and that once the federal RICO claim is dismissed, all pendent state law claims should be dismissed as well for lack of jurisdiction.
The Chapas' Motion
The bank alleges that the Chapas received embezzled money from Marsh with knowledge of the fraud and therefore the transfers were fraudulent conveyances. The Chapas argue that in raising state law causes of action against them, the bank relies on sections of New York's Debtor-Creditor Law, which are inappropriate since Marsh did not assume a debtor-creditor relationship with the bank. The Chapas further contend that they did not engage in fraudulent transfers with Marsh. According to the Chapas, all of the transfers were made for full consideration, the negotiations with Marsh were at arms length, and they had no knowledge of any fraud or embezzlement. Finally, the Chapas maintain that they are precluded from liability because any losses sustained by plaintiff were the result of the bank's failure to supervise its employees.
A. Standards for Dismissing a Complaint Under the Federal Rules of Civil Procedure
Viva Pancho seeks dismissal of the claims against it in the alternative pursuant to Rules 12(b)(6), 12(c), or 56(c), Fed. R. Civ. P. The Chapas move for dismissal of the amended complaint exclusively under Rule 12(b)(6). A motion for failure to state a claim brought under Rule 12(b) is made only "before pleading if a further pleading is permitted." In contrast, a motion for judgment on the pleadings pursuant to Rule 12(c) is made "after the pleadings are closed." In both contexts, however, if "matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56." Rules 12(b) and (c), Fed. R. Civ. P.
Because the Chapas have submitted the affidavit of Martiniano Chapa in support of their motion, the Court converts their motion to dismiss into a motion for summary judgment.
Conversely, inasmuch as Viva Pancho has presented no affidavits or other matters outside of the pleadings along with its motion, the Court need not convert its motion to dismiss into a summary judgment motion.
Moreover, regardless of whether Viva Pancho's motion was made before or after the pleadings were closed, the standards for determining its outcome are the same.
According to Fed. R. Civ. P. 12(h)(2), the defense of failure to state a claim upon which relief may be granted, typically raised pursuant to Rule 12(b)(6), may be interposed after an answer has been filed by moving for judgment on the pleadings pursuant to Rule 12(c). Although Rule 12(h)(2) requires that in moving to dismiss for failure to state a claim after filing an answer, the movant invoke Rule 12(c) rather than Rule 12(b)(6), the Second Circuit instructs that "the same standards that are employed for dismissing a complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6) are applicable" on a motion to dismiss the complaint for failure to state a claim under Rule 12(c). Ad-hoc Comm. of Baruch Black and Hispanic Alumni Ass'n v. Bernard M. Baruch College, 835 F.2d 980, 982 (2d Cir. 1987); 5A C. Wright & A. Miller, Federal Practice and Procedure § 1367, at 515 (1990). Accordingly, the Court will employ the standards for reviewing a Rule 12(b)(6) motion in determining Viva Pancho's Rule 12(c) motion and the standards for summary judgment under Rule 56(c) in reviewing the Chapas' motion.
1. Motion to Dismiss Under Rule 12(b)(6)
In considering a motion to dismiss for failure to state a claim upon which relief may be granted, a court is limited to the facts stated in the complaint. Kramer v. Time Warner Inc., 937 F.2d 767, 773 (2d Cir. 1991). However, The complaint includes any written instrument attached to it as an exhibit and any statements or documents incorporated into it by reference. Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, 118 L. Ed. 2d 208, 112 S. Ct. 1561 (1992); Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir. 1985).
The court is required to accept the facts alleged in the complaint as true, Easton v. Sundram, 947 F.2d 1011, 1014-15 (2d Cir. 1991), cert. denied, 118 L. Ed. 2d 548, 112 S. Ct. 1943 (1992), read the complaint generously, and draw all reasonable inferences in favor of the plaintiff. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989) (citing Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 562 (2d Cir. 1985)). The complaint may be dismissed only if "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); Branum v. Clark, 927 F.2d 698, 705 (2d Cir. 1991). In short, "the function of a motion to dismiss 'is merely to asses the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Ryder Energy Distribution Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774, 779 (2d Cir. 1984) (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980)).
