinmar.

During the pendency of the New Jersey action, the Franchisees filed an action in this Court against Zaro, mirroring in the complaint the defenses and counterclaims alleged in the New Jersey action. After the denial of certain preliminary relief, the New Jersey action was transferred to this Court. For purposes of these motions, the New York action is deemed to have been consolidated with the transferred New Jersey action.

Cinmar, its officers and directors, Garden State and its officers and directors, and the Knoflas filed their first answer and counterclaims on September 17, 1990. The Zaros moved to dismiss the counterclaims. Instead of opposing the motion, the Franchisees redrafted the answer and counterclaims and filed a First Consolidated Amended and Supplemental Answer, Affirmative Defenses, Counterclaims and Third-Party Complaints ("Counterclaims") on December 21, 1990. These counterclaims are the subject of the instant motions and were heard initially on April 19, 1991. Thereafter a settlement was reached with certain of the parties, and the motions were in effect withdrawn to permit further settlement discussions. On August 6, 1991, the motions were renewed upon the original papers and considered submitted as of that date.

Cinmar is presently in reorganization proceedings pursuant to 11 U.S.C. Chapter 11 in the District of New Jersey, and this action is, accordingly, stated as against Cinmar as a matter of law pursuant to 11 U.S.C. § 362. On March 19, 1991, a settlement with respect to Cinmar was reported to the Bankruptcy Court, and all claims by and against Cinmar, the Chiappas and the Hogans in this action have been withdrawn.

The Facts

Bake Shops, Licensing and Realty are corporations organized under the laws of the State of New York. At times past, Licensing granted franchises to individuals and entities to own and operate retail bakery franchises under the Zaro trademark. Realty has been in the business of leasing properties to Zaro franchisees so that they each may operate, on such premises, a bakery under the Zaro trademark.

In the process of establishing its business, Licensing submitted a proposed franchise offering prospectus to the New York State Department of Law on October 5, 1983.

Following revisions, the prospectus was duly accepted and registered by the Department of Law on October 31, 1983. On July 31, 1984, amendments to the prospectus were mailed to the Department of Law and on August 13, 1984, the Department of Law acknowledged that these amendments had been filed, thus constituting a duly registered First Amended prospectus. On February 21, 1985, Licensing mailed proposed amendments to the previously filed and registered prospectus a second time. By a letter dated March 25, 1985, the Department of Law wrote to Kestenbaum, Licensing's attorney, and noted twenty-one changes that had to be made before the amendments could be incorporated into the filed prospectus. The amendments were resubmitted on June 6, 1985.

By a letter to Kestenbaum dated June 19, 1985, the Department of Law noted four final changes that still had to be made to Licensing's draft amendments before these amendments could be incorporated into the franchise offering prospectus on file. If these changes were not made, the "franchise registration" was to be considered abandoned in two weeks, on or about July 4, 1985. No hearing was ever held, in accordance with 13 N.Y.C.R.R. § 201.1 et seq.

On June 13, 1985, the Knoflas executed a franchisee agreement with Licensing and a related sublease agreement. On June 26, 1985, Cinmar signed a franchise agreement with Licensing and an agreement with Realty to lease space from Realty at which to operate its Zaro's franchise. In April 1986, Gandolfo also executed integrated franchise and lease agreements.

Over the course of the relationship between the parties, disputes developed over the licensing fees, the billings for goods sold and delivered, and other matters, culminating in this action.

The Counterclaims

Fourteen causes of action are set out in the Counterclaims arising out of over 150 paragraphs of alleged "specific events." Each claim for relief incorporates these allegations by reference.

According to the Franchisees (Franchisees' Memo in Opp. 14-15), the Counterclaims allege:

    (a) an intentional scheme to defraud
  Franchisees by the sale of economically
  unfeasible franchises through undercapitalized
  corporate entities, false offering statements and
  false and misleading advertising materials;
    (b) material misrepresentations and
  misrepresentations by omissions in the sale of
  franchises to Franchisees;
    (c) violations of statutory and regulatory
  duties to disclose pending applications to amend
  the franchise offering prospectus, and to escrow
  funds and offer a right of rescission after the
  abandonment of the offering plan;
    (d) breaches of contract by failing to provide
  Franchisees with an economically viable franchise
  system and necessary and adequate training; by
  requiring the purchasing of Zaro's products at
  inflated and commercially unreasonable and
  unconscionable prices, and the purchasing of
  spoiled, adulterated and impure products; by
  failing to deliver Zaro's products on an orderly
  and timely basis; by discriminating in favor of
  other franchisees; and, in general, by failing to
  deal with the Franchisees in good faith;
    (e) violation of statutory duties and standards
  of fair dealing imposed under the New York
  General Business Law, the New Jersey Consumer
  Fraud and Franchise Practices Acts, and the
  Connecticut Unfair Trade Practices and Franchise
  Acts; and

(f) RICO violations.

The Franchisees also have asserted claims for equitable relief, including the imposition of a constructive trust, disgorgement, reformation of any agreements between the parties and recoupment.



Franchisees allege in their first four counterclaims that the Movants committed multiple violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"). Because the Franchisees have failed to plead the predicate acts upon which these alleged violations are premised with sufficient particularity, the RICO counterclaims are dismissed pursuant to Rule 9(b) of the Federal Rules of Civil Procedure.

To state a cause of action under RICO, the Franchisees must allege

  (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

Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984). It also is well-settled that where the predicate crimes of a RICO claim sound in fraud, as here, the pleading of those predicate acts must satisfy the particularity requirement of Rule 9(b), Fed.R.Civ.P. 9(b). See Morin v. Trupin, 711 F. Supp. 97, 111 (S.D.N.Y. 1989); Gregoris Motors v. Nissan Motor Corp., 630 F. Supp. 902, 912-13 (E.D.N.Y. 1986). In fact, "all of the concerns that dictate that fraud be pleaded with particularity exist with even greater urgency in civil RICO actions." Plount v. American Home Assurance Co., 668 F. Supp. 204, 206 (S.D.N.Y. 1987). Moreover, allegations of mail and wire fraud must specify the use of the mails and wires with particularity. Frota v. Prudential-Bache Securities, Inc., 639 F. Supp. 1186, 1192 (S.D.N.Y. 1986).

Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). Allegations of fraud must therefore specify the fraudulent statement, the time, place, speaker and content of the alleged misrepresentations, Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986); Conan Properties, Inc. v. Mattel, Inc., 619 F. Supp. 1167, 1172 (S.D.N.Y. 1985), and factual circumstances giving rise to a strong inference that the defendant had the requisite fraudulent intent, Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990); Stern v. Leucadia National Corp., 844 F.2d 997, 1004 (2d Cir.), cert. denied, 488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988). Specifically the complaint must allege "(1) specific facts; (2) sources that support the alleged specific facts; and (3) a basis from which an inference of fraud may fairly be drawn." Crystal v. Foy, 562 F. Supp. 422, 425 (S.D.N.Y. 1983).

"Racketeering activity" is defined by 18 U.S.C. ยง 1961(1) as "any act or threat involving . . . extortion . . . which is chargeable under State law and punishable by imprisonment for more than one year; any act which is indictable under any of the following provisions of title 18, United States Code: . . . section 1341 (relating to mail fraud), . . . section 1343 (relating to wire fraud), . . . section 1503 (relating to obstruction of justice), . . . [or] any offense involving fraud connected with a case under title 11. . . ." For their to be a "pattern of racketeering activity," their must be at least two racketeering acts that ...

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