Richter v. Sudman

• Decision Date: 30 April 1986
• Docket Number: No. 85 Civ. 2773 (GLG).,85 Civ. 2773 (GLG).
• Citation: 634 F. Supp. 234
• Parties: James RICHTER, Robert Laden, Murray Cantor, Judith Newman, Gerard D'Amore, Michael Rogers, Lloyd Bascone, Judith Danzig, Daniel Woehrle and Carol Rosenblatt, Plaintiffs, and Christopher Tyler and Kareiss Grenier, Intervenors-Plaintiffs, v. Leonard SUDMAN, Norman Simon, Columbia Auto Stereo, Inc., L & N Enterprises, Richard Richter, Tartufo Italgelateria, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

634 F. Supp. 234

James RICHTER, Robert Laden, Murray Cantor, Judith Newman, Gerard D'Amore, Michael Rogers, Lloyd Bascone, Judith Danzig, Daniel Woehrle and Carol Rosenblatt, Plaintiffs and Christopher Tyler and Kareiss Grenier, Intervenors-Plaintiffs, v. Leonard SUDMAN, Norman Simon, Columbia Auto Stereo, Inc., L & N Enterprises, Richard Richter, Tartufo Italgelateria, Inc., Defendants.

No. 85 Civ. 2773 (GLG).

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

April 30, 1986.

Richard P. Caro, New York City, for plaintiffs and intervenors-plaintiffs.

Milgrim Thomajan Jacobs & Lee, P.C., New York City, for defendants Leonard Sudman, Norman Simon, Columbia Auto Stereo, Inc., L & N Enterprises, and Tartufo Italgelateria, Inc.; Robert A. Meister, Mark D. Suben, Armen R. Vartian, of counsel.

OPINION

GOETTEL, District Judge:

This action, and the RICO claim asserted herein, arises out of an apparently ill-fated investment in Tartufo Italgelateria, Inc. ("Tartufo"), a California manufacturer of premium ice cream and specialty dessert products. Defendants Leonard Sudman ("Sudman"), Norman Simon ("Simon"), Columbia Auto Stereo, Inc., and L & N Enterprises are shareholders, officers, or directors of Tartufo, or are otherwise affiliated with Tartufo. All are California citizens. The plaintiffs include ten investors in Tartufo, and two individuals, Robert Laden (also an investor) and James Richter, who induced the other plaintiffs to invest in Tartufo.

On February 28, 1986, the defendants moved to dismiss the RICO claims in the third amended complaint for failure to state a claim on which relief can be granted and for failure to plead fraud with particularity. The defendants also moved to dismiss the complaint for lack of subject matter jurisdiction to the extent that it rests on an allegation of diversity jurisdiction. At oral argument the Court granted the defendants' motion to dismiss the RICO claims. We take this opportunity to supercede our oral decision with this written decision, incorporating our findings therein, and, in particular, stating our views as to the pattern requirement under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68 (1982) ("RICO").

I. BACKGROUND

The amended complaint alleges the following facts which, for purposes of considering the defendants' motion, we must deem true.

During the summer of 1984, the plaintiffs James Richter and Robert Laden ("Laden") entered into an agreement with the defendants Leonard Sudman, Norman Simon, Columbia Auto Stereos, Inc., L & N Enterprises, and Tartufo. These defendants granted James Richter and Laden the exclusive right to raise capital for Tartufo from prospective investors. To induce Richter and Laden to enter into this agreement and to find investors, the defendants allegedly made numerous material misrepresentations and omissions concerning Tartufo's present and future business prospects.

An escrow account was established in California to hold funds invested in Tartufo. During the fall of 1984, James Richter and Laden persuaded eleven investors, including Laden and ten of the individual investor plaintiffs, to invest $325,000 in Tartufo. Tartufo subsequently advised the individual investors, most by written letter, that the funds would only be released from escrow to Tartufo upon the satisfaction of certain conditions designed to make the investment less speculative. At a December 1984 meeting in New York, James Richter and Laden met with the defendants Sudman and Simon to iron out the conditions of the escrow. The parties agreed to a number of conditions that the defendants would have to satisfy before the funds could be removed from escrow and stock certificates issued to the investors. Two signatures were required to release funds from the escrow account. One had to be that of the defendant, Richard Richter (James Richter's brother); either defendant Sudman or defendant Simon could provide the other signature.

