Petitioners` Motion for Equitable Relief Striking or

Transcription

2:15-cv-10628-MFL-EAS Doc # 52 Filed 10/08/15 Pg 1 of 21
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
FORD MOTOR COMPANY,
Case No. 15-10628-MFL-EAS
Hon. Matthew F. Leitman
Plaintiff,
v.
ORAL ARGUMENT REQUESTED
VERSATA SOFTWARE, INC., f/k/a
TRILOGY SOFTWARE, INC. TRILOGY
DEVELOPMENT GROUP, INC. and
TRILOGY, INC.,
Defendants,
and
RICHARD BO DIETL, an individual,
BEAU DIETL & ASSOCIATES, INC., a
New York corporation, TIMOTHY GILBERT, an
individual, and LOUIS ZANERI, an
individual,
Petitioners.
PETITIONERS’ MOTION FOR EQUITABLE RELIEF STRIKING OR
EXPUNGING SCANDALOUS MATERIAL FROM THE RECORD AND
FOR A FINDING OF FALSITY OF THE MATERIAL
Petitioners Richard Bo Dietl, Beau Dietl & Associates, Inc., Timothy
Gilbert, and Louis Zaneri, by their attorneys, The Miller Law Firm, P.C. and Lanny
J. Davis & Associates, move for equitable relief under applicable federal rules
including Fed.R.Civ.P. 7 and the Court’s inherent equitable powers, in the form of
striking or expunging false, defamatory, and scandalous material from the record in
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the above-referenced case number which relates to Petitioners and for a finding of
falsity of the material at issue.
Petitioners have contacted Plaintiff for concurrence in the relief sought via
voicemail message to attorney John S. LeRoy on October 7, 2015, vial e-mail to
Mr. LeRoy on October 7, 2015 and via e-mail on October 8, 2015, but concurrence
was denied. Petitioners have contacted Defendants for concurrence in the relief
sought and Defendants take no position on the request.
Support for Petitioners’ motion and the relief requested is included in their
Brief in Support, filed concurrent with this motion.
WHEREFORE, to protect the sterling reputations they spent decades
building, Mr. Dietl, Mr. Gilbert, Mr. Zaneri, and BDA petition the Court to hold a
hearing on the accusations leveled against them and—after considering the
testimony and credibility of both the accusers and the accused—to issue an order
striking or expunging the declarations and accompanying motion and brief
excerpts that impugn these officers’ reputations and livelihoods and making a
finding of falsity as to the statements.
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Attorneys for Petitioners
THE MILLER LAW FIRM, P.C.
/s/ Martha J. Olijnyk (P60191)
Martha J. Olijnyk (P60191)
E. Powell Miller (P39487)
950 W. University Dr., Ste. 300
Rochester, MI 48307
(248) 841-2200; (248) 652-2852
[email protected]
and
LANNY J. DAVIS & ASSOCIATES
Dated: October 8, 2015
Lanny J. Davis (admission pending)
1900 M St. NW, Ste. 300
Washington, D.C., 20036
(202) 756-8211
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
FORD MOTOR COMPANY,
Case No. 15-10628-MFL-EAS
Hon. Matthew F. Leitman
Plaintiff,
v.
VERSATA SOFTWARE, INC., f/k/a
TRILOGY SOFTWARE, INC. TRILOGY
DEVELOPMENT GROUP, INC. and
TRILOGY, INC.,
ORAL ARGUMENT REQUESTED
Defendants,
and
RICHARD BO DIETL, an individual,
BEAU DIETL & ASSOCIATES, INC., a
__ corporation, TIMOTHY GILBERT, an
individual, and LOUIS ZANERI, an
individual,
Petitioners.
BRIEF IN SUPPORT OF PETITIONERS’ MOTION FOR EQUITABLE
RELIEF STRIKING OR EXPUNGING SCANDALOUS MATERIAL FROM
THE RECORD AND FOR A FINDING OF FALSITY OF THE MATERIAL
I.
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INTRODUCTION
This is a motion by four non-parties – the individuals all being decorated law
enforcement officers with decades of experience – whom Ford Motor Company
(“Ford”) falsely accused of thuggish and unprofessional behavior in the materials it
filed in this lawsuit. Petitioners have strong professional and personal interests in
removing the stain on their reputations created by Ford’s false accusations. These
accusations, which are accessible to the public over the internet, have the potential
to cause serious professional and economic harm. 1 Indeed, if Ford had made these
accusations outside the courtroom, they would constitute defamation per se.
Petitioners do not take a position on the merits of this litigation. They were
doing their job, professionally, respectfully and properly. In return, Ford has made
scurrilous and defamatory accusations, under the shield of “litigation.” To clear
their reputations, Petitioners ask the Court to hold a public hearing on the evidence
1
There is serious danger to the former law enforcement officers' reputations,
especially when falsely accused of criminal conduct. Even if just posted in a public
filing in a court proceeding, which exists on the Internet, it remains the functional
equivalent of a “ticking time bomb,” which the media – or Ford – can ignite
through re-publication. Petitioners have no control over how or when these
allegations will affect their livelihoods. And Petitioners have a reasonable basis to
fear Ford's willingness to act without scruples, which is the reason for Petitioners’
motion in the first place. Although Petitioners have attempted, and are attempting,
to mitigate these harms through proactive public response, only a definitive finding
by the Court can fully erase the damage that has been done. Petitioners have also
demanded that Ford withdraw the false declarations and statements at issue and to
acknowledge their falsity, without success. (Ex. 1, Correspondence to Ford’s
counsel)
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behind these accusations and, after hearing this evidence, to expunge the record of
all of the false statements.
Although the common law of defamation would
normally provide a vehicle for doing this in most circumstances, Ford made these
defamatory statements in legal proceedings, which are almost categorically
privileged against civil liability. Specifically, Ford was involved in the drafting of
witness declarations, which accused highly decorated former police officers of
criminal conduct, such as trespass. For this reason, Petitioners request that the
Court prevent Ford from using the litigation process as a shield from accountability
and a sword against Petitioners’ reputations by holding a hearing on the
accusations against them and, after determining that those accusations are false,
expunge the record of all false material. Ford should apologize to the former law
enforcement officials and withdraw their lies. Absent a hearing on this issue,
Petitioners have no remedy to protect their professional livelihoods against these
unfounded attacks and clear their names.
Public policy places a high value on protecting reputations, especially in
situations where the injury to reputation threatens an individual’s economic wellbeing.
The fact that this interest sometimes must yield to overriding First
Amendment concerns does not diminish the importance of reputation as a legallyprotected interest. Therefore, Intervenors request that the Court grant them a
hearing on this Motion. By invoking the inherent authority of this Court to fashion
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equitable relief, hold hearings and expunge material, Petitioners seek to protect
their reputations against character assassination in a manner that the First
Amendment allows and public policy strongly supports.
II.
FACTUAL BACKGROUND
A.
Petitioners were engaged to conduct witness interviews.
In connection with this patent and trade secret litigation, on June 10, 2015,
Ford submitted a declaration from Mike Sullivan that purported to identify thirty
“non-Ford individuals” who had worked on the development of the software at
issue.
Versata engaged Beau Dietl & Associates (BDA), a leading national
investigation firm, to locate these individuals and determine the extent of their
knowledge regarding the case.
BDA knew that these individuals recently had worked as contractors for
Ford, based on Ford’s declaration. Given its understanding that there was a high
likelihood that Ford would attempt to prevent these interviews from taking place,
BDA followed the standard investigative practice of conducting in-person
interviews at residences outside of business hours. Over and above acting in
accord with standard practices, BDA and its investigators took extra measures to
ensure that it conducted the investigation in the most professional and respectful
manner.
They engaged in additional training to understand potential cultural
differences between them and the witnesses and also to try to avoid any
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misunderstandings of their visits. (Ex. 2, Declaration of Richard Bo Dietl at ¶7 and
Ex. 3, Declaration of Bhanu Singh)
B.
BDA is a leading investigative firm.
BDA was founded in 1985 by Bo Dietl. (Ex. 2 at ¶4) President Bush
appointed Mr. Dietl as co-chairman of the National Crime Commission, and BDA
works closely with federal and state law enforcement agencies. (Id. at ¶3) BDA has
never been disciplined or sanctioned for any investigation. (Id. at ¶5) It uses two
in-house attorneys to advise investigators about legal compliance and professional
obligations. (Id.). Mr. Dietl is the public face of BDA and its reputation directly
reflects upon him.
He has a very strong interest in protecting his namesake
company as much as his own.
C.
Dietl assigned two decorated detectives to interview witnesses.
Upon BDA’s engagement and learning more about the assignment, Mr. Dietl
assembled a team of highly respected and professional investigators to conduct the
witness interviews. (Ex. 2 at ¶¶5-6) BDA’s investigators in this case included two
former NYPD lieutenants, two former FBI supervisors, and a highly credentialed
former detective from the City of Detroit. (Id. at ¶5) Ford singled out two of these
officers to attack in false declarations: Timothy Gilbert and Louis Zaneri.
1.
Timothy Gilbert
Mr. Gilbert served as an officer with the Detroit Police Department between
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1998 and 2007. (Ex. 4, Declaration of Timothy Gilbert at ¶2) He supervised a
variety of complex investigations, including narcotics, homicide, and armed
robbery. (Id. at ¶2) In 2000, he was awarded Officer of the Year by the Detroit
Police Department. (Id.)
Currently, Mr. Gilbert is one of only two licensed Certified Criminal
Defense Investigators (CCDI) in Michigan. (Id. at ¶3) During his time in law
enforcement and as a private investigator, he has been involved in thousands of
investigations and conducted countless witness interviews. (Id. at ¶4)
2.
Louis Zaneri
Mr. Zaneri is a 27-year veteran of the NYPD. During that time, he served
variously as Detective Squad Commander in the Central Robbery Division,
Commanding Officer of the Grand Larceny Unit, and the Investigative Team
Supervisor in the Narcotics Division. (Ex. 5, Declaration of Louis Zaneri at ¶2) He
spent approximately 21 years in plainclothes and investigative assignments. (Id. at
¶3) The NYPD awarded Mr. Zaneri 54 departmental medals for his service. (Id. at
¶2)
Mr. Zaneri also served as an Adjunct Instructor in Police Sciences at John Jay
College of Criminal Science at the City University of New York. (Id. at ¶3) Upon
his retirement from the NYPD, he founded Ascent Investigative Services. (Id. at ¶4)
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As a licensed private investigator, Mr. Zaneri is highly trained in investigative ethics
and professionalism and has taught these subjects to investigative trainees. (Id.)
D.
Gilbert and
investigation.
Zaneri
performed
a
proper,
highly
ethical
Prior to beginning the interviews in this case, BDA performed a vast amount
of background work. (Ex. 2 at ¶6) In addition, because numerous witnesses are of
Indian descent, Mr. Dietl assigned Bhanu Singh to educate the investigators about
Indian culture and sensitivities to ensure that the investigators acted in a respectful
manner to the witnesses. (Ex. 2at ¶7)2 Ms. Singh also accompanied many of the
investigators on their witness interviews. (Ex. 5 at ¶10 and see Ex. 3 at ¶¶13-14, for
example) BDA investigators never use coercive techniques—both because such
practices are unethical and because they do not work in the real world with real
witnesses. (Ex. 2 at ¶7)
Moreover, Mr. Gilbert and Mr. Zaneri only entered homes after being invited
to enter by residents. (See Exs. 4 and 5) As investigators and former police officers,
they would never enter a home without an express invitation from a resident. Such
2
Investigators who interviewed witnesses of Indian descent observed the following
protocol: Investigators offered to remove their shoes upon being invited into a
home; investigators would offer to shake hands with male witnesses, but would
only shake hands with those who appeared comfortable with the practice;
investigators avoided any physical contact with women, including handshakes; any
prolonged eye contact that might be perceived as aggressive was specifically
avoided; and, if the interview subject was female, the investigators would include
the husband in the interview process.
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an action would not only violate their training and ethical responsibilities but would
create unnecessary danger for both the investigators and any individuals inside. (Ex.
4 at ¶9 and Ex. 5 at ¶9) Additionally, a witness whose home is entered without
permission is unlikely to cooperate in any way, much less answer questions from an
investigator. (Id.)
