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BERNSTEIN v. MISK

January 2, 1997

DR. STANLEY BERNSTEIN and THE LINCOLN SERVICE GROUP, INC., Plaintiffs, against NASRALLAH MISK, DR. CHRISTIAN RIZK, and METROPOLITAN DIAGNOSTIC LABORATORIES, INC., Defendants.


The opinion of the court was delivered by: GLASSER

 GLASSER, United States District Judge:

 SUMMARY

 Plaintiffs Dr. Stanley Bernstein ("Bernstein") and The Lincoln Service Group, Inc. ("Lincoln"), a corporation whose sole shareholder is Bernstein, bring this action against Nasrallah Misk ("Misk"), Dr. Christian Rizk ("Rizk") and Metropolitan Diagnostic Laboratories, Inc. ("MDL") for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) and Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiffs also allege various state law claims. The defendants move to dismiss the federal claims pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6) and to dismiss the state claims for lack of jurisdiction. For the reasons set forth below, the motion should be granted.

 STATEMENT OF FACTS

 The essence of the complaint is that Misk, Rizk, MDL, and others have used various individuals and entities as nominees or "fronts" in order to fraudulently procure financing from lending institutions and investors. Compl. P 10. In allegations spread over fourteen pages and seventy-one paragraphs, the plaintiffs repeatedly describe transactions alleged to be fraudulent and which follow essentially this pattern or a variant thereof: Misk, or one of several nominees, borrow money from a lending institution with which to purchase real property. The loan is secured by a first mortgage. The loan thereafter intentionally remains unpaid thus inducing the lender to foreclose the mortgage. Misk or one of several nominees then acquires the property at a substantially reduced price. Before doing so, however, the mortgagor divests himself of all his assets so that a deficiency judgment obtained incident to the foreclosure is uncollectible.

 One of the properties thus acquired by a Misk nominee, Golden Towers Realty Co. ("Golden Towers"), was a hospital building located at 46-02 31st Avenue in Long Island City, New York. In connection with that acquisition, Misk obtained a $ 1.5 million loan from Capital National Bank ("CNB") which he used to purchase medical equipment, construct residential housing on neighboring properties and to renovate the first floor of the building to accommodate an ambulatory surgical center to be known as the Queens Surgical Community Center ("QSCC"). Compl. PP 92-93. Misk also obtained an Operating Certificate pursuant to the New York Public Health Law to operate a testing laboratory (the "Lab") in the building. The Lab was nominally owned by defendant MDL and operated by Rizk. The complaint alleges, however, that Misk was the de facto owner.

 The acquisition of the QSCC was made possible by a loan from Astoria Federal Savings Bank ("Astoria Federal") which was secured by a first mortgage on the property. Notwithstanding the complaint's allegation that the property was acquired and mortgaged by Golden Towers, P 91, it then alleges that Misk defaulted on the loan and that Astoria Federal acquired the property at the foreclosure sale. Compl. PP 94, 96. The complaint also alleges that the Federal Deposit Insurance Corporation ("FDIC") became the owner of the medical equipment and assets of the QSCC. Compl. P 96. Nowhere has there been a mention of a chattel mortgage but the court assumes that such a security instrument was given to CNB when it loaned money to Misk for the purchase of medical equipment and that the FDIC, as successor to CNB, became an assignee of that security instrument and through it (by foreclosure it is assumed) became the owner of the chattels. Compl. P 116. Those chattels were subsequently purchased by Lincoln and a Dr. Zupnick. Id.

 The complaint also alleges that between 1987 and 1989, Misk, acting individually and through nominees, illegally obtained loans totaling $ 10 million from CNB. CNB was founded by Carlos Cordova and Misk was a member of its advisory board. The loans remained unpaid and resulted in the intervention of the FDIC and its takeover of the CNB in July, 1990. The Securities and Exchange Commission ("SEC"), in 1991, filed an action against Misk, Cordova and others alleging violations of the federal securities laws. A consent judgment was subsequently entered against Misk permanently enjoining him from aiding and abetting violations of the federal securities laws. Compl. PP 83-87. The relevance of these allegations to the events about which plaintiffs complain is difficult to fathom.

