Opinion
00-CV-6586 CJS(F)
November 15, 2001
Joseph B. Rizzo, Esq., Gallo Iacovangelo, Rochester, N.Y. 14614, for Plaintiff.
John Spiezio, David M. Lascell, Esq., Kenneth A. Payment, Esq., Harter, Secrest Emery LLP, Rochester, NY, James E. Hough, Esq., Robert H. Murphy, Esq. Morrison Foerster, LLP, New York, NY, for Defendant.
DECISION and ORDER
Torvec, Inc. ("Torvec") is suing John Spiezio and others to recover damages for defamation, injurious falsehood, and interference with a prospective economic advantage. These three causes of action are contained in plaintiff's Amended Complaint and Demand for Jury ("Amended Complaint") filed on February 26, 2001. The case is before the Court on defendant's motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction, to strike a portion of plaintiff's reply brief and one of plaintiff's affidavits as a violation of Federal Rule of Evidence 408, and for sanctions under Rule 11 for frivolously claiming diversity jurisdiction in its two complaints. In response, plaintiff's filed a cross-motion seeking leave to amend the Amended Complaint (1) to add a cause of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and (2) to add an additional defendant.
Codified at 18 U.S. Code § 1961 et seq.
For the reasons that follow, the Court grants defendant's motions to strike and to dismiss the Amended Complaint, and denies as futile plaintiff's motion to amend the Amended Complaint. The Court also directs a further filing on the issue of sanctions.
Discussion
Torvec, Inc. ("Torvec") is a publically traded corporation having issued approximately 22,000 shares of common stock. The Amended Complaint alleges that there exists an Internet World Wide Web site with a uniform resource locator of http://ragingbull.altavista.com. This site, called Raging BullTM, maintains a variety of electronic message "boards" hosting discussions through messages posted by users of the service. Torvec maintains that between March 2000 and February 2001, "the defendants maliciously published on `Raging Bull' message boards, or caused to be so published, numerous and ongoing messages concerning TORVEC and its officers containing representations which were entirely false." Amended Complaint at ¶ 9. Attached to the Amended Complaint are copies of the postings which Torvec maintains are defamatory.
Torvec further alleges that at the time of the postings, the defendants were "motivated by actual malice and knew that the publications were false, or in the alternative, . . . were made . . . with reckless and wanton disregard for the truth or falsity thereof." Amended Complaint at ¶ 11. Torvec alleges that the postings on Raging Bull were defamatory per se. Id. at ¶ 12.
Motion to Dismiss Amended Complaint
When considering a motion to dismiss a complaint, the Court must view the complaint and draw all reasonable inferences in the light most favorable to the non-moving party. H.J. Inc. v. Northwest Bell Telephone Co., 492 U.S. 229, 249 (1989). Plaintiff alleges in its amended complaint that Torvec, Inc. is a New York Corporation with its principal place of business in Rochester, New York. Amended Complaint at ¶ 1; that defendant John Spiezio is a resident of New York, Suffolk County, and that defendant John Doe, also known as "Torvec1," is a single shareholder of Torvec and/or various other individuals acting on behalf of said shareholder. Id. at ¶ 3. The Amended Complaint then bewilderingly states that jurisdiction is based on diversity of citizenship pursuant to 28 U.S. Code § 1332, and also as a matter affecting interstate commerce under 28 U.S. Code § 1337 (original jurisdiction for any proceeding arising under any Act of Congress regulation commerce or protecting trade and commerce against restraints and monopolies).
Subsequent to the filing of defendant's motion to dismiss, Torvec learned that the allegedly defamatory posts on the "Raging Bull" message boards were made from John Spiezio's wife's Internet access account.
