Exeter Towers Associates v. Bowditch

• Citation: 604 F. Supp. 1547
• Decision Date: 28 March 1985
• Docket Number: Civ. A. No. 84-3464-K.
• Parties: EXETER TOWERS ASSOCIATES, Brian M. Capalbo, P. Edward Capalbo, Ronald E. Capalbo, Lawrence Dukatz, Edward R. Goldberg, Erza Goldberg, M. Howard Jacobson, Stuart R. Jaffee, Noel G. Posternak, David B. Reen, and Michael H. Smith, Plaintiffs, v. Robert S. BOWDITCH, Jr., Wesley E. Finch, and Fleet National Bank, Defendants.
• Court: U.S. District Court — District of Massachusetts

604 F. Supp. 1547

EXETER TOWERS ASSOCIATES, Brian M. Capalbo, P. Edward Capalbo, Ronald E. Capalbo, Lawrence Dukatz, Edward R. Goldberg, Erza Goldberg, M. Howard Jacobson, Stuart R. Jaffee, Noel G. Posternak, David B. Reen, and Michael H. Smith, Plaintiffs, v. Robert S. BOWDITCH, Jr., Wesley E. Finch, and Fleet National Bank, Defendants.

Civ. A. No. 84-3464-K.

United States District Court, D. Massachusetts.

March 28, 1985.

Robert D. Cohan, Boston, Mass., for plaintiffs.

Jeffrey B. Rudman, Stephen A. Jonas, Lee Johnson, Hale & Dorr, Boston, Mass., for Bowditch.

Daniel L. Goldberg, William G. Southard, Bingham, Dana & Gould, Boston, Mass., for Finch.

James P. Marusak, Hinckley, Allen, Tobin and Silverstein, Providence, R.I., for Fleet Nat. Bank.

OPINION

KEETON, District Judge.

A Massachusetts limited partnership, Exeter Towers Associates, and its limited partners have filed this action against the general partners for breach of contract, breach of fiduciary duty, fraud, unfair and deceptive practices in violation of the Massachusetts Regulation of Business Practices for Consumers Protection Act, and racketeering activities in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). The general partner defendants have filed a motion to dismiss this case for lack of subject matter jurisdiction under Rule 12(b)(1), because the plaintiffs have failed to state a claim under RICO—the only alleged basis for federal jurisdiction in this case. If the motion is granted, they request that the pendent state claims also be dismissed without prejudice to refiling in state court. Defendant Fleet National Bank has filed a motion to dismiss based upon several grounds. Plaintiffs have filed a motion to amend their complaint to include additional defendants and several new state causes of action. I treat the general partner defendants' motion as one filed under Rule 12(b)(6) and dismiss the RICO claim. I deny the plaintiffs' motion to amend the complaint because no independent basis for jurisdiction is alleged, and I also decline to exercise pendent jurisdiction over the state law claims. In light of these rulings, I grant Fleet National Bank's motion to dismiss.

I.

On November 21, 1977, the general partners formed a partnership to acquire a parcel of real property and to construct, maintain, and operate an apartment complex on that property. The partnership acquired several mortgages, which were eventually consolidated into one mortgage with a face value of $4,862,800. In the fall of 1978 the general partners circulated a confidential memorandum to attract several investors to purchase limited partnership interests. On March 26, 1981, the primary lending institution assigned the mortgage to the Government National Mortgage Association, which offered the mortgage in an auction to Federal Housing Association (FHA) approved mortgagees. In the auction the general partners, without notifying the limited partners, purchased the mortgage for $3,000,000 through an agreement with Merrill, Lynch, Huntoon, Prize, Inc. (Merrill Lynch), an FHA approved purchaser. The purchase was made by the general partners individually and not by the partnership. The limited partners were not approved mortgagees and were not aware of the auction. Merrill Lynch eventually assigned the mortgage to Merchants Bank. The purchased mortgage was held by Merchants Bank for two and a half years. It was assigned to Fleet National Bank on August 2, 1984.

In the Spring of 1983 plaintiffs became aware of the mortgage and asserted a 90% interest in any future profits derived from its sale. The limited partners claimed that the general partners used partnership information to purchase the mortgage, and such actions constituted a fraud upon the limited partners and the partnership. They also contend in this action that the general partners' interest in the mortgage created a conflict of interest with respect to the sale of the partnership property. On July 3, 1984, the partnership sold Exeter Towers for $7,900,000. The mortgage is now valued at a sum of about $1,000,000 over the original purchase price.

