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United States District Court, S.D. New York

September 27, 2004.

NAVILLUS TILE, INC. et al. Defendants.

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


This action arises out of civil claims pursuant to the Racketeering Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962, 1964 ("RICO"), and state law claims of breach of contract for unpaid wages. Defendants have moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, the Court grants defendants' motion in its entirety, dismissing all RICO claims with prejudice and dismissing all state claims without prejudice.


  The following allegations, set forth by the complaint, are liberally construed in the light most favorable to the plaintiff and accepted as true for the purposes of this 12(b)(6) motion. Defendants are corporations licensed in the state of New York, operating as general contractors in commercial and residential construction and transacting in the purchase and sale of residential and commercial real estate. (Pl.'s Compl. ¶¶ 8, 9.) Defendant corporations are jointly owned and operated by Denis O'Sullivan, Donal O'Sullivan, Helen O'Sullivan, and Kevin O'Sullivan, all New York state residents and members of the same family, serving as officers. (Id. ¶ 9.) Around March of 1998, defendants hired Jaikarran Chandradat ("Chandradat"), a domicile of the state of New York, as an accountant for Navillus Tile, Inc. ("Navillus"). (Id. ¶ 10.) At the time of his hiring, they failed to disclose to Chandradat that Navillus was one of several interrelated corporations owned by the O'Sullivan family. (Id.) Chandradat began performing the duties of accountant and acting comptroller for Navillus in May of 1998, and worked approximately thirty-five hours a week. (Id. ¶¶ 11, 12.) His job entailed duties such as reconstructing and analyzing financial records; managing accounts payable and receivable; overseeing job costing and expense allocations; reconciling bank, credit card, loan, overdraft, and investment accounts; preparing payroll taxes and corporate and personal income tax returns; and preparing for audits performed by the Internal Revenue Service, New York State Tax Department, and New York City Tax Commission. (Id. ¶ 11.) In return for these services, Chandradat received six hundred to seven hundred dollars in cash per week until the end of the calendar year 2000. (Id. ¶ 12.)

  By the end of 2002, Chandradat was earning sixty-two thousand, five hundred dollars a year, in addition to an annual bonus of twenty thousand dollars. (Id. ¶ 13.) However, Navillus suddenly reduced Chandradat's salary to sixty percent of the gross amount during his last nineteen weeks of employment. (Id. ¶ 14.) At that time, Donal O'Sullivan and Kevin O'Sullivan also informed Chandradat that he would be required to perform similar functions for the remaining corporations in addition to his work for Navillus, thereby confirming Chandradat's growing suspicions that defendant corporations were interrelated. (Id. ¶ 15.) In response to this demand, Chandradat immediately demanded additional payment for the services he was required to perform for the corporations other than Navillus. (Id. ¶ 16.)

  However, those corporations "de facto engaged [him], in assigning their accounting duties" to him and "requiring that he perform them, immediately, upon their assignment to him." (Id. ¶ 17.) In order to complete these assignments, Chandradat worked significantly longer hours than he did when he was working solely for Navillus. (Id. ¶ 18.) When Chandradat complained to Kevin O'Sullivan and Donal O'Sullivan, they replied that they "were deferring that part of [Chandradat's] pay until their revenues had sufficiently increased." (Id. ¶ 19.) When revenues actually increased, defendants failed to pay Chandradat the compensation to which he was entitled. (Id.)

  During his employment, Chandradat allegedly observed that on several occasions, one of the defendants (or one of its principals) altered details on customer invoices such as the date, amount, or invoice number. (Id. ¶¶ 26.) Instead of paying customers on these invoices, the defendant corporations diverted the funds to their own accounts or allowed the principals to deposit the funds to their personal accounts. (Id.) Additionally, the complaint alleges that defendants often billed each other for work that had not been performed and then disbursed the proceeds in unrecorded cash to each other or to interested donees. (Id.) Defendants also bought equipment, only to sell it without "leaving a paper trail," and allowed the principals to pocket the proceeds. (Id.)

  According to Chandradat, the payroll records indicate that defendants frequently made payments to "phantom employees." (Id.) On other occasions, one or more of the principals demanded and received benefits such as home renovations without attributing it to the corporation. (Id.) Overall, defendants are alleged to have regularly engaged in "bookkeeping indiscretions," by generating "off book" balance sheets, manipulating job costs, and maintaining multiple bank accounts for Navillus that did not report all of the transactions contained on the corporate balance sheet. (Id.)

