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BURKE v. DOWLING

November 6, 1995

William M. BURKE, et al., Plaintiffs, against William Q. DOWLING, et al., Defendants.


The opinion of the court was delivered by: ROSS

 I. Background

 
A. Ashford Castle
 
B. Dromoland Castle
 
C. Nuneham Park and Dromoland Conference Centers
 
D. Distribution of AHL's Assets
 
E. The Amended Complaint

 II. Rule 8

 III. RICO Claims

 
A. RICO Standing
 
1. Creditor Plaintiffs
 
2. Investor Plaintiffs
 
B. § 1962(c) Claims
 
1. Operation or Management of the Enterprise
 
2. Racketeering Activities
 
a. Mail and Wire Fraud
 
i. Existence of a Scheme to Defraud
 
ii. Use of the Mails
 
iii. Intent to Defraud
 
b. Securities Fraud
 
i. § 10(b) Violations
 
ii. § 12(2) Violations
 
c. Bankruptcy Fraud
 
3. Pattern Requirement
 
4. Statute of Limitations
 
C. § 1962(d) Claims
 
D. Respondeat Superior Claim
 
A. Jurisdiction
 
B. Common Law Fraud Claims
 
C. Breach of Contract

 IV. Curley's Motion to Strike

 V. Conclusion

 ROSS, United States District Judge:

 The principal plaintiffs in this case are American investors who sought shelter from U.S. tax laws in Irish castles. These plaintiffs contend that the defendants induced them to purchase interests in a scheme to convert these castles into luxury hotels--a project designed to produce tax benefits to upper income investors. They claim that in reality, defendants were perpetrating a type of Ponzi scheme, continually starting new hotel projects in order to pay off the debts of the old. When the project was near collapse, they claim that defendants looted the assets of their enterprise, leaving their creditors--several of whom are also plaintiffs here--unable to collect on their debts.

 Plaintiffs commenced this action against defendants in the Supreme Court of the State of New York, Nassau County, alleging violations of sections 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), as well as charges of common law fraud, breach of fiduciary duty, and breach of contract. Defendants removed the action to this court on July 20, 1994. Subsequently, all defendants moved to dismiss the amended complaint pursuant to Rules 8, 9(b), and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons discussed below, defendants' motions are granted in part and denied in part.

 I. Background

 The factual allegations made by plaintiffs are set out at length in the amended complaint. Since it is assumed that the parties are familiar with the details of these allegations, only a summary of the essential facts is provided below. Naturally, for the purposes of this motion, the court must accept the facts alleged in the amended complaint as true and draw all reasonable factual inferences in favor of the plaintiffs. See, e.g., IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. 1993), cert. denied, 130 L. Ed. 2d 38, 115 S. Ct. 86 (1994).

 A. Ashford Castle

 Ashford Castle ("Ashford") is an eighteenth century castle located on the western coast of Ireland that was converted into a luxury resort hotel and later acquired by Allied Irish Bank ("AIB") as a result of a failed loan. In 1985, defendants Dowling, Nickerson, and Curley decided to purchase Ashford from AIB and sell interests in the castle to investors for profit. Defendants Ashford Castle, Inc. ("ACI") and Dowmar Securities, Inc. ("Dowmar"), corporations owned and directed by Dowling, Nickerson, and Curley, handled most of the financial matters regarding the Ashford syndication. AIB agreed to be the primary lender for the project.

 Numerous American investors were successfully solicited via mail by letters and a private placement memorandum ("Ashford PPM"). Among these investors are plaintiffs Burke, Casey, Connor, Higgins, Joyce, Kane, Kaufman, Keelan, Kirkwood, McGouran, McSorley, Millard, and Mulcahy ("Ashford plaintiffs"). P 71.

