Furman v. Cirrito

• Decision Date: 01 September 1987
• Docket Number: D,No. 18,18
• Citation: 828 F.2d 898
• Parties: RICO Bus.Disp.Guide 6733 Aaron J. FURMAN, Martin J. Joel, Jr., Alvin Katz, Francis P. Maglio, Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs, Martin J. Joel, Jr., Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs-Appellants, v. John CIRRITO, Harold S. Coleman, John A. Miller, Francis G. Rea, Peter M. Toczek and A.J. Yorke, Defendants-Appellees. ocket 86-7283.
• Court: U.S. Court of Appeals — Second Circuit

Page 898

828 F.2d 898

RICO Bus.Disp.Guide 6733

Aaron J. FURMAN, Martin J. Joel, Jr., Alvin Katz, Francis P.

Maglio, Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs, Martin J. Joel, Jr., Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs-Appellants, v. John CIRRITO, Harold S. Coleman, John A. Miller, Francis G.

Rea, Peter M. Toczek and A.J. Yorke, Defendants-Appellees.

No. 18, Docket 86-7283.

United States Court of Appeals, Second Circuit.

Argued Oct. 20, 1986.

Decided Sept. 1, 1987.

Seymour Shainswit, New York City (Cooper Cohen Singer Ecker & Shainswit and Steven E. Levitsky, New York City, of counsel), for plaintiffs-appellants.

Max Gitter, New York City (Paul, Weiss, Rifkind, Wharton & Garrison and Dorothy E. Roberts, New York City, of counsel), for defendants-appellees.

Before VAN GRAAFEILAND, NEWMAN and PRATT, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

This is an appeal from an order of the United States District Court for the Southern District of New York (Cooper, J.) granting appellees' motion under Fed.R.Civ.P. 12(b)(1) and (6) to dismiss appellants' complaint, and from the judgment entered pursuant thereto. For the reasons that follow, we affirm.

Appellants' complaint states three causes of action, two that are state law claims of partnership fraud and breach of fiduciary duty and a third grounded on the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-68. It twice has been dismissed by the district court. The first dismissal was based on appellants' failure to allege a separate, distinct racketeering enterprise injury. 578 F.Supp. 1535 (S.D.N.Y.1984). This Court's affirmance of that decision, 741 F.2d 524, was vacated by the Supreme Court, 473 U.S. 922, 105 S.Ct. 3550, 87 L.Ed.2d 672 (1985), on the basis of its holdings in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), and American Nat'l Bank & Trust Co. v. Haroco, Inc., 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985) (per curiam). Following remand to the district court, appellees moved to dismiss for failure to allege a "pattern of racketeering activity", 18 U.S.C. Sec. 1962(c), or, in the alternative, to compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. Secs. 1-14. Relying on Sedima, supra, 473 U.S. at 496 n. 14, 105 S.Ct. at 3285 n. 14; id. at 527-28, 105 S.Ct. at 3289-90 (Powell, J., dissenting), and cases that followed, the district court held that racketeering activity must be continuous and related in order to constitute a pattern and must be ongoing or occur in more than one criminal episode. Although the district court felt that appellees' alleged acts were related, it concluded that the complaint failed to allege any continuity of activity, and dismissed the RICO cause of action. The district court held that it then lacked subject matter jurisdiction over appellants' state law claims and refused to address appellees' motion to arbitrate.

Because the issue on the first appeal was whether a RICO complaint must allege a racketeering injury separate and apart from that which resulted from "the predicate acts of using mail and wire facilities in violation of 18 U.S.C. Secs. 1341 and 1343" (741 F.2d at 526), precise factual allegations were treated in summary fashion only and played no determinative role in our decision. Disposition of the present appeal requires that we take cognizance of certain conceded and undisputed facts and recent substantial changes in the law of mail fraud. Although appellees' motion was made under Rule 12(b)(1) and (6), the record before us consists of more than just the complaint. Specifically, it includes the partnership agreement, which spells out the rights and obligations of the parties, the contract for the sale of the partnership assets, whose terms appellants claim were unfair, and affidavits of counsel for both sides. The district court might have treated the motion as one for summary judgment. See In re G. & A. Books, Inc., 770 F.2d 288, 295 (2d Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986); Grand Union Co. v. Cord Meyer Development Corp., 735 F.2d 714, 716-17 (2d Cir.1984). Despite its failure to do so, we nonetheless may refer to the partnership agreement and contract of sale, which are integral parts of appellants' claim and of the record before us. See Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 113 (2d Cir.1982); 5 Wright & Miller, Federal Practice and Procedure Secs. 1327, 1357, at 593. Examining the complete picture thus presented, we are unable to discover a sufficient allegation of a "pattern of racketeering activity" conducted in the affairs of an "enterprise", United States v. Ianniello, 808 F.2d 184, 190 (2d Cir.1986), cert. denied, --- U.S. ----, 107 S.Ct. 3230, 976 Ed.2d 736 (1987); indeed, we have difficulty in discovering a sufficient allegation of racketeering activity at all.

