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Rosemarie Ozbakir, et al v. Daniel J. Scotti

February 10, 2011


The opinion of the court was delivered by: David G. Larimer United States District Judge


This action was commenced in New York Supreme Court, Monroe County, by plaintiffs Rosemarie Ozbakir and Ali Demir, against sixteen defendants, alleging various claims arising out of the sale and lease of certain commercial real property ("premises" or "property") in East Rochester, New York. The action was removed to this Court by one of the defendants, Sovereign JF, SPE Manager, Inc. ("Sovereign SPE"), on the basis of federal question jurisdiction under 28 U.S.C. § 1331, because plaintiffs have asserted a claim under the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. The RICO claims, and the other state law claims, are generally based on plaintiffs' allegations that defendants engaged in a scheme to defraud plaintiffs in connection with the sale of the property to them.

Ten of the defendants have moved to dismiss the complaint, on a number of grounds. These defendants are: Sovereign SPE; Sovereign JF, LLC ("Sovereign JF"); Marcus & Millichap Real Estate Investment Brokerage Company ("M&M"); PGP Valuation, Inc. ("PGP"); Daniel J. Scotti, Jr.; Glen Kunofsky; Andrew R. Dorf, Scott Dragos, Chris Zorbas; and Paul Morabito. Five defendants--Eureka Petroleum, Inc. ("Eureka"), Tibarom, Inc., Rochester Lube, LLC, Samuel E. Pearson, III, and Deborah Pickett--have not appeared in the action. Sovereign SPE alleges in the notice of removal that Eureka, Tibarom and Rochester Lube are believed to be defunct or inactive. See Dkt. #1 ¶ 10.

The other defendant, Bruce D. Coleman, has answered the complaint and filed cross-claims against the other defendants. Dkt. #87. Defendants Sovereign SPE, Sovereign JF, Paul Morabito, PGP, and Glen Kunofsky have moved to dismiss Coleman's cross-claims against them. Coleman has also moved for leave to amend his answer to the complaint. All of those motions, however, have been ordered held in abeyance pending a decision on the motions to dismiss the complaint. Dkt. #116.


The following facts are taken from the allegations of the complaint, unless otherwise noted. Ozbakir is a resident of California, and Demir is a resident of New York who lives in Rochester. In late 2005, plaintiffs purchased the premises at issue from defendant Scotti for $1,480,000. Complaint (Dkt. #1-3) ¶ 99 and at 98, 145. At the time, the property, which is located at 781 Fairport Road in East Rochester, was the site of a Jiffy Lube franchise.

Plaintiffs allege, in short, that defendants conspired to sell them the premises at an inflated price. To facilitate this scheme, plaintiffs allege, defendants engaged in a series of transactions involving the property over a relatively short period, prior to the sale of the property to plaintiffs, in order to inflate the apparent value of the property.

According to the complaint, on February 26, 2004, the property was transferred from Evelyn and Sidney Webster (who are not parties to this action, and who are not alleged to have been a part of the scheme) to defendant Bruce Coleman, for a sale price of about $840,000. (Dkt. #1-3 at 53, 54.) On March 5, 2004, Coleman sold the property to defendant Rochester Lube for around $1,122,000. (Dkt. #1-3 at 60, 61.)

On or about the same day that it received ownership of the property from Coleman, Rochester Lube transferred the property to Sovereign JF for about $1,180,000, and shortly thereafter, Sovereign JF executed a lease with defendants Eureka and Tibarom as tenants. (Dkt. #1-3 at 64, 65, 71.) On July 21, 2004, for a purchase price of about $1,300,000, Sovereign JF transferred ownership of the property to defendant Scotti, who in turn sold the property to plaintiffs on December 30, 2005. (Dkt. #1-3 ¶ 105, and at 77, 98, 145.)

