R.C.M. EXECUTIVE GALLERY CORP. v. ROLS CAPITAL CO. No. 93 Civ. 8571 (JGK).
901 F.Supp. 630 (1995)
R.C.M. EXECUTIVE GALLERY CORP., Carmen Martinez and Roger Mojer, Plaintiffs, v. ROLS CAPITAL CO., Marvin Goldman, Paul Goldman, Jerome Goldman and Alex Reizner, Defendants.
United States District Court, S.D. New York.
September 25, 1995.
Carmen Pacheco, Betty Lugo, Paheco & Lugo, New York City, for plaintiffs.
Jordan B. DeFlora, Pearl River, NY, for defendant Rols Capital Co.
OPINION AND ORDER
KOELTL, District Judge:
This case arises out of a loan made to the plaintiffs by Rols Capital Co. ("Rols partnership"), a New Jersey partnership that, following the plaintiffs' repayment of the loan, filed for bankruptcy in June 1991. Alleging that the Rols partnership charged them a usurious rate of interest, the plaintiffs have sued various individual defendants along with J.K. Funding, which is a New Jersey corporation doing business under the name Rols Capital Co. ("J.K. Funding" or "Rols corporation"). J.K. Funding purchased the assets of the Rols partnership pursuant to an asset purchase agreement and as part of the bankruptcy reorganization plan of the Rols partnership. The plaintiffs seek to hold J.K. Funding liable for their various claims under a theory of successor liability.
J.K. Funding has moved for summary judgment under Fed.R.Civ.P. 56, arguing that it cannot be held liable as a successor to the Rols partnership. J.K. Funding also has moved, in the alternative, to dismiss the plaintiffs' claims against it under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. ("RICO"), pursuant to Fed.R.Civ.P. 12(b)(6), arguing that the plaintiffs have failed to state a claim upon which relief can be granted. For the reasons given below, J.K. Funding's motion for summary judgment is denied, and its motion to dismiss the RICO claims is granted.
The following facts are undisputed for purposes of this motion. In January 1988, the plaintiffs, R.C.M. Executive Gallery, Corp. ("R.C.M."), Carmen Martinez ("Martinez") and Roger Mojer ("Mojer"), obtained a commercial loan of $55,000 from the Rols partnership in connection with their purchase of a bar and restaurant. R.C.M., a minority-owned business, is a New York corporation, Martinez is the president of R.C.M., and Mojer is Martinez's husband. As collateral for the loan, Martinez executed a mortgage on her home, Martinez and Mojer executed individual guarantees, and Martinez and Mojer executed a confession of judgment.
The plaintiffs repaid the loan in full, making their last payment on January 25, 1993. The plaintiffs then sued the defendants in December, 1993, alleging that the Rols partnership charged them a usurious rate of interest. They have asserted claims for, among other things, misrepresentation, fraud, and violations of RICO, federal and state usury laws, and federal lending laws.
All of the individual defendants were associated with the Rols partnership: Marvin Goldman was the president and owner; Paul Goldman was an officer and an owner; Alex Reizner was an officer; and Jerome Goldman was an attorney employed by and retained by the Rols partnership. J.K. Funding purchased the assets of the Rols partnership in April 1993 pursuant to the bankruptcy court order confirming the Rols partnership's plan of reorganization and an asset purchase agreement. These assets primarily consisted of outstanding loans. The plaintiffs allege that they never received notice of the bankruptcy proceeding and paid off their loan without knowing that the Rols partnership had filed a petition. (See Response to Rule 3(g) statement at ¶ 22.)
Jerry Kaplan ("Kaplan"), a former partner of the Rols partnership, currently owns J.K. Funding. Kaplan sold his interest in the Rols partnership on or about July 1, 1987, before the loan that is at issue in this case was made to the plaintiffs. Kaplan registered the name "Rols Capital Co." with the New Jersey Secretary of State, as a corporation, to facilitate his collection of the outstanding
J.K. Funding argues that as a matter of law it cannot be held liable for any wrongdoing on the part of the Rols partnership and that it is therefore entitled to summary judgment.
