RICO: § 1962(b) Standing Requires Injury from Defendant’s Acquisition & Maintenance in Enterprise — Under § 1962(c), Defendant Cannot Be Enterprise

Royal Farms, Inc. v. Global Tropical Fresh Fruit Corp., 2006 WL 8437472 (E.D.N.Y. Feb. 14, 2006):

*1 Royal Farms, Inc. (Royal), owns and operates a retail chain of supermarkets in the New York metropolitan area. Global Fresh Fruit Corporation (Global), is a supplier of fruit with offices located in Brooklyn, New York. Umberto Tesoriero was an employee of Royal and served as its produce and fruit buyer from 1972 through 2001. Royal purchased produce from Global during the period between 1972 and 2001.

On January 29, 2003, Tesoriero pled guilty to Conspiracy to Commit Mail Fraud in violation of 18 U.S.C. § 371 and for Fraud and False statements in violations of 26 U.S.C. § 7206 (1). As part of his plea, Tesoriero admitted accepting kickbacks from Royal’s suppliers. The plaintiff alleges that during the period from 1987 to July 2000 agents of Global paid commissions and/or kickbacks to Tesoriero in the amount of five percent of all orders for Global’s produce placed by Tesoriero on behalf of Royal. As a result, Global had an unfair advantage over other competitors and Royal paid inflated prices for Global’s products.

Royal has pled three causes of action in its complaint: (1) Global committed commercial bribery in violation of the Robinson-Patman Act, 15 U.S.C. § 13; (2) Global aided and abetted a breach of fiduciary duty that Tesoriero owed Royal, namely Tesoriero’s duty to purchase goods at the lowest possible price; and (3) Global violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962. Contending that each claim is barred by the applicable statute of limitations and, in addition, the RICO claims are not plead with sufficient particularity, Global moves to dismiss the complaint.

Discussion

Claim One: Commercial Bribery in violation of the Robinson-Patman Act

The defendant contends that the plaintiff’s first claim, commercial bribery in violation of the § 2(c) Robinson-Patman Act, 15 U.S.C. § 13, is barred by the statute of limitations. It remains an open question in the Second Circuit whether commercial bribery can form the basis of a § 2(c) claim. Blue Tree Hotels Investment, Ltd v. Starwood Hotels and Resorts Worldwide, Inc., 369 F.3d 212, 223 n.6 (2d Cir. 2004). Because Global has not asserted this defense as a basis for the dismissal of the complaint, I only address the issue of whether the complaint is time barred.

The statute of limitations for causes of action under the Robinson-Patman Act is four years. 15 U.S.C. § 15b; Higgins v. New York Stock Exch. Inc., 942 F.2d 829, 832 (2d Cir. 1991). The statutory period begins to run when the injury is sustained. Zenith Radio Corp. v. Hazeltine Research Inc., 401 U.S. 321, 338 (1971). Moreover, a pattern of wrongful behavior over a period of years may be pled from the last known violation. See, e.g. Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1105 (2d Cir. 1988). Here, the complaint alleges that Global paid kickbacks to Tesoriero from 1987 until July 2000 which caused injury in the form of the payment of inflated prices because of the lack of competition. Royal was last injured in July 2000 and, therefore, the statute of limitations would bar any claim pled after July 2004. The defendant contends that, because the plaintiff filed the complaint on October 27, 2004, the cause of action is untimely.

*2 Royal alleges fraudulent concealment by Global, which would toll the limitations period until the fraud is discovered. In order to plead fraudulent concealment a plaintiff must demonstrate that: (1) the defendant concealed the existence of the cause of action from the plaintiff; (2) the plaintiff remained ignorant of the cause of action until within four years of filing the complaint; (3) the plaintiff performed due diligence to investigate. City of Detroit v. Grinnell Corp., 495 F.2d 448, 460 (2d Cir. 1974).

