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FEIRSTEIN v. NANBAR REALTY CORP.

April 24, 1997

ROBERT S. FEIRSTEIN, MICHAEL A. FEIRSTEIN, and IRA D. FEIRSTEIN, as Trustees of the Edna Feirstein (CS) Trust, MICHAEL A. FEIRSTEIN AND IRA D. FEIRSTEIN, Individually, MICHAEL A. FEIRSTEIN as Trustee under the Robert S. Feirstein Family Trust, STEPHEN GREEN and STANLEY GREEN, as Trustees under the Last Will and Testament of MURRAY GREEN, deceased, and as Trustees under the Last Will and Testament of DORA GREEN, deceased, and RICHARD RICHTER, Individually and as Executor of the Estate of SONYA RICHTER, deceased, and RUTH WATERS, Plaintiffs, against NANBAR REALTY CORP., PHILRAE REALTY CORP., PHILIP GREEN, HOWARD WAXMAN, ERIC BLUM, and BLUM, TABRISKY & BERNSTEIN, Defendants.


The opinion of the court was delivered by: BATTS

 DEBORAH A. BATTS, United States District Judge.

 Before the Court are the motions of Defendants Nanbar Realty Corp. ("Nanbar"), Philrae Realty Corp. ("Philrae"), Philip Green ("Green"), and Howard Waxman ("Waxman") (collectively the "Partner Defendants"), Eric Blum, and Blum, Tabrisky & Bernstein (collectively the "Accountant Defendants") to dismiss Plaintiffs' civil Racketeer Influenced and Corrupt Organizations Act claims, 18 U.S.C. § 1961 et seq. ("RICO"), pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure or, in the alternative, to stay the action. For the following reasons, Defendants' motions to dismiss are GRANTED.

 I. BACKGROUND

 Plaintiffs are partners, or the legal representatives of partners, of six New York real estate partnerships -- Pater Realty Co. ("Pater"), Amon Realty Co. ("Amon"), Fogar Realty Co. ("Fogar"), 41 West 17th Street ("41 West"), Irbil Realty Co. ("Irbil"), and Parley Associates ("Parley") (collectively the "Partnerships"). (Compl. PP 1-7.) The Partnerships own and operate commercial real estate in New York City. (Compl. P 8.) Defendants Nanbar and Philrae are New York corporations organized by Defendant Green, a former partner in all the Partnerships, except for Parley. (Compl. PP 9, 12.) Defendant Waxman and Green were actively involved in the operation of Nanbar, Philrae and the Partnerships. (Compl. PP 10, 13.) Defendant Eric Blum is a Certified Public Accountant, and a member of the Defendant accounting firm of Blum, Tabrisky & Bernstein, a New York partnership with offices in Tarrytown, New York. (Compl. PP 14, 15.)

 Plaintiffs allege that at some time between 1984 and 1990, Green, in furtherance of a scheme not to pay New York income and estate taxes, changed his residence to Florida but, in fact, continued to reside in New York for substantial periods each year, and to act as a partner in the Partnerships. (Compl. P 11.) Plaintiffs also claim that Green organized Nanbar and Philrae, the sole shareholders of which were his wife and/or his two daughters, Barbara Green and Nancy Green Waxman, and assigned Nanbar and Philrae his interest in the profits of the Partnerships (other than of Parley). (Compl. P 12.) Plaintiffs also claim that Green and Waxman dominated the financial affairs of the Partnerships. (Compl. PP 16-17.)

 Plaintiffs claim that the Accountant Defendants performed accounting and tax services for the Partner Defendants including the preparation of their personal income tax returns, (Compl. P 18), which services were paid by the Partnerships although the Accountant Defendants knew that Plaintiffs were also partners of the Partnerships. (Compl. P 20.) Furthermore, until approximately 1994, the Accountant Defendants, under the direction of the Partner Defendants, performed accounting and tax services for the Partnerships and prepared the tax returns for those entities, including New York City Unincorporated Business Tax ("UBT") returns for Pater and 41 West. (Compl. P 19.)

 In order that Nanbar and Philrae avoid paying New York City corporate income taxes on income they derived from the Partnerships, Plaintiffs allege that Green, Waxman and the Accountant Defendants listed the corporate offices of Nanbar and Philrae with the Department of State at the same address as the Accountant Defendants' offices, outside of New York City, notwithstanding the fact that Nanbar and Philrae's only business was the receipt of income from activities of the Partnerships in New York City. (Compl. PP 21, 22.)

 Defendants deny Plaintiffs' allegations and now move to dismiss Plaintiffs' Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure or, in the alternative, to stay the action. In addition, the Defendants argue that the Court should not grant Plaintiffs' request to amend the Complaint because it would be futile.

