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SEVILLE INDUS. MACH. CORP. v. SOUTHMOST MACH. CORP

July 8, 1983

SEVILLE INDUSTRIAL MACHINERY CORP., Plaintiff,
v.
SOUTHMOST MACHINERY CORP., TRI-STATE MACHINERY CORP., NORMAN GELLMAN, individually and doing business as SOUTHMOST MACHINERY CORP., and TRI-STATE MACHINERY CORP., and PAOLO ALFIERI, individually and doing business as SOUTHMOST MACHINERY CORP., Defendants



The opinion of the court was delivered by: DEBEVOISE

 Plaintiff, Seville Industrial Machinery Corporation, instituted this action against defendants, Southmost Machinery Corporation ("Southmost"), Tri-State Machinery Corporation ("Tri-State"), Norman Gellman ("Gellman"), an officer of Southmost and Tri-State, and Paolo Alfieri ("Alfieri"), an officer of Southmost. Plaintiff alleges violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq., fraud, breach of contract, and conversion. Jurisdiction is asserted under 18 U.S.C. § 1964 and under the principles of pendent jurisdiction.

 Defendants, Southmost, Tri-State and Gellman moved for dismissal of the complaint under Fed.R.Civ.P. 9(b), 12(b)(1), and 12(b)(6) and for lack of pendent jurisdiction, or, in the alternative, moved for a more definite statement pursuant to Fed.R.Civ.P. 12(e). Alfieri has not been served with the summons and complaint.

 In order for defendants to succeed on their motion to dismiss, they must demonstrate "beyond a doubt that the plaintiff can prove no set of facts in support of [their] claim which would entitle [them] to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir. 1980). In meeting their burden, the defendants must accept as true the allegations set forth in plaintiff's complaint. Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972); Hochman v. Board of Education of the City of Newark, 534 F.2d 1094, 1097 n.1 (3d Cir. 1976).

 It is necessary to examine the elements of a RICO violation to determine whether plaintiff has alleged a set of facts which, if proved at trial, would entitle it to relief. General pleading rules require that a complaint contain a "short and plain statement of the claim showing that the pleader is entitled to relief," Fed.R.Civ.P. 8. Fed.R.Civ.P. 9(b) requires that all circumstances constituting fraud be stated with particularity.

 The First Count of the complaint sets forth the facts upon which plaintiff relies for the RICO claim. Plaintiff, it is asserted, was the owner of certain industrial machinery listed in Exhibits A through F of the complaint. It is further asserted that Southmost and Tri-State, acting through their controlling persons Gellman and Alfieri, by means of fraudulent and misleading information induced plaintiff to sell or transfer possession of plaintiff's machinery to defendants for resale. It was represented that an agreed upon portion of the proceeds would be paid to plaintiff. It is claimed that defendants misrepresented the true ownership of the machinery to the persons to whom they sold it. Further, the complaint alleges that defendants persuaded plaintiff to enter into a joint venture with them to purchase equipment on the representation that the pro rata share of the costs of acquisition of the equipment along with the resulting profits from resale would be distributed and paid back to Seville. Finally, it is alleged that Gellman defrauded plaintiff by falsely representing that he was a business partner of plaintiff and thereby receiving a payment which should have been paid by a third party to plaintiff. According to the complaint, defendants have retained for their own use the money which they have received from these dealings instead of paying it over to plaintiff. *fn1"

 The civil remedies section of RICO, 18 U.S.C. § 1964(c), provides that:

 
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue . . . [in federal court] . . . and shall recover threefold the damages he sustains and the cost of the suit including a reasonable attorney's fee.

 The actions which RICO declares to be unlawful are enumerated in Section 1962 of the statute, all of which relate to the interaction between an "enterprise" affecting interstate or foreign commerce and a "pattern of racketeering activity." In its complaint, plaintiff charges violations of 18 U.S.C. §§ 1962(b), (c) and (d) by defendants as the basis of its recovery of damages under § 1964(c).

 Section 1962(b) makes it unlawful for any person "to acquire or maintain an interest or control of any enterprise" through "a pattern of racketeering or through collection of an unlawful debt." 18 U.S.C. § 1962(b).

 Section 1962(c) makes it unlawful for any person associated with an "enterprise" which affects interstate or foreign commerce to conduct or participate in the affairs of such enterprise through a "pattern of racketeering activity." 18 U.S.C. § 1962(c).

 Section 1962(d) simply states that it is unlawful for any person to conspire to violate any of the substantive provisions of Section 1962.

 Proper pleading of substantive RICO violations such as those charged by plaintiff requires the averment of the existence of an "enterprise" which affects interstate or foreign commerce and the defendants' participation in the enterprise and in a "pattern of racketeering activity." 18 U.S.C. § 1962(b), (c), and (d). See United States v. Turkette, 452 U.S. 576, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981).

 A. Existence of an Enterprise

 "Enterprise", according to the statute, "includes any individual, partnership, corporation, association, or other legal entity, any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4).

 It is clear that a legitimate business entity, such as a corporation, may constitute an "enterprise." United States v. Brown, 583 F.2d 659, 663 (3d Cir. 1978), cert. denied, 440 U.S. 909, 99 S. Ct. 1217, 59 L. Ed. 2d 456 (1979). In United States v. Turkette, 452 U.S. 576, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981), the Supreme Court held that even a completely illegal organization may be an enterprise for RICO purposes. Id. at 583. The Court in Turkette set forth the elements necessary to establish the existence of such an enterprise: "evidence that the various associates function as a continuing unit" for a common purpose. Id. at 583. In addition, the enterprise must be shown to have an existence "separate and apart from the pattern of activity in which it engaged." Id. at 583.

