27 F.3d 763 (2nd Cir. 1994), 457, First Nationwide Bank v. Gelt Funding Corp.

Docket Nº:457, Docket 93-7422.
Citation:27 F.3d 763
Party Name:RICO Bus.Disp.Guide 8575 FIRST NATIONWIDE BANK, A Federal Savings Bank, A Federal Stock Association, Plaintiff-Appellant, v. GELT FUNDING CORP., Allen I. Gross, Ralph Herzka, Shimon Eckstein, 505 Realty Associates, Prospect Realty Associates, Judah Wolf, Meir Unsdorfer, New Heights 765 Riverside Limited Partnership, New Heights (765 Riverside) Mana
Case Date:June 09, 1994
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 763

27 F.3d 763 (2nd Cir. 1994)

RICO Bus.Disp.Guide 8575

FIRST NATIONWIDE BANK, A Federal Savings Bank, A Federal

Stock Association, Plaintiff-Appellant,

v.

GELT FUNDING CORP., Allen I. Gross, Ralph Herzka, Shimon

Eckstein, 505 Realty Associates, Prospect Realty Associates,

Judah Wolf, Meir Unsdorfer, New Heights 765 Riverside

Limited Partnership, New Heights (765 Riverside) Management

Corp., 1691 Eastburn Realty Co., Sol Gross (a/k/a Eugene

Gross), Joseph Friedman, 1261 Central Avenue Owners Corp.,

65-11 Realty Co., Aviezier Cohen, Elaine Cohen, 730 Realty

Associates, David Malek, Peter Rebenwurzel, 36 Plaza Street

Owners Corp., Robert Wolf, 350 Sterling Associates, Edith

Gross, Brookhaven Realty Associates, Crown Equities Limited

Partnership, Adar Two Realty Co., 100 Realty Company, Esther

Shur, E. Phillip Weingarten, New Heights (173-174) Limited

Partnership, Temple Apartments Management Corporation, 740

Realty Associates, 2344 Davidson Associates, Jacob

Rabinowitz, 1958 Realty Associates, Menachem Halberstam,

Mordechai Halberstam, 273 Realty Associates, 2608 Realty

Associates, Solomon Werdiger, Esther Werdiger, Defendants-Appellees.

No. 457, Docket 93-7422.

United States Court of Appeals, Second Circuit

June 9, 1994

Argued Oct. 18, 1993.

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James L. Stengel, New York City (Andrew M. Calamari, Jodi E. Freid, Deanna R. Waldron, Donovan, Leisure, Newton & Irvine, New York City, Roger B. Mead, Folger & Levin, San Francisco, CA, of counsel), for plaintiff-appellant.

Lewis R. Clayton, New York City (Mark A. Silberman, Paul, Weiss, Rifkind, Wharton & Garrison, of counsel), for defendants-appellees Gelt Funding Corp., Allen I. Gross, Sol Gross a/k/a Eugene Gross, 350 Sterling Associates, Edith Gross, Brookhaven Realty Associates, 2608 Realty Associates, Solomon Werdiger, and Esther Werdiger.

Nathan Lewin, New York City (Miller, Cassidy, Larroca & Lewin, Washington, D.C., Sara Moss, Howard, Darby & Levin, New York City, of counsel), for defendant-appellee Ralph Herzka.

Edward D. Fagan, New York City (Fagan & Associates, New York City, of counsel), for defendants-appellees Shimon Eckstein and 505 Realty Associates.

Rosenfeld & Maidenbaum, Cedarhurst, NY (Meir Rosenfeld, New York City, of counsel), for defendant-appellee Judah Wolf.

Robin Feingold Singer, New York City (Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, of counsel), for defendants-appellees New Heights 765 Riverside Ltd. Partnership, New Heights 765 Riverside Management Corp., New Heights (173-174) Ltd. Partnership, Temple Apartments Management Corp. and Crown Equities Ltd. Partnership.

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Irving P. Seidman, P.C., New York City (Irving P. Seidman, of counsel), for defendants-appellees 1261 Central Avenue Owners Corp., 36 Plaza Street Owners Corp., and Robert Wolf.

Sheldon Rudoff, New York City (Goodkind, Labaton Rudoff & Sucharow, Mark S. Arisohn, James W. Johnson, of counsel), for defendants-appellees 730 Realty Associates, David Malek, Peter Rebenwurzel, Adar Two Realty Co., 740 Realty Associates, and 2344 Davidson Associates.

