United States District Court, Southern District of New York
September 14, 2000
ERIC GOLDFINE, ERIC GOLDFINE SELF-EMPLOYED RETIREMENT PLAN AND TRUST, AND ADZA, LLC, PLAINTIFFS,
MICHAEL SICHENZIA, LISA SICHENZIA, PATRICK COTTRELL, CATHERINE N. COUGHLIN, TERENCE M. COUGHLIN, FRANK E. DEESSO, BETTY GRAHN, DENISE GRAHN, DUTCHESS CAPITAL CORP., MODUTEK, INC., ELLENVILLE APARTMENTS, INC., RENWICK ROW ASSOCIATES, L.L.C., CARRERA EQUITIES, LTD., PJC EQUITIES, INC., MAIN STREET HOLDINGS USA, LTD., AEGEAN EQUITIES, LLC, ARTESIAN ABSTRACT, INC., OLD REPUBLIC NATIONAL TITLE INSURANCE COMPANY, "JOHN DOE", SAID NAME BEING FICTITIOUS AND INTENDED WEST PAGE 393 TO REPRESENT ONE OR MORE UNNAMED CO-CONSPIRATORS, AIDERS AND ABETTERS, PARTICIPANTS, OR EMPLOYEES OF THE ENTERPRISE NAMED HEREIN WHOSE NAMES AND ADDRESSES ARE CURRENTLY UNKNOWN TO THE PLAINTIFFS, DEFENDANTS. MICHAEL SICHENZIA, LISA SICHENZIA, PATRICK COTTRELL, BETTY GRAHN, DENISE GRAHN, DUTCHESS CAPITAL CORP., MODUTEK, INC., ELLENVILLE APARTMENTS, INC., RENWICK ROW ASSOC., L.L.C., S/H/A RENWICK ROW ASSOCIATES, L.L.C., CARRERA EQUITIES, LTD., PJC EQUITIES, INC., MAIN STREET HOLDINGS USA, LTD., AND AEGEAN EQUITIES, LLC, THIRD PARTY PLAINTIFFS, V. CHRIS GEDNEY AND RICHARD E. GRAYSON, ESQ., THIRD PARTY DEFENDANTS.
The opinion of the court was delivered by: McMAHON, District Judge.
MEMORANDUM DECISION AND ORDER DISMISSING ACTION
In the recent case of Spoto v. Herkimer County Trust, 2000 WL
533293 *1 (N.D.N.Y. Apr.27, 2000), Judge Howard G. Munson of my
sister Court made the following prescient observation:
Plaintiffs' instant action is a superlative example
of why some legal minds posit that the civil
provisions of [RICO] are the most misused statutes in
the federal corpus of law.
2000 WL 533293 at *1.
Judge Munson knew whereof he spoke. I surmise that every member
of the federal bench has before him or her at least one — and
possibly more — garden variety fraud or breach of contract cases
that some Plaintiff has attempted to transform into a vehicle for
treble damages by resort to what another respected jurist, Judge
Allan Schwartz of this Court has referred to as "the litigation
equivalent of a thermonuclear device" — a civil RICO suit.
Schmidt v. Fleet Bank 16 F. Supp.2d 340, 346 (S.D.N Y
1998) (quoting Miranda v. Ponce Fed. Bank, 948 F.2d 41, 44 (1st
Cir. 1991)). All too frequently, these damning actions are
commenced without the Plaintiff's (or his lawyer's) being aware
of the most fundamental
principles of the law that governs allegations of racketeering in
a civil action. This case is more of the same.
The reasons why these Plaintiffs' claims for violation of the
civil RICO statute must be dismissed are legion. The Plaintiffs
have brought their complaint prematurely, in that they have not
yet suffered any RICO injury. The complaint also fails to allege
that they were injured by reason of the use or investment of
racketeering income in a RICO enterprise, or indeed that any RICO
enterprise exists separate and apart from the acts that,
according to Plaintiffs, constitute the alleged racketeering
activity. To the extent that Plaintiffs allege mail and wire
fraud as predicate acts their contentions are legally
insufficient; and to the extent they assert that certain of the
defendants aided and abetted racketeering activity, they fail to
state a claim because the law recognizes no such claim. Finally,
to the extent they allege conspiracy, the claim fails because the
substantive counts themselves are deficient.
Plaintiffs' briefs in opposition to the pending motions to
dismiss betray either a woeful ignorance of these settled
principles of law or a blithe disregard of them. Whatever the
reason, the mere fact that Plaintiffs have appended RICO claims
to some 118 separate state law claims is not sufficient to
catapult them into federal court. The federal claims (Counts 119
and 120) are dismissed, and the Court declines to exercise
supplemental jurisdiction over those 118 state law claims.
STATEMENT OF FACTS
Plaintiffs Eric Goldfine Self-employed Retirement Plan and
Trust, (hereinafter "SERPT") and Adza, LLC (hereinafter "ADZA"),
were the lenders on a series of several loans to various
defendants which were secured by mortgages and notes. The secured
loans were made between February, 1998 and January, 1999.
Plaintiff Eric Goldfine is identified in the pleadings only as
the Trustee of SERPT. There is no allegation that Plaintiff
Goldfine personally ever made any loans, or has any other
connection to the defendants with respect to this case.
The Defendants Michael Sichenzia and Lisa Sichenzia are husband
and wife. Defendant Patrick Cottrell, is a business associate of
the Sichenzias, originally introduced to them as a mortgage
broker. Mr. Cottrell and Mr. and Mrs. Sichenzia, individually or
through companies they owned, subsequently made real estate
investments, some of which are at issue in this action.
The remaining "Sichenzia defendants" include Denise Grahn, Lisa
Sichenzia's sister, and Betty Grahn, Lisa and Denise's mother, as
well as Dutchess Capital Corp., ("Dutchess"), Modutek, Inc.,
("Modutek"), Ellenville Apartments, Inc., ("Ellenville"), Renwick
Row Assoc. L.L.C., s/h/a Renwick Row Associates, L.L.C.,
("Renwick"), Carrera Equities, Ltd., ("Carrera"), PJC Equities,
Inc., ("PJC"), Main Street Holdings, USA, Ltd., ("Main Street")
and Aegean Equities, L.L.C., ("Aegean") — all of which are
entities that were or are owned by the Sichenzias and/or Mr.