Clearly, the Court need go no further than paragraph two of the Amended Complaint to conclude that both Torvec and defendant John Spiezio are citizens of the same state and, therefore, there is no basis for diversity jurisdiction under 28 U.S. Code § 1332. Even if John Doe, also known as "Torvec1" was a citizen of another state, having John Spiezio as a defendant destroys the long-recognized requirement for complete diversity. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806), overruled on other grounds Louisville, C. C.R. Co. v. Letson, 43 U.S. (2 How.) 497, 555 (1844). This requirement for complete diversity is strictly construed. See Kresberg v. International Paper Co., 149 F.2d 911, 913 (2d Cir. 1945).
Torvec's Amended Complaint also asserts federal question jurisdiction under 28 U.S. Code § 1337. This section gives the Court jurisdiction over cases "arising under any act of Congress regulating interstate commerce or protecting trade ad commerce against restraints and monologies." Moore, Federal Practice 3d, § 104.43. Torvec's Amended Complaint does not allow the Court to ascertain under which federal law the complaint arises and, therefore, under the well-pleaded complaint rule, the Court finds no federal question jurisdiction. See Louisville Nashville R.R. v. Mottley, 211 U.S. 149, 150-51 (1908). During oral argument, Torvec's counsel presented no good faith basis for these assertions of jurisdiction, conceded that he could not oppose defendant's motion to dismiss also, and acknowledged that the Court had no subject matter jurisdiction under the Amended Complaint. Thus, clearly the Amended Complaint cannot stand, and the Court must grant defendant's motion to dismiss that complaint for lack of subject matter jurisdiction.
Motion for sanctions
The Court is persuaded by defense counsel's arguments regarding the appropriateness of a sanction for frivolously asserting diversity jurisdiction in this case. The Amended Complaint could not possibly be read to support diversity jurisdiction and that conclusion is easily drawn from simply reading the complaint. In the interest of fairness, however, the Court will issue a separate order directing Torvec to show cause before this Court why sanctions should not be imposed.
Motion to Strike
Torvec raises an issue pertaining to a statement made by defendant's counsel during negotiations between him and Torvec's counsel which implicates Federal Rule of Evidence 408 (Compromise and Offers to Compromise). That rule states, in pertinent part, "[e]vidence of conduct or statements made in compromise negotiations is likewise not admissible. "FED. R. EVID. 408. Evidence which would otherwise be discoverable, however, is not inadmissible. Id. In the case at bar, the Court determines that the statement offered in the affidavit of Joseph B. Rizzo, Esq., dated August 3, 2001, filed as Exhibit 9 in Torvec's Reply Brief, and cited and discussed in Torvec's Reply Brief at 3-4, are not admissible and will not be considered.
Motion for leave to file Second Amended Complaint
As previously indicated in response to defendant's motion to dismiss, Torvec filed a motion for leave of the Court to file a Second Amended Complaint. In that complaint, Torvec adds John Spiezio's wife, Elizabeth Spiezio as a defendant, and adds a fourth cause of action, discussed below, as its new basis for federal jurisdiction. Second Amended Complaint and Demand for Jury ("Second Amended Complaint") at 1 5 (attached as Exhibit 7 to Plaintiff's Opposition to Defendant's Motion to Dismiss Together with Plaintiff's Motion for Leave to Serve an Amended Summons and Second Amended Complaint ("Torvec's Motion"). The Federal Rules of Civil Procedure provide that leave to file an amended complaint "shall be freely given when justice so requires." FED. R. CIV. P. 15(a). However, leave to amend may be denied in the face of "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment . . . ." Foman v. Davis, 371 U.S. 178, 182 (1962); see also United States v. Continental Illinois Nat. Bank And Trust Co., 889 F.2d 1248, 1254 (2d Cir. 1989).
At oral argument, Torvec's counsel stated that it had been Torvec's strategy all along to bring a RICO cause of action and that this proposed Second Amended Com plaint was not filed only as a means to provide a basis for federal question jurisdiction.
In the new fourth cause of action, Torvec alleges that each defendant has conducted its activities, and participated, directly or indirectly, in a pattern of racketeering activity in violation of 18 U.S. Code § 1962(c). That section states:
(c) It shall be 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.
