Opinion
02 Civ. 4876 (SWK)
May 28, 2003
Solomon, Zauderer, Ellenhorn, Frischer Sharp, New York, New York, By: Mark C. Zauderer, Jonathan D. Lupkin, Carolyn A. Dizon, For Plaintiff.
Katten Muchin Zavis Rosenman, New York, New York, By: Robert W. Gottlieb, Arthur S. Linker, For Defendants.
OPINION AND ORDER
Plaintiff RD Management Corp. ("RD") brings this action against Walter Samuels, Marilyn Joy Samuels ("Joy Samuels") and J W Management Corp. ("J W") alleging violations of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961 et seq., and common law claims of conversion, breach of fiduciary duty, conspiracy to convert RD funds, and conspiracy to commit fraud. Defendants move to stay this action pending arbitration or, in the alternative, to dismiss the RICO claims pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, the motion to stay this action pending arbitration is denied, and the motion to dismiss the RICO claims is granted in part and denied in part.
BACKGROUND
RD is a New York corporation engaged in the business of developing and managing commercial real estate, mainly retail shopping centers. See Compl. at ¶¶ 6, 17. Defendant Walter Samuels is a shareholder and was president and a director of RD until September 10, 2002. See id. at ¶ 7; Affidavit of Jonathan D. Lupkin, dated November 15, 2002 ("Lupkin Aff."), Ex. 9, Minutes of Special Meeting of RD Board of Directors. Defendant Joy Samuels is also a shareholder of RD. See Compl. at ¶ 8. Defendant J W is a New York corporation engaged in property management and purportedly owned, operated and controlled by Walter and Joy Samuels. See id. at ¶ 9.
RD is responsible for procuring and maintaining all forms of insurance necessary for the properties and assets it manages. See id. at ¶ 17. RD alleges that while Walter Samuels was president of the company, he had final decision-making authority on insurance-related matters. See id. Beginning in or about November 1995, RD retained C.S.I.R. Enterprises, Inc. ("CSIR") and Judd Associates, Ltd. ("Judd") for the purpose of obtaining insurance coverage for RD's properties and assets.See id. at ¶ 19. Judah Feinerman, Frank DePrisco, Sr., and Frank P. DePrisco, Jr., are allegedly affiliated with either CSIR or Judd (collectively, the "RD Brokers"). See id. at ¶¶ 12-14. The RD Brokers are retail insurance brokers in the business of procuring insurance policies for their customers, either directly with various insurance companies or through entities known as wholesale brokers. See id. at ¶ 18. The business relationship between RD and the RD Brokers ended in January 2001. See id. at ¶ 20.
According to the complaint, from early 1998 through January 2001, Walter Samuels and the RD Brokers allegedly collaborated in an insurance fraud scheme whereby RD incurred damages in excess of $11 million. See id. at ¶¶ 3, 56-57. The alleged fraudulent scheme was accomplished using two different strategies: (1) the RD Brokers allegedly collected premium payments from RD for insurance coverage that they never procured for the company, see id. at ¶¶ 24-30; and (2) the RD Brokers allegedly failed to turn over to RD refunds for premium payments previously paid by the company for insurance policies that the RD Brokers cancelled. See id. at ¶¶ 24, 31-55. In return for Walter Samuels's alleged participation in the scheme, the RD Brokers allegedly funneled in excess of $600,000 to him, Joy Samuels and J W. See id. at ¶¶ 61-75.
On April 6, 2001, RD filed an action against the RD Brokers in New York State Supreme Court, New York County, RD Mgmt. v. C.S.I.R. Enters., Inc. et al., Index No. 601751/01, regarding their respective roles in the alleged insurance fraud scheme. See Lupkin Aff., Ex. 2. On or about March 6, 2002, the RD Brokers filed a third-party complaint against Walter Samuels in New York State Court. See id.
