Antitrust Law Daily Wrap Up, RICO—2nd Cir.: Developers failed to allege enterprise defrauded them of investment funds, (Oct 17, 2014)

By Jody Coultas, J.D.

Real estate developers were unable to state Racketeer Influenced and Corrupt Organizations Act (RICO) claims against a number of persons and companies that allegedly defrauded the developers and channeled the stolen funds to political actors and causes favorable to the National Black United Fund (NBUF), according to the court U.S. Court of Appeals in New York City (D. Penguin Brothers Ltd. v. City National Bank, October 16, 2014, Per Curiam).

The real estate developers and the multiple corporations and limited liability companies co-owned by them alleged that former attorney David Spiegelman and James Williams defrauded them by inducing them to invest in real estate projects that were fictitious. After the developers deposited their “investment” funds for these projects in escrow accounts maintained by Spiegelman, Spiegelman and Williams allegedly stole the deposited money. The developers brought suit against Spiegelman, Williams, and City National Bank (“CNB”), in which one of the escrow accounts was maintained.

The federal district court in New York City dismissed the RICO claims with prejudice and declined to exercise supplemental jurisdiction over the state-law claims.

To state a Section 1962(c) RICO claim, the developers were required to show conduct of an enterprise through a pattern of racketeering activity. An enterprise is “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.”

The developers failed to present sufficient evidence to support the RICO claims, according to the court. The developers alleged that the entities were NBUF, a not-for-profit corporation with a registered principal place of business in New York, of which Williams was a director. Because the developers alleged that NBUF was a not-for-profit corporation, they adequately alleged that it was an “enterprise” within the meaning of RICO. The developers argued that the identification of NBUF as a RICO enterprise saved the RICO counts from dismissal. However, the developers failed to plausibly allege the required nexus between NBUF and the alleged theft by Spiegelman and Williams. The complaint did not allege that the RICO defendants engaged in racketeering activity through NBUF or leveraged the NBUF corporate structure to perpetrate the fraud.

The developers also argued that an “association in fact” existed among the RICO defendants that was created to purchase the favor and influence of political leaders and government officials. To prove an association-in-fact enterprise, the developers needed to provide evidence of an ongoing organization, formal or informal, and evidence that the various associates function as a continuing unit. Association-in-fact enterprises have: (1) a purpose, (2) relationships among those associated with the enterprise, and (3) longevity sufficient to permit these associates to pursue the enterprise’s purpose. The enterprise must also exist “separate and apart from the pattern of activity in which it engages.” Because the developers’ failed to allege a plausible common purpose among the RICO defendants, they were unable to support the assertion that the defendants formed an association-in-fact RICO enterprise.

The case is No. 14-1056-cv.

Attorneys: David Gordon (Gordon & Haffner, LLP) for D. Penguin Brothers LTD. John B. Webb (Reed Smith LLP) for City National Bank. Charles E. Dorkey (McKenna Long & Aldridge LLP) for NBUF Development LTD., Black United Fund of New York, Inc., First Pro Group, Inc., Inner City Strategies, and James Robert Williams.

Companies: City National Bank; Black United Fund of New York, Inc.

Cases: RICO ConnecticutNews NewYorkNews VermontNews