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ZITO v. LEASECOMM CORPORATION

September 30, 2004.

THOMAS ZITO et al., Plaintiffs,
v.
LEASECOMM CORPORATION, MICROFINANCIAL INCORPORATED, CARDSERVICE INTERNATIONAL, INC., E-COMMERCE EXCHANGE, INC., ON-LINE EXCHANGE, RICHARD KARN WILSON a/k/a RICHARD KARN, PATRICK RETTEW, PETER R. VON BLEYLEBEN, RICHARD F. LATOUR, CAROL SALVO, PAUL SCHNEIDER, MEDTRAK CORPORATION, CHARLES BURTZLOFF a/k/a CHUCK BURTZLOFF, JOHN DOE and EDDY ROE, the last two being fictitious names, the real names of said Defendants being presently unknown to Plaintiffs, said fictitious names being intended to designate persons who are acting in concert with the Defendants, Defendants.



The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

In this civil RICO action, numerous plaintiffs sue Leasecomm Corporation and its parent Microfinancial Inc. ("MFI"), three of its officers (Peter R. Von Bleyleben, Richard F. Latour, and Carol Salvo) (the "MFI Officers"), three of its alleged "dealers and vendors" (Compl. ¶ 39) (Cardservice International, E-Commerce Exchange, and On-line Exchange), and several shareholders of those or other dealers (Patrick Rettew and Richard Karn Wilson, shareholders of non-defendant Themeware, Inc.; Medtrak Corporation, a shareholder of defendant On-Line Exchange; and Paul Schneider, the principal shareholder of Medtrak), for damages arising from alleged fraudulent schemes involving the leasing of e-commerce services and products. On defendants' motion, the original complaint was dismissed in September 2003 for failure to state a claim, with leave to replead. See Zito v. Leasecomm Corp., No. 02 Civ. 8074, 2003 WL 22251352 (S.D.N.Y. Sept. 30, 2003) ("Zito I"). Plaintiffs filed an Amended Complaint in November 2003.

  All defendants except Rettew and Medtrak (who have not responded to the complaint) have once again moved to dismiss for failure to state claim under the Racketeer Influenced and Corrupt Organizations statute, commonly known as "RICO," 18 U.S.C. §§ 1961-1964. They also challenge the sufficiency of plaintiffs' state law claims. Finally, defendants Karn, On-line Exchange, and Schneider argue for dismissal based on lack of in personam jurisdiction. In response, plaintiffs have once again sought leave to amend the complaint. Defendants' motions will be granted in part and denied in part; plaintiffs' motion to amend will be granted in part.

  BACKGROUND

  The facts summarized below are taken from the Amended Complaint, the allegations of which must be assumed true for purposes of these motions to dismiss. The crux of the Amended Complaint is that Leasecomm formed an enterprise with various dealers who used unscrupulous and deceptive marketing tactics to lure unsuspecting victims into signing contracts with Leasecomm. These contracts contained unconscionable terms that allowed members of the enterprise to "reap unconscionable profits" through extreme collection tactics. (¶¶ 73-74, 122-147.)

  These central allegations have not changed significantly from those outlined in plaintiffs' original complaint. However, in response to the Court's Opinion in Zito I, plaintiffs have attempted to clarify the various schemes alleged, which predicate acts were committed in furtherance of which of them, and by which defendants. Toward this end, plaintiffs have described what they refer to as the "Master Scheme" of the Leasecomm enterprise, as well as various "Implementing Schemes."

  I. The Leasecomm Enterprise

  A. General Purpose of Enterprise

  MFI is a "financial intermediary" which "finances activities of third parties through various contracts and legal arrangements which it calls leases." (¶ 45.) MFI conducts "almost all" of its business through defendant Leasecomm. (Id.) Prior to 1998, MFI/Leasecomm was engaged in the business of leasing or financing the purchase of "tangible business machine products including credit POS [point of sale] swipe machines." (¶ 57.) Those products were actually marketed by other entities, including defendant Cardservice International ("Cardservice"). (Id.) In 1998, MFI/Leasecomm began a program in which it began to lease e-commerce services, "such as web sites, POS software, and merchant accounts." (¶¶ 48, 58.) These products were marketed "as a part of proffered business ventures" by, among others, defendants E-Commerce Exchange ("ECX"), Cardservice, and On-line Exchange ("OX"). (¶ 59.) MFI/Leasecomm entered into "strategic alliances" with these entities, which plaintiffs refer to alternately as MFI/Leasecomm's "dealers" or "the Leasecomm Associates." (¶¶ 32, 54-55.)

