20, 1998. The plaintiffs allege that in early 1996, the
Konstantin Group approached Blue Chip, a mortgage banker licensed
with the New York State Department of Banking, and its principal
Asdourian, regarding a joint venture in the mortgage service
industry. Konstantin stated that he heard that Asdourian had just
received his banking license and that he, with his substantial
experience in this particular area could help get his business
off the ground in a manner in which it would otherwise take Blue
Chip years to achieve. Apparently, the Konstantin Group
represented that it would help Blue Chip generate substantial
Based on these representations, Blue Chip and the Konstantin
Group entered into a written joint venture agreement dated July
18, 1996, in which they agreed to join forces and pursuant to
which, Konstantin was named Chief Executive Officer of Blue Chip
and added as a signatory to Blue Chip's bank accounts and
warehouse lines. According to the amended complaint, warehouse
lines are lines of credit given by a "warehouse" bank to fund the
mortgages given by Blue Chip to its clients, the loan applicants.
The plaintiffs allege that in October, 1997 they discovered
substantial withdrawals for personal use by the Konstantin Group
of Blue Chip funds, including the purchase of properties in
Pennsylvania. Upon learning of this, Asdourian removed Konstantin
as a signatory on the Blue Chip bank accounts.
The plaintiffs allege that when Asdourian confronted Konstantin
with this, he became enraged and threatened to kill him. In
addition, Konstantin revealed that he had a criminal record and
had been arrested for insurance fraud in the past. Despite these
alarming statements, the plaintiffs agreed to reinstate
Konstantin as signatory to the bank account. Thereafter, the
plaintiffs allege that the Konstantin Group falsified documents
such as tax returns, and employment and bank verifications for
mortgage applicants so as to make such applicants more credit
worthy than they actually were, thereby generating funds for
their own benefits. In addition, the plaintiffs contend that
Konstantin sold loans to another company for $100,000, far below
the loans' fair market value.
Despite this activity by the Konstantin Group, the plaintiffs
continued to work with them in order to rectify problems such as
a number of banks who requested that Blue Chip buy-back the
mortgages that they were sold due to irregularities. In April,
1998, Blue Chip's office in Westbury was burglarized. The
plaintiffs allege "upon information and belief" that the
Konstantin Group orchestrated this break in to recover records
that would have exposed their unlawful conduct regarding the
buy-back loans. Approximately 1½ years after learning of
Konstantin's unscrupulous conduct, in May, 1998 Asdourian finally
moved out of Blue Chip's Westbury offices and entered into an
agreement to sell Blue Chip to the Konstantin Group. Some time
later, Asdourian learned that the Konstantin Group had purchased
multiple parcels of land in New York and Pennsylvania with Blue
Chip funds. As a result of the conduct outlined above, the
plaintiffs filed a twelve count complaint alleging violations of
RICO, conversion, an action for indemnification, breaches of
fiduciary duties, common law fraud, breach of contract, and
A. Fed.R.Civ.P. 12(b)(6)
On a motion to dismiss for failure to state a claim, the Court
should dismiss the complaint pursuant to Rule 12(b)(6) if it
appears "beyond doubt that the plaintiff can prove no set of
facts in support of his claim which would entitle him to relief."
Northrop v. Hoffman of Simsbury, Inc., 134 F.3d 41, 44 (2d Cir.
1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct.
99, 101-02, 2 L.Ed.2d 80 ); see also IUE AFL — CIO Pension
Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. 1993),
cert. denied, 513 U.S. 822, 115 S.Ct. 86, 130 L.Ed.2d 38
(1994). The Second Circuit stated that in deciding a Rule
12(b)(6) motion, "a district court must limit itself to facts
stated in the complaint or in documents attached to the complaint
as exhibits or incorporated in the complaint by reference."
Newman & Schwartz v. Asplundh Tree Expert Co., Inc.,
102 F.3d 660, 662 (2d Cir. 1996) (quoting Kramer v. Time Warner, Inc.,
937 F.2d 767, 773 [2d Cir. 1991]); see also International
Audiotext Network, Inc. v. AT & T Co., 62 F.3d 69, 72 (2d Cir.
