In re Sattler's, Inc.

• Decision Date: 01 May 1987
• Docket Number: Adv. No. 84-6177A.,Bankruptcy No. 82 B 10157 (TLB)
• Citation: 73 BR 780
• Parties: In re SATTLER'S, INC., Debtor. Dorothy EISENBERG, Trustee of the Estate of Sattler's, Inc., Plaintiff, v. The BANK OF NEW YORK, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

73 B.R. 780 (1987)

In re SATTLER'S, INC., Debtor Dorothy EISENBERG, Trustee of the Estate of Sattler's, Inc., Plaintiff, v. The BANK OF NEW YORK, Defendant.

Bankruptcy No. 82 B 10157 (TLB), Adv. No. 84-6177A.

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

May 1, 1987.

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Shaw, Goldman, Licitra, Levine & Weinberg, P.C. by Marc A. Pergament, Garden City, N.Y., for trustee.

Emmet, Marvin & Martin by Edward P. Zujkowski, New York City, for The Bank of New York.

MOTION TO AMEND COMPLAINT

TINA L. BROZMAN, Bankruptcy Judge.

Before this court is a motion by the chapter 7 trustee to amend her complaint filed in an adversary proceeding instituted against the Bank of New York ("BONY"). For the reasons discussed below, we grant the motion in part and deny it in part.

I.

For purposes of this motion, the allegations of the proposed amended complaint are taken as true.

Sattler's, Inc. ("Sattler's") operated department stores in upstate New York and New England. On January 23, 1982 it filed a voluntary petition under chapter 11 of the Bankruptcy Code ("Code"). Thereafter, on July 9, 1983, the case was converted to chapter 7 and Dorothy Eisenberg was appointed trustee ("Trustee").

In her complaint commencing this adversary proceeding, the Trustee alleges that prior to bankruptcy, BONY financed Sattler's purchase of fixtures and furnishings for one of the upstate New York stores. To facilitate the purchase, the parties entered into a number of agreements including fixture loan and fixture lease agreements pursuant to which BONY took back a security interest in the fixtures and furnishings. Certain principals of the debtor personally guaranteed Sattler's repayment of the loan.

After bankruptcy, and without court approval, Sattler's made some payments to BONY part of which were applied by BONY to amortization of the loan rather than to use and occupancy for the fixtures and furniture pursuant to the lease. In addition and again without court approval, Sattler's paid approximately $108,000 to BONY at a time when Sattler's principals allegedly knew, or should have known, that the fixtures which were BONY's security would be liquidated and that the proceeds would be turned over to BONY. Presumably this $108,000 was applied to principal or interest under the loan, but the pleading is silent in that regard. The Trustee challenged these post-petition transfers as having been made in violation of Code sections 549 and 550.

BONY answered the complaint and discovery ensued, the fruits of which prompted the Trustee to move to amend her complaint. The proposed amended complaint ("Amended Complaint") pleads the facts in greater detail and contains additional claims.

The Amended Complaint describes a series of banking transactions beginning with the post-petition closing of a Sattler's account at BONY on July 22, 1982 ("Closed Account"). On August 26 and 27, 1982, Sattler's made wire transfers of $155,000 and $41,000, respectively, from its account at Marine Midland Bank to the Closed Account. Because the Closed Account no longer existed, both these sums were placed by BONY in its Central Services Division account ("CSD Account"). BONY's Commercial Loan Department ("CLD") then requested that the total amount, $196,000, be transferred to it. CLD initially applied the funds to Sattler's outstanding loan, but later reversed the transaction. Subsequently, the Loan Collections Department ("LCD") of BONY instructed CLD to transfer the $196,000 to an account maintained at BONY in the names of four individuals. Although the proposed amended complaint does not identify the individuals, they appear to have been the principals of the debtor ("Principals").¹

It is further alleged that on November 12, 1982, David Shipson ("Shipson"), a loan officer of BONY, acting upon instruction from Plappinger, Plappinger & Platt (which may be a partnership but is not identified in the pleading or in the motion papers), wire transferred $80,000 from BONY's CLD general ledger to First National State Bank-Edison and established, at BONY, a "suspense receivable" for that amount. No account was debited at BONY for the $80,000. The $80,000 was covered by a $30,000 withdrawal from the Principals' savings account and a $56,000 transfer from Sattler's account at Marine Midland Bank. Both sums were placed, pursuant to Shipson's instructions, in the suspense receivable account. When the suspense receivable account was cleared on February 1, 1983, the $6,000 excess was returned to the Principals.