  The Amended Complaint, like the original complaint, focuses on two kinds of conduct by the defendants. The first is the deceptive marketing practices of the MFI/Leasecomm dealers, who plaintiffs allege used deceptive advertising, misrepresentations, and unfair "bait and switch" tactics to corral vulnerable customers into leasing their overpriced and ineffective products. The dealers, however, did not themselves execute the lease agreements with the customers; rather, by prior arrangement with MFI/Leasecomm, they had the customers sign a form contract provided by MFI/Leasecomm, which MFI/Leasecomm later executed. The contracts executing these leases were non-negotiable and contained numerous deceptive terms, which the dealers are alleged to have concealed or misrepresented. The second type of conduct is the aggressive, and allegedly fraudulent and extortionate, enforcement tactics subsequently used by MFI/Leasecomm against defaulting lessees — tactics enabled in part by the leases' allegedly one-sided, unconscionable terms. These collection tactics formed a central and publicly acknowledged part of MFI/Leasecomm's business plan that "distinguish[ed] MFI from its competitors and other leasing companies." (¶¶ 122-124.)

  The complaint alleges that the dealers and MFI/Leasecomm constituted a single "enterprise" by virtue of an arrangement between the dealers and MFI/Leasecomm under which the dealers would market Leasecomm products through various "heavy-handed, high-powered mass marketing" techniques, in exchange for a one-time payment of between forty and sixty percent of the face value of the leases from MFI/Leasecomm, while Leasecomm would finance these marketing efforts and the cost of the products offered. (¶¶ 45-70.)

  B. Master Scheme and Leasecomm Leases

  The form-lease that customers were asked to sign in purchasing products financed by Leasecomm leases is headed "Non Cancellable Lease Agreement" and states, in bold capitals, that "NEITHER SUPPLIER NOR ANY SALESPERSON IS AN AGENT OF LESSOR NOR ARE THEY AUTHORIZED TO WAIVE OR ALTER THE TERMS OF THIS LEASE." (Am. Compl. Ex. C.) Yet the dealer defendants, according to the complaint, regularly told customers that "the contracts were cancelable." (¶ 112(h).) The complaint alleges that the dealer defendants pressured plaintiffs to sign the leases using illusory inducements such as "waiver of usual fees and rebate coupons for the usual fees." (¶ 113 & Ex. E.)

  The lease includes a space for filling in the lessee's bank account information to permit automatic withdrawals. (Am. Compl. Ex. C.) In smaller type, the lease permits Leasecomm not only to automatically debit the lease charges, but also to charge an additional $5.00 per month if it becomes "necessary to switch to statement billing due to insufficient funds," to continue the lease on a month-to-month basis if the lessee fails to notify Leasecomm sixty days prior to its expiration that he or she opts to terminate the lease, to charge a late fee of fifteen percent of any amount past due, and to charge collection costs (including charges for collection letters and phone calls). (Id.) The lease states that lessee "fully recognize[s] [Leasecomm's] right to enforce the lease free from any defenses, offsets [or] counterclaims," that lessee has not received any express or implied warranties for the products leased, and has "unconditionally waive[d] any claims . . . against Leasecomm." It also provides for "the exclusive jurisdiction of the Courts of . . . Massachusetts" and waives "any objection to venue" there. (Id.) Plaintiffs allege improprieties in the execution of the leases, including forging of some lessees' signatures, the use of "witnesses" who did not in fact witness lessees' signatures, failure to fill out essential terms of the lease, and failure to provide copies of leases to lessees. (¶¶ 112, 117.)