1995); Paulemon v. Tobin, 30 F.3d 307, 308-09 (2d Cir. 1994).
It is not the Court's function to weigh the evidence that might
be presented at a trial; the Court must merely determine whether
the complaint itself is legally sufficient, see Goldman v.
Belden, 754 F.2d 1059, 1067 (2d Cir. 1985), and in doing so, it
is well settled that the Court must accept the factual
allegations of the complaint as true, see Strom v. Goldman,
Sachs & Co., 202 F.3d 138, 140 (2d Cir. 1999); LaBounty v.
Adler, 933 F.2d 121, 123 (2d Cir. 1991); Procter & Gamble Co.
v. Big Apple Indus. Bldgs., Inc., 879 F.2d 10, 14 (2d Cir.
1989), cert. denied, 493 U.S. 1022, 110 S.Ct. 723, 107 L.Ed.2d
743 (1990), and construe all reasonable inferences in favor of
the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94
S.Ct. 1683, 40 L.Ed.2d 90 (1974); Leeds v. Meltz, 85 F.3d 51,
53 (2d Cir. 1996); LaBounty, 933 F.2d at 123; Bankers Trust
Co. v. Rhoades, 859 F.2d 1096, 1098 (2d Cir. 1988), cert.
denied, 490 U.S. 1007, 109 S.Ct. 1642, 104 L.Ed.2d 158 (1989).
The Court is mindful that under the modern rules of pleading, a
plaintiff need only provide "a short and plain statement of the
claim showing that the pleader is entitled to relief,"
Fed.R.Civ.P. 8(a)(2), and that "[a]ll pleadings shall be so
construed as to do substantial justice," Fed.R.Civ.P. 8(f).
The issue before the Court on a Rule 12(b)(6) motion "is not
whether a plaintiff will ultimately prevail but whether the
claimant is entitled to offer evidence to support the claims."
Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d
Cir. 1995), cert. denied, 519 U.S. 808, 117 S.Ct. 50, 136
L.Ed.2d 14 (1996) (quoting Scheuer, 416 U.S. at 236, 94 S.Ct.
1683). Recovery may appear remote and unlikely on the face of the
pleading, but that is not the test for dismissal under Rule
12(b)(6). Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673
(2d Cir. 1995) (quoting Weisman v. LeLandais, 532 F.2d 308, 311
[2d Cir. 1976] [per curiam]).
B. Fed.R.Civ.P. 9(b)
When pleading a claim for fraud or misrepresentation, the
plaintiff must aver the alleged fraudulent acts with
particularity as required by Fed.R.Civ.P. 9(b). See Luce v.
Edelstein, 802 F.2d 49, 54 (2d Cir. 1986). Although "knowledge"
and "condition of mind" may be stated in general terms (see
Fed.R.Civ.P. 9[b]), the circumstances surrounding the alleged
fraud must be pled with particularity. See Moore v. Painewebber,
Inc., 189 F.3d 165, 173 (2d Cir. 1999); Farley v. Baird,
Patrick & Co., 750 F. Supp. 1209, 1217 (S.D.N.Y. 1990) (quoting
Eickhorst v. American Completion & Dev. Corp., 706 F. Supp. 1087,
1091 [S.D.N.Y. 1989]).
To satisfy the particularity requirement of Rule 9(b), the
"complaint must adequately specify the statements it claims were
false or misleading, give particulars as to the respect in which
plaintiff contends the statements were fraudulent, state when and
where the statements were made, and identify those responsible
for the statements." Moore, 189 F.3d at 173 (quoting Cosmas v.
Hassett, 886 F.2d 8, 11 [2d Cir. 1989]). Specifically, "the
complaint must allege the time, place, speaker, and sometimes
even the content of the alleged misrepresentation." Ouaknine v.
MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990).