The Court first considers the defendant's motion for summary judgment. J.K. Funding argues that it is entitled to summary judgment because it is a separate and distinct entity from the Rols partnership and cannot be held liable for the plaintiffs' claims under the law of successor liability. Because there are factual issues that preclude a determination of whether the defendant is liable as a successor to the Rols partnership, the defendant's summary judgment motion is denied.
Summary judgment may not be granted unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986); Gallo v. Prudential Residential Servs. Ltd. Partnership, 22 F.3d 1219, 1223 (2d Cir.1994). In determining whether summary judgment is appropriate, a court must resolve all ambiguities and draw all reasonable inferences against the moving party. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962)); see also Gallo, 22 F.3d at 1223. Summary judgment is improper if there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party. See Chambers v. TRM Copy Centers Corp., 43 F.3d 29, 37 (2d Cir.1994).
The plaintiffs have asserted both state and federal claims against the defendant. At oral argument, the parties agreed that New Jersey successor liability law applies to both the state and federal claims;
In any case, it is unnecessary to resolve this issue at this time because, with the exception of the strict products liability context, New Jersey follows a general rule of successor liability that courts commonly apply to both state and federal claims. See Luxliner P.L. Export, Co. v. RDI/Luxliner, Inc., 13 F.3d 69, 73 (3d Cir.1993) (holding that outside the strict products liability context, New Jersey courts follow traditional successorship doctrine); Glynwed, Inc. v. Plastimatic, Inc., 869 F.Supp. 265, 270 (same); Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F.Supp. 834, 838 (S.D.N.Y. 1977) (applying traditional successorship doctrine to claims based on federal securities laws); N. Storonske Cooperage Co., 174 B.R. at 375 (refraining from deciding which law applies to federal claims because state and federal rules are parallel).
Although J.K. Funding argues that established successorship principles do not apply to the plaintiffs' RICO claims against it, it has offered nothing to support this argument. The few courts to confront this issue have held that the principles of successor liability apply to RICO claims. See, e.g., Continental Grain Co. v. Pullman Standard, Inc., 690 F.Supp. 628 (N.D.Ill.1988); Ghouth v. Conticommodity Servs., Inc., 642 F.Supp. 1325, 1328 (N.D.Ill.1986) (recognizing the theory in the RICO context, but finding the pleading deficient); Rodriguez v. Banco Cent., 777 F.Supp. 1043, 1065 (D.P.R.1991), aff'd, 990 F.2d 7 (1993). Only the Rodriguez case offers any discussion about the appropriateness of successorship principles in RICO actions. In its decision, the court recognized the viability of successor liability in the RICO context but declined to impose liability for RICO offenses on a successor bank on the facts of that case. The court noted that "if there is a showing of knowledge, constructive or actual, by the purchaser at the time of the transaction, the equation is altered and liability might lie." 777 F.Supp. at 1065. Because the defendant is unable to point to any provision in the RICO statute or to any other authority to support its assertion that successor liability cannot apply to RICO claims, the Court finds that successor liability can apply to all of the plaintiffs' claims against the defendant J.K. Funding, including the RICO claims.
As a general rule, a successor corporation is not responsible for the debts and liabilities of its predecessor. Ramirez v. Amsted Indus., Inc., 86 N.J. 332, 340, 431 A.2d 811, 815 (1981); Fletcher Cyc. Corps. § 7122 (Perm. ed. & Supp.1994).
The defendant argues that the theory of successor liability does not apply in this case because the defendant is a separate and distinct entity that had nothing to do with the loan at issue. This argument reveals a complete misunderstanding of the very principle of successor liability, which is fundamentally a form of secondary, vicarious liability imposed upon an innocent party. As the court in Wilkerson v. C.O. Porter Mach. Co., 237 N.J.Super. 282, 567 A.2d 598 (N.J.Super.Ct.Law Div.1989), explained, a plaintiff alleging successor liability "does not allege that the purchaser of the assets did, or failed to do, anything that contributed to his injury." 237 N.J.Super. at 300-01, 567 A.2d at 607-08. Instead, the court stated, a defendant's liability depends on the relationship between the defendant and the bankrupt.
