stock ownership of Business Furniture Interior, Inc. ("BFI") to defendant Temporaries, Inc. ("TI"), in return for $ 100 cash and TI's promise to cause BFI to enter into the Employment Agreement. Plaintiff received a five year employment contract from BFI at $ 90,000 per year salary plus promised bonuses and other consideration. In the Purchase Agreement, TI reserved the right to withdraw from the contract by returning the BFI stock to the plaintiff "if an audit of the books of BFI reveals gross misrepresentations of the Company's financial condition." See Complaint, Exhibit A.
After the consummation of the acquisition of BFI by TI, TI sent independent auditors to BFI and commenced an audit of BFI's books. On or about March 19, 1984, TI determined that the plaintiff had violated the "gross misrepresentation" clause of the acquisition agreement and determined to rescind the transaction and return the stock to the plaintiff. On or about March 25, 1984, TI returned the stock to the plaintiff.
On March 18, 1987, plaintiff filed a suit against TI for breach of contract. On May 29, 1987, TI filed an answer and counterclaim.
TI's counterclaim asserts that the plaintiff used BFI as an enterprise to defraud it and others, and therefore seeks damages under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (1982) ("RICO"), and Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and for common law fraud, fraudulent concealment, constructive fraud, punitive damages and negligent misrepresentation.
Plaintiff moves pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss Count I on the grounds that (1) it fails to allege sufficiently a violation of RICO and (2) it fails to plead fraud sufficiently as required by Rule 9(b) of the Federal Rules of Civil Procedure. Further, plaintiff argues that TI failed to file its counterclaim with respect to Counts II-VI within the applicable statute of limitations.
This matter is before the Court on plaintiff's motion to dismiss TI's amended counterclaim for failure to state a claim.
The Court heard oral argument on September 18, 1989. Upon review of the motion, the opposition thereto, the arguments, and the entire record, the Court concludes that the motion should be granted.
In a motion to dismiss pursuant to Rule 12(b)(6), the Court must read the facts alleged in the complaint in the light most favorable to the plaintiff. Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957), Hishon v. King & Spalding, 467 U.S. 69, 104 S. Ct. 2229, 81 L. Ed. 2d 59 (1984). It is well established that a complaint should not be dismissed "unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. Here, the Court must read the facts most favorable to the counter-claimant, with respect to the counterclaim.
TI has submitted a 30 page counterclaim.
With respect to Count I, violation of the RICO act, TI alleges, inter alia, the following: TI contends that Clouser and other unnamed individuals associated with him are each a person within the meaning of 18 U.S.C. § 1961(3) and § 1962(c). Counterclaim at par. 61. BFI was an enterprise within the meaning of 18 U.S.C. § 1961(4) and § 1962(c) which engaged in, or the activities of which affected, interstate commerce within the meaning of 18 U.S.C. § 1962(c). Id. at par. 62. Clouser, in furtherance of the scheme or artifice to defraud Temporaries, at various times knowingly and willfully transmitted or caused to be transmitted by means of wire communication in interstate commerce telephone calls between himself or his agents and officers or agents of Temporaries, and between himself or his agents and third parties, including Maryland National Bank in violation of 18 U.S.C. § 1343. Id. at par. 64.
Clouser, in furtherance of the artifice or scheme to defraud, made false representations and material omissions of fact to induce TI to acquire BFI's stock in violation of Rule 10b-5 of the Securities and Exchange Commission and § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b). Id. at par. 65. The combination of Clouser's separate scheme to defraud National Acceptance Corporation by inflating accounts receivable, separate scheme to defraud Maryland National Bank in violation of 18 U.S.C. § 1014 with a false and misleading financial statement and with inflated fraudulent accounts receivable, and the scheme to defraud TI using a false financial statement and/or fraudulent accounts receivable and false oral representations as to the earnings and worth of BFI, have the requisite relationship and continuity to constitute a pattern of racketeering activity as defined in 18 U.S.C. § 1961(5). Id. at par. 66.
The Racketeer Influenced and Corrupt Organizations Act, Pub.L. 91-452, Title IX, 84 Stat. 941, as amended, 18 U.S.C. §§ 1961-1968, provides a private civil action to recover treble damages for injury "by reason of a violation of" its substantive provisions. 18 U.S.C. § 1964(c). TI's counterclaim alleges violation of § 1962(c) of RICO. That provision provides as follows:
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
"Racketeering activity" is defined in RICO to mean "any act or threat involving" specified state-law crimes, any "act" indictable under various specified federal statutes, and certain federal "offenses." U.S.C. § 1961(1). "Pattern of racketeering activity" requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years after the commission of the prior act of racketeering activity. U.S.C. § 1961(5).
Plaintiff argues that the counterclaim fails to state a cause of action under RICO. More specifically, he argues that the stock acquisition in which TI claims injuries is not related to the "enterprise" as required by RICO and TI has not alleged a "pattern of racketeering activity" sufficient to state a claim under RICO. The Supreme Court has addressed the pattern requirement of civil RICO. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985), H.J. Inc., et al. v. Northwestern Bell Telephone Company, et al., 492 U.S. 229, 109 S. Ct. 2893, 106 L. Ed. 2d 195 (1989).
The Supreme Court noted:
The legislative history supports the view that two isolated acts of racketeering activity do not constitute a pattern. As the Senate Report explained: "The target of [RICO] is thus not sporadic activity. The infiltration of legitimate business normally requires more than one 'racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern." S.Rep. No. 91-617, p. 158 (1969) (emphasis the Supreme Court's).