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BUTALA v. AGASHIWALA

February 24, 1996

AJITKUMAR R. BUTALA, GITA A. BUTALA, BHUPRENDA V. DUDHIA, SURENDRA D. MAHADEVIA, PANNA S. MAHADEVIA, PANKAJ MEHTA, SMITHA MEHTA, ALIAKBAR NOORANI, BIPIN PARIKH, DILIP J. PATEL, CHHAYA M. PATEL, RAJNIKANT PATEL, USHA PATEL, RAMACHANDRA G. PATEL, JASUMATI PATEL, RAJNIKANT SHAH, SUBODHCHANDRA TRIVEDI and SUDHA TRIVEDI, Plaintiffs, against MAHESH AGASHIWALA and LOMA AGASHIWALA, Defendants.


The opinion of the court was delivered by: KOELTL

 JOHN G. KOELTL, District Judge:

 This case is brought by twenty individual investors against two accountants, Mahesh and Loma Agashiwala. The plaintiffs assert two claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and three supplemental claims under New York law for fraud, negligent misrepresentation and breach of fiduciary duty. The plaintiffs allege that the defendants made statements with respect to certain real estate investments that were fraudulent and form the basis for the underlying predicate acts of securities fraud under Sections 10(b) and 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o(c), and Sections 5, 12 and 17(a); of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77l, 77q(a), and mail fraud under 18 U.S.C. § 1341. The plaintiffs allege that the defendants conducted and participated in the conduct of an enterprise through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c) (Count I), and conspired to do so in violation of 18 U.S.C. § 1962(d) (Count II). The plaintiffs seek compensatory damages in the amount of their lost investments, treble damages and attorneys' fees and expenses.

 The defendants move (i) to dismiss both RICO claims pursuant to Fed. R. Civ. P. 12(b)(6) as time barred, or, (ii) in the alternative, to dismiss the complaint for failure to plead fraud with particularity under Fed. R. Civ. P. 9(b), or, finally, (iii) to dismiss the second RICO claim for failure to state a claim under Fed. R. Civ. P. 12(b)(6). For the reasons that follow, the defendants' motion to dismiss is granted without prejudice to the plaintiffs' filing an amended complaint to remedy the defects in pleading both with respect to fraudulent concealment and with respect to failure to plead fraud with particularity as to all twenty plaintiffs.

 I.

 On a motion to dismiss, the Court "'must accept the material facts alleged in the complaint as true and construe all reasonable inferences in the plaintiff's favor.'" Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995) (considering a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) quoting Hernandez v. Coughlin, 18 F.3d 133, 136 (2d Cir.), cert. denied, 130 L. Ed. 2d 63, 115 S. Ct. 117 (1994)). In the present case, the Complaint alleges the following facts.

 Some of the twenty plaintiffs in this action were accounting clients of the defendants, while the others were friends and co-investors of such clients. (Compl. PP 1, 15.) The defendants, with others, organized a real estate venture to build residential townhouses and condominiums in Newark, New Jersey. (Compl. PP 10-11.) The defendants prepared financial projections that showed anticipated returns in excess of 140% for each of the limited partnerships. (Compl. PP 12.) The defendants also made oral representations, among which were that (i) investors would realize at least a 15% annual return, (ii) investors would receive a full return of capital by February 1990, (iii) the managers of the venture were experienced, reliable and trustworthy, (iv) a performance bond of $ 1.5 million had been put up by the contractors, (v) the defendants were the accountants for the real estate venture, and (vi) the defendants were co-investors in the limited partnerships. (Compl. PP 16-20.) Subsequently between 1987 and 1988, the plaintiffs invested in the limited partnerships. Shortly after each investment closed, the plaintiffs began to receive monthly distribution checks, allegedly representing installments on their 15% annual return. (Compl. P 33.) In April 1989 however, the monthly checks bounced. (Compl. P 40.) No further checks were sent. Consequently, the plaintiffs did not recover their capital by February 1990, nor did they realize a 15% annual return or total returns in excess of 140%. Furthermore, one defendant sent a letter to investors dated June 23, 1989, indicating that the real estate venture was having "problems." (Compl. PP 40-41.) The plaintiffs allege that a meeting was held on June 29, 1989 between the defendants, plaintiffs and other investors, although the Complaint does not indicate who attended or what was said or done. (Compl. P 43.)

 The plaintiffs further allege that the defendants claimed to have been duped by the managers of the real estate venture and that the defendants coordinated lawsuits brought against those managers and took other actions to curtail the losses. The plaintiffs maintain that the defendants concealed their own part in the fraud by controlling these lawsuits, and that the plaintiffs only recently learned of the defendants fraudulent acts. (Compl. PP 44, 45.) Accordingly, the plaintiffs now sue the defendants for violations of RICO arguing that the defendants themselves, and in conspiracy with others, conducted an enterprise through a pattern of racketeering thereby inducing the plaintiffs to make the doomed investments.

