inquiry notice. Since defendants here do not argue that plaintiffs failed to receive financial statements, Henkind is inapplicable.
In Farr, the plaintiff was the personal representative of his mother's estate. He claimed that the defendant had recommended to his mother an investment in two gas and oil limited partnerships with the knowledge that they were high-risk investments that were not suitable to her stated needs. After his mother's death, the plaintiff received an annual report which stated that these investments were risky and had produced very little return up to that date. The court held that this letter constituted actual notice of the nature of the investments and, because the plaintiff was aware of his mother's true needs, constituted inquiry notice of the alleged fraud. 755 F. Supp. at 1225-26. Again, however, the court did not state that the mere opportunity to receive financial statements constitutes inquiry notice. Rather, it premised its holding on the plaintiff's actual receipt of information that should have alerted him to the possibility of fraud.
If information in the Ashford and Dromoland reports could have alerted plaintiffs to their injuries prior to 1990, then Farr might apply. For the purposes of this motion, however, the court is bound by the allegations in plaintiffs' complaint. Since the complaint does not include copies of any financial statements suggesting that plaintiffs could have discovered the alleged fraud prior to June 15, 1990, the court must accept as true their claim that plaintiffs could not have discovered their injuries until plaintiff Burke began to investigate defendants' conduct in September, 1991. P 180.
Furthermore, plaintiffs have alleged several payments made by ACI and DCI on the "stand-in" obligations made after June 15, 1990. Pl. Ex. C. Obviously, these injuries could not have been discovered prior to that date. Under the rule of separate accrual propounded in Bankers Trust, a new cause of action accrued as of the date when plaintiffs discovered or should have discovered a new injury. Thus, for the purposes of this motion, plaintiffs' action is not time-barred.
C. § 1962(d) Claims
Plaintiffs' RICO conspiracy claims are brought only against Dowling, Nickerson, Curley, Davison, AIB and Wilde Sapte. In order to state a claim under § 1962(d), plaintiffs must specifically allege that each of these defendants entered into an agreement to commit two predicate acts. Hecht v. Commerce Clearing House, 897 F.2d 21, 25 (2d Cir. 1990). The fact of agreement itself, however, is insufficient to state a claim; plaintiffs must also allege that defendants "embraced the objective of the alleged conspiracy." United States v. Viola, 35 F.3d 37, 43 (2d Cir. 1994) (quoting United States v. Neapolitan, 791 F.2d 489, 499 (7th Cir. 1986)), cert. denied, 115 S. Ct. 1270 (1995). The defendant must be aware of the existence of a conspiracy, and understand that the RICO enterprise extends beyond his individual role. Viola, 35 F.3d at 44.
In addition, plaintiffs must allege an injury caused by a predicate act in furtherance of the conspiracy. Hecht, 897 F.2d at 25. Although Rule 9(b) does not apply to claims of conspiracy, plaintiffs must nonetheless allege "some factual basis for the finding of a conscious agreement among the defendants." Id. at 26 n.4; see also Mathon v. Marine Midland Bank, 875 F. Supp. 986, 1001 (E.D.N.Y. 1995) (dismissing RICO conspiracy claim where complaint merely contained conclusory allegation that conspiracy existed).
As discussed above, plaintiffs have adequately alleged that Dowling, Nickerson, Curley and the corporations under their control intentionally participated with AIB in a scheme to defraud investors through the commission of predicate acts of mail and wire fraud. They have also alleged injury actually and proximately caused by this fraudulent scheme. Plaintiffs therefore have also adequately alleged a RICO conspiracy with respect to these defendants.
Plaintiffs have not alleged that Wilde Sapte was sufficiently involved in the operation or management of the alleged RICO enterprise to subject it to RICO liability under § 1962(c). That does not mean, however, that Wilde Sapte cannot be liable for under § 1962(d) for conspiracy. As the Second Circuit has recently observed, "[a] defendant can be guilty of conspiring to violate a law, even if he is not among the class of persons who could commit the crime directly." Viola, 35 F.3d at 43. Plaintiffs have not, however, adequately alleged that Wilde Sapte understood the nature and scope of the enterprise. Wilde Sapte is not alleged to have joined the RICO enterprise until 1988, after the sale of the Ashford and Dromoland interests had already taken place. The principal allegations against Wilde Sapte stem from its role as a receiver of AHL's assets in proceedings before the English Courts. Even assuming that Wilde Sapte agreed with the defendants to commit fraud, its involvement does not clearly signify that it understood the scope of the alleged enterprise.