As to the first prong of the offense, a plaintiff can prove concealment by showing that a defendant, through affirmative actions, prevented it from discovering his claim or that the wrong itself was one that was self-concealing. New York v. Hendrickson Bros. Inc., 840 F.2d 1065, 1083 (2d Cir. 1988). Certain claims are inherently fraudulent and self-concealing. Id. at 1083 . In Hendrickson, the Second Circuit found that a bid-rigging scheme involving many parties was self-concealing. Id. There, parties colluded when placing bids on state highway contracts in order to elevate the price paid to the low-bidder who ultimately won the contract. Id. at 1070. In determining that such a scheme was self-concealing, the Second Circuit relied on the fact that concealment of the plan was necessary for success. Id. at 1083. Similarly, a plan to obtain steady business at inflated prices through the use of bribes requires concealment of those bribes for the success of the relationship to continue. Royal alleges that Global bribed Tesoriero in order to retain business at an inflated price. Under the circumstances, the bribery scheme is self-concealing.

The second prong of the offense requires that a plaintiff allege that it remained ignorant of the cause of action until within four years of filing the complaint. See City of Detroit, 495 F.2d at 460. In his affidavit, Michael Schreiber, the President of Royal, claims that Royal was first made aware of Tesoriero’s crimes when it received a letter from the Department of Justice dated February 10, 2003, which contained Tesoriero’s guilty plea from January 24, 2003. Consequently, the statute of limitations on Royal Farm’s claim did not begin to run until Royal did or should have discovered the claim. As stated in Schreiber’s affidavit, the earliest moment for the statute of limitations to begin running, the first date upon which Royal was put on notice of a potential claim, was February 10, 2003. The complaint was filed on October 27, 2004, a little over one year later, and, therefore, was filed well within the statutory time period of four years.

The third prong of the offense requires that a plaintiff allege that the ignorance of the cause of action was not the result of a lack of due diligence. See City of Detroit, 495 F.2d at 460. Royal failed to plead this prong in haec verba. Nonetheless, in the absence of any alleged circumstance that should have aroused the defendant’s suspicions, the allegations in the complaint discussed above are sufficient to survive a motion to dismiss.

Claim Two: Aiding and Abetting a Breach of Fiduciary Duty

The defendant alleges that the cause of action for aiding and abetting the breach of Tesoriero’s fiduciary duty to plaintiff is also barred by the statute of limitations. Under New York law, to state a cognizable claim for fiduciary duty, a plaintiff must allege three elements: 1) the existence of a fiduciary relationship; 2) knowing breach of a duty imposed by that relationship; and 3) damages. Carruthers v. Flaum, 388 F.Supp.2d 360, 381 (S.D.N.Y. 2005); Scholastic Inc. v. Harris, 80 F.Supp.2d 139, 152 (S.D.N.Y. 1999). Aiding and abetting a breach of fiduciary duty has the same statute of limitations as the underlying claim of breach of fiduciary duty. Kaufman v. Cohen, 760 N.Y.S.2d 157, 171 (App. Div. 2003) (applying the same statute of limitations period for both the breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims). The limitations period for a breach of fiduciary duty is either a three-year or six-year period depending upon the relief sought. Yatter v. William Morris Agency, Inc., 682 N.Y.S.2d 198 (App. Div. 1998) (citing Loengard v. Santa Fe Indus., Inc., 519 N.Y.S.2d 801, 803 (1987)). The six-year statute of limitations is applicable where the cause of action is based on allegations of actual fraud. N.Y.C.P.L.R. § 213(8) (2004); Kaufman, 760 N.Y.S.2d at 164. Global argues that, because the plaintiff only seeks monetary damages in this case the statute of limitations should be three-years and as a result, the claim is untimely. Because Royal filed the claim within six years from the date that the action accrued in July 2000, if the fraud based statute of limitations is applicable, the complaint is timely.

