Vereins-Und Westbank AG v. Carter, 86 Civ. 0930 (WK).

• Decision Date: 07 July 1986
• Docket Number: No. 86 Civ. 0930 (WK).,86 Civ. 0930 (WK).
• Citation: 639 F. Supp. 620
• Parties: VEREINS-UND WESTBANK AG, and Rockwood Insurance Company, Plaintiffs, v. Jeffrey E. CARTER, J.E. Carter Energy & Development Corporation, Pettet Energy Corporation, Pettet 1984 Acquisition and Development Program, W. Austin Barsalou, Barsalou and Associates, P.C., Defendants.
• Court: U.S. District Court — Southern District of New York

639 F. Supp. 620

VEREINS-UND WESTBANK AG, and Rockwood Insurance Company, Plaintiffs, v. Jeffrey E. CARTER, J.E. Carter Energy & Development Corporation, Pettet Energy Corporation, Pettet 1984 Acquisition and Development Program, W. Austin Barsalou, Barsalou and Associates, P.C., Defendants.

No. 86 Civ. 0930 (WK).

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

July 7, 1986.

COPYRIGHT MATERIAL OMITTED

Ronald H. Alenstein, Shea & Gould and William Brennan, Phillips, Lytle, Hitchcock, Blaine & Hubber, New York City, for plaintiffs.

James A. Moss, Herrick & Feinstein, Jeffrey C. Carter, Henderson & Koplik and Jay G. Safer, LeBoeuf, Lamb, Leiby & MacRae, New York City, for defendants.

MEMORANDUM & ORDER

WHITMAN KNAPP, District Judge.

Plaintiff Vereins-Und Westbank AG ("Vereinwest") is a German bank. Plaintiff Rockwood Insurance Company ("Rockwood") has its principal place of business in Pennsylvania. They sue the defendants for alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and for state law fraud, negligence, and professional malpractice in connection with their agreement to make several million dollars worth of loans to parties which have defaulted.

Two groups of defendants move to dismiss the complaint. The first group (the "Carter defendants") consists of four defendants: a limited partnership (Pettet 1984 Acquisition and Development Program ("Pettet 1984")), the general partner of Pettet 1984 (Pettet Energy Corporation), ("PEC") a Texas corporation (J.E. Carter Energy & Development Corporation ("Carter Energy")), and the president and sole shareholder of PEC and Carter Energy (Jeffrey E. Carter ("Carter")). The second group (the "attorney defendants") consists of an attorney (W. Austin Barsalou) and his law firm (Barsalou & Associates, P.C.) which acted as counsel to the first group of defendants. Also named as a defendant is Interdiscount, Ltd. ("IDL"), which has not joined in these motions.

The complaint alleges that in December, 1984, Carter and Carter Energy formed with the assistance of the attorney defendants four limited partnerships with the aim of discovering and exploiting oil and gas resources. Pettet 1984 was one of those partnerships; the other three — Hardin 1984, Arriola 1984, and Splendora 1984 — have filed for bankruptcy.¹ Carter and Carter Energy also formed other, unidentified limited partnerships at or about the same time.

The partnerships' private placement memoranda required limited partners to pay their capital contributions in the form of a 20 percent cash down payment and a promissory note representing the remaining 80 percent. Plaintiffs allege that defendants falsely represented that the cash down payments had been made when in fact they had not been and never were, and that had they known the truth they would not have entered into the subject transactions.

The misrepresentations are said to have been contained in certificates of limited partnership filed with the Texas Secretary of State which indicated that the limited partners had made the required 20 percent cash down payments, and as well in documents sent to plaintiffs in the course of the limited partnerships' efforts to obtain financing. These included the private placement memoranda which indicated that limited partners would make a 20 percent cash down payment, note pledge agreements, the Texas certificates of limited partnership, and opinion letters from the attorney defendants indicating that the cash down payments had been made. Plaintiffs relied on these materials in providing financing.

Financing was arranged in the following way. The Partnerships first negotiated the issuance to their limited partners of surety bonds from Rockwood which guaranteed the promissory notes made by the limited partners. They also arranged to borrow from defendant IDL up to $3.2 million each. IDL turned these loans over to Vereinwest, which actually advanced the funds. The partnership materials state that a lending bank would succeed IDL as lender and advance the required funds; plaintiffs claim that, at the time the loans were being negotiated, the Carter defendants knew that that bank would be Vereinwest.

The loans were evidenced by partnership notes executed by each limited partnership. As collateral for the loans, the partnerships executed note pledge agreements by which they pledged to IDL the promissory notes made by the limited partners and secured by Rockwood's bonds. The note pledge agreements, which were prepared by the attorney defendants, represent that the limited partners had in fact made their 20 percent cash down payments.

