Durante Bros. and Sons, Inc. v. Flushing Nat. Bank

• Decision Date: 27 September 1983
• Docket Number: No. 80 C 1385.,80 C 1385.
• Citation: 571 F. Supp. 489
• Parties: DURANTE BROS. AND SONS, INC., Plaintiff, v. FLUSHING NATIONAL BANK, Jack Farber and Richard Gelman, Defendants.
• Court: U.S. District Court — Eastern District of New York

571 F. Supp. 489

DURANTE BROS. AND SONS, INC., Plaintiff, v. FLUSHING NATIONAL BANK, Jack Farber and Richard Gelman, Defendants.

No. 80 C 1385.

United States District Court, E.D. New York.

September 27, 1983.

Beldock Levine & Hoffman, New York City (Melvin L. Wulf, John B. Levinson, Helene Fromm, New York City, of counsel), for plaintiff.

Shea & Gould, New York City (Milton S. Gould, Fran M. Jacobs, Peter C. Neger, New York City, of counsel), for defendants.

MEMORANDUM AND ORDER

NICKERSON, District Judge.

Plaintiff, a New York corporation, brought this action against Flushing National Bank (the Bank) and two of its officials, claiming violations of Title IX, Racketeer Influenced and Corrupt Organizations, of the Organized Crime Control Act of 1970 (the Act), 18 U.S.C. §§ 1961 et seq., the Federal banking laws, 12 U.S.C. §§ 1 et seq., and New York state law.

Defendants moved for summary judgment on six of the seventeen counts in the amended complaint, urging that (1) counts one, three and five are barred by the statute of limitations, (2) counts two and four, alleging violation of four federal banking law provisions, are either time barred or do not afford a private right of action, and (3) count six fails to state a claim under the Act. The other eleven counts assert pendent state claims that defendants say should not survive dismissal of the federal claims.

The facts underlying the first count are, according to plaintiff, in substance the following. Commencing evidently in 1973 the plaintiff and Bank had a borrowing relationship on an unsecured basis. In that year the Bank also lent Louis Durante, Sr., (father of John Durante, plaintiff's president and sole shareholder) $41,800 to invest in a real estate venture by Jerder Realty Services, Inc. (Jerder), a New York corporation, and charged an usurious rate of interest. In November 1974 defendant Farber, the Bank's chief executive, director and controlling shareholder, got the Bank to make Jerder a $200,000 mortgage loan, and personally guaranteed it in return for a $100,000 investment in Jerder calling for specified future returns.

After November 1974 the Bank made further loans to Jerder up to the federal lending limit. Then Farber had the Bank make loans to a partnership composed of Jerder's principals including himself and Louis Durante, Sr., the funds to be used as capital for Jerder.

By July 1975 the Bank's unsecured loans to plaintiff totalled $142,500. In that month plaintiff bought a real estate parcel (Parcel A) in Brooklyn, and in October 1975 requested from the Bank a $100,000 mortgage loan to make the purchase of a contiguous parcel (Parcel B). At that time Jerder was in financial difficulty, and its loan payments to the Bank were past due.

When defendants received plaintiff's request they evolved a fraudulent scheme to defraud plaintiff and to offset the Bank's and Farber's anticipated losses on the Jerder loans. Pursuant to the scheme defendants falsely represented that the Bank would make the $100,000 mortgage loan to plaintiff. In reliance on this representation plaintiff got short term, thirty day financing, pledging its accounts receivable, and bought Parcel B for $142,500 on December 12, 1975. Defendants knew that plaintiff's business would suffer unless it could replace the short term financing with a mortgage loan.

On December 18, 1975 defendants told plaintiff that the Bank would not make the $100,000 mortgage loan. Further, defendants said they would require immediate payment of plaintiff's unsecured loans of $142,500 (which had theretofore been regularly extended) unless plaintiff gave the Bank a second mortgage in that amount on Parcel A, guaranteed by the Durantes and others. On the same day the plaintiff executed the second mortgage. Plaintiff repaid the short term financing with funds it otherwise could have used in its business.

On February 24, 1976 defendants coerced John Durante to have plaintiff pay the Bank the $41,800 owed to it by Louis Durante, Sr., by increasing the mortgage by that amount and giving the Bank a first mortgage on Parcel B and a second mortgage on Parcel A in the total amount of $181,925. On March 10, 1976 plaintiff executed a consolidated mortgage for that amount covering both parcels. The Bank charged plaintiff exorbitantly for the time spent by the bank's officials and for legal fees and closing costs. These charges and the $41,800 were therefore criminally usurious interest on the original loans to plaintiff of $142,500.

