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EASTCHESTER REH. AND HEALTH CARE v. EASTCHESTER HEALTH CARE

April 12, 2005.

EASTCHESTER REHABILITATION AND HEALTH CARE CENTER, L.L.C., EASTCHESTER REALTY ASSOCIATES, L.L.C., SPLIT ROCK REHABILITATION AND HEALTH CARE CENTER, L.L.C. and EASTROCK REALTY ASSOCIATES, L.L.C., Plaintiffs,
v.
EASTCHESTER HEALTH CARE CENTER, L.L.C., SPLIT ROCK MULTICARE CENTER, L.L.C., EMZEL REALTY CORP., ZELMA PROPERTIES, INC. and ABE ZELMANOWICZ, Defendants.



The opinion of the court was delivered by: LAURA TAYLOR SWAIN, District Judge

OPINION AND ORDER

This litigation arises from the purchase of two nursing facilities and the real estate on which the facilities are located. The Complaint in this action asserts that Eastchester Rehabilitation and Health Care Center, L.L.C., Eastchester Realty Associates, L.L.C., Split Rock Rehabilitation and Health Care Center, L.L.C., and Eastrock Realty Associates, L.L.C. (referred to herein collectively as "Plaintiffs") were fraudulently induced to purchase the nursing facilities and real estate at an inflated price, in excess of the actual fair market value. Plaintiffs have asserted claims under the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq., and under state law for common law fraud and breach of contract. Eastchester Health Care Center, L.L.C. ("Eastchester"), Split Rock Multicare Center, L.L.C. ("Split Rock"), Emzel Realty Corp. ("Emzel Realty"), Zelma Properties, Inc. ("Zelma Properties"), and individual defendant Abe Zelmanowicz ("Defendant Zelmanowicz") (together, "Defendants") have moved pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure to dismiss the Complaint. For the reasons set forth below, Defendants' motion is granted.

  BACKGROUND*fn1

  In June 2001, Plaintiffs' organizers entered into an agreement to purchase two nursing facilities (the "Facilities") from Defendants along with the property on which each of the Facilities was located. (Complaint, ¶ 16.) Plaintiffs are four limited liability companies created pursuant to the purchase agreement for the purpose of owning and operating the two Facilities and the two associated parcels of land. (Id., ¶ 21.) Defendants are four legal entities that formerly owned and operated these assets and an individual, Defendant Zelmanowicz, who is and was the president of each of the Defendant entities. (Id., ¶¶ 6-10.) Through a fraudulent scheme, Defendants induced Plaintiffs to purchase the assets for about $16,000,000.00 above their fair market value. The key element of the scheme involved Defendants' repeated submissions of false patient data to Medicaid and Medicare (the "False Filings") in order to receive excess reimbursement payments and an inflated income stream that was used to misrepresent the financial status and operating conditions of the Facilities in connection with Defendants' efforts to sell the Facilities. (Id., ¶ 12.) Plaintiffs purchased the assets for approximately $37,000,000.00. (Id., ¶ 19.)

  The scheme occurred from about 1997 onward and involved false claims regarding the Facilities' "Bed Hold Days" and "Vent Bed Patients." Defendant Eastchester and Defendant Split Rock (the "Prior Operators") misrepresented the occupancy rates of their respective facilities and filed claims for ineligible patients in order to receive excess "Bed Hold" payments. Similarly, the Prior Operators filed claims that included inaccurate census data regarding certain ventilator beds and ventilator patients in order to receive excess "Vent Bed" payments. Defendant Zelmanowicz knew of these intentional false filings. (Id., ¶ 35(a).)

  The False Filings continued from about the middle of 1999 through September 2002, the period for which Plaintiffs had access to Defendants' financial statements. (Id.) The resulting excess reimbursements enabled Defendants to overstate their income and understate their operating losses, and thereby grossly to inflate the apparent value of the Facilities. (Id., ¶ 12.) Defendants failed to disclose the true nature of the Facilities' losses to Plaintiffs. These non-disclosures also created the false appearance that the Facilities would be able to maintain a certain average occupancy rate. Had that expected occupancy rate been achieved, Plaintiffs would have been eligible to obtain certain reimbursements from Medicaid that would have increased the Facilities' income and profitability. (Id., ¶ 35(b).) Absent such fraud, Plaintiffs would have refused the transaction unless the agreement had been substantially modified and the price had been significantly lowered. (Id., ¶ 12.) As a result of these misleading financial reports and non-disclosures, Plaintiffs have suffered damages in the amount of approximately $16,000,000.00, for which they seek compensation. (Id., ¶ 14.)

  DISCUSSION

  Defendants have moved to dismiss the Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.

  Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Rule 9(b) requires the complaint to "[1] specify the statements it claims were false or misleading, [2] give particulars as to the respect in which plaintiffs contend the statements were fraudulent, [3] state when and where the statements were made, and [4] identify those responsible for the statements." Moore v. Paine Webber, Inc., 189 F.3d 165, 172 (2d Cir. 1999); McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992). Plaintiffs must also "allege facts that give rise to a strong inference of fraudulent intent." Moore, 189 F.3d at 173 (quoting San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812 (2d Cir. 1996)). Furthermore, fraud must be alleged with particularity as to each defendant. U.S. Fire Ins. Co. v. United Limousine Service, Inc., 303 F.Supp.2d 432, 444 (S.D.N.Y. 2004).

  In reviewing a motion to dismiss a complaint pursuant to Rule 12(b)(6) for failure to state a claim, a court must accept as true the facts alleged in the complaint and draw all inferences in favor of the nonmoving party. Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999). A court should dismiss the complaint only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief." Id. When deciding a motion to dismiss under Rule 12(b)(6), the court generally limits itself to the facts stated in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint. See Dangler v. New York City Off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999). For the purposes of this motion, the Court has limited its examination to the Complaint and Plaintiffs' RICO Statement.

  A. The RICO Claims

  Plaintiffs assert civil RICO claims against all Defendants for violations of 18 U.S.C.A. § 1962(a)-(d) (West 2004). In order to plead properly a violation of the substantive RICO provisions, 18 U.S.C.A. § 1962(a)-(c), plaintiffs must allege "(1) that the defendant (2) through the commission of two or more acts (3) constituting a `pattern' (4) of `racketeering activity' (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an `enterprise' (7) the activities of which affect interstate or foreign commerce." Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir. 1983). Under § 1962(d), plaintiffs must demonstrate that the defendants conspired to violate one or more of the substantive RICO provisions.

  Defendants move to dismiss the RICO claims, arguing, among other things, that Plaintiffs have failed to plead their RICO claims with the requisite particularity and that, because of the lack of detail as to the alleged predicate acts underlying the RICO claims, the Complaint fails to state a claim upon ...


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