Efron v. Embassy Suites Inc.

• Decision Date: 08 May 2000
• Docket Number: No. 99-1679,E,CANCIO-SANTO,99-1679
• Citation: 223 F.3d 12
• Parties: (1st Cir. 2000) DAVID EFRON, INDIVIDUALLY, AS A CLASS A SPECIAL PARTNER OF ES HOTEL ISLA VERDE, S.E., A PUERTO RICO CIVIL PARTNERSHIP, AND FOR AND ON BEHALF OF THAT PARTNERSHIP, PLAINTIFF, APPELLANT, V. EMBASSY SUITES (PUERTO RICO), INC., EMBASSY SUITES (ISLA VERDE), INC., PROMUS HOTEL CORPORATION, MORA DEVELOPMENT CORPORATION, FIRST BIG ISLAND STEAKHOUSE, INC., CLEOFE RUBI GONZALEZ, MORAIMA CINTRON DE RUBI, EMMA M.S. HOTEL ISLA VERDE, S.E., CORPORACION DE DESARROLLO HOTELERO, AND FUNDACION SEGARRA BOERMAN E HIJOS, INC., DEFENDANTS, APPELLEES Heard
• Court: U.S. Court of Appeals — First Circuit

Page 12

223 F.3d 12 (1st Cir. 2000)

DAVID EFRON, INDIVIDUALLY, AS A CLASS A SPECIAL PARTNER OF ES HOTEL ISLA VERDE, S.E., A PUERTO RICO CIVIL PARTNERSHIP, AND FOR AND ON BEHALF OF THAT PARTNERSHIP, PLAINTIFF, APPELLANT,

V.

EMBASSY SUITES (PUERTO RICO), INC., EMBASSY SUITES (ISLA VERDE), INC., PROMUS HOTEL CORPORATION, MORA DEVELOPMENT CORPORATION, FIRST BIG ISLAND STEAKHOUSE, INC., CLEOFE RUBI GONZALEZ, MORAIMA CINTRON DE RUBI, EMMA M. CANCIO-SANTOS, E.S. HOTEL ISLA VERDE, S.E., CORPORACION DE DESARROLLO HOTELERO, AND FUNDACION SEGARRA BOERMAN E HIJOS, INC., DEFENDANTS, APPELLEES

No. 99-1679

United States Court of Appeals For the First Circuit

Heard May 8, 2000

Decided August 14, 2000

Guy B. Bailey, Jr. and Alan M. Dershowitz, with whom Victoria B. Eiger and Karin B. Morrell were on brief, for appellant.

Salvador Antonetti-Zequeira for appellees.

Maria del Carmen Taboas on brief for First Big Island Steakhouse, Inc., and Emma M. Cancio-Santos.

Arturo Diaz-Angueira and Roberto Feliberti on brief for Embassy Suites (Puerto Rico), Inc., Embassy Suites (Isla Verde), Inc., and Promus Hotel Corporation.

Luis Sanchez Betances on brief for Mora Development, Cleofe Rubi Gonzalez and Moraima Cintron de Rubi.

Before Selya, Circuit Judge, Coffin, Senior Circuit Judge, and Boudin, Circuit Judge.

Coffin, Senior Circuit Judge

Plaintiff-appellant David Efron, a member of a limited partnership formed to build and operate an Embassy Suites hotel in Puerto Rico, claims that several of his partners intentionally caused the project to experience financial difficulties in a scheme to extract additional money from him and other investors and, ultimately, to squeeze down the value of Efron's substantial interest in the partnership. Efron brought a civil suit under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c), (d), and Puerto Rico law. Concluding that the allegations in the complaint did not show RICO violations, the court dismissed the federal claims and declined to exercise supplemental jurisdiction over the Commonwealth claims. See Efron v. Embassy Suites (Puerto Rico), Inc., 47 F. Supp.2d 200 (D.P.R. 1999). We affirm, agreeing with the district court that appellant has failed to adequately allege a "pattern of racketeering activity," see 18 U.S.C. § 1962(c), but adding elaboration to its rationale.

I. Factual Background

We narrate the allegations contained in the complaint and RICO case statement in the light most favorable to appellant. See Feinstein v. Resolution Trust Corp., 942 F.2d 34, 37 (lst Cir. 1991). Efron and his associates formed the ES Hotel Isla Verde, S.E. Partnership ("the Partnership") in 1995 to develop and operate an Embassy Suites hotel and casino in the Carolina section of San Juan, Puerto Rico. Efron contributed approximately $5 million in property and cash, receiving in return twenty-two percent of the equity in the project. Of the six other partners, four are defendants in this case: Cleofe Rubi Gonzalez ("Rubi"); his wife, Moraima Cintron de Rubi ("Cintron"); Mora Development Corporation ("MDC"), a company owned by Rubi; and Embassy Suites Isla Verde, Inc. ("ESIV"). Two other partners are described as co-victims, although they did not join Efron's suit: Corporacion De Desarollo Hotelero ("CDH"), a public corporation that is a subsidiary of Puerto Rico's Department of Tourism; and Fundacion Segarra Boerman e Hijos ("FSBH"). Also named as defendants were several corporations affiliated with the defendant partners, including Embassy Suites (Puerto Rico), Inc. ("ESPR"), a company hired by the Partnership to manage the hotel, and First Big Island Steakhouse, Inc., a Rubi-controlled company that leased space from the Partnership for a restaurant ("Outback"). Emma Cancio Santos, an attorney for ESIV and Rubi, also was named as a defendant.

