Balabanos v. North American Inv. Group, Ltd.

• Decision Date: 16 December 1988
• Docket Number: No. 86 C 3802.,86 C 3802.
• Citation: 708 F. Supp. 1488
• Parties: Dorothy BALABANOS, Peter W. Hegel, Aphrodite Hegel, Peter Hegel, Sr., Elizabeth Hegel, Pamela Radke, John Saratsiotis, M.D. and Evonne Saratsiotis, Plaintiffs, v. NORTH AMERICAN INVESTMENT GROUP, LTD., Marvin Berkowitz, Konstantine Polites and Ira Kaufman, Divesco, Inc., an Illinois corporation, George E. Polites and Eva Courialis Thomas, Defendants.
• Court: U.S. District Court — Northern District of Illinois

708 F. Supp. 1488

Dorothy BALABANOS, Peter W. Hegel, Aphrodite Hegel, Peter Hegel, Sr., Elizabeth Hegel, Pamela Radke, John Saratsiotis, M.D. and Evonne Saratsiotis, Plaintiffs, v. NORTH AMERICAN INVESTMENT GROUP, LTD., Marvin Berkowitz, Konstantine Polites and Ira Kaufman, Divesco, Inc., an Illinois corporation, George E. Polites and Eva Courialis Thomas, Defendants.

No. 86 C 3802.

United States District Court, N.D. Illinois.

December 16, 1988.

COPYRIGHT MATERIAL OMITTED

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge.

The complaint in this action was brought by eight individual investors against an investment association, North American Investment Group, Ltd. ("N.A.I. G."); an investment corporation, Divesco, Inc. ("Divesco"); and five individual defendants associated with the two defendant investment organizations. The complaint alleges violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982 & Supp. IV 1986), as well as various state law claims arising out of defendants' investment activities on behalf of the plaintiff investors. On March 9, 1988, we granted defendants' motion to dismiss the RICO count under Rule 9(b) of the Federal Rules of Civil Procedure for failure to plead the acts of racketeering with particularity as to all defendants. Balabanos v. North American Investment Group, Ltd., 684 F.Supp. 503 (N.D.Ill.1988). When we dismissed the RICO count, the federal basis for the suit disappeared, so we also dismissed the pendent state law claims. After the plaintiffs filed an amended complaint, two of the defendants, Eva Courialis Thomas and Ira Kaufman, moved to dismiss the amended complaint or, in the alternative, to strike portions thereof. For the reasons set forth below, their motions are granted in part and denied in part.

I. Factual Background¹

As we discussed in our earlier opinion,² the complaint alleges that from approximately August 1982 through July 1984 defendants N.A.I.G., Marvin Berkowitz, Konstantine Polites, Ira Kaufman and Eva Courialis Thomas (collectively "the N.A. I.G. defendants") engaged in an abusive tax shelter scheme, and "From prior to November 1, 1983 through the present," defendants Divesco and George E. Polites (collectively "the Divesco defendants") "by and through their authorized agents ... as transferees, successors and assignees at N.A.I.G. Partnerships and N.A.I.G. Defendants and/or as de facto general partners and in control and in operation of N.A.I.G. and Divesco partnerships, willfully engaged in a scheme to defraud or attempt to defraud the Plaintiffs." (Amended Complaint ¶ 25). In July 1984, "certain N.A. I.G. defendants consented to a Final Judgment of Permanent Injunction (Consent Judgment) by Judge William T. Hart on July 26, 1984, in the matter entitled United States of America v. North American Investment Group, Ltd., et al., Cause No. 84 C 3683, in the United States District Court for the Northern District of Illinois, Eastern Division, wherein the abuses were in fact the same as alleged in this action." (Amended Complaint ¶ 15) The complaint further alleges that the plaintiffs were never informed of this consent judgment and that the plaintiffs continued to be defrauded because the Divesco defendants had been managing and operating the N.A.I.G. and Divesco partnerships in the same fashion from on or about November 30, 1983, which was over six months prior to the entry of the consent judgment. The plaintiffs allege that Divesco, as the de facto general partner in control of the N.A.I.G. and Divesco partnerships, sent the N.A.I.G. investors, including plaintiffs, notices to make "capital contributions, payments or receivables allegedly due by plaintiffs to N.A.I.G. Partnerships directly to Divesco." (Amended Complaint ¶ 26). Thus, the plaintiffs allege that Divesco and N.A.I.G. operated in concert to further their scheme.

