Bernstein v. IDT Corp.

• Decision Date: 02 March 1984
• Docket Number: Civ. A. No. 83-294-WKS.
• Citation: 582 F. Supp. 1079
• Parties: Lawson F. BERNSTEIN, Trustee in Bankruptcy of Frigitemp Corporation, Plaintiff, v. IDT CORPORATION, George Davis, General Dynamics Corporation, Panagiotis Takis Veliotis, James H. Gilliland, Paulette Veliotis, Elizabeth Gilliland, Lenora L. Cable a/k/a Lenora Davis, Mark J. Deroche, and John Doe Defendants whose identities are currently unknown to plaintiff, Defendants.
• Court: U.S. District Court — District of Delaware

582 F. Supp. 1079

Lawson F. BERNSTEIN, Trustee in Bankruptcy of Frigitemp Corporation, Plaintiff, v.IDT CORPORATION, George Davis, General Dynamics Corporation, Panagiotis Takis Veliotis, James H. Gilliland, Paulette Veliotis, Elizabeth Gilliland, Lenora L. Cable a/k/a Lenora Davis, Mark J. Deroche, and John DoeDefendantswhose identities are currently unknown to plaintiff, Defendants.

Civ. A. No. 83-294-WKS.

United States District Court, D. Delaware.

March 2, 1984.

COPYRIGHT MATERIAL OMITTED

William Prickett, Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., David Berger, H. Laddie Montague, Jr., Howard Langer, Alan Sandals, Berger & Montague, Philadelphia, Pa., for plaintiff.

Paul H. Spiller, Kimmel & Spiller, Wilmington, Del., Matthew L. Byrne, Hollman & Byrne, New York City, for defendantsDavis and IDT Corp.

H. James Conaway, Jr., Edward B. Maxwell, II, Young, Conaway, Stargatt & Taylor, Wilmington, Del., Albert E. Jenner, Jr., Thomas P. Sullivan, Nicholas D. Chabraja, Jayne W. Barnard, Jenner & Block, Chicago, Ill., for defendantGeneral Dynamics Corp.

Victor F. Battaglia, Gary W. Aber, Biggs & Battaglia, Wilmington, Del., Randy Paar, Anderson, Russell, Kill & Olick, New York City, for defendantsPanagiotis Takis Veliotis and Paulette Veliotis.

OPINION

STAPLETON, Chief Judge:

Plaintiff, Lawson F. Bernstein, Trustee in Bankruptcy of the Frigitemp Corporation("Frigitemp") has brought suit against a number of defendants to recover funds for the estate.Defendants include the General Dynamics Corporation("General Dynamics"), P. Takis Veliotis and James Gilliland, former officers of General Dynamics' Quincy Shipbuilding Division, the IDT Corporation("IDT"), and George Davis, President of IDT, and a former Frigitemp Vice-President.Other named defendants include the wives of Veliotis, Gilliland and Davis, and one Mark Deroche, believed to be a principal of IDT.

Frigitemp, a New York corporation, was formerly engaged in the marine construction business and did substantial subcontracting work on vessels built by General Dynamics' Quincy Shipbuilding Division in Quincy, Massachusetts.During the years 1973 through 1977, Veliotis was President and Gilliland was Vice-President of the Quincy Shipbuilding Division.Davis was Senior Vice-President with responsibility for Frigitemp's Quincy subcontracts.

Plaintiff alleges that Veliotis and Gilliland extorted millions of dollars in kickbacks and illegal rebates in return for awarding the subcontracts to Frigitemp.To pay these kickbacks, Davis is alleged to have set up various corporations, and diverted funds from Frigitemp through a complex scheme of fraudulent billing.Finally, when Frigitemp was on the verge of bankruptcy, Davis is alleged to have incorporated IDT for the purpose of further draining Frigitemp assets and continuing the dealings with Veliotis and Gilliland.

IDT was incorporated in early 1978 and approximately one month later Frigitemp filed for and obtained protection under Chapter XI of the Federal Bankruptcy Laws.Almost immediately, General Dynamics terminated its contracts with Frigitemp and transferred them to IDT.This is alleged to have constituted a fraudulent conveyance.

Frigitemp was adjudged bankrupt and the plaintiff appointed as Trustee in Bankruptcy in May 1979.In January 1980, a bankruptcy judge of the Southern District of New York authorized the trustee to conduct an investigation into the circumstances surrounding the Frigitemp bankruptcy and the possibility that meritorious claims might exist against Davis, IDT and employees of General Dynamics.Pursuant to Bankruptcy Rule 205, the trustee deposed Davis, Veliotis and Gilliland.The trustee/plaintiff alleges that he was induced by the perjurious testimony of Davis, Veliotis and Gilliland to enter into settlements and releases of Davis, IDT, General Dynamics, Veliotis, Gilliland, and other co-conspirators.Plaintiff alleges that Veliotis and Gilliland were testifying on behalf of General Dynamics and that General Dynamics knew of their allegedly perjurious testimony and actively sought to conceal both the perjury and the illegal scheme.