 The Ashford PPM described the layout of Ashford and detailed the terms and conditions of the syndication. However, it contained some misrepresentations, which form the basis of the Ashford plaintiffs' claims. Most significantly, the Ashford plaintiffs claim that the syndication of Ashford was consummated even though the requisite minimum subscription level stated in the Ashford PPM, was never actually reached. Instead, the offerors of Ashford used at least eight "stand-in" investors to meet the minimum subscription level. *fn1" These investors lent their names to be used as names of bona fide investors, and like the bona fide investors, secured loans from AIB. However, the "stand-ins" never used any of their own money. Their obligations were paid by the offerors of Ashford, using the money from the general revenue of the castle. P 78. AIB accepted and processed these "stand-in" payments, and credited the accounts of the "stand-ins" on behalf of whom the checks were being written. The Ashford offerors also received unexplained payments that were taken from the proceeds of the Ashford syndication. Pl. Ex. C.

 B. Dromoland Castle

 In 1987, a second fraudulent scheme similar to the Ashford scheme was perpetrated using another Irish castle called Dromoland Castle ("Dromoland"). The Dromoland plaintiffs are Connor, Feeley, Gilgan, Joyce, Kaufman, Keelan, Levine, Loftus, Loughran, McWeeney, Millard, Charles Milligan, Phoebe Milligan, Moore, and Quinlan ("Dromoland plaintiffs").

 The Dromoland private placement memorandum ("Dromoland PPM") contained misrepresentations about the financing and the use of proceeds with regard to the Dromoland project. Also, the syndication of Dromoland was consummated even though the requisite minimum subscription level stated in the Dromoland PPM, was never achieved on account of a "stand-in" fraud that resembled the one at Ashford. P 94. In addition to all the defendants implicated in the Ashford scheme, Dromoland Castles, Inc. ("DCI"), a corporation formerly owned and directed by Dowling, Nickerson, and Curley, is implicated in the Dromoland scheme. Again, revenue from the castles was used to pay the "stand-in" obligations at Dromoland, and for the unexplained personal expenses of the Dromoland offerors. P 102, Pl. Ex. C.

 C. Nuneham Park and Dromoland Conference Centers

 Plaintiffs charge that defendants also perpetrated additional fraudulent schemes, but do not allege any injury from these schemes in this action. In 1988, Dowling, Nickerson and Curley formed Ashford Hotels, Ltd. ("AHL"). The complaint is unclear as to the precise relationship between AHL and the other corporations run by these defendants. Plaintiffs simply state that AHL was formed to "consolidate" the management contracts of ACI and DCI, as well as other projects of the defendants. PP 47, 55. Defendant Davison joined AHL as a shareholder and director some months after its formation. P 111. With AIB acting again as the primary lender, AHL then attempted to syndicate an English property known as Nuneham Park. Although plaintiffs do not allege that defendants engaged in a "stand-in" fraud with respect to Nuneham Park, they do claim that funds from the Nuneham Park project were diverted for a number of improper purposes, including the payment of obligations connected with Dromoland. P 123. Defendant Wilde Sapte, AIB's law firm, is implicated in these diversions. No construction was ever performed on the Nuneham Park project. Plaintiff Higgins, who was also an Ashford investor, is pursuing claims related to Nuneham Park in a separate action in New York state court, along with another Nuneham investor. P 127.

 After the failure of the Nuneham Park project, AIB demanded that Dowling, Curley and Nickerson make direct payments on the Ashford and Dromoland "stand-in" units. In order to make the payments, they required diversions of additional funds. P 128. Dowling, Nickerson, Curley, Davison and AIB therefore agreed on a new project, involving the expansion of Dromoland Castle and the construction of a Dromoland Conference Center ("DCC"). These funds were subsequently diverted to pay for the "stand-in" obligations at Ashford and Dromoland. Several of the Dromoland unitholders subsequently agreed to pay $ 2.5 million to the DCC investors in settlement of a claim which the complaint does not identify or explain. P 146. The DCC investors themselves are pursuing a separate action in Ireland, and are not parties to this action. P 147.

 D. Distribution of AHL's Assets

 By late 1991, the "stand-in" frauds and the continued diversion of funds from one project to another had put the directors of AHL under great financial strain. By December of 1991, it was apparent to them that AHL was insolvent. P 150. Defendants then took several steps to protect themselves and AIB by securing as many of AHL's assets as possible.

 First, they arranged to have AHL issue them backdated demand notes, thus making it appear that their initial equity investment in AHL was merely a loan. Plaintiffs do not contend that the defendants ever actually collected on these notes, however. Rather, they intended that AHL would deny payment, thereby allowing them to write their investments off as bad debts for tax purposes. PP 155-156.

