Terra Resources I v. Burgin

• Decision Date: 29 May 1987
• Docket Number: No. 85 Civ. 2810 (RWS).,85 Civ. 2810 (RWS).
• Citation: 664 F. Supp. 82
• Parties: TERRA RESOURCES I, A New York Limited Partnership, Plaintiff, v. James D. BURGIN; B-J, Incorporated; Jim's Pipe & Supply, Inc.; Blenda S. Burgin; James Michael Cassidy; Edward Poston; Poston & Poston Drilling Company; J. Donald Silberman; and Monitor Resources, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

664 F. Supp. 82

TERRA RESOURCES I, A New York Limited Partnership, Plaintiff, v. James D. BURGIN; B-J, Incorporated; Jim's Pipe & Supply, Inc.; Blenda S. Burgin; James Michael Cassidy; Edward Poston; Poston & Poston Drilling Company; J. Donald Silberman; and Monitor Resources, Inc., Defendants.

No. 85 Civ. 2810 (RWS).

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

May 29, 1987.

Rosner & Goodman, New York City (Andrew J. Goodman, of counsel), for plaintiff.

Davis Hoxie Faithfull & Hapgood, New York City (Charles J. Raubicheck, of counsel), for defendants Blenda S. Burgin and Jim's Pipe & Supply, Inc.

Fried, Greenbaum, Spector, Scher, Schwartz & Feldman, New York City (Harvey J. Fried, Randi S. Jones, of counsel), for defendants B-J, Inc., James D. Burgin, Monitor Resources, Inc., and J. Donald Silberman.

OPINION

SWEET, District Judge.

Defendants James D. Burgin (J. Burgin); B-J, Inc. (B-J); J. Donald Silberman ("Silberman"); and Monitor Resources ("Monitor") have moved against plaintiff Terra Resources I ("Terra") pursuant to Fed.R. Civ.P. 12(b)(6) for an order dismissing the second third and fourth claims against all defendants, pursuant to Fed.R.Civ.P. 12(b)(6) for an order dismissing the complaint in its entirety against Monitor Resources and J. Donald Silberman, and for a stay pending arbitration of plaintiff's contract-related state law claims against B-J Inc. and pending dispostion by the United States Supreme Court from the decision of the Court of Appeals for the Second Circuit in McMahon v. Shearson/American Express, Inc., 788 F.2d 94 (2d Cir.), cert. granted, ___ U.S. ___, 107 S.Ct. 60, 93 L.Ed.2d 20 (1986). Blenda Burgin ("B. Burgin") and Jim's Pipe and Supply, Inc. ("Jim's Pipe") have moved pursuant to Fed. R.Civ.P. 12(b)(6) to dismiss the RICO and the securities claims as against them, which they submit would eliminate the court's jurisdiction with respect to the rest of the complaint.

Originally this motion was argued on December 5, 1986, but, the day before, the Second Circuit had issued United States v. Ianniello, 808 F.2d 184 (2d Cir.1986). On the strength of Ianniello, Terra supplemented its papers on February 13, 1987. Defendants did not object to this submission, their response to it was received by the court on March 9, 1987, and the motion was marked fully submitted on that date.

The Complaint

For the purpose of these 12(b)(6) motions, the facts as alleged in the complaint must be taken as true. In short, the allegations pertinent to these motions are as follows: Terra, a limited New York partnership, was defrauded by the defendants in connection with the exploration and drilling for oil and natural gas within the State of Tennessee.

James and Blenda Burgin were majority stockholders of B-J, a Tennessee corporation in the business of exploring and drilling for oil and natural gas and also majority stockholders of Jim's Pipe, another Tennessee corporation in the business of selling business supplies. Terra alleges that these corporations were mere alter egos of the Burgins.

Monitor is a New York corporation engaged in the practice of geological consulting. Silberman is alleged to be the dominant officer and director of Monitor, whose affairs he conducts as his alter ego.

In essence, the Burgins defrauded Terra by making fraudulent misrepresentations to induce Terra to invest in oil and gas drilling prospects, and funneled the ill-gotten profits into B-J and Jim's Pipe. Monitor, through Silberman, is alleged to have conspired with the other defendants in this scheme by confirming geologic information that J. Burgin provided to Terra although Monitor and Silberman knew or should have known that the information was false. They are alleged to have received money from J. Burgin for providing these false confirmations.

I. The RICO Claims

A. Pattern

The civil provisions of the Racketeer Influenced and Corrupt Organizations Act, Pub.L. No. 91-452 Tit. IX, 84 Stat. 941 (codified as amended at 18 U.S.C. §§ 1961-68) ("RICO") have caused jurisprudential difficulty. Although crafted as a tool to encourage private prosecution of organized crime, RICO is frequently invoked in civil fraud suits, given the possibility of obtaining an award of treble damages and attorneys' fees if successful.