In a complaint based almost entirely on information and belief, appellants accuse appellees of a RICO violation based on the predicate crime of mail fraud. We have, we believe, made it clear that we look with a jaundiced eye upon allegations of fraud based upon information and belief. Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir.1986); Decker v. Massey-Ferguson, Ltd., supra, 681 F.2d at 114. Nevertheless, we have carefully reviewed the complaint, in light of the undisputed documents, in an attempt to understand how appellants are attempting to meet their obligation to allege statutorily required charges of criminal wrongdoing. See United States v. Angelilli, 660 F.2d 23, 34-35 (2d Cir.1981), cert. denied, 455 U.S. 910, 945, 102 S.Ct. 1258, 1442, 71 L.Ed.2d 449, 657 (1982). Moreover, unlike the district court in the two hearings before it and this Court on the prior appeal, we have determined the sufficiency of appellants' allegations in accordance with the Supreme Court's "crabbed" construction of the mail fraud statute in McNally v. United States, --- U.S. ----, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987) (Quote is from Justice Stevens' dissenting opinion at 107 S.Ct. at 2889).

Appellants' RICO allegations, stated succinctly, are as follows:

1. Prior to August 7, 1981, appellants and appellees were general partners in a limited brokerage partnership known as Bruns, Nordeman, Rea & Co. (Bruns).

2. Appellees Coleman and Rea were Bruns Managing Directors, and, by the terms of the written partnership agreement, they "were empowered to sell all or substantially all the assets of Bruns 'on behalf of all of the partners' on such terms and conditions as they, in their sole discretion, approved."

3. During May and June of 1981, Rea and several members of the Executive Committee negotiated with Bache, Halsey, Stuart, Shields, Inc. (Bache) for the sale to Bache of all or substantially all of Bruns' assets.

4. A preliminary agreement on the terms of the purchase contract was reached on June 30, 1981, and a letter of intent was signed on July 2, 1981.

5. On July 6, 1981, appellants were informed of the deal, which was described as a fait accompli, whose terms could not be altered.

6. At a firm meeting on July 23, 1981, appellants learned for the first time that their signatures would be required on the purchase agreement that was to be executed.

7. On July 27, 1981, all of the appellants executed the agreement.

8. Appellants were defrauded because they were not told "in a timely manner" that their signatures would be required, that as a result some of the partners were secretly favored over others and appellees did not discharge their "duty of finding the potential purchaser willing to make the largest offer for Bruns' assets."

It is readily apparent that the crucial element in appellants' claim of mail fraud is appellees' alleged failure to promptly inform them that they would have to sign an eventual agreement with Bache. We think that, as an allegation of criminal wrongdoing, this claim borders on the specious.

It is undisputed that, although appellants and appellees were general partners in Bruns, their interests in the firm were far from identical. The six appellees accounted for 75 percent of the general partners' equity, and the remaining 25 percent was allocated among seven partners, four of whom are now appellants. In view of appellees' substantially greater financial interests, it is not surprising that, between them, they comprised the firms' Managing Directors and Executive Committee, which together had the primary responsibility for Bruns' operations.

It is likewise not surprising that, under the terms of the partnership agreement, the Managing Directors had "full power and authority on behalf of all of the partners, at any time, to sell or otherwise transfer all or substantially all of the assets and business of the partnership, on such terms and conditions as the Managing Directors, in their sole discretion, [might] approve." The agreement also provided that it would terminate automatically upon the sale of all or substantially all of the partnership assets as an entirety or the merger or consolidation of the partnership with or into another partnership or corporation. Upon such termination, the Executive Committee was to liquidate the partnership.

The rights and obligations of partners, as between themselves, are fixed by the terms of the partnership agreement. Levy v. Leavitt, 257 N.Y. 461, 466, 178 N.E. 758 (1931). "If complete, as between the partners, the agreement so made controls." Lanier v. Bowdoin, 282 N.Y. 32, 38, 24 N.E.2d 732 (1939). Even terms which permit self-dealing by a partner will be enforced. Riviera Congress Assocs. v. Yassky, 25 A.D.2d 291, 295, 268 N.Y.S.2d 854, aff'd, 18 N.Y.2d 540, 277 N.Y.S.2d 386, 223 N.E.2d 876 (1966); Raymond v. Brimberg, 99 A.D.2d 988, 473 N.Y.S.2d 437 (1984) (mem.); Crane and Bromberg on Partnership, sec. 5, at 43 (1968). Since appellees were acting pursuant to their contractual...