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CENTER CADILLAC, INC. v. BANK LEUMI TRUST CO.

July 28, 1994

CENTER CADILLAC, INC., CENTER CADILLAC LEASING, INC. IRWIN STEINHAUSER, ELAINE STEINHAUSER MICHAEL STEINHAUSER, MARLEEN STEINHAUSER MARILYN STEINHAUSER, JOSH STEINHAUSER as Administrator of the estate of MARVIN STEINHAUSER, JAMES SANDLER, and ROSALYN SANDLER, Plaintiffs,
v.
BANK LEUMI TRUST COMPANY OF NEW YORK, MARTIN A SIMON, ELIOT ROBINSON, LEONARD LEVINE, EFTIHIA PIPER, VINCENT GARVEY and RACHEL BERGSOHN, Defendants.



The opinion of the court was delivered by: CONSTANCE BAKER MOTLEY

 Plaintiffs filed this action in May 1991 against defendant Bank Leumi Trust Company of New York ("Bank Leumi") and defendants Martin A. Simon, Eliot Robinson, Leonard Levine, Eftihia Piper, Vincent Garvey and Rachel Bergsohn alleging violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Section 1962, et seq., in connection with a loan of money to them by Bank Leumi in August 1979. The complaint also asserted claims of common law 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. By memorandum opinion and order dated April 13, 1992, this court dismissed plaintiffs' fraud and breach of contract claims as barred by the statute of limitations and dismissed the complaint in its entirety with respect to defendants Eliot Robinson, Eftihia Piper and Rachel Bergsohn for failing to state a claim upon which relief may be granted. See Center Cadillac Inc. v. Bank Leumi Trust Co. of New York, 808 F. Supp. 213 (S.D.N.Y. 1992). With respect to the RICO claim, the court held that "all monetary losses sustained before May 14, 1987 [were] time-barred" by the statute of limitations. Id. at 225. Hence, plaintiffs recovery, if any, was limited to the thirty-six loan payments made within four years of commencing their lawsuit. Id.

 Defendants have since moved for summary judgment against plaintiffs on their remaining RICO claim. On Tuesday, May 31, 1994, the court heard oral argument on defendants' motion. Based upon the evidence presented by both parties, this court finds that plaintiffs have failed to produce evidence to support the allegations made in their complaint. Accordingly, defendants' motion is granted and they are entitled to judgment for the balance of plaintiffs' indebtedness plus accrued interest and attorneys' fees.

 FACTS

 Although this opinion assumes familiarity with the facts set forth in its prior opinion, a brief overview of the facts which pertain to plaintiffs' RICO claim is necessary. Briefly stated, plaintiffs Irwin Steinhauser, Michael 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 Center Cadillac, Center Leasing, the Officers, *fn1" and the Officers spouses, *fn2" brought this suit against Defendants Bank Leumi and certain officers of Bank Leumi. Defendant Martin Simon was chief lending officer of Bank Leumi from 1979 to 1986, at which time he left Bank Leumi to start the First New York Bank for Business ("First New York Bank"). Defendant Eliot Robinson was a senior lending officer at Bank Leumi until 1986 when he also left to join First New York Bank.

 In 1975, plaintiffs obtained a $ 475,000 mortgage loan from American Bank & Trust Company ("ABT" or "ABT Loan") to purchase a Cadillac dealership. The terms of the loan included specified monthly payments and two large lump-sum payments (or "balloon payments") of $ 175,000 due April 1, 1976 and $ 125,000 due December 31, 1978. Exhibit C to the Affidavit of Stephen G. Rinehart ("Rinehart Aff."). The loan bore an interest rate of 1.5% above the prime rate and was secured by a second mortgage on plaintiffs' residences; mortgages on their two shopping malls, Marwin Malls and Winmar Malls; a lien on all bank accounts owned by plaintiffs; and all of the assets and inventory of their Cadillac dealership. Plaintiffs additionally executed unconditional guarantees of the debt and assigned to ABT the General Motors "holdback" accounts of Center Cadillac. Rinehart Aff., Ex. A at 44:9-21; 47:5-9; Ex. C; and Ex. D at 2-3.

 In 1976, Bank Leumi acquired certain assets of ABT including the ABT Loan which was assigned to the bank. At that time, the $ 125,000 balloon payment, in addition to regular monthly payments, remained due. In 1977 and 1978, Bank Leumi made two additional loans to plaintiffs totalling $ 335,000, the proceeds of which plaintiffs used to purchase a yacht and to finance their other business holdings. Rinehart Aff., Exs. F, G, H, I.

 Plaintiffs also maintained a separate checking account for Center Cadillac at Bank Leumi, which, taken from the monthly reports that plaintiffs made to General Motors, had an increasingly negative cash balance. By April 1979, Center Cadillac was reporting "cash in bank" of negative $ 794,728; by May 1979, total cash in bank was negative $ 976,180; and by the end of July 1979, Center Cadillac's negative cash position totalled $ 1,205,510. Rinehart Aff., Ex. N. By the first week of August 1979, Center Cadillac's checking account statement reflected an overdraft exceeding $ 1,100,000. Rinehart Aff., Ex. O. Prior to August 1979, there is no evidence that plaintiffs repaid any portion of Center Cadillac's negative cash balance.

