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Kurins v. Silverman

February 10, 2009

ANDRIS KURINS, INDIVIDUALLY AND AS A SHAREHOLDER OF SILVERSEAL CORPORATION, PLAINTIFF,
v.
JOHN SILVERMAN AND ALAN SERRINS, DEFENDANTS.



The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Andris Kurins ("Plaintiff" or "Kurins"), individually and as a shareholder of Silverseal Corporation ("Silverseal"), brought the above-captioned civil action alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and state law in New York Supreme Court. Defendants John Silverman ("Silverman") and Alan Serrins ("Serrins") (collectively, "Defendants") removed the action to this Court pursuant to 28 U.S.C. § 1441(c) and 28 U.S.C. § 1331. Defendants now move to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).*fn1

BACKGROUND

The following relevant facts are alleged in the Complaint. Silverseal is engaged, through its subsidiaries, in the business of corporate security and private investigation. (Compl. ¶ 8.) Plaintiff owns 49% of the outstanding stock of Silverseal and Defendant Silverman, the president of Silverseal, owns 51% of the outstanding stock. (Compl. ¶¶ 4-5.) Defendant Serrins served as primary outside counsel to Silverseal and personal counsel to Defendant Silverman and was a member of the company's board of directors. (Compl. ¶ 6.)

In January 2002, Defendants created an escrow account with Defendant Serrins's law firm. (Compl. ¶ 9.) Over the course of 2002, Silverman arranged for a number of deposits of Silverseal funds into the escrow account and, on or about February 26, 2002, Serrins authorized a payment to Maria Weissman ("Weissman") (an attorney alleged to have been Defendant Silverman's girlfriend at the time of the payment). Silverseal's books do not, however, reflect that Weissman ever submitted an invoice. (Compl. ¶¶ 9-14.) The deposits and the payment were sent by mail or overnight interstate carrier. (Id.)

Plaintiff was unaware of the existence of the escrow account until late 2002, when Silverman advised Plaintiff that Silverseal should create a "rainy day" fund to protect against the possible loss of a major client. (Compl. ¶ 15.) Plaintiff agreed to the deposit of $300,000 in the escrow account, but was not aware that the escrow account had existed for nearly a year and was already in use. (Compl. ¶ 16.) Over the course of the next four years, Defendant Silverman arranged additional deposits to the escrow account, which were sent to Defendant Serrins by mail or overnight interstate carrier (Compl. ¶¶ 39, 48), and Defendant Serrins authorized additional payments from the escrow account, which were mailed or sent by overnight interstate carrier, (Compl. ¶¶ 21, 23, 24, 34, 37, 38, 40, 43, 45, 47, 50, 51). The checks written on the escrow account were in payment for a number of invoices that included charges for personal legal services for Defendant Silverman that were not proper Silverseal expenses. (See, e.g., Compl. ¶¶ 20-21 (payment by check written on escrow account for invoice including "a matter entitled 'real Estate Entity (Matrimonial)'"); ¶¶ 22-23 (payment for invoice including legal services rendered in connection with "a matter entitled 'Estate and Will Planning'"); ¶ 37 (payment for an invoice for legal services related to "Montclair Multiples"); ¶ 40 (check from escrow account in payment for invoice including personal Silverman legal expenses, including the drafting of an "April 25, 2005 letter to a co-op board").) Other payments were made for invoices that included legal services rendered to Yolanda Rubel, Silverman's mother. (Compl. ¶¶ 30; 34.) The invoices and/or the checks issued in payment for the invoices were mailed or sent by overnight interstate carrier. The Complaint alleges that additional improper payments, some of them from the escrow account, were made to Weissman, and that invoices and payments in connection with these amounts were sent by mail or interstate carrier. (Compl. ¶¶ 29-31.) According to the Complaint, all of the improper payments described in the Complaint were reported to federal and state taxing authorities as legitimate Silverseal business expenses, and not as part of Defendant Silverman's income. (Compl. ¶ 52.)