The Amended Complaint alleges that loans were made by SERPT
and/or ADZA to Lisa Sichenzia, (Def. Exh A, ¶¶ 54-56, 177),
Michael Sichenzia, (Id. ¶¶ 284, 324, 362, 440, 493) Renwick,
(Id. ¶¶ 238, 410), Carrera, (Id. ¶¶ 284, 324, 362) and Main
Street, (Id. ¶¶ 440, 493).
Defendants Artesian Abstract, Inc., Catherine Coughlin and
Terence Coughlin (collectively, the Artesian defendants) are
alleged to have failed to record in a timely manner various
instruments, including mortgages, deeds, and agreements
consolidating, modifying and extending loans, all of which
document the various loans described above between Plaintiffs and
the Sichenzia defendants. Plaintiffs contend that, by failing to
timely record these instruments, the Artesian defendants lost
priority on certain mortgages, and certain of the properties were
purchased by third parties without any notice of encumbrance.
According to Plaintiffs' Civil RICO Statement, the Artesian
defendants' actions allowed the Sichenzia defendants to "default
on the loans, obtain additional monies from third parties who
took title to the property or gave mortgages without constructive
knowledge of Plaintiffs' (supposedly) prior liens." (Plaintiffs'
Civil RICO Statement, Def. Exhibit B, at p. 24).
Defendant Old Republic National Title Insurance Company,
through its agent, Artesian Abstracts, allegedly caused mortgage
priority insurance policies to be issued with respect to the
various mortgaged properties. In the main, it appears that Old
Republic is alleged to be vicariously liable for the actions of
Artesian and the Coughlins.
Defendant Frank DeEsso is an attorney. He represented various
of the Sichenzia defendants and/or Artesian (it is not clear
which, or whether the client differed in different deals) in
connection with some of the loan transactions at issue. DeEsso
allegedly took various actions in connection with those
presentations, including the provision of opinion letters, that
Plaintiffs allege were wrongful as to them, even though DeEsso
was not Plaintiff's lawyer.
Plaintiffs allege, in wholly conclusory fashion, that these
various co-defendants were involved in an "enterprise" under
18 U.S.C. § 1962 (the "RICO Statute"), and that they purportedly
engaged in the extensive series of real estate transactions with
the Plaintiffs that are documented in the complaint for the
sole purpose of "obtain[ing] monies from the Plaintiffs under
false pretenses" (Def.Exh. B, § 5[e], p. 25). The Complaint and
the RICO Statement allege violations of 18 U.S.C. § 1962(a),
(c), and (d). (Def. Exh. A, ¶¶ 529-545, pp. 86-89; Exh. B, § 1 p.
Plaintiffs originally alleged that Michael Sichenzia, Lisa
Sichenzia and Patrick Cottrell were the only "members" of the
enterprise. (Exhibit "B", § 5[e], p. 25). In an Amended Civil
RICO Statement, they added the Artesian defendants also members
of the enterprise. (§ 5(e), Amended Civil RICO Statement).
Plaintiffs nebulously describe the remaining Sichenzia defendants
and everybody else as being "associated with the alleged
enterprise". (Def.Exh. B, § 5[d], p. 25), although in the Amended
Civil RICO statement DeEsso is described as being "employed by
all the members of the Enterprise." At section 5(b)(A) of their
original Civil RICO Statement, Plaintiffs further describe the
defendants other than Michael and Lisa Sichenzia and Patrick
Cottrell as "corporate shells of the defendants, participants, or
aiders and abetters [sic], in the scheme, employed by the
enterprise, or  liable for the activities of the enterprise".
(Def.Exh. B, pp. 3-4).
The complaint alleges, in addition to substantive violations of
Sections 1962(a), (c) and (d) of RICO, numerous violations of
State law, sounding in fraud, breach of contract, negligence and
breach of fiduciary duty.
CONCLUSIONS OF LAW
On a motion pursuant to FRCP 12(b)(6), a Complaint should be
dismissed when it fails to state a claim upon which relief can be
granted. Although the factual allegations of this pleading are
presumed to be true, and the non-moving party is entitled to all
reasonable inferences, a pleading fails to state a cause of
action where it appears beyond doubt that the Plaintiff can prove
no set of facts which would entitle him to relief. See, H.J.
Inc., v. Northwestern Bell Telephone Co., 492 U.S. 229, 109
S.Ct. 2893, 106 L.Ed.2d 195 (1989). For those purposes, the Civil
RICO statement is deemed to be part of the Complaint. See A.
Terzi Productions, Inc. v. Theatrical Protective Union,
2 F. Supp.2d 485, 508 n. 16 (S.D.N.Y. 1998).
Of course, where the Complaint fails to properly set forth any
element of a claim, the Court must dismiss the complaint. See
Redtail Leasing, Inc. v. Bellezza, 1999 WL 32941 at *3, RICO
Bus. Disp. Guide 9670 (S.D.N.Y. 1999) ("The Complaint must
contain allegations concerning each of the material elements
necessary to sustain recovery under a cognizable legal theory.").
Moreover, the Court is not required to accept as true mere
"conclusions of law or unwarranted deductions". First Nationwide
Bank v. Gelt Funding Corp., 27 F.3d 763, 771 (2d Cir. 1994).
This Court looks with particular scrutiny at Civil RICO claims
to ensure that the Statute is used for the purposes intended by
Congress. In an exhaustive examination of the Court's role in
such cases, Judge Schwartz stated in Schmidt:
In considering RICO claims, courts must strive to
achieve results consistent with Congress's goal of
protecting legitimate businesses from infiltration by
organized crime. As one district court within this
circuit has stated, Civil RICO is an unusually potent
weapon — the litigation equivalent of a thermonuclear
device. Because the mere assertion of a RICO claim .
. . has an almost inevitable stigmatizing effect on
those named as defendants, . . . courts should strive
to flush out frivolous RICO allegations at an early
stage of the litigation. To this end, a court's focus
must be to ensure that RICO's severe penalties are
limited to enterprises consisting of more than simple
conspiracies to perpetuate the acts of racketeering.
