letter that the plaintiffs allege was written in response to that conversation is addressed to Duane Leonard of Marine Midland Bank and signed-by Hank Mathon and Sheila Mathon. The letter is annexed to the Amended Complaint as Exhibit "D." The letter recites that there will be 100% financing by the bank. The plaintiffs complain that a written contract later sent to them by the Marine Midland Bank varied the terms to which the parties allegedly verbally agreed as recited in the Mathon's February 8, 1994, letter.
III. The Shapiro Defendants - November, 1993 to May, 1994
The Shapiro defendants, another law firm that represented Marine Midland Bank, entered the picture in November of 1993, when an eviction notice prepared by them was left at the premises. The Mathons called the Shapiro defendants, who allegedly assured them they should not worry about the eviction notice and asked them to write a letter stating that they were interested in purchasing the property. That letter is annexed to the Amended Complaint as Exhibit "E."
Three letters regarding the purchase and sale agreement were sent to the Mathons by the Shapiro defendants during the period between February, 1994, and May, 1994. These letters constitute the alleged mail fraud. One letter dated February 23, 1994 accompanied a contract for purchase and sale of the premises, which required a 10% down payment. The next letter, which is dated March 18, 1994, states that the contract terms were firm and sets a March 31, 1994, expiration date of the offer to sell. The final letter, dated May 3, 1994, states that the bank is no longer interested in selling the property to the Mathons.
A letter from the Mathons to the Shapiro defendants dated March 1, 1994, reflects negotiating efforts regarding the terms of the purchase and discusses the following: 1) a lower purchase price if a down payment is required; 2) the possibility of a certificate of occupancy problems or violations that might have to be corrected if another lender was involved; 3) the Mathons' willingness to pay $ 240,000.00 for the house "as is" and release the bank from past and present liabilities if the bank holds the mortgage for 5 years. The Court notes that communications regarding the house all refer to purchase and sale in an "as is" condition.
The Amended Complaint alleges that the bank's demand of a 10% down payment for the house is a "strong armed tactic" to "fraudulently attempt to steal $ 24,000.00 of the Mathons' down payment as well as other monies invested in the house by the Mathons." See Amended Compl. P96. According to the Amended Complaint, "this was done with great malice and intent in a conspiratorial scheme to defraud the Mathons." Id.
The plaintiffs relate that they hired legal counsel in March of 1993, with regard to the purchase of the premises and were advised to research the certificate of occupancy for the house. They allege that they discovered at that time that the premises had a certificate of occupancy covering less than half of the actual premises. The Amended Complaint alleges that the defendants knew at all times that the house lacked proper certification for occupancy. However, the Mathons' letters reflect that the agreement with the bank was to purchase the premises "as is." The plaintiffs allege that the lack of certification meant financing problems would arise and that the bank was aware of those problems.
The plaintiffs state that during the month of March, 1994, an eviction proceeding was commenced in New York State Supreme Court by the Marine Midland defendants, whose legal counsel in that proceeding was the Shapiro defendants. The Mathons state that they were assured by the Shapiro defendants on March 24, 1994, that the eviction proceedings would not effect them, because of their prospective purchase of the premises. This latter statement appears to the Court to be a statement of opinion, not a statement of fact.
The Mathons name as a defendant Dominick Vinceslio, the process server who came to the premises to serve eviction papers in March, 1994, to the owner of the premises. As to this defendant, the plaintiffs allege certain improprieties with regard to the service of the papers.
The plaintiffs commenced this civil RICO action on or about May 10, 1994. On or about June 20, 1994 an amended complaint was filed and sent via certified mail to all defendants whose addresses were known. At that time the plaintiffs also sent, via certified mail, a request for waiver of service of summons. The plaintiffs state that on July 25, 1994 they received a written waiver of service from the Shapiro defendants. On July 12, 1994 an answer to the Amended Complaint was filed with the Court by the Aaron defendants. Apparently, the other defendants did not respond to the Amended Complaint.
On September 29, 1994, the plaintiffs filed a notice of motion for service pursuant to Rule 4, seeking service by the United States Marshals at the cost of the defendants. The plaintiffs claim that they withdrew that motion because the Marine Midland defendants' attorney represented to the Mathons on October 20, 1994 that he would accept service on behalf of the Marine Midland defendants. That attorney thereafter appeared at a hearing before United States Magistrate Judge Michael L. Orenstein on October 27, 1994.
