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SCHMIDT v. FLEET BANK

August 6, 1998

PAUL SCHMIDT, et al., Plaintiffs, against FLEET BANK, et al., Defendants; GARY S. FRAGIN, Plaintiff, - against - FLEET BANK and LEONARD PATNOI, Defendants; JACOB and CHANA ZELIGFELD, et al., Plaintiffs, -against- FLEET BANK and LEONARD PATNOI, Defendants. NORMAN FEINSTEIN, Plaintiff, -against- FLEET BANK, et al., Defendants.


The opinion of the court was delivered by: SCHWARTZ

OPINION AND ORDER

 ALLEN G. SCHWARTZ, DISTRICT JUDGE:

 Six related cases have been filed by investors defrauded by David Schick. By Opinion and Order dated February 4, 1998 ("the February 4 Opinion"), familiarity with which is assumed, the Court granted the motions of several defendants to dismiss the complaints in four cases, Schmidt v. Fleet Bank, et al., 96 Civ. 5030, Fragin v. Fleet Bank and Leonard Patnoi, 97 Civ. 7836, Eshell v. Fleet, et al., 96 Civ. 9705 and Bassman v. Blackstone Assoc., et al., 96 Civ. 9706. In the wake of the February 4 Opinion, there were several procedural developments. First, the plaintiffs in Eshell and Bassman informed the Court by letter dated March 9, 1998 that they had determined to abandon their federal claims against the dismissed parties and to pursue their remedies against these parties in state court. Accordingly, the Eshell and Bassman actions are dismissed with respect to defendants Republic National Bank ("Republic"), Sterling National Bank & Trust Company ("Sterling"), Fleet Bank ("Fleet") and Citibank, N.A. and Neil Simon ("Simon"). Second, the plaintiffs in Schmidt and Fragin requested permission to file amended complaints curing the deficiencies in the original complaints. By stipulation dated March 20, 1998, the parties agreed that the plaintiffs in these two actions would be permitted to file amended complaints, which were filed on April 22, 1998. Finally, the plaintiffs in two new related actions, Feinstein v. Fleet Bank et al., 98 Civ. 2901 and Zeligfeld v. Fleet Bank and Patnoi, 97 Civ. 9298, also filed complaints on April 23, 1998 and April 28, 1998 respectively. Fleet and Leonard Patnoi ("Patnoi") (collectively the "Fleet Defendants") have moved to dismiss the complaints in all the captioned matters. Sterling has moved to dismiss the complaints in Schmidt and Feinstein. For the reasons stated, the motions of Fleet and Patnoi are granted and Sterling's motions will be held in abeyance.

 FACTUAL BACKGROUND

 I. Schick's Scheme

 These cases arise out of a scheme orchestrated by David Schick. In connection with this scheme, Schick pled guilty to fraud in the Southern District of New York and Eastern District of New York. According to plaintiffs, Schick, through various entities that he controlled, including Venture Mortgage Fund, L.P. and Venture Mortgage Corp. (collectively "Venture") and Blackstone Associates ("Blackstone"), would bid on distressed mortgage pools at auctions and sales conducted by the Resolution Trust Company ("RTC"), the Federal Deposit Insurance Corporation ("FDIC"), and other banking institutions. (Zeligfeld Am. Compl. P 35; Feinstein Compl. P 14.) Schick told investors that, after being awarded a bid to purchase a mortgage pool, subject to at least a 90-day due-diligence period, he could resell the same pool to a "take-out buyer" for a substantial profit (usually between 12% and 20%), subject to a due diligence period of fewer than 90 days. (Schmidt Am. Compl. PP 29-30; Zeligfeld Am. Compl. P 36; Feinstein Compl. PP 14-15.) According to Schick, if the take-out buyer declined to purchase the pool, he could rescind the original purchase within his own 90-day due-diligence window, at no cost to him or his investors. (Zeligfeld Am. Compl. P 36; Feinstein Compl. P 14.) Schick told investors that in order to be able to close on a bid, he needed to deposit substantial sums of cash -- ten percent of the bid -- to evidence to the auctioneer (usually the FDIC or RTC) his ability to complete the purchases. (Zeligfeld Am. Compl. P 38; Fragin Second Am. Compl. PP 40-41; Feinstein Compl. P 14.) To collect this "earnest money," Schick solicited funds from investors and assured them that their investments would be protected in escrow accounts covered by restrictive provisions, including a requirement that no funds could be withdrawn without the signature of the plaintiffs' representative. (Fragin Second Am. Compl. PP 16, 56-57, 73; Feinstein Compl. PP18, 19, 42.) Plaintiffs allege that on the basis of these fraudulent promises, Schick induced more than 50 victims to invest over $ 100 million, approximately $ 82 million of which was eventually stolen by him. (Fragin Second Am. Compl. P18, 117-121; Schmidt Am. Compl. P 31.)