Before: MAHONEY and WALKER, Circuit Judges, and METZNER, District Judge. [*]

WALKER, Circuit Judge:

This appeal raises issues surrounding the requirements for pleading a private civil cause of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Sec. 1962(c) and (d). Principal among these is whether, where the predicate to the RICO claim is fraud by a borrower in misrepresenting the value of collateral, the fraud is complete before any actual loss is realized because the lender incurs additional concealed risk. Plaintiff-appellant First Nationwide Bank ("FNB" or the "Bank") appeals from a judgment of the United States District Court for the Southern District of New York (Michael B. Mukasey, Judge ), dismissing its complaint for failure to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6). In its amended complaint, FNB alleges that the defendants misrepresented the value of properties pledged as collateral to secure nonrecourse loans, and thereby fraudulently induced FNB to make loans it otherwise would not have made. FNB claims that it was damaged in an amount equal to the fraudulently induced portion of the loans. The amended complaint contains two counts under RICO, 18 U.S.C. Sec. 1962(c) and (d), and seven pendent state law claims.

The district court concluded that FNB had not sufficiently alleged: (1) that it suffered an injury cognizable under RICO; (2) that the alleged fraud proximately caused FNB's loss; or (3) that the eighteen borrowers named as defendants were part of a RICO enterprise. The court thus dismissed the RICO counts of the amended complaint, and absent a substantial federal question, the pendent state law claims as well. Because we agree that FNB has not adequately plead injury and proximate cause, we affirm.

BACKGROUND

We review de novo the district court's dismissal under Rule 12(b)(6), taking as true the factual allegations in the complaint, and drawing all reasonable inferences therefrom in FNB's favor. Ferran v. Town of Nassau, 11 F.3d 21, 22 (2d Cir.1993).

FNB is a federal stock association based in San Francisco, California with offices in New York City. Prior to 1985, FNB's business consisted primarily of making purchase money mortgage loans to individuals. In 1985, FNB's parent corporation, First Nationwide Financial Corp., was purchased by Ford Motor Company. In May of that year, FNB began a significant expansion of its lending activities in New York by offering nonrecourse mortgage loans to owners and purchasers of commercial properties, principally multi-unit apartment buildings. Over the next five years FNB made over 1,000 nonrecourse loans to commercial property investors in the New York Metropolitan area in an aggregate amount of approximately $1.3 billion. In November 1990, in the midst of a severe downturn in the New York real estate market, FNB phased out its commercial lending business and stopped making commercial loans through its New York office.

Defendant Gelt Funding Corp. ("Gelt Funding") is a commercial mortgage broker that represents owners and potential buyers of commercial property, and helps them obtain financing for their transactions. Defendants Allen I. Gross and Ralph Herzka are Gelt Funding's principals: Gross its president and principal or sole shareholder, Herzka

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an officer and employee. Between 1985 and 1990, Gross and Herzka cultivated a lucrative relationship with FNB on Gelt Funding's behalf in which Gelt Funding served as mortgage broker for borrowers of about $900 million in loans comprising roughly seventy percent of FNB's commercial mortgage portfolio. Eighteen of those borrowers are alleged to have supplied fraudulent information in their loan applications and are named as defendants in this action. The remaining individual defendants are alleged to be partners in, or otherwise affiliated with, one or more of the defendant borrowers.

FNB made all the loans in question on a nonrecourse basis. In a nonrecourse loan transaction, the lender gives up its right to sue the borrower personally upon default, and is confined to recourse against the collateral property. Because the lender's remedy upon default is limited to the value of the property, that value is critical to the lender's decision whether to make the loan. Accordingly, before making a loan, FNB required borrowers to supply information about the property's operating income; the price for which the property was to be purchased; sale prices for the property in the previous three years; and whether the borrower intended to encumber the property with additional debt. FNB ordinarily would not make a nonrecourse loan unless the collateral property's net operating income was at least 1.05 times greater than the combination of principal and interest due on the loan, and the property value exceeded the loan amount by at least twenty-five percent.

During an audit of its commercial loan portfolio in 1991, FNB determined that a higher proportion of loans brokered by Gelt Funding had defaulted compared to other loans. In January 1992, FNB filed its original complaint in nine counts consisting of two RICO counts and seven state common-law claims. The first RICO count was brought against Gross, Herzka, and Gelt Funding (collectively, the "Gelt Defendants"). The second RICO count named, in addition to the Gelt Defendants, all the...

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