China Trust Bank of N.Y. v. Standard Chartered Bank

• Decision Date: 22 October 1997
• Docket Number: No. 96 CIV 9764(SWK).,96 CIV 9764(SWK).
• Citation: 981 F.Supp. 282
• Parties: CHINA TRUST BANK OF NEW YORK, Plaintiff, v. STANDARD CHARTERED BANK, PLC, an English Corporation, a/k/a Standard Chartered Bank, New York Branch, Defendant.
• Court: U.S. District Court — Southern District of New York

981 F.Supp. 282

CHINA TRUST BANK OF NEW YORK, Plaintiff, v. STANDARD CHARTERED BANK, PLC, an English Corporation, a/k/a Standard Chartered Bank, New York Branch, Defendant.

No. 96 CIV 9764(SWK).

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

October 22, 1997.

COPYRIGHT MATERIAL OMITTED

Gary D. Nissenbaum, Wong, Tsai & Fleming Edison, NJ, for Plaintiff.

Martin Domb, Hill, Betts & Nash, New York, NY, for Defendant.

MEMORANDUM OPINION AND ORDER

KRAM, Senior District Judge.

In this action alleging violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.1961, et seq. ("RICO"), fraud and fraudulent misrepresentation, Standard Chartered Bank, PLC ("SCB") moves pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss China Trust Bank of New York's ("China Trust") RICO claims and claim for punitive damages. For the reasons set forth below, China Trust's RICO claims are dismissed and SCB's motion to dismiss the claim for punitive damages is denied.

BACKGROUND¹

In or about March 1992, Standard Chartered Bank, New York Branch ("SCBNY") extended a $5 million credit facility to Chine Fashion, Inc. ("Chine Fashion"). The loan officer assigned to the Chine Fashion account was Leonardo Tee ("Tee"). In or about March 1993, SCBNY performed a credit review of the Chine Fashion account in connection with an application to increase the credit facility. SCBNY noted that the account had failed to perform in the manner for which it was originally approved and was not pleased with the manner in which the account had been handled. Nevertheless, SCBNY approved the increased credit application, subject to certain conditions. One of these conditions was that if Chine Fashion failed to comply with the terms of the credit as approved, proceeds from the sale of land were to be used to reduce the loan balance. In addition, the account was to be fully reviewed in July 1993.

In July 1993, a SCBNY credit officer wrote a memorandum to Tee's supervisor in which he criticized the way Tee had handled and internally reported on the Chine Fashion account. Tee's supervisor agreed that Tee erred in reporting that the account had been conducted in a satisfactory manner.

In September 1993, SCBNY prepared a "Substandard Account Report" which stated that Chine Fashion's credit rating had been downgraded because it had reported two consecutive years of operating losses. In December 1993, SCBNY's credit officer declined an application to extend Chine Fashion's credit facility, citing Chine Fashion's negative cash flow, its failure to comply with loan requirements to reduce its principal balance from $5 million to $4.85 million, and labor difficulties at its affiliated Philipine garment plant. The credit officer allowed Chine Fashion to continue to extend the credit facility for a limited period to allow Chine Fashion to find alternative bankers.

In late 1993 or early 1994, Tee told China Trust's President that Chine Fashion was leaving SCBNY because SCBNY was getting out of the middle market business, and that Chine Fashion was a good customer of SCBNY. China Trust alleges that these statements were false and that Chine Fashion was leaving SCBNY because of Chine Fashion's poor credit history, and that SCBNY's and Tee's intent was to find another bank to take over Chine Fashion's account. Thereafter, Chine Fashion applied to China Trust for a loan facility. China Trust alleges that Chine Fashion intentionally misrepresented its own financial condition and credit history at SCBNY, in order to induce China Trust to approve the facility.

On May 18, 1994, a loan officer at China Trust sent a credit inquiry to Tee, by which China Trust informed SCBNY that Chine Fashion had applied to China Trust for a $5 million line of credit, and asked SCBNY to comment on its overall experience with Chine Fashion. That same day, Tee responded in writing that Chine Fashion was a customer in good standing, that SCBNY considered its principals to be honorable, extremely cooperative and very knowledgeable of their business. China Trust alleges that these statements were false, and that SCBNY knew them to be false in view of the actual history of Chine Fashion's account at SCBNY.

