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LERNER v. FLEET BANK

May 22, 2001

ISAAC LERNER, ELI LERNER, BALLYWARD INVESTMENT COMPANY, LTD., JAIME SOHACHESKI, GASTON LIMITED, HOTEL INVESTORS, INC., PERKY LIMITED, ABRAHAM RAPPAPORT, ESTHER RAPPAPORT, MOSHE COHN, ESTABLISSEMENT SOMER, JOSEPH KOHN, CHANCERY ENTERPRISES, LTD., ROSDEV DEVELOPMENTS, INC., AND MICHAEL ROSENBERG, PLAINTIFFS,
v.
FLEET BANK, N.A., STERLING NATIONAL BANK AND TRUST COMPANY OF NEW YORK, AND REPUBLIC NATIONAL BANK OF NEW YORK, DEFENDANTS. BRUCE BAYROFF, JOSHUA GOLDSTEIN, LAND TECH AT MANALPAN LLC, THEODORE BRODIE, MEYER ROSENBAUM, MR ASSOCIATES LLC, ILANA BLUMKIN, AS TRUSTEE, EMDEE TOURS, INC., ALEXANDER HASENFELD, INC., PROFIT SHARING RETIREMENT PLAN, PINCHOS RUBINSON, AKIVA LEIMAN, ESTATE OF BORUCH RUBINSON, CHAIM AND RACHEL LEKOWITZ, NAFTALI AND SARAH LIPSHUTZ, MENDEL AND FEIGY LIPSCHUTZ, REISEL BERGSTEIN, MICHAEL KONIG, ESTHER WERTENTEIL, AARON WERTENTEIL, TEENA RUBINFELD, MARK WERTENTEIL, MORRIS AND SARAH FRIEDMAN, THE REGAL TRADE, S.A., VAVEL CORP., CHADWICK FUNDING CO. L.P., ALLEN SAUSEN AND LEONARD SAUSEN, D/B/A ATASSCO, KEREN HACHESED OF MONSEY, INC., GENEVA PROPERTIES, L.L.C., MT. PLEASANT PARTNERS, HERSCEL KULEFSKY, ALBERT DAVID PEARLS & GEMS, INC., DEFINED BENEFIT PENSION PLAN, CHAI PROPERTIES CORP., ARTHUR KURTZ, CRESFIELD ASSOCIATES, INC., WEINREB MANAGEMENT AND HOWARD MERMELSTEIN, PLAINTIFFS, V. FLEET BANK, N.A., STERLING NATIONAL BANK AND TRUST COMPANY OF NEW YORK, AND REPUBLIC NATIONAL BANK OF NEW YORK, DEFENDANTS.



The opinion of the court was delivered by: Block, District Judge:

MEMORANDUM AND ORDER

Plaintiffs in both actions were investors who have been defrauded by David Schick ("Schick"), a prominent attorney and businessman. They have brought in each action identical multiple state law claims as well as federal Racketeer Influenced and Corrupt Organizations claims ("RICO") pursuant to 18 U.S.C. § 1962(c) and (d), seeking to recover in excess of $200 million from defendants Fleet Bank, N.A., Sterling National Bank and Trust Company of New York, and Republic National Bank of New York (collectively "defendants" or "banks") in connection with defendants' handling of certain bank accounts in a multi-million dollar Ponzi scheme orchestrated by Schick.*fn1 Plaintiffs rely on mail and wire fraud as the predicate acts constituting the RICO pattern of racketeering activity. As an association-in-fact RICO enterprise, plaintiffs name the New York State Attorney Disciplinary System. Plaintiffs claim that the enterprise was corrupted by the defendants because the banks allowed Schick to perpetuate his scheme for a protracted period of time by failing to report to the enterprise's Lawyers' Fund for Client Protection of the State of New York ("Lawyers' Fund") that Schick was writing checks against insufficient funds. Plaintiffs contend that if reporting had occurred, the Ponzi scheme would have been discovered sooner, curtailing their losses.
Defendants move to dismiss the RICO claims pursuant to Rule 12(b)(6) for a host of reasons, including plaintiffs' failure to plead the mail and wire fraud RICO components with Rule 9(b) particularity. Although not specifically referencing Rule 12(b)(1), defendants also challenge plaintiffs' standing. The Court agrees, albeit by separate analysis, that plaintiffs do not have standing and, accordingly, dismisses the RICO claims pursuant to Rule 12(b)(1) for lack of subject matter jurisdiction. Because the RICO claims are dismissed, and the Court declines to exercise supplemental jurisdiction, the complaints, as amended, are dismissed in their entirety.