Following these protocols, Mr. Gilbert and Mr. Zaneri interviewed—among
other witnesses—Sreejit Sivansakaran and Manisha Tambe.
1.
Interview of Mr. Sivansakaran
At 7:15 p.m. on June 25, 2015, Mr. Gilbert and Mr. Zaneri visited Mr.
Sivansakaran’s home in Troy. Mr. Sivansakaran was identified as a “non-Ford
individual” in a sworn declaration filed by Ford. (Ex. 4 at ¶10 and Ex. 5 at ¶12 )
Mr. Sivansakaran lives in a two-story, low-rise apartment building with a
central lobby that leads to apartments on the first and second floors. The
investigators rang the buzzer for Mr. Sivansakaran’s apartment through the buzzer
system located outside the main entrance to the building lobby. (Ex. 4 at ¶¶11-12
and Ex. 5 at ¶¶13-14)
Mr. Sivansakaran met them in the building lobby and let them into the
building. (Ex. 4 at ¶13 and Ex. 5 at ¶14) They explained they were private
investigators investigating a dispute between Ford and Versata.
(Id.)
They
explained to Mr. Sivansakaran that he was under no obligation to speak with them
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and that they were not interested in asking him questions about any confidential
information he might possess. (Id.)
After Mr. Sivansakaran informed the investigators that he was not a Ford
employee, they spoke with him for several minutes in the foyer of his building. (Ex.
4 at ¶14 and Ex. 5 at ¶16 ) They then asked Mr. Sivansakaran if they could continue
the conversation inside his apartment. (Id.) He said yes, led them down the hallway
to his apartment, and invited them inside. (Id.) The investigators offered to remove
their shoes, but Mr. Sivansakaran said that would not be necessary. (Id.)
The investigators did not speak with Mr. Sivansakaran’s wife or daughter
during their interview.
(Ex. 4 at ¶¶ 15-16 and Ex. 5 at ¶¶17-18) After Mr.
Sivansakaran invited the investigators to sit down in his apartment, Mr.
Sivasankaran asked his wife to take their daughter into another room. (Id.) The
investigators then spoke with Mr. Sivansakaran for approximately 20 minutes. (Id.)
Mr. Sivansakaran was polite and cordial during the conversation. (Id.)
2.
Interview of Ms. Tambe
At approximately 10:20 a.m. on June 28, 2015, Mr. Gilbert and Mr. Zaneri
visited the home of Manisha Tambe, who is also named as a “non-Ford individual”
in a sworn declaration filed by Ford. (Ex. 4 at ¶25 and Ex. 5 at ¶27)
After the investigators rang the doorbell, a gentleman answered and identified
himself as Ms. Tambe’s husband. (Ex. 4 at ¶26 and Ex. 5 at ¶28) The investigators
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told him they were inquiring about a dispute between Ford and Versata, and Mr.
Tambe then invited them into the home. (Id.) Once inside, they asked Mr. Tambe if
they should remove their shoes and, at his request, did so. (Ex. 4 at ¶27 and Ex. 5 at
¶29) Mr. Tambe then led them into his living room and invited them to sit on his
couch. (Id.) Ms. Tambe was not in the room at the time. (Id.) Mr. Tambe then left
the room and returned with his wife. (Id.)
After confirming that Ms. Tambe was not a Ford employee, Mr. Gilbert and
Mr. Zaneri spoke with her for about 15 minutes. (Ex. 4 at ¶28 and Ex. 5 at ¶30)
Mr. Tambe was in the living room for the entire conversation as well. (Id.) Ms.
Tambe was polite throughout the conversation, which ended on a cordial note. (Ex.
4 at ¶30 and Ex. 5 at ¶32)
E.
Ford submitted false declarations for the witnesses.
Ford filed a “motion for protection” , opposing efforts to conduct the witness
interviews In support of that motion, Ford included false statements from Mr.
Sivasankaran and Ms. Tambe in their false declarations and in its motion and
briefing with the Court that disparage two decorated law enforcement officers as
heavy-handed goons and defame the professional reputations of all four of the
Petitioners. (The filing is Dkt. 19 in this matter and the declarations of Mr.
Sivasankaran and Ms. Tambe are attached thereto as Exhibits B and C,
respectively.)
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The key statements in Mr. Sivasankaran’s declaration are untrue. The
investigators did not “walk directly into [Mr. Sivasankaran’s] apartment, in front [of
him] and without [his] permission.” Such an act would have been impossible given
that Mr. Sivasankaran’s apartment door was closed. (Ex. 4 at ¶17 and Ex. 5 at ¶19)
It is also false that Mr. Gilbert and Mr. Zaneri “barged into [Mr. Sivasankaran’s]
apartment like they were FBI agents.” Instead, they entered Mr. Sivasankaran’s
home at his invitation, and only after he had voluntarily opened two separate closed
entrances. (Id.)
Neither Mr. Gilbert nor Mr. Zaneri asked “[Mr. Sivasankaran’s] wife to take
[his] daughter to another room.” In fact, when Mr. Sivasankaran asked his wife to
take their daughter into another room, the investigators said that was unnecessary
because they were not there to ask him any questions of a confidential nature. (Ex.
4 at ¶1818 and Ex. 5 at ¶20) Neither Mr. Gilbert nor Mr. Zaneri told Mr.
Sivasankaran that “[his] answers will determine whether [he] would be summoned
to court” or that “[he] should provide as much information as [he] could in
response to [their] questions.” (Ex. 4 at ¶19 and Ex. 5 at ¶21)
Likewise, Ms. Tambe’s declaration contains material falsehoods that paint
a highly misleading portrait of the officers’ conduct. For instance, Ms. Tambe
suggests that the officers entered her home and sat on her sofa uninvited. In reality,
her husband asked them to come inside and sit on the couch. (Ex. 4 at ¶27 and Ex.
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5 at ¶29) She claims she and her family were wearing pajamas. In fact, they were
wearing casual clothes and the investigators did not arrive until after 10 a.m. (Ex.
4 at ¶¶25, 27 and Ex. 5 at ¶¶27, 29) Finally, she claims that she and her son were
“scared” by the investigators when, in truth, she calmly answered their questions
and ended the conversation on a cordial note (her husband was also present during
the short interview). (Ex. 4 at ¶¶28, 30 and Ex. 5 at ¶¶30, 32)
Taken together, the false declarations and the embellishments in Ford’s
motion paint a false and offensive picture of two decorated law enforcement
veterans. The purpose of this motion is to seek a hearing at which Mr. Gilbert, Mr.
Zaneri and BDA may explain their investigation to the Court in order to have the
record cleared of the damaging misstatements against them.
III.
LEGAL ANALYSIS
A.
The Court’s inherent power permits, and equity requires,
expunging the public record of libelous statements.
Trial courts have inherent power to control their dockets. Anthony v. BTR
Auto. Sealing Sys., Inc., 339 F.3d 506, 516 (6th Cir. 2003). That power includes the
authority to strike court filings for any proper reason. Zep Inc. v. Midwest Motor
Supply Co., 726 F. Supp. 2d 818, 822 (S.D. Ohio 2010); U.S. v. Doe, 556 F.2d 391,
393 (6th Cir. 1977)(“It is within the inherent equitable powers of a federal court to
order the expungement of a record in an appropriate case.”). Moreover, the
Supreme Court long ago established that federal courts have a “duty to keep [their]
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records clean and free from scandal.” Green v. Elbert, 137 U.S. 615, 624 (1891)
(striking record of comments “bearing reproachfully upon the moral character of
individuals, which are clearly impertinent and scandalous”); see also United States
v. Spellissy, 374 Fed. App’x 898, 900 (11th Cir. 2010) (upholding trial court’s
decision to strike affidavit and associated brief “due to their scandalous nature”).
Exercising these powers, federal courts “frequently” strike references that
have “criminal overtones.” See Toto v. McMahan, Brafman, Morgan & Co., 93 CIV.
5894 (JFK), 1995 WL 46691, at *16 (S.D.N.Y. Feb. 7, 1995)(Ex. 6). For good
reason, “courts have refused to permit their files to serve as reservoirs of libelous
statements for press consumption . . . or as sources of business information that
might harm a litigant’s competitive standing.” Nixon v. Warner Comm’cns., Inc., 435
U.S. 589, 598 (1978). Striking or expunging the record of defamatory references is
especially appropriate in cases, such as this one, where the references go to an
ancillary procedural issue—like a protective order—instead of the suit’s underlying
merits. Cf. Fleischer v. A.A.P., Inc., 180 F. Supp. 717, 721–22 (S.D.N.Y. 1959)
(striking “scandalous” references was even more appropriate because they related
only to disqualification motion, not merits).
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B.
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Ford’s motion and declarations are defamatory per se because
they accuse two decorated law-enforcement officials of criminal
behavior and attempt to portray them as unfit for their careers.
1.
The declarations falsely accuse the Petitioners of misconduct.
Ford’s motion and declarations falsely accuse the officers of using illegal
and unethical tactics. For instance, the Sivasankaran declaration claims that the
officers “barged into” his apartment, were “much larger” than him, and “scared”
his wife and daughter to the point of tears. Sivasankaran Decl., ¶¶ 6-8. Likewise,
the Tambe declaration states that when the officers arrived, she “did not invite
them in” and that she and her son “became scared because these men were entering
our house.” Tambe Decl., ¶¶ 4-7. Worse, Ford’s motion for protection repeats these
and similarly scurrilous “facts.” (See Dkt. 19)
Ford’s accusations are false. As described above, the officers, Mr. Dietl and
BDA are respected members of the law-enforcement community with decades of
experience conducting proper, ethical, and professional investigations. They are
not the sorts to engage in the ham-fisted tactics described by Ford, and the sullying
of their names in the public record is a threat to the careers they have worked
decades to build. This is especially true of the individual officers who take great
pride in their sterling reputations and whom rely on their reputation for their
livelihood.
Because the officers’ declarations conflict with Ford’s, the officers deserve an
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opportunity to testify—and cross-examine Mr. Sivasankaran and Ms. Tambe—so
the Court can assess these witnesses’ credibility and clear the officers’ names.
2.
The misleading statements are libelous and should be stricken
or expunged.
By accusing the officers of trespass, harassment, and threatening children,
Ford committed defamation per se. In general, any statement implying criminal
activity or unfitness for one’s profession is defamatory. Burden v. Elias Bros. Big
Boy Restaurants, 240 Mich. App. 723, 727-28 (2000) (crime); Shannon v Taylor
AMC/Jeep, Inc, 168 Mich. App. 415, 418 (1988) (profession). Based on this
principle, Michigan courts have specifically recognized that defamation occurs
through publication of false information that harms a police officer’s reputation by
lowering him in the eyes of the community or deterring others from dealing with
him. Tomkiewicz v Detroit News, Inc, 246 Mich. App. 662, 667 (2001).
It is beside the point whether Ford’s choice to place these statements in court
filings immunizes Ford from liability for money damages. Whether financial
remedies are available or not, Ford’s accusations of law-breaking easily qualify as
“scandalous” matters that have no place in the Court’s records. See G-I Holdings,
Inc. v. Baron & Budd, 238 F. Supp. 2d 521, 555–56 (S.D.N.Y. 2002) (striking
references to alleged uses of “extortionate threats” and “improper means”). Indeed,
courts have rightly expunged their records of charges far less destructive. See, e.g.,
Smith v. Kentucky Fried Chicken, Civ. A. 06-426-JBC, 2007 WL 162831, at *3
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(E.D. Ky. Jan. 18, 2007) (striking as “scandalous” an accusation that defendant’s
employees were “lazy” and “cruel”) (Ex. 7). Consequently, the officers deserve to
have their names cleared of the false charges that Ford wrongly inserted into the
public record.
C.
Allowing the false statements to remain in the public record
will prejudice the defamed law-enforcement officers.
As the officers will show at the requested hearing on this matter, allowing
Ford’s accusations to remain in the public record will prejudice their reputations
and careers. Even before court records were readily accessible to anyone surfing
the internet, with the potential to “go viral” at any moment, the Supreme Court
warned that federal records should not be allowed to “serve as reservoirs of libelous
statements for press consumption . . . or as sources of business information that
might harm a litigant’s competitive standing.” Nixon, 435 U.S. at 598.
The longer that Ford’s false accusations go both unaddressed and available to
anyone who happens to search for these investigators’ names, the greater potential
that Ford’s declarations will create even more harm to these officers’ reputations and
ability to gain future business.
