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FIRST CAPITAL ASSET MANAGEMENT v. BRICKELLBUSH

July 29, 2002

FIRST CAPITAL ASSET MANAGEMENT, INC., ET ANO., PLAINTIFFS,
V.
BRICKELLBUSH, INC., ET AL., DEFENDANTS.



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

              MEMORANDUM OPINION

Plaintiffs are judgment creditors of certain of the defendants and allege that they have been hindered by violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO")*fn1 and various state law torts in their efforts to collect their judgments. Their initial complaint was dismissed substantially on the ground that it failed sufficiently to allege a pattern of racketeering activity.*fn2 The moving defendants Ahmed Vahabzadeh ("Ahmed"), Afsar Vahabzadeh ("Afsar"), the Estate of Soleyman Vahabzadeh ("Soleyman's Estate"), Satinwood, Inc. ("Satinwood"), Sphinx Rock, N.V. ("Sphinx Rock"), and Savco, S.A. ("Savco")*fn3 now seek an order dismissing (1) the amended complaint against the moving defendants for failure to state a claim pursuant to Rule 12(b)(6) or, in the alternative, pursuant to Rule 12(b)(1) for lack of standing and subject matter jurisdiction, and (2) all claims against Afsar, Ahmed, and Afiwa, S.A. ("Afiwa") pursuant to Rule 12(b)(2) for lack of personal jurisdiction.

The amended complaint asserts eight claims for relief. Counts One through Four are New York law fraudulent conveyance claims against Sohrab, Ahmed, Afsar, Soleyman's Estate, Sphinx Rock, Satinwood, Peninsula, and "John Does 1-20." Count Five is substantive RICO claim under 18 U.S.C. § 1962(c) against Sohrab and Afsar. Count Six is a RICO conspiracy claim under 18 U.S.C. § 1962(d) against Sohrab, Ahmed, and Afsar. Count Seven is a reverse corporate veil piercing and alter ego liability claim against Afiwa. Count Eight is a successor liability, common corporate enterprise, and alter ego liability claim against Savco.

I. Standing

As the moving defendants' standing arguments implicate the Court's subject matter jurisdiction,*fn4 the Court will address these arguments first.

A. Applicable Standard

It is unclear whether dismissal for lack of standing properly is sought under Rule 12(b)(6) or Rule 12(b)(1).*fn5 The question is academic, however, because even when a standing motion is considered under Rule 12(b)(6), the district court is authorized to consider matters outside the pleadings and to make findings of fact when necessary.*fn6 Because the more recent Second Circuit authority suggests that dismissals for lack of standing more properly are sought under Rule 12(b)(1),*fn7 the applicable standards under Rule 12(b)(1) and 12(b)(6) are not materially different in the standing context,*fn8 and the moving defendants' ask for dismissal pursuant to Rule 12(b)(1), the Court will consider the standing arguments under Rule 12(b)(1).

In resolving a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), a district court may refer to evidence outside the pleadings, such as affidavits and other documents.*fn9 While the plaintiff has the ultimate burden of establishing subject matter jurisdiction and generally must establish jurisdiction by a preponderance of the evidence when the defendant makes a "factual challenge" on a Rule 12(b)(1) motion,*fn10 "where `[subject matter] jurisdiction is so intertwined with the merits that its resolution depends on the resolution of the merits, the trial court should employ the standard applicable to a motion for summary judgment.'"*fn11 Here, the proximate cause and injury questions central to the standing determination would be bound up also in any jury award of damages.*fn12 Thus, standing and the merits are intertwined, and the Court will employ the summary judgment standard on this Rule 12(b)(1) motion.

B. RICO Standing

1. General Principles

To invoke RICO's civil remedies, a plaintiff must have been "injured in his business or property by reason of a violation of section 1962."*fn13 This language "has been construed to require that in order to merit standing, a civil RICO plaintiff must establish that the RICO violation at issue was a proximate cause of the injury to the plaintiffs business or property for which redress is sought."*fn14 "Because a plaintiff must show injury `by the conduct constituting the violation' of RICO, the injury must be caused by a pattern of racketeering activity violating section 1962 or by individual RICO predicate acts."*fn15

Plaintiffs make only bare bones allegations of injury to their business and property. They assert, on both the substantive and conspiracy claims, the following:

"Plaintiffs have suffered injuries proximately caused by the bankruptcy crimes and mail frauds set forth above, including, but not limited, to the following:
(a) The loss of any ability to satisfy their claims and judgments out of assets Sohrab was entitled to inherit from Soleyman and receive from Soleyman's Estate.
(b) The attorneys fees and expenses incurred in prosecuting their objections to Sohrab's fraudulent Chapter 7 petition in the First Capital v. Vahabzadeh adversary proceeding.

