Grunwald v. Bornfreund

• Decision Date: 09 July 1987
• Docket Number: No. CV-85-3338.,CV-85-3338.
• Citation: 668 F. Supp. 128
• Parties: Yudah GRUNWALD, Plaintiff, v. Ben Zion BORNFREUND et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

668 F. Supp. 128

Yudah GRUNWALD, Plaintiff, v. Ben Zion BORNFREUND et al., Defendants.

No. CV-85-3338.

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

July 9, 1987.

Weg & Myers, P.C. by Frank Weg, New York City, for plaintiff.

Shea & Gould by Leon Gold, New York City, for Community Nat'l Bank.

Meissner, Tisch & Kleinberg by Richard A. Finkel, New York City, for Bobober Yeshiva and Naftali Halberstam.

Slotnick & Cutler (Michael Shapiro, of counsel), New York City, for Ben Zion Borenfreund.

Rappaport & Frost by Louis I. Albert, New York City, for Chaim Borenfreund.

Joseph H. Neimann, New York City, for Jacob Banda.

Strook & Strook & Lavan by James Falick, Rabin & Sirota by Howard B. Sirota, New York City, for Bodner & Obstfeld, Brown Knapp & Co.

Todtman, Hoffman, Epstein, Young, Goldstein, Tunick & Pollok by Edward Gasthalter, Hoffman, Pollok & Gasthalter by Edward Gasthalter, New York City, for Saul Hutterer.

Reuben Blum, New York City, for Gems of World, Tema & N. Guarary.

MEMORANDUM AND ORDER

SIFTON, District Judge.

Plaintiff, Yudah Grunwald, brings this action against nineteen named defendants and thirty-one "John Does," alleging that defendants engaged in an elaborate scheme to defraud him by inducing him to invest money under the pretext that the funds would be invested in legitimate diamond deals. Liability against all of the defendants is premised on the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1962(b), (c) and (d), as well as New York Gen. Bus. Law § 349, common law conspiracy and fraud. Two additional claims to collect on promissory notes valued at $1,000,000 and $238,000 are alleged against defendants Samuel Solomon Obstfeld and Brown Knapp & Co., respectively.

The essence of the complaint, although presented in 68 pages with 65 pages of exhibits, is clear. Beginning in 1981-82, plaintiff entered into a personal and business relationship with defendant Ben Zion Bornfreund, who at the time was in the diamond business. As part of this relationship, plaintiff entrusted to Bornfreund considerable sums of money ostensibly for the purpose of investing in legitimate diamond deals. Rather than invest the funds, Bornfreund, in conjunction with the other defendants, diverted the funds for their own use. As part of their scheme, defendants allegedly engaged in a series of elaborate banking transactions involving fictitious names, forged checks, foreign bank accounts and thousands of transfers of funds in an effort to "launder" and "kite" plaintiff's money. As a result of this scheme, plaintiff claims to have been defrauded of over $10 million.

Plaintiff commenced the present action on September 9, 1985. In October 1985 plaintiff amended the complaint as of right to assert additional causes of action against defendants Obstfeld and Brown Knapp on the promissory notes as well as to include defendant Community National Bank ("CNB") as a defendant. Thereafter, various defendants moved to dismiss the first amended complaint for failure to state a cause of action and for failure to plead fraud with particularity. The case was reassigned from Judge Costantino to the undersigned, and plaintiff moved for permission to file an amended complaint. By Memorandum and Order dated November 26, 1986, this Court granted plaintiff's motion and deferred decision on defendants' motions to dismiss.

Renewing their dismissal motions, defendant CNB, Obstfeld, Bodner, Brown Knapp, Halberstam, Bobover Yeshiva Bnei Zion ("BYBZ"), Hutterer, and Bornfreund all move to dismiss the RICO claims pursuant to Rule 9(b) for failure to plead fraud with particularity. Alternatively, defendants request a more definite statement pursuant to Rule 12(e) and that certain portions of the complaint be stricken pursuant to Rule 12(f). In addition, defendants CNB, Halberstam and BYBZ moved to dismiss for failure to state a claim under Rule 12(b)(6).

DISCUSSION

Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Thus, when a complaint alleges fraud as a predicate act in a RICO action, it must meet the requirements of 9(b) with respect to the underlying racketeering acts. See Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 49 (2d Cir.1987); Moss v. Morgan Stanley Inc., 719 F.2d 5, 18-19 (2d Cir.1983). This means that the complaint must state the time, place, and content of the misrepresentation, the person responsible for making the misrepresentation or omission, and what was given up as a consequence of the fraud. Whitbread (US) Holdings, Inc. v. Baron Philippe de Rothschild, S.A., 630 F.Supp. 972, 982 (S.D.N.Y.1986); 2A J. Moore, Moore's Federal Practice ¶ 9.03, at 9-20 to 9-24 (2d ed. 1986). Further, while knowledge or intent may be averred generally, the complaint must allege a sufficient factual basis to support an inference of scienter. Beck, supra, at 49-51. "These factual allegations must give rise to a `strong inference' that the defendants possessed the requisite fraudulent intent." Id. at 50.

