United States District Court, S.D. New York
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,
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.
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., ¶
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., ¶
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.)
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 " specify the statements it
claims were false or misleading,  give particulars as to the
respect in which plaintiffs contend the statements were
fraudulent,  state when and where the statements were made,
and  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 which
relief can be granted because it fails to depict a "pattern of
1. Pleading Fraud with Particularity
Rule 9(b) of the Federal Rules of Civil Procedure applies to
RICO claims based on allegations of fraud. Moore,
189 F.3d at 172. In their Complaint, Plaintiffs allege that Defendants committed
numerous predicate acts of mail and wire fraud in furtherance of
their scheme to induce Plaintiffs to purchase the two nursing
facilities. Mail and wire fraud constitute predicate illegal acts
under RICO. See 18 U.S.C.A. § 1961(1) (West 2004). The mail and
wire fraud statutes are similar in all material respects, each
requiring two essential elements: (1) a "scheme or artifice to
defraud" and (2) a mailing or transmission in furtherance of the
scheme. 18 U.S.C.A. §§ 1341 and 1343 (West 2004); Spira v.
Nick, 876 F.Supp. 553, 558-59 (S.D.N.Y. 1995). Allegations
regarding the "scheme or artifice to defraud" must satisfy the
particularity requirements of Rule 9(b), as must Plaintiffs'
allegations concerning any specific mailing that they claim was
fraudulent. See Spira, 876 F.Supp. at 559.*fn2
Plaintiffs allege that Defendants fraudulently obtained excess
reimbursement payments from Medicaid and Medicare from the middle
of 1999 through September 2002 in order to manipulate the
Facilities' financial condition and for the purpose of
fraudulently inducing a prospective purchaser, i.e., Plaintiffs,
to buy the Facilities at an inflated price. The predicate acts of
mail and wire fraud on which Plaintiffs base their claim thus
include Defendants' transmission of a series of allegedly false
reimbursement claims to Medicaid and Medicare (the "False
Filings") and a number of communications in which Defendants
allegedly made material misrepresentations to the Plaintiffs
regarding the Facilities' financial status and operating
The Complaint contains only the most general allegations
surrounding the False Filings element of the alleged scheme.
(Complaint, ¶¶ 12-13, 35.) For example, paragraphs 12 and 13, contained in the section describing the "nature of the
action," merely provide a summary overview of the fraudulent
scheme involving the False Filings without providing any
particulars. Paragraph 35 and its relevant subsections also fail
to provide specifics. The paragraph does not identify a single
specific filing. The paragraph provides no dates, approximate or
otherwise, apart from the general claim that the pattern of False
Filings stretched from the middle of 1999 through September 2002.
Paragraph 35 does explain, in a general way, why the filings
were false. (Complaint, ¶ 35(a)(i)-(iii).) According to the
Complaint, the filings overstated the Facilities' occupancy rates
and included false data with respect to patients in order to
receive excess "Bed Hold" payments. (Id., ¶ 35(a)(i)-(ii).) In
addition, the filings for "Vent Bed" payments included inaccurate
information regarding ventilator beds and ventilator patients.
(Id., ¶ 35(a)(iii).) However, this part of the Complaint simply
identifies the general content of the filings that Defendants
routinely submitted to Medicare and Medicaid and then concludes
that such filings were false without identifying any specific
filings or data to support this conclusion. These general and
conclusory allegations are insufficient to satisfy Rule 9(b).
The Complaint identifies specific amounts by which Defendants
Eastchester and Split Rock were allegedly overpaid during this
time period, and provides an estimate of the impact those
payments had on the Facilities' operating losses. (Complaint, ¶
35(a).) However, the Complaint offers no details as to how
Plaintiffs reached their conclusions regarding these figures.
Also, the claim that the Facilities received "overpayments"
assumes that the Defendants engaged in the False Filings, which
filings Plaintiffs' allegations are inadequate to identify.
Plaintiffs cannot avoid the strictures of Rule 9(b) by layering
conclusory statements regarding the impact of a scheme, no matter
how specifically those statements are phrased, on top of
inadequate allegations of a fraudulent scheme.
Plaintiffs are correct in arguing that Rule 9(b) does not
require them to plead detailed evidentiary matter. See Hollin
v. Scholastic Corp. (In re Scholastic Corp. Sec. Litig.),
252 F.3d 63, 72 (2d Cir. 2001). As the Second Circuit has explained,
Rule 9(b) must be harmonized with the general directives of Rule
8, which requires that the pleadings contain a "short and plain
statement" of the claim, Fed.R.Civ.P. 8(a)(2), and that each
averment be "simple, concise, and direct," Fed.R.Civ.P.