Wilkerson, 237 N.J.Super. at 300-01, 567 A.2d at 607-08. The issue of whether Jerry Kaplan knew about any alleged wrongdoing by Rols may, indeed, be relevant to the ultimate determination of whether, under the appropriate standards, J.K. Funding is a successor to the Rols partnership. However, this issue, which involves numerous questions of fact, cannot be resolved in the context of a motion for summary judgment.
J.K. Funding also argues that successor liability does not apply to any of the plaintiffs' state or federal claims because it purchased the assets of the Rols partnership pursuant to an asset purchase agreement and as part of the bankruptcy reorganization plan of the Rols partnership without agreeing to assume liability for claims like the plaintiffs'. There is, however, authority that neither party cites indicating that neither New Jersey successor liability law nor the Bankruptcy Code precludes the application of successor liability under such circumstances.
The only New Jersey courts to address this issue — two New Jersey superior courts not cited by the parties — held that the traditional doctrine of successor liability remains viable even when there is an intervening bankruptcy. In Wilkerson, 237 N.J.Super. 282, 567 A.2d 598, the court held that where the defendant purchased in the context of a Chapter 11 bankruptcy proceeding the assets of a manufacturer of a product that had previously caused injury to the plaintiff, the defendant was not insulated, as a matter of law, from the imposition of successor liability. Id. at 285, 567 A.2d at 599. The court noted that "[t]he mere fact that the bankruptcy order approve[d] a sale purporting to transfer assets free and clear of various claims ... should not be determinative...." Id. at 288, 567 A.2d at 601. After examining the leading New Jersey cases that outlined the doctrine of successor liability in that state, the Wilkerson court concluded that there was nothing in those decisions to "support the argument that a transfer in bankruptcy is to be shielded from exposure to successor liability." Id. at 292, 567 A.2d 598. Instead, the issue of whether the defendant could be held liable as a successor required the resolution of issues of both law and fact, precluding summary judgment. Id. at 303-04, 567 A.2d at 609.
The court in Goncalves v. Wire Tech. & Mach. Co., 253 N.J.Super. 327, 601 A.2d 780 (N.J.Super.Ct.Law Div.1991), reached a similar
Furthermore, there is no federal preemption of state law successor liability merely because the sale of assets occurred in a bankruptcy proceeding. See Goncalves at 331, 601 A.2d at 782 (noting that there is no federal preemption of state successorship liability law); In re Savage Indus., Inc., 43 F.3d 714, 717, 723 (1st Cir.1994) (the bankruptcy court could not enjoin the prosecution of a state-law based successor product-line liability action against an all-asset transferee when the state court plaintiff was not afforded appropriate notice of either the material terms of the all-asset transfer or the Chapter 11 plan); Everest v. American Transp. Corp., 685 F.Supp. 203, 207-08 (D.Minn.1988) (declining to impose successor liability for a products liability claim on a company that purchased the assets of another company in bankruptcy under a plan that specified that the purchaser would assume only certain liabilities and granting summary judgment for the defendant, but only after analyzing the facts of the case and concluding that they did not fall within any of the recognized exceptions to the no-successor liability rule); see also Ross Controls, Inc. v. Department of the Treasury, 160 B.R. 527, 532 (E.D.Pa.1993) (citing Goncalves in support of the proposition that filing for bankruptcy under Chapter 7 does not preclude a company from having a successor corporation for the purposes of tax liability). This is particularly true when the plaintiff does not receive notice of the bankruptcy and accordingly fails to pursue possible remedies in that proceeding.