*3 The beach of fiduciary duty in this case is sufficient to include a legally cognizable claim for fraud. Under New York law, the allegations in plaintiff’s complaint are also sufficient to sustain a cause of action for fraud in its own right. To state a cause of action for fraud, five elements must be alleged: (1) a representation of a material fact, (2) the falsity of that representation, (3) knowledge by the party who made the representation that it was false when made, (4) justifiable reliance by plaintiff and (5) resulting injury. Monaco v. New York University Medical Center, 623 N.Y.S.2d 566, 568 (App. Div. 1995). A “representation of a material fact,” however, can include a failure to disclose. Case law in New York makes it clear that “(c)oncealment with the intent to defraud of facts which one is duty-bound in honesty to disclose is of the same legal effect and significance as affirmative misrepresentations of fact.” Abbate v. Abbate, 441 N.Y.S.2d 506, 514 (App. Div. 1981) (quoting Nasaba Corp. v. Harfred Realty Corp., 287 N.Y. 290, 295 (1942)). This duty to disclose is triggered when a fiduciary has reason to believe that information is material and germane and that the failure to disclose it has the same net effect as an affirmative misrepresentation. Botti v. Russell, 580 N.Y.S.2d 505, 507 (App. Div. 1992). In this case, Tesoriero was under a legal duty to disclose to his employer the fact that he was being paid by Global. As the Second Circuit has held:

[A]n employee’s duty to disclose material information to his employer need not be the creation of a state or federal statute. On the contrary, the employment relationship itself may give rise to an obligation on the part of an employee not to conceal, and in fact to reveal information material to his employer’s business.”

United States v. Margiotta, 688 F.2d 108, 127 (2d Cir. 1982). The fact that Tesoriero was receiving remuneration from Global was material to his employer’s business and he had a fiduciary obligation to disclose it. Indeed, if the disclosure had been made, the payments would have terminated to Royal’s advantage. Moreover, as Judge Weinfeld observed: “One who knowingly participates in or joins in an enterprise whereby a violation of a fiduciary duty is effected is liable jointly and severally with the ‘recreant fiduciary.’ ” Oil & Gas Ventures – First 1958 Fund, Lt. v. Kung, 250 F.Supp. 744, 749 (S.D.N.Y. 1966). While the complaint does not in haec verba allege the elements of a cause of action for fraud, the allegations of fact are sufficient to survive a motion to dismiss. “[A] complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

Finally, I note that the allegations in the plaintiff’s complaint may also be sufficient to sustain a cause of action for commercial bribery. Under the New York cases that recognize such a cause of action, a plaintiff must allege that the defendant conferred a benefit upon plaintiff’s employee, without plaintiff’s consent, and with the intent to influence the employee’s conduct. Niagra Mohawk Power Corp. v. Freed, 696 N.Y.S.2d 600, 602 (App. Div. 1999). There is, however, a conflict in the New York courts on the question of whether or not a private right of action is available under the commercial bribery statute. Compare Niagra Mohawk (holding that there is a private right of action for commercial bribery under New York law); with Sardanis v. Sumitomo Corp, 718 N.Y.S.2d (App. Div. 2001) (disagreeing with the Niagra Mohawk decision). Because the elements of the cause of action for commercial bribery overlap with those of the preceding cause of action, I need not resolve the issue at this point.

 

As I have noted before, see Friedman v. New York City Admin. for Children’s Services, 2005 WL 2436219 (E.D.N.Y. 2005), if one of a number of integrally related causes of action have to be tried, it makes little sense to grant a motion to dismiss as to one or more of them, as it may prove necessary to hold yet another trial in the event that it is determined on appeal that the motion to dismiss was improperly granted. As observed by Judge Clark in an analogous context: “[T]here seems no question that in the long run fragmentary disposal of what is essentially one matter is unfortunate not merely for the waste of time and expense caused the parties and the courts, but because of the mischance of differing dispositions of what is essentially a single controlling issue.” Audi Vision Inc. v. RCA Mfg. Co., 136 F.2d 621, 625 (2d Cir.1943). Accordingly, I will submit the cause of action for commercial bribery to the jury. This procedure would also permit the Second Circuit to certify the issue to the New York Court of Appeals if there is a verdict for the plaintiff.

Claim Three: Violation of Civil RICO

*4 The defendant contends that the RICO claim should be barred by the statute of limitations and, in addition, is inadequately pled.