Racketeering activity is defined, in pertinent part, as
(1) "racketeering activity" means . . . (B) any act which is indictable under any of the following provisions of title 18, United States Code: . . . section 1343 (relating to wire fraud),
. . . section 1951 (relating to interference with commerce, robbery, or extortion) . . . .
18 U.S. Code § 1961(1)(B) (emphasis added).
Torvec alleges that the defendants' multiple predicate acts of racketeering activity include wire fraud, in violation of 18 U.S. Code § 1343, and interference with interstate commerce, in violation of 18 U.S. Code § 1951. Those sections state in pertinent parts:
§ 1343. Fraud by wire, radio, or television
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than five years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
§ 1951. Interference with commerce by threats or violence
(a) Whoever in any way or degree obstructs, delays, or affects commerce or the movement of any article or commodity in commerce, by robbery or extortion or attempts or conspires so to do, or commits or threatens physical violence to any person or property in furtherance of a plan or purpose to do anything in violation of this section shall be fined under this title or imprisoned not more than twenty years, or both.
(b) As used in this section —
(1) The term "robbery" means the unlawful taking or obtaining of personal property from the person or in the presence of another, against his will, by means of actual or threatened force, or violence, or fear of injury, immediate or future, to his person or property, or property in his custody or possession, or the person or property of a relative or member of his family or of anyone in his company at the time of the taking or obtaining.
(2) The term "extortion" means the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.
(3) The term "commerce" means commerce within the District of Columbia, or any Territory or Possession of the United States; all commerce between any point in a State, Territory, Possession, or the District of Columbia and any point outside thereof; all commerce between points within the same State through any place outside such State; and all other commerce over which the United States has jurisdiction.
Torvec contends that defendants engaged in a scheme to defraud it, its officers, directors and shareholders by making fraudulent misrepresentations "intended to deceive persons of ordinary prudence and comprehension so as to injure the business reputations of TORVEC's officers and managers, and to otherwise harm TORVEC as hereinbefore alleged. The Defendants executed, or attempted to execute, the said scheme through wire transmissions in interstate commerce." Second Amended Complaint at ¶ 29. Torvec repeats in the proposed Second Amended Complaint, that "as the direct and proximate result of the Defendant(s)' injurious falsehood, TORVEC has sustained significant damages, including but not limited to . . . a diminution in the value of TORVEC's publically-traded stock at a minimum trading range equal to Five and no/00 Dollars ($5.00) per share . . . ." Second Amended Complaint at ¶ 19.
To state a RICO claim under 18 U.S. Code § 1962(c), Torvec must allege (1) that the defendant (2) through the commission of two or more acts (3) constituting a "pattern" (4) of "racketeering activity" (5) directly or indirectly invests in, or maintains an interest in, or participates in, (6) an enterprise (7) the activities of which affect interstate or foreign commerce. See Lucky Yeh Inter'l., Ltd. v. Happiness Express, Inc., 1999 WL 147095 (E.D.N.Y. 1999). To avoid dismissal, Torvec's complaint "`must contain either direct or inferential allegations respecting all the material elements necessary to sustain a recovery under some viable legal theory.'" Hitchcock v. Woodside Literary Agency, 15 F. Supp.2d 246, 249 (E.D.N.Y. 1998) (quoting Cohen v. Litt, 906 F. Supp. 957, 962 (S.D.N.Y. 1995) (quotation omitted; emphasis in original)). Not only must Torvec plead sufficiently that defendants violated RICO, it must also show injury suffered as a result of such violation. Id.; 18 U.S. Code § 1964(c).