Beyond protecting a defendant's reputation and preventing strike suits, Rule 9(b) serves to ensure that the defendant is given "fair notice of what the plaintiff's claim is and the grounds upon which it rests." Ross v. A.H. Robins Co., Inc., 607 F.2d 545, 557 (2d Cir.1979); Denny v. Barber, 576 F.2d 465, 496 (2d Cir.1978). In serving these goals, however, Rule 9(b) must be harmonized with the parallel provisions of Rule 8 which require that the pleadings contain a "short plain statement of the claim" and which prohibit the pleading of evidentiary matter. See Ross, supra, 607 F.2d at 557 n. 20.

Although defendants challenge the sufficiency of the pleadings in general, the thrust of each defendant's motion is that fraud has not been adequately alleged with respect to their own participation in the alleged scheme. In actions involving multiple defendants, Rule 9(b) requires the plaintiff to plead facts from which fraud may be reasonably inferred as to each defendant. See, e.g., Dannenberg v. Dorison, 603 F.Supp. 1238, 1241 (S.D.N.Y.1985). However, pleading requirements may be relaxed when the information is exclusively within the defendant's knowledge so long as the factual basis for allegations based upon information and belief are adequately set forth. Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir.1986); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974).

Turning first to defendant Bornfreund, who appears to be the alleged mastermind of the scheme, it is clear that Rule 9(b) has been satisfied. At numerous points in the complaint, it is alleged that Bornfreund falsely stated to plaintiff that his money was being invested in legitimate diamond deals. There are also allegations that, when plaintiff became suspicious, his fears were allayed by false representations that Bornfreund and others would make good any losses. Complaint ¶ 57. While the precise content or dates of these misrepresentations is not as clear as it might be, it is adequate to give defendant notice of the claim against him. Moreover, the fact that the complaint fails to detail the dates and content of each instance of mail or wire fraud does not render the complaint deficient since plaintiff has specified the nature and operation of the scheme and the exact dates and amounts of money of the banking transactions made in furtherance of the fraudulent scheme. See City of New York v. Joseph L. Balkan, Inc., 656 F.Supp. 536, 545-56 (E.D.N.Y.1987); Beth Israel Medical Center v. Smith, 576 F.Supp. 1061 (S.D.N.Y.1983). For example, in addition to identifying dates and amounts in the body of the complaint, plaintiff has attached 29 exhibits to the complaint identifying specific banking transactions allegedly made in furtherance of the scheme to defraud plaintiff. With regard to defendant Bornfreund, Exhibit 2 is particularly noteworthy since it contains a list including dates, names, and amounts of over 100 checks or notes allegedly forged by Bornfreund.

The complaint is also sufficient with respect to defendants Obstfeld, Bodner, and Brown Knapp. Prior to any dealings with plaintiff, the complaint alleges that Bornfreund and Obstfeld were partners in the diamond business. Obstfeld eventually left this partnership to enter the securities business where he became associated with Bodner. While still in touch with Bornfreund and allegedly with funds stolen by Bornfreund, Obstfeld and Bodner together purchased Brown Knapp, a small securities firm. According to the complaint, defendant Obstfeld, Bodner, and Brown Knapp, acting in concert with Bornfreund and with knowledge that the funds supplied by Bornfreund were obtained by false pretenses, engaged in an elaborate kiting scheme with plaintiff's money. To support these allegations plaintiff lists hundreds of checks flowing in and out of defendants' hands, either originating or returning to Bornfreund. There are also allegations, mentioned above, that Obstfeld and Bodner represented to plaintiff on several occasions that they, as well as Brown Knapp would make good any losses. In particular, plaintiff alleges that in August 1985 Obstfeld admitted the existence of their scheme, stating that the funds were secreted in Brown Knapp under different names and that time was needed to disgorge the funds. To hold plaintiff at bay, Obstfeld and Brown Knapp then executed the notes for $1,000,000 and $238,000, respectively. Clearly, these allegations are sufficient to support an inference of scienter and to provide these defendants with notice of the claims against them.

With respect to defendants BYBZ, an orthodox Jewish school, and Halberstam, said to be the son of the Grand Chief Rabbi of the Bobover Chassidic community, the complaint alleges that Halberstam, in connection with Obstfeld and Bornfreund, used BYBZ's and his own bank accounts in furtherance of the scheme to defraud plaintiff. To support...