 II. DISCUSSION

 Plaintiffs allege two RICO claims, found in the Fourth and Fifth Causes of Action, and three state law claims, found in the first three causes of action, against the Partner and Accountant Defendants.

  "On a motion to dismiss under Rule 12(b)(6), the court must accept as true the factual allegations in the complaint, and draw all reasonable inferences in favor of the plaintiff." Bolt Elec., Inc. v. City of N.Y., 53 F.3d 465, 469 (2d Cir. 1995) (citations omitted); Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). The Court will grant such a motion only if after viewing plaintiff's allegations in a most favorable light, "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Walker v. City of N.Y., 974 F.2d 293, 298 (2d Cir. 1992), cert. denied, 507 U.S. 961, 122 L. Ed. 2d 762, 113 S. Ct. 1387 (1993). Accordingly, the factual allegations set forth and considered herein are presumed to be true for the purpose of deciding the motions to dismiss.

 A. RICO

 The purpose of civil RICO liability does not include deterrence of all unlawful acts but only of those set out in Section 1961. H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 232, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989); Hecht v. Commerce Clearing House, Inc., 897 F.2d 21 (2d Cir. 1990); Mathon v. Marine Midland Bank, N.A., 875 F. Supp. 986, 1001 (E.D.N.Y. 1995). Furthermore, "alleged RICO violations must be reviewed with appreciation of the extreme sanctions it provides, so that actions traditionally brought in state courts do not gain access to treble damages and attorneys fees in federal court simply because they are cast in terms of RICO violations." Mathon, 875 F. Supp. at 1001.

 To state a civil RICO cause of action, Plaintiffs must establish that the Defendants, conducted or participated in the conduct of an enterprise's affairs, through a pattern of racketeering activity, that caused injury to the Plaintiffs' business or property. See 18 U.S.C. § 1962(c); *fn1" Sedima, S.P.R.L v. Imrex, Co., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985); McLaughlin v. Anderson, 962 F.2d 187, 190 (2d Cir. 1992).

 1. Accountant Defendants

 a. Enterprise

 Plaintiffs allege in their fourth cause of action that the Accountant Defendants charged the Partnerships for services rendered on behalf of the Partner Defendants and mailed statements for those services to the Partnerships on a monthly basis during the period of July 1992 through the end of 1994, and that Partner Defendants mailed back payments of those charges to the Accountant Defendants. Plaintiffs allege that the payments made by the Partner Defendants were taken from the Partnerships' funds and that each act of mailing constitutes a separate racketeering act of mail fraud. (Pls.' Mem. of Law at 13.)

 The Complaint alleges Defendant Blum, Tabrisky & Bernstein is an enterprise. Accordingly, Defendant Blum, Tabrisky & Bernstein is dismissed. An enterprise and the persons conducting the affairs of an enterprise must be distinct. See Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1063 (2d Cir. 1996); R.C.M. Executive Gallery Corp. v. Rols Capital Co., 1997 U.S. Dist. LEXIS 565, No. 93 Civ. 8571, 1997 WL 27059, at *7 (S.D.N.Y. Jan. 23, 1997). A corporate entity, such as the accounting firm, cannot be both the person who conducts the affairs of the enterprise and the enterprise itself. Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994); R.C.M., 1997 U.S. Dist. LEXIS 565, 1997 WL 27059 at *7. A corporate entity can only form with others to compose an enterprise if it is sufficiently distinct. Riverwoods, 30 F.3d at 344; R.C.M., 1997 U.S. Dist. LEXIS 565, 1997 WL 27059 at *7. This requirement may not be circumvented by alleging that the corporate entity's agents or employees and the corporate entity itself form the RICO enterprise that carries out its regular business. Riverwoods, 30 F.3d at 344; R.C.M., 1997 U.S. Dist. LEXIS 565, 1997 WL 27059 at *7. Accordingly, Defendant Blum is also dismissed. Riverwoods, 30 F.3d at 344-45.

 b. Manage or Operate Enterprise

 Assuming, however that all the Defendants combined to form a separate enterprise from the accounting firm, *fn2" the Court finds that the Accounting Defendants did not manage or operate this alleged RICO enterprise. See, e.g., Reves v. Ernst & Young, 507 U.S. 170, 188, 122 L. Ed. 2d 525, 113 S. Ct. 1163 (1993); Azrielli v. Cohen Law Offices, 21 F.3d 512, 521-22 (2d Cir. 1994); Department of Econ. Dev. v. Arthur Andersen & Co., 924 F. Supp. 449, 468-69 (S.D.N.Y. 1996) (accountants fraudulent certification of misleading financial statements in aid of corporation's securities fraud does not constitute participation in operation and management of enterprise for purposes of assessing RICO liability); 131 Main St. Assocs. v. Manko, 897 F. Supp. 1507, 1527 (S.D.N.Y. 1995); Amalgamated Bank of N.Y. v. Marsh, 823 F. Supp. 209, 220 (S.D.N.Y. 1993); United States v. Altman, 820 F. Supp. 794, 796 (S.D.N.Y. 1993); Strong & Fisher Ltd. v. Maxima Leather, Inc., 1993 U.S. Dist. LEXIS 10080, No. 91 Civ. 1779, 1993 WL 277205, at *1 (S.D.N.Y. July 22, 1993).