IV.
CONCLUSION AND PRAYER FOR RELIEF
No matter the merits of the dispute between the parties, the good names of
these non-parties will remain at issue if they are kept part of the public record and
if their falsity is not addressed. To protect the sterling reputations they spent
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decades building, Mr. Dietl, Mr. Gilbert, Mr. Zaneri, and BDA petition the Court to
hold a hearing on the accusations leveled against them and—after considering the
testimony and credibility of both the accusers and the accused—to issue an order
striking or expunging the declarations and accompanying motion and brief
excerpts that impugn these officers’ reputations and livelihoods and making a
finding of falsity of the statements.
Respectfully submitted,
Rochester, MI 48307
(248) 841-2200; (248) 652-2852
[email protected]
and
LANNY J. DAVIS & ASSOCIATES
Dated: October 8, 2015
Lanny J. Davis (admission pending)
1900 M St. NW, Ste. 300
Washington, D.C., 20036
(202) 756-8211
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CERTIFICATE OF SERVICE
I hereby certify that on October 8, 2015, I filed the foregoing document
using the electronic filing system which will serve all counsel of record.
Rochester, MI 48307
(248) 841-2200; (248) 652-2852
[email protected]
2:15-cv-10628-MFL-EAS Doc # 52-1 Filed 10/08/15 Pg 1 of 1
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INDEX OF EXHIBITS
1
Correspondence with Counsel for Ford Motor Company
2
Declaration of Richard Bo Dietl
3
Declaration of Bhanu Singh
4
Declaration of Timothy Gilbert
5
Declaration of Louis Zaneri
6
Toto v. McMahan, Brafman, Morgan & Co, 1995 WL 46691
(S.D.N.Y. Feb. 7, 1995)
7
Smith v. Kentucky Fried Chicken, 2007 WL 162831 (E.D. Ky. Jan. 18,
2007)
EXHIBIT 1
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EXHIBIT 2
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EXHIBIT 3
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EXHIBIT 4
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EXHIBIT 5
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EXHIBIT 6
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Toto v. McMahan, Brafman, Morgan & Co., Not Reported in F.Supp. (1995)
1995 WL 46691, Fed. Sec. L. Rep. P 98,639, RICO Bus.Disp.Guide 8761
KeyCite Yellow Flag - Negative Treatment
Implied Overruling Recognized by Moy v. Terranova, E.D.N.Y.,
March 2, 1999
1995 WL 46691
United States District Court, S.D. New York.
William TOTO, Ronald A. Katz, Roger Staubach,
Danat Investment Co., Charles H. Boxenbaum,
Walter J. Michel, L.P. Byler, Myron D. Stutzman,
Saul Bass, Herbert Yager, on his own behalf and as
Trustee for Anna Stramese, Harvey Schmidt,
Warren Hirsch, Robert B. Glynn, Jerry H. Mouser,
Thomas S. Yount, Danforth K. Richardson,
Bernard and Sally Lewis, Etta K. Steiner and
Mervyn Hecht, Plaintiffs,
v.
McMAHAN, BRAFMAN, MORGAN & CO.,
McMahan & Co., D. Bruce McMahan, Milton
Brafman, Burton Esrig, Minor Eager, SMR
Corporation, John G. Lane, and Gill & Duffus
Securities, Inc. Defendants.
No. 93 CIV. 5894 (JFK). | Feb. 7, 1995.
Attorneys and Law Firms
Beigel Schy Lasky Rifkind Goldberg & Fertik (Lawrence
R. Gerber, of counsel), New York City, for plaintiffs.
Sills Cummis Zuckerman Radin Tischman Epstein &
Gross, P.C. (Richard J. Schulman, of counsel), New York
City, for defendants McMahan, Brafman, Morgan & Co.,
McMahan & Co., D. Bruce McMahan, and Milton
Brafman.
Lankler Siffert & Wohl (Helen Gredd, David S. Jones, of
counsel), New York City, for defendant Burton J. Esrig.
OPINION AND ORDER
KEENAN, District Judge:
*1 Before the Court is the motion of defendants
McMahan, Brafman, Morgan & Co., McMahan & Co., D.
Bruce McMahan, and Milton Brafman (collectively
“McMahan defendants”) to dismiss to Corrected
Amended Complaint pursuant to Federal Rule of Civil
Procedure 12(b) or alternatively for summary judgment
pursuant to Federal Rule of Civil Procedure 56. This
motion will be predominantly treated as a motion to
dismiss, although the motion relating to the claims both
assigned and released will be treated as a motion for
summary judgment, as this Court has considered evidence
outside of the pleadings. The McMahan defendants
additionally move, pursuant to Federal Rule of Civil
Procedure 12(f), to strike certain references in the
Amended Complaint as redundant, immaterial,
impertinent and/or scandalous. Defendant Burton Esrig
joins the McMahan defendants’ motions as well as makes
a separate motion to dismiss pursuant to Federal Rule of
Civil Procedure 9(b) and 12(b)(6).1 Plaintiffs oppose these
motions. For the reasons that follow, the motions are
granted in part and denied in part.
BACKGROUND
Plaintiffs claim that in private placement offerings
occurring in 1980, 1981 and 1982, they purchased limited
partnership interests in McMahan, Brafman, Morgan &
Co. (“MBM”), a New York limited partnership, formed
on September 5, 1980 to engage in securities and
commodities trading. See Am.Compl. ¶¶ 4, 9, 19, 20 &
21. These investments, plaintiffs claim, were based on
various misrepresentations concerning a securities trading
strategy designed to achieve certain tax consequences for
investors. The alleged misrepresentations appeared in
various offering documents disseminated in connection
with each offering of limited partnership interests in
MBM. See Am.Compl. ¶ 24.
Plaintiffs contend that the representations in the offering
documents were false when made. Plaintiffs allege that at
the time of the offerings, defendants had no intention,
despite their representations to the contrary, to engage in
bona fide securities transactions to achieve the
contemplated tax consequences. Rather, the plan was to
engage in “fictitious” and “economic sham” trades which
were without risk, had no realistic opportunity of earning
pre-tax profits (only of creating “fraudulent tax deductible
losses which could be claimed by the partners of MBM”)
and thus could not provide the stated tax results. See
Am.Compl. ¶¶ 1, 25, 26 & 47.
Specifically, plaintiffs charge that beginning in November
1980, defendant John Lane, through Gill & Duffus
Securities, Inc. (hereinafter “Gill & Duffus”), fabricated a
series of “bogus” trades by creating fictitious
book-keeping entries and issuing false confirmations or
purchases and sales of securities (consisting of Ginnie
© 2015 Thomson Reuters. No claim to original U.S. Government Works.
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Maes and Treasury notes). These fictionalized trades
allegedly created the appearance of counterbalancing long
term gains to offset trading losses for MBM. Plaintiffs
claim that these trades were used by MBM to induce
plaintiffs to invest in MBM. See Am.Compl. ¶¶ 45, 46.
*2 Subsequently, from 1982 through 1986, MBM is
accused of entering into “rigged and pre-arranged”
transactions, involving United States government
securities, for the purpose of creating “bogus” tax
deductions for the partners of MBM. Plaintiffs claim that
by secret oral agreement between MBM and certain
“colluding entities,” transactions were structured so that
MBM would neither earn any profits nor sustain any
losses, except that “MBM would pay the colluding
entities special fees disguised as trading profits or
interest.” In return for these special fees, MBM allegedly
obtained “bogus” interest expenses which its investors
could use to generate income tax deductions. These
“economic sham” trades also produced offsetting income,
but that income was generated “primarily in tax years
after the years in which the fraudulent interest expenses
were first recognized for tax purposes.” In this way, the
transactions supposedly functioned as “a fraudulent tax
shelter device for the deferral of income.” Furthermore,
since a substantial part of the income generated was
taxable only as long-term capital gains, 60% of the
“fraudulent” interest expense deductions generated by the
“economic sham” transactions was never offset by any
corresponding taxable income the partners received from
MBM. See Am.Compl. ¶¶ 27, 28, 32–37, 39 & 40.
In September of 1984, defendant McMahan made tender
offers for the partner shares. The selling documents
contained language that provided that those accepting the
offer sign documents purporting to assign and release
their claims against McMahan and its general partners for
(i) any acts in connection with the original sales of such
interests and/or the conduct of MBM’s business at any
time prior to the resale, and (ii) any subsequent
disallowance of tax benefits by the IRS. See Am.Compl.
¶¶ 62–67.
The fraudulent transactions engaged in by MBM resulted
in the March 19, 1992 indictment of Victor Wexler, a
former MBM chief financial officer and managing partner
who is not a defendant in this action and who is currently
awaiting trial in the United States District Court for the
District of New Jersey. In that indictment, defendant
Minor Eager was named as an unindicted co-conspirator.
By reason of the alleged “fraudulent transactions engaged
in by MBM,” plaintiffs claim that they have been
damaged by the complete loss of their limited partnership
investments, the disallowance of tax deductions taken by
them in connection with their investments, and the
imposition by the IRS of severe penalties. See Am.Compl.
¶ 55.
Predicated upon these allegations, plaintiffs assert civil
RICO violations under 18 U.S.C. sections 1962(c) and (d)
(claims one and two of the Corrected Amended
Complaint), as well as state law claims for fraud (claim
three), breach of fiduciary duty (against McMahan and
Brafman
only)
(claim
four),
and
negligent
misrepresentation (claim five which is mis-numbered as
“four” in the Amended Complaint).
*3 This action was originally filed in the District of New
Jersey on June 19, 1992. Because that Court determined
that venue was inappropriate, the action was transferred to
this Court on July 23, 1993. Following the transfer,
plaintiffs requested and were granted leave to file an
amended complaint. Defendants were given leave to file a
revised version of the motion to dismiss that it had filed in
New Jersey addressing the Amended Complaint.
DISCUSSION
This is an action by several investors who claim they were
defrauded in connection with their purchases of limited
partnership interests in McMahan, Brafman, Morgan &
Co. (hereinafter “MBM”). Plaintiffs found their suit on
alleged violations of the Racketeer Influenced and
Corrupt Organizations Act (hereinafter “RICO”) as well
as on various state law theories of recovery.
The McMahan defendants and Esrig argue that plaintiffs’
claims are unactionable for a variety of reasons. First,
they argue that plaintiffs claims are time barred. Second,
they argue that several of the plaintiffs assigned away any
claims they may have had. Third, they argue that the
Amended Complaint fails to state a claim upon which
relief can be granted. Additionally, Esrig claims that the
Amended Complaint must be dismissed against him for
failure to plead fraud with particularity.
I. THE RICO CLAIMS
Defendants first argue that the Amended Complaint must
be dismissed as the RICO claims, upon which federal
jurisdiction is based, are time barred. Defendants also
argue that the RICO claims are otherwise legally
insufficient. Because defendants claim that the federal
claims are time barred or otherwise insufficient, they
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Pg ID 1260
further claim that the state claims should also be
dismissed in an exercise of this Court’s discretion.
A. Standards for a Motion to Dismiss
The purpose of a motion to dismiss is merely to assess the
legal feasibility of the complaint and not to weigh the
evidence that might be offered in support thereof. See
Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir.1980). In
deciding a motion to dismiss, it is necessary for the Court
to view the complaint in the light most favorable to the
plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 237
(1974); Yoder v. Orthomolecular Nutrition Inst., Inc., 751
F.2d 555, 562 (2d Cir.1985). The Court must accept the
factual allegations stated in the complaint as true. See
Cooper v. Pate, 378 U.S. 546 (1964). A motion to dismiss
for failure to state a claim may therefore only be granted
if it appears, beyond doubt, that the plaintiff can prove no
facts in support of its claim that entitle him to relief. See
Conley v. Gibson, 355 U.S. 41, 45–46 (1957). “A district
court should grant a motion to dismiss a RICO claim only
if ‘it is clear that no relief could be granted under any set
of facts that could be proved consistent with the
allegations.’ ” McLaughlin v. Anderson, 962 F.2d 187,
190 (2d Cir.1992) (quoting H.J., Inc. v. Northwestern Bell
Tel. Co., 492 U.S. 229, 249–50 (1989) (quoting Hishon v.
King & Spalding, 467 U.S. 69, 73 (1984))).