The complaint alleges that after providing the written reference on May 18, 1994, SCBNY further mislead China Trust, when Tee informed Mr. M.S. Wu of China Trust, in June 1994, that SCBNY had frozen Chine Fashion's line of credit, not because of any problems with the loan, but because SCBNY wanted to remove itself from the middle market business. China Trust alleges that SCBNY's intent to mislead China Trust is reflected in an internal SCBNY memo which, in referring to the conversation with Mr. Wu, stated: "We hope we did not scare them off; the one immediate opportunity for a complete take out." Complaint ¶ 41.

On May 26, 1984, China Trust approved the $5 million facility to Chine Fashion and on June 28, 1994 extended Chine Fashion a temporary loan. On July 21, 1994, China Trust issued a commitment letter and on December 6, 1994 entered into the $5 million facility at which time it advanced Chine Fashion $3,559,045.67 to pay off Chine Fashion's outstanding debt to SCBNY. The complaint alleges that China Trust was fraudulently induced, by SCBNY's allegedly false statements, to approve and extend such loans and facilities to Chine Fashion.

Thereafter, China Trust sued Chine Fashion in New Jersey state court, alleging default, fraud and other wrongful acts by Chine Fashion. The instant complaint alleges that SCBNY, through Tee, committed perjury in the New Jersey state court proceeding by testifying that Chine Fashion's account at SCBNY had been managed satisfactorily, and that Chine Fashion left SCBNY because of SCBNY's policy decision to stop lending to middle market customers such as Chine Fashion. Specifically, Tee provided a sworn certification, which Chine Fashion submitted in opposition to China Trust's application for injunctive relief. Moreover, Tee testified at a deposition taken in the New Jersey action, on August 1, 1996. On February 28, 1997, China Trust filed a complaint in this Court against SCB, alleging violations of RICO, common law fraud and fraudulent misrepresentation.

DISCUSSION

I. Standard of Law

On a motion to dismiss brought pursuant to Rule 12(b)(6), the Court must accept the allegations in the complaint as true and construe them in the light most favorable to the plaintiff. Easton v. Sundram, 947 F.2d 1011, 1014-15 (2d Cir.1991), cert. denied, 504 U.S. 911, 112 S.Ct. 1943, 118 L.Ed.2d 548 (1992). A complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

II. RICO

Title 18, section 1962(c) of the United States Code provides:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

18 U.S.C. § 1962(c).

In support of the motion to dismiss, SCB argues that the China Trust does not state a cause of action because it fails to allege a distinct enterprise under Section 1962(c) and because it fails to allege the element of continuity that is essential to establish a pattern of racketeering.

A. Distinct Enterprise

To state a cause of action under Section 1962(c), a single defendant may not be both the enterprise and the person liable. Bennett v. U.S. Trust Co., 770 F.2d 308, 315 (2d Cir.1985), cert. denied, 474 U.S. 1058, 106 S.Ct. 800, 88 L.Ed.2d 776 (1986). Section 1962(c) contains a distinctiveness requirement. "[A] corporate entity may not be simultaneously the `enterprise' and the `person' who conducts the affairs of the enterprise through a racketeering activity." Id. Furthermore, this distinctiveness requirement may not be circumvented by alleging a conspiracy between the defendant and its own employees or agents carrying on the regular affairs of the defendant. Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir.1994). "Where employees of a corporation associate together to commit a pattern of predicate acts in the course of their employment and on behalf of the corporation, the employees in association with the corporation do not form an enterprise distinct from the corporation." Id. Moreover, in this Circuit, where the alleged conspirators are separate legal entities but operate within the same corporate structure guided by a single corporate consciousness, a RICO person may not be subject to liability simply because he is separately incorporated from the RICO enterprise. See Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1063-64 (2d Cir.1996) ("It would be inconsistent for a RICO person, acting within the scope of its authority, to be subject to liability simply because it is separately incorporated, whereas otherwise it would not be held liable under Riverwoods."), cert. denied, ___ U.S. ___, 118 S.Ct. 49, 139 L.Ed.2d 14 (1997).

SCB is a public liability company of England and SCBNY is registered with the New York Department of Banking as a "foreign branch of Standard Chartered Bank, plc." Complaint ¶ 6. SCB and SCBNY are alleged to be separate entities operating within the same corporate structure guided by a single corporate consciousness. See Plaintiff's Memorandum in of Law in Opposition to Defendant's Motion to Dismiss at 7-9. SCBNY is a separate enterprise that SCB uses to conduct business in New York. Id. at 10. Thus, SCB and SCBNY are not distinctive entities for RICO purposes. China Trust has failed to distinguish the RICO person from the alleged enterprise, and thus cannot state a claim under Section 1962(c).²

B. Continuity

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