Finally, the Trustee alleges that on December 16, 1982, $28,000 of Sattler's funds was transferred without court approval from Marine Midland Bank to BONY to the attention of Shipson. Upon receipt at BONY, the money was placed in the general ledger account at CLD. Four days later BONY withdrew the money from CLD and applied it to Sattler's loan.

Based upon those transactions, the Trustee wishes to assert eight claims for relief — three claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO") charging BONY with bankruptcy fraud, wire fraud, mail fraud and conspiracy; one claim for fraud and deceit; one claim for conversion; one claim for bankruptcy and state fraudulent transfers; one claim for punitive damages; and one claim for post-petition transfers.²

BONY opposes the Trustee's motion asserting lack of jurisdiction over the RICO claims and failure to state any claim upon which relief can be granted. Accordingly, BONY also urges that no punitive damages can be awarded.

II.

We begin by rejecting defendant's argument that the three proposed RICO claims should be disallowed because this court lacks jurisdiction to entertain them under 28 U.S.C. § 157(d). Pursuant to 28 U.S.C. § 157(a) and the Order of the United States District Court for the Southern District of New York, Acting Chief Judge Robert S. Ward, dated July 10, 1984, all bankruptcy cases and proceedings are referred to the bankruptcy court. Accordingly, this proceeding is properly here.

Section 157(d) of title 28, upon which defendant relies, sets the standard for determining when the district court has discretion or is mandated to withdraw its reference of a case or proceeding. That determination is to be made either on timely motion of a party or on the district court's own motion. 28 U.S.C. § 157(d). No such motion, which is properly addressed to the district court, has been made. See, e.g., In re Oceanquest Feeder Service, Inc., 56 B.R. 715, 720 (Bankr.D. Conn.1986); First Landmark Development Corporation v. City of Pinellas Park (In re First Landmark Development Corp.), 51 B.R. 25, 27 (Bankr.M.D.Fla. 1985); Ram Construction Company, Inc. v. Port Authority, 49 B.R. 363 (W.D.Pa. 1985).³ Notwithstanding that any motion to withdraw the reference should be presented to the district court, we are empowered to determine the sufficiency of the pleadings and, indeed, should do so, so as to avoid swamping the district court with motions to withdraw the reference pegged to allegations in deficient pleadings. See, e.g., Lesser v. A-Z Associates (In re Lion Capital Group), 44 B.R. 690, 694-95 (Bankr.S.D.N.Y.1984).⁴

III.

With this aside, we proceed to scrutinize the Amended Complaint. Although amendments to complaints should be freely permitted when justice so requires, see Fed.R.Civ.P. 15(a); Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); S.S. Silberblatt, Inc. v. East Harlem Pilot Block-Building 1 Housing Development Fund Company, Inc., 608 F.2d 28, 41 (2d Cir.1979), it would be an exercise in futility to allow an amendment when the new complaint would not survive a motion to dismiss. See J. Moore, 3 Moore's Federal Practice ¶ 1115.084 (2d ed. 1985); Freeman v. Marine Midland Bank, 494 F.2d 1334, 1338 (2d Cir.1974); Vibrant Sales, Inc. v. New Body Boutique, Inc., 105 F.R.D. 553 (S.D.N.Y.1985). Thus, we must determine whether the Amended Complaint could survive such a motion.⁵

The RICO Claims

The elements required to plead a RICO claim under 18 U.S.C. § 1962(c) are "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985) (footnote omitted); see also Cullen v. Margiotta, 811 F.2d 698, 712-13 (2d Cir.1987). In urging that the Amended Complaint would not survive a motion to dismiss, BONY asserts that the Trustee fails to plead 1) the existence of an enterprise, 2) a pattern of racketeering activity and 3) with particularity, two or more predicate acts.

(i) Enterprise

An "enterprise" is statutorily defined to include "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." One type of enterprise is "a group of persons associated together for a common purpose of engaging in a course of conduct." United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981). The enterprise is proved "by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." Id. It is also settled that this circuit requires, under section 1962(c) (which sets forth that which is prohibited activity), that the enterprise be a continuing operation and that the acts of that enterprise be related to the common purpose. United States v. Ianniello, 808 F.2d 184, 191 (2d Cir.1986), pet. for cert. filed March 27, 1987; see Moss v. Morgan Stanley, Inc., 719 F.2d 5, 21-22 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984); United States v. Mazzei, 700 F.2d 85, 89 (2d Cir.), cert. denied, 461 U.S. 945, 103 S.Ct. 2124, 77 L.Ed.2d 1304 (1983).

The allegations of the Amended Complaint taken as a whole plead that Shipson, other BONY agents and the Principals operated together in a scheme which resulted in...