United States District Court, S.D. New York
February 9, 2004.
OSRECOVERY, INC., et al., Plaintiffs, -against- ONE GROUPE INTERNATIONAL, INC., et al., Defendants
The opinion of the court was delivered by: LEWIS KAPLAN, District Judge
Defendant Latvian Economic Commercial Bank ("Lateko") has moved to
dismiss the second amended complaint on the grounds that it is not
subject to personal jurisdiction, the complaint fails to state a claim
against it upon which relief may be granted, the complaint fails to
allege fraud with particularity, and the claims of plaintiff OSRecovery,
Inc. are barred by N.Y. JUD. L. § 489. Lateko subsequently withdrew
so much of the motion as seeks dismissal on personal jurisdiction
grounds. The balance of the motion is ripe for disposition.
The claims against Lateko are brought under the Racketeer Influenced
and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq.
("RICO"), and for common law fraud, negligent misrepresentation, breach
of fiduciary duty, aiding and abetting common law fraud, and to impose a
constructive trust. The RICO, common law fraud, and aiding and abetting
claims all are subject to Fed.R.Civ.P. 9(b). The remaining claims all
incorporate the fraud claims by reference and thus also sound in fraud.
Accordingly, they too are subject to Rule 9(b). See, e.g., Rombach v.
Chang, ___ F.3d___, Nos. 02-7907(L), 02-7933(XAP), 2004 WL 77928 (2d
Cir. Jan. 20, 2004) (Securities Act claims which do not require proof of
fraud nevertheless subject to Rule 9(b) where claims sound in fraud).
All of plaintiffs' fraud-based claims against Lateko require proof of
scienter, whether formulated as culpable adherence to a
fraudulent scheme forming the basis of mail or wire fraud predicates acts
for purposes of RICO, knowledge of falsity for purposes of common law
fraud or fraudulent breach of fiduciary duty, culpable knowledge of the
principals' fraud for purposes of aiding and abetting, and so on. In each
case, therefore, Rule 9(b) requires the allegation of facts from
which a strong inference of fraud reasonably may be drawn.*fn1 The
requisite "strong inference" of fraud may be established by alleging
facts either (a) showing that defendants had both motive and opportunity
to commit fraud, or (b) constituting strong circumstantial evidence of
conscious misbehavior or recklessness.*fn2 Moreover, allegations made on
information and belief are insufficient "`unless the facts are peculiarly
within the knowledge of the defendants, in which case the complaint must
allege facts demonstrating the basis for the information and
As plaintiffs' papers make abundantly clear, the essence of plaintiffs'
position here, which rests in some part on allegations made on
information and belief, is that Lateko "knew or should have known of the
[core defendants'] intent to defraud innocent victims of their
hard-earned money." PL Mem. 59. While the inclusion of the phrase "or
should have known" perhaps is an immaterial albeit insufficient
alternative theory, see, e.g., CMNY Capital, L.P. v. Deloitte &
Touche, 821 F. Supp. 152, 157 & n.3 (S.D.N.Y. 1993), the second
amended complaint does not clearly set forth the factual basis for
plaintiffs' allegations on information and belief and or what precisely
they claim Lateko knew at relevant times, let alone the facts upon which
such claims of knowledge are based. Accordingly, for these reasons alone,
and possibly others that need not now be detailed, the complaint fails to
allege fraud by Lateko the particularity required by Rule 9(b). As it is
not clear, however, that plaintiffs are unable to allege legally
sufficient claims against Lateko, leave to amend will be granted and a
few additional words of guidance are appropriate.
First, plaintiffs purport to have claims against Lateko of which
scienter is not an indispensable element. The incorporation in
these claims by reference of the fraud allegations rendered them subject
to Rule 9(b). Any amended pleading should carefully distinguish between
claims in which plaintiffs rely on proof of scienter and claims
that do not so require. Absent the filing of such an amended complaint,
it would be premature to determine the legal sufficiency of such claims.
Second, insofar as Lateko relies upon N.Y. JUD. L. § 489 in support
of dismissal of the claims of plaintiff OS Recovery, Inc., the motion is
denied on the merits. "[V]iolation of Section 489 turns on whether `the
primary purpose of the purchase [was]. . . to bring a suit,' or whether
`the intent to bring a suit [was]. . . merely incidental and
contingent.'" Elliott Associates, L.P. v. Banco de la Nacion,
194 F.3d 363, 378 (2d Cir. 1999) (quoting Moses v. McDivitt,
88 N.Y. 62, 65 (1882)). It "is not violated when, as here, the accused
party's `primary goal' is found to be satisfaction of a valid debt and
its intent is only to sue absent full performance." Id. at 381.
This is an inherently fact specific inquiry, and certainly not a matter
that may be decided, except perhaps in the most extraordinary
circumstances, on a motion by a defendant to dismiss a complaint
brought by the putative assignee.
Third, as the Court assumes that plaintiffs will amend, discovery is to
continue unabated. In particular, Lateko shall proceed notwithstanding
Finally, if plaintiffs elect to amend pursuant to this order, they
should take their best shot and should not assume that leave to amend
will be granted yet again.
For the foregoing reasons, the motion of Latvian Economic Commercial
Bank to dismiss the second amended complaint is granted to the extent
that the second amended complaint is dismissed for failure to allege
fraud with the particularity required by Fed.R.Civ.P. 9(b), with leave
to file a third amended complaint no later than March 1, 2004, and denied
in all other respects.