 II.

 The defendants move to dismiss the two RICO claims pursuant to Fed. R. Civ. P. 12(b)(6) on the basis of the statute of limitations. The defendants argue that RICO claims have a four-year statute or limitations which began to run when the plaintiffs discovered or with reasonable diligence should have discovered their injuries. The defendants assert that the plaintiffs' injuries occurred at the time they purchased their limited partnership interests and that they had notice of their injuries upon the occurrence of three events: i) the bounced April 1989 checks, (ii) the subsequent lack of further payments, and (iii) the failure to recover their capital as promised by February 1990. The defendants argue that these events put the plaintiffs on notice of their injuries and that, therefore, the statute of limitations began to run no later than February 1990. Since more than four years elapsed between February 1990 and the filing of this lawsuit on February 9, 1995, the suit is untimely. In response, the plaintiffs argue first that the statute did not begin to run until their damages were "finally determined in 1994[,]" (see Pls.' Mem. Opp'n Defs.' Mot. Dismiss at 10), and that, therefore, their claims are timely. Second, the plaintiffs argue that even if the statute began to run when the limited partnerships were purchased, the statute was tolled on the basis of the defendants' fraudulent concealment.

 A.

 The statute of limitations for civil enforcement actions under RICO is four years. See Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 156, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987). A cause of action under RICO accrues when the plaintiff suffers an injury, and the statute of limitations begins to run when the plaintiff discovers or should discover that injury. Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1102 (2d Cir. 1988), cert. denied, 490 U.S. 1007, 104 L. Ed. 2d 158, 109 S. Ct. 1642 [1989); see In re Integrated Resources Real Estate Ltd. Partnerships Sec. Litig., 850 F. Supp. 1105, 1117-18 (S.D.N.Y. 1993) ("The RICO limitations test here then, is an objective one, to wit, when a reasonable person should have discovered the RICO injury, the RICO statute of limitations will start to run."); Ackerman v. Nat'l Property Analysts, Inc., 887 F. Supp. 494, 503 (S.D.N.Y. 1992). In the case of the purchase of allegedly fraudulent limited partnerships, ordinarily the injury occurs at the time of purchase. See Fisher v. Reich, No. 92 Civ. 4158, 1995 WL 23966, at *3 (S.D.N.Y. Jan. 10, 1995) ("Where, as here, plaintiffs acquired limited partnership interests based upon the defendants' alleged fraudulent statements and offering material, the injury to plaintiffs is the purchase of the partnership interests."); Ackerman, 887 F. Supp. 494 at 503 at 503-04 ("The injury to plaintiffs is the actual purchase of the partnership interest rather than each subsequent payment of that interest."); Gould v. Berk & Michaels, P.C., No. 89 Civ. 5036, 1990 U.S. Dist. LEXIS 3655, 1990 WL 41706, at *5 (S.D.N.Y. Apr. 5, 1990) ("A [securities-based] RICO cause of action accrues on the date of the last sale to plaintiffs, subject to tolling for fraudulent concealment.").

 The plaintiffs' argument that their cause of action did not accrue until their damages were ascertainable is premised on a misunderstanding of the difference between when an injury occurs and when the damages resulting from that injury are fully quantifiable. The plaintiffs contend that their losses were not "crystallized" until the 1994 disposition of certain lawsuits allegedly controlled by the defendants. The plaintiffs rely on several cases where the injuries suffered resulted from the denial of tax benefits and the courts held that a RICO action accrued at the time of the adverse tax ruling rather than the time the investments were purchased. See Rohland v. Syn-Fuel Assocs.-1982 L.P., 879 F. Supp. 322 (S.D.N.Y. 1995); Toto v. McMahan, Brafman, Morgan & Co., No. 93 Civ. 5894, 1995 U.S. Dist. LEXIS 1399, 1995 WL 46691, at *6 (S.D.N.Y. Feb. 7, 1995); Mazella v. Rothschild Reserve Int'l, Inc., No. 89 Civ. 4675, 1992 U.S. Dist. LEXIS 7726, 1992 WL 138321, at *3 (S.D.N.Y. June 3, 1992). These cases do not further the plaintiffs' argument since they concern whether the injury occurred at all and not whether the statute of limitations should only begin to run once the full amount of damages is ascertainable. See, e.g., Rohland, 879 F. Supp. at 332 (plaintiffs could not maintain RICO claim until tax court decision denied deductions).

 In the present case the plaintiffs' alleged injuries occurred when they purchased the limited partnership interests in late 1987 and early 1988. (See Compl. PP 20, 21, 33.) The plaintiffs allege that these investments were fraudulent from their inception. Consequently, the plaintiffs were injured when they purchased them. Nothing is pleaded indicating that there was ever a question as to whether the plaintiffs were injured at all. The only issue the plaintiffs raise is the amount of their damages, not the ...


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