Simpson Elec. Corp. v. Leucadia, Inc.

• Court: New York Supreme Court Appellate Division
• Citation: 128 A.D.2d 339,515 N.Y.S.2d 794
• Parties: , RICO Bus.Disp.Guide 6632 SIMPSON ELECTRIC CORPORATION, Respondent, v. LEUCADIA, INC., etc., Defendant Third-Party Plaintiff-Appellant, et al., Isaac Silverman, Third-Party Defendant.
• Decision Date: 18 May 1987

Page 794

515 N.Y.S.2d 794

128 A.D.2d 339, RICO Bus.Disp.Guide 6632

SIMPSON ELECTRIC CORPORATION, Respondent, v. LEUCADIA, INC., etc., Defendant Third-Party

Plaintiff-Appellant, et al.,

Isaac Silverman, Third-Party Defendant.

Supreme Court, Appellate Division,

Second Department.

May 18, 1987.

Butler, Fitzgerald & Potter, P.C., New York City (Raymond Fitzgerald, Andrew W. Sidman and Deborah Doty, of counsel), for defendant third-party plaintiff-appellant.

Barr & Faerber, Spring Valley (Joseph J. Haspel, of counsel), for respondent.

Before THOMPSON, J.P., and RUBIN, EIBER, KUNZEMAN and SPATT, JJ.

THOMPSON, Justice Presiding.

The issue with which we are confronted on this appeal is a question of first impression in this judicial department: whether state courts enjoy concurrent jurisdiction with Federal courts over civil claims under the Racketeer Influenced and Corrupt Organizations Act (hereinafter RICO) (18 U.S.C. §§ 1961-1968). We find that the structure and language of that Act, viewed together with its legislative history and underlying policies, leads to the inexorable conclusion that Congress implicitly intended to confer exclusive jurisdiction over RICO claims on the Federal courts. Therefore, we affirm the order of Special Term (126 Misc.2d 312, 481 N.Y.S.2d 627) dismissing the fifth counterclaim of Leucadia, Inc., alleging a RICO violation.

This action arises out of an agreement between Simpson Electric Corporation (hereinafter Simpson) and Leucadia, Inc., formerly known as James Talcott, Inc. (hereinafter Leucadia) for the provision of electrical contracting work in connection with the renovation of a building located at 315 Park Avenue South in Manhattan (hereinafter the premises). The premises were owned and operated by the defendant Grand-White Realty Corporation (hereinafter Grand-White) and the third-party defendant Isaac Silverman (hereinafter Silverman), who was Grand-White's president and majority shareholder. Leucadia held a mortgage on the premises. In May 1984 Simpson commenced an action to recover damages in excess of $13,000,000, inter alia, for the balance due on electrical renovation work under the contract. In its answer, Leucadia denied the essential allegations of the complaint and interposed six counterclaims. The fifth counterclaim,

which is the subject of this appeal, alleged a RICO violation. Leucadia asserted that Simpson, Silverman and Grand-White were an "enterprise", as that term is defined in 18 U.S.C. § 1961(4), which was engaged in a pattern of racketeering activity affecting interstate commerce in violation of 18 U.S.C. § 1962. The gravamen of Leucadia's RICO claim is that Silverman and Simpson engaged in a fraudulent scheme whereby Silverman obtained loans from Leucadia to pay bills and invoices submitted by Simpson. Although Silverman knew the bills and invoices were highly inflated, he induced Leucadia to make loans and gave Leucadia mortgages on the premises as security. In return, Simpson made substantial payments to Silverman personally. As predicate acts, Leucadia alleged that Simpson used the United States mail to execute the scheme and committed at least two acts of mail fraud, thereby engaging in a pattern of racketeering activity in violation of 18 U.S.C. § 1962. In February 1982 Leucadia obtained a judgment of foreclosure and sale, and the premises was sold at public auction. In October 1982, a deficiency judgment was entered in favor of Leucadia and against Grand-White in an amount in excess of ten million dollars ($10,000,000)

