Banks v. Wolk

• Citation: 918 F.2d 418
• Decision Date: 09 November 1990
• Docket Number: No. 90-1278,90-1278
• Parties: RICO Bus.Disp.Guide 7621 Philip BANKS, Appellant, v. Donald WOLK, Brad Cohen, Larry Cohen, First Fidelity Insurance Corp., James Weiner, Esquire, First Fidelity Financial Group.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 418

918 F.2d 418

RICO Bus.Disp.Guide 7621

Philip BANKS, Appellant, v. Donald WOLK, Brad Cohen, Larry Cohen, First Fidelity Insurance Corp., James Weiner, Esquire, First Fidelity Financial Group.

No. 90-1278.

United States Court of Appeals Third Circuit.

Argued Sept. 18, 1990.

Decided Nov. 9, 1990.

Robert J. Sugarman (argued), Sugarman & Associates, Philadelphia, Pa., for appellant.

Michael P. Coughlin (argued), David N. Bressler, Lesser & Kaplin, Blue Bell, Pa., for appellee Donald Wolk.

Thomas Martin (argued), Philadelphia, Pa., for appellees Brad Cohen, Larry Cohen, First Fidelity Ins. Corp., James Weiner and First Fidelity Financial Group.

Before HIGGINBOTHAM, Chief Judge, SCIRICA and ALDISERT, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This case requires us once again to address the question of what constitutes a "pattern of racketeering activity" under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. Secs. 1961-1968 (1984 & Supp.1990).

Plaintiff Philip Banks filed an initial complaint against defendants Donald Wolk, Brad Cohen, Larry Cohen, James Weiner, First Fidelity Insurance Corporation ("FFIC"), and First Fidelity Financial Group ("FFFG"). The complaint contained both RICO and pendent state law claims arising from an alleged real estate fraud. The district court dismissed this complaint under Fed.R.Civ.P. 12(b)(6) for failure to allege a sufficient "pattern" under RICO, and plaintiff sought leave to file an amended complaint containing new allegations. The district court denied this motion on the grounds that the amended complaint would still fail to state a RICO claim, and plaintiff now appeals from this denial. We will affirm the district court's dismissal of the RICO claims against defendants Donald Wolk, James Weiner, FFIC, and FFFG. However, we will reverse the order of the district court with instructions to allow certain claims against Brad Cohen and Larry Cohen to proceed.

I. BACKGROUND

Denials of leave to amend a complaint under Fed.R.Civ.P. 15(a) are reviewed for abuse of discretion. Kiser v. General Elec. Corp., 831 F.2d 423, 426-27 (3d Cir.1987), cert. denied, 485 U.S. 906, 108 S.Ct. 1078, 99 L.Ed.2d 238 (1988). However, reversal is proper when the district court bases its denial on an erroneous rule of law. See, e.g., Centifanti v. Nix, 865 F.2d 1422, 1431 (3d Cir.1989). Here, the district court denied plaintiff's motion for leave to amend on the grounds that the amended complaint would fail to withstand a motion to dismiss under Fed.R.Civ.P. 12(b)(6). Consequently, we must accept as true all factual allegations in the amended complaint and all reasonable inferences that can be drawn from them. The amended complaint must be construed in the light most favorable to the plaintiff, and can be dismissed only if the plaintiff has alleged no set of facts upon which relief could be granted. Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir.1988); Labov v. Lalley, 809 F.2d 220, 221-22 (3d Cir.1987). We note that in RICO actions, "in many cases plaintiffs will be able to withstand a facial attack on the complaint and have the opportunity to have their pattern allegations threshed out in discovery." Swistock v. Jones, 884 F.2d 755, 758 (3d Cir.1989).

The allegations in plaintiff's initial complaint pertained solely to a transaction involving the American Patriot Building in Philadelphia ("AP Building"). According to the complaint, Banks and Wolk had been partners in a partnership that owned the AP Building ("Partnership"). On July 28, 1987, the Partnership entered into an agreement to sell the AP Building to Brad Cohen, his brother Larry Cohen, and FFIC. Unknown to Banks, however, Wolk was also an undisclosed partner in the buying enterprise, and was to become a 50% owner of the building upon sale. The buyers delayed the transaction, which was never completed. After Wolk refused to enter into an agreement to pay Partnership debts, a creditor bank foreclosed upon the AP Building.

The gravamen of the complaint was that Wolk and the Cohens concealed Wolk's involvement with the buyers in an attempt to gain a favorable price for the AP Building. The complaint also alleged that James Weiner, the attorney for the buyers, participated in this fraud. The RICO claim was based on allegations that all defendants committed two or more unspecified acts of mail and wire fraud in carrying out the scheme. The district court dismissed the RICO count for failure to allege a "pattern of racketeering activity," since the alleged fraudulent scheme "was a one-time happening without the threat of repetition." See H.J. Inc. v. Northwestern Bell Telephone Co., --- U.S. ----, 109 S.Ct. 2893, 2901-02, 106 L.Ed.2d 195 (1989) (RICO pattern requires that predicate acts pose threat of continuing criminal activity). Having dismissed the RICO claim, the court then declined to assume jurisdiction over the pendent state law claims.

