UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
May 17, 2007
CEDAR SWAMP HOLDINGS, INC., ET AL., PLAINTIFFS,
FAITH ZAMAN, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.
Plaintiffs are (1) Duli Yang Teramat Mulia Paduka Seri Pengiran Digadong Sahibul Mal Pengiran Muda Haji Jefri Bolkiah, the youngest brother of the ruling Sultan of Brunei ("Prince Jefri"), (2) Cedar Swamp Holdings, Inc. ("Cedar Swamp") and Casa de Meadows, Inc. (Cayman Islands) ("Cayman Casa"), and (3) Amedeo Hotels Limited Partnership ("Amedeo"), all of which are beneficially owned by Prince Jefri. They sue, among others, Faith Zaman and Thomas William Derbyshire, husband and wife as well as English barristers, in connection with the management of Prince Jefri's assets. Zaman and Derbyshire are charged with various counts of, inter alia, fraud and breach of fiduciary duty, as well as one count of racketeering in violation of the Racketeering Influenced Corrupt Organizations Act ("RICO").*fn1 They move to dismiss the RICO claim. Plaintiffs move for leave to amend the complaint.
I. The Amended Complaint
According to the Amended Complaint,*fn2 Zaman and Derbyshire from Approximately May 2004 to November 2006 served as "principal legal advisors, strategists and confidantes" to Prince Jefri, members of his family, and companies owned or controlled by them.*fn3 Prince Jefri agreed to pay Zaman and Derbyshire each £1 million per year in return for their services.*fn4 He gave Zaman a limited power of attorney and appointed her the director and officer of Cedar Swamp and Cayman Casa, as well as other unspecified entities that he owned.*fn5 Derbyshire provided legal advice to Prince Jefri and took control of Prince Jefri's companies along with Zaman.*fn6 In February 2006, Zaman became the managing director of the New York Palace Hotel, which is owned by Amedeo.*fn7
Plaintiffs allege that Zaman and Derbyshire breached their fiduciary and other obligations, principally by
(1) causing Cedar Swamp to sell a piece of property called the Sunninghill Estate*fn8 to defendant Westfields Invest Limited, LLC ("Westfields") -- a company allegedly owned or controlled by Zaman and Derbyshire and operated by their friend, defendant Charles Hoareau -- in a "sham transaction" where "[n]either the down payment nor any other sales proceeds were ever delivered to Cedar Swamp or Prince Jefri,"*fn9
(2) depositing a check payable to Cayman Casa into the account of a "twin, doppelganger entity" owned by Zaman called Casa de Meadows Inc., Cayman Islands Corp., LLC ("Delaware Casa"), and using the money to buy property for one of their companies, defendant Oceanview Estate, LLC ("Oceanview"),*fn10
(3) falsifying employment documents to overstate Zaman's compensation for directing Amedeo and managing the Palace Hotel,*fn11
(4) hiring Zaman's brother, defendant Arzie Zamarni, at a high salary and for an unnecessary position at the Palace Hotel, despite an anti-nepotism policy,*fn12
(5) using Amedeo corporate credit cards for personal expenses,*fn13
(6) causing the Palace Hotel to purchase over $4 million worth of television and related equipment -- which it never received -- from Golden Twist, Ltd., a company owned by Prince Jefri, and depositing $1 million of the sale proceeds into Zaman's personal account,*fn14
(7) executing long-term, below-market subleases of real property belonging to Amedeo to defendants Fitzjohn's Holdings Inc. ("Fitzjohn's") and Eurofinch Limited ("Eurofinch"), which they owned or controlled,*fn15
(8) drafting an agreement whereby they would receive a $40 million brokerage commission for causing Amedeo to sell the Palace Hotel and another hotel owned by Prince Jefri,*fn16
(9) devoting their time to running a hotel they owned in Texas instead of Prince Jefri's affairs,*fn17 and
(10) failing to return confidential documents relating to Prince Jefri's companies following their November 2006 termination and threatening to disclose privileged information if plaintiffs did not drop this lawsuit.*fn18
Count Twenty-Four of the amended complaint charges Zaman and Derbyshire with a RICO violation. According to plaintiffs, Zaman, Derbyshire, Westfields, Hoareau, Delaware Casa, Oceanview, Zamarni, Fitzjohn's, and Eurofinch comprised a RICO enterprise. Moreover, plaintiffs claim, Zaman and Derbyshire's use of telephone calls, faxes, e-mails, and wire transfers to effectuate various of the above schemes allegedly constituted predicate acts of mail and wire fraud, and their wrongful depositing of a check made out to Cayman Casa into Delaware Casa's account allegedly constituted the predicate act of bank fraud. The RICO claim is the only basis for federal jurisdiction.