 Section 1962(c) makes it unlawful for any person to "conduct or participate" in the enterprise's affairs. The Supreme Court has found this requires that one participate in the operation or management of the enterprise itself. Reves, 507 U.S. at 184-85; 179 ("Once we understand the word 'conduct' to require some degree of direction and the word 'participate' to require some part in that direction, the meaning of § 1962(c) comes into focus."); see also Napoli v. United States, 45 F.3d 680 (2d Cir. 1995), cert. denied, 131 L. Ed. 2d 724, 115 S. Ct. 1796 (1995). The Accounting Defendants did not participate in the conduct of the enterprise's affairs by preparing monthly statements, even if fraudulent, by mailing them to the Plaintiffs, or by mailing fraudulent tax returns. It is well established that professional services by outsiders is insufficient to satisfy the participation element of RICO. Reves, 507 U.S. at 188; Hayden v. Paul, Weiss, Rifkind, Wharton & Garrison, 955 F. Supp. 248, 1997 WL 76674, at *5 (S.D.N.Y. 1997); Department of Econ. Dev. v. Arthur Andersen & Co., 924 F. Supp. 449 (S.D.N.Y. 1996); 131 Assocs., 897 F. Supp. 1507, 1527; Marsh, 823 F. Supp. at 220; Strong & Fisher, 1993 U.S. Dist. LEXIS 10080, 1993 WL 277205, at *1. There is also no allegation that the Accountant Defendants had any measure of control over the enterprise's affairs. Napoli, 45 F.3d at 683; Hayden, 955 F. Supp. 248, 1997 WL 76674, at *5. Nor is there an allegation of how the Accountant Defendants instituted this plan. Nor is there any allegation that the Accountant Defendants performed any acts beyond what they were hired to perform. Hayden, 955 F. Supp. 248, 1997 WL 76674, at *6; LaSalle Nat'l Bank v. Duff & Phelps Credit Rating Co., No. 93 Civ. 4692, 1996 WL 754138 (S.D.N.Y. Dec. 2, 1996). Therefore, no claim against the Accountant Defendants, alleged in either Cause of Action Four or Five, can survive this requirement. Reves, 507 U.S. 170, 113 S. Ct. 1163, 122 L. Ed. 2d 525; Hayden, 955 F. Supp. 248, 1997 WL 76674.

 c. Rule 9(b)

 Finally, Plaintiffs' Complaint has failed to allege fraud with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of a person may be averred generally." Fed. R. Civ. P. 9(b). "Allegations of predicate mail and wire fraud acts should state the contents of the communications, who was involved, where and when they took place, and why they were fraudulent." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir. 1993). Here, Plaintiffs' allegations are conclusory. For example, there are no specific citations to the accounting services that were improperly charged to the Partnerships nor to a single invoice containing an improper charge.

 a. Pattern of Racketeering Activity

 In order to prove a pattern of racketeering activity under RICO, Plaintiffs must show, at least, two *fn3" related racketeering acts, that occurred in the last ten years, which "amount to or pose a threat of continued criminal activity." H.J. Inc., 492 U.S. at 237-39; GICC Capital Corp. v. Technology Fin. Group, Inc., 67 F.3d 463, 465 (2d Cir. 1995), cert. denied, 135 L. Ed. 2d 1067, 116 S. Ct. 2547 (1996). Relatedness and continuity combine to discern whether a pattern exists. H.J. Inc., 492 U.S. at 243. Relatedness is defined as "acts that have the same or similar purposes, results, participants, victims or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." Id. at 240.

 "'Continuity' is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." H.J. Inc., 492 U.S. at 241; GICC, 67 F.3d at 465-66. Closed-ended continuity may be demonstrated "by proving a series of related predicates extending over a substantial period of time." H.J. Inc., 492 U.S. at 242; GICC, 67 F.3d at 466, 467 (citing only two instances where the 2d Circuit has found closed-ended continuity -- one for acts occurring over a period of eight years and the other for a two year period.) Acts that extend "over a few weeks or months and threaten[] no future ...


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