  Finally, plaintiffs allege that Leasecomm used extortionate means to collect on the leases, such as
insulting, harassing, and intentionally harmful rhetoric including disparaging personal remarks, embarrassing messages left with third parties about sending debtors to jail, taunting debtors about their credit and threatening to destroy their credit unless payment was made without objection for each and every charge including unjustified credit fee charges.
(¶ 133.) They allege that Leasecomm made unauthorized withdrawals from plaintiffs' bank accounts and that Leasecomm inflated its charges by (1) making "frequent, duplicative contacts" such as multiple collection calls on the same day, and then "charging for each contact" (¶ 136 & Ex. H), and (2) presenting bad checks for payment multiple times on the same day, (¶ 137). Plaintiffs also allege that Leasecomm "obtained thousands of default judgements [sic] in Massachusetts and . . . sought enforcement of the same." (¶ 139.) The complaint includes a financial presentation made by MFI at an investor conference touting the centrality of its "persistent and innovative collection effort" to its business plan. (Am. Compl. Ex. D.)

  C. Implementing Schemes

  1. The Internet Tool Box Scheme: Themeware, Cardservice, and the "Karn Infomercial"

  Plaintiffs have outlined several "implementing schemes" that they claim were used to further the master enterprise of luring unsuspecting victims into signing Leasecomm leases. The most involved of these, and the one outlined in the most detail, is the "Internet Tool Box" scheme (the "ITB" scheme). This campaign was conducted by non-defendant Themeware, whose shareholders include defendants Richard Karn Wilson (generally referred to in the complaint, and therefore in this Opinion, as "Karn") and Patrick Rettew. Karn is also described as Themeware's "principal spokesman." (¶ 21.)

  In 1997, Themeware began marketing, through a television "infomercial" hosted by Karn, a group of products sold together, called the "Internet Tool Box," at a price of $49.95. (¶¶ 167-182.) The infomercial referred to the product as the "Internet Business Tool Box," and led the viewer "to believe that [it] contained software and services worth as much as $800" which would "give them the facility to accept credit cards on their web pages" and enable them to "get[] onto the web in thirty minutes and mak[e] money instantly." (¶¶ 189.) It promised a "30 day money back guarantee." (Id.) The Tool Box actually consisted of items "many of [which] were readily available for no or nominal charge." (¶ 189(c).) It did not permit purchasers to accept credit cards on their web pages without purchasing additional services from Cardservice "at costs of many thousands of dollars." (¶ 189(f).) Furthermore, the internet connection provided as part of the Tool Box software "specifically stated it was for non-commercial use[]." (¶ 189(h).) The Tool Box infomercial was widely broadcast as a part of the Leasecomm Enterprise's "bait and switch" tactics to lure customers into purchasing ineffective and overpriced products, and lock them into Leasecomm contracts. (¶¶ 186-187.)

  2. Other Implementing Schemes

  Plaintiffs describe various other "implementing schemes" carried out by various defendants in furtherance of the Master Scheme, detailing the manner in which each defendant marketed Leasecomm contracts. Briefly, these are as follows:
a. Cardservice
  Plaintiffs allege that it was Cardservice's practice to "make telephone marketing calls to individuals in order to induce them to purchase both virtual terminals financed by Leasecomm and merchant accounts from Cardservice." (¶ 199.) In those calls, "it was represented that the goods and services being sold were fit and appropriate for use by the customers and that the contracts could be cancelled if the customer was dissatisfied." (¶ 200.) When a customer expressed interest, Cardservice would send them a "slick brochure" making various representations about the company that plaintiffs allege are false, and would subject them to "persistent, high-pressure telemarketing harangues that continued to falsely promise money back guarantees and concealed and obfuscated the unfair and deceptive provisions of the Leasecomm contract." (¶¶ 204-208.)

