Procter & Gamble Co. v. Big Apple Indus. Bldgs., 86 Civ. 3474(PNL).

• Decision Date: 13 March 1987
• Docket Number: No. 86 Civ. 3474(PNL).,86 Civ. 3474(PNL).
• Parties: The PROCTER & GAMBLE COMPANY and Riverview Productions, Inc., Plaintiffs, v. BIG APPLE INDUSTRIAL BUILDINGS, INC., Arol I. Buntzman, Martin William Halbfinger, Esq., George A. Fuller Company, the Arkhon Corporation, Haines Lundberg Waehler and John Does 1-10, Defendants.
• Court: U.S. District Court — Southern District of New York

655 F. Supp. 1179

The PROCTER & GAMBLE COMPANY and Riverview Productions, Inc., Plaintiffs, v. BIG APPLE INDUSTRIAL BUILDINGS, INC., Arol I. Buntzman, Martin William Halbfinger, Esq., George A. Fuller Company, the Arkhon Corporation, Haines Lundberg Waehler and John Does 1-10, Defendants.

No. 86 Civ. 3474(PNL).

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

March 13, 1987.

Kramer, Levin, Nessen, Kamin & Frankel, New York City (Harold P. Weinberger, of counsel), for plaintiffs.

Paul Weiss, Rifkind, Wharton & Garrison, New York City (Edward N. Costikyan, Lewis A. Kaplan, of counsel), for defendant Big Apple Indus. Bldgs. Inc.

Max E. Greenberg, Cantor & Reiss, New York City (Jerome Reiss, Ray Goddard, of counsel), for defendant George A. Fuller Co.

Rivkin, Radler, Dunne & Bayh, Uniondale, N.Y. (Howard J. Newman, of counsel), for defendant Haines Lundberg, Waehler.

Shea & Gould, New York City (Martin I. Shelton, of counsel), for defendant The Arkhon Corp.

OPINION AND ORDER

LEVAL, District Judge.

This is an action for rescission and treble damages pleading a violation of the Racketeer Influenced and Corrupt Organizations ("RICO") statute, 18 U.S.C. § 1961 et seq. as well as various state law causes of action for fraud and conversion. The court's jurisdiction is alleged to depend on 28 U.S.C. § 1331 by reason of the claim under the federal RICO statute. Defendants move to dismiss on the grounds that the complaint fails to plead a valid RICO claim.

Background

For the purpose of the motions to dismiss, the allegations of the complaint are taken as true.

The Procter & Gamble Company ("P & G"), plaintiff, produces several daytime television serials—"soap operas." In the past these programs were produced in the New York studios of the various networks. In 1983, P & G, together with its advertising agency Benton & Bowles, began looking for alternative sites for the production of these shows. Eight New York City sites were considered, including the Washburn Wire Factory (between E. 116th and E. 119th at the FDR Drive) owned by defendant Big Apple Industrial Buildings ("Big Apple"). Defendant Arol Buntzman, President and owner of Big Apple, approached P & G with a plan to renovate the old factory and develop a state-of-the-art television and film complex, unequaled outside of California. Buntzman, together with his attorney, defendant Martin Halbfinger, represented to P & G that Big Apple possessed sufficient experience and expertise to make the proposed project a reality. The complaint alleges that this was the beginning of "a pervasive and ongoing course of fraudulent conduct...."

In the Spring of 1984, Buntzman sent several communications to Benton & Bowles allegedly exaggerating Buntzman's abilities and experience and explaining that the completed site would attract millions of visitors each year, thus netting additional profits for P & G. In response to requests by P & G, Buntzman estimated construction costs at approximately $18 million and total costs at $25 million. This estimate was supported by a letter from the proposed general contractor, defendant George A. Fuller Co., to Buntzman adopting the $18 million figure.

Plaintiff Riverview Productions was incorporated as a wholly owned subsidiary of Benton & Bowles to act for P & G in connection with the studio project. In January 1985 Riverview entered into a ten-year lease with Big Apple for the three as yet unbuilt studios. The terms were set at $1.2 million annual ground rent, plus amortization over the ten years of a loan for the entire construction costs of the project. P & G guaranteed Riverview's obligations.

Big Apple then experienced difficulty securing construction financing, and requested that P & G agree to guarantee a construction loan. At first P & G refused. During this time, Riverview continued its efforts to obtain precise estimates of construction costs. It is alleged that although Fuller estimated total costs at $40 million this was never divulged to P & G. Big Apple instead employed an outside consultant to make a new estimate of costs, which came in at $22.7 million for "hard" costs. This estimate was disclosed to plaintiffs, who thereupon estimated total costs in the $30-35 million range. Buntzman repeatedly assured P & G that these estimate were much too high.