On or about November 3, 1994, the plaintiffs filed a notice of motion to enter default judgment allegedly because they had not received a waiver of service from the Marine Midland defendants. The Court declined to enter a default judgment based on evidence that the defendants were attempting to move or answer in the action.
DISCUSSION OF THE PLAINTIFFS' MOTIONS TO ENTER DEFAULTS
I. As to the Marine Midland Defendants
Fed. R. Civ. P. 4(d) is a provision by which a plaintiff may seek to have the defendant waive formal summons service. The rule states that defendants have a "duty to avoid unnecessary costs of service summons" and sets forth formal requirements for the notice and request for waiver. As a consequence of failure by a defendant to comply with such a request, "the court shall impose the costs subsequently incurred in effecting service on the defendant unless good cause for the failure be shown." Fed. R. Civ. P. 4(d)(2).
The effect of this rule is to shift the cost of service to a defendant who does not agree to waive formal service. It is clear from the plain language of the rule as well as the commentary to the rule that absent a waiver from the defendant, service must be effected in a formal manner in order to bring the defendant under the Court's jurisdiction.
Here, it is alleged that the Marine Midland defendants gave verbal assurance that they would accept service on or about October 20, 1994. On November 4, 1994, the law firm of Cullen & Dykman served a notice of appearance on behalf of Marine Midland Bank, N.A., Duane Leonard, and Marine Midland Mortgage Corp., annexed to which is acknowledgment of service on those defendants as of that date. The plaintiffs' notice of motion for entry of default judgment is dated November 3, 1994. Even if the Marine Midland defendants are deemed to have accepted service on October 20, 1994, the plaintiffs' default motion was filed prior to the expiration of the time in which the Marine Midland defendants could respond to the Amended Complaint.
The plaintiffs argue that the Marine Midland defendants have been uncooperative and misleading regarding the return of waivers of service so that "entry of default judgment under special circumstances" is appropriate. The Court does not agree that the defendants behavior has been so egregious as to justify entry of default.
The defendants actual acknowledgement of service is dated November 4, 1994. The Marine Midland defendants served and filed a notice of motion to dismiss the Amended Complaint against them on or about November 3, 1994. The Court finds that the Marine Midland Bank, N.A., Duane Leonard and Marine Midland Mortgage Corp. are not in default. Accordingly, the plaintiffs' motion to enter default judgment against them is denied.
The Court notes that to date, the named defendant Hongkong and Shanghai Bank Corp., Ltd. has not waived service and has not been formally served in this action. Also, the named defendant Laura Glulseppotti, a former Marine Midland employee, has not been served in this action.
II. As to the Shapiro defendants
The plaintiffs first moved for entry of a default judgment against the Shapiro defendants on or about September 30, 1994, three days after their time to answer had expired. The Shapiro defendants first attempted to respond to the Amended Complaint on or about October 11, 1994, by making a motion to dismiss, which was unsuccessful, as explained below. The default period at most spans only a matter of weeks.
The Shapiro defendants signed waivers of summons service on July 25, 1994. According to Fed. R. Civ. P. 4(d)(3):
A defendant that, before being served with process, timely returns a waiver so requested is not required to serve an answer to the complaint until 60 days after the date on which the request for waiver of service was sent....
Accordingly, the Shapiro defendants' time to answer or otherwise move with respect to the Amended Complaint expired on September 26, 1995. The plaintiffs consented to extend the Shapiro defendants time to answer the Amended Complaint until September 27, 1995. The plaintiffs served and filed a notice of motion for entry of default judgment against the Shapiro defendants on or about September 30, 1994.
The Court returned the plaintiffs' motion papers under cover letter dated October 5, 1994 because they did not include proof of service. Upon resubmission of the motion papers, the Court thereafter advised the Mathons, by letter dated October 26, 1994, that no default would be entered when it appeared that the defendants were attempting to appear in the action.
The Shapiro defendants prepared and submitted to the Court, motion papers to dismiss the Amended Complaint. These motion papers were returned to the defendants under cover letter from the Court dated October 19, 1994 explaining that the papers failed to conform to Judge Spatt's individual rules. The papers were resubmitted and again rejected by the Court under cover letter dated October 26, 1994, which explained that the record revealed a default. The Shapiro defendants served and filed a cross motion to be relieved of their default on or about November 10, 1994.
Fed. R. Civ. P. 55(c) provides:
For good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b).
