S.Q.K.F.C., Inc. v. Bell Atlantic TriCon Leasing Corp.

Citation84 F.3d 629
Decision Date28 May 1996
Docket NumberNo. 775,D,775
PartiesRICO Bus.Disp.Guide 9044 S.Q.K.F.C., INC., Plaintiff-Appellant, v. BELL ATLANTIC TRICON LEASING CORPORATION, Defendant-Appellee. ocket 95-7533.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Stephen T. Mangiaracina, Howard Beach, NY, for Plaintiff-Appellant.

Douglas J. Good, Mineola, N.Y. (Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, NY, David T. Maddox, Timothy Berg, Kendis K. Muscheid, and Fennemore Craig, Phoenix, AZ, on the brief), for Defendant-Appellee.

Before KEARSE, MAHONEY and PARKER, Circuit Judges.

PARKER, Circuit Judge:

Plaintiff S.Q.K.F.C. is a family-held corporation that owns and operates eleven Kentucky Fried Chicken franchises. After twice attempting to obtain a commercial loan from Bell Atlantic TriCon Leasing Corporation ("TriCon"), S.Q.K.F.C. brought this action against TriCon in the United States District Court for the Eastern District of New York, Eugene H. Nickerson, Judge, alleging: (1) violations of § 1962(c) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq.; (2) common law fraud in the inducement to contract; and (3) violations of New York General Business Law § 349 (McKinney 1996). According to the complaint, TriCon defrauded S.Q.K.F.C. and other similarly situated consumers by offering unrealistically generous preliminary loan terms to lure them into exclusive negotiations. The district court dismissed the complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). Because S.Q.K.F.C. failed to adequately allege a fraudulent or deceptive practice on the part of TriCon, we affirm.

I. BACKGROUND

In April of 1993, S.Q.K.F.C. contacted Bell Atlantic TriCon Leasing, then a wholly-owned subsidiary of Bell Atlantic Capital Corporation, to discuss the possibility of borrowing money to expand and improve its restaurants, and to refinance loans made by family members. 1 The parties arranged for a meeting between Joseph R. Panzarella, S.Q.K.F.C.'s president, and Charles Fletcher, an account executive for TriCon. At the meeting, which took place on May 6, Panzarella explained to Fletcher that S.Q.K.F.C. wanted to obtain a loan without executing individual guaranties. Fletcher told Panzarella that he thought this was possible, though he would have to check with his boss.

On May 7, S.Q.K.F.C. received a mailing from TriCon, which included materials described as a standard document loan package and a sample individual guaranty. Shortly thereafter, Fletcher telephoned Panzarella to tell him that TriCon had reviewed S.Q.K.F.C.'s financial records and the Kentucky Fried Chicken franchise documents, and had determined that no individual guaranty would be required as a condition of the loan agreement.

On May 27, TriCon sent two written loan proposals to S.Q.K.F.C., the first to finance the construction of a new franchise, the second to finance a franchise renovation and an additional new project. Consistent with Fletcher's oral representation, each proposal stated that "[n]o personal guaranties will be required with this loan." However, the proposals were explicitly subject to several "terms and conditions." For example, they stated that commitment would only issue upon written approval of the Senior Review Committee as to "pricing, term, structure, credit and other conditions, including but not limited to requirements and guarant[ie]s and/or other collateral to secure the obligations." (emphasis added). The proposals also contemplated the possibility of an outright rejection of S.Q.K.F.C.'s loan application: "If we do not approve your application, the application fee will be refunded...." And each explicitly stated that "[t]his letter does not constitute a commitment by [TriCon]." In addition, although the proposals at one point stated that personal guaranties would not be required, at another point they indicated that "all of your obligations to us shall be unconditionally guaranteed by: To be determined."

On July 2, Panzarella executed the loan proposals on behalf of S.Q.K.F.C. and mailed them to TriCon along with a check for fees in the amount of $11,600.

On August 22, prior to issuance of any commitment from TriCon, the company notified Panzarella by telephone, facsimile, and mail that personal guaranties would be necessary in order for the loans to close. S.Q.K.F.C. refused to provide the guaranties, and the deal fell through. TriCon returned plaintiff's check in full on September 1.

Three months later, S.Q.K.F.C.'s shareholders once again decided to attempt to obtain a loan through TriCon, even if personal guaranties would be required. Panzarella called Fletcher, who indicated that a loan could be completed within as few as thirty days. Fletcher did not send plaintiff a new set of sample loan documents. TriCon sent a Commitment Letter to plaintiffs on January 25. It differed from the July loan proposal in several respects, most notably in that it listed Joseph R. and Angela Panzarella as personal guarantors. Panzarella executed the proposal under a notation "Agreed and Accepted" and mailed a check.