Statute of Limitations

The RICO statute does not provide an express statute of limitations for its civil enforcement provision. However, based upon an analogy to the Clayton Act, the established statute of limitations for a civil RICO lawsuit is four years. Agency Holding v. Malley Duff & Assoc., Inc., 483 U.S. 143, 156 (1987). A RICO action accrues when a party discovered or should have discovered the injury that provides the basis for the action. Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1105 (2d Cir. 1988), cert. denied, 490 U.S. 1007 (1989). In addition, there is a “separate accrual” rule which establishes that “each time plaintiff discovers or should have discovered an injury caused by defendant’s violation of § 1962, a new cause of action arises as to that injury, regardless of when the actual violation occurred.” Id. It is also established that a plaintiff can only recover for injuries that were or should have been discovered within four years of the time the law suit is brought. Bingham v. Zolt, 66 F.3d 553, 560 (2d Cir. 1995). The issue at hand is at what point was the injury was discovered or discoverable.

There is an objective discovery rule which involves a two-part inquiry: (1) the court must determine, based upon the facts in the complaint, whether plaintiff had inquiry notice of the fraud and (2) if plaintiff had inquiry notice, the court must then determine if he responded with reasonable diligence. Butala v. Agashiwala, 916 F.Supp. 314, 318 (S.D.N.Y. 1996). The court must look to the record to determine whether the plaintiff was put on inquiry notice. Id.; See e.g. In re Colonial Ltd. Partnership Litigation, 854 F. Supp. 64 (D. Conn. 1994) (finding that where the record is insufficient to establish when the plaintiff was put on inquiry notice it is inappropriate to grant a motion to dismiss based upon the statute of limitations). The defendant alleges that the kickbacks causing injury to Royal as a result of a violation of RICO, which began in 1987, ended in February 2000, when agents of the defendant cooperated with the government in an investigation of Tesoriero, but has provided no evidence to establish that the plaintiff was put on inquiry notice at that date. Royal alleges that it first became aware of any injury as a result of RICO violations sometime after the beginning of February 2003. The record is insufficient to show that the plaintiff was put on inquiry notice prior to February 2003. As a result, because the action was brought on October 27, 2004 and there is no evidence that the action accrued prior to February 2003, the complaint is timely.

Sufficiency of the Pleadings: Predicate Acts of Mail and Wire Fraud

The defendant also challenges the sufficiency of the pleadings regarding the predicate acts of mail and wire fraud, the requirement of “enterprise,” and the statutory requirements presented in 18 U.S.C. §§ 1962 (a)(d). First, when bringing a RICO claim, a plaintiff must allege a pattern of racketeering activity involving at least two predicate acts. 18 U.S.C. § 1961(5). When the predicate acts are mail and wire fraud, the plaintiff must comply with the heightened pleading requirements of Fed. R. Civ. P. 9(b). The defendant asserts that Royal provides cursory allegations of mail and wire fraud in its complaint by stating that “Defendant violated 18 USC § 1341 by placing inflated invoices, statements, purchase orders and bills in the United States Mails” and “Defendant violated 18 USC 1343 by communicating with Tesoriero by telephone and for placing telephone calls to 718-646-8650, the phone number of Royal for the purpose of perpetrating the scheme to defraud Royal.” However, in alleging the RICO claim the plaintiff realleged and repleaded paragraphs 1- 21 of the complaint. In these paragraphs the plaintiff alleges that Global conspired with Tesoriero to defraud Royal, Global paid bribes and kickbacks to Tesoriero in order to maintain an unfair advantage resulting in inflated prices, and that the bribes caused Royal to pay inflated rates for produce from Global. It is these statements that provide the origins of the inflated invoices sent through the U.S. Mail and the content of the telephone conversations both of which explain Global’s intent to defraud Royal. See Clifford v. Hughson, 992 F.Supp. 661, 669 (S.D.N.Y. 1998) (citing Center Cadillac, Inc. v. Bank Leumi Trust Co. of New York, 808 F.Supp. 213, 229 (S.D.N.Y. 1992) (where “nature and mechanics of the underlying scheme is sufficiently detailed, it is enough to plead the general content of the [mailing] without stating the exact words involved”)). Indeed, the mailings are sufficient if they simply further the scheme. They need not themselves be fraudulent.