Shortly after receiving the loans, the partnerships defaulted. Three of them declared bankruptcy.

Plaintiffs allege that defendants either deliberately made misrepresentations or failed to exercise the requisite degree of care necessary to establish the truth or falsity of the information they provided to plaintiffs. Plaintiffs assert that had they known that the limited partners had not in fact made the required cash down payments, they would not have issued the loans and surety bonds.

Plaintiffs also assert claims under RICO, identifying the named limited partnerships and defendants as an enterprise which engaged in a pattern of racketeering activity to defraud plaintiffs and unnamed others.

DISCUSSION

Rule 9(b)

We do not agree that, as to the Carter defendants, the complaint fails to plead fraud with specificity. Paragraph 20 of the complaint alleges that all defendants together conspired to exact funds fraudulently from the plaintiffs. It identifies the alleged misrepresentations, the documents in which they were contained, and the two month period in which they were made. In light of the Carter defendants' intimate involvement in the formation and operation of the limited partnerships, we think the complaint sufficient despite its failure to pinpoint which among the four of them was the speaker or mailer on any given occasion. The complaint further states that the defendants knew the statements were false, and that plaintiffs would not have made the loans had they known of the falsity. These allegations provide more than fair notice of the claims which must be refuted.

As to the attorney defendants, we find that the complaint sufficiently alleges that they participated in preparing the documents containing the false representations. However, nowhere is it specifically claimed that the attorneys knew the statements to be false; while such allegations are readily made and inferable as to the Carter defendants, who must have known whether or not the limited partners had made their payments, the same cannot be said of the attorneys, who, according to the complaint, acted only at the Carter defendants' behest. We therefore conclude that the inference plaintiffs would have us draw as to the attorneys' knowledge is too tenuous to support the complaint as to them. However, as plaintiffs indicated at oral argument that facts did exist which more strongly support the inference that they knew the relevant statements were false, we grant them leave to replead their fraud claims against the attorneys to allege them.

The Carter defendants also argue that Vereinwest lacks standing to sue for fraud because IDL did not assign to it its cause of action for fraud or deceit. Vereinwest does not sue as IDL's assignee, but on the basis of misrepresentations made directly to it or intended for its ears. See Peerless Mills, Inc. v. AT&T (2d Cir.1975) 527 F.2d 445, 450 (third party may sue for fraudulent misrepresentation if he relied upon it and defendants intended that it be conveyed to him).²

The Carter defendants finally argue that their alleged misrepresentations are immaterial as a matter of law. We find plaintiffs' assertion that they would not have loaned several million dollars to the partnerships had they known of the limited partners' failure to make their cash down payments more than adequate to establish materiality.

RICO

Section 1962(a)

Plaintiffs allege violations of 18 U.S.C. § 1962(a), (b), (c), and (d). Defendants argue that in order to state a cause of action for violation of § 1962(a), plaintiffs must allege facts showing that they have been injured by the acts there specifically forbidden, namely, from the investment of income derived from racketeering in an enterprise engaged in interstate commerce. They cite our recent decision in DeMuro v. E.F. Hutton (Jan. 13, 1986) Docket No. 85 Civ. 7097, where we so interpreted the language of § 1964(c) — affording a civil remedy for violations of the statute — and § 1962(a). We agree that DeMuro controls. As plaintiffs have not pled facts meeting the requirements there set forth, we dismiss the § 1962(a) claim with leave to replead to set forth facts which would.

Pattern of Racketeering Activity

Plaintiffs must prove that they were injured by reason of defendants' conduct of an enterprise through a pattern of racketeering activity. 18 U.S.C. § 1964(c). This requires that at least two acts of racketeering activity have been committed within ten years of each other. The question presented, of course, is what additional requirements are suggested by use of the expression "at least".

In Sedima S.P.R.L. v. Imrex Co. (1985) ___ U.S. ___, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed. 2d 346, the Supreme Court stated that the key to the pattern requirement was continuity and relationship between the acts alleged. Subsequent decisions have construed this footnote to mean that the pattern requirement is not satisfied by allegations of two or more related acts implemented to carry out one isolated and unlawful transaction because the requisite continuity of illegal activity is missing. Northern Trust Bank/O'Hare, N.A. v. Inryco, Inc. (N.D.Ill. 1985) 615 F.Supp. 828 (no pattern where there is a "single fraudulent effort, implemented by several fraudulent acts" and claims alleging two...