Giuliano v. Everything Yogurt, Inc., No. CV-92-1728.

• Decision Date: 28 April 1993
• Docket Number: No. CV-92-1728.
• Citation: 819 F. Supp. 240
• Parties: Thomas A. GIULIANO and Michele N. Giuliano, Plaintiffs, v. EVERYTHING YOGURT, INC. and Richard Nicotra, Defendants.
• Court: U.S. District Court — Eastern District of New York

819 F. Supp. 240

Thomas A. GIULIANO and Michele N. Giuliano, Plaintiffs, v. EVERYTHING YOGURT, INC. and Richard Nicotra, Defendants.

No. CV-92-1728.

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

April 28, 1993.

COPYRIGHT MATERIAL OMITTED

Arthur J. Gallancy, New York City, for plaintiffs.

Gary Trachten, Kudman & Trachten, New York City, for defendants.

MEMORANDUM AND ORDER

GLASSER, District Judge.

Plaintiff franchisees commenced this civil action under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"), against a corporate franchisor and its principal. Defendants move to dismiss the complaint under Fed.R.Civ.P. 8(a), 9(b) and 12(b)(6). For the following reasons, defendants' motion is denied in part and granted in part.

FACTS

Defendant Everything Yogurt, Inc. ("EYI"), a New Jersey corporation, operates a chain of yogurt stores and food stores nationwide under the trade names of "Everything Yogurt" ("EY"), "Bananas" and "South Philly Steaks and Fries." In addition, EYI franchises stores under those trade names to interested individuals. Defendant Richard Nicotra is a director and shareholder of EYI.¹

On or about October 16, 1989, plaintiffs Thomas and Michele Giuliano entered into a franchise agreement with defendants to operate an EY store in the South Street Seaport area. Complaint ¶ 334. Since the franchise was unsuccessful, plaintiffs were forced to close the store in December of 1991. Id. ¶ 348. Thereafter, they commenced this civil RICO action alleging that defendants conducted the affairs of an enterprise engaged in interstate commerce through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c) by committing predicate acts of mail fraud and wire fraud (Count I); that defendants conspired to violate § 1962(c) (Count II); and that defendants invested income derived from racketeering activity in an enterprise in violation of § 1962(a) (Count III).

In a prolix Second Amended Complaint,² plaintiffs state, with excess particularity, predicate acts of mail fraud and wire fraud involving statements that defendants allegedly made to five prospective and eventual EY franchisees from 1987 through 1989. Since many of plaintiffs' allegations do not appear to rise to the level of actionable fraud, only the salient allegations of fraud will be detailed here. The alleged defrauded franchisees include plaintiffs, John and Judith LaBarbara ("LaBarbaras"); Michael Collins, his wife Heidi Noun, and his sister Kathleen Collins ("Collins"); Allan C. Selserman; and Frank and Dawn Monteleone ("Monteleones").³

Plaintiffs allege that defendants committed fraud and used "bait and switch" tactics to induce LaBarbaras, Collins and plaintiffs to invest in EY franchises other than those originally proposed to those franchisees. Complaint ¶¶ 35, 52 (LaBarbaras); 84-86 (Collins) and 274 (plaintiffs). Next, plaintiffs allege that defendants intentionally and with deliberate disregard for the truth fraudulently detailed the expenses to be incurred, and overstated the gross income to be realized, in operating various franchises. Id. ¶¶ 53-65 (LaBarbaras); 136-139 (Collins); 191, 202-203 (Selserman); 241-243 (Monteleones), 330-332 (plaintiffs). Finally, defendants are alleged to have defrauded some of the franchisees by failing to supply them with franchise disclosure materials, as mandated by applicable state law, which would have influenced the decisions of those prospective franchisees whether or not to purchase an EY franchise. Id. ¶¶ 153-158, 171-172 (Collins), 208-210 (Selserman), and 238-239 (Monteleones).

Defendants move to dismiss the complaint on the grounds that (1) the predicate acts of mail and wire fraud have not been alleged with the requisite particularity mandated by Fed.R.Civ.P. 9(b); (2) the pleading violates the "short and plain statement" requirement of Fed.R.Civ.P. 8(a); and (3) plaintiffs have not sufficiently pleaded a RICO enterprise. In addition, defendants move to dismiss the third count on the ground that plaintiffs have not demonstrated that they were injured by reason of the alleged § 1962(a) violation and they move to dismiss the second count on the grounds that plaintiffs have not pleaded a RICO conspiracy with the requisite particularity nor have they alleged that they were injured by reason of the alleged conspiracy. For the following reasons, defendants' motion is denied as to the first count, but is granted as to the second and third counts.

DISCUSSION

1. Rules 9(b) and 8(a)

Federal Rule of Civil Procedure 9(b) provides:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake, shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally.

