235 F.3d 629 (D.C. Cir. 2001), 00-7021, W. Assoc. Limited Partnership v. Market Square Assoc.

Docket Nº:00-7021
Citation:235 F.3d 629
Party Name:Western Associates Limited Partnership, individually and on behalf of Avenue Associates Limited Partnership, Appellant v. Market Square Associates, et al., Appellees
Case Date:January 05, 2001
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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235 F.3d 629 (D.C. Cir. 2001)

Western Associates Limited Partnership, individually and on behalf of Avenue Associates Limited Partnership, Appellant

v.

Market Square Associates, et al., Appellees

No. 00-7021

United States Court of Appeals, District of Columbia Circuit

January 5, 2001

Argued November 28, 2000

Page 630

Appeal from the United States District Court for the District of Columbia (No. 97cv02452)

Barry Wm. Levine argued the cause for appellant. With him on the briefs was Richard J. Conway.

Paul B. Gaffney argued the cause for appellees. With him on the brief were Paul Martin Wolff, Joseph B. Tompkins, Jr., and Christine Liverzani Prame. James D. Miller, Michael R. Smith and Peter M. Todaro entered appearances.

Before: Henderson, Rogers and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Rogers.

Rogers, Circuit Judge:

In this appeal the court again addresses the continuity prong of the "pattern of racketeering activity" requirement of the

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Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq. Western Associates Limited Partnership ("Western") sued various individuals and investors associated with Market Square Associates (collectively, "Market"), its partner in the development of a real estate project known as Market Square. Western alleged violations under RICO and District of Columbia law based on an accounting dispute in the partnership. The district court, applying the multi-factor analysis of Edmondson & Gallagher v. Alban Towers Tenants Association, 48 F.3d 1260 (D.C. Cir. 1995), dismissed the complaint pursuant to Fed. R. Civ. P. 12(b)(6) because Western failed to allege the requisite pattern of racketeering activity.1 Western contends that in finding the "continuity" element lacking, the district court erred by failing to focus on the length of the time period during which Market's predicate acts occurred, and misread Edmondson. We disagree, and accordingly we affirm.

I.

Market Square is a mixed-use property in downtown Washington, D.C. that consists of office and retail space and residential condominium units. In 1985, Western, a District of Columbia limited partnership, formed Avenue Associates Limited Partnership ("Avenue Associates") to "develop, own, manage, and ultimately dispose of the Market Square Project." In 1987, Western invited Market Square Associates, a Washington, D.C. general partnership, to join Avenue Associates. Upon completion of the construction of the project, Western held a 30 percent limited partnership interest, and Market Square Associates owned a 67.5 percent limited partnership interest and a 2.5 percent general partnership interest.

In October 1997, Western filed suit in the United States District Court for the District of Columbia, alleging that beginning in 1988 and continuing for more than eight years thereafter, Market repeatedly violated partnership agreements, transmitted fraudulent accounting statements, and stole the value of Western's partnership interest. At the heart of the alleged fraud are alleged misrepresentations of expected costs and profits that Market made in budget projections for the Market Square project. According to the complaint, after Western was deceived into approving a fraudulent budget in 1989, Market covered up its misrepresentations by exaggerating the economic viability of the project in annual financial statements. Western alleged that Market also violated the terms of the partnership agreement regarding the priority of cash flow distribution by improperly favoring itself over Western for cash flow disbursements, and caused the partnership to repay loans for cost overruns that Market alone was responsible for repaying. Western asserted that as a result of Market's violations of the RICO Act, Western had suffered over $89 million in damages.2

The following month, in November 1997, Western filed for an injunction to prevent Market from transferring some of its interests in the Market Square Project. Relying on Edmondson, the district court denied the request for an injunction, ruling that because Western had alleged a single scheme, a single discrete injury, and a single victim, Western had not demonstrated the requisite "pattern of racketeering activity" under § 1961(5) of the RICO Act, and thus, was unlikely to succeed on the merits.

Subsequently, Western filed an amended complaint, increasing the number of

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schemes and victims alleged. The Amended complaint alleges that Market conspired to commit and engaged in four separate but related schemes to defraud Avenue Associates, Western, and the general and limited partners that make up Western. The four schemes consist of: (1) the Revised Budget-Approval Scheme; (2) the Cost Shifting Scheme; (3) the Income Projection Scheme; and (4) the Going-Concern Scheme.