  Chandradat further alleges that defendants "knowingly recruited and hired undocumented aliens, who sometimes possessed false immigration and/or work-authorization documents, as office assistants, masons, tilers and other construction laborers" through advertisements in The New York Times and Irish Voice and international phone calls. (Id.)

  On or about May 13, 2003, Kevin O'Sullivan informed Chandradat that he was being laid off, effective immediately, and would recall him to work as soon as possible. (Id. ¶ 22.) Yet Chandradat was never recalled. (Id. ¶ 23.) Chandradat nevertheless contends that he was punctual, never absent, a "team player," sensitive to his employers and the obligations of his position, and upbeat in attitude at work, and for the purposes of this motion, the Court assumes these allegations to be true. (Id. ¶ 21.) Although Chandradat claims that he never had disciplinary issues at work, he found his employers' treatment of him forced him to become an "outsider" at the office. (Id.)

  Based on these allegations, Chandradat has asserted two causes of action. First, Chandradat alleges that defendants engaged in a fraudulent scheme involving predicate acts of mail fraud, wire fraud, money laundering, and the knowing recruitment of undocumented aliens in violation of RICO. These unlawful acts gave Chandradat the false impression that defendants had insufficient funds to pay him the wages and bonuses to which he was entitled. Second, Chandradat argues that defendants' failure to compensate him for the additional services he performed amounted to a breach of contract under state law.


  I. The Rule 12(b)(6) Standard

  In ruling on a motion to dismiss under Rule 12(b)(6), the court is required to read a complaint generously, accepting all the alleged facts as true and drawing all reasonable inferences in favor of the plaintiff. See LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991); Frasier v. Gen. Elec. Co., 930 F.2d 1004, 1007 (2d Cir. 1991). The court must deny the motion unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Additionally, "the review of such a motion is limited, and `[t]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.'" Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (citation omitted).

  II. Merits of Chandradat's RICO Claims

  Chandradat's complaint asserts that defendants' refusal to compensate him was "part of a pattern of wrongful behavior, proscribed by [f]ederal statutes, such as the Racketeering Influenced and Immigration and Nationality Acts, and State statutes." (Pl.'s Compl. ¶ 26.)*fn1 These predicate acts "concealed the defendants' true profits," thereby misrepresenting to Chandradat that the defendants had insufficient funds to pay him. (Id.) In response, defendants seek to dismiss Chandradat's complaint on the ground that he lacks standing to assert a cognizable injury under RICO.

  The civil remedies provision of RICO grants standing to "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter." 18 U.S.C. § 1964(c) (1988). Section 1962 creates a private right of action against:

[A]ny person who: (a) invests or otherwise uses, directly or indirectly, income derived from a pattern of racketeering activity to acquire an interest in or to establish or operate an enterprise engaged in interstate commerce; (b) acquires or maintains, directly or indirectly, an interest in or control of such an enterprise through a pattern of racketeering activity; (c) is employed by or associated with such an enterprise and conducts or participates, directly or indirectly, in the conduct of its affairs through a pattern of racketeering activity; or (d) conspires to do any of the foregoing.
18 U.S.C. § 1962 (1988).*fn2 To demonstrate standing under RICO, a plaintiff must "plead, at a minimum, `(1) the defendant's violation of § 1962, (2) an injury to the plaintiff's business or property, and (3) causation of the injury by the defendant's violation.'" Lerner v. Fleet Bank, N.A., 318 F.3d 113, 120 (2d Cir. 2003) (quoting Commercial Cleaning Servs., L.L.C. v. Colin Serv. Sys., Inc., 271 F.3d 374, 380 (2d Cir. 2001)).*fn3

  The Second Circuit has carefully addressed the "causation" element due to the proliferation of "creative pleading" by plaintiffs who seek to take advantage of RICO's generous remedies. See Lerner, 318 F.3d at 116. Specifically, a plaintiff must show that his injury was "caused by a pattern of racketeering activity violating section 1962 or by individual RICO predicate acts." Hecht v. Commerce Clearing House, 897 F.2d 21, 23 (2d Cir. 1990). Additionally, the plaintiff must demonstrate that the "injurious conduct is both the factual and the proximate cause of the injury alleged." Lerner, 318 F.3d at 120 (citation omitted); Holmes v. Sec. Investor Protection Corp., 503 U.S. 258, 266 (1992) (rejecting premise that all "factually injured" plaintiffs may recover under RICO).

