The opinion of the court was delivered by: CONSTANCE BAKER MOTLEY
OPINION ON MOTION TO DISMISS
This action was commenced in United States District Court for the District of New Jersey. The complaint alleges violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, and pendant state law claims for fraud and breach of contract. Defendants moved to dismiss the complaint for failure to state a claim or, in the alternative, to transfer venue pursuant to 28 U.S.C. § 1404(a). Judge Nicholas H. Politan, United States District Judge, District of New Jersey, transferred the case to the Southern District of New York by order dated October 28, 1991. Defendants' motion to dismiss is now before the Court.
In reviewing a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court may not dismiss the complaint unless it appears beyond a doubt that Plaintiffs can prove no set of facts upon which relief may be granted. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). For purposes of this motion, the court accepts the facts alleged in the complaint as true.
During the times relevant to the complaint, Plaintiffs Irwin Steinhauser, Michael Steinhauser, Marvin Steinhauser and James Sandler (collectively, the "Officers") were officers of Center Cadillac and Center Leasing, two corporations authorized to do business in the state of New York. Plaintiffs in this action, Center Cadillac, Center Leasing, the Officers,
and the Officers' spouses, brought suit against Defendants Bank Leumi Trust Company of New York ("Bank Leumi") and certain officers of Bank Leumi. Defendant Martin Simon was the Chief lending officer of Bank Leumi from 1979 to 1986. Defendants Eliot Robinson and Leonard Levine were senior lending officers at Bank Leumi until 1986, and Defendant Eftihia Piper was an officer of Bank Leumi until 1986. Simon left Bank Leumi in 1986 to create the First New York Bank for Business ("First New York Bank"), which is not a named Defendant. At approximately the same time, Robinson, Levine and Piper also left Bank Leumi and joined First New York Bank. Defendants Vincent Garvey and Rachel Bergsohn were officers at Bank Leumi at all relevant times. The thrust of the complaint is that Defendants, acting as Plaintiffs' bankers, engaged in a series of illegal and fraudulent actions which deprived them of their money and property and ultimately resulted in their financial ruin.
Plaintiffs' tortured relationship with Defendants spans a period of nearly fifteen years and involves a complicated series of transactions. In 1975, Plaintiffs entered into an agreement with American Bank & Trust Company to obtain a $ 475,000 mortgage loan to purchase a cadillac dealership. The terms of the loan included specified monthly payments, two large lump-sum payments, and a rate of interest at 1.5% above the prime rate. Plaintiffs made regular payments in accordance with the agreement. In 1977, Bank Leumi acquired American Bank and became Plaintiffs' obligee and mortgagee. At that time, a lump sum payment of $ 125,000, in addition to regular monthly payments, remained due. From 1977 to August of 1979, Bank Leumi made further loans to Center Cadillac and the Officers totaling approximately $ 750,000 to finance the operations of Center Cadillac, in addition to other unsecured loans to finance Plaintiffs' other business holdings. All of the loans were made pursuant to oral agreements whereby all additional loans would be repaid at the same interest rate that the Officers had agreed to pay American Bank, 1.5% above the prime rate.
In July of 1979, the Officers requested an additional loan of $ 360,000 for increased business costs. At the request of Robinson, Garvey, Levine and Simon, the Officers prepared and sent to Levine a letter delineating the nature and purposes of the requested funds. On August 1, 1979, Simon, Robinson, Garvey, and Levine told Plaintiffs that in order to receive the requested funds, they must appear at the offices of Bank Leumi's counsel, Parker Chapin Flattau & Klimpl ("Parker Chapin"), to execute the necessary documents. Plaintiffs appeared at Parker Chapin as requested, expecting to receive the requested $ 360,000 loan at the same interest rate as the prior loans based on the representations made by Defendants' in July, 1979. Garvey and Levine were present at the Parker Chapin meeting. Much to their surprise, Plaintiffs were told that in order to receive the $ 360,000, each Plaintiff must execute: (1) certain documents reflecting an agreement for Bank Leumi to tender $ 1.1 million to Plaintiffs, with no specified repayment or interest terms; (2) certain documents referring to nonexistent agreements for material terms, including repayment and interest provisions; (3) signature pages, unattached to any document, but which affirmed the signor's consent to the terms of the "attached" document; and (4) numerous guarantees making each Plaintiff personally liable for all obligations incurred in the above documents (collectively, the "Documents").