Thus, courts must always be on the lookout for the
putative RICO case that is really nothing more than
an ordinary fraud case clothed in the Emperor's
16 F. Supp.2d at 346 (internal citations and quotations omitted).
For the reasons set forth below, Plaintiffs' action is
PLAINTIFF HAS NOT YET SUFFERED ANY COGNIZABLE RICO DAMAGES AND
THE COMPLAINT IS PREMATURE
Plaintiffs admit in their Amended Complaint, as well as their
Civil RICO Statement, that each and every loan was secured by a
mortgage and note, most of which bind the individual Sichenzia
defendants personally. They also admit that each mortgage was
insured through defendants Old Republic and/or Artesian Abstract.
However, Plaintiffs have made no effort to enforce those rights
prior to instituting this action. Nonetheless, Plaintiffs allege
that they were "deprived of money or property", as a result of
the alleged acts of the Defendants, totaling the full amount of
proceeds of each and every loan (Def. Exh B, § 12[a]). Because
the Plaintiffs have not exhausted the bargained-for remedies,
which they admit are available to them, they have not satisfied
RICO's requirement of alleging damages that are clear and
definite. As a result, Plaintiffs lack standing to sue under
RICO, and their claims must be dismissed.
In First Nationwide, the Second Circuit Court of Appeals
addressed the issue of the ripeness of First Nationwide's alleged
RICO damage claims on unforeclosed loans. The Court first
reviewed the applicable law relating to fraud damages in general:
The general role of fraud damages is that the
defrauded Plaintiff may recover out-of-pocket losses
caused by the fraud. In this case, the damages issue
arises in the specific context of a fraudulently
induced loan. In such cases, although the loan is
procured through fraud, any amounts paid on the debt
reduce the amount the Plaintiff can claim as damages
resulting from the fraud. Thus, the amount of loss
cannot be established until it is finally determined
whether the collateral is insufficient to make the
Plaintiff whole, and if so, by how much.
In determining fraud damages, any amount recovered
by the fraudulently induced lender necessarily
reduces the damages that can be claimed as a result
of the fraud. Because the fraud defendant is not
liable for all losses that may occur, but only for
those actually suffered, only after the lender has
the bargained-for remedies available to it can the
lender assert that it was damaged by the fraud, and
then only to the extent of the deficiency.
First Nationwide, 27 F.3d 763
, 768 (2d Cir. 1994) (internal
Applying the general rule specifically in RICO context, the
Court in First Nationwide held:
The rule of fraud damages described above has been
adopted by this Court in the context of deciding
whether a defrauded Plaintiff has standing under
RICO. A RICO Plaintiff only has standing if, and can
only recover to the extent that, he has been injured
in his business or property by the conduct
constituting the violation. Furthermore, as a general
rule, a cause of action does not accrue under RICO
until the amount of damages becomes clear and
definite. Thus a Plaintiff who claims that a debt is
uncollectible because of the defendant's conduct can
only pursue the RICO treble damages remedy after his
contractual rights to payment have been frustrated.
Id. (internal citations and quotations omitted).
Similarly, in Burke v. Dowling, 944 F. Supp. 1036 (E.D.N Y
1995), the Court dismissed the RICO claims of the "creditor
Plaintiffs" because of their failure to plead frustration of
their contractual rights:
Based on a careful reading of the Amended Complaint,
the Court concludes that in this case, the creditor
Plaintiffs have not adequately alleged such
frustration of their contractual rights, and that
their RICO claim is not yet ripe.
[T]here remains — so far as the Court can tell from
the pleadings — a real possibility that the creditor
Plaintiffs may be able to recover all or part of
their losses. Yet they have not chosen to do so
through the traditional legal means available to
them. Rather, they seek to recover three times what
they are owed by application of the Federal
Anti-racketeering Statute . . . Until these
Plaintiffs can demonstrate that the orthodox methods
of recovery have failed them, and that defendants'
acts of racketeering have in fact caused them a loss,
they should not be entitled to treble damages under
Id. at 1050-1052.
In the instant case, the Plaintiffs admit that there are
mortgages and notes underlying the subject loans. However,
nowhere do Plaintiffs allege that they made any effort whatsoever
to recover their alleged losses, or even any part of such losses,
by seeking to enforce any of their admitted contractual rights.
Plaintiffs cannot claim that their loans are uncollectible
before making any effort to collect them "through the
traditional legal means available to them". Burke, 944 F. Supp.
at 1051. The Plaintiffs' conclusory allegations that the notes,
mortgages, and insurance policies underlying their loans are
unenforceable, and that the debts are therefore uncollectible,
are, simply put, legal conclusions that must be reached by a
court of competent jurisdiction before they will suffer any RICO
Plaintiffs' 118 separate State law claims sounding in breach of
contract, breach of fiduciary duty, negligence, gross negligence,
constructive trust, conversion and fraud are the very claims that
Plaintiffs must pursue in order to determine whether or not they
suffered any injury compensable under RICO. Plaintiffs cannot
come to this Court, with only a RICO claim as a jurisdictional
predicate, and obtain adjudication of the State law claims that
are a necessary predicate to ripeness and standing under the very
statute they claim gives this Court jurisdiction in the first
instance. Were this Court to adopt Plaintiffs' pleading
rationale, RICO's "clear and definite" injury requirement would
be rendered moot.
RICO was not enacted for the purpose of providing a Federal
forum and treble
damages for nearly every conceivable contract action under State
law. Before Plaintiffs in this case have standing to treble their
alleged damages under the provisions of RICO, they must first
establish, "through the traditional legal means available to
them", that they in fact suffered damage. See Burke,
944 F. Supp. 1036, First Nationwide, 27 F.3d 763. As Plaintiffs
cannot allege "clear and definite" damages to their business or
property, they lack standing under RICO, and their RICO causes of
action must be dismissed.