Facts must be pled with sufficient particularity to support a
"strong inference" that the defendant possessed
the requisite fraudulent intent or scienter. See Shields v.
Citytrust Bancorp, 25 F.3d 1124, 1128 (2d Cir. 1994). Moreover,
such allegations may not merely rest upon statements based on
"information and belief." See Di Vittorio v. Equidyne Extractive
Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987) (citations
The particularity requirement of Rule 9(b) is designed to serve
several important policies, such as to afford the defendant fair
notice of the claims, to safeguard the defendant's reputation and
also to inhibit the institution of "strike suits." See
Campaniello Imports v. Saporiti Italia S.p.A., 117 F.3d 655, 663
(2d Cir. 1997).
If multiple defendants are involved in the alleged fraud, it is
especially important that the fraud be particularized as to each
one of them. See Lou v. Belzberg, 728 F. Supp. 1010, 1022
(S.D.N.Y. 1990). However, specific connection need not
necessarily be made between the fraudulent representations and
the specific defendants where the defendants are insiders.
DiVittorio v. Equidyne Extractive Industries, Inc.,
822 F.2d 1242, 1247 (2d Cir. 1987).
C. Ali's Motion to Dismiss
Ali essentially makes three arguments in support of his motion
to dismiss. First, Ali argues that the amended complaint amounts
to a "group pleading" and thus fails to provide specific
allegations of any wrongdoing. In particular, Ali claims that "in
virtually every paragraph the Amended Complaint alleges that
various wrongs and frauds were committed by `the Konstantin
Group,' without making any attempt to particularize the allegedly
wrongful conduct of each `member' of the Group, such as defendant
Ali." Ali's second argument in favor of dismissal is that even if
the amended complaint complies with Rule 9(b), it fails to state
a RICO claim since the intended target of the alleged wrongs was
not Blue Chip or Asdourian, but were the third party
lenders/banks that were enticed into making the loans to
customers with falsified records. Finally, Ali claims that the
state law causes of action should be dismissed under the "group
pleading" theory. In addition, Ali asserts that the claims for
breach of contract, breach of fiduciary duty and indemnification
should be dismissed as they are based upon a 1996 Joint venture
Agreement that was never approved by the New York State
Superintendent of Banking.
1. Group Pleading
As previously stated, where multiple defendants are involved in
the alleged fraud, it is especially important that the fraud be
particularized as to each of them. See Lou v. Belzberg,
728 F. Supp. 1010, 1022 (S.D.N.Y. 1990).
It cannot be disputed that the amended complaint makes numerous
references to the Konstantin Group without specifying the member
of the "Group" responsible for the alleged fraudulent activity.
However, the amended complaint does allege the time, place,
speaker, and the alleged misrepresentations committed by Ali. As
such, the amended complaint alleges sufficient particular facts
to support a "strong inference" that Ali possessed the requisite
fraudulent intent or scienter.
For example, the amended complaint makes the following specific
allegations with regard to Ali:
Ali falsified tax returns, employment verifications
and bank verifications for the mortgage applicants.
As such, the banks who purchased the Buy-Back Loans
from Blue Chip purchased mortgages whose borrowers
were less credit-worthy than represented by Blue Chip
due to Ali's . . . fraudulent conduct.
Ali, the loan officer in charge of the Buy-Back
Loans, was an extremely close colleague of
Konstantin's who had worked side-by-side with the
defendant for approximately 5 years. Not
Ali was a big "producer" for Blue Chip, generating a
great deal of revenues based on the number of
mortgage applicants he recruited and eventually had
approved. The Plaintiffs would later learn that the
key to Ali's success was his provision of false
documents for certain mortgage applicants. Since it
did not affect Ali or the Konstantin Group if the
mortgage applicant eventually defaulted on their
loans (the loans having been resold to a third-party
bank), this scheme to falsify credit documents
resulted in extraordinary risk-free profits for the
Konstantin Group. . . .
(Amended Complaint at ¶¶ 31, 35).