Plaintiffs refused to sign the Documents and demanded the opportunity to have an attorney present. Garvey and Levine refused, ignoring their counsel's advice to let Plaintiffs consult an attorney. Garvey, in the presence of Levine, told Plaintiffs that the Documents were only a formality and that previous oral agreements would still govern the terms of all of the loans. Plaintiffs continued to refuse to execute the documents. Garvey, after speaking to Simon on the phone, then told Plaintiffs that if they did not sign the Documents, Bank Leumi would immediately close all accounts that financed Plaintiffs' business operations. Plaintiffs, fearing that Defendants would act on their threats and force Plaintiffs out of business, signed the documents. Garvey and Levine again reassured Plaintiffs that their previous oral agreements would control.
Immediately after the meeting at Parker Chapin, Garvey suggested to the Officers that they go to a nearby penthouse suite to meet with a Mr. Zohar who might help them reduce their indebtedness to Bank Leumi. The Officers went with Garvey to meet Zohar, who offered $ 500,000 for one of Plaintiffs' shopping centers which was then valued at $ 2 million. Plaintiffs refused Zohar's offer. Zohar then offered Plaintiffs a long term usurious loan. The Officers rejected the offer and left the meeting.
Over the next several months, the Officers received by mail various of the Documents with material terms filled in where they had previously been blank, and other documents, not seen before by Plaintiffs, to which Plaintiffs' signatures had been affixed. These documents obligated Plaintiffs to make exorbitant monthly and lump sum payments. Defendants warned Plaintiffs that failure to make the required payments would result in foreclosure on all of Plaintiffs' real estate holdings and refusal to honor any check drawn on any Bank Leumi account. Over the next several years, Plaintiffs were forced to sell many of their assets at below market value, including two shopping centers, two personal homes, and the businesses of Center Leasing and Center Cadillac in order to comply with Defendants' demands.
On three known occasions during 1979 and 1980, Defendants debited a total amount of over $ 29,000 from Center Cadillac's account. Defendants did not obtain Plaintiffs' consent for these debits and did not send written statements documenting the debits. The two largest debits were ostensibly for legal services rendered by Parker Chapin on behalf of Defendants, and Defendants refused to give any explanation for the third amount debited. Plaintiffs believe that unauthorized debits may have been made on other occasions as well, but are unable to determine the existence of such debits due to Defendants' refusal to provide Plaintiffs with regular written statements.
Plaintiffs claim that Defendants used their financial leverage to extort money and property from them on a number of occasions. In 1980, Simon used his influence over Plaintiffs' loan accounts to force Center Cadillac to sell him a car for $ 2,000 below cost, and without payment for taxes and fees. Also in 1980, James Sandler learned through a friend, who had noticed an advertisement for a yacht for sale, that Defendants had advertised, negotiated, and effected the sale of a yacht owned by Center Cadillac. When the Officers protested, they were forced, under threat of foreclosure, to execute all documents necessary to effectuate the sale. In November of 1980, Plaintiffs liquidated Center Cadillac and sold the company's assets in order to comply with the terms set forth in the Documents.
After Center Cadillac was liquidated, Center Leasing assumed all remaining obligations to Bank Leumi and continued to make regular payments on the loans. In 1982, Plaintiffs were forced to sell Center Leasing and liquidate its assets in order to meet their repayment obligations under the Documents. Simon then demanded that the entire outstanding debt be repaid immediately, and began foreclosure proceedings on the Sandler's personal residence, Plaintiffs' one remaining asset. At Plaintiffs' requests, Simon agreed to accept monthly payments of $ 3,300 in lieu of foreclosure until the balance of the debt was paid.
During the period of their indebtedness to Bank Leumi, the Officers repeatedly requested written statements documenting how their payments were applied to their debt, the rate of interest charged, and the outstanding balance. Defendants repeatedly refused by telephone to provide such statements. Plaintiffs received statements from Bank Leumi on only four occasions, despite Plaintiffs' continual requests for regular statements. In 1981, Plaintiffs received three computer monthly loan statements for the months of January, May and August. In September of 1983, Plaintiffs received a computer monthly loan statement for the month of September, which Plaintiffs believe to have been sent inadvertently. In July of 1985, James Sandler, believing that the entire indebtedness had been repaid or nearly repaid, demanded a written statement from Bank Leumi. Bergsohn refused the request, and instead gave Sandler a credit administration manual which stated the "designated rate" of interest, and told him to compute the principal-interest allocations himself for the entire period of debt in order to determine the principal outstanding. Sandler made the calculations and showed them to Bergsohn, who said that the figure for the remaining debt was too low. Sandler then received by mail a handwritten statement prepared by Bergsohn which contained a history of Plaintiffs' payments and the interest-principal allocations for Plaintiffs' five year indebtedness to Bank Leumi This document reflected a rate of interest significantly higher than the rate Defendants had agreed to charge. In December of 1989, Michael Steinhauser telephoned Bergsohn and demanded a written statement of indebtedness to comply with requests from the Internal Revenue Service. Bergsohn initially refused, and acceded to the request only when Steinhauser told her that the IRS would question Bank Leumi directly if the statements were not provided. Bergsohn then sent Steinhauser a handwritten statement listing all payments and principal-interest allocations for the ten year period of Plaintiffs' indebtedness to the Bank.