  In espousing this approach, the Second Circuit has strongly encouraged its district courts to resolve RICO standing issues on proximate cause grounds before reaching the standing requirements of the underlying predicate statutes. Lerner, 318 F.3d at 122. Where the plaintiff fails to adequately plead proximate cause in a civil RICO action, dismissal pursuant to Rule 12(b)(6) is appropriate.*fn4 Id. at 116-17. A. Defendant's Alleged Mail Fraud, Wire Fraud, and Money Laundering Acts

  Chandradat's complaint alleges that defendants engaged in a fraudulent scheme involving predicate acts of mail fraud, wire fraud, and money laundering in violation of RICO. This activity, he contends, caused him economic injuries in the form of unremunerated wages because it concealed defendants' true ability to pay him.

  Following the proximate cause analysis established by the Second Circuit, the Court recognizes that RICO liability is limited to acts that are a "substantial factor in the sequence of responsible causation" and cause "reasonably foreseeable" injuries." Ideal Steel Supply Corp. v. Anza, 373 F.3d 251, 257 (2d Cir. 2004) (quotations omitted). As such, the plaintiff must show that he is the target, competitor or intended victim of the racketeering enterprise. Lerner, 318 F.3d at 124. Incidental or derivative injuries to the plaintiff are insufficient to establish proximate cause. Laborers Local 17 Health and Benefit Fund v. Philip Morris, Inc., 191 F.3d 229, 239-40 (2d Cir. 1999).

  Chandradat has not demonstrated that his alleged injury — the denial of wages — was proximately caused by defendants' alleged wire fraud, mail fraud, or money laundering. Specifically, Chandradat alleges that defendants altered invoices to customers and diverted the funds to their personal accounts; billed and received payment for work that not been performed; made payments to "phantom" employees; took advantage of benefits at the corporation's expense; and promoted manipulative bookkeeping practices. Contrary to what Chandradat suggests, these allegations indicate that defendants' RICO activity was aimed at either its customers in overcharging their services or the corporations themselves in diluting assets. See Burdick v. American Exp. Co., 865 F.2d 527, 529 (S.D.N.Y. 1989) (corporation breached duty to customers, and not employees, when it charged excessive commissions); Hecht, 897 F.2d at 22-24 (employee of racketeering enterprise lacked standing where enterprise defrauded customers); Manson v. Stacescu, 11 F.3d 1127, 1130 (2d Cir. 1993) (looting of corporation inflicted direct injury on corporation and not its shareholders or employees). Chandradat fails to allege that defendants owed a duty to him in refraining from these unlawful acts; moreover, Chandradat does not allege that his injuries were "the preconceived purpose" or "the specifically intended consequence of the RICO defendants' acts." In re American Exp. Co., v. S'holder Litig., 39 F.3d 395, 400 (2d Cir. 1994) (quotations omitted). Therefore, the injury to Chandradat was "not reasonably foreseeable as a natural consequence of the RICO violations." Hecht, 897 F.2d at 24.

  While customers of racketeers may have standing to assert RICO claims, Chandradat has a tenuous relationship at best to the allegedly defrauded customers as one of defendants' employees. Id. The "mere recitation of the chain of causation alleged by [Chandradat] is perhaps the best explanation of why [he does] not have standing" based on defendants' RICO activity. Lerner, 318 F.3d at 123 (quoting Newton v. Tyson Foods, Inc., 207 F.3d 444, 447 (8th Cir. 2000)). In order to demonstrate a link between the RICO violations alleged and Chandradat's denial of wages, Chandradat must show that if defendant corporations had not committed the predicate acts of mail and wire fraud, (1) unspecified third party customers would not have overpaid on defendants' original invoices; (2) defendants would not then have diverted money to their personal accounts without a paper trail; (3) Chandradat would have become aware that the corporations were understating their profits and demanded immediate payment of additional compensation for his services; and (4) defendants would have paid him in response to these demands. See id. at 123. As the Second Circuit remarked in Lerner, "[e]ach of the assumptions upon which this theory rests is inherently speculative." Id. at 124. Critically, it is dubious whether Chandradat has even alleged that defendants would have paid him his wages even if he had demanded immediate compensation for his additional services.*fn5 The strained reading of these events thus demonstrates that Chandradat is "too far removed from the actual predicate acts committed to recover for any injuries that [he] suffered." Id.

