Balabanos v. North American Inv. Group, Ltd.

• Decision Date: 09 March 1988
• Docket Number: No. 86 C 3802.,86 C 3802.
• 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

684 F. Supp. 503

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, E.D.

March 9, 1988.

Paul J. Maganzini, Maganzini McMahon & McNicholas, Chicago, Ill., for plaintiffs.

Marvin Berkowitz, E. James Gildea, Thomas, Mason D. Sullivan, G.E. Polites and Divesco, Chicago, Ill., Stavros & Biasiello, K. Polites, Wheeling, Ill., Wayne S. Shapiro, Kaufman, Chicago, Ill., for defendants.

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 (West Supp.1987), as well as various state law claims all arising out of defendants' investment activities on behalf of the plaintiff investors. Various defendants have filed motions to dismiss which we grant for the reasons stated below.

I.

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." (Complaint ¶ 25).¹ 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." (Complaint ¶ 17) 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." (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 others limited partnerships in syndicated real estate packages through which expenditures would 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 so 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 N.A.I. G. and Divesco 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 investors have recently been informed by the IRS that their deductions attributable to these investments have 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.

There are four separate motions to dismiss the RICO Count on various grounds and the other counts for lack of pendent jurisdiction. The motions raise five issues: (1) failure to allege a pattern of racketeering activity; (2) failure to plead fraud with specificity under Fed.R.Civ.P. 9(b); (3) failure to allege the existence of a racketeering enterprise; (4) failure to allege an enterprise that functioned as a continuing unit and that existed apart from the pattern of racketeering activity in which it engaged; and (5) Statute of Limitations as to the RICO count. Because we must dismiss the RICO count under Fed.R.Civ.P. 9(b) as discussed below, we need not address the last three issues. However, should plaintiffs file an amended complaint, defendants may renew those arguments in a new motion to dismiss the amended complaint.

Defendants Divesco,² G. Polites and K. Polites move to dismiss the RICO claim for failure to adequately allege the existence of a "pattern of racketeering activity" which is necessary to state a claim under RICO. Because this issue also concerns their argument under Fed.R.Civ.P. 9(b) that the complaint fails to allege fraud with particularity, we will address both issues together.

A key element of a claim under 18 U.S.C. § 1962 is the existence of a pattern of racketeering. Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1304 (7th Cir.1987). In Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court noted that a pattern of racketeering activity required more than just two acts committed within a ten year period; the acts must have "continuity plus relationship which combines to produce a pattern." Id. at 496 n. 14, 105 S.Ct. at 3285 n. 14. Since Sedima, the circuit courts have struggled with defining the concept of a "pattern" under RICO. The Seventh Circuit has taken a middle position among the circuits requiring that the predicate acts be "ongoing over an indentifiable period of time so that they can fairly be viewed as constituting separate transactions." Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir.1986). The Seventh Circuit has recently reiterated the proper analysis under its recent case law on the subject:

In determining whether the predicate acts are sufficiently continuous and related, we urged courts to examine the following factors: the number and variety of predicate acts and the length of time over which they were committed, the number of victims, the presence of separate schemes and the occurrence of distinct injuries. We noted however that "the mere fact that the predicate acts relate to the same overall scheme or involve the same victim does not mean that the acts automatically fail to satisfy the pattern requirement." Thus, Morgan envisioned a fact-specific inquiry, in which no single factor would be determinative. In Lipin Enterprises v. Lee, 803 F.2d 322 (7th Cir.1986), however, we noted that a single fraudulent scheme with one injury to one victim was not transmuted into a federal case simply because it required several acts of mail and wire fraud to inflict a single injury.

Liquid Air, 834 F.2d at 1304 (citations omitted). In conducting this analysis we are hampered by the exact lack of particularity in the complaint complained of by defendants Divesco, and George and Konstantine Polites under Fed.R.Civ.P. 9(b). Rule 9(b) does not command that a plaintiff plead evidence and prove his case in the complaint. Haroco, Inc. v. American National Bank & Trust Co., 747 F.2d 384, 405 (7th Cir.1984), aff'd, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). However, in detailing the scheme to defraud, the plaintiff must give a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants. Ghouth v. ContiCommodity Services, Inc., 642 F.Supp. 1325, 1331 (N.D.Ill.1986). In the context of allegations of mail fraud this means that plaintiffs must sketch out who (i.e. which defendant) caused what to be mailed when, and how that mailing furthered the fraudulent scheme. Id. at 1331-32. In reviewing the complaint we find that it adequately alleged what the general fraudulent conduct was, i.e. the abusive tax shelter scheme, when and where it took place and how it was perpetuated and by whom. The complaint alleges that the N.A.I.G. defendants (¶¶ 7-11) "have been and/or are presently engaged in organizing or promoting or assisting in the organization of or selling interests in, and/or the operation of the alleged tax shelter partnership programs...." (¶ 14). The complaint also alleges that "Divesco defendants (¶¶ 17-18) have been and/or are presently...