Contrary to the defendant's assertion, the Court of Appeals for the Second Circuit has not decided this issue. J.K. Funding incorrectly cites Forde v. Kee-Lox Mfg. Co., 437 F.Supp. 631 (W.D.N.Y.1977), aff'd on other grounds, 584 F.2d 4 (2d Cir.1978), to support its argument. J.K. Funding relies on the district court's reasoning in that case; however, the Court of Appeals specifically did not affirm that basis of the lower court's decision. In Forde, the district court granted summary judgment for the defendant on the plaintiff's Title VII claim where the defendant had purchased the assets of the allegedly culpable party in a bankruptcy liquidation sale "free of all claims." Forde, 437 F.Supp. at 635. In affirming the decision of the district court, the Court of Appeals explicitly noted that it "express[ed] no view" on the district court's reasoning, but affirmed the district court's decision concluding that, on the facts, the defendant could not be held liable as a successor. Forde, 584 F.2d at 5-6. Indeed, this explicit refusal indicates that the Court of Appeals was not prepared to accept the blanket proposition J.K. Funding espouses in this case.
The opinion by the Court of Appeals for the Seventh Circuit in Chicago Truck Drivers, 59 F.3d 48, is particularly persuasive on this issue. In that case, the court held that successor liability applies to companies that obtain assets as a result of a bankruptcy proceeding. The court reasoned that there was no reason to offer such companies protection from successor liability that is not available for companies that are distressed but not yet bankrupt. Id. at 50.
The court also rejected the argument that successor liability under such circumstances would frustrate the scheme of the Bankruptcy Code by giving unsecured creditors priority over secured creditors. Id. at 51. The court stated that a successor liability claim "does not directly implicate the Bankruptcy Code, since the underlying bankruptcy proceeding is long over." Id. at 50 n.
In this case, the case for successor liability is even stronger: unlike the plaintiffs in Chicago Truck Drivers, the plaintiffs here allege that they had no notice of the prior bankruptcy proceedings and therefore never pursued a claim in bankruptcy. There is no per se rule under state or federal law that would prevent the application of successor liability to state and federal causes of action asserted against J.K. Funding; instead, whether successor liability applies is a question of fact. As the Supreme Court has stated, "in light of the difficulty of the successorship question, the myriad factual circumstances and legal contexts in which it can arise, and the absence of congressional guidance as to its resolution, emphasis on the facts of each case as it arises is especially appropriate." Howard Johnson Co., Inc. v. Detroit Local Joint Exec. Bd., 417 U.S. 249, 256, 94 S.Ct. 2236, 2240, 41 L.Ed.2d 46 (1974).
In this case, the plaintiffs point to various issues of fact in support of their argument that, under the appropriate state and federal tests, J.K. Funding may be liable as a successor to the Rols partnership. They note, among other things, that J.K. Funding was to have the exclusive right to conduct business under the name Rols Capital Co.; that key management personnel of the Rols partnership would continue at J.K. Funding, including the in-house counsel; that Marvin Goldman and Paul Goldman agreed to assist Kaplan in collecting various loans; that J.K. Funding would continue at the same address and with the same telephone number as the Rols partnership; that J.K. Funding would receive a loan from Marvin Goldman; that Marvin Goldman and Paul Goldman would serve as consultants to J.K. Funding; and that there was a cessation of the Rols partnership's business when J.K. Funding was formed. Relying on these facts, the plaintiffs allege that J.K. Funding is a mere continuation of Rols as indicated by the alleged continuity of ownership, continuity of management, continuity of personnel, continuity of physical location, and continuity of assets and general business operations. Because the Court cannot resolve these issues of material fact in the context of a motion for summary judgment,
The court notes, however, that although the parties have not argued the issue, the pleadings are woefully deficient in arguing successor liability. Therefore, the plaintiffs are directed to file an amended complaint stating with specificity their claim for successor liability and the basis for that claim, and the defendants will be afforded the opportunity to respond. See Musikiwamba v. ESSI, Inc., 760 F.2d 740 (7th Cir.1985) (acknowledging successor liability for claims under 42 U.S.C. § 1981, reversing dismissal of complaint, and remanding to provide an opportunity to amend the grossly deficient allegations in the complaint).
J.K. Funding also moves to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) the plaintiffs' RICO claims under §§ 1962(c), 1962(a) and 1962(d).