8(e)(1). Ross v. A.H. Robins Co., Inc., 607 F.2d 545, 557 n. 20
(2d Cir. 1979). However, under Rule 9(b), Plaintiffs are still
required to plead facts with particularity in support of their
general fraud allegations. Plaintiffs must identify the
particular filings they claim were fraudulent and explain why the
contents of those filings were false or misleading. Further,
Plaintiffs must identify who was responsible for the filings and
state approximately when the submissions occurred.*fn3
Plaintiffs have thus failed to plead the alleged False Filings
fraud scheme with sufficient particularity to meet the
requirements of Rule 9(b). As explained in the following section,
Plaintiffs' failure to specify the identity and content of the
False Filings precludes the use of those filings to demonstrate
the existence of a "pattern of racketeering" for RICO purposes.
See GICC Capital Corp. v. Technology Finance Group, Inc.,
67 F.3d 463, 467 (2d Cir. 1995); First Capital Asset Management, Inc. v.
Bricklebush, 150 F. Supp. 2d 624, 633 (S.D.N.Y. 2001), aff'd,
835 F.3d 159 (2d Cir. 2004). Plaintiffs' RICO allegations thus
fail to state a claim upon which relief can be granted and must
be dismissed pursuant to Federal Rules of Civil Procedure 9(b)
2. Pattern of Racketeering Activity
Proving a "pattern of racketeering activity" requires at the
very least a showing that defendants committed two acts of
racketeering activity within a ten-year period.
18 U.S.C.A. § 1961(5) (West 2004); First Capital Asset Management, Inc. v.
Satinwood, Inc., 385 F.3d 159, 178 (2d Cir. 2004). Besides this
baseline showing, plaintiffs must demonstrate that "the
racketeering predicates are related, and that they amount to or
pose a threat of continued criminal activity." H.J. Inc. v.
Northwestern Bell Telephone Co., 492 U.S. 229, 239 (1989). In
order to establish the requisite threat of continuing criminal
activity, plaintiffs must show either a "closed-ended" or an
"open-ended" pattern of racketeering activity. See id. at
239; GICC Capital Corp., 67 F.3d at 466. Because the allegedly
fraudulent statements, other than the False Filings, on which
Plaintiffs rely were all made within a relatively brief period of
time, Plaintiffs' failure to proffer sufficient allegations
regarding the False Filings is fatal to Plaintiffs' ability to
allege a pattern of racketeering activity under either of these
(a) Closed-Ended Continuity
Closed-ended continuity is demonstrated by showing "a series of
related predicates extending over a substantial period of time.
Predicate acts extending over a few weeks or months . . . do not
satisfy the requirement." H.J. Inc., 492 U.S. at 242; DeFalco
v. Bernas, 244 F.3d 286, 321 (2d Cir. 2001). Closed-ended
continuity is primarily a temporal concept, although other factors such as "the number and variety of predicate acts, the
number of both participants and victims, and the presence of
separate schemes are also relevant in determining whether
closed-ended continuity exists." DeFalco, 244 F.3d at 321;
Cofacredit S.A. v. Windsor Plumbing Supply Co. Inc.,
187 F.3d 229, 242 (2d Cir. 1999). Notably, however, since the Supreme
Court decided H.J., Inc., the Second Circuit has never found a
"substantial period" of time where the predicate acts occurred
over a period of less than two years. DeFalco, 244 F.3d at 321
(collecting cases). But see Zito v. Leasecomm Corp., No. 02
Civ. 8074, 2003 WL 22251352, at *17 (S.D.N.Y. Sep. 30, 2003)
(suggesting that an 18 month period may satisfy closed-ended
Other than the False Filings (which, as explained above, are
described too generally to be taken into account as predicate
acts for purposes of analyzing Plaintiffs' RICO claims),
Plaintiffs rely on a series of mailings that occurred between
April 2001 (Complaint, ¶ 39(a)) and June 2002 (Complaint, ¶
40(u)) to frame their allegation of a "pattern of racketeering
activity." The duration of these mailings spans a mere 14 months.
Even assuming that these mailings can be used to satisfy the
requirement of predicate acts of mail and wire fraud, an issue
the Court does not reach, the acts span far less time than the
two-year period that the Second Circuit has recognized as
constituting a "substantial period." The Court finds no basis for
departing from the general rule that a period of at least two
years is required to establish a closed-ended pattern. Therefore,
Plaintiffs allegations are insufficient to state a claim of a
closed-ended pattern of racketeering.