*4 In deciding Federal Rule of Civil Procedure 12(b)(6)
motions, district courts can only consider the factual
allegations set forth in the complaint, viewing them in the
light most favorable to the plaintiff. See Fonte v. Board of
Managers of Continental Towers Condominium, 848 F.2d
24, 25 (2d Cir.1988). All factual allegations contained in
affidavits and memoranda are treated as matters outside
the pleadings and cannot be considered in a motion of this
type. See id.
B. Are the RICO Claims Time Barred?
The Supreme Court has determined that the most
appropriate limitations period for a RICO action is four
years from the time of a claim’s accrual. See Agency
Holding Corp. v. Malley–Duff & Associates, Inc., 483
U.S. 143, 156 (1987). Plaintiffs commenced this action on
June 19, 1992.2 Therefore, if the RICO claims accrued
prior to June 19, 1988, the claims will be time barred and
will be dismissed.
While Agency Holding did not answer the question of
when a claim accrues, the Second Circuit has adopted the
following rule of “separate accrual” under which:
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 ... as
with all rules of accrual, the
standard tolling exceptions apply.
Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1105 (2d
Cir.1988) (citations omitted), cert. denied,490 U.S. 1007
(1989). Application of the “separate accrual” rule
involves a two-step process: first, it must be determined
when an injury was caused by a RICO violation; and
second, it must be determined when the plaintiffs
discovered or should have discovered their injury. See
Ackerman v. National Property Analysts, Inc., 1992 WL
240605, at *4 (S.D.N.Y. Sept. 9, 1992).
An injury under RICO is an injury to a person’s business
or property. See Moeller v. Zaccaria, 831 F.Supp. 1046,
1051 (S.D.N.Y.1993). The moving defendants argue that
the only injury suffered in a situation where the plaintiff
acquires an interest in a limited partnership in reliance on
allegedly fraudulent offering materials is the actual
purchase of the partnership interest rather than each
subsequent installment payment of that interest. See
Ackerman, 1992 WL 240605, at *4. Accord, Mazza v.
Berk & Michaels, P.C., 1991 WL 35837, at *4 (S.D.N.Y.
Mar. 8, 1991), modified,1991 WL 177646 (S.D.N.Y. Sept.
4, 1991); Gould v. Berk & Michaels, P.C., 1990 WL
41706, at *4 (S.D.N.Y. Apr. 5, 1990). Because plaintiffs
admittedly acquired their partnership interests in 1980,
1981 and 1982, in reliance on allegedly false and
fraudulent offering materials, defendants contend that
their RICO claims are time barred.
Plaintiffs dispute defendants’ characterization of the law.
Plaintiffs contend that they suffered a RICO injury from
the loss of their tax deductions and the penalties and
interest imposed in their 1993 settlement with the IRS.
Defendants, in turn, argue that loss of tax deductions and
penalties and interest are not RICO injuries.
*5 Viewing the Amended Complaint in the light most
favorable to plaintiffs as required, the Court finds that
plaintiffs’ RICO claims are not time barred. The Court
noted in Mazella v. Rothschild Reserve International,
Inc., 1992 WL 138321, at *3 (S.D.N.Y. Jun. 3, 1992), that
a plaintiff who invested in a limited partnership tax
shelter had brought a timely RICO claim when he “could
not have learned that he had been injured ... until he
received some final determination by the IRS on his
deductions....” See also Landy v. Mitchell Petroleum
3
Pg ID 1261
Technology Corp., 734 F.Supp. 608, 625 (S.D.N.Y.1990)
(investor’s RICO claims based on misrepresentation in
offering memorandum did not accrue until the investor
learned that he had lost his investment and its possible
benefits). The Court in Landy further noted that in RICO
actions, it is the injury, and not the racketeering activity
itself, that triggers the statute of limitations. See Landy,
734 F.Supp. at 625. The Court has considered the
remaining arguments advanced by the defendants and
finds them unpersuasive.
Following the clear precedent established in this Circuit,
this Court finds that plaintiffs arguably suffered a RICO
injury at the time of the IRS disallowances and penalties
that were finalized in 1993. Events occurring within 1993
are well within the statute of limitations period for a
RICO action. Therefore, plaintiffs’ RICO claims are
sufficiently timely to withstand a motion to dismiss as
they were brought within four years of the final
determination of the IRS proceedings.
C. Have Plaintiffs Stated Legally Sufficient RICO
Claims?
18 U.S.C. section 1964(c) creates a private civil cause of
action under RICO. The Second Circuit has outlined the
following checklist of burdens that a plaintiff must fulfill
in order to allege a substantive RICO violation:
First, he must allege that the
defendant
has
violated
the
substantive RICO statute, 18
U.S.C. § 1962 (1976), commonly
known as “criminal RICO.” In so
doing, he must allege the existence
of seven constituent elements: (1)
that the defendant (2) through the
commission of two or more acts (3)
constituting a “pattern” (4) of
“racketeering activity” (5) directly
or indirectly invests in, or
maintains an interest in, or
participates in (6) an “enterprise”
(7) the activities of which affect
interstate or foreign commerce. 18
U.S.C. § 1962(a)–(c) (1976).
Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d
Cir.1983), cert. denied,464 U.S. 1025 (1984). In addition,
a private plaintiff only has standing to sue if he has been
injured in his business or property by the violation. See
id.(quoting 18 U.S.C. § 1964(c) (1976)).
The moving defendants argue that plaintiffs’ RICO claim
should be dismissed on the merits for a variety of reasons.
1. Racketeering Activity?
First, the moving defendants argue that plaintiffs have
failed to successfully allege racketeering activity because
they have failed to allege timely securities fraud claims as
predicate acts to support a RICO claim. Plaintiffs assert
that the timeliness of the securities fraud claim is
irrelevant. This Court agrees with plaintiffs.
*6 The moving defendants fail to provide the Court with
any authority that an untimely securities fraud predicate in
any way affects the timeliness of a RICO claim. As the
plaintiffs point out, to hold that an untimely securities
fraud predicate would render a RICO action untimely
would subvert the four-year statute of limitations
applicable to a RICO action. In addition, this Court has
already noted that in RICO actions, it is the injury, and
not the racketeering activity itself, that triggers the statute
of limitations. See Landy, 734 F.Supp. at 625. Plaintiffs
argue that a four-year statute of limitations applies to
RICO actions regardless of the predicate acts involved.
See Bankers Trust, 859 F.2d at 1101 (four-year statute of
limitations applies civil RICO actions regardless of the
predicate acts involved).
This Court agrees with plaintiffs that an untimely
securities fraud predicate act does not render the RICO
claim untimely as well. RICO actions clearly focus on the
injury, which in this action arguably occurred in 1993
when the IRS issued its final determination. Therefore,
the motion to dismiss plaintiffs’ Amended Complaint for
failure to plead a timely predicate act is denied.
2. Injury?
Second, the moving defendants argue that plaintiffs have
failed to allege a loss resulting from the claimed securities
fraud. Plaintiffs argue, and this Court agrees, that they
have adequately alleged a RICO injury. As explained
earlier, a RICO injury is an injury to a person’s business
or property. Plaintiffs have alleged, sufficient to withstand
a motion to dismiss, that the defendants, by failing to
disclose their true intentions, caused plaintiffs to lose their
investment in the limited partnership, their tax deductions,
and the interest and penalties they were required to pay
out. Therefore, the motion to dismiss plaintiffs’ Amended
Complaint for failure to plead a RICO injury is denied.
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Pg ID 1262
3. Mail Fraud as Second Predicate to RICO?
Third, the moving defendants argue that plaintiffs have
failed to adequately allege mail fraud as the second
predicate offense. Specifically, the moving defendants
argue that plaintiffs failed to allege mail fraud with the
requisite particularity.
a. Federal Rule of Civil Procedure 9(b)
Where the predicate acts of a civil RICO claim sound in
fraud or mistake, the pleading of those predicate acts must
satisfy the requirements of Federal Rule of Civil
Procedure 9(b). See Morin v. Trupin, 711 F.Supp. 97, 111
(S.D.N.Y.1989). Federal Rule of Civil Procedure 9(b)
requires that “[i]n all averments of fraud ... the
circumstances constituting fraud shall be stated with
particularity.” SeeFed.R.Civ.P. 9(b).
To satisfy the Federal Rule of Civil Procedure 9(b)
requirement of pleading with particularity, allegations
must specify when and where the alleged
misrepresentation took place, as well as the content of
those misrepresentations and the identity of the speaker.
See Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir.1986);
Denny v. Barber, 576 F.2d 465, 469 (2d Cir.1978); Segal
v. Gordon, 467 F.2d 602, 608 (2d Cir.1972). The
complaint must further give particulars as to the way in
which plaintiff alleges the statements were fraudulent. See
Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989). Finally,
plaintiff must specify the accusations and particular acts
of fraud committed by each defendant, in cases of
multiple defendants, in order to give each defendant fair
notice. See Natowitz v. Mehlman, 542 F.Supp. 674, 676
(S.D.N.Y.1982).
b. Analysis
*7 This Court finds that plaintiffs have adequately
pleaded a second predicate act of mail fraud. Plaintiffs
allege that defendants committed mail fraud by mailing
(or conspiring to do so) fraudulent offering materials.
Plaintiffs identify those offering materials by title and
date. See Am.Compl. ¶ 24. (1980 Offering Circular and
Private Offering Memoranda dated August 20, 1980 and
September 26, 1980; 1981 Private Offering Memorandum
dated August 20, 1981; 1982 Private Offering
Memorandum dated October 1, 1982). Plaintiffs also
identify the alleged misrepresentations contained in those
documents. See id. In addition, plaintiffs list other
documents mailed in connection with the allegedly
fraudulent limited partnerships, including offering
circulars and solicitation memoranda. See Am.Compl. ¶
73.
The Court is satisfied that the Amended Complaint
alleges mail fraud with sufficient particularity to survive
this motion to dismiss. Plaintiffs have alleged that
defendants engaged in fraud surrounding the limited
partnership and it was foreseeable that the scheme would
make use of the mails. See Wellington International
Commerce Corp. v. Retelny, 727 F.Supp. 843, 846
(S.D.N.Y.1989) (stating that to maintain a RICO claim
predicated on mail fraud, it is sufficient to allege that
defendants participated in the fraudulent scheme and that
it was foreseeable that the fraudulent scheme would
involve the use of the mails).
Defendants are clearly on notice of what it is alleged that
they have done wrong in this action. The requirement of
pleading instances of mail fraud with particularity “does
not require a plaintiff to plead every date and place of
mailing.” Landy, 734 F.Supp. at 622. Therefore, the
motion to dismiss plaintiffs’ Amended Complaint for
failure to plead mail fraud with particularity is denied.
4. Enterprise?
Defendants also contend that plaintiffs have failed to set
forth a proper RICO enterprise. Plaintiffs claim that
Victor Wexler and MBM were together the RICO
enterprise. Defendants argue that plaintiffs have failed to
allege an enterprise because Wexler is also an employee
of MBM.
18 U.S.C. section 1961(3) defines “person” as
“includ[ing] any individual or entity capable of holding a
legal or beneficial interest in property.” 18 U.S.C. section
1961(4) defines “enterprise” as “includ[ing] any
individual, partnership, corporation, association, or other
legal entity, and any union or group of individuals
associated in fact although not a legal entity.” A
complaint must distinguish between the enterprise and the
person who conducts the affairs of the enterprise through
a pattern of racketeering activity. See Bennett v. United
States Trust Co., 770 F.2d 308, 315 (2d Cir.1985), cert.
denied,474 U.S. 1058 (1986); Park South Associates v.
Fischbein, 626 F.Supp. 1108, 1112 (S.D.N.Y.), aff’d,800
F.2d 1128 (2d Cir.1986).
However, as the Second Circuit has explained:
*8 [w]e see no reason a single
entity could not be both the RICO
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“person” and one of a number of
members of the RICO “enterprise.”
The definitions of both terms are
intentionally broad ... [T]here is
neither a conceptual nor a doctrinal
difficulty in positing an entity
associated with a group of which it
is but a part.
Cullen v. Margiotta, 811 F.2d 698, 729–730 (2d Cir.),
cert. denied,483 U.S. 1021 (1987). Thus, an individual
may be both the RICO “person” and the RICO
“enterprise” if he is merely a part of that enterprise and
not its sole entity.