  Similarly, Chandradat lacks standing to assert civil RICO claims on behalf of injuries suffered by the corporations. Even assuming, arguendo, that defendant corporations profited from their RICO violations but diverted the proceeds to their principals,*fn6 it is well settled that "shareholders, creditors, and employees of a corporation lack standing to sue under RICO where their injuries derive from direct injuries to the corporation itself." Bona v. Barasch, No. 01 Civ. 2289, 2003 WL 1395932, at *25 (S.D.N.Y. 2003) (citing Manson, 11 F.3d 1127 (2d Cir. 1993)).

  Chandradat attempts to recast his argument in his opposition brief, asserting that defendants took advantage of the accounting confusion created by the racketeering enterprise to induce him to work without pay. (Pl.'s Mem. in Opp'n to Mot. to Dismiss at 6.) In effect, Chandradat seeks to position himself as an intended target or victim of defendants' racketeering scheme by alleging that defendants used the pre-existing RICO scheme to perpetrate a second fraud on him.

  As an initial matter, the Court notes that "[c]onsideration of extraneous material in judging the sufficiency of a complaint is at odds with the liberal pleading standard of Federal Rule of Civil Procedure 8(a)(2)." Chambers v. Time Warner, 282 F.3d 147, 154 (2d Cir. 2002); Fed R. Civ. P. 8(a)(2) (plaintiff must present a "short and plain statement of the claim showing that the pleader is entitled to relief"). Even if the Court entertains this novel claim, however, it falls far short of stating a viable cause of action under RICO. Beneath the creative pleading, Chandradat merely asserts that defendants failed to disclose their true profits to him and misrepresented to him that they would actually pay him. Assuming, arguendo, that defendants intended to mislead Chandradat, that fraud is separate from the mail and wire fraud perpetrated on customers and the corporation. See Lerner, 318 F.3d at 124 (investors' claim against banks allegedly violating reporting requirements for attorney with criminal record was separate from investors' injuries stemming from that attorney's Ponzi scheme). Without the benefit of a specific statute, these actions are not predicate acts actionable under RICO. Id. at 123 (violation of state reporting requirements was not predicate act); Nova-Park New York, Inc. N.V. v. Banque Worms, S.A., No. 85 Civ. 1254, 1987 WL 19639, at *4 n. 9 (S.D.N.Y. Oct. 29, 1987) (breach of contract was not predicate act); Sedima, 473 U.S. at 497 ("[a]ny recoverable damages occurring by reason of violation of § 1962(c) . . . [flows] from the commission of the predicate acts"). Ultimately, the connection between Chandradat's injury and defendants' alleged RICO activity, which obscured their financial status, is "far too attenuated to meet the requirement of proximate cause" and thus, the complaint fails to state a civil RICO claim. Ideal Steel Supply Corp., 373 F.3d at 258 (citing Lerner, 318 F.3d at 122-24).*fn7

  Chandradat nevertheless urges the Court to read the Supreme Court's statement in Sedima that "RICO is to be read broadly . . . to effectuate its remedial purposes" as granting him permission to proceed with his RICO claims. (Pl.'s Mem. in Opp'n to Mot. to Dismiss at 7 (quoting Sedima, 473 U.S. at 498).) However, the Court does not read Sedima as eviscerating the proximate cause requirement. See Sedima, 473 U.S. at 497 (RICO was designed to remedy "the harm caused by predicate acts sufficiently related to constitute a pattern"). Instead, that remark was specifically directed towards rejecting the requirement that plaintiffs show a prior RICO conviction or special "racketeering injury" in stating their claims and is therefore inapplicable here. Id. at 493.

  Despite his dubious efforts at strained pleading, Chandradat simply cannot contort RICO law into providing him a civil remedy for what appears to be a standard breach of contract claim. See Harrell v. Primedia, Inc., No. 02 Civ. 2893, 2003 WL 21804840, at *1 (S.D.N.Y. Aug. 6, 2003) (criticizing counsel's attempt to turn "straightforward breach of contract case" into RICO claim through "tortured pleading"); Lerner, 318 F.3d at 116 ("[t]he creative pleading in the instant cases serves as a reminder why [RICO's] treble damages provisions are not available to every possible injury that can, with some ingenuity, be attributed to a defendant's injurious conduct"). Assuming, arguendo, that defendants engaged in serious conduct rising to the level of RICO violations on the facts alleged, Chandradat was not the target, competitor or intended victim of those actions, and is therefore not the appropriate party to assert RICO claims against defendants. Id. at 124.