Plaintiffs identify a number of inconsistencies in the statements received. First, the January 1981 statement indicated a payment that reduced interest by nearly $ 10,000, whereas the handwritten statements reflected no such payment whatsoever. Second, the September 1983 statement reflected a significantly lower outstanding balance than indicated by the handwritten statements for that period, and the September statement indicated that a particular payment had reduced principal, whereas the handwritten statements indicated that the same payment had reduced interest. Third, the 1985 handwritten statement did not specify how the interest rate was computed, whereas the portion of the 1989 handwritten statement that covered the pre-July 1985 period of indebtedness--a mere photocopy of the 1985 handwritten statement--now showed a rate of interest at "P plus 2" for the pre-July 1985 period.
Plaintiffs allege that Defendants misrepresented the meaning of the term "Prime Rate" and induced Plaintiffs to accept loans from Bank Leumi by misrepresenting the rate of interest actually charged. Plaintiffs also allege that Defendants made material misrepresentations as to interest rates to a "presently-undetermined number of other borrowers," although Plaintiffs do not state any factual basis for this allegation.
After Plaintiffs received the 1989 handwritten statements, Plaintiffs determined that they had finally amassed enough capital to pay the funds alleged to be owing and alleviate the threat of foreclosure. Consequently, James Sandler, Michael Steinhauser and Irwin Steinhauser met with Garvey in March of 1990 and informed Garvey that Plaintiffs would no longer continue making payments to Bank Leumi. Garvey acknowledged the protracted history of Plaintiffs' indebtedness and instructed Plaintiffs to cease making payments. Plaintiffs have made no payments to Bank Leumi since March of 1990. Plaintiffs have since received only one letter demanding payment sent by mail from Bergsohn to James and Rosalyn Sandler, notwithstanding the purported balance of $ 125,000 that remains due as of March, 1990.
Before turning to the merits of Defendants' motion to dismiss, the Court must first determine what effect the transfer of venue has on the federal law governing Plaintiffs' RICO claims. The parties relied primarily on Third Circuit law in briefing the motion to dismiss while the case was pending in District Court in New Jersey. After the case was transferred to this Court, Defendants submitted a letter arguing that Second Circuit law is now dispositive and requesting leave to file a brief memorandum of law summarizing the relevant Second Circuit RICO precedents. By order dated December 20, 1991, the Court reserved decision on the disputed question of which circuit's law applies and directed the parties to submit legal memoranda briefing the choice of law issue and the pertinent Second Circuit decisions that would affect Plaintiff's RICO claims.
The decisions of the Second Circuit do not unambiguously answer the question of which circuit's interpretation of federal law is binding. H.L. Green Co. v. MacMahon, 312 F.2d 650, 652 (2d Cir. 1962), cert. denied, 372 U.S. 928, 83 S. Ct. 876, 9 L. Ed. 2d 736 (1963), held that a plaintiff may not avoid transfer under 28 U.S.C. § 1404(a) on the grounds that the transferee court will apply a less favorable interpretation of federal law. The court stated:
"if there is a conflict of views among circuits, 'this presents a matter for consideration by the Supreme Court on application for certiori, not for consideration by a district judge on application for transfer . . . We have no sympathy with shopping around for forums.'" Id. (quoting Clayton v. Warlick, 232 F.2d 699, 706 (4th Cir. 1956)).
The court rejected the argument that a plaintiff's initial right to choose a forum includes the right to choose a particular interpretation of federal law. However, the court accepted the view that a plaintiff may choose which state's law governs a state law claim by choosing the initial forum. The court held that when a case is transferred under § 1404(a) the transferee court must apply the state law that the transferor court would have applied. The court justified this distinction between state and federal law based on the nature of our federal system. The court reasoned that a certain amount of forum shopping for state law is inevitable because federal courts adjudicating state law claims apply the laws of fifty separate jurisdictions, while forum shopping for federal law is improper because "the federal courts comprise a single system applying a single body of law, and no litigant has a right to have the interpretation of one federal court rather than that of another determine his case." Id.
