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Flexborrow LLC v. TD Auto Finance LLC

United States District Court, E.D. New York

June 16, 2017

Flexborrow LLC and The Vault Auto Group, LLC, Plaintiffs,
v.
TD Auto Finance LLC, Defendant.

          Plaintiffs are represented by Randy Scott Zelin of Randy Scott Zelin P.C.,

          Defendant is represented by Alexander D. Bono, Kevin P. Potere, and Michael S. Zullo of Duane Morris LLP

          MEMORANDUM AND ORDER

          JOSEPH F. BIANCO United States District Judge

         Plaintiffs Flexborrow LLC (“Flexborrow”) and The Vault Auto Group, LLC (“Vault”) (collectively, “plaintiffs”) bring this action against defendant TD Auto Finance LLC (“TDAF” or “defendant”), alleging (1) a substantive violation of the Racketeer Influenced and Corrupt Organizations (“RICO”) Act pursuant to 18 U.S.C. § 1962(c) and conspiracy to violate RICO pursuant to 18 U.S.C. § 1962(d); and (2) New York State law claims for lender liability and fraud. [1] Defendant now moves to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).

         For the reasons set forth below, the Court dismisses plaintiffs' RICO claims because plaintiffs have not (1) adequately alleged that defendant conducted or participated in the affairs of a RICO enterprise; (2) established either a closed-ended or open-ended pattern of racketeering activity; and (3) pled the underlying predicate acts for mail and wire fraud with the requisite particularity. The RICO conspiracy claim must also be dismissed because there is no plausible underlying substantive violation and because plaintiffs have not adequately alleged the existence of any agreement or intent by defendant to violate RICO. In addition, the Court declines, in its discretion, to exercise supplemental jurisdiction over plaintiffs' New York State law claims, which it dismisses without prejudice. Although it is unclear to the Court that plaintiffs can cure these pleading deficiencies, in an abundance of caution, it will allow plaintiffs an opportunity to amend their complaint to attempt to allege a plausible RICO claim.

         I. Background

         A. Factual Background

         The Court takes the following facts from the complaint. (“Compl., ” ECF No. 1.) The Court assumes these facts to be true for purposes of deciding this motion and construes them in the light most favorable to plaintiffs as the non-moving party.

         The gravamen of plaintiffs' complaint is that defendant “knowingly and intentionally” participated in “funding the continued operations of a corrupt enterprise known as Emporio Motor Group LLC (‘Emporio'), ” a foreign limited liability company that was engaged in the business of dealing in pre-owned exotic, high-end, classic, and collectible automobiles. (Compl. ¶¶ 1, 6.) Emporio's principal Afzal Khan (“Khan”) was indicted on June 30, 2015 in the United States District Court for the District of New Jersey on wire fraud charges, and he is presently a fugitive from justice. (Id. ¶¶ 1, 7; Exhs. A and B.) The indictment alleges that, from in or about December 2013 through in or about September 2014, Khan defrauded his lenders and customers by failing to remunerate them for the sale of automobiles by Emporio. (Id. ¶ 4; Exh. B.)

         Flexborrow is a domestic limited liability company principally engaged in the business of asset-based short-term lending. It regularly lends against exotic, high-end, classic, or collectible automobiles and will secure those loans by, inter alia, taking physical possession of the vehicles and their title documents. (Id. ¶¶ 3, 11.) Occasionally, to pay off its loans, Flexborrow will sell an automobile it has lent against to a dealer like Emporio with the understanding that the dealer will either sell the automobile for an agreed-upon price and remit the proceeds of the sale to Flexborrow, or return the vehicle to Flexborrow. (Id. ¶ 12.)

         Vault is a domestic limited liability company principally engaged in the business of dealing in pre-owned exotic, high-end, classic, and collectible automobiles. (Id. ¶ 4.) It occasionally receives automobiles from customers on consignment to be sold for the customer at an agreed-upon price, for which Vault receives an agreed-upon commission. (Id. ¶ 13.) Like Flexborrow, Vault sometimes cosigns a vehicle to a dealer like Emporio with the understanding that the dealer will either sell the automobile for an agreed-upon price and remit the proceeds of the sale to Vault, or return the vehicle to Vault. (Id. ¶ 14.)

         TDAF is a foreign limited liability company principally engaged in the indirect financing of automobiles for purchase. (Id. ¶ 5.) Plaintiffs allege that defendant utilized salespeople to solicit dealers like Emporio so that defendant could provide financing for automobiles sold by those dealers. (Id. ¶ 15.) Defendant purportedly entered into agreements with those dealers to provide financing and conducted commercially reasonable due diligence before approving those contracts, including analyzing a dealer's financial statements and reviewing pre-existing liens on the subject vehicle. (Id. ¶¶ 18-19.)

         In their complaint, plaintiffs assert that, between December 2013 and September 2014, Emporio and Khan “stole” ten vehicles that plaintiffs cosigned to Emporio. (Id. ¶¶ 20-29, 34.) They allege that, after they secured loans against those assets, plaintiffs cosigned the vehicles to Emporio to effect their sale. (E.g., id. ¶ 20(a)-(d).) Emporio and Khan then sold the vehicles to third-party purchasers, but they never informed plaintiffs of those transactions or remitted the sale proceeds to them; instead, Emporio and Khan kept those funds for themselves. (E.g., id. ¶ 20(e)-(f).)