In its Reply Brief in Further Support of Motion for Leave to Serve Second Amended Complaint ("Torvec's Reply Brief"), Torvec alleges that much of the substance of the Torvec1 postings on Raging Bull's message board were confidential to Torvec's officers and published solely to a three-person Executive Committee. That committee included Keith Gleasman, Torvec's president, Vernon Gleasman, Keith's father, and Arthur H. McElroy, II ("McElroy"), an Oklahoma resident. In a separate suit in Oklahoma, Torvec is suing McElroy alleging that McElroy, and his company, fraudulently concealed the operability of a certain prototype he was to have manufactured. Torvec reasons that of the three-person Executive Committee, McElroy would gain most from devaluing Torvec. Their theory is that if Torvec wins the Oklahoma litigation, damages will be based, in part, on Torvec's value as a going concern. Thus, if McElroy could devalue Torvec, and if he loses the Oklahoma litigation, the damages would supposedly be less onerous. See Torvec's Reply Brief at 2-3. Torvec has also alleged that the postings had the effect of diminishing the value of its stock at least five dollars per share. See Second Amended Complaint at ¶¶ 14 32.
There are actually two suits: McElroy Manufacturing, Inc. v. Gleasman, No. CV-97-751-K(J) (N.D.Okla.), which was stayed pending arbitration, and Gleasman v. McElroy Mfg., Inc., No. 00 CV 987 B(J) (N.D.Okla.). According to defendant, McElroy was awarded $862,699 against the Gleasmans in an arbitration proceeding, and this award is the subject of the second law suit.
The RICO statute defines an enterprise as "`includ[ing] any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.'" DeFalco v. Berns, 244 F.3d 286, 306-07 (2d Cir. 2001) (quoting 18 U.S. Code § 1961(4)). "[E]vidence of an ongoing organization, the associates of which function as a continuing unit, suffices to prove an enterprise." Id. at 307 (citations omitted). Under the statute, § 1962(c), a defendant must be distinct from the enterprise. Id. "`This requirement focuses the section on the culpable party and recognizes that the enterprise itself is often a passive instrument or victim of the racketeering activity.'" Id. (quoting River woods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994)) (internal quotation marks omitted in original).
In its Second Amended Complaint, Torvec names John and Elizabeth Spiezio and John Doe, also known as "Torvec1," as defendants, and then alleges that, "[a]t all relevant times, the Defendants each constituted an `enterprise' within the meaning of 18 U.S.C. § 1961(4). Each enterprise has engaged in, and its activities have affected, interstate commerce." Second Amended Complaint at ¶ 26. This pleading is contrary to the rule in this Circuit that the defendants must be distinct from the "enterprise." See DeFalco v. Berns, 244 F.3d 286. Thus, the Second Amended Complaint fails to allege the existence of an enterprise as required by the RICO statute. Torvec's counsel conceded to the Court during oral argument that the Second Amended Complaint, as presented, was defective in this respect and could not withstand a motion to dismiss. However, he asked leave to present a third amended complaint, or leave to cure the defect in the pleading. Even assuming that this pleading error is curable, the Court finds that the substantive conduct complained of does not amount to racketeering as defined in the statute. Despite specifically requesting Torvec's counsel during oral argument to point to one or more of the postings attached to his Second Amended Complaint which constituted indictable evidence of the crime of wire fraud or the crime of interference with commerce by threats and violence, counsel was unable to do so.
Additionally, the short term of the conduct as alleged here, specifically from March 2000 through October 2000, does not "amount to, or pose a threat of, continuing criminal activity" as required by case law. See, GICC Cap. Corp. v. Tech. Fin. Group, Inc., 67 F.3d 463, 465 (2d Cir. 1995), and therefore, the Court concludes that even a liberal reading of the complaint fails to meet the Second Circuit requirement for a RICO complaint. The Court finds that seven months clearly fails to establish "closed-ended continuity" and further finds no demonstrated threat of open-ended continuity. See H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229 (1989).
Conclusion
The Court grants defendant's motion [5] to dismiss the Amended Complaint [3], denies Torvec's motion [12] for leave to file a second amended complaint and will issue a separate order regarding the defense request for sanctions.
IT IS SO ORDERED.