On March 2, 2007 defendants moved to dismiss the RICO Claim.*fn19 They filed also an answer to the amended complaint as well as counterclaims for abuse of process, indemnification, breach of contract, and unjust enrichment for, inter alia, the failure of various plaintiffs to pay Zaman and Derbyshire their agreed compensation.*fn20 On April 5, 2007, plaintiffs answered the counterclaims*fn21 and cross-moved for leave to amend the complaint in the event the RICO claim were dismissed.*fn22
Defendants subsequently sought,*fn23 and the Court granted,*fn24 leave to file a third party complaint, alleging claims for breach of contract, unjust enrichment, and indemnification against two of Prince Jefri's sons, Pengiran Muda Abdul Hakeem and Pengiran Muda Bahar, and his ex-wife, Jefridah Mohammed Louis.*fn25
After briefing was complete on the motion to dismiss and the conditional cross- motion to amend, plaintiffs on May 9, 2007 filed an additional motion to amend the complaint.*fn26
They claim to have discovered an e-mail contradicting prior sworn statements by Zaman and Derbyshire that they did not own or control Westfields and therefore did not defraud Prince Jefri in connection with the Sunninghill transfer. Plaintiffs assert that this newly discovered evidence bolsters their claim that defendants were engaged in a continuing pattern of racketeering activity.
I. Motion to Dismiss
In deciding a motion to dismiss, the Court ordinarily accepts as true all well-pleaded factual allegations and draws all reasonable inferences in the plaintiff's favor.*fn27 Dismissal is inappropriate "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."*fn28
B. Procedural Issues
Plaintiffs argue that the motion to dismiss should be denied because defendants brought it as a motion for failure to state a claim under Rule 12(b)(6),*fn29 instead of as a motion for judgment on the pleadings under Rule 12(c), as the motion was made after defendants answered the amended complaint. This argument is both dilatory and without merit.
Defendants' motion, contrary to plaintiffs' assertions, was filed before the answer to the amended complaint.*fn30 In any event, how defendants labeled their motion is immaterial. The cases plaintiffs cite make clear that motions to dismiss filed after the pleadings are complete are treated essentially the same as Rule 12(b)(6) motions regardless of how they were or should have been labeled.*fn31 Hence, even if plaintiffs were correct that the motion should have been labeled a Rule 12(c) motion, this would not be a ground for denial.