-and-

(c) The loss of any ability to execute directly against the assets Sohrab had gratuitously transferred to Afsar and Sohrab's siblings."*fn16

Plaintiffs' allegations of injury thus can be divided into two categories for purposes of the standing analysis: the inability to collect their judgments (the "Lost Debt" injury) (sections (a) and (c) above), and the cost of pursuing their objections to Sohrab's bankruptcy discharge (the "Legal Fees" injury) (section (b) above).

2. Lost Debt Injury

Whether plaintiffs have standing based on their alleged Lost Debt injury is controlled by Stochastic Decisions, Inc. v. DiDomenico.*fn17 The plaintiff in that case was a judgment creditor of various defendants and their companies. As in this case, one of the defendant companies filed a bankruptcy petition that was dismissed when the company failed to file financial reports.*fn18 The plaintiff brought a civil RICO action charging the defendants with conspiracy to commit bankruptcy, wire, and mail fraud for the purpose of preventing the plaintiff from collecting the outstanding judgments.*fn19 The complaint alleged that the property transfers effected in the course of the conspiracy were fraudulent conveyances under state law and that the overall scheme constituted common law fraud.*fn20 Thus, while not identical, the facts of Stochastic and the facts of this case are substantially similar.

After a bench trial, the Stochastic court awarded judgment to the plaintiff against most of the defendants.*fn21 It awarded the plaintiff $467,477.24 on the civil RICO claim, which consisted of $50,000 in legal fees expended by plaintiff in attempting to collect its state court judgments*fn22 and $317,477.24 in RICO attorneys fees and expenses incurred in pursuing the RICO action.*fn23 The district court determined that the plaintiff was not entitled to the amounts owed on the state court judgments or the attorneys fees spent litigating those actions.*fn24

The plaintiff appealed, arguing that it was entitled to recover the amounts of its state court judgments. The Second Circuit, however, flatly rejected this argument.*fn25

The Stochastic panel reaffirmed the principle laid down in Bankers Trust Co. v. Rhoades,*fn26 that "a debt is `lost[,]' and thereby becomes a basis for RICO trebling[,] only if the debt (1) cannot be collected (2) `by reason' of a RICO violation."*fn27 It reasoned that "a RICO claim does not accrue until it is established that collection of the claim or judgment has been successfully frustrated."*fn28 The court held that, to the extent the plaintiff successfully collected on the state court judgments by reason of their state law fraudulent conveyance claims, those amounts would reduce the RICO injury pro tanto, before any trebling occurred. Because the plaintiffs collection efforts were ongoing (by reason of the federal court action itself), and the actual amount of its injury was indefinite and unprovable, plaintiff did not yet have standing under RICO.*fn29

Here, plaintiffs do not allege that collection of the amounts owed on the state court judgments has been "successfully frustrated," much less how any such ultimate frustration was a proximate consequence of any of defendants' predicate acts. Indeed, an affidavit submitted by plaintiffs counsel, Eric Berry, suggests that plaintiffs have commenced and prosecuted to judgment or settlement five lawsuits against transferees of Sohrab's allegedly fraudulently conveyed assets.*fn30 Their efforts, as evidenced by the state law claims in this case, are continuing and have met with varying degrees of success, grossing $370,000 as of the date of Mr. Berry's affidavit.*fn31 In short, plaintiffs neither have alleged nor offered any proof that the collection of the debt has been frustrated as a proximate consequence of any of the defendants' alleged predicate acts.*fn32 Accordingly, plaintiffs lack RICO standing based on their alleged Lost Debt injury.

3. Legal Fees Injury

Plaintiffs seek also to recover under RICO the "attorneys fees and expenses incurred in prosecuting their objections to Sohrab's fraudulent Chapter 7 petition in the First Capital v. Vahabzadeh adversary proceeding."*fn33 This allegation and its supporting proof are sufficient to confer standing for the substantive RICO claim against Sohrab and the RICO conspiracy claim against Sohrab, Ahmed, Afsar, and Schlegelmilch, but not the substantive RICO claim against Afsar.

Bankers Trust and Stochastic offer substantial guidance on this point as well. Since Bankers Trust, it has been well settled that legal fees may constitute RICO damages when they are the proximate consequence of a RICO violation.*fn34 The defendants there had initiated fraudulent lawsuits against the plaintiffs in South Carolina and New York and allegedly bribed the judge in the South Carolina action, all in an effort to frustrate collection of the debt owed the plaintiff.*fn35 The Second Circuit held that the plaintiff could recover as RICO damages (1) legal fees and other expenses incurred in fighting the frivolous lawsuits in New York, (2) legal fees and other expenses spent in overcoming bribe-induced decisions in the South Carolina action, and (3) legal fees and other expenses incurred in obtaining a revocation of the initial reorganization plan.*fn36 In Stochastic, the court held that the plaintiff could recover as RICO damages legal fees and other expenses incurred in its attempt to collect the state court judgments,*fn37 but that it could not recover its fees and expenses incurred in originally obtaining those judgments.*fn38