RD commenced the instant action on or about May 16, 2002 in New York State Supreme Court, New York County, and on June 24, 2002, defendants removed it to this Court. The first five causes of action, four claims under RICO and one claim for conversion, are asserted against all three defendants. The remaining three causes of action, claims for breach of fiduciary duty, conspiracy to convert RD funds and conspiracy to commit fraud, are asserted against only Walter Samuels. As to the four RICO claims, two claims are under Section 1962(c) and two claims are under Section 1962(d). In the first Section 1962(c) claim (Count I), RD alleges that its business relationship with CSIR and Judd constituted an association-in-fact enterprise (hereinafter the "RD/Insurance Brokers Enterprise"). In the second Section 1962(c) claim (Count II), RD alleges a second association-in-fact enterprise comprised of defendants together with the RD Brokers (hereinafter the "Samuels/RD Brokers Enterprise"). Both Section 1962(c) claims are based on alleged predicate acts of mail and wire fraud, commercial bribery and money laundering. In the two Section 1962(d) claims (Counts III and IV), RD asserts that defendants conspired with each other and the RD Brokers to violate Section 1962(c), thus violating Section 1962(d).
On or about July 8, 2002, Walter Samuels commenced two arbitrations relating to Realty Equity Limited Partnership ("RELP") and FW Associates ("FW"). See Affidavit of Walter R. Samuels, dated September 26, 2002 ("Samuels Aff."), Exs. B C, Demands for Arbitration. RELP is a Connecticut limited partnership with Walter Samuels, Jay Furman and Michael Ades as general partners, and seven limited partners, including Richard Birdoff. See Samuels Aff., Ex. B. FW is a New York general partnership with Walter Samuels, Furman and the Jay F. Corp. as partners.See Samuels Aff., Ex. C. RELP and FW are each in the real estate business, and both have retained RD to manage their respective properties. See Samuels Aff., Exs. B C. The partnership agreements for RELP and FW each contain an arbitration clause. See Samuels Aff., Exs. D E.
In the RELP arbitration, Walter Samuels asserts that Furman, Ades and Birdoff engaged in improper self-dealing, breaches of fiduciary duties and other wrongful acts. See Samuels Aff., Ex. B. In the FW arbitration, Walter Samuels alleges that Furman engaged in improper self-dealing, breaches of fiduciary duties and other wrongful acts. See Samuels Aff., Ex. C. In both arbitrations, Samuels seeks dissolution of the partnerships and a winding-up of their respective affairs, and an accounting. See Samuels Aff., Exs. B C.
In response to Walter Samuels's demands for arbitration, on or about July 29, 2002, RD filed two petitions in New York State Supreme Court, New York County, RD Mgmt. Corp., et al v. Walter Samuels, Index No. 116754/02, and RD Mgmt. Corp., et al v. Walter Samuels, Index No. 116755/02, seeking to stay the arbitrations. See Lupkin Aff., Exs. 3 4. The state court hearing those matters issued two identical orders restraining the arbitrations "from considering issue of whether [Walter Samuels] committed RICO violations or whether his claimed actions were not RICO violations." Lupkin Aff., Exs. 5 6, Orders dated September 30, 2002.
DISCUSSION
I. Motion to Stay Action Pending Arbitrations
Defendants seek a stay of this action pending the completion of the RELP and FW arbitrations. Under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3, a district court "must stay proceedings if satisfied that the parties have agreed in writing to arbitrate an issue or issues underlying the district court proceedings." Worldcrisa Corp. v. Armstrong, 129 F.3d 71, 74 (2d Cir. 1997). However, Section 3 of the FAA does not apply to parties who have not agreed to arbitrate. See Citrus Mktg. Bd. of Israel v. J. Lauritzen A/S, 943 F.2d 220, 224-25 (2d Cir. 1991). In the action pending before this Court, the agreements to arbitrate are contained in the partnership agreements for RELP and FW. Because RD is not a signatory to either partnership agreement, a stay of this action cannot be justified under the FAA. See Provident Bank v. Kabas, 141 F. Supp.2d 310, 318 (E.D.N.Y. 2001).