Predicate acts—two of which must be proved to establish a RICO violation—include violations of the Mail Fraud Act, a provision that is so broad that former Chief Justice Burger once referred to it as a "stopgap" criminal statute, a statute so broad that it could be invoked by prosecutors to stop swindlers even before Congress appreciated the new type of crime and got around to outlawing it. See United States v. Maze, 414 U.S. 395, 405-06, 94 S.Ct. 645, 651, 38 L.Ed.2d 603 (1974) (Burger, C.J., dissenting); see also United States v. Margiotta, 688 F.2d 108, 139-44 (2d Cir. 1982) (Winter J., dissenting) (generally discussing "limitless expansion of the mail fraud statute"), cert. denied, 461 U.S. 913, 103 S.Ct. 1891, 77 L.Ed.2d 282 (1983).

In the criminal sphere, RICO prosecutions are controlled through measured prosecutorial discretion. In the private sector these constraints are missing and the courts have seen a flood of cases under the RICO label which have nothing at all to do with organized crime as it is understood commonly or was understood by Congress at the time of the enactment of the statute. As the Supreme Court has said, "in its private civil version, RICO is evolving into something quite different from the original conception of its enactors." Sedima, S.P. L.R. v. Imrex Co., Inc., 473 U.S. 479, 500, 105 S.Ct. 3275, 3287, 87 L.Ed.2d 346 (1985). Although trying to cripple organized crime, Congress may have instead contributed to the slow disintegration of the quality of the federal courts through yet another example of what Chief Judge Wilfred Feinberg has called "thoughtless increases in federal jurisdiction." Feinberg, The Coming Deterioration of the Federal Judiciary, 42 The Rec. 179, 182 (1987).

The unexpected effect of the civil RICO provisions has been brought to Congress's attention, hearings have been held, and various solutions proposed. However, legislation moves slowly through the halls of the Capitol, and no remedy has yet been forthcoming. Still, there is no evidence that it was ever the intent of Congress to flood the federal courts with actions more properly brought under various state and other federal statutes in the name of RICO simply because of the carrot of treble recovery. Although the ultimate correction of the civil RICO problem "must lie with Congress," Sedima, 473 U.S. at 499, 105 S.Ct. at 3287, the Supreme Court laid part of the blame for the civil RICO explosion on the failure of the judiciary "to develop a meaningful concept of `pattern,'" id. at 500, 105 S.Ct.at 3287.

RICO requires that the commission of racketeering offenses must comprise a "pattern." 18 U.S.C. § 1962(a)-(d). The statute defines pattern as requiring at least two of the enumerated predicate acts within a ten-year period. 18 U.S.C. § 1961(5). In Sedima, the Supreme Court indicated that two acts are necessary, but perhaps not sufficient, to create a "pattern." Noting that "in common parlance two of anything do not generally form a `pattern,'" the Court suggested that "continuity plus relationship ... combines to produce a pattern." Id. In other words, the requirement of the pattern is not satisfied unless there is "a relationship and continuity between predicate acts." Beck v. Manufacturers Hanover Trust, 645 F.Supp. 675, 683 (S.D.N.Y.1986); see also Procter & Gamble Co. v. Big Apple Indus. Bld'gs, Inc., 655 F.Supp. 1179 (S.D.N.Y.).

The law on continuity in this Circuit has included a rule that "a defendant who commits various criminal acts in the course of one fraudulent scheme has not committed a `pattern of racketeering'." Beck v. Manufacturers Hanover Trust Co., 645 F.Supp. 675, 683 (S.D.N.Y.1986). For instance, in Bear Creek Productions v. Saleh, 643 F.Supp. 489 (S.D.N.Y.1986), the Honorable Edward Weinfeld dismissed the "seemingly inevitable civil RICO claim," id. at 490, on pattern grounds. Bear Creek involved allegations of fraudulent representions relating to the production and distribution of a single motion picture, and in dismissing the RICO counts, Judge Weinfeld observed: "numerous cases in this circuit, examining the question of length, have held that where the criminal acts alleged form a single scheme, they do not constitute a `pattern of racketeering activity.'" Id. at 495 (footnote omitted). See also Richter v. Sudman, 634 F.Supp. 234 (S.D.N.Y.1986); Anisfeld v. Cantor Fitzgerald & Co., 631 F.Supp. 1461 (S.D.N.Y.1986). But see Bankers Trust Co. v. Feldesman, 648 F.Supp. 17, 25-26 (S.D.N.Y.1986); Conan Properties, Inc. v. Mattel, Inc., 619 F.Supp. 1167, 1170-71 (S.D.N.Y.1985).

In this case, the RICO pattern is alleged to be constituted by a series of mail and wire frauds all directed at consummating a single fraud. That is, it took a number of telephone calls and letters to separate Terra from its money successfully. This is an insufficient allegation to meet the pattern requirement.

Plaintiff here contends that the recent Second Circuit case United States v. Ianniello, 808 F.2d 184 (2d Cir.1986), stands for the proposition that it need show no element of continuity except insofar as the enterprise element of RICO is also met. As the Honorable Pierre Leval has recently noted in construing Ianniello, "Although there is language in Ianniello which on a superficial reading can give apparent support to plaintiff's argument, this notion disappears when the language is read carefully in the context of the facts and the holding." Procter & Gamble Co. v. Big Apple Indus. Bld'gs, Inc., 655 F.Supp. 1179, 1183-84 (S.D.N.Y.1987).

As Judge Leval's careful parsing of the case shows, the essence of Ianniello was the court's holdings that the enterprise in question was wholly...