On April 26, 1978 the Bank, claiming default, brought an action in state court to foreclose the consolidated mortgage. That action has been stayed pending termination of this action.

The first count concludes that defendants willfully violated the Act, 18 U.S.C. § 1962, in that the Bank derived income through collection of an unlawful, usurious debt and used the income in its operation, and defendant officials participated in the collection of the unlawful debt and conspired to that end.

The second count repeats the allegations of the first and concludes that the individual defendants violated federal law by (a) causing the Bank to charge interest made usurious by 12 U.S.C. § 85, (b) making false entries in the Bank's books in violation of 18 U.S.C. § 1005, (c) furnishing false reports to the Comptroller of the Currency (the Comptroller) as to the Bank's condition in violation of 12 U.S.C. § 161, and (d) making false statements to influence the Bank's action on the consolidated mortgage in violation of 18 U.S.C. § 1014.

The third count repeats all previous allegations and asserts that starting April 6, 1976 through 1977 the Bank extended overdraft privileges to plaintiff and received, with the participation of the defendant officials, usurious interest in violation of the Act, 18 U.S.C. § 1962.

The fourth count alleges that in connection with the receipt of interest on the overdrafts defendant officials violated the same laws as are referred to in the second count.

The fifth count alleges that by commencing the foreclosure action in April 1978 defendants violated the Act by collecting an unlawful debt, 18 U.S.C. § 1962.

The sixth count alleges that, in order to execute their scheme to defraud, defendants caused to be mailed to plaintiff during the period January 1976 through February of 1978 monthly bank statements of account at the Bank and on March 20, 1978 a letter, thus engaging in a pattern of racketeering activity in violation of the Act, 18 U.S.C. § 1962.

I

Defendants argue that counts one, three and five are time barred. All three counts claim a violation of the Act in that the Bank received income derived from "collection of an unlawful debt" and used the income in the Bank's operation, or that defendant officials participated in the Bank's collection of an unlawful debt or conspired to do so.

In 18 U.S.C. § 1962(a) the Act makes it unlawful for a person to use income in the operation of an enterprise affecting interstate commerce where the income is derived either (i) "from a pattern of racketeering activity" (including various statutory frauds as defined in 18 U.S.C. § 1961(1)(B)) or (ii) "through collection of an unlawful debt." The Act also prohibits participation by a bank employee in either of those types of violations, 18 U.S.C. § 1962(c), or a conspiracy to commit them, 18 U.S.C. § 1962(d). Under 18 U.S.C. § 1964 a person injured by a violation of section 1962 may sue for threefold damages, plus costs and attorneys fees.

The Act thus makes illegal two different kinds of activities pertinent to the claims in the amended complaint. One kind is engaging in "a pattern of racketeering activity," as exemplified by the alleged mail frauds set forth in count six. The other is the "collection of an unlawful debt," as claimed in counts one, three and five. The question raised by defendants' motion as to those three counts is what limitation period applies to a claim based on the Act's prohibition against collection of an unlawful debt.

The parties agree that since the Act contains no limitations period, the court must look to the most analogous New York State statute. Defendants point to section 215(6) of the New York C.P.L.R., requiring "an action to recover any overcharge of interest or to enforce a penalty for such overcharge" to be brought within one year. This action was brought on May 21, 1980, more than two years after the last interest payment on the consolidated mortgage on December 19, 1977. To the extent that plaintiff was injured by the payment of usurious interest and seeks to recover that interest, and a penalty for the overcharge, the claim falls squarely within the language of C.P.L.R. § 215(6).

Plaintiff argues, however, that the three counts allege more than a usury claim, that the collection of usurious interest was only part of a scheme to defraud embracing other elements, and that therefore the court should apply the six year statute contained in C.P.L.R. § 213(8), providing that "an action based on fraud" must be commenced within six years.

Plaintiff's assertions of fraud do not alter the federal predicate on which the three counts rest, namely, the Act's prohibition against the "collection of an unlawful debt." The addition of allegations of false representations to a claim based on such a predicate does not transmogrify the claim into one "based on fraud." The nature of the claim is determined by the law which gives rise to it. The fraud allegations, while pertinent to the claim in count six of "racketeering activity," are superfluous to a claim for "collection of an unlawful debt."

This court does not read McNellis v. Raymond, 420 F.2d 51 (2d Cir.1970), as requiring application of the six year fraud limitation. There the "basic theory" for the claim of a bankruptcy trustee to recover payments of a bankrupt to a creditor was that the payments were fraudulent because made without consideration while the debtor was insolvent.

...