  Cardservice also marketed products financed by Leasecomm contracts at "business opportunity seminars and conferences," which were themselves advertised by infomercials. (¶¶ 210, 215.) At these conferences, Cardservice representatives would make product presentations, introduced by conference "trainers" as offering a "special opportunity" for web-based businesses. (¶¶ 217-218.) Using high-pressure tactics, they would push Cardservice products that "could not be purchased unless other products financed by Leasecomm contracts were purchased." (¶¶ 219-220.) The same representations were made that the contracts for these products were cancelable, and "the unfair and deceptive provisions of the Leasecomm contract were concealed." (¶ 222.)

  b. "ECX/OX Scheme" and "ECX Seminar Scheme"

  The implementing scheme allegedly executed by ECX, OX (which is controlled by Medtrak), and non-defendant National Entrepreneur Support Association ("NESA"), is somewhat more complicated. Plaintiffs allege that in 1999, ECX and Leasecomm entered a "strategic alliance" whereby Leasecomm agreed to finance the sale of ECX's products, which primarily consisted of "merchant accounts and related services." (¶¶ 224, 231.) ECX, Medtrack, and Schneider agreed that ECX would in turn finance OX to sell its merchant accounts. (¶ 225.) OX then hired non-defendant NESA to market these merchant accounts; this it did primarily through the circulation of a videotape of a seminar conducted in January 2000, which was itself promoted by a direct-mail campaign. (¶¶ 229, 230, 233.) The products offered in the video consisted of "distributorships" which granted "exclusive territories" to purchasers of ECX merchant accounts. (¶ 233(f).) Those who purchased this option would be entitled to training and "commissions on all business OX did in the distributor's area" as well as the benefit of "extensive" marketing, through infomercials and other promotional activities. (¶ 233(f)-m.).

  The video was allegedly deceptive in that it promised that distributors could, with minimal time commitment, skills, or risk, earn a "positive cash flow" (¶ 223(b)) and revenues in the "hundreds of thousands [of] dollars." (¶ 223(e).) The investment necessary was "either $1450 for a one time payment or $89.95 a month for four years." (¶ 223(e).) These payments were to be made to Leasecomm, under the same form-lease that was used in the Master Scheme. Those who received the video were allegedly subjected to the same "high-pressure" sales calls which made the same false representations about the nature of the Leasecomm contracts. (¶ 235.)

  ECX is also alleged to have "sponsored or participated in business opportunity seminars and conferences at which it sold products financed by Leasecomm contracts." (¶ 237.) Like the Cardservice Seminar Scheme, the ECX seminars involved a "vendor of ECX products" presenting a "special business opportunity" and using high-pressure tactics to close the deal, while giving false assurances that the contracts were cancellable and concealing their unfair provisions. (¶¶ 239-240.) While plaintiffs allege generally that they were "caused to purchase over-valued defective goods and services" by the ECX seminars (¶ 241), they do not allege describe specific defects or identify particular false representations about the products, as they do with respect to Cardservice.*fn1 DISCUSSION

  I. Legal Standards

  A. Dismissal under Rule 12(b)(6)

  On a motion to dismiss under Fed.R. Civ. P. 12(b)(6), the Court must accept "as true the facts alleged in the complaint," Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 699-700 (2d Cir. 1994), and may grant the motion only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir. 1998) (citations omitted); see also Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (when adjudicating motion to dismiss under Fed.R. Civ. P. 12(b)(6), the "issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims" (internal quotation marks and citations omitted)). When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents attached to the complaint as exhibits or incorporated in it by reference. Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993). All reasonable inferences are to be drawn in the plaintiff's favor, which often makes it "difficult to resolve [certain questions] as a matter of law." In re Independent Energy Holdings PLC, 154 F. Supp. 2d 741, 748 (S.D.N.Y. 2001).

  B. Civil RICO

  Plaintiff's RICO claim, the only federal claim and therefore the basis of federal jurisdiction for the case, is based on 18 U.S.C. § 1962(c), which makes it unlawful for "any person employed by or associated with any [interstate] enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity," and 18 U.S.C. § 1962(d), which penalizes conspiracy to violate, inter alia, § 1962(c).

  In order to state a substantive cause of action under § 1962(c), the plaintiff must allege that a defendant engaged in "(1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity" (5) resulting in (6) injury to business or property. Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 89 (2d Cir. 1999), quoting Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985).

  A RICO "enterprise" can be "any individual, partnership, corporation, association, or other legal entity, [or] any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). The enterprise cannot, however, be the very defendant that is itself charged with being the "person . . . associated with" and "participat[ing] in the conduct of" the enterprise; that is, the enterprise must be distinct from each of the "persons" conducting it. Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 343-44 (2d Cir. 1994). Here, plaintiffs allege an "association in fact" consisting of Themeware, Cardservice, OX, ECX, and MFI/Leasecomm.