Plaintiffs do not cite any authority that suggests otherwise.
As to Davison, the complaint is similarly defective. Since Davison was not involved in the "stand-in" scheme, plaintiffs have not alleged that he ever agreed to commit any predicate acts which caused injury to the Ashford and Dromoland investors. Count Two of the Amended Complaint is therefore dismissed as to Wilde Sapte and Davison.
D. Respondeat Superior Claim
Count Three of the Amended Complaint alleges that, even if AIB was not part of the RICO enterprise, it violated 1962(c) through the actions of Dowling and Gill, whom plaintiffs describe as AIB's agents. AIB argues both that Dowling was not its agent and that, as a matter of law, respondeat superior liability does not exist under RICO.
With respect to AIB's first argument, plaintiffs have alleged facts sufficient to support their claim that Dowling had at least apparent authority to act as agent of AIB. The complaint alleges that he represented to investors that he could obtain financing for them from AIB, approved them as borrowers, and waived the bank's application requirements. P 199-200. In response, AIB argues that Dowling was actually the plaintiffs' agent with respect to these transactions. In support of this argument, they have submitted a Power of Attorney form signed by plaintiff Gilgan. Defs. Ex. 8. Clearly, the precise role that Dowling played as an intermediary involves complicated questions of fact that the court cannot address on this motion. Plaintiffs' allegations, however, are sufficient to enable their vicarious liability claim to survive this motion. The precise scope of Dowling's role might be better probed in a motion for summary judgment.
As to whether respondeat superior liability exists under RICO, the Second Circuit has not yet ruled definitively on this question. See, e.g., In re Ivan F. Boesky Securities Litigation, 36 F.3d 255, 262 (2d Cir. 1994). Courts in this circuit have recognized, however, that in certain circumstances a defendant may be liable for a RICO violation committed by an agent. See Amendolare v. Schenkers Int'l Forwarders, 747 F. Supp. 162, 168-169 (E.D.N.Y. 1990); see also Center Cadillac v. Bank Leumi Trust Co., 808 F. Supp. 213, 236 (S.D.N.Y. 1992) (holding that corporation may be vicariously liable where it benefitted from alleged scheme); Gruber v. Prudential-Bache Securities, 679 F. Supp. 165, 180 (D.Conn. 1987) (holding that corporation may be liable when it is a "central figure" or "aggressor" in the alleged scheme). In Amendolare, this court employed the "central figure" analysis used by Judge Cabranes in Gruber. In that case, the court concluded that:
In order to establish corporate liability under Section 1962(c) . . . it is necessary to show that an officer or director had knowledge of, or was recklessly indifferent toward, the unlawful activity. . . . The court may then consider other factors, among them the number of high-level employees involved in the racketeering activity, their degree of participation in the racketeering activity, whether these high-level employees themselves committed the alleged predicate acts, and whether the corporation directly and substantially benefitted from the racketeering activity.
679 F. Supp. at 181. The court also noted that "the fact that a corporation benefits from an illegal scheme does not in itself establish that the corporation participated as a 'central figure.'" Id.
Although plaintiffs have clearly alleged that AIB benefited from the alleged scheme, they do not clearly allege the kind of involvement by high-level officials at AIB necessary to invoke vicarious liability under Amendolare and Gruber. Nonetheless, the complaint permits at least a reasonable inference that such officials were, at the very least, aware of Dowling's activities. For the purposes of this motion, the court accepts this inference. AIB's motion to dismiss Count Three is therefore denied.
III. Supplemental Claims
Counts Four through Seven of the Amended Complaint raise various state law claims against the defendants. Pursuant to 28 U.S.C. § 1367, this court has supplemental jurisdiction over state law claims that are "so related to claims in the action within [the court's] original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." 28 U.S.C. § 1367(a).
In this case, the court has dismissed, without prejudice, the federal RICO claims by the creditor plaintiffs and against Wilde Sapte. There remains, however, a state law claim for breach of fiduciary duty against Dowling, Nickerson, Davison, AIB and Wilde Sapte.