Wexler neither is nor was the sole member of MBM.
Therefore, this Court finds that Wexler may be both the
RICO “person” and part of the RICO “enterprise”. As a
result, defendants’ contention that plaintiffs have failed to
set forth a proper RICO enterprise is incorrect.
Defendants also argue that plaintiffs have failed to allege
a RICO enterprise because Wexler was only employed by
the partnership from December of 1980 through February
of 1983, and therefore some of the challenged actions
preceded Wexler’s employment by the partnership. The
Court finds, however, that there is no requirement that
Wexler be formally employed by the partnership for its
entire duration to be a part of the RICO enterprise.
Therefore, this argument is also unpersuasive.
5. Pattern?
Defendants further argue that plaintiffs have failed to
successfully allege a pattern of racketeering activity and
the continuity required thereunder. For that reason,
defendants contend that the RICO cause of action fails.
18 U.S.C. section 1961(5) defines “pattern of racketeering
activity” as:
requir[ing] 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
(excluding
any
period
of
imprisonment)
after
the
commission of a prior act of
racketeering activity.
Thus, a plaintiff must allege that each defendant
committed at least two acts of racketeering in order to
establish a RICO claim. See Albany Ins. Co. v. Esses, 831
F.2d 41, 44 (2d Cir.1987). Furthermore, to prove a pattern
of racketeering, a plaintiff must “show that the
racketeering predicates are related and that they amount
to or pose a threat of continued criminal activity.” H.J.,
Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229,
239 (1989) (emphasis in original).
While there is no fixed measurement of continuity to
define in advance whether in a particular case a “pattern
of racketeering activity” exists, where it is shown that the
predicates are the usual way of conducting a defendant’s
ongoing legitimate business, the continuity requirement is
satisfied. See id. at 241. Continuity may be either
close-ended or open-ended. Close-ended continuity is
repeated conduct which takes place over a closed period
of time, while open-ended continuity is past conduct that
by its nature threatens future repetition. See id. at 241–42.
The “pattern” cannot be mere sporadic activity, but must
show a threat of continuing criminal activity, whether
within one closed significant block of time or over an
open-ended period. See id. The series of predicates must
be alleged to have been both related and extended over a
substantial period of time in stating a claim for
close-ended continuity. See id.
*9 In the case at bar, plaintiffs allege multiple acts of mail
and securities fraud regarding plaintiffs’ investments in
the limited partnership from 1980 to 1982. This Court
finds the alleged predicate acts of mail and securities
fraud were directly related to plaintiffs’ investments. This
Court finds the three-year span from 1980–1982 to be
sufficiently substantial to constitute a proper allegation of
close-ended continuity for purposes of RICO. Therefore,
this Court finds that plaintiffs have successfully alleged a
pattern of racketeering activity, including the required
continuity.
D. Conspiracy
Finally, defendants urge that the RICO conspiracy claim
is inadequately pleaded. The conspiracy element of RICO
is defined in 18 U.S.C. section 1962(d) which states: “It
shall be unlawful for any person to conspire to violate any
of the provisions of subsections (a), (b), or (c) of this
provision.” While predicate acts of fraud must be alleged
with particularity pursuant to Federal Rule of Civil
Procedure 9(b), conspiracy may be pleaded under a less
stringent standard of particularity. The Second Circuit has
explained that:
Rule 9(b) applies only to fraud or
mistake, not to conspiracy. [The]
pleading of conspiracy, apart from
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Pg ID 1264
the underlying acts of fraud, is
properly measured under the more
liberal requirements of Rule 8(a).
Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 26
(2d Cir.1990); see also Landy v. Mitchell Petroleum
Technology Corp., 734 F.Supp. 608, 622 (S.D.N.Y.1990).
A plaintiff need not make an express allegation of an
agreement to establish a conspiracy. “[D]isconnected acts,
when taken together, may satisfactorily establish a
conspiracy....” First Federal Savings and Loan
Association v. Oppenheim, Appel, Dixon & Co., 629
F.Supp. 427, 443 (S.D.N.Y.1986); see also Grosser v.
Commodity Exchange, Inc., 639 F.Supp. 1293
(S.D.N.Y.1986), aff’d,859 F.2d 148 (2d Cir.1988). By
such indirect evidence, a conspiracy may be inferred. See
Rich–Taubman Associates v. Stamford Restaurant
Operating Co., 587 F.Supp. 875, 879 n. 5
(S.D.N.Y.1984).
Defendants contend that conspiracy is inadequately
pleaded in that plaintiffs rest their claim solely on a series
of conclusory allegations that the defendants agreed to
conduct, aid and abet, and substantially assist the
“fraudulent schemes and racketeering activities”
described in the Amended Complaint. Plaintiffs, on the
other hand, assert that the conspiracy was adequately
pleaded and that defendants’ contention really amounts to
a “failure to allege with particularity” argument.
As this Court has noted, conspiracy may be pleaded under
a less stringent standard of particularity. Thus,
considering all of the distinct acts alleged in a light most
favorable to plaintiffs, it is a reasonable inference from
the acts alleged that members of MBM conspired with
each other and with defendant Wexler to defraud
plaintiffs in violation of RICO.
*10 This Court concludes that plaintiffs have adequately
alleged all of the requisite elements of a RICO claim. As a
result, the Court denies defendants’ motion to dismiss the
RICO claim.
II. THE STATE LAW CLAIMS
Because the RICO claim is viable, this Court has
supplemental jurisdiction over the state claims of
common law fraud, breach of fiduciary duty, and
negligent misrepresentation, pursuant to 28 U.S.C. section
1367(c). Notwithstanding the fact that this Court has
jurisdiction over the state claims, this Court must still
determine whether those state claims are adequately
pleaded within the appropriate statute of limitations.
Defendants argue that each of the pendant state claims
should be dismissed because they are time barred by the
applicable statute of limitations. Defendants additionally
argue that, in the absence of a prior special relationship
between the parties, plaintiffs may not maintain a breach
of fiduciary duty claim or a negligent misrepresentation
claim.
A. The Fraud Claim
It is well settled under New York law that claims for
fraud must be brought within either six years of the
commission of the fraud or two years from the time the
fraud was discovered or could have been discovered with
reasonable diligence. See Stull v. Bayard, 561 F.2d 429,
431 (2d Cir.1977), cert. denied,434 U.S. 1035 (1978);
Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, 406
(2d Cir.1975); Arrathoon v. East New York Savings Bank,
169 A.D.2d 804, 805, 565 N.Y.S.2d 172, 173 (2d Dep’t
1991). To toll the statute of limitations through fraudulent
concealment, a plaintiff may allege that the fraud was
either
affirmatively
concealed
or
inherently
self-concealing. See Moll v. U.S. Life Title Ins. Co., 700
F.Supp. 1284, 1289–1290 (S.D.N.Y.1988) (quoting State
of New York v. Hendrickson Bros. Inc., 840 F.2d 1065,
1083 (2d Cir.1988)). The Court explained:
[t]he difference in the two
categories, as we see it, is whether
the deception, misrepresentation,
trick or contrivance is a necessary
step in carrying out the illegal act,
or whether it is separate from the
illegal act and intended only to
cover up the act.
Moll v. U.S. Life Title Ins. Co., 700 F.Supp. at 1290
(quoting Hobson v. Wilson, 737 F.2d 1, 33 n. 102
(D.C.Cir.1984), cert. denied,470 U.S. 1084 (1985)). This
“doctrine of fraudulent concealment cannot be invoked
where plaintiffs have notice of the facts underlying their
claims.” O’Brien v. National Property Analysts Partners,
719 F.Supp. 222, 232 & n. 11 (S.D.N.Y.1989).
Here, unlike with the RICO claim, it is notice of the fraud
and not the resulting injury that controls the statute of
limitations. All of the investments challenged by plaintiffs
took place prior to June 19, 1986—precisely six years
before the filing of the action. Therefore, the only way for
plaintiffs to state a timely claim for fraud is to allege that
the fraud was concealed from them.
To plead fraudulent concealment, a plaintiff must allege
7
Pg ID 1265
that:
*11 (1) the defendant concealed the
very conduct which comprises the
cause of action; (2) defendant’s
concealment obstructed plaintiffs
from discovering the cause of
action within the limitations period;
and (3) up until the actual
discovery, plaintiffs performed due
diligence in trying to uncover the
fraud.
Ackerman v. National Property Analysts, 1992 WL
240605, at *5 (S.D.N.Y. Sept. 9, 1992). Plaintiffs argue
that the earliest they could have been on inquiry notice of
the fraud was in 1992, when Victor Wexler was indicted.3
Reading the Amended Complaint in the light most
favorable to plaintiffs, the Court cannot find that plaintiffs
were on notice of the alleged fraud prior to the indictment
of Wexler in 1992 at this stage of the litigation. Therefore,
inasmuch as the action was brought in 1992, the fraud
claim is timely.
B. The Claim For Breach of Fiduciary Duty
The applicable statute of limitations for a claim for breach
of fiduciary duty depends upon the substantive nature of
relief the plaintiff seeks. Generally, a breach of fiduciary
duty claim carries a three-year statute of limitations. See
Loengard v. Santa Fe Industries, Inc., 573 F.Supp. 1355,
1359 (S.D.N.Y.1983). Only where the nature of relief
sought from a breach of fiduciary duty is equitable is the
claim governed by a six-year statute of limitations. See
Loengard v. Santa Fe Industries, Inc., 70 N.Y.2d 262,
266–267, 519 N.Y.S.2d 801, 803, 514 N.E.2d 113, 115
(1987). In the case at bar, the relief sought is not
equitable, so the three-year statute of limitations is
applicable.
An action for breach of fiduciary duty generally accrues
at the time the plaintiff suffers the alleged injury, see
Martin v. Julius Dierck Equipment Co., 43 N.Y.2d 583,
591, 403 N.Y.S.2d 185, 189, 374 N.E.2d 97, 101 (1978),
but may be tolled in a case of continuous representation
with respect to the particular matter giving rise to the
complaint. See Bingham v. Zolt, 683 F.Supp. 965, 975
(S.D.N.Y.1988); Siegel v. Kranis, 29 A.D.2d 477,
479–480, 288 N.Y.S.2d 831, 834 (2d Dep’t 1968).
In this case, the Court has already determined that the
plaintiffs suffered injury at the time of the IRS
disallowances and penalties that were finalized in 1993.
As these injuries occurred as recently as 1993, the
plaintiffs’ claims for breach of fiduciary duty accrued in
1993 and as such are not time barred. To the extent that
plaintiffs suffered any concrete injury prior to June 19,
1986, those breach of fiduciary duty claims are dismissed
as time barred.
C. The Claim For Negligent Misrepresentation
The applicable statute of limitations for a claim for
negligent misrepresentation is six years where the claim
sounds in fraud. See Milin Pharmacy, Inc. v. Cash
Register Systems, Inc., 173 A.D.2d 686, 687, 570
N.Y.S.2d 341, 341–42 (2d Dep’t 1991); Schwartz v.
Michaels, 1992 WL 184527, at *30 (S.D.N.Y. July 23,
1992). Such a claim accrues when the misrepresentation
is made. See Schwartz, 1992 WL 184527, at *30.
*12 In this case, to the extent that plaintiffs are
complaining of misrepresentations contained occurring
prior to June 19, 1986 (six years prior to the filing of this
action), such claims are dismissed. Thus, claims
respecting alleged misrepresentations in the various
offering documents disseminated in connection with each
offering of limited partnership interests in MBM, in 1980,
1981 and 1982, are dismissed. To the extent plaintiffs can
identify misrepresentations occurring after June 19, 1986,
the claim survives.
D. Absence of a Prior Special Relationship
Defendants additionally argue that the claims for breach
of fiduciary duty and negligent misrepresentation fail
because plaintiffs lack a prior relationship with
defendants such that there existed a fiduciary duty or that
negligence would be actionable. Under New York law, it
is well established that “[a] defendant is not liable for
breach of fiduciary duty or for negligent
misrepresentation unless a prior relationship existed
between the defendant and the plaintiff.” Schwartz, 1992
WL 184527, at *29. See, e.g., Vermeer Owners, Inc. v.