(b) Open-Ended Continuity
A claim of open-ended continuity is made out on the basis of
past criminal conduct coupled with a threat of future criminal
conduct. GICC Capital Corp., 67 F.3d at 466. The nature of the
RICO enterprise and of the predicate acts is relevant to
determining whether open-ended continuity exists. DeFalco,
244 F.3d at 323; Cofacredit, 187 F.3d at 242. Inherently unlawful
acts conducted for an enterprise in the business of racketeering
activity constitute a threat of future criminal activity and are
thus sufficient to form the basis of a claim of open-ended
continuity. DeFalco, 244 F.3d at 323. However, open-ended
continuity may also be established with respect to an enterprise
that primarily conducts a legitimate business where the predicate
acts are part of the regular way of operating the business and
the acts imply a threat of future criminal conduct. Cofacredit,
187 F.3d at 243. Finally, a scheme that is "inherently
terminable" creates no threat of continued criminal conduct and
thus cannot support a finding of open-ended continuity. GICC
Capital Corp., 67 F.3d at 466 ("[I]t is clear that the scheme
was inherently terminable. It defies logic to suggest that a
threat of continued looting activity exists when, as plaintiffs
admit, there is nothing left to loot.").
Plaintiffs' allegations are insufficient to support open-ended
continuity. First, this case involves legitimate businesses,
which are not alleged to have been engaged solely in the business
of racketeering activity. Second, the scheme here was inherently
terminable. The scheme of fraudulently inducing a victim to
purchase the Facilities could not continue after the Facilities
and properties were sold. In addition, since the Plaintiffs have
not pleaded the False Filings scheme with particularity, any
argument that the False Filings scheme demonstrated a threat of
future criminal activity cannot be considered. Plaintiffs have
failed to allege facts sufficient to demonstrate an open-ended
pattern and thus have not adequately pleaded a "pattern of
For all of these reasons, the RICO claims against Defendants
under 18 U.S.C. § 1962(a)-(c) must be dismissed. 3. Section 1962(d)
Plaintiffs' section 1962(d) RICO claims must also be dismissed.
Section 1962(d) prohibits any person from conspiring to violate
any of the substantive provisions of § 1962(a)-(c). To state a
claim thereunder, a plaintiff must allege that "each defendant,
by words or actions, manifested an agreement to commit two
predicate acts in furtherance of the common purpose of the RICO
enterprise." Colony at Holbrook, Inc. v. Strata, G.C., Inc.,
928 F. Supp. 1224, 1238 (E.D.N.Y. 1996).
There can be no RICO conspiracy without a substantive RICO
violation. See Schmidt v. Fleet Bank, 16 F. Supp.2d 340, 353
(S.D.N.Y. 1998). "Thus, if the prior claims do not state a cause
of action for substantive violations of RICO, then a RICO
conspiracy claim necessarily does not set forth a conspiracy to
commit such violations." Id. (quoting Discon v. NYNEX Corp.,
93 F.3d 1055, 1064 (2d Cir. 1996), rev'd on other
grounds, 525 U.S. 128 (1998)); Katzman v. Victoria's Secret
Catalogue, 167 F.R.D. 649, 658 (S.D.N.Y. 1996) ("failure to
adequately plead facts that would satisfy the pleading
requirements of 1962(a), 1962(b) or 1962(c) necessarily dooms any
claims that the [plaintiff] might assert arising under 1962(d)").
Accordingly, because Plaintiffs have failed to assert a
substantive RICO claim against any of the Defendants, Plaintiffs'
claims under § 1962(d) must also be dismissed.
B. Supplemental Jurisdiction
The Complaint asserts claims under state law for common law
fraud and breach of contract. Since the federal RICO claims have
been dismissed, the Court declines to exercise its supplemental
jurisdiction over the remaining state law claims. See, e.g.,,
Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 n. 7 (1988)
(recognizing that federal courts should ordinarily decline to exercise supplemental jurisdiction over state claims when the
federal claims have been dismissed before trial); DiLaura v.
Power Auth., 982 F.2d 73, 80 (2d Cir. 1992) (same); First
Capital Asset Management, Inc. v. Bricklebush, Inc.,
150 F. Supp. 2d at 636. Therefore, the state law claims will be
dismissed without prejudice to renewal in connection with the
repleading of Plaintiffs' federal claims.
Defendants' motion to dismiss Plaintiffs' RICO claims pursuant
to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil
Procedure is granted. The Court declines to exercise supplemental
jurisdiction over the remaining state law claims.
Plaintiffs shall have 21 days from the date of this Opinion and
Order to file and serve an amended complaint. If no such amended
pleading is timely filed and served, the Court may dismiss this
action with prejudice and without further advance notice to
IT IS SO ORDERED.