By February 11, TriCon was prepared to close the loan. Its attorneys mailed numerous documents to S.Q.K.F.C.'s attorney, including a proposed form of individual guaranty. According to S.Q.K.F.C.'s complaint, this individual guaranty was materially different from the sample guaranty received by S.Q.K.F.C. on May 7, 1993. It allegedly contained four new terms: a guarantor waiver of rights, covenants of guarantor, events of default, and a New Jersey forum selection clause. S.Q.K.F.C. alleges that, in spite of its protests, TriCon refused to remove these terms. An attorney for TriCon told S.Q.K.F.C. that the company had been using the individual guaranty form "for years and years [and] for hundreds and hundreds of loans." Because the Panzarellas refused to sign the individual guaranty, the loan was never finalized.

S.Q.K.F.C. obtained a loan elsewhere, but only after incurring great expense in reliance on its negotiations with TriCon. It filed suit alleging that TriCon had: 1) violated § 1962(c) of RICO, 18 U.S.C. §§ 1961 et seq., by engaging in a pattern of racketeering; 2) committed common law fraud in the inducement to contract, and 3) violated § 349 of New York General Business Law, by customarily defrauding consumers. The district court dismissed these claims pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), on the ground that plaintiff had not alleged fraud with sufficient particularity, and, for purposes of the New York General Business Law claim, had not alleged that TriCon's misrepresentations affected the public interest and were recurring in nature. This appeal followed.

II. DISCUSSION
A. Plaintiff's RICO and Common Law Fraud Claims

In order to state a RICO racketeering claim, a plaintiff must allege that a defendant, "employed by or associated with" an enterprise affecting interstate or foreign commerce, conducted or participated in the conduct of this enterprise's affairs "through a pattern of racketeering activity." 18 U.S.C. § 1962(c); Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir.1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984). The RICO statute defines "racketeering activity" to include acts which are indictable under 18 U.S.C. § 1341, relating to mail fraud, or 18 U.S.C. § 1343, relating to wire fraud. 18 U.S.C. § 1961(1)(B).

S.Q.K.F.C. based its RICO claim on allegations that TriCon engaged in mail and wire fraud when it made "fraudulent and misleading representations, intending to induce plaintiff to borrow money from defendant." A complaint alleging mail and wire fraud must show (1) the existence of a scheme to defraud, (2) defendant's knowing or intentional participation in the scheme, and (3) the use of interstate mails or transmission facilities in furtherance of the scheme. United States v. Gelb, 700 F.2d 875, 879 (2d Cir.), cert. denied, 464 U.S. 853, 104 S.Ct. 167, 78 L.Ed.2d 152 (1983). S.Q.K.F.C. also alleged that TriCon committed common law fraud. To successfully plead a common law fraud claim, plaintiff must allege a "material, false representation, an intent to defraud thereby, and reasonable reliance on the representation, causing damage to the plaintiff." Katara v. D.E. Jones Commodities, 835 F.2d 966, 970-71 (2d Cir.1987).

Since the district court dismissed these claims pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), this court engages in a de novo review of the pleadings. Rent Stabilization Ass'n v. Dinkins, 5 F.3d 591, 593 (2d Cir.1993) (citation omitted). The pleadings are deemed to include both the complaint, and any documents attached to it as exhibits. Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir.1985).

S.Q.K.F.C. claims to have been defrauded by a "bait and switch" tactic employed by TriCon. According to this theory, TriCon lured S.Q.K.F.C. into negotiating exclusively with TriCon by making false promises and providing preliminary loan proposals with attractive terms. Then, at the last minute, after S.Q.K.F.C. had "invested time and resources in gathering the required financial documents and sent thousands of dollars to [TriCon]", TriCon changed the terms of the loan to the detriment of S.Q.K.F.C. S.Q.K.F.C. points to two examples of such allegedly fraudulent behavior. The first is when, during the first round of loan negotiations, TriCon "purposefully misled" S.Q.K.F.C. into believing that no personal guaranties would be required so that S.Q.K.F.C. would not seek out another lender.

In order to successfully plead this fraud claim, S.Q.K.F.C.'s complaint must specify the circumstances constituting fraud "with particularity." Fed.R.Civ.P. 9(b). In addition, it must allege facts that give rise to a strong inference of fraudulent intent. Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994). It can do so by (1) alleging...

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