Relief from default under Rule 55(c) is to be granted at the discretion of the court upon consideration of the individual circumstances of the case and the credibility and good faith of the parties. Enron Oil Corp. v. Diakuhara, 10 F.3d 90 (2d Cir. 1993). The Second Circuit strongly prefers dispute determination on the merits and directs district courts to resolve any doubts regarding vacatur of default in favor of a trial on the merits. Enron Oil, supra, at 96, 98.
Rule 55(c) provides that default may be set aside for "good cause" in accordance with Rule 60(b). In determining a motion to vacate a default the Court focuses on three considerations with regard to the meaning of "good cause." These factors are (1) the willfulness of the default; (2) potential prejudice to the adversary; and (3) the presentation of a meritorious defense. Enron Oil, supra, at 96.
The Shapiro defendants explain that inadvertence resulted in their motion being filed two weeks after their time to answer the Amended Complaint had expired. They state in affidavits annexed to their moving papers that preparation of their motion to dismiss began in early September and that they spoke with the plaintiffs at that time to secure their agreement to a brief extension of the time to answer.
The Shapiro defendants admit several mistakes in their understanding of federal motion procedure. Specifically, they claim that they initially understood that the motion would be heard by the magistrate judge to whom the case was assigned. Further, they allege that they mistakenly understood that adjournment of an introductory conference before Judge Orenstein from August 30, 1994 until October 27, 1994 meant that their time to answer the Amended Complaint was extended until that time.
The Shapiro defendants initially submitted their motion to dismiss to the Court on or about October 11, 1994, two weeks after their time to answer or otherwise respond to the Amended Complaint had expired. Although the papers were returned because they did not conform to this Court's individual rules, the Shapiro defendants' conduct clearly indicated to all parties that they intended to appear and defend the lawsuit. The Court finds the errors made by the Shapiro defendants do not rise to the level of a willful default.
It cannot be said that a delay in the proceedings of several weeks prejudices the plaintiffs. Furthermore, delay alone does not constitute prejudice. Enron Oil, supra, at 98. A brief delay is not a critical factor at this early stage of the proceedings, when some of the defendants have only recently accepted service and discovery has not commenced. Real prejudice is evidenced by the loss of evidence, the unavailability of witnesses or roadblocks to discovery. See Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983). The Court finds that the plaintiffs have suffered no prejudice as a result of this brief default.
C. Meritorious defense
Even where delay in filing an answer constitutes willfulness, relief under Rule 60(b) is granted where a meritorious defense is presented. See Wagstaff-El v. Carlton Press Co., 913 F.2d 56 (2d Cir. 1990), cert. denied, 499 U.S. 929, 113 L. Ed. 2d 263, 111 S. Ct. 1332 (1991). A meritorious defense is established by Rule 55 standards by setting forth denials and defenses in an answer. Meehan v. Snow, 652 F.2d 274, 277 (2d Cir. 1981). For reasons discussed in detail below, the Court finds that the Shapiro defendants present a meritorious defense to the Amended Complaint.
The Court agrees with the Shapiro defendants that it would be manifestly unjust to allow the plaintiffs to enter a default judgment in a RICO case, especially considering the availability of treble damages and attorneys fees, without permitting an opportunity to defend on the merits of the claims. The Court finds that extreme sanction of default is inappropriate in this case. Accordingly the plaintiffs' motion for entry of default judgment against the Shapiro defendants is denied and the said defendants' default is vacated.
DISCUSSION OF THE MOTIONS TO DISMISS
I. Rule 12(b)(6) standard
On a motion to dismiss for failure to state a claim, "the court should not dismiss the complaint pursuant to Rule 12(b)(6) 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'". Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)); see also IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052-53 (2d Cir. 1993), cert. denied, 130 L. Ed. 2d 38, U.S. , 115 S. Ct. 86 (1994). The Second Circuit stated that in deciding a Rule 12(b)(6) motion a Court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken". Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir. 1993); see also Rent Stabilization Ass'n v. Dinkins, 5 F.3d 591, 593-94 (2d Cir. 1993) (citing Samuels, 992 F.2d at 15).
It is not the Court's function to weigh the evidence that might be presented at a trial, the Court must merely determine whether the complaint itself is legally sufficient, see Goldman, 754 F.2d at 1067, and in doing so, it is well settled that the court must accept the allegations of the complaint as true, see LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991); Proctor & Gamble Co. v. Big Apple Indus. Bldgs., Inc., 879 F.2d 10, 14 (2d Cir. 1989), cert. denied, 493 U.S. 1022, 107 L. Ed. 2d 743, 110 S. Ct. 723 (1990), and construe all reasonable inferences in favor of the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1099 (2d Cir. 1988), cert. denied, 490 U.S. 1007, 104 L. Ed. 2d 158, 109 S. Ct. 1642 (1989).