 The essential dispute in this matter begins with plaintiffs' request for an additional $ 360,000 loan to provide working capital for Center Cadillac in July 1979. According to plaintiffs, the Officers prepared and sent to Levine a letter delineating the nature and purposes of the requested funds. *fn3" On August 1, 1979, Simon, Robinson, Garvey, and Levine allegedly told plaintiffs that in order to receive the requested funds, they were required to appear at the law offices of Bank Leumi's counsel, Parker Chapin, on August 9, 1979.

 When they appeared at Parker Chapin's offices on August 9, plaintiffs were met with "a stack of documents piled high on the table they were told to sign." Plaintiffs' Memorandum of Law in Opposition to Defendants' Motion for Summary Judgment at 5 ("Pl.'s Memo."). Among the documents which plaintiffs were allegedly forced to execute at that meeting were: (1) "a promissory note, date [sic] August 9, 1979, requiring plaintiffs to pay $ 1,100,000 on December 31, 1979" (Pl.'s Memo. at 5) ("August 1979 Loan") (2) "signature pages that were unattached to any document" (Id. at 6); and (3) a "Modification, Extension and Spreader Agreement, dated as of December 31, 1978," which modified the repayment terms on the final balloon payment of the ABT Loan. Id. Plaintiffs also signed a one-page letter dated August 9, 1979 acknowledging a credit extension of $ 1,100,000 by Bank Leumi and agreeing to repay that amount "plus interest at the rate of 3% per annum in excess of the prime rate." Rinehart Aff., Ex. R. The letter also promised repayment of $ 110,416.62 "plus interest at the rate of 3% per annum in excess of the prime rate," which represented the outstanding balance on the ABT Loan. Id.

 Plaintiffs initially refused to sign the documents without the presence of their attorney, but they later decided to sign them after defendants threatened to immediately close all of Center Cadillac's bank accounts. Pl.'s Memo. at 5. Accordingly, plaintiffs signed the documents because they feared that their business would be ruined.

 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 checks drawn on their Bank Leumi account. Since plaintiffs could not repay the loan, over the next several years, they were forced to sell many of their assets which had been used as collateral for the Bank Leumi loans at below market value, including their shopping malls, their personal homes, and their businesses.

 In essence, plaintiffs claim that defendants used their financial leverage to extort money and property from them in the course of repaying the August 1979 Loan. Plaintiffs additionally claim that defendants defrauded them into executing the loan by misrepresenting the meaning of the term "prime rate" and misrepresenting the rate of interest actually charged on the 1979 loans. Finally, plaintiffs claim that defendants failed to provide them with loan statements for several years, and the loan statements that were sent contained erroneous information.

 Defendants, on the other hand, argue that plaintiffs cannot prove the essential elements of their RICO claim because they have failed to establish that defendant committed the predicate acts alleged in the compliant. According to defendants, there is no evidence that they either defrauded plaintiffs into signing the loan documents, misrepresented the terms of the loans, or used economic fear to extort property from plaintiffs to which they were not legally entitled. As such, "what remains is nothing more than the workout of a troubled commercial loan, embellished with self-serving allegations of 'fraud' and extortion' having no support in the record." Defendants Memorandum of Law in Support of Motion for Summary Judgment at 2. ("Def.'s Memo.").

 DISCUSSION

 Title 18 U.S.C. § 1962(c) provides that:

 
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprises's affairs through a pattern of racketeering activity or collection of unlawful debt.

 To establish a civil RICO claim, plaintiffs must plead (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L v. Imrex Co., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 358-59, 105 S. Ct. 3275 (1985). A pattern of racketeering activity requires the commission within a ten year period of at least two predicate acts that violated laws listed in 18 U.S.C. § 1961(1); these acts must be related and must amount to, or threaten the continued likelihood of, continued criminal activity. H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989). Section 1961(1) defines "racketeering activity" to include, inter alia, violations of the federal mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343, and extortion in violation of the Hobbs Act, 18 U.S.C. § 1951(a). Based on the evidence presented, plaintiffs have failed to establish the predicate acts of mail fraud *fn4" or extortion. Accordingly, defendants' motion is granted.

 No Proof of Mail Fraud

 As the court noted in its earlier opinion, in order to prove mail fraud, plaintiffs must prove: (1) the existence of a scheme to defraud; and (2) the knowing use of interstate mails or transmission facilities in furtherance of the fraud. Center Cadillac, 808 F. Supp. at 227 (citing, United States v. Gelb, 700 F.2d 875, 879 (2d Cir.), cert. denied, 464 U.S. 853, 104 S. Ct. 167, 78 L. Ed. 2d 152 (1983); United States v. ...


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