Plaintiffs allege that in December 2004, they entered into an agreement with M&M, whereby plaintiffs granted M&M an exclusive authorization to sell certain property owned by plaintiffs in San Diego, California. Dkt. #1-3 Ex. H. According to plaintiffs, this sale was intended to be part of a property exchange pursuant to section 1031 of the Internal Revenue Code, which allows a seller of 'property held for productive use in a trade or business or for investment' to avoid capital gains on the sales proceeds if they are used to purchase a replacement property meeting the same criteria. In order to qualify, the seller must complete the exchange within 180 days of the original sale and must not take control of the proceeds in the interim, § 1031(a)(3). Accordingly, property owners typically entrust their sales proceeds to a qualified intermediary until they purchase replacement property ... .

United States v. Carpenter, 494 F.3d 13, 15 (1st Cir. 2007), cert. denied, 552 U.S. 1230 (2008). Plaintiffs, then, intended to "exchange" the California property for the East Rochester property, using M&M as their intermediary.

Plaintiffs contend that they decided to acquire the East Rochester property in part based on an offering memorandum describing the property, which was prepared by M&M. Plaintiffs allege that M&M, along with defendants Glen Kunofsky, Andrew Dorf, Scott Dragos, and Chris Zorbas, marketed the premises to plaintiffs both orally and in writing, representing it to be an excellent, safe investment offering steady rental income from its then-tenant, Eureka Petroleum, Inc., which at the time was operating a Jiffy Lube franchise at the premises. Dkt. #1-3 ¶¶ 69-84.

After plaintiffs executed a letter of intent, but before the transfer of the property, M&M provided plaintiffs with an "activity detail" containing a number of representations concerning the property, including a physical description, and a summary of the existing lease. The activity detail stated, in part, that the property was "subject to an absolute triple net lease, with 23 years remaining in a 25 year primary term that commenced on February 4, 2004." Dkt. #1-3 Ex. O. It also stated that "the tenant, Eureka Petroleum, Inc. has an oil agreement with Shell. It is a 10 year agreement which Shell only signs with Eureka. Shell Oil has a right to cure any lease default under the oil agreement." Id.

Plaintiffs purchased the property from Scotti in late December 2005. Plaintiffs then became the landlords, with Eureka and Tibarom as tenants.*fn1 Eureka and Timarom both paid rent to plaintiffs, in the amount of about $9346 monthly, but in late 2006 the lease was transferred to defendants Samuel Pearson and Deborah Pickett, and nonparties DDS Management, LLC ("DDS") and Peanut Oil, LLC (collectively "assignees"). Plaintiffs allege that this transfer took place "on a date unknown to the Plaintiffs, and without the written consent of the Plaintiffs ... ."

Beginning in December 2006, the assignees began paying rent to plaintiffs, but in or around August 2007, they stopped paying rent, taxes, and other charges associated with the property that they were obligated to pay under the terms of the lease. Dkt. #1-3 ¶ 114. In December 2007, the assignees abandoned the premises. Dkt. #1-3 ¶ 116. The assignees allegedly caused damage to the property, and wrongfully removed some equipment from the property as well. Dkt. #1-3 ¶¶ 117, 118.

After the assignees vacated the premises, plaintiffs took possession, and discovered that the premises contained only 0.52 acre, not 0.84 acre as defendants had represented. Dkt. #1-3 ¶ 122. Plaintiffs also demanded that Shell Oil cure the tenants' default, but Shell elected not to cure. See Dkt. #1-3 ¶¶ 120, 121 and Ex. V.

Plaintiffs filed the complaint in this action in state court in August 2009. They allege a complex web of relationships among the various defendants as well as DDS and Peanut Oil, both of which allegedly filed for Chapter 7 bankruptcy protection in 2008. Dkt. #1-3 ¶ 123. They allege that several of the corporate defendants, as well as DDS and Peanut Oil, are alter egos of several of the individual defendants, and that all of the defendants participated in a scheme to artificially inflate and misrepresent the value of the premises, with the aim of inducing plaintiffs to purchase the property for far more than its true market value.