Fed.R.Civ.P. 9(b).

Where a RICO claim is based on predicate acts of mail and wire fraud, the pleading must comply with Rule 9(b). Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 49-50 (2d Cir.1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988); Center Cadillac, Inc. v. Bank Leumi Trust Co. of New York, 808 F.Supp. 213, 228 (S.D.N.Y.1992); Grunwald v. Bornfreund, 668 F.Supp. 128, 130 (E.D.N.Y.1987). To comply with Rule 9(b), a plaintiff must generally state the time, place, speaker, and content of the alleged misrepresentation. Galerie Furstenberg v. Coffaro, 697 F.Supp. 1282, 1288 (S.D.N.Y.1988) (citing Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir.1986)). "However, the complaint need not specify the time, place and content of each mail communication where the nature and mechanics of the underlying scheme is sufficiently detailed, and it is enough to plead the general content of the misrepresentation without stating the exact words used," Center Cadillac, 808 F.Supp. at 229; Vereins-Und Westbank AG v. Carter, 639 F.Supp. 620, 623 (S.D.N.Y.1986); Galerie Furstenberg, 697 F.Supp. at 1288, especially where the information is exclusively in the possession of the defendants. Landy v. Mitchell Petroleum Technology Corp., 734 F.Supp. 608, 622 (S.D.N.Y.1990); Grunwald, 668 F.Supp. at 131. Furthermore, a motion to dismiss under Rule 9(b) will be denied if the pleading contains some allegations of fraud. Center Cadillac, 808 F.Supp. at 228.

Here, the complaint sets forth in detail the allegations of defendants' statements made with intent to defraud or with deliberate disregard or reckless indifference of the truth or falsity of those statements.⁴ For example, plaintiffs allege that defendants intentionally misrepresented to Selserman the rental expense to be incurred in a premises which they had previously leased, Complaint ¶ 203; that they fraudulently misstated in a Uniform Franchise Offering Prospectus the number of actions commenced by other franchisees against EYI, ¶¶ 258-263; that they fraudulently misstated to plaintiffs the cost of producing their product despite defendants' prior knowledge and control over its ingredients, ¶¶ 315-321; and that they violated the franchise disclosure laws of three states and even attempted to backdate documents, ¶¶ 150, 172, 208, 245. Thus, notwithstanding that many of plaintiffs' allegations may not be actionable fraud because they either involve statements of opinion, sales talk and puffery or projections of anticipated income and expenses and future conduct, see Defs.' Mem. of Law at 38-42,⁵ the complaint survives a motion to dismiss because plaintiffs may yet be able to prove two or more predicate acts of mail fraud or wire fraud.

The complaint also adequately informs defendants of the documents which were placed in the United States mails and the various interstate telephone conversations alleged to have been part of their scheme to defraud. Complaint ¶¶ 31, 49, 91-92, 168, 177-178, 197, 216, 226, 241, 245, 255-258, 320, 329, 336. While plaintiffs do not specify the exact dates of all of those communications, nor the respective speakers or writers of all of those communications, the alleged scheme to defraud is sufficiently outlined to place defendants on notice so that they may frame a responsive pleading. In addition, because plaintiffs do not have the documents which were sent to the other four franchisees, that information is solely in defendants' possession and the alleged fraudulent acts are clearly pleaded with sufficient particularity. Thus, because the complaint viewed in the light most favorable to plaintiffs does allege some fraudulent acts, defendants' motion to dismiss under Rule 9(b) must be denied.

Similarly, the complaint sufficiently avers that defendants acted with specific intent to defraud them. It is well settled that to constitute mail fraud the defendant (1) must participate in a scheme to defraud; (2) knowingly use the mails to further that scheme; and (3) must have the specific intent to defraud. United States v. Rodolitz, 786 F.2d 77, 80 (2d Cir.), cert. denied, 479 U.S. 826, 107 S.Ct. 102, 93 L.Ed.2d 52 (1986); Beck, 820 F.2d at 49-50. While Rule 9(b) provides that a pleading may generally allege intent, the pleading must nonetheless contain a "factual basis ... to give rise to a `strong inference' that the defendants possessed the requisite fraudulent intent." Beck, 820 F.2d at 50. A sufficient "factual basis" exists where plaintiffs show that the defendants had a motive for committing fraud and the opportunity to do so. Id. Here, the complaint sufficiently alleges that defendants EYI and Nicotra were motivated to defraud franchisees as part of their scheme to obtain franchising fees and they had a "clear opportunity" to defraud prospective franchisees by manipulating the financial figures pertaining to various franchise opportunities.

Defendants simultaneously move to dismiss the complaint under Fed.R.Civ.P. 8(a). Rule 8 mandates that a pleading contain a "short and plain statement" of the grounds for relief because one of the principal purposes of pleading under the federal rules is to provide fair...