*5 Moreover, while mail and wire fraud may not be pled generally upon information and belief, such a pleading is allowed when the facts are “peculiarly within the opposing party’s knowledge, in which event the allegations must be accompanied by a statement of facts upon which the belief is based.” DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). Royal’s information and belief is based upon Tesoriero’s guilty plea to the charges of Conspiracy to Commit Mail Fraud and for Fraud and False Statements in addition to his admission of accepting kickbacks from suppliers of Royal.

§ 1961(a)

Global challenges the sufficiency of the allegations of the plaintiff’s § 1962(a) claim. Section 1962(a) prohibits any person who has received income from racketeering from “us[ing] or invest[ing], directly or indirectly, any part of such income ... in the acquisition of any interest in ... or the operation of ... any enterprise.” 18 U.S.C. § 1962(a). The Second Circuit further requires that the investment itself proximately cause the plaintiff’s injury. See e.g., Ouaknine v. MacFarlane, 897 F.2d 75, 82-83 (2d. Cir. 1990) (“The violation is not established by mere participation in predicate acts of racketeering.”). It is insufficient to allege only that the defendant reinvested the racketeering proceeds in its ongoing business; a plaintiff must also allege injury “by reason of” defendants investment of racketeering income in an enterprise. The complaint contains no such allegation.

§ 1962(b)

Next, Global challenges the sufficiency of the allegations of the plaintiff’s § 1962(b) claim. Standing for § 1962(b) purposes requires that the plaintiff be injured by the defendant’s acquisition and maintenance of an interest in a pertinent enterprise. Gregory P. Joseph, Civil Rico: A Definitive Guide, 39 (1992). Here, Royal alleges an injury based upon the predicate acts of mail and wire fraud but fails to allege any separate injury related to the acquisition and maintenance of any interest in an enterprise. The scheme to defraud, which involved the use of the mails, led the plaintiff to pay inflated prices to the defendant. If the plaintiff had known of the bribes, it would have insisted on a lower price. The plaintiff alleges no other separate injury caused by the acquisition and maintenance of any interest in an enterprise.

§ 1962(c)

Defendants further contend that the plaintiffs have not met the “enterprise” requirement of § 1962(c). Under that provision, a person who violates § 1962(c) must be distinct from the “enterprise” the affairs of which that person is “conduct[ing] or participat[ing].” Gregory P. Joseph, Civil Rico: A Definitive Guide, 42 (1992). This is because that section of the statute only applies to a person associated with or employed by an enterprise that has wrongfully conducted or participated in the enterprise’s affairs. Id. In the present case, Global was the enterprise. The officers, as employees of Global, were the persons conducting its affairs through a pattern of racketeering. They are proper defendants and not the enterprise (Global) itself. Riverwoods Chappaqua Corp v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994). Because the defendant is the enterprise, the affairs of which were conducted pursuant to a pattern of racketeering, a § 1962(c) cause of action against it cannot stand. This would be another matter if the plaintiffs had named as defendants officers of employees of Global who conducted its affairs pursuant to a pattern of racketeering.

§ 1962(d)

*6 Last, the defendant contends that the plaintiff failed to plead a violation of § 1962(d). Standing to sue for a § 1962(d) conspiracy violation requires an allegation of injury from a substantive violation of § 1962(a), (b), or (c). First Capital Asset Management, Inc. v. Satinwood, Inc., 385 F.3d 159, 182 (2d Cir. 2004) quoting Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir.1996) (“Since we have held that the prior claims do not state a cause of action for substantive violations of RICO, the present claim does not set forth a conspiracy to commit such violations.”), vacated on other grounds, 525 U.S. 128, 119 S.Ct. 493, 142 L.Ed.2d 510 (1998). Thus, since I find that the plaintiff has not stated a cause of action for substantive violations of RICO, the plaintiff lacks standing to sue under § 1962(d).

Conclusion

I deny the defendant’s motion to dismiss the Robinson-Patnam Act cause of action and the cause of action for aiding and abetting a breach of fiduciary duty. I grant the motion to dismiss the RICO claims with leave to replead.

 

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