On January 18, 1985, and prior to the satisfaction of the conditions for release of the escrowed funds, the defendants withdrew $200,000 of the investors' money from escrow and used it to pay taxes and creditors, and to meet payroll obligations. The defendants nonetheless continued to represent to the plaintiff investors, as well as to plaintiffs James Richter and Robert Laden, that the funds remained in escrow.

When plaintiffs Richter and Laden learned of the withdrawal, they demanded that the defendants return all of the investors' money. At first, James Richter and Laden were told that $125,000 could be returned immediately. They were then informed that the remaining $125,000 would be held in escrow. Finally, they learned that Tartufo had used portions of the remaining $125,000.

When efforts to persuade Tartufo to return all of the transferred monies to the escrow account, or, at least, to agree to leave the remaining monies in escrow failed, James Richter and Laden commenced this action against Sudman, Simon, Richard Richter, Tartufo, and two of their affiliated companies, for breach of contract, violation of the New York and California securities laws, breach of fiduciary duty, and violation of various federal securities laws. Soon after filing their original complaint, the plaintiffs moved pursuant to Fed.R.Civ.P. 65 for temporary and preliminary injunctive relief directing the defendants to restore the $325,000 to escrow and restraining them from disposing of that portion of the original $325,000 that remained in escrow. An amended complaint filed soon thereafter added various individual investors as plaintiffs.

On May 7, 1985, the Court entered a temporary restraining order enjoining the defendants from utilizing any portion of the $325,000 that remained in escrow. On June 19, 1985, after an evidentiary hearing, the Court preliminarily enjoined the defendants from disposing of that portion of the $325,000 that remained in escrow. Richter v. Sudman, No. 85-2773, slip op. (S.D.N.Y. June 19, 1985) (Findings of Fact and Conclusions of Law). After the plaintiffs again amended their complaint, the defendants answered. On November 26, 1985, the plaintiffs filed a third amended complaint, adding three claims under the Racketeer Influenced and Corrupt Organizations Act, as well as adding two plaintiffs, one of whom is a citizen of California.

II. DISCUSSION

A. Subject Matter Jurisdiction

Prior to holding the June 19, 1985 evidentiary hearing, the Court dismissed the plaintiffs' various Securities Act claims for failure to plead fraud with particularity. Since those were the plaintiffs' only federal claims, it was incumbent upon the plaintiffs to establish another basis of federal subject matter jurisdiction. The plaintiffs then satisfied the Court that they had established diversity jurisdiction: all of the defendants were California citizens; none of the plaintiffs were California citizens. The plaintiffs' third amended complaint added as an additional plaintiff, Christopher Tyler, a California citizen who had invested in Tartufo. However, the plaintiffs preserved federal jurisdiction by repleading their securities claims. The defendants have not objected to those pleadings, nor have they moved to dismiss those claims. The Court, therefore, has federal subject matter jurisdiction.¹

B. The RICO Claims

The plaintiffs purport to state claims under subsection (a), (b), and (c) of section 1962 of RICO, 18 U.S.C. § 1962 (1982). Subsection (c) provides in pertinent part 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." 18 U.S.C. § 1962(c) (1982). Subsection (b) states that "it shall be unlawful for any person through a pattern of racketeering activity ... to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce." 18 U.S.C. § 1962(b) (1982). Subsection (a) states,

It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.

18 U.S.C. § 1962(a) (1982). This provision prevents persons engaged in a RICO enterprise from retaining the spoils of their illegal activity.

1. The "Pattern of Racketeering Activity"

Although the requirements for pleading and proving a violation of these subsections may differ, one prerequisite must be pleaded in every instance: a "pattern of racketeering." Section 1961(1) defines "racketeering activity" as any of a large number of specified illegal acts, including securities fraud and mail fraud. 18 U.S.C. § 1961(1) (1982). To properly allege a "pattern of racketeering," the complaint must allege at least two acts of racketeering activity, one of which occurred after the effective date of the RICO statute, and the last of which occurred within ten years ... after the commission of a prior act of "racketeering activity." 18 U.S.C. § 1961(5) (1982).

Although the language of the statute requires only two predicate acts, the Supreme Court, in Sedima S.P.R.L. v. Imrex Co., ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), suggested that "the `extraordinary' uses to which civil RICO has been put appear to be primarily the result of the breadth of the predicate offenses, in particular the inclusion of wire, mail,...