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GUERRERO v. KATZEN

July 29, 1983

Efrain GUERRERO, et al., Plaintiffs,
v.
Cyrus KATZEN, et al., Defendants



The opinion of the court was delivered by: ROBINSON, JR.

 AUBREY E. ROBINSON, Jr., Chief Judge.

 This case arises out of a partnership gone sour. Plaintiffs, Dr. and Mrs. Efrain Guerrero, entered into a partnership with Defendant Cyrus Katzen to develop a shopping center on property owned by the Guerreros. Their seven-count complaint alleges that Katzen mismanaged the partnership, misappropriated its funds and, together with Defendant Prudential Life Insurance Company, defrauded them of property worth $16 million. The complaint alleges two counts under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq., and five state law counts, including fraud, breach of trust, breach of contract, conspiracy to defraud, and embezzlement. Katzen is a defendant in six of the seven counts, Prudential in only five counts. Plaintiffs allege federal question, diversity, and pendent jurisdiction.

 The case is before the Court on motions to dismiss filed by Defendants Katzen and Prudential. Both defendants assert that Plaintiffs' complaint fails to state a claim under RICO and that the remainder of Plaintiffs' claims lack jurisdictional bases for a suit in federal court. Defendants also challenge the sufficiency of Plaintiffs' state law counts.

 I. Applicable Legal Standard

 A party who seeks to terminate an action on a motion to dismiss bears a heavy burden of persuasion, for

 
a complaint should not be dismissed for failure to state a claim unless it appears beyond 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, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957) (footnote omitted). The burden facing the moving party on such a motion is heightened by the presumptions in favor of his opponent's version of the events. On a motion to dismiss, the plaintiff is entitled to have his complaint read in the most favorable light, with all his allegations accepted as true and all doubts resolved in his favor. Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S. Ct. 1843, 1848, 23 L. Ed. 2d 404 (1969). Despite this stringent standard, the Court concludes that Plaintiffs' allegations under RICO must be dismissed for failure to state a claim. *fn1"

 II. Background

 The following summary of the facts underlying this dispute are taken from Plaintiffs' complaint; the allegations contained in the complaint are, of course, treated as true for purposes of the instant motions to dismiss.

 Prior to 1970, the Guerreros owned 54 acres of land in Fairfax County, Virginia. In 1970, they formed a partnership with Katzen to develop a shopping center on approximately 25 acres of the property. The partnership, known as the "9200 Arlington Boulevard Associates Limited Partnership," in turned controlled a "straw corporation," to which the Guerreros transferred legal title to the property. Although both Dr. Guerrero and Katzen were general partners in the venture, *fn2" Katzen managed and controlled the affairs of the partnership.

 Construction of the shopping center commenced, with Riggs National Bank of Washington, D.C. providing initial construction financing of $7.7 million; Defendant Prudential agreed to provide permanent loan financing in the same amount upon completion of construction.

 Disputes arose among the partners, and in March 1978 they executed a "Restated Limited Partnership Agreement" and a "Mutual Release" of all claims that might have arisen since the inception of the partnership. The disputes did not cease, however, and in April 1979 Katzen was appointed by the Fairfax County Circuit Court to wind up the affairs of the partnership. Over the Guerrero's objections, the Court granted Katzen leave to negotiate the sale of the shopping center to Prudential. Prudential purchased the center in August 1980 for $12.4 million, a figure Plaintiffs contend is considerably below the project's fair value. Because of cost overruns and alleged misappropriations and mismanagement by Katzen, the partnership netted only $694 from the sale. This action ensued.

 Plaintiffs allege that Katzen mismanaged the partnership, misappropriated its assets, and refused Plaintiffs access to the partnership books and records. He accomplished these misdeeds partly through a series of misrepresentations to and concealments from Plaintiffs, and partly through a series of arrangements with corporations that were wholly owned and/or controlled by him, including Capital Mortgage Investments, from which the partnership "secretly" borrowed money; Mozel Development Corporation, the general contractor for the shopping center; and Culmore Realty Company, the leasing agent and property manager for the shopping center. Both Mozel and Culmore received payments from the partnership to which they were not entitled. Moreover, Katzen's alleged mismanagement caused substantial delays and cost overruns in the project construction, necessitating an additional $2.5 million of credit on the Riggs construction loan.

 Finally, Plaintiffs allege that Katzen disregarded the best interests of the partnership in negotiating the sale of the project because of his "conspiratorial relationship" with Prudential. To wit, Plaintiffs assert that Prudential promised Katzen that Culmore Realty could continue as leasing agent and property manager for the shopping center following the sale. The result was a "sweetheart contract" whereby Prudential purchased the shopping center from the partnership at a "distressed ...


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