  The "pattern of racketeering activity" must consist of at least two "predicate acts" of racketeering activity within ten years, § 1961(5), where the "acts" are certain violations of state or federal law as set forth in § 1961(1). Plaintiffs here allege predicate acts consisting of wire fraud, 18 U.S.C. § 1343, mail fraud, 18 U.S.C. § 1341, and violations of the Hobbs Act, 18 U.S.C. § 1951. (¶¶ 325-332.)

  In order to demonstrate that defendants "conduct[ed] or participate[d], directly or indirectly, in the conduct of" an enterprise, plaintiffs must allege more than mere participation in the enterprise, since to "conduct" the affairs of an enterprise "one must have some part in directing those affairs." Reves v. Ernst & Young, 507 U.S. 170, 179 (1993). Plaintiffs must therefore allege facts indicating that each defendant participated in the management of the enterprise. Id. The plaintiff must allege facts supporting an inference that each defendant "was aware of the general nature of the conspiracy and that the conspiracy extended beyond the defendant's individual role." United States v. Zichettello, 208 F.3d 72, 100 (2d Cir. 2000) (quoting trial court's jury instructions). In other words, the general structure of the conspiracy alleged must suggest that the alleged participant "knew what the other conspirators `were up to' or [that] the situation would logically lead an alleged conspirator `to suspect he was part of a larger enterprise.'" Id. at 99, quoting United States v. Viola, 35 F.3d 37, 44-45 (2d Cir. 1994).

  Courts in this district, in agreement with the holdings of several Courts of Appeals, have carefully scrutinized civil RICO claims at the dismissal stage, since the statute was "enacted expressly, as set forth in the preamble to the Act, `to seek the eradication of organized crime in the United States'" and therefore "mere assertion of a RICO claim . . . has an almost inevitable stigmatizing effect on those named as defendants." Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 654-55 (S.D.N.Y. 1996) (quoting Figueroa Ruiz v. Alegria, 896 F.2d 645, 650 (1st Cir. 1990)); see also Goldfine v. Sichenzia, 118 F. Supp. 2d 392, 397 (S.D.N.Y. 2000) (stating that "[t]his Court looks with particular scrutiny at Civil RICO claims to ensure that the Statute is used for the purposes intended by Congress" and dismissing RICO claim); Schmidt v. Fleet Bank, 16 F. Supp. 2d 340, 346-49 (S.D.N.Y. 1998) (citing Katzman and dismissing RICO claims). II. Plaintiffs' RICO Claims

  In dismissing plaintiffs' first Complaint, this Court remarked upon the complexity and abstraction of the RICO statute, noting that these characteristics "render[ed] it difficult for plaintiffs to plead the elements of a cause of action with clarity and concision." Zito I at *5. The Court further noted that "the broad-brush, imprecise approach to pleading exemplified by this complaint challenges the defendants' ability to understand what they are being sued for, the Court's ability to understand the plaintiffs' theories, and the plaintiffs' ability to survive judicial scrutiny that may misperceive the plaintiffs' true intentions." Id. at *6. While the plaintiffs' Amended Complaint is still far from a model of clarity, they have sufficiently cured the primary defects previously identified by the Court. Although the Amended Complaint does not materially alter plaintiffs' central allegations, it does "spell out more clearly the nature of the enterprise alleged, the specific predicate acts that constitute the pattern of racketeering, and the persons who are alleged to have committed each of those predicate acts." Id. The Amended Complaint therefore survives the instant motions to dismiss.

  Although defendants filed their motions to dismiss separately, there is significant overlap in the arguments they have presented. For example, defendants have focused on the sufficiency of a few elements of plaintiffs' RICO claims, namely whether plaintiffs have alleged an enterprise, whether they have attributed predicate acts to each defendant, whether such acts are sufficient to constitute a "pattern" of racketeering activity, and whether they have sufficiently alleged that each defendant "conducted" the enterprise.*fn2 Thus, ...


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