C. The RICO Claim
The RICO statute, in relevant part, makes it unlawful "for any person employed by or associated with any enterprise engaged in . . . interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity."*fn32 "To establish a civil RICO claim for violation of Section 1962(c), a plaintiff must show that he was injured by defendants' (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity."*fn33
Allegations of RICO violations not only have a stigmatizing effect on those named as defendants,*fn34 but carry also the possibility of treble damages.*fn35 RICO therefore is an "unusually potent weapon," sometimes referred to as the "litigation equivalent of a thermonuclear device."*fn36
Accordingly, courts -- ever prone to using colorful metaphors when analyzing RICO -- have warned that putative civil RICO claims that "are nothing more than sheep masquerading in wolves' clothing,"*fn37 or ordinary fraud cases "clothed in the Emperor's trendy garb"*fn38 should be "flush[ed] out" at early stages of the litigation.*fn39
1. "Enterprise" Generally
An "enterprise," for RICO purposes, is defined to include any "individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity."*fn40 The Supreme Court has explained that a RICO enterprise is "a group of persons associated together for a common purpose of engaging in a course of conduct," the existence of which is proved "by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit."*fn41
Where a complaint alleges an association-in-fact enterprise, courts in this Circuit look to the "hierarchy, organization, and activities"*fn42 of the association to determine whether "its members functioned as a unit."*fn43 Accordingly, merely stringing together a list of defendants and labeling them an enterprise is insufficient to state a RICO claim.*fn44
Moreover, courts have held that allegations of a "hub-and-spokes" structure -- that is, allegations that a common defendant perpetrated various independent frauds, each with the aid of a different co-defendant -- do not satisfy the enterprise element of a RICO claim. For example, in New York Automobile Insurance Plan v. All Purpose Agency and Brokerage, Inc.,*fn45 the plaintiffs alleged a scheme orchestrated by a single insurance broker fraudulently to obtain reduced automobile insurance rates for various insureds. The court rejected the claim that the insurance broker and the insureds together formed an association-in-fact enterprise for RICO purposes where the "[i]nsureds each committed similar but independent frauds with the aid of the [insurance broker], and that each [i]nsured acted on a particular occasion to benefit himself or herself and not to benefit any other insured."*fn46 A series of discontinuous independent frauds does not constitute an enterprise, the court held, but rather a series of two-party conspiracies.*fn47
Similarly, in First Nationwide Bank v. Gelt Funding, Corp.,*fn48 the plaintiffs alleged a scheme fraudulently to obtain loans involving a single mortgage broker and several different borrowers, each seeking unrelated loans. The court rejected the plaintiffs' RICO claim, holding that their claims of a "classic 'hub and spoke' conspiracy, in which the [mortgage broker was] the 'hub' and the various borrower defendants were the 'spokes'"*fn49 were insufficient to allege a RICO enterprise where they failed to specify "how all defendants, including various borrowers, joined together as a group to perpetrate" the alleged frauds.*fn50
In Aiu Insurance Co. v. Olmecs Medical Supply, Inc.,*fn51 by contrast, the court upheld the sufficiency of a RICO claim alleging a scheme by doctors and sellers of medical equipment to submit to insurance companies fraudulent charges for unneeded medical supplies on behalf of individuals injured in automobile accidents. The court rejected the argument that the plaintiffs simply had alleged a hub-and-spokes conspiracy where they described "in detail each defendant's necessary and symbiotic contribution to the overall scheme."*fn52
In sum, an allegation that the perpetrator of a series of independent fraudulent transactions used a different accomplice to aid each transaction is insufficient to justify a conclusion that the perpetrator and the accomplices together constituted an ongoing organization or functioned as a continuing unit. To satisfy the enterprise element of a RICO claim, a plaintiff must allege that the defendants operated symbiotically and played necessary roles in the achievement of a common purpose.
2. This Case
Plaintiffs have failed to allege the existence of an enterprise for RICO purposes. Assuming arguendo that plaintiffs have alleged a pattern of racketeering activity -- and that those allegations are sufficient under Rule 9(b) -- the amended complaint simply groups together all of the individuals and entities involved in the racketeering acts and calls them an enterprise. It contains no allegation that this group operated according to any structure or hierarchy. With the exception of Zaman and Derbyshire, no participant is alleged to have acted for the benefit of any other participant.
They appear to have had no relationship to one another, and their actions and involvement in Zaman's and Derbyshire's schemes appear to have been isolated and independent. In sum, there is no indication that this group was an "ongoing organization" as opposed to an ad hoc collection of entities and individuals who each happened to have been involved in one scheme or another against Prince Jefri.
Notably, plaintiffs themselves assert that defendants operated according to a hub-and-spokes structure of which Zaman and Derbyshire were the "hub" and the other members of the alleged "enterprise" were the "spokes."*fn53 But this is precisely the kind of structure that the New York Automobile and First Nationwide Bank courts held is insufficient to satisfy the enterprise element of a RICO claim.
