Equitable Life Assur. Soc. v. Alexander Grant & Co.

• Decision Date: 19 December 1985
• Docket Number: No. 85 Civ. 3595.,85 Civ. 3595.
• Citation: 627 F. Supp. 1023
• Parties: The EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES, Plaintiff, v. ALEXANDER GRANT & CO., Defendant.
• Court: U.S. District Court — Southern District of New York

627 F. Supp. 1023

The EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES, Plaintiff, v. ALEXANDER GRANT & CO., Defendant.

No. 85 Civ. 3595.

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

December 19, 1985.

COPYRIGHT MATERIAL OMITTED

Werner Weinstock, New York City, for plaintiff.

Parker Chapin Flattau & Klimpl, New York City (Alvin Stein, Lee W. Stremba, of counsel), for defendant.

WALKER, District Judge.

Introduction

This matter is currently before the Court on defendant's motion to dismiss the complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6). Defendant also seeks court-awarded sanctions against plaintiff under Rule 11.

Plaintiff Equitable Life Assurance Society of the United States (Equitable), brings three causes of action against Alexander Grant & Co. (Grant) arising out of the accounting firm's alleged role as auditor of ESM Group, Inc., its subsidiaries, divisions and affiliates (ESM):

(1) Equitable's first claim alleges that Grant, in issuing statements on behalf of ESM, violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961 et seq (1970). As a result of that violation, Equitable claims it has been damaged in the amount of $7,000,000 plus interest. Plaintiff also demands trebled damages and attorney's fees under RICO.

(2) Equitable's second claim alleges gross negligence on the part of Grant in the performance of its accounting duties for ESM. Equitable seeks $7,000,000 plus interest in damages on this count.

(3) The third count of the complaint alleges fraud by Grant in reporting the financial condition of ESM. Equitable seeks $7,000,000 plus interest in actual damages on this claim and $10,000,000 in punitive damages.

Plaintiff claims that all damages on all counts result from Equitable's issuing "various policies of life insurance" on "senior officers of ESM." ¶ 12, 13

The complaint alleges federal jursidication under both RICO, 18 U.S.C. § 1965 and diversity jurisdiction pursuant to 28 U.S.C. § 1332. Paragraph 5 states that Equitable "is a corporation organized and existing under the laws of the State of New York, with an office at 1285 Avenue of the Americas, New York City, New York." Paragraph 6 states that Grant "is a partnership of certified public accountants organized and existing under the laws of the State of Illinois, and transacts business in its offices in the City, County and State of New York, as well as in various other cities of the United States."

When considering a motion to dismiss the complaint, the court is required to construe the complaint in the light most favorable to the plaintiff. Indeed, "for the purposes of a motion to dismiss, the material allegations of the complaint are taken as admitted." Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1849, 23 L.Ed.2d 404 (1969). The complaint should not be dismissed "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, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

Jurisdiction

Plaintiff's allegation of diversity jurisdiction is deficient and fails to establish diversity under 28 U.S.C. § 1332.

It is fundamental that a complaint must affirmatively allege subject matter jurisdiction and that absent a properly pleaded basis for federal jurisdiction the complaint must be dismissed. John Birch Society v. National Broadcasting Co., 377 F.2d 194, 197-98 (2d Cir.1967); Martin Hodas, East Coast Cinematics, Inc. v. Lindsay, 431 F.Supp. 637, 640 (S.D.N.Y.1977). Under the law of diversity jurisdiction, a corporation is considered a citizen of both its state of incorporation and the state where it has its principal place of business. 28 U.S.C. § 1332(c).

On the other hand, a partnership is deemed a citizen of every state of which any partner is a citizen. Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 456, 20 S.Ct. 690, 693, 44 L.Ed. 842 (1900); Woodward v. D.H. Overmeyer Co., 428 F.2d 880, 883 (2d Cir.1970). Even if a single partner is not diverse to the plaintiff, the action must be dismissed. Cunard Line, Ltd. v. Abney, 540 F.Supp. 657, 660 (S.D.N.Y.1982).

Here, although ¶ 5 of the complaint alleges that Equitable has "an office" in New York, nowhere is the principal place of business of the corporation alleged. For that reason, plaintiff has failed to properly plead its own citizenship. Moreover, the complaint alleges neither the citizenship of Grant's partners, nor that whatever their citizenship Equitable's is diverse. It is apparent that Equitable has not alleged complete diversity between itself and Grant because it cannot do so. Presumably some of the partners in Grant's New York office are citizens of New York and would therefore be non-diverse to Equitable, a New York company. Thus, plaintiff has failed to adequately plead diversity.