In their complaint, the plaintiffs allege that defendants Marvin Goldman, Paul Goldman, Jerome Goldman, Alex Reizner, and the Rols partnership violated § 1962(c). That subsection provides:
18 U.S.C. § 1962(c). See Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir.1983), cert. denied sub nom. Moss v. Newman, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984); Curiale v. Capolino, 883 F.Supp. 941, 947 (S.D.N.Y.1995).
Under this section, the RICO "person" must conduct the affairs of the RICO "enterprise" through a pattern of racketeering activity. In their complaint, the plaintiffs allege that the Rols partnership constituted the RICO "enterprise" and that Marvin Goldman, Paul Goldman, Jerome Goldman, and Alex Reizner were "persons" who were employed by or associated with the Rols partnership. (Compl. ¶¶ 79-80.) In their RICO case statement, the plaintiffs allege an alternative associated-in-fact enterprise consisting of the Rols partnership, Marvin Goldman, Paul Goldman, Alex Reizner and Jerome Goldman. (RICO case statement at 33.) J.K. Funding argues that the plaintiffs fail to state a legally sufficient claim against J.K. Funding because § 1962(c) requires that the "enterprise" and the "persons" who participated in the conduct of the enterprise be separate and distinct.
J.K. Funding is correct that under § 1962(c), the "enterprise" and the "persons" must be separate and distinct. See Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir.1994) (under § 1962(c), the RICO "person" who conducts the affairs of the RICO "enterprise" through a pattern of racketeering activity must be distinct from the enterprise); see also Bennett v. United States Trust Co. of New York, 770 F.2d 308, 315 (2d Cir.1985) ("[W]e follow the majority view and hold that under section 1962(c) a corporate entity may not be simultaneously the `enterprise' and the `person' who conducts the affairs of the enterprise through a pattern of racketeering activity."), cert. denied, 474 U.S. 1058, 106 S.Ct. 800, 88 L.Ed.2d 776 (1986). A corporate entity cannot be both the RICO person and the RICO enterprise under § 1962(c). Riverwoods, 30 F.3d at 344. Accordingly, the Rols partnership, through J.K. Funding, its alleged successor, cannot be liable for a violation of § 1962(c) under the plaintiffs' allegation that the Rols partnership constituted the RICO enterprise. Recognizing the clarity of the law on this point, the plaintiffs withdrew at oral argument their allegation that the Rols partnership
The plaintiffs' alternative allegation of an associated-in-fact enterprise is also insufficiently distinct from the Rols partnership to withstand a motion to dismiss. Although the Court of Appeals has explained that a § 1962(c) claim can be sufficient where there is only partial overlap between the RICO person and the RICO enterprise, see, e.g., Jacobson v. Cooper, 882 F.2d 717, 720 (2d Cir.1989) (citing Cullen v. Margiotta, 811 F.2d 698, 730 (2d Cir.), cert. denied sub nom. Nassau County Republican Comm. v. Cullen, 483 U.S. 1021, 107 S.Ct. 3266, 97 L.Ed.2d 764 (1987)), and that, therefore, a RICO enterprise can consist of a corporate defendant associated with others to form an enterprise that is "sufficiently distinct" from the corporate entity itself, the "distinctness requirement may not be circumvented" by alleging a RICO enterprise that "consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant...." Riverwoods, 30 F.3d at 344 (citations omitted).
Id. (citations omitted); see also Rodriguez, 777 F.Supp. at 1054 ("Under 1962(c), the enterprise and the `person' who violates the statute must be distinct from each other, the former being exempt from liability, the latter being the targeted defendant. The distinction requirement is not satisfied by merely naming a corporation and its employees, affiliates, and agents as an association-in-fact, since a corporation acts through its employees, subsidiaries and agents, and would thereby be merely associating with itself.") (citations omitted).
Here, the plaintiffs make conclusory allegations in the RICO case statement that the associated-in-fact enterprise is distinct from the Rols partnership acting through its employees and agents. For example, they claim:
(RICO case statement at 33-35.)