2. Motion for Summary Judgment Under Rule 56(c)
Summary Judgment may be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Rule 56(c), Fed. R. Civ. P.; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). If no rational fact finder could find in the nonmovant's favor, there is no genuine issue of material fact and summary judgment is appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). The Supreme Court has emphasized that a principal purpose behind the summary judgment rule is the disposal of factually unsupported claims or defenses. Celotex Corp. v. Catrett, 477 U.S. at 323. Accordingly, a party opposing a motion for summary judgment "must do more than simply show there is some metaphysical doubt as to the material facts . . . In the language of [Federal Rule of Civil Procedure 56], the non-moving party must come forward with 'specific facts showing there is a genuine issue for trial.'" Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986) (emphasis in original).
In ruling on the motion, however, the court must resolve all ambiguities and draw all reasonable inferences from the underlying facts in favor of the nonmoving party. Binder v. Long Island Lighting Co, 933 F.2d 187, 191 (2d Cir. 1991). The movant has a heavy burden of showing that facts which would warrant summary judgment are undisputed because "credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions not those of the judge." Anderson v. Liberty Lobby, Inc., 477 U.S. at 255. In making a summary judgment determination, then, the court does not resolve disputed issues of fact, but assesses whether material factual issues remain for the trier of fact. Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990).
B. Viva Pancho's Motion
1. Rule 9(b) - Pleading Fraud with Particularity
In assessing the legal feasibility of plaintiff's amended complaint with respect to defendant Viva Pancho, the Court must first determine whether the bank's fraud allegations have been pleaded with sufficient specificity. When alleging fraud, "the circumstances constituting fraud . . . shall be stated with particularity," but "malice, intent, knowledge, and other condition of mind of a person may be averred generally." Rule 9(b), Fed. R. Civ. P.
Rule 9(b)'s specificity requirement serves three purposes: (1) it provides a defendant with adequate notice of a plaintiff's claim in order to prepare a defense; (2) it protects defendant's reputation or goodwill from damage due to baseless allegations of fraud; (3) and it reduces the number of strike suits. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d. Cir. 1987).
In order to satisfy Rule 9(b), "a complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." Cosmas v. Hassett, 886 F.2d at 11. Where there are multiple defendants, the complaint must disclose the specific nature of each defendant's participation in the alleged fraud. DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d at 1247 ("Fraud allegations ought to specify the time, place, speaker and content of the alleged misrepresentations.").
While Rule 9(b) allows "condition of mind" to be averred generally, plaintiff must at least present those circumstances that provide a minimal factual basis for allegations of scienter. Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987). In other words, plaintiff must "'specifically plead those events' which 'give rise to a strong inference' that defendants had an intent to defraud, knowledge of the falsity, or a reckless disregard for the truth." Id. (citing Ross v. A.H. Robins, 607 F.2d 545, 558 (2d Cir 1979), cert. denied, 446 U.S. 946, 64 L. Ed. 2d 802, 100 S. Ct. 2175 (1980)); Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990) ("Although scienter need not be alleged with great specificity, plaintiffs are still required to plead the factual basis which gives rise to a 'strong inference' of fraudulent intent").
Viva Pancho's contention that plaintiff distinguishes the specific defendants only in the caption and initial paragraphs of the amended complaint and that it fails to differentiate the acts of fraud committed by Viva Pancho as opposed to Marsh is inaccurate. The amended complaint details how Marsh orchestrated the scheme by tampering with the bank's books and by issuing checks to his own account and to others accounts including Viva Pancho. Viva Pancho's participation is delineated in Exhibit A. Exhibit A is captioned "List of Defalcation Checks in Chronological Order." It is a chart consisting of the following nine columns: (1) Item Number; (2) Check Number; (3) Date; (4) Payee; (5) Amount; (6) Annual Total; (7) Cumulative Total; (8) Date of Deposit; and (9) Date of Statement Deposit Appeared. Penned in along the left side are asterisks indicating which defalcation checks can be attributed to Viva Pancho as material misrepresentations.