Efron alleges that the defendants deliberately caused the hotel project to lose money by generating excessive construction costs, engaging in sweetheart leases with the on-site restaurant and gift shop, overpricing rooms, and performing other acts of mismanagement. According to the complaint, ESPR purposefully created artificial cash shortfalls, which under the Partnership agreement could be covered by capital calls to the limited partners. The agreement specified that a partner who did not provide the requested capital could have his interest reduced proportionately. Efron alleges that, to protect his initial investment and avoid losing his equity, he was forced to invest an additional $1 million in response to such capital calls.¹

Efron filed suit in October 1997. The amended complaint identified seventeen instances of alleged mail or wire fraud during a twenty-one-month period as the unlawful acts supporting a RICO claim, the first of which was a letter sent to the partners by Rubi on January 11, 1996, stating that the project was experiencing cost overruns of about $7 million. The subsequent letters fall into two general categories: (1) communications that relate to the project's cost overruns and possible solutions, namely, capital contributions from the partners and refinancing, and (2) communications that concern appellant's efforts to review the Partnership books and obtain information about the restaurant and other lease arrangements.

In addition to the substantive RICO claim, see 18 U.S.C. § 1962 (c), the amended complaint asserted a RICO conspiracy cause of action, see 18 U.S.C. § 1962(d), as well as claims under Commonwealth law for fraud, breach of contract, breach of fiduciary duty, and violation of the Puerto Rico RICO act.

The district court rejected defendants' argument that the amended complaint lacked the particularity required for fraud claims under Fed. R. Civ. P. 9(b), but it concluded that appellant had not adequately alleged a pattern of racketeering activity. It alternatively ruled that Efron lacked standing to bring the RICO claims either individually or derivatively on behalf of the Partnership. Having dismissed the federal RICO claims, the court declined to exercise supplemental jurisdiction to hear the Commonwealth law claims. On appeal, Efron contends that the court improperly viewed the alleged facts and inferences in the defendants' favor, leading it to conclude wrongly that he had failed to establish the elements of a RICO violation and conspiracy. He further maintains that the amended complaint demonstrates his standing, both individually for his unique damages and derivatively for the Partnership.

We turn now to the issue which we deem dispositive - whether the amended complaint described a "pattern" of racketeering activity. We first sketch the general principles governing RICO claims and then evaluate appellant's specific contentions in light of those standards.

II. Discussion

To state a RICO claim under section 1962(c), a plaintiff must allege each of the four elements required by the statute: "'(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.'" Feinstein, 942 F.2d at 41 (quoting Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985)).² This case centers on whether Efron alleged sufficient facts to support a jury finding of a "pattern," there being no dispute that the complaint adequately alleged the other components of a RICO violation. By statute, the "pattern" element requires a plaintiff to show at least two predicate acts of "racketeering activity," which is defined to include violations of specified federal laws, such as the mail and wire fraud statutes, see 18 U.S.C. § 1961(1)(B), (5). Although showing two predicate acts is the only statutory requirement, case law establishes that this is not sufficient to prove a "pattern" - the plaintiff also must demonstrate that the "predicates are related, and that they amount to or pose a threat of continued criminal activity." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989); see also Feinstein, 942 F.2d at 44.

We have more than once remarked upon the difficulty of articulating concrete guidelines for this "continuity plus relationship" standard for identifying a pattern. See Schultz v. Rhode Island Hosp. Trust Nat'l Bank, N.A., 94 F.3d 721, 731 (lst Cir. 1996); Apparel Art Int'l, Inc. v. Jacobson, 967 F.2d 720, 722 (lst Cir. 1992); see also H.J. Inc., 492 U.S. at 236 ("[D]eveloping a meaningful concept of 'pattern' within the existing statutory framework has proved to be no easy task.").³ The Supreme Court has noted that the "relationship" portion of the standard is easier to grasp, in part because there exists a relevant statutory definition in another portion of the legislation of which RICO was a part. See H.J. Inc., 492 U.S. at 240. Under Title X of the partially repealed Organized Crime Control Act of 1970, the pattern requirement was defined "solely in terms of the relationship of the defendant's criminal acts one to another: '[C]riminal conduct forms a pattern if it embraces criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.'" Id. (quoting 18 U.S.C. § 3575(e)). The parties do not dispute the relatedness of the communications at issue here.

The continuity element, which lacks statutory illumination, has proved more puzzling. Noting that it is "difficult to formulate in the abstract any general test for continuity," the Supreme Court in H.J. Inc. nonetheless provided a starting point for analysis. See 492 U.S. at 241-43; Feinstein, 942 F.2d at 45. We previously have summarized the court's guidance as follows:

For there to be continuity, the plaintiff must show that the related predicates "amounted to, or posed a threat of, continued criminal activity."... Under the "amount[ing] to" approach, "[a] party alleging a RICO violation may demonstrate continuity... by proving a series of related predicates extending over a...