The crux of the scheme was to sell plaintiffs and other investors limited partnerships in syndicated real estate packages through which expenditures would then qualify for investment tax credits ("ITC") under the Internal Revenue Code. This would generate sufficient ITCs to reduce the plaintiff investors' federal income tax to zero for the then current year and also generate sufficient ITCs to carry back to the third preceding tax year to reduce that liability to zero as well. N.A.I.G. and Divesco never owned the properties as they were required to do under the tax laws in order to claim the ITCs. They also syndicated the property without the knowledge or permission of the true owners. The rehabilitation expenditures were never actually made, and the N.A.I.G. and Divesco defendants merely created fictitious figures which were then reported to the Internal Revenue Service ("IRS"). N.A.I.G. and Divesco falsified documents which backdated the plaintiffs' investment payments to prior years and also prepared false federal income tax returns for the plaintiffs to claim the ITCs. The scheme was envisioned to last at least for three years. Each year the investor would invest for that year and would also have an unused ITC carryback to the third preceding year. By doing this for three consecutive years the investor would then receive refunds in the amount of his total taxes paid for six years and reduce his tax liability to zero.

The IRS subsequently informed the investors that their deductions attributable to these investments had been totally disallowed. The IRS independently determined that there is no substantiation for any business activity by the N.A.I.G. and Divesco partnerships and the IRS assessed tax deficiencies and penalties to the plaintiff investors as a result of their investments in the purported tax shelter programs of N.A.I.G. and Divesco.

II. The RICO Claim

Thomas' and Kaufman's motions³ present three grounds for dismissing the RICO claim. We consider these first because if we dismiss the RICO claim, we will no longer have jurisdiction to consider the pendent state law claims.

A. Interstate Commerce

Thomas and Kaufman first assert that the amended complaint should be denied for failure to allege facts showing the alleged enterprise was engaged in or affected interstate commerce. We disagree. In paragraph 50 of the amended complaint, the plaintiffs allege: "Defendants are all associated with an `enterprise' engaged in activities which affect interstate commerce." Amended Complaint ¶ 50. This simple assertion has been held to be sufficient for the purposes of stating a claim under RICO and surviving a motion to dismiss. Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1289 (7th Cir.1983); see also Caliber Partners, Ltd. v. Affeld, 583 F.Supp. 1308, 1313 n. 13 (N.D.Ill.1984). The plaintiffs, therefore, have adequately alleged the requisite nexus. The cases relied on by the defendants are not to the contrary; in those cases, the complaints made no allegations about interstate commerce at all. Dunham v. Independence Bank of Chicago, 629 F.Supp. 983, 991 (N.D.Ill.1986); Fields v. National Republic Bank of Chicago, 546 F.Supp. 123, 125 n. 6 (N.D.Ill.1982).

B. Particularity as to the Individual Defendants

Thomas and Kaufman also contend that the amended complaint fails the test of Federal Rule 9(b) because it does not set out specific facts showing that either defendant committed any fraudulent acts.⁴ Rule 9(b) provides:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

This Court has previously recognized that Rule 9(b)'s demand for greater specificity in pleadings serves at least three purposes:

Complaints alleging fraud should seek redress for a wrong rather than attempting to discover unknown wrongs. Moreover, defendants must be protected from the harm that results from charges of serious wrongdoing, as well as the harm that comes to their reputations when they are charged with the commission of acts involving moral turpitude. Finally, allegations of fraud must be concrete and particularized enough to give notice to the defendants of the conduct complained of, to enable the defendants to prepare a defense. D & G Enterprises v. Continental Illinois National Bank & Trust Co., 574 F.Supp. 263, 266-67 (N.D.Ill.1983) (citations omitted); see also Coronet Insurance Co. v. Seyfarth, 665 F.Supp. 661, 666 (N.D.Ill.1987). Nonetheless, Rule 9(b) does not require the plaintiff to plead detailed evidentiary matter in the complaint, see, e.g., Haroco, Inc. v. American National Bank & Trust Co., 747 F.2d 384, 404 (7th Cir.1984), affd, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985).

Rule 9(b) is of especial importance in a case involving multiple defendants. Where there are allegations of a fraudulent scheme with more than one defendant, the complaint should inform each defendant of the specific fraudulent acts that constitute the basis of the action against the particular defendant. Harris Trust & Savings Bank v. Ellis, 609 F.Supp. 1118, 1123 (N.D. Ill.1985), aff'd, 810 F.2d 700 (7th Cir.1987); D & G Enterprises, 574 F.Supp. at 267. A complaint is sufficient if it reasonably notifies each defendant of the part he or she plays in the scheme. Donato v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 663 F.Supp. 669, 673 (N.D.Ill.1987). Accordingly, we must determine whether the amended complaint reasonably notifies Thomas and Kaufman of their respective roles in the alleged scheme.

Although it is a close question, and although the complaint is certainly not a model of drafting,⁵ we conclude that it meets the requirements of Rule 9(b). Paragraph 11 of the complaint states that Thomas "actively recruited many of the Plaintiffs and recommended to them the ... tax shelter programs," and paragraph 10 states that Kaufman "prepared tax returns for N.A.I.G. and its investors, including some of the...