PLAINTIFFS' RICO CAUSES OF ACTION ARE DISMISSED BECAUSE
PLAINTIFFS DO NOT ALLEGE THAT THEY WERE INJURED BY REASON OF
ANY USE OR INVESTMENT OF RACKETEERING INCOME
Plaintiffs' Amended Complaint purports to set forth violations
of 18 U.S.C. § 1962(a) and (d) under "Claim 120", at paragraphs
539-545, pp. 88-89. (See Def. Exh. A.) Section 8 of Plaintiffs'
Civil RICO Statement further states that the Complaint alleges a
violation of 18 U.S.C. § 1962(a). (Exh. B, p. 28.) However,
Plaintiffs admit, at Section 8(b) of their Amended Civil RICO
Statement, that they have no idea whether any alleged income was
ever invested by any defendant at all, let alone that it was
invested in the alleged enterprise and that they were injured as
a result of that investment. Elsewhere, they make it quite clear
that the injury they have allegedly suffered — the supposed
non-collectability of their various mortgages and loans —
resulted, not from the investment of any money in a RICO
enterprise, but rather because of the various predicate acts
(i.e., the Sichenzias defaults on the notes coupled with failure
to record the mortgages promptly, which enabled the Sichenzias to
obtain additional loans from other parties or to sell mortgaged
properties to other parties without any recognition of
Plaintiffs' rights). Because injury by reason of investment of
racketeering income in an enterprise is the very foundation of a
§ 1962(a) claim, Plaintiffs' allegations are insufficient as a
matter of law.
In determining the requirements for pleading a cause of action
under § 1962(a), the Court must first look to the statutory
language. 18 U.S.C. § 1964(c) provides a private right of action for
"[a]ny person injured in his business or property by reason of a
violation of Section 1962". (emphasis added). Section 1962(a)
provides, in pertinent part:
It shall be unlawful for any person who has received
any income derived, directly or indirectly, from a
pattern of racketeering activity * * * to invest,
directly or indirectly, any part of such income, or
the proceeds of such income, in the acquisition of
any interest in, or the establishment or operation
of, any enterprise which is engaged in, or the
activities of which affect, interstate or foreign
18 U.S.C. § 1962(a) (emphasis added).
As held by the Second Circuit Court of Appeals in Ouaknine v.
MacFarlane, 897 F.2d 75 (2d Cir. 1990):
Under the plain language of this section, a violation
of § 1962(a) consists of investing income derived
from a pattern of racketeering activity to acquire an
interest in, establish, or operate an enterprise; the
violation is not established by mere participation in
predicate acts of racketeering. Accordingly, under
the plain terms of the statute, to state a civil
claim under § 1964(c) for a violation of § 1962(a), a
Plaintiff must allege injury "by reason of"
defendant's investment of racketeering income in an
Id. at 82-83. See also, National Council of Young Israel v.
Wolf, 963 F. Supp. 276, 280 (S.D.N.Y. 1997).
Based on the above reasoning, the Court in Ouaknine went on
to hold that:
[T]o state a claim for civil damages under § 1962(a),
a Plaintiff must allege injury from the defendants'
investment of racketeering income in an enterprise.
Furthermore, because the District Court correctly
held that Ouaknine had alleged no facts asserting
injury by reason of defendants' investment of
racketeering income, we affirm the dismissal of the §
1962(a) RICO claim.
Id. at 83.
In the instant case, neither Plaintiffs' Amended Complaint nor
their Civil RICO Statement sets forth a single allegation
relating to any investment whatsoever made by any Defendant, in
the alleged enterprise or anywhere else, much less that the
Plaintiffs were damaged or injured as a result of such
investment. In fact, in Section 8(b) of Plaintiffs' Civil RICO
Statement, (whether the original statement or the amended
version) Plaintiffs admit that they have no idea whatsoever of
how any "funds", whether racketeering income or not, were
invested, if at all:
[T]he use of such income is currently unknown to the
Plaintiffs except to the extent that funds received
by said defendants were retained by said defendants
or disposed of by said defendants according to their
(Def.Exh. B, p. 28).
This sweepingly general allegation that the defendants either
"retained" or "disposed of" any income they received plainly
fails to allege the required: (1) investment, (2) of any income,
(3) in an enterprise. Because Plaintiffs' complaint and Civil
RICO Statement contain "no mention . . . of any claimed
investment of racketeering income, let alone injury resulting
from such investment," Pyke v. Laughing, 1998 WL 37599, RICO
Bus. Disp. Guide 9513 (N.D.N.Y. 1998), they fail to state a cause
of action under 18 U.S.C. § 1962(a). Thus, Plaintiffs' RICO claims
must be dismissed.
PLAINTIFFS' SECTION 1962(c) CLAIMS ARE DISMISSED AS AGAINST ALL
DEFENDANTS AS THEY FAILED TO ALLEGE AN ENTERPRISE THAT IS
SEPARATE AND DISTINCT FROM THE ALLEGED PATTERN OF RACKETEERING
It is firmly established that, to state a claim under RICO, a
Plaintiff must allege and prove the existence of an enterprise
which is "separate and distinct from the alleged pattern of
racketeering activity." Black Radio Network, Inc. v. NYNEX
Corp., 44 F. Supp.2d 565 at 580 (S.D.N.Y. 1999). Plaintiffs
admit that the alleged enterprise would not exist but for the
alleged pattern of racketeering activity, and their RICO claims
must therefore be dismissed against all moving defendants.
The Supreme Court held in United States v. Turkette,
452 U.S. 576, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981) that: "[t]he
enterprise is not the `pattern of racketeering'; it is an entity
separate and apart from the pattern of activity in which it
engages." Id. at 583, 101 S.Ct. 2524. In Schmidt v. Fleet
Bank, Judge Schwartz held that in order to determine whether the
alleged enterprise is separate from the activity in which it
engages, the Court should look to whether the alleged enterprise
would exist in the absence of that activity:
The enterprise cannot simply be the minimal
association which surrounds the [pattern
racketeering] acts. In other words, the members of
the group as a whole must have a common link other
than the racketeering activity. Thus, in assessing
whether an alleged enterprise has an ascertainable
structure distinct from that inherent in a pattern of
racketeering, it is appropriate to consider whether
the enterprise would still exist
were the predicate acts removed from the equation.