Plaintiffs argue that defendants were not engaged in a series of independent frauds. Each alleged fraud, they claim, was a smaller "implementing scheme" that formed part of a single "master scheme" to enrich Zaman and Derbyshire at Prince Jefri's expense.*fn54 This is unpersuasive. Taking the allegations in the amended complaint as true, there is no indication that Zaman's and Derbyshire's "implementing schemes" were related to one another. For example, the "sham" Sunninghill transaction and the Cayman Casa bank fraud did not rely upon one another for completion or implementation. Nor did these two schemes contribute necessarily and symbiotically to the achievement of Zaman's and Derbyshire's overall purpose. Each scheme alone was sufficient but not necessary to serve the goal of the purported "master scheme" -- enriching Zaman and Derbyshire at Prince Jefri's expense.
Furthermore, nothing in the amended complaint supports the inference the that participants in the Sunninghill scheme (Westfields and Hoareau) had anything to do with, let alone acted for the benefit of, the participants in the Cayman Casa bank fraud (Delaware Casa and Oceanview), or vice versa. Rather, it appears that the participants in each scheme acted on a particular occasion to benefit themselves and not to benefit the participants of any other scheme. In the last analysis, the alleged "implementing schemes" were similar but unrelated frauds. They were not necessary components of a broader undertaking. The facts of this case therefore are much closer to New York Automobile and First Nationwide Bank than to Aiu Insurance Co.
Perhaps the most that can be said is that Zaman and Derbyshire themselves constituted an enterprise -- a husband and wife "team," so to speak. But even this dubious premise would not save plaintiffs' RICO claim. Zaman and Derbyshire are alleged to be the "persons" who were "associated with an enterprise" under the RICO statute. Courts long have held that a "person" for RICO purposes must be distinct from the alleged enterprise.*fn55
The Court recognizes that the RICO statute was intended to cast a wide net*fn56 and that even loosely affiliated individuals with little organizational structure can constitute an enterprise where the group exists solely for the purpose of carrying out a pattern of racketeering activity.*fn57 But it is not persuaded that the group constituting the alleged "enterprise" in this case is anything other than a laundry list of the individuals and entities that were connected to Zaman and Derbyshire and somehow involved in one of their alleged schemes. An enterprise, however, must be more than the sum of the participants in a series of independent frauds. Accordingly, as the complaint states little more than garden variety fraud and breach of fiduciary duty claims -- assuming that Rule 9(b) is satisfied here -- plaintiffs have failed to state a RICO claim.
II. Leave to Amend
Federal Rule of Civil Procedure 15(a) provides that leave to amend a complaint shall be given freely when justice so requires. Nonetheless, the Court may deny leave if the amendment (1) has been delayed unduly, (2) is sought for dilatory purposes or is made in bad faith, (3) would prejudice the opposing party, or (4) would be futile.*fn58
As noted, plaintiffs have filed two motions to amend the complaint. The first requests leave to amend "should any aspect of Defendants' motion [to dismiss the RICO claim] be granted."*fn59
It fails to indicate, however, what new allegations plaintiffs would make or how they would cure the defective RICO claim.
The second motion seeks leave to amend in light of a newly discovered e-mail that, plaintiffs claim, evidences Zaman's and Derbyshire's ownership of Westfields, despite their previous sworn statements that they did not own or control the company. Plaintiffs contend that the new allegations would show "the continuity of Defendants' pattern of racketeering."*fn60 But the Court fails to see how these allegations would strengthen the claim that the disparate players involved in Zaman's and Derbyshire's purported schemes formed an ongoing organization or functioned as a unit. Indeed, the amended complaint asserts that Zaman and Derbyshire owned Westfields at the time of the Sunninghill transfer,*fn61 an allegation that the Court presumed to be true in deciding the motion to dismiss. Even if plaintiffs were permitted to add allegations concerning the newly discovered e-mail, the RICO claim still would be fatally flawed for failure to allege an enterprise.
Plaintiffs already have had two opportunities to plead a proper RICO claim. As they have pointed to no new allegations that would permit them to do so on a third attempt, the Court concludes that leave to amend would be futile.
Defendants' motion to dismiss the RICO claim [docket item 48] is granted.*fn62
Plaintiffs' motions for leave to file an amended complaint [docket items 71, 89] are denied.
As no other basis for federal jurisdiction exists, the state law claims, counterclaims, and third party complaint must be dismissed as well, albeit for lack of subject matter jurisdiction.*fn63
The Clerk shall enter judgment and close the case.