The complaint asserts 15 causes of action. Counts 1, 2, and 4 through 7 assert claims for breach of contract, seeking damages for lost rent, against Eureka, Tibarom, Pearson and Pickett. Count 3 asserts a claim against Sovereign SPE and Sovereign JF, alleging that defendants' "purported assignment" of the lease to DDS and Peanut Oil constituted a material breach of the lease.

The remaining claims are asserted against all the defendants. The eighth cause of action asserts a claim of negligent misrepresentation, based on various alleged misrepresentations and wrongdoing by defendants (e.g., the use of "dummy or shell corporations," tenants who "had no intentions in [sic] fulfilling their obligations under the Leases," misrepresenting the anticipated income from and value of the property, etc.), to induce plaintiffs to purchase the premises at an inflated price. Dkt. #1-3 ¶¶ 210-38.

The ninth cause of action alleges that defendants engaged in deceptive acts or practices in violation of N.Y. Gen. Bus. L. § 349. The tenth cause of action asserts a claim under RICO, based on the allegation that defendants were engaged in a mail and wire fraud scheme regarding the premises and ten other Jiffy Lube locations in New York State. Though the complaint identifies the addresses of those other locations, it does not clearly spell out exactly what the scheme was, other than to say that defendants "employed the same scheme and fraudulent actions" as alleged with respect to the East Rochester property, and that defendants' "actions ... yielded the same results, had similar participants, employed similar methods and are otherwise interrelated." Dkt. #1-3 ¶¶ 249, 251. Plaintiffs do not appear to allege that they were victims of the alleged scheme with respect to any of those other properties, or that they were in any way involved in any events concerning those properties.

The eleventh cause of action asserts a fraud claim, based on the allegation that defendants intentionally misrepresented and concealed material information concerning the property and its actual value. The twelfth cause of action asserts a claim for breach of the implied covenant of good faith and fair dealing. The thirteenth and fourteenth causes of action allege unjust enrichment and promissory estoppel, respectively.

What is denominated the fifteenth cause of action does not really set forth an independent claim, but simply alleges that defendants concealed their wrongdoing and that plaintiffs could not have learned of defendants' fraudulent scheme until July 1, 2008 at the earliest. Plaintiffs allege that the applicable statutes of limitations have therefore been tolled as a result of defendants' actions. Dkt. #1-3 ¶¶ 314-24.

For relief, plaintiffs seek money damages in amounts ranging from $80,000 to $4 million. The complaint also requests pre- and post-judgment interest, and an award of attorney's fees.


I. RICO Claim

A. Pleading Standards

As stated, ten of the defendants have moved to dismiss, in seven separate motions. While defendants' motions advance a number of reasons why the complaint is subject to dismissal, I begin with the RICO claim, since that is the only claim brought under federal law, and it therefore provides the ostensible basis for jurisdiction in this case.*fn2

The RICO statute makes it unlawful "for any person employed by or associated with any enterprise ... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c); see also United States v. Indelicato, 865 F.2d 1370, 1373 (2d Cir. 1989) (en banc). "'Enterprise' 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.'" First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 173 (2d Cir. 2004) (quoting 18 U.S.C. § 1961(4); additional internal quotes and alteration omitted). As the Supreme Court has explained, 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 proven "by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." United States v. Turkette, 452 U.S. 576, 583 (1981).

A "plaintiff asserting a civil RICO claim must be able to support allegations of (1) a RICO violation, (2) injury, and (3) transaction and loss causation." McLaughlin v. American Tobacco Co., 522 F.3d 215, 222 (2d Cir. 2008). With respect to causation, the Court of Appeals for the Second Circuit has recently set forth the applicable standard as follows:

To show injury by reason of a RICO violation, a plaintiff must demonstrate that the violation caused his injury in two senses. First, he must show that the RICO violation was the proximate cause of his injury, meaning "there was a direct relationship between the plaintiff's injury and the defendant's injurious conduct." First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994). Second, he must show that the RICO violation was the ...

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