The opinion of the court was delivered by: LOUIS L. STANTON
All defendants move to dismiss the complaint. Defendant First Constitution Bank also moves, as an alternative, for summary judgment.
Defendant Mark David Associates ("M.D.A.") is a general partnership. Its general partners are defendants William D. Weinstein ("Weinstein") and Richard Schlesinger ("Schlesinger") (Id. P12). (M.D.A., Weinstein, and Schlesinger are collectively "the principals"). Defendants Balbec Corp., Balbec Contracting Corp., Balbec Roofing Corp., Balbec Painting Corp., Balbec Plumbing Corp., Down to Earth Balbec Corp., Schlesinger Management Corp., Quest-Co Ltd. a/k/a Questco Ltd., M.D. Leasing Corp., Gilbert Schlesinger Management Co., Leslie Schlesinger, Acquest, Joan Robey, and Buchanan Associates (collectively "the affiliates") are allegedly all affiliated with, related to, or controlled by one or more of the principals (PP13, 15-16, 28, 63). Defendant Robert Schwartz is the chief financial employee or an officer of M.D.A. and some of the affiliates (P18). Defendant Martin Cohen was the sales director of Quest-Co (P29).
Valeria Associates and the Valeria Property
Dana was a contract vendee of real estate in Cortlandt, New York (the "Valeria Property") (P40). On or about December 11, 1987 Attick and M.D.A. entered into a limited partnership agreement (the "Valeria Agreement"), which formed defendant limited partnership Valeria Associates, L.P. ("Valeria"), to acquire, market, and develop the Valeria Property (PP43-43). M.D.A., the general partner, owned a 47.5% interest in Valeria. Attick, a limited partner, owned a 40% interest. Two limited partners who are not parties to this action each owned a 6.25% interest (P44).
General partner M.D.A. had full responsibility for developing the Valeria Property, subject to certain contractual restrictions on how it was to discharge its duties (PP45-62). M.D.A. allegedly conspired with the affiliates to divert money from Valeria by having the affiliates submit false and fraudulent invoices to Valeria and causing Valeria to pay them. The conspirators then concealed their acts and Valeria's financial picture from Attick (PP72-103, 110).
On April 22, 1988 defendant Marine Midland Bank ("Marine") entered into a $ 27,500,000 construction loan and mortgage agreement with Valeria (P70-71; Complaint Exh. B). Under the agreement, Marine would lend money to Valeria upon presentation of documents verifying expenditures on the Valeria Property. However, Marine allegedly knowingly made disbursements upon presentation of false, fraudulent, and duplicative expenditure documents (P99-103).
Valeria had a checking account with defendant Chemical Bank ("Chemical"). Only Schlesinger was permitted to sign checks on Valeria's behalf. Chemical allegedly paid checks signed by Schwartz, Weinstein, and Cohen (P111).
Claim I alleges that Valeria, the principals, the affiliates, Schwartz, Cohen, Marine, and Chemical violated the Racketeering and Corrupt Organizations Act ("RICO"), 18 U.S.C. 1962 (b) and (c). Claim II alleges that these defendants violated 18 U.S.C. § 1962(d) by conspiring to violate RICO.
Dana Mark David and the Candlewood and Marina Properties
On May 1, 1987 Dana owned real estate in Danbury, Connecticut (the "Candlewood Property") and had a contract to purchase contiguous real estate (the "Marina Property") (Complaint P127). Dana and M.D.A. executed joint venture and limited partnership agreements (the "D.M.D. LP agreements") and formed defendant Dana Mark David ("D.M.D. LP"), a Connecticut limited partnership, to acquire the Marina Property, and to develop and sell luxury condominium dwelling units (PP129-130). Schlesinger and Weinstein were D.M.D. LP's general partners, and Dana was its limited partner.
The D.M.D. LP agreement provided that within four months Dana would obtain written commitments for the release of four encumbrances on the Marina Property ("the commitments"). Within 120 days after Dana delivered these commitments to the principals, M.D.A. was to obtain refinancing commitments for at least $ 8,000,000 (PP131-32; Exh. C). If M.D.A. did not obtain a refinancing commitment within 120 days, the joint venture and limited partnership would terminate, and the Candlewood and Marina properties would be transferred to Dana (P133; Exh. C).