A court, "despite the inapplicability of the FAA, may stay a case pursuant to 'the power inherent in every court to control the disposition of the causes on its docket with economy of time and offset for itself, for counsel, and for litigants.'" Worldcrisa, 129 F.3d at 76 (quotingNederlandse Erts-Tankersmaatschappij, N.V. v. Isbrandtsen Co., 339 F.2d 440, 441 (2d Cir. 1964)); see also Landis v. North Am. Co., 299 U.S. 248, 254 (1936). "It is appropriate, as an exercise of the district court's inherent powers, to grant a stay where the pending arbitration is an arbitration in which issues involved in the case may be determined." Sierra Rutile Ltd. v. Katz, 937 F.2d 743, 750 (2d Cir. 1991); see also Orange Chicken, L.L.C. v. Nambe Mills, Inc., No. 00 Civ. 4730, 2000 WL 1858556, at *9 (S.D.N.Y. Dec. 19, 2000) (finding a stay appropriate where "the claims in the instant action and those being adjudicated in arbitration arise out of the same series of alleged acts"); Midland Walwyn Capital Inc. v. Spear, Leeds Kellogg, No. 92 Civ. 2236, 1992 WL 249914, at *2 (S.D.N.Y. Sept. 22, 1992) ("Courts in this district have repeatedly granted stays pending arbitration where the nonarbitrable issues overlap the arbitrable issues, thus minimizing inconsistent results and conserving judicial resources."); Hikers Indus., Inc. v. William Stuart Indus. Ltd., 640 F. Supp. 175, 178 (S.D.N.Y. 1986) ("A stay as to claims against a non-arbitrating party defendant is properly granted where the arbitration of the plaintiff's claims against a defendant party to the arbitration would at least partially determine the issues which form the basis of the claim against that non-arbitrating defendant."). The party seeking the stay "bears the burden of demonstrating that such a stay is justified." Worldcrisa, 129 F.3d at 76.
Here, defendants have not sustained their burden of demonstrating that a stay is justified. While numerous officers and directors of RD, including Walter Samuels, Furman, Birdoff and Ades, are also partners of RELP and FW, the factual allegations in the complaint in this action do not arise out of the same series of alleged acts as the factual allegations in the two demands for arbitration. Each cause of action recited in the complaint is predicated upon defendants' alleged participation in an insurance fraud scheme. Moreover, both the RELP and FW arbitrations are restrained from considering whether Walter Samuels's alleged conduct constitutes a RICO violation. See Lupkin Aff., Exs. 5 6. In contrast, in each demand for arbitration, Walter Samuels alleges that his partners in both RELP and FW engaged in conduct that enriched themselves personally while causing the partnerships to incur unnecessary and expensive financial burdens. In these circumstances, where the result of the arbitrations will not substantially resolve any issue in this action, a stay of this action is not warranted.
II. Motion To Dismiss RICO Claims
A. Legal Standard
On a motion to dismiss made pursuant to Rule 12(b)(6), the Court is required to accept as true the factual assertions in the complaint and documents appended to the complaint and to draw all reasonable inferences in plaintiff's favor. See Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, a complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99 (1957).
B. Analysis
RD alleges two substantive civil RICO violations, 18 U.S.C. § 1962 (c) (Counts I and II), and two conspiracies to commit such violations. 18 U.S.C. § 1962 (d) (Counts III and IV). RD alleges that defendants were members of two RICO enterprises as defined by 18 U.S.C. § 1961 (4): first, an association-in-fact enterprise based upon the business relationship between RD and its two insurance brokers, CSIR and Judd, the RD/Insurance Broker Enterprise, and second, another association-in-fact enterprise, the Samuels/RD Broker Enterprise, which consisted of Walter Samuels, Joy Samuels, J W and the RD Brokers. Defendants first contend that both Section 1962(c) claims must be dismissed because RD has failed to allege cognizable RICO enterprises. Specifically, defendants argue that the complaint fails to plead a common purpose for either enterprise. Furthermore, defendants also assert that the RICO enterprise alleged in Count II, the Samuels/RD Broker Enterprise, should be dismissed because RD has failed to properly allege its hierarchy or structure, or that defendants participated in the management or operation of it. Lastly, defendants argue that since the complaint fails to allege a substantive violation of RICO, the complaint also fails to set forth a viable claim for conspiracy to commit such a violation. The Court addresses each of defendants' arguments in turn.