a. Substantive RICO Claim: Sohrab

Among the scores of predicate acts allegedly committed by Sohrab, the following are particularly relevant: (1) on July 17, 1997, Sohrab filed a materially false bankruptcy petition*fn39 in violation of 18 U.S.C. § 152(2); (2) on July 17, 1997, Sohrab transferred $95,000 he held in an account at Bank of New York in the name of Vahabzadeh & Co. to an account at Credit Suisse in Zurich controlled by his wife Ninni's brother, Ali Ladjevardi,*fn40 in violation of 18 U.S.C. § 152(1) and 18 U.S.C. § 152(7); (3) on May 13, 1997, Sohrab and Ninni executed a separation agreement in which Sohrab, without consideration, ostensibly waived a claim to an equitable distribution of his and Ninni's marital property*fn41 in violation of 18 U.S.C. § 152(1) and 18 U.S.C. § 152(7); (4) on September 4, 1997, Sohrab made false statements concerning his family's financial affairs and his interest in Soleyman's Estate and in the Vahabzadeh family business at a meeting of his creditors*fn42 in violation of 18 U.S.C. § 152(3); and (5) on September 16, 1997, Sohrab made similar false statements under oath during an examination by his creditors conducted under Bankruptcy Rule 2004*fn43 in violation of 18 U.S.C. § 152(3).

There is at least a genuine issue of fact regarding whether these predicate acts proximately caused plaintiffs to incur legal fees and other expenses in prosecuting their objections to Sohrab's bankruptcy petition in the First Capital v. Vahabzadeh adversary proceeding. A "RICO pattern or acts proximately cause a plaintiffs injury if they are a substantial factor in the sequence of responsible causation, and if the injury is reasonably foreseeable or anticipated as a natural consequence."*fn44 It seems entirely foreseeable that these acts designed to hide assets and obtain a wrongful discharge of debts would cause creditors to expend money to block such a discharge and recover any fraudulently transferred assets. In other words, the adversary proceeding, with its attendant costs, may be viewed as an expected and natural consequence of the type of conduct allegedly engaged in by Sohrab. And it seems that the alleged predicate acts enumerated above played a substantial role in plaintiffs' decision to pursue the adversary proceeding: all of them were mentioned by Judge Gallet as grounds upon which plaintiffs sought denial of Sohrab's petition.*fn45 Accordingly, plaintiffs have standing to pursue their substantive RICO claim against Sohrab because of the Legal Fees injury.*fn46

b. RICO Conspiracy Claim: Sohrab, Afsar, Ahmed, and Schlegelmilch

In light of the above, the standing question regarding the RICO conspiracy claim can be disposed of without much difficulty. To have standing to bring a RICO conspiracy claim, the plaintiffs must demonstrate that at least one Section 1961 predicate act taken in furtherance of the RICO conspiracy proximately caused injury to their business or property.*fn47 Here, plaintiffs' conspiracy allegations encompass the predicate acts of Sohrab discussed above.*fn48 And there is at least an issue of fact regarding whether they were taken in furtherance of a conspiracy formed by Sohrab, Ahmed, Afsar, and Schlegelmilch in Geneva,*fn49 which had as its object "to transfer and conceal assets of Sohrab in contemplation of and during Sohrab's bankruptcy case to the detriment of plaintiffs, the Chapter 7 Trustee and Sohrab's other creditors."*fn50 Thus, the Legal Fees injury flowing from Sohrab's predicate acts confers standing on plaintiffs on their RICO conspiracy claim as well.

c. Substantive RICO Claim: Afsar

Plaintiff alleges that Afsar committed the following predicate acts: (1) at an unspecified time in early 1997, she received assets from Sohrab, which he purportedly inherited from Soleyman's Estate and transferred to her overseas, all in violation of 18 U.S.C. § 152(7);*fn51 (2) on September 16, 1998, she falsely stated in a letter sent to Sohrab and intended for the bankruptcy court that she had no documents in her possession relating to Soleyman's Estate or the financial affairs of her late husband;*fn52 (3) on March 24, 1998, as part of the adversary proceeding, she submitted an affidavit stating falsely that Soleyman had been an Iranian citizen and not a Swiss citizen, presumably in violation of 18 U.S.C. § 152(3);*fn53 (4) she caused Russell McRory, in his capacity as her attorney, to submit a declaration dated to the bankruptcy court, dated March 4, 1998, in which he stated that Soleyman, at the time of his death, owned no bank, brokerage, investment or other type of account, presumably in violation of 18 U.S.C. § 152(3);*fn54 (5) she caused Mr. McRory, in his capacity as her attorney, to submit a declaration to the bankruptcy court, dated June 12, 1998, in which he stated that Schlegelmilch had informed him that there were no assets in Soleyman's Estate at the time of his death beyond personal effects, furnishings in his home and nonworking automobiles, both over 20 years old, presumably in violation of 18 U.S.C. § 152(3);*fn55 and (6) on various dates between 1997 and 1999, she sent money to Sohrab, allegedly out of assets unlawfully transferred to her in 1997 by Sohrab, in violation 18 U.S.C. § 152(7).*fn56 For the sake of convenience, the Court will analyze the predicate acts listed above in two groups: the "Adversary Proceeding Predicate Acts" (including predicate acts (2) through (5)) and the "Transfer Predicate Acts" (including predicate acts (1) and (6)).

