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THOMAS F. CLIFFORD & THOMAS CLIFFORD, INC. v. JAME

February 4, 1998

THOMAS F. CLIFFORD and THOMAS CLIFFORD, INC., Plaintiffs, against JAMES R. HUGHSON, JAMIE LYNN ENTERPRISES, INC., ARTHUR E. KESSLER, FIRST NATIONAL BANK OF JEFFERSONVILLE and JEFFERSONVILLE BANCORP., Defendants.

William C. Conner, Senior United States District Judge.


The opinion of the court was delivered by: CONNER

Conner, Senior D.J.

 Plaintiffs Thomas Clifford ("Clifford") and Thomas Clifford, Inc. brought this action against defendants James R. Hughson ("Hughson"), Jamie Lynn Enterprises, Inc. ("JLE"), Arthur E. Keesler ("Keesler"), and First National Bank of Jeffersonville and Jeffersonville Bancorp (together, the "banks") for mail fraud, wire fraud, and conspiracy to defraud, in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(c) and (d), and for common law fraud. Defendants now bring identical motions to dismiss the Third Amended Complaint and for sanctions pursuant to Rules 9(b), 11 and 12(b) (6) of the Federal Rules of Civil Procedure. For the following reasons, defendants' motions to dismiss are granted and their motions for sanctions are denied.

 BACKGROUND

 This case arises out of a series of lending and leasing transactions, through which plaintiffs claim that defendants used plaintiffs and other investors as "credit dummies" to establish and run a restaurant and to prevent foreclosure of that business. Plaintiffs assert that defendants defrauded them and other investors by "luring" them into taking out loans from the banks, and using the proceeds to establish a restaurant on premises leased from Hughson, from which Hughson planned to "evict plaintiffs, to expropriate plaintiffs' equipment and to take over plaintiffs' restaurant business."

 Plaintiffs allege the following facts: In or around March 1990, defendant Hughson, through JLE, agreed to rent property to plaintiffs in Sullivan County, New York, and to assist plaintiffs in constructing and operating a restaurant. Plaintiffs agreed to pay JLE rent, in addition to a percentage of the restaurant's profits. Before signing the lease, Hughson told Clifford that he had borrowed $ 140,000 from the banks in order to purchase property and to construct and operate the restaurant, and that Keesler, the banks' president and Chief Executive Officer ("CEO"), would make an additional loan to Hughson at a later date. Hughson then asked plaintiffs to make a "good faith capital contribution" to the restaurant and promised to guarantee any debts that plaintiffs might incur. Hughson and Clifford both used Frederick Schadt, an attorney, who was also counsel to the banks, to negotiate and draft the lease. Though Hughson and Schadt had previously worked together, neither Hughson nor Schadt disclosed their relationship to plaintiffs.

 In the spring of 1990, Clifford borrowed $ 30,000 from the banks, upon Keesler's assurance that Hughson and JLE would guarantee the loan. The note required only interest payments over a one-year period and then a balloon payment of the principal at the end of the year. The note was sent to Clifford by U.S. mail. That summer, Hughson borrowed $ 180,000 from the banks and consolidated the remainder of his debt. On October 1, 1990, plaintiffs opened TJ's, a restaurant and catering business in Hughson's building. Plaintiffs used the remainder of the loan as partial payment on fixtures, equipment and furnishings for the restaurant. On or about May 28, 1991, the banks rewrote plaintiffs' first note and lent plaintiffs an additional $ 30,000. The second note was guaranteed by Hughson and JLE but, unbeknownst to plaintiffs, it was secured by the restaurant equipment. The note was sent to plaintiffs by U.S. mail in June 1991. Plaintiffs used this second loan in purchasing additional equipment and to operate the business.

 In January or February 1993, Hughson served an eviction notice on plaintiffs by U.S. mail. Plaintiffs allege that the banks were informed of the eviction before it occurred and that defendants spread rumors that TJ's was going out of business. Specifically, plaintiffs allege that Hughson placed advertisements in local newspapers announcing the sale of a restaurant and catering business at TJ's location, which had a devastating effect on future catering reservations.

 In January 1993, Clifford's wife, Catherine Clifford, promised the banks that she would pay the balance of the first note, then overdue, within one week. According to plaintiffs, an agent for the bank informed Mrs. Clifford that the banks would not collect on the note until then. Before the end of the week, however, Kaiser Hotel Restaurant and Equipment Corp. ("Kaiser") repossessed the restaurant's equipment and served plaintiffs with an eviction notice. Kaiser informed plaintiffs that it would cease repossession only upon the banks', Hughson's or JLE's direction. Mrs. Clifford then spoke to Keesler, who told her that he would accept payment only upon Hughson's consent. The banks then brought suit against plaintiffs in state court to recover the debt. According to plaintiffs, the banks never foreclosed on the collateral equipment securing the note, and Hughson continued to operate TJ's with that equipment. Finally, in an effort to show a RICO "pattern," plaintiffs allege that defendants defrauded Dr. Jerome Triola in 1994, and Allan Breindel and Danielle Gespart in 1996, by using the same scheme.

 DISCUSSION

 I. Relevant Legal Standards

 A. RICO

 To state a claim for damages under 18 U.S.C. § 1962(c), a complaint must specifically allege:

 
(1) the existence of an enterprise which affects interstate or foreign commerce;
 
(2) that the defendants were "employed by" or "associated with" the enterprise;
 
(3) that the defendants participated in the conduct of the enterprise's affairs; and
 
(4) that the participation was through a pattern of racketeering activity.

 See Town of West Hartford v. Operation Rescue, 915 F.2d 92, 100 (2d Cir. 1990). Furthermore, a plaintiff must explain how he was "'injured in his business or property by reason of a violation of section 1962.'" Id. ...


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