The four alleged schemes are briefly summarized as follows. (1) The Revised Budget-Approval Scheme was a plot to conceal cost overruns. According to the complaint, Market knew as early as April 1988 that the total cost of the project would exceed the original budget, and improperly approved and conspired to conceal cost increases. In August 1989, after 18 months, Market sent a revised budget to Western, knowing that the cost projections in this budget were also inaccurate. Western relied on the false representations in the revised budget and approved it in December 1989. (2) The Cost-Shifting Scheme addresses the priority of allocations and the continuing cost increases. The partnership's budgets called for costs to be divided into "guaranteed" and "non-guaranteed" categories, and prohibited guaranteed cost overruns from being repaid from partnership cash flow. According to the complaint, Market circumvented these accounting restrictions by shifting guaranteed cost items into the non-guaranteed category, used improperly authorized optional loans to cover these cost increases, and repaid these loans out of partnership distributions. This fraudulent scheme was concealed by annual financial statements mailed to Western each year between 1990 and 1996. (3) The Income Projection Scheme arises from Market's attempt to conceal the impact of the budget overruns. According to the complaint, in 1992, in a series of financial documents, Market falsely represented the expected revenues from Market Square over the next 15 years, overstated the value the cost increases had added to the project, and deceived Western regarding the partnership's debt. Due to these misrepresentations, Western refrained from suing appellees or pursuing other remedies. (4) The Going-Concern Scheme relates to a failure to provide honest annual accounting statements. The complaint alleges that from 1994 to 1996, Market sent Western financial statements that omitted a "going-concern clause," in an effort to conceal Avenue Associates' burdensome debt.

According to the amended complaint, Western did not become aware that the Market Square Project's financial health was in jeopardy until early 1997, when it received a financial statement indicating that the partnership was having difficulty meeting its financial obligations. This statement also acknowledged that Market Square would not meet Market's 1992 income projections. The amended complaint alleged that the four schemes included numerous violations of the mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343, and that these allegedly fraudulent acts violated § 1962(c) of the RICO Act. Western also alleged a violation of § 1962(d) of the RICO Act, which prohibits conspiracy to violate § 1962(c). Finally, Western alleged common law claims of fraud, civil conspiracy to defraud, breach of fiduciary duty, aiding and abetting a fiduciary, and breach of contract, and requested various types of injunctive relief, including access to the records of Avenue Associates.

The district court granted Market's motion to dismiss under Fed. R. Civ. P. 12(b)(6), based on Western's failure to allege a "pattern of racketeering activity," as required by § 1961(5) of the RICO Act. Relying on similarities to Edmondson, 48 F.3d 1260, the district court found Western's RICO claims deficient because Western had alleged a single fraudulent scheme, the single harm of a diminished partnership interest, and, at most, one set of victims. The district court rejected Western's argument that because it had

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alleged fraudulent acts over an eight-year period of time, it had successfully distinguished Edmondson and established a pattern of racketeering activity.

II.

On appeal, Western contends that the district court misapplied Edmondson and overlooked the importance of the eighty ear time period during which the alleged fraud occurred. Our review of the district court's order dismissing the complaint is de novo. The court assumes that the factual allegations in the complaint are true, but it is not bound by the complaint's legal conclusions. See Whitacre v. Davey, 890 F.2d 1168, 1168 n.1 (D.C. Cir. 1989).

A violation of § 1962(c) of the RICO Act consists of four elements: "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Pyramid Securities Ltd. v. IB Resolution, Inc., 924 F.2d 1114, 1117 (D.C. Cir. 1991) (quoting Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985)). The RICO Act defines the term "pattern of racketeering activity" as requiring the commission of at least two predicate racketeering offenses over a ten year period. See 18 U.S.C. § 1961(5). These predicate offenses are acts punishable under certain state and federal criminal laws, including mail and wire fraud. See 18 U.S.C. § 1961(1)(B).

The Supreme Court has interpreted the pattern requirement to include two additional elements:...

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