The Court is mindful that under the modern rules of pleading, a plaintiff need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), and that "all pleadings shall be so construed as to do substantial justice". Fed. R. Civ. P. 8(f).
In addition, because the plaintiffs are proceeding without an attorney, the Court must give wide latitude to the papers filed by the pro se litigants. See Haines v. Kerner, 404 U.S. 519, 520, 30 L. Ed. 2d 652, 92 S. Ct. 594 (1972) (pro se papers are to be held "to less stringent standards than formal pleadings drafted by lawyers"). The Court recognizes that it must make reasonable allowances so that a pro se plaintiff does not forfeit his rights by virtue of his lack of legal training. Seagrave Corp. v. Vista Resources, Inc., 710 F.2d 95 (2d Cir. 1983). However, the Court is also aware that "'self representation does not exempt a party from compliance with relevant rules of procedural and substantive law.'" Id. (quoting Birl v. Estelle, 660 F.2d 592, 593 (5th Cir. 1981)).
The Aaron defendants, the Midland Marine defendants and the Shapiro defendants all move to dismiss the Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6), 9(b), and 12(b)(1). From this point forward these three groups of defendants will be referred to collectively as the "defendants." Federal jurisdiction in this action is based on alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 - 1968. The defendants assert that: 1) the Amended Complaint fails to state a RICO claim upon which relief can be granted; 2) the Amended Complaint fails to plead fraud with particularity; and 3) in the absence of the RICO claim, there is no jurisdictional basis for the pendant state claims.
II. Pleading a civil RICO cause of action
Under civil RICO it is unlawful to participate in the conduct of an enterprise's affairs through a pattern of racketeering or to conspire to violate any of the substantive provisions of Section 1962. See 18 U.S.C. § 1962 (c) & (d). Section 1964(c) of Title 18 creates a private right of action for individuals to enforce the RICO statute.
The threshold pleading requirements of a private action under Section 1962 of the RICO statute were set forth in Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025 (1984), as follows:
To state a claim for damages under RICO a plaintiff has two pleading burdens. First, he must allege that the defendant has violated the substantive RICO statute, 18 U.S.C. § 1962 (1976), commonly known as "criminal RICO." In so doing, he must allege the existence of seven constituent elements: (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 or foreign commerce. . . . Plaintiff must allege adequately defendant's violation of section 1962 before turning to the second burden -- i.e., invoking RICO's civil remedies of treble damages, attorneys fees and costs. . . . To satisfy this latter burden, plaintiff must allege that he was "injured in his business or property by reason of a violation of section 1962" ( Moss, supra, 719 F.2d at p. 17 [citations omitted]).
The Court will now address the elements of the RICO claims to determine whether the pleading requirements are satisfied.
An "enterprise" within the meaning of the RICO statute includes any "individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). This enterprise is generally described as "a group of persons associated together for a common purpose of engaging in a course of conduct." Procter & Gamble, 879 F.2d at 15 (emphasis in original). The existence of an enterprise is proven by "evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." United States v. Turkette, 452 U.S. 576, 583, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981). The term "enterprise" encompasses both legitimate and illegitimate enterprises. Id. The Supreme Court recently held that "one must participate in the operation or management of the enterprise itself" to be liable as part of a RICO enterprise. Reves v. Ernst & Young, U.S. , 113 S. Ct. 1163, 1173, 122 L. Ed. 2d 525 (1993). The high court explained that "participate" in the context of RICO has a narrower meaning than "aid and abet," and that "some part in directing the enterprise's affairs is required." Id. at 1170.
The Amended Complaint alleges an "enterprise" between creditors of the plaintiffs' defaulting landlord (the Marine Midland defendants), the law firms retained by the creditors, and the employees of those law firms. The defendant law firms (Aaron defendants and Shapiro defendants) draw the Court's attention to two cases from the Eastern and Southern districts of New York, that found, under the Reves "operation or management" test, that law firms carrying out their clients' directives do not incur RICO liability even if they intentionally assist a client's fraudulent scheme. See Morin v. Trupin, 835 F. Supp. 126 (S.D.N.Y. 1993) (dismissing RICO claims against attorneys because "providing legal advice and legal services does not constitute participation sufficient to ground allegation of § 1962(c)); Biofeedtrac, Inc. v. Kolinor Optical Enterprises, 832 F. Supp. 585 (E.D.N.Y. 1993) (granting summary judgment to defendant lawyers as to RICO liability where defendant lawyers provided legal advice and services, even where the intentionally assisted a fraudulent scheme by the clients to defraud); see also Nolte v. Pearson, 994 F.2d 1311 (8th Cir. 1993) (affirming district court's directed verdict for defendant lawyers because no evidence suggested that the attorneys participated in the operation or management of the enterprise).
