First Capital Asset Management v. Brickellbush

• Decision Date: 11 September 2002
• Docket Number: No. 00 CIV.5597 LAK.,00 CIV.5597 LAK.
• Citation: 219 F.Supp.2d 576
• Parties: FIRST CAPITAL ASSET MANAGEMENT, INC., et ano., Plaintiffs, v. BRICKELLBUSH, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

219 F.Supp.2d 576

FIRST CAPITAL ASSET MANAGEMENT, INC., et ano., Plaintiffs, v. BRICKELLBUSH, INC., et al., Defendants.

No. 00 CIV.5597 LAK.

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

September 11, 2002.

Eric W. Berry, Eric W. Berry Law Office PC, New York City, for Plaintiffs.

Russell P. McRory, McRory and McRory, P.L.L.C., Garden City, NY, for Defendants Satinwood, Inc., Sphinx Rock, N.V., Ahmed Vahabzadeh, Afsar Vahabzadeh, Savco, S.A., and The Estate of Soleyman Vahabzadeh.

MEMORANDUM OPINION

KAPLAN, District Judge.

Plaintiffs and certain defendants seek reconsideration of different aspects of the Court's July 29, 2002 opinion (the "July 29 Opinion"), familiarity with which is presumed, which granted in part and denied in part defendants' motion to dismiss the amended complaint.¹ Most of the points they raise lack any color of merit and are simply efforts to replow ground adequately cultivated before. Certain arguments, however, require further discussion. Upon reconsideration of these limited matters, the Court adheres to its prior ruling on the standing/ripeness issue challenged by the plaintiffs,² but is persuaded that it should have considered the moving defendants' Rule 12(b)(6) and 9(b) arguments.

I. Lost Debt Injury

Plaintiffs contend that the Court erred in ruling that they lack standing under RICO to recover their alleged "lost debt" as a result of its failure to recognize that GICC Capital Corp. v. Technology Finance Group, Inc.³ permits such a claim in these circumstances and, indeed, modified or overruled Bankers Trust Co. v. Rhoades⁴ and Stochastic Decisions, Inc. v. DiDomenico⁵ to the extent that they pointed to the opposite result.

The Court has reconsidered those cases carefully and, to the extent that it suggested in a footnote in the July 29 Opinion that the GICC panel had misread Bankers Trust and Stochastic,⁶ has concluded that it was mistaken. The Court nevertheless reaches the same result.

The Court indicated in its prior opinion that Bankers Trust and Stochastic stand for the proposition that a creditor claiming that its ability to collect its debt has been impaired or frustrated by a RICO violation lacks standing to sue under RICO for the amount of the debt as long as the extent of the loss remains uncertain, as for example where collection efforts continue.⁷ To be more precise, these cases go to the ripeness of such a plaintiff's RICO claim, but ripeness and standing are intertwined because a plaintiff does not acquire standing by virtue of a claim that is not ripe.⁸ Plaintiffs previously argued, and argue again, that GICC held that the pendency of state law fraudulent conveyance claims does not preclude maintenance by the plaintiff of a RICO action to recover the lost debt, seizing on a statement in that opinion that "[t]he possibility of a state court action, however, does not preclude [the plaintiffs'] standing to pursue federal claims in federal court."⁹ As the Court previously observed, however, the quoted statement, taken in context, does not support the argument plaintiffs now base on it.

The complaint in GICC alleged that the defendants had looted Technology Finance Group, Inc. ("TFG") in order to frustrate GICC Capital Corporation's ability to collect a debt owed to it by TFG and contained various state law claims as well as a RICO count. The district court dismissed the RICO claim on the ground that "the looting of TFG proximately caused harm only to TFG and not to Capital, and that Capital therefore lacks RICO standing."¹⁰ On appeal, GICC argued that it had standing to sue under RICO, "even though it [was] a creditor," and that this conclusion was supported by Bankers Trust and Stochastic.¹¹ The defendants, for their part, maintained that the magistrate and district judges had concluded correctly that GICC lacked standing because, as a creditor, its injury from the alleged looting of the TFG was indirect.¹² Additionally, in a brief, three-sentence passage, they argued that the case was simply a collection action, that it belonged in state court, and that it was a sort of suit that Bankers Trust and Stochastic were designed to prevent.¹³ And the Second Circuit's only reference to the question in GICC, quoted in full, was:

"Defendants contend that the appropriate remedy for a general unsecured creditor like Capital is a state court action. They surmise that Capital is in federal court only because of RICO's treble damages provision. The possibility of a state court action, however, does not preclude Capital's standing to pursue federal claims in federal court."¹⁴

Taken in full and in context, this statement simply did not modify or overrule those portions of Bankers Trust and Stochastic dealing with the ripeness of lost debt injury.