On October 31, 1984, plaintiffs instituted this action and simultaneously filed a motion for a temporary restraining order and a preliminary injunction. Plaintiffs included Fleet National Bank as a defendant and sought a declaratory judgment against the bank as to their rights in the mortgage. I granted the temporary restraining order on that day and scheduled a hearing. At the conclusion of the hearing, on November 9, 1984, I vacated the former order, and denied the plaintiffs' motion for a preliminary injunction. Plaintiffs have filed a motion for reconsideration and to reinstate the temporary restraining order. I deny the motion for reconsideration. For the reasons stated during the hearing of November 9, 1984, and in this Opinion, I conclude that plaintiffs have failed to satisfy the requirements of Rule 65.

The only basis for this court's jurisdiction in this action is the federal RICO count. I conclude that if the RICO count is dismissed, then the pendent state claims should also be dismissed.

Have the plaintiffs stated a cause of action under civil RICO?

Under 18 U.S.C. § 1964(c) (1982), "Any person injured in his business or property by reason of a violation of section 1962 ... may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee." Section 1962(c) provides that "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." Section 1962(d) prohibits a conspiracy to perform such activities. A "pattern of racketeering activity" is generally defined as two violations of specified federal statutes within a ten-year period. See 18 U.S.C. § 1961(5) (1982).

If one disregards the connotations of "racketeering" and "pattern of racketeering activity," the definitions in 18 U.S.C. § 1961 (1982) may lead to a very broad construction of the statute as tending to federalize most garden variety common law actions for fraud. Some of the conflicting precedents appear to support this construction. Others do not. Neither the Supreme Court nor the First Circuit has yet addressed this question.

I turn, first, to an examination of the precedents and then to other factors bearing upon the decision in this case—factors relevant to predicting how this disputed issue is most likely to be resolved by the Supreme Court, at least insofar as is necessary to the decision of the present case.

II.

Among the precedents favoring a very broad construction of the statute is Harco, Inc. v. American National Bank & Trust Co., 747 F.2d 384 (7th Cir.1984) (Harco, Inc.), cert. granted, ___ U.S. ___, 105 S.Ct. 902, 83 L.Ed.2d 917 (1985). In Harco, Inc. the Seventh Circuit rejected all limitations upon civil RICO other than the requirements explicitly stated in the statute:

With respect to the case before us, it does not seem at all likely that Congress anticipated the application of civil RICO to improperly calculated interest charges by a commercial bank. And this may or may not be an appropriate subject for this federal statute. Nevertheless, it does not seem fitting for us to attempt to narrow the statute in ways which are nearly impossible to rationalize merely to exclude subjects of this kind. For to say that Congress did not anticipate this subject is not to say that Congress would have excluded it if the subject had been brought explicitly to its attention. Congress appears to have preferred a broad statute, even if overinclusion might result.

Id. at 399. Other decisions have adopted a similarly broad construction of civil RICO. See id. at 388 (decisions rejecting limitations); Sutliff, Inc. v. Donovan Companies, Inc., 727 F.2d 648 (7th Cir.1984).

Other courts have concluded that the statute should be construed as imposing some limitations beyond those explicitly stated. The most widely accepted limitation on the scope of civil RICO is a "standing" requirement that is inferred from the "by reason of" language of § 1964(c). One version of this requirement has been recently adopted by the Second Circuit. See Sedima, S.P.R.L. v. Imrex, Co., Inc., 741 F.2d 482 (2d Cir.1984) (Sedima), cert. granted, ___ U.S. ___, 105 S.Ct. 901, 83 L.Ed.2d 917 (1985). By this view, in order to have standing under the act, a plaintiff must allege an injury caused by activity that the statute was designed to deter, which is not simply the injury caused by the predicate acts. "RICO was not enacted merely because criminals break laws, but because mobsters, either through the infiltration of legitimate enterprises or through the activities of illegitimate enterprises, cause systemic harm to competition and the market, and thereby injure investors and competitors.... It is only when injury caused by this kind of harm can be shown, therefore, that we believe that Congress intended that standing to sue civilly should be granted." Id. at 495-96. Some district courts have followed this formulation of the standing requirement. See, e.g., Atlantic Federal Savings & Loan Ass'n v. Dade Savings & Loan Ass'n, 592 F.Supp. 1089, 1092-93 (S.D.Fla.1984).

Another Second Circuit case has elaborated upon Sedima's standing limitation. See Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.1984). This decision follows Sedima's holding that a plaintiff "must allege a proprietary injury caused by a RICO violation, not just one caused by some of the essential elements of a RICO violation." Id. at 516. But it goes on to conclude that each element of § 1962 must be a "but for" cause of the injury. Id. at 517. The...