  Accordingly, the Court dismisses Chandradat's RICO claims predicated on defendants' alleged mail fraud, wire fraud, and money laundering acts.

  B. Immigration and Nationality Act Claims

  Chandradat separately alleges that defendants committed another predicate act based on the Immigration and Nationality Act. 8 U.S.C. § 1324, in violation of RICO. Specifically, Chandradat claims that defendants "knowingly recruited and hired undocumented aliens, who sometimes possessed false immigration and/or work-authorization documents, as office assistants, masons, tilers and other construction laborers" through advertisements in The New York Times and Irish Voice. (Pl.'s Compl. ¶ 26.)

  Chandradat fails to advance any theory — and the Court is aware of none — explaining how these acts injured him either directly or indirectly, except to claim that they were part of a "pattern of wrongful behavior." However, the Second Circuit has established that the RICO statute "requires that the pattern of racketeering activity or the individual predicate acts impose a direct injury on plaintiff[]." Lerner, 318 F.3d at 123 (emphasis added). Although Rule 8(a) of the Federal Rules of Civil Procedure allows liberal pleading, plaintiff "must disclose sufficient information to permit the defendant to have a fair understanding of what the plaintiff is complaining about and to know whether there is a legal basis for recovery." Kittay v. Kornstein, 230 F.3d 531, 541 (2d Cir. 2000). Accordingly, the Court dismisses this claim pursuant to Rule 12(b)(6).

  C. Leave to Amend

  Chandradat seeks to amend his complaint to add Section 1962, claiming that this omission was an oversight. (Pl.'s Mem. in Opp'n to Dismiss at 8.) A party may amend its complaint "only by leave of the court or by written consent of the adverse party" if it does not do so before the complaint is served. Fed R. Civ. P. 15(a). Although such leave "shall be freely given when justice so requires," Fed.R.Civ. P. 15(a), a court may disallow an amendment if the movant demonstrates undue delay, bad faith, or dilatory motive. Dougherty v. Town of North Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)). Ultimately, the decision to grant or deny the opportunity to amend "is within the sound discretion of the district court." Dluhos v. Floating and Abandoned Vessel, Known as "New York," 162 F.3d 63, 70 (2d Cir. 1998) (citations omitted).

  In this case, Chandradat has failed to file the appropriate motion under Rule 15 of the Federal Rules of Civil Procedure for leave to amend his complaint, and thus, his request is denied. See B&E Aiello Foods, Inc. v. International Cheese Co., Inc., No. 89 Civ. 3205, 1989 WL 105783, at *1 (S.D.N.Y. Sept. 6, 1989) (declining to consider footnote in plaintiff's brief suggesting desire to amend complaint); Alston v. New York City Housing Authority, No. 97 Civ. 1080, 1998 WL 437154, at *2 (S.D.N.Y. Aug. 3, 1998) (denying motion to amend where plaintiff failed to file proposed complaint, identify federal rule on which motion was based, and address motion in memorandum). Given the marked absence of any logical connection between the facts alleged in the present complaint and any possible claims under RICO or the Immigration and Nationality Act, it also appears that the proposed amendment would be futile. In re American Express Co., 39 F.3d at 402 ("leave to amend may be denied if the amendment would be futile"). Chandradat has "not indicated how [he] could satisfy RICO's proximate cause requirement, and it is hardly self-evident that [he] could transform the facts pleaded into a sufficient allegation of proximate injury." Id. Accordingly, Chandradat's complaint is dismissed with prejudice and without leave to replead.

  III. Chandradat's State Breach of Contract Claims

  Given that the Court has dismissed all federal claims with prejudice, Chandradat's only remaining claims are pendent state law claims of breach of contract. Since all parties are domiciles of New York, there is no diversity jurisdiction and therefore, jurisdiction over these claims was premised solely on supplemental jurisdiction. See 28 U.S.C. § 1367 (1991) ("district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form the same case or controversy . . ."). Where all federal claims have been dismissed before trial, a district court may exercise its discretion in declining to adjudicate the remaining pendent state claims. See 13 U.S.C. § 1967(a)(3) ("district courts may decline to exercise supplemental jurisdiction over a claim . . . [if] the district court has dismissed all claims over which it has original jurisdiction"); Travelers Ins. Co. v. Keeling, 996 F.2d 1485, 1490 (2d Cir. 1993). Accordingly, the Court dismisses the state claims without prejudice. SO ORDERED

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