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.
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effect withdrawn to permit further settlement discussions.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.
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.
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.
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
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
commerce.
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 ...