Simpson moved, inter alia, to dismiss the RICO counterclaim on the ground that the court lacked subject matter jurisdiction over that claim. Special Term dismissed the RICO counterclaim. Initially, it found that state courts have concurrent jurisdiction with Federal courts over civil RICO claims. Notwithstanding this jurisdictional determination, Special Term dismissed the RICO counterclaim in reliance upon the July 25, 1984, decision of the United States Circuit Court of Appeals for the Second Circuit in Sedima, S.P.R.L. v. Imrex Co. 741 F.2d 482, which held that a prior criminal conviction of the predicate act is a prerequisite to a civil RICO action. On July 1, 1985, the United States Supreme Court reversed the Second Circuit in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346. In its decision, the Supreme Court admonished that RICO is to be read and applied broadly and liberally to " 'effectuate its remedial purposes' " (Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346, supra, at 498, quoting from Pub.L. 91-452, § 904[a], 84 U.S. Stat. 947). It held that no prior predicate criminal conviction was necessary in order to establish a prima facie case under RICO, nor does RICO require proof of a "racketeering injury" (Sedima, S.P.R.L. v. Imrex Co., supra, at 498-499, 105 S.Ct. at 3287). To prove a claim under 18 U.S.C. § 1962(c), a party must demonstrate (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (Sedima, S.P.R.L. v. Imrex Co., supra, at 500, 105 S.Ct. at 3287). We do not address our inquiry to the question of whether Leucadia, in its fifth counterclaim, has sufficiently pleaded a cause of action under 18 U.S.C. § 1962(c). This issue is rendered moot by our determination that RICO claims fall within the exclusive jurisdiction of the Federal courts.

Simpson argues on appeal that Special Term properly dismissed Leucadia's fifth counterclaim because state courts lack subject matter jurisdiction over civil claims under RICO. In support of its contention, the plaintiff relies upon a May 1985 decision of the Appellate Division, First Department, in Greenview Trading Co. v. Hershman & Leicher, 108 A.D.2d 468, 489 N.Y.S.2d 502, finding that Federal jurisdiction over RICO claims is exclusive.

In our analysis of the jurisdictional question, we indulge the presumption in favor of concurrent jurisdiction announced by the Supreme Court over a century ago in Claflin v. Houseman, 93 U.S. (3 Otto.) 130, 23 L.Ed. 833 and reaffirmed, more recently, in the seminal case of Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 101 S.Ct. 2870, 69 L.Ed.2d 784. Absent a Congressional provision precluding concurrent jurisdiction or a disabling incompatibility between the Federal claim and adjudication of that claim in a state court, state courts may assume subject matter jurisdiction over Federal causes of action (see, Gulf Offshore Co. v. Mobil Oil Corp., supra, at 477, 101 S.Ct. at 2875).

Despite the presumption of concurrent jurisdiction, Congress may confine jurisdiction either explicitly or implicitly. Specifically, the presumption of concurrent jurisdiction may be rebutted by (1) an explicit statutory directive, (2) an unmistakable implication from legislative history, or (3) a clear incompatibility between Federal interests and state court jurisdiction (Gulf Offshore Co. v. Mobil Oil Corp., supra, at 478, 101 S.Ct. at 2875). The factors that generally commend exclusive Federal court jurisdiction over federal claims under the latter possibility, i.e., "clear incompatibility," include "the desirability of uniform interpretation, the expertise of federal judges in federal law, and the assumed greater hospitality of federal courts to peculiarly federal claims" (Gulf Offshore Co. v. Mobil Oil Corp., supra, at 478, 483-484, 101 S.Ct. at 2878).

These principles of law are not disputed by the parties; it is their application to the RICO Act which represents the point of departure of the parties' opposing claims and also that of the views expressed in this majority opinion with those of our dissenting colleagues.

Looking first at the language of that provision of the RICO Act which creates the civil remedy for private litigants and also confers jurisdiction on Federal courts, noticeably absent is either any explicit limitation of jurisdiction to the federal courts or a grant of concurrent jurisdiction to the state courts (see, 18 U.S.C. § 1964[c] ). That section provides:

"Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States District Court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee" (18 U.S.C. § 1964[c] ).

Thus, the first factor of the Gulf Offshore framework is absent here and the starting point of our analysis must necessarily be an examination of the language, structure, legislative history and underlying policies of the RICO Act to determine whether Congress implicitly restricted jurisdiction.

The question of whether state courts have concurrent jurisdiction with the Federal courts to hear and decide civil RICO claims has not been widely litigated. In fact, to date, no Federal appellate court has considered the question ¹ and the only appellate decision in this State emanates from the First Department (see, Greenview Trading Co. v. Hershman & Leicher, 108 A.D.2d 468, 489 N.Y.S.2d 502, supra ). Such limited Federal and state authority as exists has been sharply divided. ² Courts finding exclusive Federal jurisdiction primarily rely on the factors discussed below. First, Congress consciously patterned the RICO Act (see, 18 U.S.C. § 1964[c] ) after the private remedy provision of section 4 of the Clayton Antitrust Act (see, 15 U.S.C. § 15). Courts uniformly have held that the latter provision confers exclusive Federal jurisdiction for claims arising under it. On the basis of the virtually identical language

of RICO and its antitrust prototype, the District Court in County of Cook v. Midcon Corp., 574 F.Supp. 902, affd. 773 F.2d 892, held that the jurisdictional grant in the RICO Act created exclusive jurisdiction in the Federal courts over civil RICO claims (see, County of Cook v. Midcon Corp., supra, at 912). The Midcon court reasoned that the legislators must have known...