I.GENERAL DYNAMICS' MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

Plaintiff charges General Dynamics with violation of Sections 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act("RICO"), 18 U.S.C. § 1961, et seq.(1970), as well as common law fraud and negligent entrustment or negligent supervision.Before the Court at this time is General Dynamics' motion to dismiss plaintiff's RICO claims for failure to state a claim upon which relief can be granted.Fed.R.Civ.P. 12(b)(6).General Dynamics argues further that in the absence of a viable federal claim, the state law fraud and negligence claims should be dismissed for lack of pendent jurisdiction, and that, in addition, plaintiff has failed to allege a state law claim upon which relief can be granted.

A.The Claims Under Sections 1962(c) And (d)

Section 1962(c) of RICO proscribes conduct whereby a "person" or persons conduct the affairs of an "enterprise" through a "pattern of racketeering activity."Each of these terms is further defined in Section 1961 of the Act: A "person,"Section 1961(3), "includes any individual or entity capable of holding a legal or beneficial interest in property."An "enterprise,"Section 1961(4), "includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity."A "pattern of racketeering activity", Section 1961(5), "requires at least two acts of racketeering activity" occurring within a ten year period.Included in the list of predicate acts of racketeering is "any offense involving fraud connected with a case under title 11, ...", Section 1961(1)(D).

Dismissal of a complaint under Rule 12(b)(6) for failure to state a claim is not proper "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Conley v. Gibson,355 U.S. 41, 45-6, 78 S.Ct. 99, 101-2, 2 L.Ed.2d 80(1957).At the same time, the allegations of the complaint must provide some reason to believe that the plaintiff may be entitled to relief.

There are four elements of a claim under Section 1962(c).The defendant must be alleged and ultimately shown to be (1) a person, (2) associated with an enterprise affecting interstate or foreign commerce, (3) who has conducted the affairs of that enterprise (4) through a pattern of racketeering activity.In paragraph 18 of the complaint the trustee alleges that "Veliotis, Gilliland and General Dynamics conducted the affairs of General Dynamics through a pattern of racketeering activity."It is clear from a reading of Count I that this allegation was directed to the third and fourth elements of a Section 1962(c) violation.¹

By so alleging, the trustee poses the troubling issue of whether a corporate enterprise whose affairs have been conducted through a pattern of racketeering activity can be held liable as a "person" which is associated with itself and which participated in the conduct of its own affairs.The courts that have considered this person/enterprise issue have reached differing conclusions.The Fourth Circuit in United States v. Computer Sciences Corp.,689 F.2d 1181(4th Cir.1982) concluded that the culpable person must be an entity distinct and separate from the enterprise with which it, he or she associates.The Eighth Circuit, in Bennett v. Berg,685 F.2d 1053(8th Cir.1982), reached the same conclusion.On the other hand, the Eleventh Circuit decided that a corporation could be both the "person" and the "enterprise" for purposes of the RICOstatute.United States v. Hartley,678 F.2d 961(11th Cir.1982).I need not resolve this issue, however.In Computer Sciences and Hartleythe courts were concerned solely with criminal responsibility and, accordingly, were forced to decide whether a corporation can be both a "person" and the "enterprise" within the meaning of RICO.²I am confronted with a question of whether General Dynamics may be held civilly liable based on the allegations of the complaint and I conclude that the answer is yes.When conduct is proscribed by a federal statute and civil liability for that conduct is explicitly or implicitly imposed, the normal rules of agency law apply in the absence of some indication that Congress had a contrary intent.As the Supreme Court recently observed in the context of the antitrust statutes:

We can honor the statutory purpose best by interpreting the antitrust private cause of action to be at least as broad as a plaintiff's right to sue for analogous torts, absent indications that the antitrust laws are not intended to reach so far....

American Soc. of M.E.'s v. Hydrolevel Corp.,456 U.S. 556, 569, 102 S.Ct. 1935, 1944, 72 L.Ed.2d 330(1982).

In American Society of Mechanical Engineers v. Hydrolevel Corp.,the Court held the Association liable for treble damages as a result of the anticompetitive conduct of the chairman of one of its committees under the agency rule that principals are "liable when their agents act with apparent authority."456 U.S. at 565-66, 102 S.Ct. at 1942.Citing the Restatement of Agency,the Court noted that a "principal is liable for an agent's misrepresentations that cause pecuniary loss to a third party, when the agent acts within the scope of his apparent authority."456 U.S. at 566, 102 S.Ct. at 1942.

The trustee here alleges that Veliotis and Gilliland committed a statutory tort by conducting the affairs of General Dynamics through a pattern of racketeering activity in violation of RICO.That activity included extortion of kickbacks and misrepresentation in a bankruptcy proceeding.I perceive nothing in RICO or its legislative history which would suggest that the normal rules of agency law should not apply to the civil liability...