 It is significant to note that all of the foregoing, spread over twenty-five pages and eighty-nine paragraphs, bears no relationship to the plaintiffs, nor implicates them in any way, but is ostensibly pleaded as "background" for what follows.

 The plaintiffs' entry into this story allegedly begins in August 1991, when Misk informed Bernstein and one Dr. Medhat Sami that he (Misk) could assist them in purchasing the QSCC property from Astoria Federal at an attractive price because of his favorable relationship with Astoria Federal. Misk also advised them that he would transfer the Operating Certificate to them were they able to purchase the property. Misk did not disclose to them his prior role in numerous real estate transactions to which reference has previously been made, nor did he disclose the consent judgment obtained against him by the SEC.

 The acquisition of the building was discussed with Misk over the next several months in person and by phone. There came a time when Misk informed Bernstein and Sami that their combined resources were insufficient to purchase the building. Misk then introduced Rizk to them as a source of additional financing, not revealing, however, the complaint alleges, that he was in reality Misk's nominee. An oral agreement was eventually reached by the terms of which Bernstein, Sami and Rizk would own the building and the QSCC within it through a corporation to be formed for that purpose. It was contemplated that Bernstein would bring his abortion practice to the QSCC and the income to be thus derived would enable the QSCC to succeed and eventually make it attractive for purchase by a major corporation and produce a large profit for the principals.

 Astoria Federal refused to make the loan essential to the purchase of the QSCC when it learned of Misk's involvement. Sami then recruited his brother-in-law Roy Peterson ("Peterson") to head the purchasing group and Roy Pet Realty Corp. ("Roy Pet") was formed to become the borrower.

 A contract was eventually entered into between Astoria Federal as vendor and Roy Pet as vendee by the terms of which the property would be sold for $ 2.15 million. Sami, Peterson, Rizk and Bernstein (through Lincoln) made a down payment of $ 250,000 to which each contributed an equal amount. The balance of the purchase price was to be financed by Johnson and Johnson Finance Corporation ("J&J") provided Bernstein, Sami and Peterson personally guaranteed the loan. Sami and Peterson refused and withdrew from the project. Compl. PP 119, 120. They were replaced by Arias Schwarz as a shareholder in Roy Pet. Personal guarantees were then executed by Bernstein and the Estate of Gustav Schwarz for the benefit of Arias Schwarz. The acquisition of the building closed on August 31, 1993.

 The foregoing summary has been distilled from a complaint which can be described, only charitably, as challenging. Beyond that, attempts to summarize the complaint coherently fail. For example, P 121 describes the percentage interests of Bernstein, Rizk and Schwarz in Roy Pet, purportedly fixed by an oral agreement among them, and the contemplated source of income to be derived from rents paid by the Lab, the QSCC, Bernstein's medical practice, etc. Misk is not mentioned as having any pecuniary interest whatsoever in Roy Pet. Incomprehensibly, however, the complaint alleges that Misk (who had no ownership interest in it) caused title to the building to be transferred to an entity known as BSR Realty L.P. Compl. P 123. The following paragraph, 124, alleges that Misk manipulated insurance payments. "In fact, no insurance payments were ever billed by Misk during the entirety of 1994." The insurance payments refer to reimbursements by insurance companies for medical services rendered by Bernstein. Misk's connection to this is mystifying.

 Even more puzzling is the allegation in P 125 that Misk refused to permit "Bernstein's abortion patients access to the QSCC facilities," bearing in mind, that Misk is not shown to have any ownership interest in the property. Continuing with this remarkable saga is the next allegation in P 126 that Misk failed to pay the monthly mortgage installments due J&J for almost a full year and an action to foreclose the mortgage was commenced. In P 128, it is alleged that Misk failed and refused to pay real estate taxes on the property.