On the basis of the foregoing allegations, Plaintiff asserts that Defendants participated in the operation and management of Silverseal through a pattern of racketeering activity in violation of the RICO statute. Plaintiff also asserts that this conduct violated state law. Plaintiff originally brought this action in New York State Supreme Court and it appears from the briefing that there is pre-existing litigation in the state Supreme Court for valuation of Plaintiff's Silverseal shares in a buy-out pursuant to New York Business Corporation Law section 1118. (See Defs' Mem. P. 1-2.) Although the Complaint does not explicitly identify the RICO subsection that Defendants allegedly violated, the language of the Complaint and Plaintiff's memorandum in opposition indicate that Plaintiff is alleging a section 1962(c) violation based on predicate acts of mail and wire fraud in connection with the allegedly fraudulent scheme to use Silverseal's funds to make payments that were not legitimate expenditures of the Company's funds, and the Court evaluates Plaintiff's claim as such. (See Pl's Opp. at 1-2; Compl. ¶¶ 56-63.)

The Court has thoroughly reviewed the parties' submissions and, for the reasons that follow, grants in part Defendants' motion pursuant to Rule 12(b)(6) to dismiss Plaintiff's Complaint, with leave to replead.

DISCUSSION

In deciding a motion to dismiss for failure to state a claim, the Court accepts the factual allegations in the complaint as true, and draws all reasonable inferences in Plaintiff's favor. Roth v. Jennings, 489 F.3d 499, 501 (2d Cir. 2007). The "complaint must plead 'enough facts to state a claim to relief that is plausible on its face.'" Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008) (quoting Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1974 (2007)). Allegations of fraudulent predicate acts under RICO are subject to the heightened pleading standard of Rule 9(b). First Capital Asset Management, Inc. v. Satinwood, Inc., 385 F.3d 159, 178 (2d Cir. 2004); Fed. R. Civ. P. 9(b). Under Rule 9(b), "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b).

RICO Claim

A plaintiff alleging a RICO violation must allege: "(1) a violation of the RICO statute, 18 U.S.C. § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962." DeFalco v. Bernas, 244 F.3d 286, 305 (2d Cir. 2001). Under section 1962(c),"[i]t [is] unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, 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 or collection of unlawful debt." 18 U.S.C.A. § 1962(c) (West 2000). The statute defines "enterprise" as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity;" "racketeering activity" includes any act that is indictable under 18 U.S.C. § 1341, the mail fraud statute, or under 18 U.S.C. § 1343, the wire fraud statute. 18 U.S.C.A. § 1961(4) (West 2000); 18 U.S.C.A. § 1961(1)(B) (West 2008). The statute defines a "pattern of racketeering activity" as requiring at least two acts of racketeering activity. Id. at § 1961(5). Thus, "to establish to a violation of 18 U.S.C. § 1962(c), a plaintiff must establish that a defendant, through the commission of two or more acts constituting a pattern of racketeering activity, directly or indirectly participated in [the conduct of the business of] an enterprise, the activities of which affected interstate or foreign commerce." DeFalco, 244 F.3d at 306.

Defendants contend that Plaintiff has failed to sufficiently allege the participation in the enterprise conduct element of a 1962(c) violation.*fn2 In Reves v. Ernst & Young, 507 U.S. 170 (1993), the Supreme Court resolved a disagreement in the Courts of Appeal as to the meaning of the phrase "to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs." The Reves Court held that "'to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs,' § 1962(c), one must participate in the operation or management of the enterprise itself." Reves, 507 U.S. at 185. In the Second Circuit, this "'operation or management' test typically has proven to be a relatively low hurdle for plaintiffs to clear, especially at the pleading stage." First Capital, 385 F.3d at 176 (internal citations omitted). Plaintiff's allegations that Defendants controlled and disbursed Silverseal's funds are sufficient to clearly frame participation in the operation and management of Silverseal, whether or not the funds were applied to legitimate business expenses. See Reves, 507 U.S. at 185 ("Of course, 'outsiders' may be liable under § 1962(c) if they are "associated with" an enterprise and participate in the conduct of its affairs - that is, participate in the operation or management of the enterprise itself.").

Defendants further contend that Plaintiff has failed to allege a pattern of racketeering activity, as required for a Section 1962(c) violation, and thus, has failed to allege a RICO claim. The statutory requirement that there be at least two acts of racketeering activity, "does not[, however,] so much define a pattern of racketeering activity as state a minimum necessary condition for the existence of such pattern." H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 237 (1989). A pattern of racketeering activity requires that "the ...


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