16 F. Supp.2d at 349 (internal citations and quotations
omitted) (emphasis added).
The Court in Black Radio Network, thus held:
[P]laintiffs have not alleged an enterprise separate
from its pattern of racketeering activity. Even
assuming that these proposed defendants were part of
a continuing enterprise, it [sic] was part of that
enterprise only by virtue of the alleged racketeering
activity. Plaintiffs simply have not alleged an
ascertainable structure distinct from that inherent
in [the alleged] pattern of racketeering, and it is
apparent that the alleged enterprise, including the
proposed defendants, would not still exist were the
predicate acts removed from the equation.
Accordingly, Plaintiffs fail to state a claim under
18 U.S.C. § 1962(c).
44 F. Supp. 2d at 581 (internal citations and quotations omitted).
Further, in a fraud-based RICO claim, if the sole purpose of
the alleged enterprise is to perpetrate the alleged fraud, there
can be no enterprise for RICO purposes. See Schmidt, 16
F. Supp.2d at 350 ("If the purpose of the entity or the
association in fact was to defraud the investors, then it has no
continuity or distinct structure beyond the alleged conspiracy.
In short, the enterprise in this case likely would not exist were
the predicate acts removed from the equation.") (internal
citations and quotations omitted).
In the case at bar, the Plaintiffs unequivocally stated, at
section 5(b)(B) of their original Civil RICO Statement, that
"[t]he purpose of the enterprise was to obtain monies from the
Plaintiffs under false pretenses." (Def. Exh. B at 24.) There is
no allegation in the Amended Complaint or the Civil RICO
Statement of what activity, if any, the alleged enterprise ever
engaged-in other than the alleged predicate acts. Therefore,
under the plain language of Schmidt, the alleged enterprise
"has no continuity or distinct structure beyond the alleged
conspiracy," and the Plaintiffs' RICO claims are insufficient as
a matter of law.
Additionally, Plaintiffs fail to allege any chain of command of
the enterprise, or how, if at all the alleged "members"
functioned as an integrated group or directed the affairs of the
alleged enterprise apart from the predicate acts themselves.
In an attempt to distinguish the alleged predicate acts from
the "usual and daily activities of the enterprise," Plaintiffs
set forth at section 6(a) of their Civil RICO Statement a series
of activities that they characterize as "[t]he usual and daily
activities of the members of the SAC Enterprise". (Id. at 25).
However, whether the claimed predicate acts differed from the
"usual and daily activities of the members of the enterprise" is
of no moment. The test is whether the predicate acts differed
from the usual and daily activities of the enterprise itself.
See Schmidt, 16 F. Supp.2d at 349 n. 5 ("[t]hat each member of a
group carries on activities distinct from the pattern of
racketeering is insufficient; the group as a whole must have a
common link other than the racketeering activity.") (quoting
McDonough v. National Home Ins. Co., 108 F.3d 174, 177 (8th
The inadequacies of the Plaintiffs' pleadings are remarkably
similar to those in Schmidt:
The only common factor joining the various defendants
is their alleged participation in [the] scheme to
defraud the Plaintiffs. The complaints do not allege
facts sufficient to support an inference that the
enterprise existed as a continuous structure
"separate and apart" from the commission of the
predicate acts alleged, or that there was an
organized mechanism for directing the enterprise's
affairs on an ongoing basis beyond the fraudulent
Id. at 350.
After this particular defect in the pleading was called to the
attention of Plaintiffs' counsel at oral argument, he proffered
an Amended Civil RICO Statement, which was obviously filed for
the purpose of curing this problem, since the only substantive
change from the original statement reflects these very
allegations. The new statement (which was not timely, and for
which no permission to file had been granted) replaced the "sole
purpose" language with a lengthy statement of what each member of
the RICO enterprise supposedly did. The new language, which
merely parrots allegations made elsewhere about the functions
performed by each of the alleged enterprise members in the course
of their dealings with Plaintiffs, does not solve Plaintiffs'
problem, because the complaint and Amended Civil RICO Statement,
taken together, still fail to allege facts tending to show that
the enterprise exists separate and apart from the activities
complained of in the complaint. Plaintiff identifies no purpose
of the enterprise except to engage in the racketeering activity,
no group (as opposed to individual) activity other than the
racketeering activity, and no on-going structure except the
conduct of racketeering. In addition, Plaintiffs' counsel filed a
letter with the court in which he claimed to have found new
(unspecified) information about other, similar actions committed
by the same group against other potential Plaintiffs —
information that he hopes to place before the Court in the form
of a newly filed lawsuit on behalf of these other, unnamed
parties. Suffice it to say that a letter from Plaintiff saying
"more to come" does not in any way cure the deficiencies of the
complaint that is already on file.
As the Plaintiffs failed to allege the existence of an
enterprise that has any existence separate and apart from the
purported predicate acts, they fail to state a claim under
18 U.S.C. § 1962(c), and their Claim 119, brought under that
provision must be dismissed as a matter of law.
PLAINTIFFS' SECTION 1962(c) CLAIMS ARE DISMISSED AS AGAINST MOST
DEFENDANTS, AS PLAINTIFFS FAILED TO ALLEGE THAT ANY DEFENDANT
EXCEPT MICHAEL SICHENZIA AND LISA SICHENZIA OR PATRICK COTTRELL
PARTICIPATED IN THE "OPERATION OR MANAGEMENT" OF THE ENTERPRISE
Liability under § 1962(c) requires a showing that each
defendant employed by or associated with the enterprise "conduct
or participate, directly or indirectly, in the conduct of [the]
enterprise's affairs". In this case, the Plaintiffs failed to
allege that any defendant satisfied this essential element. The
§ 1962(c) causes of action must therefore be dismissed.
Section 1962(c) of RICO provides:
It shall be unlawful for any person employed by or
associated with any enterprise engaged in, or the
activities of which affect, interstate or foreign
commerce, to conduct or participate, directly or
indirectly, in the conduct of such enterprise's
affairs through a pattern of racketeering activity or
collection of unlawful debt.