Furthermore, in Count II, entitled "Fraud as to Defendants Marsh and Viva Pancho," the amended complaint neatly separates Marsh's material misrepresentations from those of Viva Pancho. With respect to Marsh, the amended complaint identifies two forms of material misrepresentations. First, he issued checks with the knowledge that none of the recipients were entitled to them. Second, he concealed the embezzlement scheme by listing false journal entries in the bank's books. Amended Complaint PP 33-34. As to Viva Pancho's acts of fraud, the amended complaint states:
Viva Pancho consistently and intentionally made material misrepresentations to Amalgamated Bank by receiving, accepting and depositing the proceeds of numerous defalcation checks illustrated at Exhibit A hereto with knowledge that the checks were wrongfully procured, and intentionally concealed material information that these checks were wrongfully procured.
Id. P 35. Because Marsh's misrepresentations are distinctly separated from those of Viva Pancho's, the amended complaint sufficiently distinguishes Viva Pancho's participation in the alleged fraud.
Similarly, Viva Pancho is incorrect in claiming that plaintiff presents no facts as to how, when, and to what extent any particular defendant joined the alleged conspiracy. A RICO claim is deficient if "it fails to allege any facts demonstrating a knowing agreement involving each of the defendants to commit at least two predicate acts." Metro Furniture Rental, Inc. v. Alessi, 770 F. Supp. 198, 201 (S.D.N.Y. 1991). "The complaint must allege some factual basis for a finding of a conscious agreement among the defendants." Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 26 n. 4 (2d Cir. 1990). In short, a RICO claim, based on the predicate acts of mail fraud and wire fraud, must comply with Rule 9(b)'s pleading requirements. Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 49-50 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 98 L. Ed. 2d 650, 108 S. Ct. 698 (1988); Center Cadillac, Inc. v. Bank Leumi Trust Co., 808 F. Supp. 213, 228 (S.D.N.Y. 1992).
As stated above, to comply with Rule 9(b), a plaintiff must generally state the time, place, content, and speaker of the alleged misrepresentation. With respect to the predicate act of mail fraud, however, "the complaint need not specify the time, place and content of each mail communication where the nature and the mechanics of the underlying scheme is sufficiently detailed, and it is enough to plead the general content of the misrepresentation without stating the exact words used." Center Cadillac, Inc. v. Bank Leumi Trust Co., 808 F. Supp. at 229. In asserting a violation of the federal mail fraud statute, plaintiff needs to show the existence of a scheme to defraud and a knowing use of the mails to execute the scheme. 18 U.S.C. § 1341. Moreover, proving mail fraud requires a showing of an intent to defraud, or reckless conduct rising to the level of intentional behavior. O'Malley v. New York City Transit Authority, 896 F.2d 704, 706-07 (2d Cir. 1990); United States v. Rodolitz, 786 F.2d 77, 80 (2d Cir.), cert. denied, 479 U.S. 826, 93 L. Ed. 2d 52, 107 S. Ct. 102 (1986). Therefore, when alleging mail fraud as a predicate act, Rule 9(b) requires the amended complaint to specify: (1) precisely what statements were made in what documents or oral representations; (2) the time and place of each such statement and the person responsible for making the same; (3) the content of the statements and the manner in which they misled the plaintiff; and (4) what the defendants obtained as a consequence of the fraud. Equitable Life Assur. Soc. v. Alexander Grant & Co., 627 F. Supp. 1023, 1029 (S.D.N.Y. 1985). These same requirements apply to wire fraud. United States v. Ventura, 724 F.2d 305, 310 (2d Cir. 1983) (18 U.S.C. § 1343 parallels 18 U.S.C. § 1341).