Although the plaintiffs rely on the fact that the actions of the defendants allegedly violated
Like the plaintiffs in Riverwoods and Langley, the plaintiffs here offer no evidence that the partnership and the individuals defendants had any association aside from the ordinary business of the partnership. Indeed, to support their fraud claim the plaintiffs allege in their complaint that "[a]t all times set forth herein Marvin Goldman, Paul Goldman, Jerome Goldman and Alex Reizner were acting as agents for ROLS, and were acting within the apparent scope of their authority as employees and/or agents of ROLS." (Compl. ¶ 71.) Therefore, the plaintiffs have failed to set forth a sufficient claim under § 1962(c). See, e.g., C.A. Westel de Venezuela v. American Tel. & Tel. Co., No. 90 Civ. 6665, 1994 WL 558026, at *8 (S.D.N.Y. Oct. 11, 1994) (dismissing a claim under § 1962(c) for failure to state a claim where "[p]laintiff's complaint nowhere pleads facts that separate and distinguish the RICO enterprise from the named defendants nor does it plead facts that suggest that the actions taken by defendants in this case are sufficiently distinguishable from the regular activities of [the corporate defendant] to permit the existence of a distinct enterprise").
In some cases where the pleading of an associated-in-fact enterprise is apparently deficient, courts have permitted a plaintiff to proceed to trial, where the plaintiff will have the burden of proving a sufficiently distinct enterprise under § 1962(c). See, e.g., Greenfield v. Professional Care, Inc., 677 F.Supp. 110, 116 (E.D.N.Y.1987); Kress v. Hall-Houston Oil Co., No. Civ. A. 92-543, 1993 WL 166274, at *9 (D.N.J. May 12, 1993). Here, however, given the obvious deficiency in the plaintiffs' pleadings, the pleadings are not sufficient to withstand a motion to dismiss. The plaintiffs should, however, be afforded the opportunity to file an amended complaint if they can in good faith make the necessary allegations to proceed with their claim.
Plaintiffs' § 1962(a) claim contained in their RICO case statement fares no better. Section 1962(a) provides as follows:
18 U.S.C. § 1962(a). To state a claim under this section, the plaintiffs must make two basic allegations: (1) that the defendants used or invested racketeering income to acquire or maintain an interest in the alleged enterprise; and (2) that the plaintiffs suffered injury as a result of that investment by the defendants. O & G Carriers, Inc. v. Smith, 799 F.Supp. 1528, 1542 (S.D.N.Y. 1992). The Court of Appeals explicitly has held that to state a civil claim under § 1964(c) for a violation of Section 1962(a),
The plaintiffs' claim under § 1962(a) is deficient because the plaintiffs have not alleged that the defendants' investment of racketeering income injured them. Although the plaintiffs claim in their RICO case statement that "[t]he investment of [the income derived from the pattern of racketeering activity and the collection of the unlawful debt] in the enterprises enabled defendants to continue their fraudulent behavior and cause continuous injury to plaintiffs[,]" this allegation is insufficient to state a claim. See, e.g., Update Traffic Sys., Inc. v. Gould, 857 F.Supp. 274, 282-83 (E.D.N.Y.1994) ("Th[e] investment-injury requirement is not satisfied merely because the defendant/enterprise has reinvested money from the racketeering acts back into its own operations, thus enabling the scheme to continue.... [P]laintiff must show that it was injured by the investment itself."); Dayton Monetary Assocs. v. Donaldson, Lufkin & Jenrette, Nos. 91 Civ. 2050, 91 Civ. 4944, 91 Civ. 5000, 91 Civ. 5622, 91 Civ. 6432, 91 Civ. 2059, 1993 WL 410503, at *3 (S.D.N.Y. Oct. 14, 1993) ("Plaintiffs' allegation that the investment of racketeering income created and sustained the enterprises by providing funding and `the appearance of legitimacy' is insufficient.") (citations omitted); Vista Co. v. Columbia Pictures Indus., Inc., 725 F.Supp. 1286, 1299-1300 (S.D.N.Y. 1989) (holding that the allegations that the defendant invested or used the income derived from its pattern of racketeering activity "to facilitate its own general operations and that the continuing operation of [the defendant] injured the plaintiffs" did not sufficiently allege investment injury under § 1962(a)); DeMuro v. E.F. Hutton, 662 F.Supp. 308, 308-09 (S.D.N.Y.1986) (dismissing a claim under § 1962(a) where the plaintiffs alleged that the investment of the racketeering proceeds created incentive for and rewarded the commission of the fraud and financed the defendant's office expenses, permitting the continuing defrauding of the plaintiffs); Galerie Furstenberg v. Coffaro, 697 F.Supp. 1282, 1288-89 (S.D.N.Y.1988) (even if the investment of funds derived from the alleged racketeering activity "enabled defendants to pursue their racketeering activities with enhanced vigor," the alleged injury was caused by the alleged underlying racketeering activity and not by the investment of racketeering income).