 Second, AIB instituted proceedings against AHL in the English High Court for collection of a $ 5.4 million debt stemming from the Nuneham Park project. The AHL directors opted neither to defend this action nor to file for bankruptcy. As a result, AHL obtained a default judgment on September 18, 1992. P 160.

 AHL then sought to have one of its attorneys, a partner at Wilde Sapte named Mark Gill, appointed as a receiver of an "asset" of AHL. The asset in question was an indemnification agreement, executed by plaintiff Higgins and his co-plaintiff in the Nuneham Park action, Tyree. Under this agreement, Higgins and Tyree apparently agreed to indemnify AHL for certain of its liabilities, although they claim they have no such obligations. P 161.

 In connection with the receivership proceedings, plaintiffs claim that Gill made numerous false representations to the English court. Most significantly, he swore to an affidavit stating that AHL had no other creditors with an interest in the indemnification agreement. P 162-165. In fact, AHL had numerous other creditors, several of whom have joined as plaintiffs in this action. These plaintiffs ("creditor plaintiffs") are William Bertram & Fell, Bollinger, Inc., GMA Architecture Ltd., Ove Arup & Partners, and Paget, and their claims arise from debts owed to them in connection with yet another hotel project, the Empire Hotel in Bath, England. PP 163(b), 188. The creditor plaintiffs claim that they are entitled to a share of this asset, but that AIB, AHL and Wilde Sapte obstructed their efforts to gain access to it. As a result of the defendants' efforts to strip AHL of its assets, they claim, they are now unable to collect on the debts owed to them.

 E. The Amended Complaint

 The Amended Complaint alleges seven causes of actions under various theories of liability. The first three causes of action allege violations of RICO. Count One is brought by all plaintiffs against all defendants, and charges that defendants conducted an enterprise through a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(c), based on predicate acts of mail and wire fraud, securities fraud, and bankruptcy fraud. The predicate acts of securities fraud apply to the Ashford and Dromoland "stand-in" frauds, while the predicate act of bankruptcy fraud applies only to the fraudulent distribution of assets. P 175.

 Count Two is also brought by all plaintiffs. It alleges that Dowling, Nickerson, Curley, Davison, AIB, and Wilde Sapte conspired to violate RICO through the schemes described above, in violation of 18 U.S.C. § 1962(d). Count Three is brought by all plaintiffs against AIB. It alleges that AIB is vicariously liable under RICO for the actions of Dowling and Gill.

 The Ashford and Dromoland plaintiffs claim that as a result of defendants' Ponzi-like scheme, the value of their interests in Ashford and Dromoland have greatly decreased. The creditor plaintiffs claim that they have been cheated out of money that they are owed and to which they should have had access. All plaintiffs seek treble damages and punitive damages against all defendants jointly and severally.

 II. Rule 8

 At the outset, defendant AIB argues that the Amended Complaint should be dismissed in its entirety pursuant to Rule 8 of the Federal Rules of Civil Procedure for failure to set forth a "short and plain statement" of plaintiffs' claims. See Fed.R.Civ.P. 8(a). Initially, the court notes that this argument is somewhat at odds with the contentions of AIB and the other defendants that plaintiffs have failed to plead allegations of fraud with the particularity required by Fed.R.Civ.P. 9(b). AIB nonetheless describes the complaint as a "massive pleading, filled with irrelevant detail, in an effort to convince the Court that somewhere in all those pages a claim must have been stated." AIB Mem. at 14.

 To be sure, plaintiffs' complaint is lengthy. It contains 115 pages and 231 numbered paragraphs, and sets forth seven causes of action by thirty-three plaintiffs against ten defendants. But "long and involved complaints do not per se fail to pass the test of sufficiency under Rule 8." Karlinsky v. New York Racing Ass'n, 52 F.R.D. 40, 43 (S.D.N.Y. 1971). In view of the complexity of the schemes alleged, and the requirement of Rule 9 that allegations of fraud be pleaded with particularity, the Amended Complaint does not seem inordinately long.