 II. Fleet's Role

 Most of plaintiffs' funds were maintained at Fleet's Hewlett, New York branch, *fn1" where Patnoi, a Fleet Vice-President, was Branch Manager. Plaintiffs allege that Fleet aided Schick in stealing their money by:

 
(i) approving withdrawals and transactions that violated the restrictive provisions on the accounts (Schmidt Am. Compl. PP 43, 46; Fragin Second Am. Compl. PP 32-33, 80-81, 102(b); Zeligfeld Am. Compl. PP 67, 97; Feinstein Compl. P 45);
 
(ii) repeatedly approving overdrafts on the accounts (Schmidt Am. Compl. PP 44, 54; Fragin Second Am. Compl. PP 28-33, 85, 88-89, 102(d); Zeligfeld Am. Compl. P 57, 62, 102, 104, 107; Feinstein Compl. PP 44-45);
 
(iii) failing to inform either the state banking authorities or the investors of what it knew regarding the fraud in violation of clear legal obligations to do so (Schmidt Am. Compl. PP 49,55; Fragin Second Am. Compl. P 91-93, 96, 102(e); Zeligfeld Am. Compl. PP 61, 72, 88, 89, 103, 105, 107; Feinstein Compl. PP 46-47) and
 
(iv) misleading investors as to the status of the accounts (Fragin Second Am. Compl. P 84, 102(c); Zeligfeld Am. Compl. P 99; Feinstein Compl. PP 31-33, 51), by, among other things, submitting to investors a fraudulent report on February 28, 1996 overstating the balance of the escrow account in which most of the investors' funds were maintained and misrepresenting that the account restrictions were still in place. (Schmidt Am. Compl. P 53; Zeligfeld Am. Compl. PP 73-76, 100-101; Feinstein Compl. P 37.)

 Plaintiffs have alleged two motives for Fleet's assistance to Schick. First, plaintiffs allege that Schick paid Patnoi an amount between $ 100,000 and $ 125,000 and arranged for the discharge of two loans totalling $ 30,000 on Patnoi's behalf. (Fragin Second Am. Compl. P 108; Zeligfeld Am. Compl. PP 50, 53, 70, 108; Feinstein Compl. P 53.) *fn2" Second, plaintiffs allege that Schick's attorney escrow deposits constituted the overwhelming bulk (80% to 90%) of the deposits received by the Hewlett branch during the period 1994 to 1996, and that Fleet officers assisted Schick in his scheme because of the close relationship he had developed with Fleet as its largest customer and the benefits derived by Fleet through such large deposits. (Schmidt Am. Compl. P 41; Fragin Second Am. Compl. PP 23-24, 28, 103-107; Zeligfeld Am. Compl. PP 52, 71, 91-94, 109, 110; Feinstein Compl. P 52.) Plaintiffs also allege that Schick developed a close relationship with Jane Manditch, Patnoi's superior at the Hewlett branch. Schmidt Am. Compl. P 42.) *fn3"

 On the basis of these allegations, plaintiffs have made claims against the Fleet Defendants for violating the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) and conspiring to violate RICO, 18 U.S.C. § 1962(d) and against Fleet, Patnoi and Sterling for various causes of action under New York state law.

 DISCUSSION

 I. Standards on a Motion to Dismiss

 "[A] complaint should not be dismissed for failure to state a claim unless 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). On a motion to dismiss, the allegations in the complaint are liberally construed and considered in the light most favorable to the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683, (1974). However, the court is not required to accept as true ...


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