 The Third Circuit recently analyzed Turkette in United States v. Riccobene, 709 F.2d 214 (1983). The language of that opinion, read in conjunction with the facts of the case, throw considerable light upon what must be alleged and proved in order to find the evidence of an enterprise for RICO purposes.

 In Riccobene the government charged that during the period 1972 to 1978 there existed an ongoing criminal enterprise implicating each of the defendants and that the enterprise engaged in illegal gambling, mail fraud, wire fraud, extortionate credit transactions and collection of unlawful debts. The evidence at the trial established the existence of an enterprise headed by Angelo Bruno and staffed by a number of other individuals with varying degrees of authority and differing responsibilities within the organization. The organization used different groupings of its members to engage in a number of discrete illegal activities referred to in the RICO Act. The Court concluded that the evidence was sufficient to demonstrate that an organization existed which satisfied the requirements for an enterprise and that all the members of the conspiracy knowingly agreed to participate in or conduct the enterprise through a pattern of racketeering.

 (1) Ongoing Organization

 The Third Circuit held that the first requirement of an "ongoing organization" is a showing that a structure exists for group decision making, whether it be hierarchial or consensual. Id. slip op. at 15. The Court stated that some mechanism must exist to control and direct group affairs on an ongoing rather than ad hoc basis. Id. slip op. at 15.

 Plaintiff's allegations in Count One of its complaint are insufficient to aver an "ongoing organization" for several reasons. First, plaintiff merely asserts that "defendants Southmost, Tri-State, Gellman and Alfieri are enterprises" (complaint, First Count, para. 17) without clarifying whether all four defendants comprise one enterprise or whether each defendant constitutes an "enterprise."

 Plaintiff, however, could not logically allege violations of 18 U.S.C. § 1962(b) and (c) by a single-person enterprise. For example, a defendant can violate Section 1962 only by acquiring or maintaining an interest in or control of the enterprise. 18 U.S.C. § 1962(b). It would be absurd for plaintiff to attempt to prove by a preponderance of the evidence that Mr. Gellman or Mr. Alfieri acquired or maintained an interest in themselves. Similarly, a violation of Section 1962 occurs only when a person is employed by or associated with an enterprise. A corporation such as Southmost and Tri-State could not employ itself or associate with itself. See Tarlow, RICO Revisited, 17 Georgia Law Review 291, 344-345 (1983).

 Nor does plaintiff properly allege that all four defendants comprise one enterprise. For instance, plaintiff does not provide so much as a clue describing how Southmost, a corporation whose principal place of business is located in Texas, its officer, Mr. Alfieri, a Texas resident, belonged to an "ongoing organization" with Tri-State, a New Jersey corporation and its officer, Mr. Gellman, who plaintiff alleges is an officer of both Southmost and Tri-State and who is also a New Jersey citizen. Aside from assertions that the four defendants conspired with each other and committed numerous fraudulent acts, plaintiff does not mention any identifiable structure which would encompass all four defendants. Nor does plaintiff detail the roles each defendant played in the "enterprise" or explain any interrelationship between the four defendants.

 Furthermore, it is not clear that the term "enterprise" can be construed to embrace two corporations and two individuals who allegedly conspired to violate predicate offenses of RICO. Section 1961(4) contains two conjunctive phrases to define the term "enterprise." The first phrase describes legal entities: "any individual, partnership, corporation, association or other legal entity. . . ." The second phrase refers to non-legal entities: "any union or group of individuals associated in fact although not a legal entity." Since the complaint as pleaded does not allege that the combined entity of two corporations and two individuals operate as a legal entity, the "enterprise" named by plaintiff must fall within the second category of "associated individuals." Since the combined entity is not a union and is not "associated individuals," it does not come within the definition of "enterprise."

 Plaintiff attempts to allege that defendants Southmost, Tri-State, Gellman and Alfieri associated with each other in fact by conspiring to commit mail fraud and wire fraud in connection with the title, purchase, shipment, and sale of Seville's industrial machinery.

 However, this allegation of conspiracy cannot be sufficient to allege an "enterprise" for RICO purposes. Congress specifically provided in Section 1962(d) of RICO that a conspiracy to violate the substantive RICO offenses is itself a violation of RICO. 28 U.S.C. § 1962(d). This indicates that Congress intended to establish a separate conspiracy offense in subsection (d) distinct from the offenses described in subsection (a), (b) or (c).

 As the Eighth Circuit stated in United States v. Anderson, 626 F.2d 1358, 1369 (8th Cir. 1980):

 
If a single . . . conspiracy to commit the predicate crimes were to fulfill the "enterprise" element of section 1962(c) violation, then a conspiracy to commit a 1962 violation would be defined as when a person, associated with a conspiracy to commit criminal acts, conspires to conduct those criminal acts. The awkwardness and duplication inherent in the structure of this articulation of the offense should be sufficient to suggest that we search for an alternative interpretation.

 In United States v. Bledsoe, supra, the Eighth Circuit held that a group of agricultural cooperatives and corporations could not constitute an enterprise under RICO. The Court rejected the government's contention that "any confederation, no matter how loose or temporary" can be an "enterprise." Rather, the Court construed RICO as requiring "some structure separate from the racketeering activity ...


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