 Rule 8 is designed primarily to ensure that courts and adverse parties can understand a claim and frame a response to it. The Second Circuit has observed that:

 
The statement should be plain because the principal function of pleadings is to give the adverse party fair notice of the claim asserted so as to enable him to answer and prepare for trial. The statement should be short because "unnecessary prolixity in a pleading places an unjustified burden on the court and the party who must respond to it because they are forced to select the relevant material from a mass of verbiage."

 Salahuddin v. Cuomo, 861 F.2d 40, 42 (2d Cir. 1988) (quoting 5 C. Wright & A. Miller, Federal Practice and Procedure § 1281, at 365 (1969)) (other internal citations omitted). If a complaint is so "confused, ambiguous, vague, or otherwise unintelligible that its true substance, if any, is well disguised," a court may dismiss it. Id. Absent extraordinary circumstances, however, it is an abuse of discretion for a court to dismiss a complaint under Rule 8 without granting leave to amend. Id.

 The cases cited by AIB make it clear that the complaint in this case is not the kind of departure from the "short and plain" standard that the Salahuddin court had in mind. In Moscowitz v. Brown, 850 F. Supp. 1185 (S.D.N.Y. 1994), the court dismissed a plaintiff's complaint after giving him three opportunities to replead. The amended complaint contained a bewildering array of charges, ranging from religious discrimination to defamation to insider trading to prostitution. Id. at 1189. The plaintiff also charged that the New York City Police Department, his former employer, was "an effective subsidiary" of Goldman, Sachs & Co., a prominent New York investment banker. Id. Thus the court had an ample basis for its conclusion that the complaint was "a labyrinthian prolixity of unrelated and vituperative charges" Id. (quoting Prezzi v. Schelter, 469 F.2d 691, 692 (2d Cir. 1972) (per curiam), cert. denied, 411 U.S. 935, 36 L. Ed. 2d 396, 93 S. Ct. 1911 (1973)).

 Plaintiffs in this case have made allegations that are neither vague nor incomprehensible. At a minimum, they place the defendants on notice of the charges against them and allow them sufficient opportunity to prepare a response. Nor are the allegations framed in a manner that places an inordinate burden on this court or opposing counsel. Accordingly, the court finds that the complaint meets the standards of Rule 8. *fn2"

 III. RICO Claims

 Plaintiffs' first three counts seek to recover for alleged violations of the RICO Act of 1970. The analysis begins, therefore, with the language of the statute, which provides that "any person injured in his business or property by reason of a violation of § 1962 of this chapter may sue therefor in the appropriate United States district court, and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee." 18 U.S.C. § 1964(c).

 Based on this language, courts have identified three elements which plaintiffs must establish in order to have standing to sue under RICO. Plaintiffs must allege "(1) a violation of § 1962; (2) injury to business or property; and (3) causation of the injury by the violation." Hecht v. Commerce Clearing House, 897 F.2d 21, 23 (2d Cir. 1990); see also First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 771 (2d Cir. 1994), cert. denied, 130 L. Ed. 2d 632, 115 S. Ct. 728 (1995). Causation, for the purposes of the RICO inquiry, requires a showing of both actual or "but-for" causation and a showing of proximate causation. Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 112 S. Ct. 1311, 1317, 117 L. Ed. 2d 532 (1992). A RICO violation proximately causes a plaintiff injury when it is "a substantial factor in the sequence of responsible causation, and if the injury is reasonably foreseeable or anticipated as a natural consequence." Hecht, 897 F.2d at 23.

 A. RICO Standing

 At the outset, several of the defendants contend that plaintiffs have not pleaded facts sufficient to demonstrate standing under RICO. Because plaintiffs have alleged predicate acts of fraud as the basis of their RICO complaint, they must plead injury and causation with particularity, as required by Fed.R.Civ.P. 9(b). See First Nationwide, 27 F.3d at 771. For the purposes of this discussion, the court will address the allegations of the creditor plaintiffs and the Ashford and Dromoland plaintiffs separately.

 1. Creditor Plaintiffs

 Defendants Dowling, Nickerson, Davison, ACI, DCI, Dowmar and AHL (the "Dowling defendants") argue that the creditor plaintiffs have not alleged an injury cognizable under RICO. Dowling Mem. at 39-40. The court agrees, although for ...


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