Paragraph 2 of the Complaint alleges an alternate basis for federal jurisdiction under RICO, 18 U.S.C. § 1965 and the principles of pendent jurisdiction. Since the court holds that there has been no adequate allegation of diversity jurisdiction, plaintiff's entire complaint, the RICO claim and the pendent state claims of gross negligence and fraud, stands or falls together.

The Court holds that since the complaint fails to adequately plead a RICO cause of action, the entire complaint must be dismissed. Moreover, the Court concludes that plaintiff's common law fraud and gross negligence claims are deficient and would be dismissed even if a basis for federal jurisdiction existed.

RICO

Although it is nowhere explicitly stated in the complaint, plaintiff apparently bases its RICO claim on 18 U.S.C. § 1962(c) which 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.

A plaintiff seeking to bring a civil RICO action must allege the following essential elements:

(1) "that the defendant a `person' in terms of the Act

(2) through the commission of two or more acts;

(3) constituting a `pattern'

(4) of `racketeering activity'

(5) directly or indirectly invests in, or maintains an interest in, or participates in

(6) an `enterprise'

(7) the activities of which affect interstate commerce or foreign commerce."

(8) And "that the plaintiff was injured in his business or property `by reason of' the aforementioned activity of the defendant."

Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir.1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984).

(1) Persons Liable

A "person" is defined in 18 U.S.C. § 1961(3) as "any individual or entity capable of holding a legal or beneficial interest in property." Equitable has clearly satisfied this pleading element by alleging that "Alexander Grant & Company ("Grant") is a partnership of certified public accountants organized and existing under the laws of the State of Illinois." ¶ 6.

(2) Predicate Acts

The offenses which underlie "racketeering activity" are the predicate acts necessary for a RICO violation. They are defined in 18 U.S.C. § 1961 as acts "indictable" or "punishable" under various federal criminal statutes and acts "chargeable" under certain state criminal laws. These include murder, kidnapping, arson, robbery, bribery, extortion, dealing in narcotics, securities fraud, mail fraud and wire fraud. Civil litigation under RICO typically involves allegations of mail fraud or wire fraud.

Viewed in its most charitable light, the complaint alleges violation of the federal mail fraud statute, 18 U.S.C. § 1341. Construing the disjointed complaint generously, the Court concludes that two paragraphs of the complaint, when combined, constitute a facial pleading of mail fraud as a predicate act.

Although plaintiff's claim for relief under RICO does not mention "fraud", ¶ 19(a), declared applicable to all claims, appears to allege fraud:

(a) Grant knew or should have known that financial information contained in the Statements was materially false and misleading and would be provided to and relied upon by plaintiff in underwriting the applications for insurance on the lives of the senior officers of ESM; ...

In addition, ¶ 21 accuses Grant of violating § 1962 of RICO "by the use of means and instrumentalities of interstate commerce and of the mails" (emphasis added). Taken together, these paragraphs on their face plead a violation of the federal mail statute. A separate question is whether the offense has been adequately pleaded under Fed.R.Civ.P. 9(b).

In its recent decision in Sedima, S.P.R.I. v. Imrex Co., ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court left open the question of whether more than two predicate acts must be alleged to sustain a RICO claim. We need not reach that issue here, however, because plaintiff appears to allege three separate acts of mail fraud as predicate acts:

10. (a) On or about January 11, 1977, Grant certified the accuracy of and published the Statements of ESM as of December 31, 1976, and plaintiff obtained a copy thereof on or about September 28, 1977.

(b) On or about February 4, 1982, Grant certified the accuracy of and published the Statements of ESM as of December 31, 1981, and plaintiff obtained a copy thereof on or about July 1, 1982.

(c) On or about January 25, 1983, Grant certified the accuracy of and published the Statements of ESM as of December 31, 1982, and plaintiff obtained a copy thereof on or about February 13, 1984.

(3) and (4) "Pattern" of Racketeering Activity

Section 1961 prohibits the use of a "pattern" of predicate acts to play a role in an interstate "enterprise." The statute does not define a "pattern of racketeering activity" but instead states that a pattern "... requires at...