UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NEW YORK
March 21, 1997
PATRICK ARONS, et al., Plaintiffs,
JAMES L. LALIME, et al., Defendants.
The opinion of the court was delivered by: HECKMAN
REPORT AND RECOMMENDATION AND ORDER
This case has been referred to the undersigned pursuant to 28 U.S.C. § 636(b) for all pretrial matters and to hear and report on dispositive motions. Defendant Harold Dingman has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure (Item 77) and for sanctions against plaintiffs pursuant to Fed.R.Civ.P. 11 (Item 101).1 For the following reasons, it is recommended that Dingman's motion for summary judgment be granted in part and denied in part. Dingman's motion for Rule 11 sanctions is denied.
On August 26, 1994 plaintiffs filed this action alleging that between April and October, 1993, defendants induced plaintiffs to invest their money in a fraudulent "serial transaction (roll) program" involving the purchase and sale of bank notes and securities, in violation of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, and various common law theories. More specifically, plaintiffs allege that between April and June of 1993 they transferred a total of $ 775,317.00 to Centerpointe Capital Corp. ("Centerpointe"), a corporation established by Lalime and defendant David Miller to carry out the serial transaction program. These funds were deposited into an attorney trust account maintained by Dingman, as Centerpointe's attorney, at NationsBank of Virginia.
Plaintiffs allege that instead of using the solicited funds to buy and sell discounted bank notes and securities as promised, Miller, Dingman, Lalime and the other defendants used the funds for their own personal gain.
After discovery, and after litigation of several disputes that arose between counsel during the course of discovery, Dingman moved for summary judgment pursuant to Rule 56 (see Items 77-79). Dingman claims that he was retained by Miller in early 1993 to provide legal services to Centerpointe in connection with certain proposed real estate transactions. According to Dingman, he had no previous experience or knowledge in the area of securities transactions, he is not nor has he ever been an officer of Centerpointe and played no role in the operation or management of Centerpointe, and he had no communications of any kind with the plaintiffs prior to any of the transactions at issue. He contends that the proof fails in several respects to meet the requirements for establishing a violation of RICO or liability under any of the state law theories set forth in the complaint (see generally Item 79).
In response, plaintiffs have submitted extensive documentation in support of their contention that Dingman was directly involved in the serial transaction "scheme" and the Centerpointe "enterprise" (see Items 86-93). According to plaintiffs, these submissions establish that there are genuine issues of material fact precluding summary judgment in favor of Dingman.
Oral argument was heard by the undersigned on February 27, 1997. For the reasons that follow, it is recommended that Dingman's summary judgment motion be granted in part and denied in part.
I. Summary Judgment.
Summary judgment is appropriate if the pleadings, discovery materials, and affidavits on file "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In reaching this determination, the court must assess whether there are any material factual issues to be tried while resolving ambiguities and drawing reasonable inferences against the moving party. Coach Leatherware Co., Inc. v. AnnTaylor, Inc., 933 F.2d 162, 166-67 (2d Cir. 1991). "Entry of summary judgment indicates that no reasonable jury could return a verdict for the losing party." Coach Leatherware, supra at 167.
As stated by the Second Circuit:
The trial court's task at the summary judgment motion stage of the litigation is carefully limited to discerning whether there are any genuine issues of material fact to be tried, not to deciding them. Its duty, in short, is confined at this point to issue-finding; it does not extend to issue-resolution. . . . It must be kept in mind that only by reference to the substantive law can it be determined whether a disputed fact is material to the resolution of the dispute.
Gallo v. Prudential Residential Services, 22 F.3d 1219, 1224 (2d Cir. 1994). In this case, the substantive law is the RICO statute.
In order to plead and prove a civil claim for damages under RICO, a plaintiff faces two distinct burdens. First, it must allege and show that the defendants violated the substantive RICO statute,
commonly known as "criminal RICO." Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S. Ct. 1280, 79 L. Ed. 2d 684 (1984). The plaintiff must show the following 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 invested in, or maintained an interest in, or participated in (6) an "enterprise" (7) the activities of which affected interstate or foreign commerce. Id. (citing 18 U.S.C. § 1962(a)-(c)); see also Maussner v. McCormick, 653 F. Supp. 131, 133 (W.D.N.Y. 1986).
If the plaintiff adequately demonstrates a § 1962 violation, it then must meet its second burden -- i.e., invoking RICO's civil remedies of treble damages, attorneys fees and costs. To satisfy this burden, the plaintiff must show that it was "injured in [its] business or property by reason of a violation of § 1962." 18 U.S.C. § 1964(c) (emphasis added); Moss v. Morgan Stanley, supra at 17.