The above cases lead to the conclusion that attorneys do not incur RICO liability for the traditional functions of providing legal advice and services. However, the cases do not foreclose the possibility of an attorney or law firm maintaining a operational or managerial position in a RICO enterprise. Because the Court must construe all allegations in favor of the plaintiff in reviewing a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the Court determines for the purposes of this motion that the Amended Complaint sufficiently to pleads a "RICO enterprise." See LaBounty, 933 F.2d at 123.
Because the First Amended Complaint properly sets forth the required "enterprise", the Court must now examine whether the Amended Complaint sets forth the required "pattern" of racketeering activity.
B. A pattern of racketeering activity
A "pattern" requires at least two acts of "racketeering activity", occurring within ten years of each other. See 18 U.S.C. § 1961(5). The term "racketeering activity" refers to the predicate acts necessary to sustain a RICO claim and include mail fraud and wire fraud. See 18 U.S.C. § 1961(1). Those predicate acts must be crimes under state or federal law. United States v. Angelilli, 660 F.2d 23 (2d Cir. 1981), cert. denied, 455 U.S. 945, 102 S. Ct. 1442, 71 L. Ed. 2d 657 rehearing denied, 456 U.S. 939, 72 L. Ed. 2d 460, 102 S. Ct. 1999 (1982).
Both the Supreme Court and Second Circuit have held that an allegation of two acts of "racketeering activity", without more, is not sufficient to establish a pattern. See H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 238-44, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989); United States v. Indelicato, 865 F.2d 1370, 1381 (2d Cir.) (en banc), cert. denied, 493 U.S. 811, 107 L. Ed. 2d 24, 110 S. Ct. 56 (1989)). In order to constitute a "pattern" of racketeering activity, the predicate acts must be related and constitute a threat of continued racketeering activity and this determination is to be made on a case-by-case basis. H.J. Inc., 492 U.S. at 238-44; see also United States v. Alkins, 925 F.2d 541, 551 (2d Cir. 1991) (predicate acts must be related and amount to or pose a threat of continued criminal activity). In addressing the determination about a "pattern" of racketeering activity the Second Circuit noted that "an interrelationship between acts, suggesting the existence of a pattern, may be established . . . [by] proof of their temporal proximity, or common goals, or similarity of methods, or repetitions." Indelicato, 865 F.2d at 1382.
The Court will first address the predicate acts alleged by the plaintiffs and then determine whether those acts properly plead a pattern.
C. Predicate acts of mail fraud and wire fraud
In the present case, the plaintiffs allege that certain telephone conversations and letters constitute predicate acts of mail and wire fraud.
Specifically, the plaintiffs allege that they were advised by telephone that it would be possible for them to purchase the premises following foreclosure. As recited above, as to some of the alleged calls, the Mathons identify dates that these alleged conversations took place, the names of the persons with whom they spoke and the subjects of the conversations. The plaintiffs allege that during these phone calls the defendants knowingly made false representations to induce the plaintiffs to invest money to repair and maintain the premises. They also allege that three letters regarding a contract for sale for the premises constitute mail fraud by the defendants.
The plaintiffs further allege that their investment unjustly enriched the defendants. However, the plaintiffs admit that during the period in question they were told by the defendants not to pay rent. The plaintiffs stated on the record of the November 18, 1994 hearing in this matter that they continue to live in the premises without paying rent. At oral argument on January 13, 1995, the Mathons conceded that they have not paid rent since about July of 1993 and have benefited in the sum of approximately $ 27,000.00, which represents $ 1,500.00 per month for eighteen months.
1. Mail fraud
In discussing the predicate act of mail fraud, the Second Circuit has stated that
allegations of mail fraud must be made with the particularity required by Federal Rule of Civil Procedure 9(b) . . . Pursuant to this higher pleading standard, the "complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiffs contend the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." . . . Plaintiffs asserting mail fraud must also identify the purpose of the mailing within the defendant's fraudulent scheme.