Plaintiff sought leave to file an amended complaint containing six additional specific allegations against Brad and Larry Cohen, which are as follows. First, in 1982 Brad Cohen formed an entity called the Philadelphia Gold Corporation which later was used "to illegally obtain funds from investors via fraudulent sales orders." Amended Complaint at p 50. Second, in 1989 the Cohens signed an illusory sale agreement for the Rittenhouse Club in Philadelphia, for the purpose of lowering the property's value. Id. at p 53(a). Third, in 1987 they misappropriated $1.5 to 2 million in profits from "Securities Trading Commissions [sic]" and invested this money in real estate. Id. at p 53(b). Fourth, in 1986 they misused funds that had been entrusted to them by an investor. Id. at p 53(c). Fifth, in 1984 or 1985 they defrauded another investor of profits that were owed him. Id. at p 53(d). Sixth, sometime between 1986 and 1989 Brad Cohen "illegally financed another party as a strawman in a real estate transaction ... where he was specifically rejected as a potential partner." Id. at p 53(e).

FFIC and FFFG are named as the RICO "enterprises." The amended complaint alleges that FFIC and FFFG were formed and operated with money derived from the Philadelphia Gold Corporation scheme, and were the vehicles through which the other frauds, with the exception of the last, were committed. Again, each defendant was alleged to have committed two or more unspecified acts of mail and wire fraud in carrying out these schemes. There are no allegations that Banks, Wolk, or Weiner were involved in any way in the additional frauds.

The district court held that the amended complaint still failed to allege a "pattern of racketeering activity," since the additional allegations were not sufficiently "related" to the AP Building scheme. See H.J. Inc., --- U.S. at ----, 109 S.Ct. at 2900-01 (RICO pattern requires relationship between predicate acts). The district court stressed that neither Banks nor Wolk were alleged to have participated in the additional schemes, and that "the transactions in themselves bear no relationship to the breach of fiduciary duty in the original complaint."

II. STATUTORY LANGUAGE

The RICO statute authorizes civil suits by "[a]ny person injured in his business or property by reason of a violation of [18 U.S.C. Sec. 1962]." 18 U.S.C. Sec. 1964(c) (1988). Section 1962(a) prohibits "any person who has received any income derived ... from a pattern of racketeering activity" from using that money to acquire, establish or operate any enterprise that affects interstate commerce. Section 1962(b) prohibits any person from acquiring or maintaining an interest in, or controlling any such enterprise "through a pattern of racketeering activity." Section 1962(c) prohibits any person employed by or associated with an enterprise affecting interstate commerce from "conduct[ing] or participat[ing] ... in the conduct of such enterprise's affairs through a pattern of racketeering activity." Finally, section 1962(d) prohibits any person from "conspir[ing] to violate any of the provisions of subsections (a), (b), or (c)." A "pattern of racketeering activity" requires commission of at least two predicate offenses on a specified list. 18 U.S.C.A. Secs. 1961(1), (5) (1984 & Supp.1990).

We note that no defendant can be liable under RICO unless he participated in two or more predicate offenses sufficient to constitute a pattern. This participation need not be direct. RICO recognizes liability for those who merely aid and abet the underlying predicate offenses. Petro-Tech, Inc. v. Western Co. of North America, 824 F.2d 1349, 1356-58 (3d Cir.1987). Moreover, a defendant can be liable under RICO's conspiracy provision for agreeing to the commission of a pattern of racketeering activity, even if that defendant does not directly participate in the underlying acts. United States v. Adams, 759 F.2d 1099, 1116 (3d Cir.), cert. denied, 474 U.S. 906, 971, 106 S.Ct. 275, 336, 88 L.Ed.2d 236, 321 (1985); see also Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1166-67 (3d Cir.1989) (RICO conspiracy requires "agreement to commit predicate acts and knowledge that the acts were part of a pattern of racketeering activity.").

In this case, defendants Wolk and Weiner are alleged only to have participated in the AP Building fraud, and there is no indication that either was involved, directly or indirectly, in any of the additional schemes. Consequently, we must consider only the AP Building scheme allegations in determining whether a sufficient "pattern" has been alleged against either Wolk or Weiner. Even if the AP Building scheme were part of a pattern of acts committed by the Cohens, the additional schemes cannot affect the liability of Wolk or Weiner, since they neither participated in those frauds nor agreed to their commission. Because the further allegations involve the Cohens, we will consider separately whether a sufficient pattern has been alleged against them.

Although no...