1. Section 1962(c) Claims
Section 1962(c) makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate of foreign commerce, 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). To establish a claim for a civil violation of Section 1962(c), "a plaintiff must allege that he was injured by defendants' (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity."Cofacredit, S.A. v. Windsor Plumbing Supply Co., Inc., 187 F.3d 229, 242 (2d Cir. 1999); see also Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275 (1985). These requirements must be sufficiently alleged as to each individual defendant. See De Falco v. Bernas, 244 F.3d 286, 306 (2d Cir. 2001).
a. Enterprise
"Enterprise" is defined as any "individual, partnership, corporation, association, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961 (4). In pleading the element of "enterprise," the plaintiff need satisfy only the notice pleading requirements of Federal Rule of Civil Procedure 8(a). See In re Sumitomo Copper Litig., 995 F. Supp. 451, 454 (S.D.N.Y. 1998). To demonstrate an "association-in-fact" enterprise, the plaintiff must show that a "group of persons associated together for a common purpose of engaging in a course of conduct which functioned then as a continuing unit." Procter Gamble Co. v. Big Apple Indust. Bldgs., Inc., 879 F.2d 10, 18 (2d Cir. 1987) (internal quotations omitted) (citingUnited States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524 (1981)). Courts in this Circuit construe the enterprise element of RICO liberally. See, e.g., United States v. Indelicato, 865 F.2d 1370, 1382 (2d Cir. 1989) ("the language and the history suggest that Congress sought to define that term as broadly as possible") (construing 18 U.S.C. § 1961 (4)).
i. RD/Insurance Broker Enterprise
1. Common Purpose of the Enterprise
The complaint alleges that the RD/Insurance Broker Enterprise was based upon the business relationship between RD and its two insurance brokers, CSIR and Judd, whereby RD purchased insurance coverage for the properties it managed through CSIR and Judd from November 1995 through January 2001.
In Manhattan Telecomms. Corp., Inc. v. DialAmerica Marketing, Inc., 156 F. Supp.2d 376 (S.D.N.Y. 2001), the plaintiff was a customer of the defendant telemarketing services provider, and asserted a Section 1962(c) claim alleging that it was victimized by the defendant's fraudulent billing practices. In that case, the alleged association-in-fact enterprise consisted of the defendant telemarketing services provider and its customers, and the purported purpose of the enterprise was for customers to receive telemarketing sales services from the defendant.Id. at 382. The court found that such a purpose was the business of the defendant, and therefore the plaintiff and the defendant were "no more united in an enterprise than any vendor and its customers." Id. As a result, the court dismissed the RICO claim for failure to adequately plead an enterprise.
As in Manhattan Telecomms., the purpose of the RD/Insurance Broker Enterprise is merely the business of both CSIR and Judd, the procurement of insurance coverage for their customers. This cannot constitute an enterprise under RICO because RD and the insurance brokers were in a vendor-customer relationship and thus did not share a common purpose.See id. at 382. Therefore, RD failed to sufficiently plead that the RD/Insurance Broker Enterprise is an association-in-fact enterprise. Accordingly, the first Section 1962(c) claim (Count I) is hereby dismissed.
ii. Samuels/RD Brokers Enterprise
1. Common Purpose of the Enterprise
Defendants argue that as to the Samuels/RD Broker Enterprise, the complaint does not allege that defendants knew about the RD Brokers misappropriation of insurance premiums, or that defendants intentionally did anything to facilitate such misconduct, and thus fails to allege that defendants shared a common purpose with the RD Brokers. This argument is without merit. The complaint alleges that the RD Brokers billed RD for insurance coverage they never procured and failed to return money to RD for cancelled insurance policies. See Compl. at ¶¶ 25-55. The complaint also alleges that Walter Samuels wrongly deterred RD employees from discovering the insurance fraud scheme and also directed RD employees to continue paying the RD Brokers for insurance coverage. See id. at ¶¶ 59-60. Moreover, the complaint alleges that as a result of Walter Samuels's efforts, defendants received illegal kickbacks from the RD Brokers. See id. at ¶¶ 61-75.