In June 1985, P & G agreed to guarantee the loan. In the "Tri-Party Agreement," P & G agreed to guarantee $25 million of financing to be provided by Citibank and committed itself to fund the project if Citibank failed to do so. P & G later agreed to provide an additional $7 million in guarantees.

The complaint alleges that once construction on the project got underway, defendants made excessive and improper requisitions from Citibank, including $617,344.25 in legal fees for thirteen months for defendant Halbfinger, as well as additional charges for specific services already covered in the base contract price. Plaintiffs further allege that defendants have fraudulently abused escrow accounts, building a cushion against the possibility that their fraud would be detected and subsequently making improper withdrawals from these accounts.

* * *

Defendants move to dismiss the complaint alleging lack of federal subject matter jurisdiction. The sole asserted basis for federal jurisdiction is the seventh cause of action, which alleges that defendants Buntzman, Halbfinger, Big Apple, and Fuller violated the RICO statute, 18 U.S.C. § 1962(b), (c), and (d).¹ Defendants contend these allegations do not implicate a violation of RICO.²

Discussion

The question posed by this motion is whether a contractor who puffs as to his experience and seeks to fleece his customer by underestimating costs and mailing padded bills has thereby violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., making him liable to 20 years imprisonment, criminal and civil forfeitures, treble damages and attorneys' fees.

Accusations that the contractor has overstated his experience, understated the expected costs and overstated completed work used in bills for progress payments are as common to construction as steel, bricks and mortar. If those allegations implicate RICO, it is safe to assume that henceforth virtually every construction dispute will be waged in federal court as a RICO matter. Plaintiff-owners who previously asserted claims of fraud or breach of contract against the contractor in the state courts will now qualify for triple damages plus attorneys' fees, merely by asserting that the two or more false statements constituted a "pattern of racketeering activity." I am persuaded that the facts alleged here, although they may well support a state law fraud action, do not establish a violation of the federal RICO statute.

For years courts have groped to develop meaningful standards for determining the scope of this confusing statute. Controlling guidance comes from the Supreme Court's recent opinion in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 3285, 3287, 87 L.Ed.2d 346 (1985). After stating that "a violation of § 1962(c) ... requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity," the Court attributed the unjustified expansion of civil RICO litigation, in part, to "the failure of Congress and the courts to develop a meaningful concept of `pattern'." In note 14, which has become the principal source of guidance for these endeavors, the Court quoted the following passage from the Senate Report:

"The target of RICO is thus not sporadic activity. The infiltration of legitimate business normally requires more than one `racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern." S.Rep. No. 91-617, p. 158 (1969) (emphasis added)....

105 S.Ct. 3275, 3285 n. 14.

This passage, which has since been cited by the Court of Appeals for the Second Circuit as authoritative, United States v. Teitler, 802 F.2d 606, 611 (2d Cir.1986), furnishes the key to the present motion.

A violation of § 1962(c) is not reducible to any instance of fraud or frauds involving two or more mailings. It requires the "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity...." And the requirement of the pattern is not satisfied without "continuity plus relationship."

Thus the identification of a few unrelated instances of fraudulent activity in an essentially lawful organization (for example, a charge that within a nationwide stock brokerage house, a salesman in Phoenix and another in New York had each independently engaged in a fraudulent transaction) would not satisfy the element of relationship between the frauds or of conduct of the enterprise. See Teitler, 802 F.2d at 611 ("sporadic activity" is not a pattern). On the facts alleged in this case, the deficiency pertains primarily to the other element of the pattern requirement. An undertaking by a contractor engaged in a lawful enterprise to bilk one customer in one construction project of finite duration and scope does not satisfy the "continuity" element of the pattern of racketeering.³

Both continuity and relationship, as well as the breadth necessary to satisfy the element of conduct of an enterprise through a pattern, must be present to prevent trivialization of RICO's requirements and its invocation, with concomitant federal jurisdiction, in practically every allegation of fraud. The allegation here of a scheme by a contractor to bilk its customer as to a construction project, even by repeated fraudulent assertions, is not sufficient to involve the RICO statute.

Plaintiff seeks comfort from the Court of Appeals' recent decision in United States v. Ianniello, 808 F.2d 184 (2d Cir.1986). Although there is language in Ianniello which on a superficial reading can give apparent...