The amended complaint clearly describes how, when and to what extent the scheme involved conscious participation on the part of all of the defendants including Viva Pancho. It asserts that Marsh began the scheme in 1981, that the scheme lasted for approximately eight years, and that, as a result of the scheme, funds were diverted from the bank to Marsh's own accounts, Viva Pancho's account and the accounts of other defendants. Amended Complaint P 17. In orchestrating the scheme, Marsh "had official checks of Amalgamated bank issued, made payable to his bank accounts at other banks and to the bank accounts of others, including Viva Pancho . . . . A list of these checks is attached as Exhibit A." Id. P 18. The amended complaint then details how Marsh credited these checks on the bank's official ledger:
Marsh would cause the corresponding debit to be made to a Clearance Loan department customer's demand deposit account, to a customer's loan account or to the Bank's internal account for its deposits at Chemical Bank. Marsh would subsequently correct these improper debit entries with corresponding credits, only to make more improper debit entries in these same or other accounts. Marsh would thereafter move these improper debits from account to account. A list of the false transactions that Marsh caused to be made from 1984 through 1989 is attached hereto as Exhibit B and is incorporated by reference herein.
Id. P 19. As a result of Marsh's transactions, the amended complaint alleges that the bank incurred losses of $ 8,963,967.57. In identifying how the other defendants participated in the scheme, the amended complaint explains: "None of the persons or entities receiving these official checks . . . was or is a customer of the Commercial Loan and Mortgage Department or the Clearance Loan Department. There was no legitimate reason for any of these persons or entities to be receiving funds from the Commercial Loan and Mortgage Department or the Clearance Loan Department." Id. P 18 (emphasis added). By accepting and depositing the bank's official checks, Viva Pancho made material representations to the bank that it was entitled to the checks.
The factual basis demonstrating Viva Pancho's conscious participation in the scheme is furnished by Exhibit A. It lists at least 67 separate checks that were allegedly obtained by Viva Pancho through acts of fraud from July 1, 1986 through October 30, 1989. For example, the first of the defalcation checks on Exhibit A attributed to Viva Pancho is item number 170. It corresponds to check number 0283576, its date of issuance and date of deposit were July 1, 1986, the payee was Chemical Bank account number 012-052981, and the amount was $ 9000.
Through Exhibit A, in fact, the amended complaint specifies the time, place and content of the false representations as well as by whom or to whom such representations were made. Whether "time" of the misrepresentation is determined by date of issuance or by date of deposit, both are provided for in Exhibit A. The "place" of the misrepresentation refers to the banks at which Viva Pancho had its accounts. Viva Pancho's accounts at-Chemical Bank and Manufacturers Hanover Trust are represented in the payee column of Exhibit A by the abbreviations CHEM and MHT respectively. The "content" of Viva Pancho's misrepresentations was the acceptance and deposit and the retention of the proceeds of the official checks. Inasmuch as Exhibit A includes a date of deposit column, it is clear that Viva Pancho accepted, deposited and retained the proceeds. In addition, the amended complaint alleges that Viva Pancho knew it was not entitled to the proceeds and it thus concealed material information that the checks were wrongfully procured. By concealing its wrongful procurement of the checks, Viva Pancho can be considered the "speaker" of the material misrepresentations. Together with the factual information provided in Exhibit A, the amended complaint's allegation that "Viva Pancho consistently and intentionally made material misrepresentations to Amalgamated bank by receiving, accepting and depositing the proceeds of numerous defalcation checks" is plead with sufficient particularity. Therefore, Viva Pancho's motion to dismiss the amended complaint cannot be granted based on the special pleading requirements for fraud under Rule 9(b), Fed. R. Civ. P.
2. Statutory Requirements of RICO Under 18 U.S.C. § 1962(c)
However, Viva Pancho's motion to dismiss will be granted based on the bank's failure to comply with the statutory requirements of 18 U.S.C. 1962(c). To state a claim for civil damages under RICO, a plaintiff must allege that a defendant violated the substantive RICO statute, 18 U.S.C. § 1962, and that this violation caused injury to the plaintiff in his business or property. Town of West Hartford v. Operation Rescue, 915 F.2d 92, 100 (2d Cir. 1990) (citing 18 U.S.C. § 1964(c)).
When bringing a civil RICO claim pursuant to § 1962(c), a plaintiff must specifically prove
(1) the existence of an enterprise which affects interstate or foreign commerce;