In support of their argument that the Samuels/RD Brokers Enterprise lacks a common purpose, defendants rely heavily on Feinberg v. Katz, No. 99 Civ. 45, 2002 WL 1751135 (S.D.N.Y. July 26, 2002). However, that case is inapposite. In Feinberg, the plaintiffs alleged that Norman Katz and his son, Stephen Katz, constituted an association-in-fact enterprise engaged in the systematic looting of corporate assets. Id. at *12. The court noted that nearly all of the allegations regarding the misappropriation scheme detailed acts of looting by Stephen, not by Norman, and the plaintiffs alleged only one specific act of looting by Norman. Id. at *14. The court further noted that "[w]ithout any facts which might suggest that Norman knew of and participated in Stephen's assorted fraudulent activities, there can be no reasonable suggestion that the two worked together for the common purpose of looting" the company. Id. at *15. As a result, the court dismissed the RICO claim because plaintiffs inadequately plead an association-in-fact enterprise.Id.
By contrast, the complaint in this action sets forth factual allegations as to the involvement of both the RD Brokers and defendants in the insurance fraud scheme and the benefits each received therefrom. Thus, contrary to defendants' argument, the facts alleged in the complaint provide a reasonable inference that the individuals participating in the Samuels/RD Brokers Enterprise shared a common purpose, to enrich themselves at the expense of RD.
Defendants also argue that it is entirely illogical for them to have shared a common purpose with the RD Brokers to steal from RD. According to defendants, given Walter Samuels's substantial ownership interests in the properties RD manages, his personal damages resulting from the alleged insurance fraud scheme vastly exceeded the alleged illegal kickbacks they allegedly received. This contention is not a basis for dismissing the RICO claims at this stage of the litigation. On a motion to dismiss, the Court is not to weigh the evidence, and every reasonable inference must drawn in favor of the plaintiff. See Harris, 186 F.3d at 247. As set forth above, the Court finds that RD has sufficiently plead a common purpose as to the Samuels/RD Brokers Enterprise.
2. Structural Hierarchy
Defendants next argue that the complaint does not sufficiently allege the structural hierarchy of the Samuels/RD Brokers Enterprise. However, such evidence is not required in alleging a Section 1962(c) claim. The existence of an association-in-fact enterprise "is oftentimes more readily proven by what it does rather than by abstract analysis of its structure," and evidence of its structure is merely one means of demonstrating enterprise. United States v. Coonan, 938 F.2d 1553, 1559 (2d Cir. 1991) (emphasis in original). In fact, the Second Circuit has repeatedly found a sufficient enterprise where the complaint alleges a group without a centralized hierarchy existing for the sole purpose of carrying out a pattern of racketeering acts. See, e.g., Moss v. Morgan Stanley Inc., 719 F.2d 5, 22 (2d Cir. 1983) (enterprise found for a single two-year transaction, where employees acquired inside knowledge of a tender offer and contacted a trader who asked a stockbroker to buy stock for employees); Mazzei v. United States, 700 F.2d 85, 88 (2d Cir. 1983) (holding that an enterprise consisting of a group of individual bettors and Boston College basketball players constituted a proper enterprise that was formed exclusively to shave points in nine games and to maximize gambling proceeds); United States v. Errico, 635 F.2d 152, 156 (2d Cir. 1980) (holding that an enterprise properly consisted of a network of jockeys and bettors who joined together for the sole purpose of fixing and betting on horse races). In light of clear Second Circuit precedent, RD need not plead the structural hierarchy of the Samuels/RD Brokers Enterprise to adequately plead an association-in-fact enterprise.