In Reves v. Ernst & Young, 507 U.S. 170, 113 S.Ct. 1163, 122
L.Ed.2d 525 (1993), the Supreme Court held that § 1962(c)
requires actual operation or management of the enterprise:
In sum, we hold that "to conduct or participate,
directly or indirectly, in the conduct of such
enterprise's affairs", § 1962(c), one must
participate in the operation or management of the
Id. at 185, 113 S.Ct. 1163 (emphasis added).
Judge Schwartz analyzed the Reves "operation and management"
test in Schmidt:
As interpreted by courts in this district and others,
the "operation and management"
test . . . is a very difficult test to satisfy. As
the Second Circuit has held, simple taking of
directions and performance of tasks that are
"necessary and helpful" to the enterprise, without
more, is insufficient to bring a defendant within the
scope of § 1962(c). Simply because one provides goods
or services that ultimately benefit the enterprise
does not mean that one becomes liable as a result.
There is a substantial difference between actual
control over an enterprise and association with an
enterprise in ways that do not involve control; only
the former is sufficient under Reves because the
test is not involvement but control. [I]t is not the
importance of such services that determines § 1962(c)
liability, but whether the provision of those
services allows the defendant to direct the affairs
of the enterprise.
6 F. Supp.2d at 46 (internal citations and quotations
omitted) (emphasis added).
In addition, the mere fact that a defendant may have aided in
the alleged scheme to defraud, even if that aid was
intentional, does not give rise to liability under § 1962(c).
See Biofeedtrac, Inc. v. Kolinor Optical Enterprises &
Consultants, S.R.L., 832 F. Supp. 585, 592 (E.D.N Y
1993) ("[P]laintiff has adduced no facts to suggest that
[defendant's] actual or projected role was to lead, run, manage
or direct any part of the enterprise. Thus, he did not
participate in the conduct of an enterprise and did not violate §
1962(c), even though he may have intentionally assisted a scheme
to defraud.") (internal quotations omitted).
Plaintiffs fail to set forth any facts to show that most of the
defendants were leaders, managers or directors of the SAC
enterprise. Reading the allegations of the complaint most
generously to the Plaintiffs, there are allegations sufficient to
charge Michael and Lisa Sichenzia and Patrick Cottrell with
leading, running, managing or directing any of the alleged
enterprise. But there is no allegation that the other Defendants
were leaders or managers of the enterprise.
For example, there is no allegation that Betty Grahn or Denise
Grahn ever even spoke with any other defendant about the loans
Plaintiffs claim were fraudulent, let alone that they were
involved with the operation and management of the alleged
enterprise, the sole purpose of which, Plaintiffs claim, was to
procure those loans. The only allegations against Betty and
Denise Grahn are that Betty Grahn purchased two of the parcels
several months after the Plaintiffs made the loans, and that
Denise Grahn notarized the signatures of other defendants. Denise
Grahn's name is not even mentioned in section 4 of Plaintiffs'
Civil RICO Statement, which purports to be a "Description of the
Pattern of Racketeering Activity".
The business entities named by the Plaintiffs in their §
1962(c) claim, as opposed to the individual defendants, cannot
possibly "lead, run, manage or direct" the affairs of the alleged
enterprise, or, for that matter, act "intentionally" at all,
since corporations can act only through their individual
officers, directors or agents (who are not explicitly
Similarly, there are no allegations of leading, running,
managing or directing the alleged enterprise made against the
Artesian Defendants, D'Esso or Old Republic. Rather, the
complaint asserts that they "engaged in or aided and abetted a
pattern of indictable criminal acts". (Complaint ¶ 535). The
specific allegations of the complaint identify what they did as,
in essence, failing to record mortgages and other instruments
affecting the loans made by Plaintiffs, wrongfully issuing
priority of title insurance, offering false documents for filing,
and engaging in various acts of negligence and breach of duty.
None of those pages and pages of contentions remotely suggests
how this transformed the non-Sichenzia Defendants into leaders,
managers or directors of the enterprise of which they are not
even alleged to be members (or, in the case of the Artesian
Defendants, were not alleged to be members until the Court
suggested that the complaint was fatally deficient). Moreover,
following Biofeedtrac, even if the Plaintiffs' Amended
Complaint and Civil RICO Statement are construed to allege that
the 1962(c) Defendants intentionally assisted in the purported
scheme, such allegations are insufficient as a matter of law to
properly plead a cause of action under section 1962(c).
Plaintiffs' § 1962(c) claims must therefore be dismissed as to
all Defendants other than the Sichenzia defendants.
PLAINTIFFS' RICO CLAIMS FAIL TO ALLEGE WITH PARTICULARITY A
SCHEME TO DEFRAUD RATHER THAN A MERE BREACH OF CONTRACT, WHICH
MANDATES DISMISSAL AGAINST THE SICHENZIA DEFENDANTS AND
It is fundamental that a Plaintiff who contends that the
counterparty to a contract never intended to perform the terms of
that contract may only prevail in an action for fraud under
When a Plaintiff claims that the defendant breached a
contract that he never intended to honor, he may only
present that claim as an action sounding in fraud if
(1) the defendant owed a legal duty to the Plaintiff
"separate from the duty to perform under the
contract"; (2) the defendant makes a fraudulent
misrepresentation that is "collateral or extraneous"
to the contract; or (3) the Plaintiff seeks special
damages unrecoverable as contract damages. See
Bridgestone/Firestone, Inc. v. Recovery Credit
Services, Inc., 98 F.3d 13, 20 (2d Cir. 1996).
Cougar Audio, Inc. v. Reich, 2000 WL 420546 at * 6 (S.D.N Y
April 18, 2000).
As against the Sichenzia Defendants, Plaintiffs assert that
they were defrauded into entering into contracts (mortgages,
loans, etc.) that the counterparty never intended to honor. These
alleged frauds form the basis of the predicate acts of mail and
wire fraud that purport to underlie the RICO claims. At section 2
of their Civil RICO Statement, Plaintiffs set forth their theory
of the "alleged misconduct and basis of liability of each
Defendant" as follows:
Defendants [Michael Sichenzia, Lisa Sichenzia and
Patrick Cottrell] borrowed money from the Plaintiffs
and executed and delivered false and invalid
mortgages on said properties. . . . [A]fter the
closing of the mortgage loans, the Coughlins retained
possession of the mortgages and did not record the
mortgages until such time as the Sichenzias and
Cottrell either sold the real property to others or
mortgaged the property to others. These other
defendants are corporate shells of the defendants,
participants, or aiders and abetters [sic], in the
scheme, employed by the enterprise, or were liable
for the activities of the enterprise.