Guterman, 169 A.D.2d 442, 444, 564 N.Y.S.2d 335, 338
(1st Dep’t 1991) (sponsor had no fiduciary duty to
prospective purchasers before the public offering),
aff’d,78 N.Y.2d 1114, 578 N.Y.S.2d 128, 585 N.E.2d 377
(1991); Coolite Corp. v. American Cyanamid Co., 52
A.D.2d 486, 488, 384 N.Y.S.2d 808, 811 (1st Dep’t 1976)
(no liability attaches for a negligent misstatement unless
the parties’ relationship suggests a closer degree of trust
than that of ordinary buyer and seller).
To the extent that these claims relate to
misrepresentations and omissions after the sale to the
8
Pg ID 1266
plaintiffs, a relationship does exist and these claims
survive to the extent that they are not barred by the statute
of limitations. To the extent that these claims relate to
pre-sale misrepresentations and omissions, the claims are
dismissed.
III. ASSIGNMENTS AND/OR RELEASES OF
CLAIMS
As this Court has considered evidence outside of the
pleadings with respect to the assignments and releases,
this portion of the motion will be treated as a motion for
summary judgment.
A. Standards for Summary Judgment
This Court may grant summary judgment only if there is
no genuine dispute as to any material fact and the moving
party is thus entitled to judgment as a matter of law. See,
e.g., Silver v. City University of New York, 947 F.2d 1021,
1022 (2d Cir.1991); Montana v. First Fed. Sav. & Loan
Ass’n, 869 F.2d 100, 103 (2d Cir.1989); Knight v. U.S.
Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.1986), cert.
denied,480 U.S. 932 (1987); Falls Riverway Realty, Inc.
v. Niagara Falls, 754 F.2d 49, 54 (2d Cir.1985). The role
of the Court on such a motion “is not to resolve disputed
issues of fact but to assess whether there are any factual
issues to be tried, while resolving ambiguities and
drawing reasonable inferences against the moving party.”
Knight v. U.S. Fire Ins. Co., 804 F.2d at 11. See, e.g.,
Twin Lab. Inc. v. Weider Health & Fitness, 900 F.2d 566,
568 (2d Cir.1990); Montana v. First Fed. Sav. & Loan
Ass’n, 869 F.2d at 103; Ramseur v. Chase Manhattan
Bank, 865 F.2d 460, 465 (2d Cir.1989).
*13 The movant bears the initial burden of informing the
Court of the basis for its motion and identifying those
portions of the “pleadings, depositions, answers to
interrogatories, and admissions on file, together with
affidavits, if any,” that show the absence of a genuine
issue of material fact. Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986). If the movant meets this initial burden,
the party opposing the motion must then demonstrate that
there exists a genuine dispute as to the material facts. Id.;
see also Silver v. City University of New York, 947 F.2d at
1022; Greater Buffalo Press, Inc. v. Federal Reserve
Bank, 866 F.2d 38, 42 (2d Cir.), cert. denied,490 U.S.
1107 (1989). To show such a “genuine dispute,” the
opposing party must come forward with enough evidence
to allow a reasonable jury to return a verdict in its favor.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986); Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 586–87 (1986); Cinema North Corp.
v. Plaza at Latham Assoc., 867 F.2d 135, 138 (2d
Cir.1989). If “the party opposing summary judgment
propounds a reasonable conflicting interpretation of a
material disputed fact,” then summary judgment must be
denied. Schering Corp. v. Home Ins. Co., 712 F.2d 4,
9–10 (2d Cir.1983) (citing New York State Energy
Research & Dev. Auth. v. Nuclear Fuel Servs., Inc., 666
F.2d 787, 790 (2d Cir.1981)).
B. Analysis
Defendants’ final contention is that, in connection with
the December 31, 1984 sale of their limited partnership
interests to defendant McMahan, twelve4 of the plaintiffs
entered into a Contract of Sale whereby they assigned and
released certain rights. Under the contract, each limited
partner taking advantage of the offer allegedly assigned to
McMahan all rights to any cause of action the limited
partner might have against MBM or its general partners
for (a) any acts in connection with the original sale of a
limited partnership interest to that limited partner, and (b)
for the conduct of MBM’s business prior to the limited
partner’s tender of his interest. In addition, each tendering
limited partner allegedly released MBM and its general
partners from any and all claims that might arise by
reason of the IRS’s disallowance of tax benefits
previously taken by MBM.
Later, on March 31, 1985, another limited partner and
now plaintiff, Stutzman, allegedly entered into a sales
agreement under which he sold his limited partnership
interest to another investor. Under that agreement,
Stutzman allegedly released all potential causes of action
arising from the original sale of the limited partnership
interest to Stutzman by MBM, the conduct of MBM’s
business prior to the execution and delivery of the sales
agreement, and the disallowance by the IRS of any tax
deductions taken previously.
Defendants argue that due to these alleged assignments
and releases, thirteen of the plaintiffs are prohibited from
joining this lawsuit. Defendants contend that to the extent
that the twelve plaintiffs assigned causes of action to
defendant McMahan, they have transferred their entire
interest in those claims. See generally, Paragon
International, N.V. v. Standard Plastics, Inc., 353 F.Supp.
88, 93 (S.D.N.Y.1973); Client’s Security Fund v.
Goldome, 148 Misc.2d 157, 160–61, 560 N.Y.S.2d 84, 88
(Sup.Ct.Monroe Co.1990). Therefore, defendants claim
that the twelve assigning plaintiffs no longer have any
legal right to the claims or standing to maintain this action
based upon the assigned claims. See Contemporary
Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 924
(2d Cir.1977).
9
Pg ID 1267
*14 Defendants further contend that to the extent that the
thirteen plaintiffs have released MBM and its general
partners from various causes of action, they have
discharged or abandoned those claims. See Colton v. New
York Hospital, 98 Misc.2d 957, 963 & 965, 414 N.Y.S.2d
866 (Sup.Ct.NY Co.1979). As a result, defendants claim
that as a contractual matter these plaintiffs are foreclosed
from pursuing any actions against the defendants. See,
e.g., In re Estate of Hutchins, 23 Misc.2d 565, 568, 199
N.Y.S.2d 528, 530 (Surr.Ct.NY Co.1960), aff’d,12
A.D.2d 484, 209 N.Y.S.2d 269 (1st Dep’t 1961).
Plaintiffs argue that the alleged assignments and releases
were obtained by agreements induced by fraud and as
such are invalid. Plaintiffs rely on the principle of New
York law that dictates that a contract is not enforceable if
it was procured by wrongful non-disclosure. See Martin
Pincus Marketing v. Sawyer of Napa, Inc., 774 F.Supp.
171, 175 (S.D.N.Y.1991). Releases may be invalidated if
they are the product of fraud, duress, undue influence, or
illegality. See Fleming v. Ponziani, 24 N.Y.2d 105, 299
N.Y.S.2d 134, 139–41, 247 N.E.2d 114 (1969). See also
Bushkin, Gaims, Gaines, Jonas & Stream v. Garber, 677
F.Supp. 774 (S.D.N.Y.1988) (general release does not bar
claims that are unknown to releasor).
The Court agrees with defendants. The assignments and
releases here, while broad, are also quite specific. The
plaintiffs make conclusory allegations that McMahan
possessed knowledge of the fraudulent nature of the
trading activity at issue when the plaintiffs sold their
interests to him and to another investor. The plaintiffs do
not adduce any evidence of this knowledge however. In
fact, the evidence before the Court indicates that the
plaintiffs who sold their interests were informed through
the September 18, 1984 Confidential Solicitation
Memorandum that the IRS was conducting an audit of the
1980 MBM partnership return. There is no evidence that
McMahan had any beforehand knowledge of the results of
that audit. Indeed, the evidence before the Court is that
McMahan and the partnership vigorously opposed the
IRS determination. This Court does not find that that is
evidence of advance knowledge of the nature of the
trading at issue in this litigation. The Court has examined
each of plaintiffs’ contentions as to what McMahan
allegedly knew when the plaintiffs sold their interests and
the Court does not find those conclusory allegations
sufficient to withstand summary judgment.
Inasmuch as the claims asserted in this lawsuit are within
the scope of the assignments and/or releases given by the
thirteen plaintiffs, the claims asserted by those plaintiffs
are hereby dismissed with prejudice.
IV. DEFENDANT ESRIG’S MOTION TO DISMISS
Defendant Bruce Esrig both joins the McMahan
defendants’ motion to dismiss as well as makes his own
motion to dismiss.
First, Esrig moves to dismiss the Amended Complaint for
failure to plead fraud with particularity as required by
Federal Rule of Civil Procedure 9(b). Esrig complains
that the allegations in the Amended Complaint against
him are nothing more than an endless stream of
conclusory allegations that neither specify the nature of
Esrig’s alleged participation nor state facts from which it
could be inferred that Esrig acted with intent to defraud.
*15 Second, Esrig moves to dismiss for failure to state a
claim upon which relief can be granted. Specifically,
Esrig alleges that the RICO claim fails because there are
no facts alleged that Esrig participated in the enterprise’s
management or operation. Also, Esrig contends that there
are no facts alleged that show that he even knew of the
alleged racketeering enterprise. Moreover, Esrig contends
that there are no facts alleged that show that he
participated in the alleged enterprise.
A. Failure to Plead Fraud with Particularity
This Court has already set forth the standards for a motion
to dismiss for failure to plead fraud with particularity.
Applying those standards to the allegations in the
Amended Complaint specific to defendant Esrig, the
Court finds that the RICO and common law fraud claims
must be dismissed as against Esrig.
The Amended Complaint, aside from stating that Esrig is
“a natural person and a citizen and resident of the state of
New York,” and that “[b]eginning in or about January,
1981, Esrig was in charge of government securities
trading for” MBM, alleges no facts specific to Esrig. The
remaining allegations against Esrig, as contained in
paragraphs 28, 29, 30, 31, 32, 33, 37, 41, 54, and 57,
merely include Esrig in a list of co-conspirators. The
allegations do not state what Esrig is supposed to have
done. The Amended Complaint allegations regarding
Esrig are merely conclusory assertions as to Esrig’s
intentions, knowledge and involvement. After a thorough
review of the Amended Complaint, the Court cannot find
a single fact alleged in support of plaintiffs’ contention
that Esrig was a knowing participant in the alleged
fraudulent scheme.
Plaintiffs do not dispute that the only fact pleaded with
10
Pg ID 1268
respect to Esrig is that he was in charge of government
securities trading for MBM. Rather, plaintiffs contend
that that bare allegation is sufficient to allege common
law fraud and RICO (predicated on securities fraud)
claims against Esrig because the law allows pleading
solely on the basis of corporate affiliation. The Court does
not find that argument persuasive, as the cases relied upon
by plaintiffs all require at least an allegation that Esrig
was specifically involved in offering the securities. See,
e.g., Morin v. Trupin, 809 F.Supp. 1081, 1087
(S.D.N.Y.1993) (particularity requirement relaxed for
insiders participating in the offer of securities); DiVittorio
v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1249
(2d Cir.1987) (relaxation of the particularity requirement
not warranted when the defendant is not “tied to the
offering memorandum in any way.”).
Plaintiffs also argue that because an Assistant United
States Attorney indicated that Esrig was believed to be a
co-conspirator with Wexler in tax fraud, that justifies the
inclusion of Esrig in the Amended Complaint. The Court
does not agree. Federal Rule of Civil Procedure 9(b)
specifically requires particularity in fraud pleadings
because discovery of the fraud is supposed to precede its
pleading.
*16 Plaintiffs’ allegation that Esrig is a co-conspirator is
not sufficient to satisfy the obligations imposed by
Federal Rule of Civil Procedure 9(b). As a result, this
Court dismisses the common law fraud and the RICO
(predicated on fraud) claims asserted by plaintiffs against
Esrig without prejudice.
B. Failure to State a Claim
Now that the fraud based claims have been dismissed,
Esrig also argues that the remaining claims against him
should be dismissed for failure to state a claim. It is
unnecessary for this Court to make that determination,
however. Inasmuch as plaintiffs’ only federal claim has
been dismissed, this Court is empowered by 28 U.S.C.
section 1367(c)(3) to dismiss remaining state claims
against Esrig. Where federal claims are disposed of well
before trial, it is appropriate for the pendent state claims
to be dismissed as well. See Nolan v. Meyer, 520 F.2d
1276, 1280 (2d Cir.), cert. denied,423 U.S. 1034 (1975).