Dingman contends that he is entitled to summary judgment on the RICO claims against him in this case because the proof fails to demonstrate the following:
(A) that Dingman participated in the operation or management of the Centerpointe "enterprise" (Item 79, pp. 17-22);
(B) that plaintiffs relied to their detriment on any representations made by Dingman ( id., pp. 22-25);
(C) that Dingman committed any RICO predicate acts;
(D) that Dingman was involved in any continuing criminal conduct constituting a RICO "pattern" ( id., pp. 28-34);
(E) the existence of a RICO conspiracy ( id., pp. 35-36); and,
(F) the requirements for mail and wire fraud ( id., pp. 36-41).
Each of these grounds is discussed in turn below.
A. Participation in the Enterprise.
Under the previously settled law of the Second Circuit, a plaintiff could successfully establish conduct or participation in the conduct of the affairs of an enterprise under 18 U.S.C. § 1962(c) in either of two ways: (1) by showing that the defendant was able to commit the predicate offenses solely by virtue of his or her position in the enterprise or control over the affairs of the enterprise, or (2) by showing that the predicate offenses were related to the activities of the enterprise. United States v. Scotto, 641 F.2d 47, 54 (2d Cir. 1980), cert. denied, 452 U.S. 961, 69 L. Ed. 2d 971, 101 S. Ct. 3109 (1981); see also United States v. Robilotto, 828 F.2d 940, 947-48 (2d Cir. 1987), cert. denied, 484 U.S. 1011, 98 L. Ed. 2d 662, 108 S. Ct. 711 (1988). More recently, however, the Circuit adopted the Supreme Court's holding in Reves v. Ernst & Young, 507 U.S. 170, 122 L. Ed. 2d 525, 113 S. Ct. 1163 (1993), applying a narrower test "to gauge whether a defendant had a sufficient connection to the enterprise to warrant imposing liability under § 1962(c)." United States v. Viola, 35 F.3d 37, 40 (2d Cir. 1994), cert. denied, 513 U.S. 1198, 115 S. Ct. 1270, 131 L. Ed. 2d 148 (1995); see also Napoli v. United States, 32 F.3d 31, 34-35 (2d Cir. 1994), cert. denied, 513 U.S. 1110, 115 S. Ct. 900, 130 L. Ed. 2d 784 (1995).
Now, under Reves, in order to be subject to § 1962(c) liability, a defendant "must participate in the operation or management of the enterprise itself." Reves, supra, 507 U.S. at 185. Thus, the plaintiff must plead and prove at a minimum that the defendant was associated with the enterprise and had " some part in directing" the affairs of the enterprise. Reves, supra, 507 U.S. at 179 (emphasis in original); see also United States v. Viola, supra, 35 F.3d at 40; Amalgamated Bank of New York v. Marsh, 823 F. Supp. 209, 220 (S.D.N.Y. 1993). In other words, in order to prove a violation of § 1962(c), the plaintiff must establish more than mere association with the enterprise or relatedness of the predicate acts to the affairs of the enterprise. The plaintiff must show that the defendant exercised at least some degree of control over the affairs of the enterprise. Amalgamated Bank, supra at 220-21.
In addition, providing legal advice and legal services generally does not constitute participation in the operation or management of an enterprise sufficient to ground an allegation of a violation of § 1962(c). Morin v. Trupin, 835 F. Supp. 126, 135 (S.D.N.Y. 1993); see also Nolte v. Pearson, 994 F.2d 1311, 1317 (8th Cir. 1993) (attorneys who prepared allegedly false opinion letters and informational memoranda regarding a music recording leasing program had not participated in "operation or management"); University of Maryland v. Peat, Marwick, Main & Co., 996 F.2d 1534, 1539 (3d Cir. 1993) ("simply because one provides goods or services that ultimately benefit the enterprise does not mean that one becomes liable under RICO as a result"); Sassoon v. Altgeld, 777 Inc., 822 F. Supp. 1303 (N.D.Ill. 1993)(attorneys' provision of legal services to general partners and limited partnership did not constitute operation or management of enterprise that would support liability under Section 1962(c)); Gilmore v. Berg, 820 F. Supp. 179, 183 (D.N.J. 1993)(attorney who prepared false limited partnership documents not liable under Section 1962(c)).
In this case, the primary proof relied on by plaintiffs to impose RICO liability on Dingman is a document entitled "Contract" (Item 93, Ex. 33).
This document was signed by Dingman on April 12, 1993, and by defendants Miller, McKernan, Polishuk and Schwartze-Berenguer (with no corresponding dates). It provided for the establishment of a "roll program" in Dingman's NationsBank attorney trust account, with Miller and McKernan as managers of the program and with Scwartze-Berenguer (on behalf of defendant Two Headed Eagle, Inc.) and Polishuk (on behalf of defendant Multinational, Ltd.) as representatives of "investors to the program from Europe" (id.). The contract described the procedure for wiring the investors' funds to the Dingman account, "to be used for the roll program to purchase credit lines to enable purchase of bank securities" (id.). The contract further provided for the following distribution of "financial benefits:"
1. Attorney Harold W. Dingman 5%
2. David Miller 10%
3. Dr. James McKernan 10%
4. Investors 50%
5. Mutinational & Two Headed Eagle 25%
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