         Plaintiffs allege that TDAF financed the sale of the vehicles by Emporio without first determining that plaintiffs had liens on those automobiles, obtaining satisfaction of those liens, or securing the vehicle titles from plaintiffs. (E.g., id. ¶ 20(g)-(h).) As a result, plaintiffs assert that they lost the security for the loans they made against those automobiles and were unable to collect on that debt. (E.g., id. ¶ 20(i).)

         With respect to their RICO claim, plaintiffs allege that defendant committed wire and mail fraud by “permit[ing] Khan, through Emporio, to sell the automobiles Khan stole through Emporio, by providing the financing to the purchasers of these stolen automobiles sold by Emporio.” (Id. ¶¶ 36, 38.) They also contend that defendant, “through its funding of the purchase of the automobiles Emporio illegally sold in interstate and foreign commerce after having stolen these automobiles, conspired with Emporio to violate” RICO. (Id. ¶ 37.)

         Specifically, plaintiffs assert that defendant “knowingly, intentionally and willfully permitted Emporio to avoid and circumvent Emporio's obligations under” its financing agreement with TDAF by, among other things, not securing the titles to the vehicles at issue or ascertaining whether plaintiffs had liens on those vehicles prior to financing their sale. (Id. ¶¶ 39-40.) Plaintiffs also claim that TDAF had an “economic incentive” to finance Emporio and Khan's theft of the vehicles because defendant profited from those loans, and defendant's employees were compensated by approving financing deals with Emporio. (Id. ¶¶ 41-44.) Through this conduct, defendant purportedly “aided and abetted Khan's and Emporio's fraudulent scheme”; “permitted Emporio and Khan to continue to stay in business”; and “controlled Emporio's affairs.” (Id. ¶¶ 50-52.)

         B. Procedural Background

         Plaintiffs commenced this action on November 16, 2016. (ECF No. 1.) Defendant moved to dismiss on February 13, 2017 (ECF No. 15); plaintiffs filed their opposition on March 17, 2017 (ECF No. 20); and defendant replied on March 30, 2017 (ECF No. 21). The Court held oral argument on May 10, 2017 (ECF No. 22) and has fully considered the parties' submissions.

         II. Standard of Review

         In reviewing a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir. 2006); Nechis v. Oxford Health Plans, Inc., 421 F.3d 96, 100 (2d Cir. 2005). “In order to survive a motion to dismiss under Rule 12(b)(6), a complaint must allege a plausible set of facts sufficient ‘to raise a right to relief above the speculative level.'” Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir. 2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). This standard does not require “heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570.

         The Supreme Court clarified the appropriate pleading standard in Ashcroft v. Iqbal, setting forth a two-pronged approach for courts deciding a motion to dismiss. 556 U.S. 662 (2009). The Supreme Court instructed district courts to first “identify[] pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.” Id. at 679 (explaining that though “legal conclusions can provide the framework of a complaint, they must be supported by factual allegations”). Second, if a complaint contains “well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id. A claim has “facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a ‘probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. at 678 (quoting and citing Twombly, 550 U.S. at 556-57 (internal citation omitted)).

         The Court notes that in adjudicating a Rule 12(b)(6) motion, it is entitled to consider:

(1) facts alleged in the complaint and documents attached to it or incorporated in it by reference, (2) documents ‘integral' to the complaint and relied upon in it, even if not attached or incorporated by reference, (3) documents or information contained in defendant's motion papers if plaintiff has knowledge or possession of the material and relied on it in framing the complaint, (4) public disclosure documents required by law to be, and that have been, filed with the Securities and Exchange Commission, and (5) facts of which judicial notice may properly be taken under Rule 201 of the Federal Rules of Evidence.

In re Merrill Lynch & Co., 273 F.Supp.2d 351, 356-57 (S.D.N.Y. 2003) (internal citations omitted), aff'd in part and reversed in part on other grounds sub nom. Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005), cert. denied, 546 U.S. 935 (2005); see also Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991) (“[T]he district court . . . could have viewed [the documents] on the motion to dismiss because there was undisputed notice to plaintiffs of their contents and they were integral to plaintiffs' claim.”).

         III. Discussion

         Defendant moves to dismiss plaintiffs' substantive RICO claim for failure to state a plausible cause of action because plaintiffs have not adequately pled (1) that defendant conducted or participated in Emporio's affairs; (2) a closed- or open-ended pattern of racketeering activity; and (3) the underlying predicate acts of mail and wire fraud with the requisite particularity. In addition, defendant argues that the RICO conspiracy claim must be dismissed because plaintiffs have not plausibly alleged the existence of any agreement between defendant and Emporio or Khan, or that defendant knew of or intended to further their illicit conduct.

         As set forth below, the Court agrees with each of these arguments and dismisses plaintiffs' RICO claims.[2] In addition, the Court declines, in its discretion, to exercise supplemental jurisdiction over plaintiffs' New York State law claims for lender liability and fraud, which it dismisses without prejudice. Finally, in an abundance of caution, it will permit plaintiffs to file an amended complaint.

         A. RICO

         1. ...


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