(Def. Exh. B at 2-4).
Plaintiffs fail to identify any legal duty owed to the
Plaintiffs by any of the Sichenzia Defendants that is separate
from the duty to perform under the mortgages and notes as
required by Cougar. Although there are literally dozens of
purported claims in the Amended Complaint based on alleged breach
of fiduciary duty, they are made against Artesian Abstract and/or
the Coughlins, not the Sichenzia Defendants, and, therefore,
cannot be the basis for a fraud claim against the Sichenzia
The Plaintiffs also do not claim that any alleged material
misrepresentation made by any of the moving defendants was
"collateral or extraneous" to the notes and mortgages that
underlie their causes of action. The Plaintiffs claim that the
mortgages are "false and invalid" because "the Sichenzias and
Cottrell closed on the mortgage
loans prior to the date they obtained title to the properties".
(Def. Exh. B at 2). This allegation, even if true, does not show
any misrepresentation that is collateral or extraneous to the
underlying mortgages, and therefore cannot form the basis for a
Without making any legally sufficient allegation of fraud,
Plaintiffs cannot allege mail fraud. Clearly, the Plaintiffs in
this case are simply "attempt[ing] to dress a common law breach
of contract . . . claim as a RICO claim." Spoto v. Herkimer
County Trust, 2000 WL 533293 at *5 (N.D.N.Y. Apr.27, 2000).
Because there is no basis upon which Plaintiffs can convert their
common law contract claims into even common law (as opposed to
RICO) fraud claims, the RICO claims against the Sichenzia
Defendants are deficient as a matter of law, and Count 119 must
As against the Artesian Defendants, Plaintiffs allege, in their
complaint and RICO Statement, that Artesian "accomplished" the
fraudulent scheme by mailing or faxing copies of one defective
mortgage, as well as certain letters and satisfactions of
mortgages, to the Plaintiffs. (Cplt., Claim 16, and Amended RICO
Statement at pp. 8, 23). The allegations concerning the letters
can be quickly dismissed, as the contents thereof are not set
forth with specificity, nor are any misrepresentations identified
with the specificity required by Fed.R.Civ.P. 9(b). As for the
supposed transmission of defective insurance policies (most of
which appear to have been sent by overnight courier, not via the
mail or interstate wire), Plaintiff does not explain how the act
of transmission was incidental to an essential part of the
alleged fraudulent scheme to withhold and fail to file
instruments so as to defeat Plaintiffs' priority liens, see
Schmuck v. United States, 489 U.S. 705, 712, 109 S.Ct. 1443, 103
L.Ed.2d 734 (1989) — nor is it apparent to this Court that is was
incidental to an essential part of the scheme. Thus, Plaintiffs
have not sufficiently pled violations of 18 U.S.C. § 1962(a) and
(c) against those Defendants, either.
PLAINTIFFS' CLAIMS BASED UPON "AIDING AND ABETTING" ARE
DISMISSED, AS THERE IS NO PRIVATE RIGHT OF ACTION FOR AIDING
AND ABETTING A RICO VIOLATION
Plaintiffs allege, at Paragraph 535 of the Amended Complaint:
Each of the defendants have engaged in or aided and
abetted a pattern of indictable criminal acts
including, but not limited to, mail fraud, in
violation of 18 U.S.C. § 1341; wire fraud, in violation
of 18 U.S.C. § 1343; aiding and abetting in violation of
18 U.S.C. § 2; and [sic] which, in turn, constitute
[sic] "racketeering activity" as that term is defined
in 18 U.S.C. § 1961(5).
Plaintiffs' Civil RICO statement, at Paragraph 4(a), states:
"The specific statutes that were allegedly violated are
18 U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), and § 2 (aiding and
abetting)." The final paragraph of Item "2" of Plaintiff's Civil
RICO Statement (pp. 3-4) describes the roles of 13 separate named
defendants, along with the "John Doe" defendants, as follows:
These other defendants are corporate shells of the
defendants, participants, or aiders and abetters
[sic], in the scheme, employed by the enterprise, or
were liable for the activities of the enterprise.
While this rather vague and general pleading does not
sufficiently delineate among the various categories of
defendants, it would appear that the only allegations against (1)
the Sichenzia defendants other than Lisa and Michael Sichenzia
and Cottrell, (2) Old Republic, (3) DeEsso, and (4) certain
allegations against the Artesian
defendants are allegations of aiding and abetting.*fn1
Courts in this District have long held that there is no private
right of action for aiding and abetting a RICO violation. See
LaSalle National Bank v. Duff & Phelps Credit Rating Co.,
951 F. Supp. 1071, 1088-1089 (S.D.N.Y. 1996) ("the Court . . .
recommends dismissal of Plaintiffs' claim of aiding and abetting
a RICO violation on the ground that there is no such cause of
action."); Department of Economic Development v. Arthur Andersen
& Co., 924 F. Supp. 449, 475-78 (S.D.N.Y. 1996) (citing the
Supreme Court's analysis in Central Bank of Denver, N.A. v.
First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct.
1439, 128 L.Ed.2d 119 (1994)).
In Hayden v. Paul Weiss, Rifkind, Wharton & Garrison,
955 F. Supp. 248 (S.D.N.Y. 1997), the district court followed the
reasoning of Central Bank and declined to find a private right
Nowhere in the text of Section 1962 is there any
indication that Congress intended to "impose aiding
and abetting liability for a violation of the RICO
Statute." Indeed, the only reference to aiding and
abetting is found in Section 1962(a), which
incorporates the general criminal aiding and abetting
statute, 18 U.S.C. § 2, with specific reference to the
collection of an unlawful debt. Plaintiffs have not
alleged that price in any way violated § 1962(a).
Indeed, the reference to Section 2, in that limited
connection, cuts strongly against a conclusion that a
Congress intended to create Section 2 liability for
other RICO violations.