Therefore, the plaintiffs' claim under § 1962(a) is dismissed without prejudice.
The plaintiffs also assert a claim under § 1962(d), which provides that "[i]t shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b) or (c) of this section." 18 U.S.C. § 1962(d). In order to state a claim for conspiracy, the plaintiffs must claim that each alleged conspirator agreed to commit at least two predicate acts of racketeering activity.
The conclusory nature of the plaintiffs' allegations with respect the alleged conspiracy requires dismissal of the plaintiffs' claim under § 1962(d). The only conspiracy claim is made in the RICO case statement, and the plaintiffs have failed to allege with particularity an agreement by the Rols partnership to commit the requisite predicate acts. In their case statement, the plaintiffs merely assert that the defendants "conspired to defraud the plaintiffs," "assent[ed] to the fraudulent activities," and were "aware of the monthly loan payments." (RICO case statement at 38). These allegations are insufficient because they do not provide a adequate basis from which to infer a conspiracy. See Hecht, 897 F.2d at 25 ("Because the core of a RICO civil conspiracy is an agreement to commit predicate acts, a RICO civil conspiracy complaint, at the very least, must allege specifically such an agreement.") (citations omitted); Trautz v. Weisman, 809 F.Supp. 239, 246 (S.D.N.Y.1992) (at the very least, a plaintiff must allege facts that imply an agreement to commit two predicate acts to state a sufficient claim under § 1962(d); there must be actual knowing participation by the defendant; mere knowledge of the conspiracy is insufficient); Laverpool v. New York City Transit Auth., 760 F.Supp. 1046, 1060 (E.D.N.Y.1991) ("Bare or conclusory allegations of participation in a conspiracy under section 1962(d) will not avail on a motion to dismiss, and the plaintiff must plead allegations that each defendant knowingly agreed to participate in the conspiracy, particularly when the predicate acts alleged are fraud.") (citations omitted); Friedman v. Arizona World Nurseries Ltd. Partnership, 730 F.Supp. 521, 548-49 (S.D.N.Y.1990), aff'd, 927 F.2d 594 (2d Cir.1991) (conclusory allegations that did not sufficiently allege that each defendant personally agreed to commit two or more predicate acts held insufficient). Therefore, plaintiffs' § 1962(d) claim is dismissed.
Because leave to replead is to be liberally granted, the plaintiffs are granted leave to replead their RICO claims in their complaint. See Devaney v. Chester, 813 F.2d 566, 569 (2d Cir.1987) (leave to amend pleadings "shall be freely given when justice so requires"); Trautz v. Weisman, 809 F.Supp. 239, 249 (S.D.N.Y.1992). The pleadings in this case, however, have been thoroughly deficient, and the plaintiffs are reminded that they must have a good faith basis for making the specific legal and factual allegations that would be required to replead their claims.
For all of the foregoing reasons, J.K. Funding's motion for summary judgment is denied and its motion, in the alternative, to dismiss the plaintiffs' RICO claims against it is granted. The RICO claim is dismissed without prejudice. The plaintiffs are directed to file an amended complaint within 20 days setting forth the particulars of their claims for successor liability. The plaintiffs are granted leave to replead their RICO claim in that complaint if they are able to do so. The parties should also consult with Magistrate Judge Francis on the schedule to submit responses to the amended complaint and to submit the Joint Pretrial Order.
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