Plaintiffs have failed to demonstrate an issue of fact regarding whether the Adversary Proceeding Predicate Acts proximately caused Legal Fees injury. As defendants point out, these predicate acts all occurred after commencement, and as part, of the adversary proceeding for which legal fees and expenses are claimed as RICO injury.*fn57 While in other circumstances the alleged dilatory tactics might have increased the costs of prosecuting the adversary proceeding, here there is undisputed evidence that plaintiffs' attorney charged them a flat fee for this action.*fn58 Thus, it is impossible for the Court to see how these predicate acts possibly could have increased the legal expenses incurred by plaintiffs in pursuing denial of Sohrab's discharge.

Nor do the Transfer Predicate Acts support plaintiffs' standing on their substantive RICO claim against Afsar. If Afsar had committed such acts, it would be easy to see how they might proximately have caused an increase in plaintiffs' legal fees for many of the same reasons discussed above with respect to Sohrab's predicate acts. However, plaintiffs have failed adequately to plead, much less provide any factual support for, these predicate acts.

"Section 152(7) [of the Bankruptcy Code] makes it unlawful for any person, in contemplation of his [or her] bankruptcy or that of another person or corporation, to transfer or conceal knowingly and fraudulently `his [or her] property or the property of such other person or corporation.' By its plain language, therefore, Section 152(7) makes it a crime for a person to transfer or conceal knowingly an fraudulently . . . the property of another person [in contemplation of that other person's bankruptcy]. . . ."*fn59

Rule 9(b) of the Federal Rules of Civil Procedure applies to allegations of bankruptcy fraud under Section 152(7).*fn60 While the original complaint provided detail regarding when money allegedly was transferred to Sohrab from Afsar, it was silent on when the money was received from the debtor.*fn61 The amended complaint adds a mountain of new allegations asserting, on information and belief, that Soleyman owned assets at the time of his death and that Sohrab received an inheritance.*fn62 Nevertheless, there still is nothing in the amended complaint detailing when*fn63 or how*fn64 any transfer to Afsar was accomplished. These omissions are particularly glaring because Afsar's receipt of Sohrab's assets in contemplation of his bankruptcy is the gravamen of the alleged predicate act.*fn65 Without any rational and specific allegations regarding Afsar's receipt of Sohrab's assets, predicate act (1) fails for lack of particularity under Rule 9(b). Furthermore, without specific allegations regarding Afsar's receipt of Sohrab's assets, plaintiffs' allegations regarding Afsar's subsequent transfers of funds to Sohrab in 1997 through 1999 (making up predicate act (6) above) also fail for lack of particularity. Plaintiffs have failed to allege sufficient, specific facts supporting their contention that the ultimate source of the transfers was Sohrab and not Afsar herself. If she was the source of the funds, there was no violation of Section 152(7). Accordingly, the Transfer Predicate Acts do not support plaintiffs' standing on their substantive RICO claim against Afsar.

For the foregoing reasons, plaintiffs lack standing to bring their substantive RICO claim against Afsar.

II. Personal Jurisdiction

The moving defendants challenge also the Court's personal jurisdiction over Ahmed, Afsar, and Afiwa. In its prior opinion, the Court disposed of the jurisdictional issue, reasoning that if the RICO conspiracy count were sufficient, a prima facie showing of personal jurisdiction over Afsar, Ahmed, and Schlegelmilch would be established by virtue of their status as alleged co-conspirators of Sohrab, over whom personal jurisdiction was and is undisputed.*fn66 As defendants correctly point out, however, more than a prima facie showing of conspiracy is required to establish personal jurisdiction over an alleged co-conspirator under New York's long-arm statute.*fn67 Accordingly, the Court will address its personal jurisdiction over Afsar, Ahmed, and Afiwa before proceeding further.

A. Applicable Standard

"In deciding a pretrial motion to dismiss for lack of personal jurisdiction a district court has considerable procedural leeway. It may determine the motion on the basis of affidavits alone; or it may permit discovery in aid of the motion; or it may conduct an evidentiary hearing on the merits of the motion."*fn68 Here, the Court has not conducted an evidentiary ...


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