Although this claim is brought by all plaintiffs, it appears to relate only to the creditor plaintiffs, since the investor plaintiffs have not alleged facts that suggest that AHL owed them any money. Thus Count Six properly relates only to the creditor plaintiffs, and is dismissed insofar as it purports to be brought on behalf of the Ashford and Dromoland investors. Furthermore, the claims of the creditor plaintiffs and the claims of the investor plaintiffs do not appear to spring from a "common nucleus of operative fact." United Mine Workers v. Gibbs, 383 U.S. 715, 725, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966). The investor plaintiffs claim that they were fraudulently induced to invest in Ashford and Dromoland Castles through the use of the "stand-in" scheme, and that money from the castles was subsequently diverted to pay the "stand-in" obligations. The creditor plaintiffs claim that AHL engaged their services in connection with an entirely different hotel project, and that defendants then stripped AHL of its assets and declined to pay them. None of the creditor plaintiffs was involved with the Ashford or Dromoland projects, and none of the investor plaintiffs has alleged facts supporting a claim of injury as a direct result of the diversion of AHL's assets. The link between the two claims is that they both allege wrongdoing by some of the same defendants. Thus it appears doubtful that these two claims can fairly be said to be part of the same "case or controversy." If that is so, this court has no jurisdiction over the creditor plaintiffs' breach of fiduciary duty claim.
Even if the two claims are part of the same case or controversy, the court concludes that it would be improvident to exercise jurisdiction over the creditor plaintiffs' state law claims at this time. Under § 1367, a district court may decline to exercise supplemental jurisdiction where it has dismissed all claims over which it has original jurisdiction. 28 U.S.C. 1367(c). Given the fact that the court has dismissed the creditor plaintiffs' RICO claim, it is appropriate to decline jurisdiction over the state law claims against them at this time. See First City National Bank & Trust Co. v. FDIC, 730 F. Supp. 501, 513 (E.D.N.Y. 1990). Count Six of the amended complaint is therefore dismissed without prejudice.
Because the remaining state law counts assert state law claims by the investor plaintiffs stemming from the "stand-in" scheme, the court concludes that it has supplemental jurisdiction over these claims pursuant to § 1367(a).
B. Common Law Fraud Claims
Count Four of the Amended Complaint charges Dowling, ACI, DCI, Dowmar and AIB with common law fraud in connection with the "stand-in" scheme. Count Five charges Nickerson, Curley and AIB with aiding and abetting fraud. Under New York law, a cause of action for fraud arises "when one misrepresents a material fact, knowing it is false, which another relies on to its injury." Graubard Mollen Dannett & Horowitz v. Moskovitz, 86 N.Y.2d 112, 122, 629 N.Y.S.2d 1009, 653 N.E.2d 1179 (1995). The Dowling defendants argue variously that they made no misrepresentations, that plaintiffs could not have relied on statements in the offering memoranda because of the disclaimers therein, that the plaintiffs' injury was not proximately caused by their conduct. They argue that the cause of action for aiding and abetting should be dismissed because plaintiffs have failed to prove a primary violation. AIB argues that plaintiffs have not alleged a definite injury, that they have not alleged that they relied on misstatements, and that they have not alleged proximate causation.
All of these arguments have been addressed above. Plaintiffs have identified statements in the Ashford and Dromoland PPMs that were either false, or, in light of the omission of information concerning the stand-ins, materially misleading. They have adequately alleged reliance on the statements and injury actually and proximately caused by such reliance. Furthermore, they have alleged intent by each of the defendants named in these counts.
The Dowling defendants also argue that plaintiffs' fraud claim is time-barred. Under N.Y. CPLR § 203(f) and § 213(8), a cause of action for fraud must be commenced within six years of the date of the fraud or from the time when the plaintiff could have discovered the fraud with reasonable diligence. Plaintiffs contend that because of defendants' obstructions, they could not reasonably have discovered the fraud until early 1994. P 180. Based on the allegations in the complaint, plaintiffs' claim is therefore not time-barred.
C. Breach of Contract
Count Seven of the Amended Complaint charges DCI and AIB with breach of contract. Specifically, it claims that the loan agreements between AIB, DCI and plaintiffs Gilgan and Milligan incorporated the terms of the Dromoland PPM, which stated that plaintiffs' payments would be held in escrow until the Minimum Subscription Level was reached. In the alternative, plaintiffs argue that DCI is directly bound by the representations in the Dromoland PPM.
DCI contends that plaintiffs have failed to allege a material breach of a contract. As noted above, however, plaintiffs have alleged that the Dromoland offering was closed despite a failure to reach the minimum subscription level. Furthermore, the Dromoland PPM clearly states that:
Owner may cancel his or her purchase without liability if any condition for the Closing of Sale has not been met by DCI. DCI has the right to dispute Owner's cancellation of his or her purchase.