A rider to the D.M.D. LP agreement provided that if Dana did not obtain the commitments within four months, Dana could either (a) withdraw from D.M.D. LP, and M.D.A would succeed to its interest or (b) pay to M.D.A. $ 2,500,000, plus interest from May 1, 1987, plus reasonable costs expended by M.D.A. in its acquisition of the Marina Property. Dana's failure to exercise either option within two days would "constitute an automatic grant to [M.D.A.] of an irrevocable power of attorney, coupled with an interest, to execute whatever documents are necessary to . . . transfer the interest of Dana in the Limited Partnership to [M.D.A.]" (Id. Exh. C - Rider P5).
On July 22, 1987 Attick allegedly provided the commitments, by letter mailed to Weinstein (P139). The principals allegedly ignored the letter and their duty to obtain refinancing (P140). On July 8, 1988 Dana informed the principals in writing that the joint venture and limited partnership were terminated because of their failure to obtain refinancing (P141).
On August 13, 1988 and on August 30, 1988, the principals allegedly fraudulently conveyed the Marina Property from D.M.D. LP to M.D.A. in two quitclaim deeds, for no consideration ( Id. PP143-46; Exh. E and F).
On August 31, 1988 Schlesinger, on behalf of M.D.A., obtained from defendant First Constitution Bank ("FC Bank") a commercial construction loan of $ 4,600,000, secured by a mortgage on the Marina Property (P148). Schlesinger and Weinstein allegedly falsely and fraudulently represented to FC Bank that M.D.A. had lawful title to the Marina Property (P152). M.D.A. and affiliates Balbec Corp. and Quest-Co. Ltd. then submitted false and fraudulent requisitions for disbursements on the loan (PP155-56).
FC Bank allegedly had a duty to investigate M.D.A.'s title to the Marina Property before issuing the mortgage loan (P159). FC Bank issued the loan although it allegedly knew, or should have known, that M.D.A. had invalid title (PP161-62). M.D.A. defaulted on the loan, and FC Bank has instituted foreclosure proceedings (PP163-64).
Claim III alleges that the principals, FC Bank, Balbec Corp., and Quest-Co. Ltd. violated RICO, 18 U.S.C § 1962(b) and (c). Claim IV alleges that the defendants violated 18 U.S.C. § 1962(d) by conspiring to violate RICO. In claims V through XVI, plaintiffs assert state law claims, pendent to claims I, II, III and IV, against all defendants.
I. MOTION TO DISMISS AND THE PLEADING REQUIREMENTS
In passing on a motion to dismiss, the allegations in the complaint are liberally construed and considered in the light most favorable to the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
"In 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). Where scienter is alleged generally, plaintiff must plead particular facts which allow a strong inference of scienter. Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990); Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 98 L. Ed. 2d 650, 108 S. Ct. 698 (1988). "Plaintiffs can be required to supply a factual basis for their conclusory allegations regarding [defendants'] knowledge. It is reasonable to require that the plaintiffs specifically plead those events which they assert give rise to a strong inference that defendants had knowledge of the facts . . . ." Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979), cert. denied, 446 U.S. 946, 64 L. Ed. 2d 802, 100 S. Ct. 2175 (1980).
Despite the generally rigid requirement that fraud be pleaded with particularity, allegations may be based on information and belief when facts are peculiarly within the opposing party's knowledge. This exception to the general rule must not be mistaken for license to base claims of fraud on speculation and conclusory allegations. Where pleading is permitted on information and belief, a complaint must adduce specific facts supporting a strong inference of fraud or it will not satisfy even a relaxed pleading standard.
Wexner, 902 F.2d at 172 (citations omitted).
Defendants argue that plaintiffs Attick and Dana do not have standing to assert the RICO claims (claims I through IV) because only the limited partnerships, Valeria Associates and D.M.D. LP, were directly injured, and plaintiffs, as limited partners, were injured only derivatively.
In Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 849 (2d Cir.), cert. denied, 479 U.S. 987, 93 L. Ed. 2d 582, 107 S. Ct. 579 (1986), the Second Circuit held that a shareholder does not have standing to assert a RICO claim where the corporation is directly injured, and the shareholder suffers only from the decrease in the value of his investment. "Plaintiffs lack standing to sue under RICO . . . . The legal injury, if any, was to the firm. Any decrease in value of plaintiffs' shares merely reflects the decrease in value of the firm as a result of the alleged illegal conduct." See also Carter v. Berger, 777 F.2d 1173, ...