955 F. Supp. at 256.
The Plaintiffs in this case do not allege any collection of any
unlawful debt as a basis for section 1962(a) liability.
Therefore, the fact that Congress incorporated the general
criminal aiding and abetting statute into section 1962(a) in the
specific context of unlawful debt collection has no application
to the facts of this case. As this Court does not recognize a
private right of action for aiding and abetting a RICO violation,
Plaintiffs' causes of action against the all defendants, insofar
as they are based on either "aiding and abetting" or
18 U.S.C. § 2, must be dismissed.
PLAINTIFFS' SECTION 1962(d) CLAIMS ARE DISMISSED AS THE
SUBSTANTIVE CLAIMS ARE DEFICIENT
Plaintiffs' substantive claims under 18 U.S.C. § 1962(a) and (c)
fail to state a cause of action, and have been dismissed. As a
result, Plaintiffs' claim under section 1962(d) sounding in
conspiracy to violate sections 1962(a) and (c) must also be
dismissed. As noted in Black Radio Network:
Section 1962(d) prohibits any conspiracy to commit a
RICO violation. A RICO conspiracy claim must fail,
however, if the substantive claims themselves are
deficient. Discon Inc. v. NYNEX Corp., 93 F.3d 1055
at 1064 (2d Cir. 1996); Hecht v. Commerce Clearing
House, Inc., 897 F.2d 21, 25 (2d Cir. 1990).
44 F. Supp.2d at 581. See also, Biofeedtrac, 832 F. Supp. at 592;
Redtail Leasing, 1999 WL 32941 at *6.
The Plaintiffs' substantive RICO claim (Claim 119) is plainly
deficient in this case. Therefore, the purported Section 1962(d)
claim (Claim 120) also must fail as a matter of law.
In addition, the Section 1962(d) claim fails as against every
defendant because the complaint does not allege that each
defendant agreed to commit two or more predicate acts. In Adler
v. Berg Harmon Associates, 790 F. Supp. 1222 (S.D.N.Y. 1992), the
court noted that "18 U.S.C.
§ 1962(d) requires an allegation that a `defendant himself at
least agreed to commit two or more predicate crimes.'" (quoting
United States v. Ruggiero, 726 F.2d 913, 921 (2d Cir.), cert.
denied, 469 U.S. 831, 105 S.Ct. 118, 83 L.Ed.2d 60 (1984)). 790
F. Supp. at 1233. In that case, the complaint alleged that "All of
the defendants conspired among themselves to further the scheme
to defraud, which was in violation of 18 U.S.C. § 1962(c) as
described above. By knowingly and willingly participating in the
conspiracy, defendants violated 18 U.S.C. § 1962(d)." Id. The
court concluded that "Such an allegation falls short of alleging
that each defendant personally agreed to commit two or more
predicate acts," and that there exited "no factual allegations
supporting an inference that the various defendants consciously
agreed to become part of a RICO conspiracy." Id. at 1234.
Similarly, in Burke v. Dowling, the Eastern District Court
In order to state a claim under § 1962(d), Plaintiffs
must specifically allege that each of these
defendants entered into an agreement to commit two
predicate acts. The fact of agreement itself,
however, is insufficient to state a claim; Plaintiffs
must also allege that defendants embraced the
objective of the alleged conspiracy. The defendant
must be aware of the existence of the conspiracy, and
understand that the RICO enterprise extends beyond
his individual role.
944 F. Supp. 1036, 1068 (internal citations and quotations
The mere parroting of the statutory language in the pleadings
is insufficient to show that each defendant knowingly agreed to
participate in the alleged scheme:
[T]he complaints fail to provide specific factual
allegations supporting an inference that Fleet
entered into an agreement to facilitate the goals of
[the] enterprise. "Bare and conclusory allegations
are insufficient to withstand a motion to dismiss and
a Plaintiff must plead facts sufficient to show that
each defendant knowingly agreed to participate in the
conspiracy." Colony at Holbrook, Inc. v. Strata
G.C., Inc., 928 F. Supp. 1224, 1238 (E.D.N.Y. 1996).
Schmidt, 16 F. Supp.2d at 354.
Here, Plaintiffs' Amended Complaint and Civil RICO Statement
are devoid of any factual allegation whatsoever to indicate that
any of the moving defendants were aware of the alleged scope of
the purported enterprise, or that they specifically agreed to
further the alleged scheme through the commission or facilitation
of any racketeering activity. Therefore, Plaintiffs fail to
properly plead the requisite elements of a claim under section
1962(d), and their RICO conspiracy claim (Claim 120) is
THIS COURT DECLINES TO EXERCISE SUPPLEMENTAL JURISDICTION OVER
PLAINTIFFS' STATE LAW CAUSES OF ACTION
Dismissal of pendent state law claims is appropriate where the
federal claims under which supplemental jurisdiction is claimed
have been dismissed by the Court. See United Mine Workers v.
Gibbs, 383 U.S. 715
, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966);
Castellano v. Bd. Of Trustees of Police Officers' Variable
Supplements Fund, 937 F.2d 752
, 758 (2d Cir. 1991). See also
Calzaturificio Rangoni S.p.A. v. United States Shoe Corp.,
868 F. Supp. 1414,1421 (S.D.N.Y. 1994). Id. 16 F. Supp.2d at 355.
In the instant case, as set forth above, Plaintiffs' alleged
causes of action under RICO, the sole basis for Federal
jurisdiction, are dismissed pursuant to Rule 12(b)(6). There is
no reason, let alone a compelling reason, for this Court to
retain jurisdiction over the Plaintiffs' 118 remaining alleged
causes of action, all of which
are based upon state or common law claims.
Plaintiffs in this action did not — and, based on counsel's
representations at oral argument, apparently cannot — plead any
set of facts that would establish any cognizable RICO claim. For
that reason, defendants' motion to dismiss the complaint is
granted, with prejudice as to the RICO claims and without
prejudice as to Plaintiffs various (and numerous) state law
The third party complaint, which asserts claims for
contribution against Chris Gedney and Richard E. Grayson, Esq. is
also dismissed without prejudice.