The Court therefore dismisses the remaining state claims
asserted against Esrig.
V. MOTION TO STRIKE REFERENCES IN
AMENDED COMPLAINT
The McMahan defendants’ final motion, pursuant to
Federal Rule of Civil Procedure 12(f), requests this Court
to strike certain references from the Amended Complaint
as redundant, immaterial, impertinent, and/or scandalous.
Plaintiffs oppose this motion.
Federal Rule of Civil Procedure 12(f) provides that “the
Court may order stricken from any pleading ... any
redundant, immaterial, impertinent, or scandalous
matter.”5 Motions to strike, while not favored, may be
granted where the allegations challenged have no real
bearing on the subject matter or are likely to prejudice the
movant. See FRA S.p.A. v. Surg–O–Flex of America, Inc.,
415 F.Supp. 421, 427 (S.D.N.Y.1976). Frequently courts
will strike references that have criminal overtones. For
instance, in Cooper v. North Jersey Trust Co., 10
Fed.R.Serv.2d 127, 130 (S.D.N.Y.1966), the court struck
references to certain indicted individuals who were
allegedly defendants’ co-conspirators. The Court held
there that whether the jury should be made aware of the
indictments was a matter more suited to being decided by
a Judge during trial. See id. That was especially so
because there was a dispute as to whether certain of the
references were related to the conduct giving rise to the
litigation. See id.
Here, the defendants allege that that is also the case.
Because this is an action based on fraud in connection
with the sale of limited partnership interests, defendants
argue that allegations of criminal tax fraud (as contained
in the Amended Complaint paragraphs 49 and 50) are
immaterial because criminal tax fraud is not a
racketeering activity supportive of a RICO claim.
Defendants also argue that the documents referenced in
those paragraphs are not part of the alleged fraud and
references to them should be stricken. Also, in paragraphs
55 through 57, plaintiffs refer to the criminal indictment
of Victor Wexler (a former employee of MBM) and to the
naming of defendant Minor Eager as an unindicted
co-conspirator. Defendants argue that these references
should be stricken.
*17 Plaintiffs argue, on the other hand, that these
references are both relevant and appropriate. As such,
plaintiffs contend that they should not be stricken.
This Court agrees with defendants that these references
should be stricken as immaterial, impertinent and
scandalous. If the jury is ultimately made aware of these
matters at trial through reading the Amended Complaint,
defendants will be prejudiced. The Court therefore grants
defendants’ motion and hereby strikes the indicated
references to purported criminal tax fraud violations, the
references to Wexler’s indictment, and the references to
Minor Eager’s naming as an unindicted co-conspirator.
11
Pg ID 1269
CONCLUSION
The motions of the McMahan defendants are granted in
part and denied in part. Plaintiffs Saul Bass, Herbert
Yager, Charles H. Boxenbaum, L. Peter Byler, Robert B.
Glynn, Warren Hirsch, Bernard and Sally Lewis, Walter
J. Michel, Jerry H. Mouser, Danforth K. Richardson,
Harvey Schmidt and Myron D. Stutzman are dismissed
from the action. The remaining plaintiffs include William
Toto, Ronald A. Katz, Roger Staubach, Danat Investment
Co., Thomas S. Yount, Etta Steiner and Mervyn Hecht.
Only in the event that plaintiffs can plead specific facts
with respect to defendant Esrig may plaintiffs may
replead their Amended Complaint as against Esrig. Any
such amendment must be filed with the Court by no later
than March 1, 1995. A pre-trial conference is scheduled
for March 29, 1995 at 9:45 a.m.
SO ORDERED.
All Citations
Not Reported in F.Supp., 1995 WL 46691, Fed. Sec. L.
Rep. P 98,639, RICO Bus.Disp.Guide 8761
Defendant Esrig’s motion to dismiss is granted in full.
Footnotes
1
When this Court refers to “defendants,” it is specifically referring to those defendants who have moved to dismiss this
action.
2
Certain plaintiffs were added later on February 8, 1994 as part of the Amended Complaint. Although the moving
defendants are analyzing the timeliness of the RICO claims as to all plaintiffs as of the initial filing date, June 19, 1992,
they reserve the right to draw a distinction between the two sets of plaintiffs at a later date.
3
Defendants, on the other hand, argue (through an affidavit submitted by defendant McMahan) that plaintiffs were on
inquiry notice of the fraud by no later than May 27, 1988. By that date, plaintiffs allegedly received offering materials
and reports from the partnership apprising them about the IRS audit and the federal grand jury investigation. However,
as this issue is before the Court on a motion to dismiss, it is inappropriate to consider the evidence contained in
McMahan’s affidavit at this time. Plaintiffs have not yet had an opportunity to conduct discovery on this issue.
4
Saul Bass, Herbert Yager, Charles H. Boxenbaum, L. Peter Byler, Robert B. Glynn, Warren Hirsch, Bernard and Sally
Lewis, Walter J. Michel, Jerry H. Mouser, Danforth K. Richardson, and Harvey Schmidt.
5
Redundant material is that which is superfluous or repetitious. Immaterial matter is that which is irrelevant and which is
probative of a matter not in issue. Impertinent matter is that which is inappropriate and not relevant to the issues in
controversy. Scandalous matter is that which is unnecessary or matter that is “criminatory” of a party mentioned in a
pleading. See generally Burke v. Mesta Mach. Co., 5 F.R.D. 134, 139 (D.Pa.1946).
End of Document
12
EXHIBIT 7
Pg ID 1270
Pg ID 1271
Smith v. Kentucky Fried Chicken, Not Reported in F.Supp.2d (2007)
2007 WL 162831
2007 WL 162831
Only the Westlaw citation is currently available.
United States District Court,
E.D. Kentucky,
Central Division,
Lexington.
Michael Ray SMITH, Plaintiff,
v.
KENTUCKY FRIED CHICKEN, et al., Defendants.
Civil Action No. 06-426-JBC. | Jan. 18, 2007.
JRN’s liability insurer. On October 18, 2006, Liberty
denied the plaintiff’s claim by letter; this letter was
written by Diane Dannenfeldt,3 a claims case manager
who is employed by Liberty.
The plaintiff filed this action pro se in Boyle Circuit Court
on December 5, 2006, and supplemented his complaint on
December 9, 2006. The defendants removed it to this
court on December 27, 2006. After careful scrutiny of his
complaint, the court has determined that the plaintiff
seeks relief against JRN for “gross negligence” regarding
his slip and fall and against Dannenfeldt and Liberty for
malicious prosecution and violations of the Eighth and
Fourteenth Amendments to the United States
Constitution.
Attorneys and Law Firms
Michael Ray Smith, Danville, KY, pro se.
Donald L. Miller, II, Tracy Clemmons Smith, Frost
Brown Todd LLC, Louisville, KY, for Defendants.
MEMORANDUM OPINION AND ORDER
JENNIFER B. COFFMAN, U.S. District Judge.
*1 This matter is before the court on the defendants’
motion to dismiss or in the alternative motion to strike or
motion for more definite statement (DE 6); the plaintiff’s
motion for default judgment (DE 8); the defendants’
motion for protective order (DE 10); and the defendants’
motion for a hearing and for a preliminary injunction (DE
12).
I. Factual Background
The plaintiff’s claims in this action arise out of an
accident that he alleges occurred on September 14, 2006,
at a Kentucky Fried Chicken1 restaurant in Danville,
Kentucky. The plaintiff contends that when he entered the
restroom on that day, he slipped and fell in some water
that was on the floor of the restroom. Following this
accident, an ambulance was called, and the plaintiff was
taken to a hospital.
While not clearly spelled out in the plaintiff’s complaint,
it appears from the complaint and documents attached to
it that the plaintiff then filed a claim with Liberty Mutual
Fire Insurance Company (“Liberty”),2 which is apparently
II. Legal Analysis
A. Defendants’ Motion to Dismiss
The defendant has moved the court to dismiss the
plaintiff’s complaint pursuant to Fed.R.Civ.P. 12(b)(2),
12(b)(4), 12(b)(5), and 12(b)(6). More specifically, the
defendants claim that the plaintiff’s complaint against
them should be dismissed for failure to properly serve
them with process and that all claims against Liberty and
Dannenfeldt should be dismissed for failure to state a
claim upon which relief can be granted. The court will
consider the defendants’ latter argument first.
i. Motion to Dismiss for Failure to State a Claim
As previously noted, the plaintiff appears to have brought
claims against Liberty and Dannenfeldt for violation of
his rights under the Eighth and Fourteenth Amendments
and for malicious prosecution. Dismissal for failure to
state a claim can be granted only when the defendants
establish beyond a reasonable doubt that the plaintiff can
prove no set of facts in support of his claims that would
entitle him to relief. Hiser v. City of Bowling Green, 42
F.3d 382, 383 (6th Cir.1994). The court must consider the
pleadings in the light most favorable to the plaintiff and
take the factual allegations in the complaint as true. Jones
v. Carlisle, 3 F.3d 945, 947 (6th Cir.1993).
*2 With regard to the plaintiff’s constitutional claims,
only state actors may be held liable for violations of the
Fourteenth Amendment. See Moose Lodge No. 107 v.
Irvis, 407 U.S. 163, 172 (1972) (quoting Shelley v.
Kraemer, 334 U.S. 1, 13 (1948) (holding that the Equal
Protection Clause did not prohibit private conduct,
“however discriminatory or wrongful”); Rendell-Baker v.
1
Pg ID 1272
2007 WL 162831
Kohn, 457 U.S. 830, 837 (1982) (“[T]he Fourteenth
Amendment ... applies to acts of the states, not to acts of
private persons or entities.”); Ingraham v. Wright, 430
U.S. 651, 671 n. 40 (1977) (“Eighth Amendment scrutiny
is appropriate only after the State has complied with the
constitutional guarantees traditionally associated with
criminal prosecutions.”) (emphasis added). Liberty and
Dannenfeldt are an insurance company and a private
person, respectively. The plaintiff has presented no
evidence of their affiliation with any government entity.
Therefore, the court will dismiss the plaintiff’s
constitutional claims against Liberty and Dannenfeldt.
The plaintiff’s malicious prosecution claim is also fatally
flawed. Six basic elements are required for the
maintenance of a malicious prosecution action under
Kentucky law: (1) the institution or continuation of
original judicial proceedings; (2) by, or at the instance of,
the defendant; (3) the termination of such proceedings in
the plaintiff’s favor; (4) malice in the institution of such
proceeding; (5) want of probable cause for the
proceeding; and (6) the suffering of damage as a result of
the proceeding. Raine v. Drasin, 621 S.W.2d 895, 899
(Ky.1981). The plaintiff has not alleged that either Liberty
or Dannenfeldt ever instituted judicial proceedings against
him, and nothing in his complaint would indirectly
support such an inference. The court will dismiss the
plaintiff’s malicious prosecution claims as well.
ii. Motion to Dismiss for Ineffective Service of Process
The court having dismissed all claims against Liberty and
Dannenfeldt, the only claim remaining is the plaintiff’s
claim for “gross negligence” against JRN. The defendants
assert that this claim should also be dismissed for failure
to properly serve JRN pursuant to the Federal and
Kentucky Rules of Civil Procedure.
Fed.R.Civ.P. 4(e) provides that “service upon an
individual ... may be effected in any judicial district of the
United States ... pursuant to the law of the state in which
the district court is located ... or ... by delivering a copy of
the summons and of the complaint to the individual
personally.”In turn, the Kentucky Rules of Civil
Procedure provide that service must be made by mailing
the summons and complaint via registered or certified
mail or by personally serving the complaint. SeeKy. R.
Civ. P. 4.01. Ky. R. Civ. P. 4.04(5) further states that
“service shall be made upon a corporation by serving an
officer or managing agent thereof, or the chief agent in
the county wherein the action is brought, or any other
agent authorized by appointment or by law to receive
service on its behalf.”With regard to non-residents,
Kentucky’s long-arm statute provides an alternative
means of service of process. SeeK.R.S. § 454.210(3)(b)
(stating that service of process may be made on a
non-resident “where he may be found [in Kentucky], or
on the Secretary of State who, for this purpose, shall be
deemed to be the statutory agent of such person”).