3. Operation or Management Test
Defendants also argue that the complaint fails to adequately allege that they participated in the management or operation of an enterprise. In Reves v. Ernst Young, 507 U.S. 170, 113 S.Ct. 1163 (1993), the Supreme Court found that liability under Section 1962(c) requires that a defendant be a participant "in the operation or management of the enterprise itself." Id. at 185. The Court further explained that "[i]n order to 'participate, directly or indirectly, in the conduct of such enterprise's affairs,' one must have some part in directing those affairs." Id. at 179. The Court then went on to note that "the word 'participate' makes clear that RICO liability is not limited to those with primary responsibility for the enterprise's affairs . . . but some part in directing the enterprise's affairs is required." Id.
Here, the complaint alleges that Walter Samuels shielded the insurance fraud scheme from discovery and directed RD employees to continue paying the RD Brokers for insurance coverage. During 1999, RD's controller, Jeff Sinacore, learned that the RD Brokers owed RD approximately $1 million for unearned or returned insurance premiums. See Compl. at ¶ 59. After Sinacore advised the RD Brokers that RD intended to withhold payments pending receipt of the unpaid balance, Walter Samuels directed Sinacore to ignore the outstanding balance and to not withhold funds from the RD Brokers See Id. The complaint also alleges that defendants directed the RD Brokers to funnel kickbacks to them out of the proceeds from the insurance fraud scheme, and identifies three vehicles through which the kickbacks were paid. See Id. at ¶¶ 62-75. At this early stage of the litigation, these allegations are sufficient to infer that the defendants had some part in directing the affairs of the Samuels/RD Brokers Enterprise. See In re Sumitomo Copper Litig., 104 F. Supp.2d 314, 318 (S.D.N.Y. 2000); Mezzonen, S.A. v. Wright, No. 97 Civ. 9380, 1999 WL 1037866, at *10-*12 (S.D.N.Y. Nov. 16, 1999) Accordingly, defendants' motion to dismiss the Samuels/RD Brokers Enterprise (Count II) is hereby denied.
2. Section 1962(d) Claims
Defendants move to dismiss the two Section 1962(d) claims on the basis that RD has failed to state claims under Section 1962(c). Section 1962(d) prohibits any person from conspiring to violate any of the substantive provisions of Section 1962(a)-(c). See 18 U.S.C. § 1962 (d). The first Section 1962(d) claim (Count III) is based upon the RD/Insurance Broker Enterprise (Count I), and the second Section 1962(d) claim (Count TV) is based upon the Samuels/RD Brokers Enterprise (Count II). To state a claim under Section 1962(d), 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." Int'l Brotherhood of Teamsters v. Carey, 163 F. Supp.2d 271, 285 (S.D.N.Y. 2001) (quotation omitted); see also Cofacredit, S.A. v. Windsor Plumbing Supply Co., Inc., 187 F.3d 229, 244 (2d Cir. 1999). Because RD's first Section 1962(c) claim (Count I) fails as plaintiff has insufficiently plead an association-in-fact enterprise, RD's corresponding claim under Section 1962(d) (Count III) must also be dismissed. However, as discussed above, because defendants' motion to dismiss RD's second Section 1962(c) claim (Count II) is denied, defendants' motion to dismiss the second Section 1962(d) claim (Count IV) must also be denied.
CONCLUSION
For the reasons set forth above, defendants' motion tic stay this action pending the resolution of the RELP and FW arbitrations is denied, and defendants' motion to dismiss is granted with respect to the first Section 1962(c) claim (Count I), and the first Section 1962(d) claim (Count III) and denied with respect to the second Section 1962(c) claim (Count II), and the second Section 1962(d) claim (Count IV). The parties are hereby directed to appear for a pre-trial conference on June 25, 2003, at 10:30 a.m., in Room 906, 40 Centre Street, New York New York.
SO ORDERED.