BACKGROUND*fn2

I. The Scheme
In 1992 Schick began marketing investment opportunities based upon mortgage flip transactions. Schick's "original intentions were good" and "his modus operandi was not criminal;" however, due to "unrelated losses stemming from a 1988 `problem' which came back to `haunt' him," he began to use fraudulent means to stay afloat. Am. Compl. ¶ 3. The essence of Schick's scheme to defraud was the marketing of risk-free investments with high, short-term yields. In this regard, Schick purported to bid on distressed mortgage pools at auctions and sales conducted by the Resolution Trust Company, Federal Deposit Insurance Corporation, and other banking institutions. Schick explained to prospective investors that after being awarded a bid to purchase a mortgage pool subject to at least a ninety-day due diligence, he could re-sell the same pool to a "take-out buyer" for a substantial profit (between twelve and twenty percent),*fn3 subject to a due diligence period of fewer than ninety days. Am. Compl. ¶ 126. Schick assured them that if the take-out buyer declined to purchase the pool, Schick could rescind the original purchase within his own ninety-day due diligence window, thus avoiding any risk of loss.
However, Schick told the putative investors that in order to close on a bid he was required to deposit substantial sums of cash as evidence of his ability to complete the purchase. Schick misrepresented to the investors that their investments would be protected in escrow accounts covered by restrictive provisions during the due diligence period, including a requirement that funds could not be withdrawn without the signature of plaintiffs' representative. Using these fraudulent promises as well as his status in the community, Schick successfully induced numerous individuals and entities to invest millions of dollars.
II. Governing New York Regulations Regarding Attorney Escrow Accounts
Relevant to the RICO allegations set forth in the amended complaints, there are several regulations that govern the responsibilities and obligations of attorneys maintaining attorney escrow accounts and the banking institutions within which they are maintained. In particular, pursuant to Disciplinary Rule 9-102 of the Code of Professional Responsibility ("DR 9-102"):
(B)(1) A lawyer who is in possession of funds belonging to another person incident to the lawyer's practice of law, shall maintain such funds in a banking institution within the State of New York which agrees to provide dishonored check reports in accordance with the provisions of Part 1300 of the joint rules of the Appellate Divisions. Banking institution means a state or national bank, trust company, savings bank, savings and loan association or credit union. Such funds shall be maintained, in the lawyer's own name, or in the name of a firm of lawyers of which he or she is a member, or in the name of the lawyer or firm of lawyers of whom he or she is employed, in a special account or accounts, separate from any business or personal accounts of the lawyer or lawyer's firm, and separate from any accounts which the lawyer may maintain as executor, guardian, trustee or receiver, or in any other fiduciary capacity, into which special account or accounts all funds held in escrow or otherwise entrusted to the lawyer or firm shall be deposited.
(B)(2) A lawyer or the lawyer's firm shall identify the special bank account or accounts required by paragraph (1) of this subdivision as an "Attorney Special Account," or "Attorney Trust Account," or "Attorney Escrow Account," and shall obtain checks and deposit slips that bear such title. Such Title may be accompanied by such other descriptive language as the lawyer may deem appropriate, provided that such additional language distinguishes such special account or accounts from other bank accounts that are maintained by the lawyer or the lawyer's firm.

N.Y. Jud. Law App. at DR 9-102 (McKinney 2001) (codified at N.Y. Comp. Codes R. & Regs., tit. 22, § 1200.46 [b][1], [2] (2001)). Furthermore, pursuant to the Dishonored Check Reporting Rules For Attorney Special, Trust and Escrow Accounts:

(a) Special bank accounts required by [22 N.Y.C.R.R. § 1200.46] shall be maintained only in banking institutions which have agreed to provide dishonored check reports in accordance with the provisions of this section.
(b) An agreement to provide dishonored check reports shall be filed with the Lawyer's Fund for Client Protection, which shall maintain a central registry of all banking institutions which have been approved in accordance with ...

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