 The failure by Misk, who as near as can be discovered owns no interest in this property, to pay mortgage installments and property taxes is, it is alleged, in furtherance of a scheme by Misk to defraud J&J and extinguish the interest of the plaintiffs in this property. It is also interesting to note that at oral argument it was revealed that Bernstein never consulted with or was represented by counsel during his entanglement in this legal maze.

 The complaint in this action was filed on June 4, 1996. In addition to alleging violations of RICO and the federal securities laws against Misk, Rizk and MDL, it charges them with breach of contract, breach of fiduciary duty, and common law fraud and seeks damages plus declaratory and injunctive relief.

 DISCUSSION

 I. Motion to Dismiss Standards

 On a motion to dismiss, the factual allegations of the complaint must be accepted as true, and the complaint must be liberally construed and its allegations considered in the light most favorable to plaintiffs. Morin v. Trupin, 711 F. Supp. 97, 103 (S.D.N.Y. 1989)(citing Dwyer v. Regan, 777 F.2d 825, 828-29 (2d. Cir. 1985) and Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974)). "A motion to dismiss will be granted only if it appears to be certain that the plaintiff is entitled to no relief under any set of facts which could be proved in support of the claim made." Id. (citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).

 A. The RICO Claims

 To state a claim for damages under § 1962(a)-(c), a plaintiff has two pleading burdens. First, he must assert that the defendant has violated 18 U.S.C. § 1962, the substantive RICO statute. This requires the plaintiff to allege (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. Moss v. Morgan Stanley, Inc. 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025 (1984). Second, he must allege that he was injured in his business or property by reason of a violation of § 1962. Id. Because both the complaint and the defendants' motion to dismiss are primarily focused on § 1962(c), the court will examine the sufficiency of the pleadings under that subsection first.

 1. Section 1962(c)

 a. Enterprise

 "Enterprise" is defined in the RICO statute to include "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.A. § 1961(4). The term "person" includes "any individual or entity capable of holding a legal or beneficial interest in property." 18 U.S.C.A. § 1961(3). In United States v. Turkette, 452 U.S. 576, 583, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981), the Supreme Court explained that an enterprise is a "group of persons associated together for a common purpose or engaging in a common course of conduct . . . [It is] proved by evidence of an ongoing organization, formal or informal, and by any evidence that the various associates function as a continuing unit." Courts in the Second Circuit should look to the "hierarchy, organization, and activities" of an association-in-fact to determine whether "its members functioned as a unit." United States v. Coonan, 938 F.2d 1553, 1560-61 (2d Cir. 1991), cert. denied, 503 U.S. 941 (1992). For an association of individuals to constitute an enterprise, the individuals must "share a common purpose to engage in a particular fraudulent course of conduct and work together to achieve such purposes." Moll v. U.S. Life Title Ins. Co., 654 F. Supp. 1012, 1031 (S.D.N.Y. 1987). For purposes of § 1962(c), the Second Circuit requires that the alleged racketeering enterprise be distinct from the persons who participate in it. See Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994).

 The complaint alleges the "enterprise" to consist of "Misk, Rizk, various other individuals and their various related companies." The purpose of the enterprise is alleged to be engaging in "massive and ongoing illegal activities affecting interstate and international commerce." Compl. P 9. It should be noted that although MDL is named as a defendant, it is not included as a member of the enterprise as above defined. In P 130 of the complaint, however, it is alleged that "the defendants and each of them are members, or associates of members, of the QSCC, the Lab, and the various nominee entities described above, an association-in-fact." (Emphasis added). Neither allegation describes an "organization whose various associates function as a continuing unit" as is required by Turkette or clearly differentiate between the "person" and the "enterprise" as being separate and distinct entities as required. See Riverwoods, 30 F.3d at 344; Bennett v. United States Trust Co., 770 F.2d 308, 315 (2d Cir. 1985), cert. denied, 474 U.S. 1058, 88 L. Ed. 2d 776, 106 S. Ct. 800 (1986). The indispensability of distinguishing between the person and the enterprise has been tersely explained by Judge Posner as follows: "you cannot associate with yourself, any more than you can conspire with ...


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