*3 The plaintiff attempted to serve JRN, which is a
Tennessee corporation, by delivering a copy of the
complaint and summons to Kris Jones, an assistant
manager at the Kentucky Fried Chicken restaurant at
which he was injured. This method of service does not
comply with any of the above-described means of serving
a defendant with process under Kentucky law. As a result,
the court finds that JRN has not properly been served with
process.
This conclusion, however, does not mandate the dismissal
of the plaintiff’s suit against JRN. See Froland v. Yamaha
Motor Co., Ltd ., 296 F.Supp.2d 1004, 1006
(D.Minn.2003) (“[D]ismissal is not always required when
service has been deemed improper.”). Rather, the better
practice is to quash insufficient service of process unless
it is clear that the plaintiff cannot effect proper service. Id.
at 1008.The plaintiff, who is proceeding pro se in this
action, has clearly attempted to serve JRN in what he
believed to be a valid manner, and JRN has made no
claim that it is not amenable to service of process or that
this court lacks personal jurisdiction over it. The court
will therefore quash the plaintiff’s service on JRN but will
not dismiss his claim against it. The court will further
direct the Clerk of Court to issue a summons for JRN via
the Kentucky Secretary of State.
B. The Defendants’ Alternative Motions to Strike and
For a More Definite Statement
The defendants have also moved to strike portions of the
plaintiff’s complaint pursuant to Fed.R.Civ.P. 12(f) or, in
the alternative, for a more definite statement pursuant to
Fed.R.Civ.P. 12(c).Rule 12(f) permits a court to “order
stricken from any pleading ... any redundant, immaterial,
impertinent, or scandalous matter.”In his complaint and
his supplement thereto, the plaintiff makes numerous
offensive and baseless allegations against the defendants,
particularly Dannenfeldt. Most notably, the plaintiff refers
to Dannenfeldt as a “cruel woman” and requests that she
be “fired this week” if she refuses to settle his claim. The
plaintiff also implies that, if a rich or powerful person
such as President Bush-whom the plaintiff discusses at
length in his complaint-suffered the same injuries as the
plaintiff, that person would receive better treatment from
the defendants than the plaintiff has.
The court finds that the plaintiff’s complaint contains a
2
Pg ID 1273
2007 WL 162831
great deal of “redundant, immaterial, impertinent, [and]
scandalous matter.”Moreover, much of that material
relates only to the plaintiff’s claims against Liberty and
Dannenfeldt, which claims have already been dismissed
by the court. At this point, there is no simply no reason
not to strike any material relating to Liberty or
Dannenfeldt from the complaint, as nearly all of this
matter consists of unsubstantiated and demeaning
allegations against these parties.
The plaintiff’s allegations against JRN, however, do have
some merit and are generally not scandalous or offensive.
The only references to JRN that should be stricken are:
(1) the plaintiff’s references to Marian Finch Graves,
another JRN customer who suffered an accident similar to
the plaintiff’s and apparently settled her claim against
JRN; (2) the plaintiff’s demand that Dannenfeldt’s
employment be terminated; and (3) the plaintiff’s
repeated references to JRN’s employees as “lazy.” These
portions of the plaintiff’s complaint are all irrelevant to
this action.
*4 In sum, the court will order the entirety of the
plaintiff’s complaint and the supplement thereto entitled
“More Evidence for Hon Jurors to Consider” stricken,
with the exception of: (1) the case caption and “Statement
of Claim” on the first page of the complaint; (2)
Paragraph 1 of the section entitled “Damages” on pages
one and two of the complaint; and (3) the first sentence of
Paragraph 2 of the section entitled “Damages” on page
two of the complaint. These sections adequately describe
the plaintiff’s tort claim against JRN without
unnecessarily demeaning the defendants or introducing
impertinent material into this action.
In light of the court’s ruling on the plaintiff’s motion to
strike, the court will deny the defendants’ motion for a
more definite statement. As previously noted, the parts of
the complaint that have not been stricken are sufficient to
inform JRN of the nature and substance of the plaintiff’s
claim against it and the damages he seeks in relief.
C. The Plaintiff’s Motion for Default Judgment
The plaintiff moves for default judgment against the
defendants on the ground that they did not file a pleading
in response to his complaint within 20 days of its service
upon them. SeeFed.R.Civ.P. 12(a)(1)(A); Ky. R. Civ. P.
12.01. A court may enter a default judgment when “a
party against whom a judgment for affirmative relief is
sought has failed to plead or otherwise defend as provided
by [the Federal Rules of Civil Procedure].”Fed.R.Civ.P.
55. Judgment by default is a drastic step which should be
resorted to only in the most extreme cases. United Coin
Meter Co., Inc. v. Seaboard Coastline R.R., 705 F.2d 839,
845 (6th Cir.1983). In order to obtain a default judgment,
a plaintiff must properly serve a defendant with a copy of
the summons and complaint in accordance with the
Federal Rules of Civil Procedure and applicable state
rules. Rankel v. Town of Greenburgh, 117 F.R.D. 50, 53
(S.D.N.Y.1987). As previously noted, the plaintiff has
failed to properly serve JRN under the Federal and
Kentucky Rules of Civil Procedure. The court will
therefore deny the plaintiff’s motion.
D. The Defendants’ Motion for Protective Order and for
a Hearing and Preliminary Injunction
The defendants have moved, pursuant to Fed.R.Civ.P.
26(c), for the entry of a protective order that would
prohibit the plaintiffs from contacting any of the
defendants or the defendants’ employees regarding his
allegations in this lawsuit. The plaintiffs also move,
pursuant to Fed.R.Civ.P. 65, for a preliminary injunction
that would enjoin the plaintiff from: (1) committing or
threatening to commit any act likely to result in injury to
any employee of the defendants or counsel for the
defendants; (2) coming with 1000 feet of JRN, Inc. d/b/a
KFC (store # 0277) or Liberty Mutual Fire Insurance
Company or any employee of those entities; (3) engaging
in any conduct intended to intimidate or harass any
employee of these entities. As grounds for these motions,
the defendants allege that the plaintiff has repeatedly
contacted representatives of and counsel for the
defendants and made threatening and insulting statements
to those persons.
*5 While the court is sympathetic to the defendants’
dilemma, the relief they request is not within the purview
of this court. Rule 26(c) deals with protection from
abusive and harassing discovery; it is not meant to limit a
party’s communications with other parties. An injunction
also will generally not issue to restrain torts, such as
defamation or harassment, against the person because
there is usually an adequate remedy at law which may be
pursued in seeking redress for such abuses. Alberti v.
Cruise, 383 F.2d 268, 272 (4th Cir.1967). Finally, an
order prohibiting the plaintiff from contacting the
defendants or their counsel, even in an unwelcome
manner, would run the risk of violating the plaintiff’s
First Amendment rights as a prior restraint.
The court is aware that the plaintiff has already cast
several unwarranted aspersions on the defendants in what
is still a relatively new case. Nonetheless, the issuance of
restraining orders to prohibit unwanted or potentially
dangerous personal contact is a matter for law
enforcement agencies, and, if the defendants or their
3
Pg ID 1274
2007 WL 162831
counsel are truly concerned for their safety, they are free
to contact their local police force. However, the fact that
the plaintiff has made offensive or threatening
communications to them does not entitle them to the
broad injunctive relief they now seek from this court. The
court will deny the defendants’ motions.
E. Admonition to the Plaintiff
Notwithstanding its ruling in the previous section, the
court notes that the plaintiff has referred to the
defendants, their employees, and their counsel in a
disparaging, offensive, and menacing manner throughout
his prosecution of this action. In addition to the statements
referred to earlier in this opinion, the plaintiff has implied
that Dannenfeldt would rather force patrons of Kentucky
Fried Chicken to “piss on [themselves]” than require JRN
employees to clean its restaurants. In his response to the
defendants’ motion to dismiss, the plaintiff states that the
defendants “wasted” their money in hiring their counsel
because said counsel “does not know what she is
doing.”Most disturbingly, the plaintiff has alleged that if
his case is not settled, he plans to seek the arrest and
disbarment of defense counsel along with a $500,000
claim against her.
The court is also aware that the plaintiff has filed at least
ten other pro se cases in this court over the past ten years,
including a Social Security Appeal decided four months
ago by the undersigned. See Smith v. Appeals Council in
Falls Church, VA, Civ. A. No. 5:05-cv-279-JBC (E.D.Ky.
Sept. 1, 2006). In one of his more recent lawsuits, the
plaintiff accused another United States District Judge of
exhibiting racial prejudice in the repeated dismissal of his
lawsuits. See Smith v. Peckler, et al., Civ. A. No.
5:05-cv-190-KSF, DE 14.
The court recognizes that the plaintiff is proceeding pro se
in this action. A plaintiff’s pro se status, however, does
not grant him an unfettered license to wage an endless
campaign of harassment against defendants or to abuse
the judicial process. Pfeifer v. Valukas, et al., 117 F.R.D.
420, 423 (N. D.Ill., 1987); see also Crisafi v. Holland,
655 F.2d 1305, 1309 (D.C.Cir.1981) (“No one, rich or
poor, is entitled to abuse the judicial process.”). District
courts possess the power to impose sanctions against
parties who file malicious and unsubstantiated pleadings;
such sanctions may range from monetary penalties, see,
e.g., Pfeifer, 117 F.R.D. at 423-24, to permanent
injunctions against filing civil lawsuits. See, e.g., Triparti
v. Beaman, 878 F.2d 351, 352 (10th Cir.1989).
*6 Based on the pleadings the plaintiff has filed to date,
his slip-and-fall claim against JRN does not appear to be
frivolous. That fact notwithstanding, the plaintiff’s
behavior in pursuing that claim and his prior claims
before this court is wholly unacceptable. The plaintiff is
not entitled to harass, annoy, and threaten the defendants
and their counsel merely because he is pursuing a claim in
federal court. The plaintiff is hereby warned that any
pleadings or other communications that serve no purpose
other than an attempt to embarrass or intimidate will
result in an appropriate sanction.
III. Conclusion
Accordingly,
IT IS ORDERED as follows:
(1) The defendant’s motion to dismiss (DE 6) is
GRANTED to the extent that all claims against the
defendants Liberty Mutual Fire Insurance Company and
Diane
Dannenfeldt
are
DISMISSED
WITH
PREJUDICE.The remainder of the motion is DENIED.
(2) The Clerk shall issue summons for JRN, Inc. d/b/a
Kentucky Fried Chicken.
(3) As the plaintiff has not provided any instructions
regarding method of service, the Clerk shall forward the
summons to the United States Marshal.
(4) The United States Marshal is directed to serve JRN,
Inc. d/b/a Kentucky Fried Chicken with the summons and
a copy of the complaint, by serving these documents on
the Kentucky Secretary of State, who is deemed the
proper agent for service of process on JRN, Inc. d/b/a
Kentucky Fried Chicken pursuant to K.R.S. §
454.210(3)(b).
(5) The defendants’ motion to strike (DE 6) is
GRANTED insofar as the entirety of the plaintiff’s
complaint and the supplement thereto entitled “More
Evidence for Hon Jurors to Consider” are STRICKEN,
with the exception of: (1) the case caption and “Statement
of Claim” on the first page of the complaint; (2)
Paragraph 1 of the section entitled “Damages” on pages
one and two of the complaint; and (3) the first sentence of
Paragraph 2 of the section entitled “Damages” on page
two of the complaint.
(6) The defendants’ motion for a more definite statement
(DE 6) is DENIED.
(7) The plaintiff’s motion for default judgment (DE 8) is
DENIED.
4
Pg ID 1275
2007 WL 162831
(8) The defendants’ motion for a protective order (DE 10)
is DENIED.
All Citations
Not Reported in F.Supp.2d, 2007 WL 162831
(9) The defendants’ motion for a hearing and for a
preliminary injunction (DE 12) is DENIED.
Footnotes
1
The plaintiff has alleged claims against “Kentucky Fried Chicken” in this action and refers to this entity as “Kentucky
Fried Chicken” or “K.F.C.” throughout his complaint. Submissions by the defendants show that this entity’s true
corporate name is “JRN, Inc. d/b/a Kentucky Fried Chicken.”The court shall abbreviate this name as “JRN” in this
order.
2
In his complaint, the plaintiff refers to Liberty as “Liberty Mutual Insurance Company.”
3
In his complaint, the plaintiff refers to Dannenfeldt as “Diane Insurance Adj.”
End of Document
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