The ambiguity surrounding the issue of which federal court's interpretation of federal law applies after transfer arises from a later Second Circuit case, Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402 (2d Cir. 1975). Berry involved an action for violation of federal securities law that had been transferred from the Northern District of Texas to the Southern District of New York. The court dismissed the action as time barred, applying the Texas limitations period that would apply to the Texas cause of action that the court found to be most analogous to the federal action. On appeal, the Second Circuit had to decide which Texas action most closely resembled the federal action for purposes of selecting the appropriate limitations period. In comparing the relevant Texas actions with the Fifth Circuit's interpretations of SEC Rule 10b-5, the court mentioned in a footnote that, "since this case was brought in a district court in the Fifth Circuit, the substantive law of that circuit is the law we must consider here." Id. at 408 n.7. No substantive analysis followed or preceded this conclusion, and the court did not acknowledge its contrary analysis in H.L. Green or Ackert. Instead, the court merely cited the case of In re Plumbing Fixtures Litigation, 342 F. Supp. 756 (Jud. Pan. Mult. Lit. 1972), which relied on Van Dusen v. Barrack, 376 U.S. 612, 84 S. Ct. 805, 11 L. Ed. 2d 945 (1964), to support its statement that Fifth Circuit law applied.
Berry Petroleum's reliance on In re Plumbing Fixtures and Van Dusen is not persuasive. In re Plumbing Fixtures stated that a transferee court applies the substantive law of the transferor forum to decide a disputed issue of federal law. The opinion did not contain any analysis justifying this result, but simply cited Van Dusen. However, Van Dusen held only that a transferee court must apply the substantive state law of the transferor court after a case is transferred under 28 U.S.C. § 1404(a). The Court did not discuss the effect of transfer on the application of federal law. Moreover, the principles underlying the Van Dusen holding -- to uphold the policies of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938), and to preserve the plaintiff's venue privilege to shop for favorable state law -- are inapplicable in the federal law context. See Marcus, "Conflicts Among Circuits and Transfers Within the Federal Judicial System," 93 Yale L. J. 677 (1984). The Third Circuit has criticized the assumption by the courts in Berry Petroleum and In re Plumbing Fixtures that Van Dusen applies to federal law questions, stating "it is difficult to understand why this should be so since Van Dusen v. Barrack involved conflicting state wrongful death policies, while in theory, at least, federal law, in its area of competence, is assumed to be nationally uniform, whether or not it is in fact." In re Pittsburgh & L.E.R. Co. Secur. & Antitrust Litigation, 543 F.2d 1058, 1065 n.19 (3d Cir. 1976); see also In re Korean Air Lines Disaster, 265 U.S. App. D.C. 39, 829 F.2d 1171, 1177 n.2 (D.C. Cir. 1987) (Ginsburg, J., concurring) (criticizing Berry Petroleum and other cases applying Van Dusen to questions of federal law). Judge Friendly has also interpreted Van Dusen as limited to state law. See Friendly, "The 'Law of the Circuit' and All That," 46 St. John's L. Rev. 406, 412 (1972).
The Court finds more persuasive those cases which analyze the differences between questions of state and federal law for the purpose of determining the effect of transfer under § 1404(a). The most thorough analysis of a transferee court's choice of federal law is found in In re Korean Air Lines Disaster, 265 U.S. App. D.C. 39, 829 F.2d 1171, 1175-76 (D.C. Cir. 1987). The Judicial Panel on Multi-district Litigation had transferred these cases to the District Court for the District of Columbia for consolidated pretrial proceedings under 28 U.S.C. § 1407. The District Court applied its own interpretation of federal law to the cases, including those cases transferred from district courts in the Second Circuit which follow a contrary interpretation. The D.C. circuit held that the district court properly adhered to its own interpretation, since the law of the transferor forum on federal question is not binding on a transferee forum in another circuit. The court held that Van Dusen did not apply to questions of federal law because it relied on Erie policies that are not relevant to the federal law calculus. Id. at 1174-75. Moreover, the court explained, applying Van Dusen to federal questions would not produce uniformity of interpretations, but would force a federal court to apply contrary federal precedents to similar cases based on the mere circumstance of where the case was initially filed. Id. at 1175. The court found it logically inconsistent to require a federal Judge to apply conflicting interpretations of a supposedly unitary federal law, and instead concluded that federal courts have an obligation to engage in independent analysis, with binding precedent set only by the Supreme Court and the Court of Appeals for that circuit. Id. at 1176.
Other courts have also refused to blindly extend Van Dusen to federal law questions. In Roth v. Bank of the Commonwealth, [1981-1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P98,267 at P91,707 (W.D.N.Y. August 17, 1981), the court rejected Berry Petroleum's interpretation of Van Dusen and applied the law of the transferee forum to the federal law issues in the case. The court held that "because the court's statement in Berry Petroleum is mere dicta is contrary to H.L. Green Company v. McMahon,. . . and has been criticized by the United States Court of Appeals for the Third Circuit as over-extending Van Dusen v. Barrack,. . . it appears to represent an aberration rather than a true reflection of the Second Circuit's view concerning the applicability of the law of the transferor court." Id. Similarly, in Isaac v. Life Investors Ins. Co., 749 F. Supp. 855 ...