To begin with, the appellate arguments to which this statement responded had nothing to do with the ripeness of the RICO claim, the issue here. The defendants' point was that the suit was a collection case that belonged in state court and, in substance, that it was an abuse of the RICO statute. The Circuit's statement that the possibility of a suit in state court did not foreclose a RICO action thus was not intended to suggest that GICC's RICO claim was ripe even if GICC still might have collected the allegedly lost debt by other means — that issue was not before the Court.¹⁵ It simply invoked the uncontroversial proposition that the availability of a RICO or, for that matter, a securities, antitrust or other claim based on a federal statute, ordinarily does not require exhaustion of state remedies.

Further, if the panel had intended its comment as plaintiffs now contend, it would have been inconsistent with or, at least, in significant tension with the prior decisions by other panels in Bankers Trust and Stochastic. The fact that the GICC panel did not suggest that it was overruling or modifying those cases, or even indicate that it was addressing the issue that plaintiffs now claim it decided, convincingly confirms that plaintiffs have misread the decision.

In sum, the Court adheres to its prior ruling that plaintiffs' alleged lost debt injury does not provide them with RICO standing because their ongoing collection efforts render the extent of the loss uncertain.¹⁶

II. Rule 9(b) and 12(b)(6) Arguments

On their motion to dismiss the amended complaint, the moving defendants argued that certain predicate acts were not pleaded with particularity and that the amended complaint failed adequately to allege a pattern of racketeering activity by either Sohrab or Afsar, requiring dismissal of plaintiffs' claims under 18 U.S.C. § 1962(c) and (d). In the July 29 Opinion, the Court declined to address these arguments because they revolved exclusively around plaintiffs' RICO claims, "all of the RICO claims against the moving defendants ha[d] been dismissed," and the arguments, in its view, therefore were moot.¹⁷

It is well settled that federal courts have no power "to decide questions that cannot affect the rights of litigants in the case before them"¹⁸ or "`to give opinions upon moot questions or abstract propositions.'"¹⁹ Defendants argue that the Court incorrectly concluded that determination of these issues could not affect the rights of any of the moving defendants. The Court agrees because a number of the moving defendants now are faced with the task of defending state law claims in federal court solely by virtue of the continued pendency of the RICO claims against Sohrab.²⁰ In other words, resolution of the RICO claims against Afsar and Sohrab would enable the Court to determine whether the remaining moving defendants are entitled to dismissal of the state law claims against them for lack of subject matter jurisdiction.²¹

Moreover, while dismissing a complaint as to a non-moving defendant is not an ordinary practice,²² a district court may dismiss claims sua sponte for failure to state a claim, at least so long as the plaintiff had notice and an opportunity to be heard on the issue.²³ Here, both parties devoted a significant portion of their papers to the Rule 9(b) and 12(b)(6) arguments, apparently assuming that the Court would adjudicate these questions despite Sohrab's failure to move for dismissal. In short, plaintiffs had ample notice and availed themselves of the opportunity to litigate the sufficiency of the claims against Sohrab under Section 1962(c) and (d).²⁴

In sum, the Court will consider defendants' arguments that all of the RICO claims should be dismissed for failure to plead fraud with particularity or to state a claim upon which relief can be granted because it is persuaded that substantial rights of the moving defendants turn on these issues.

A. Particularity

Defendants argue that the amended complaint's allegations regarding Sohrab's alleged transfer of his interests in the Timberland and Tiburon partnerships to Ahmed in August 1995 do not satisfy Rule 9(b)'s heightened pleading requirements. Plaintiffs contend that this transaction amounted to an act of bankruptcy fraud on the part of Sohrab in violation of 18 U.S.C. § 152(7), which makes it unlawful for any person, in contemplation of his or her bankruptcy, to transfer or conceal knowingly and fraudulently his or her property.²⁵ As noted in the July 29 Opinion, Rule 9(b) applies to allegations of bankruptcy fraud.²⁶

Rule 9(b) requires that the circumstances of fraud be alleged with particularity. This requires reasonable detail as well as the allegation of facts from which a strong inference of fraud reasonably may be drawn.²⁷ Moreover, allegations made on information and belief are insufficient "`unless the facts are peculiarly within the knowledge of the defendants, in which case the complaint must allege facts demonstrating the basis for the information and belief.'"²⁸ The requisite "strong inference" of fraud may be established by alleging facts either (a) showing that defendants had both motive and opportunity to commit fraud, or (b)...