VALERIE CAPRONI, District Judge.
Plaintiffs, Joseph Albunio ("Albunio") and Homeland Safety Consultants, Inc. ("Homeland"), bring claims for breach of contract, fraud, unjust enrichment, aiding and abetting fraud, breach of fiduciary duty, and RICO violations following the merger of Homeland with the predecessor-in-interest to Defendant International Safety Group, Inc. ("ISG") in November 2012. Defendants Certified Site Safety, Inc. and Certified Site Safety of NY, LLC (together, "Certified"), and Michael Gianatasio ("Gianatasio" and, together with Certified, the "Moving Defendants") have moved to dismiss Plaintiffs' First Amended Complaint ("FAC") pursuant to Fed. R. Civ. P. 12(b)(6) and Rule 9(b) and the Private Securities Litigation Reform Act (the "Motion").
Plaintiff Homeland is a New York corporation, which, at all relevant times, was engaged in providing site safety and training services on construction-related projects. FAC ¶ 22. In or around 2012, Plaintiff Albunio, the former president, founder and majority shareholder of Homeland, became interested in taking Homeland public through a reverse merger with other companies in the site safety sector. Id. ¶¶ 22, 31-32. At that time, Homeland had annual revenue of approximately $4-5 million. Id. ¶ 22. Albunio consulted with OmniView Capital, LLC ("OmniView"), a non-party consultant, which advised that Homeland would need at least $10 million in revenue before going public. Id. ¶ 32. In or around June 2012, OmniView introduced Homeland to Defendant Gianatasio, whose wife, Penny Gianatasio, nominally owned Certified, another site safety business. Id. ¶ 33. At that time, Certified had approximately $7-8 million in annual revenue. Id. ¶ 33.
In the summer and fall of 2012, Albunio and Gianatasio negotiated a proposed transaction pursuant to which Homeland, Certified and a third non-party company would be merged into a public shell entity called Benaco, Inc. ("Benaco"). Id. ¶ 34; Albunio Decl. 1. In or around October 2012, Benaco was purchased for approximately $250,000 by Homeland's investment advisor, OmniView. Id. ¶ 20. Plaintiffs allege that, at a meeting between Albunio and Gianatasio in or around October 2012, it was agreed that Gianatasio would be the Chief Executive Officer of any newly-formed public entity because Certified would be the company contributing the most business to the merged entity. Id. ¶ 35. Gianatasio nevertheless allegedly assured Albunio that all Homeland employees would be retained post-merger unless Albunio agreed otherwise. Id. Based on Gianatasio's representation that Certified would be rolled-into the Benaco shell, the parties further agreed that Gianatasio would be permitted to buy discounted Benaco shares and that he would also acquire voting control of the company. Id. ¶¶ 36, 66. Gianatasio also allegedly drafted or signed off on investor presentations stating that Certified would be rolled-into Benaco. Id. ¶¶ 37-39. As attachments to their FAC, Plaintiffs have submitted declarations of various Benaco investors averring that Gianatasio induced them to invest by representing, inter alia, that Certified, along with its $7-$8 million in annual revenue, would be included in the Benaco merger. Gallo Decl. ¶ 3; Goldberger Decl. ¶ 4; Caridi Decl. ¶ 5.
On November 12, 2012, Homeland entered into a Share Exchange Agreement ("SEA") with Benaco. FAC ¶ 43.
Shortly after the execution of the SEA, Benaco's name was changed to ISG. Id. ¶¶ 20, 39. In accordance with the parties' agreement, Gianatasio became ISG's CEO and President, purchased ISG shares at a discounted price, and obtained control of ISG. Id. ¶¶ 36, 66-67. Although Albunio and other shareholder investors believed that Certified would be rolled-in shortly thereafter, Certified never contributed its assets or business to Benaco or ISG. Id. ¶ 44; Albunio Decl. ¶ 17; Gallo Decl. ¶ 7; Goldberger Decl. ¶ 6; Caridi Decl. ¶ 6. Instead, as early as December 2012, Gianatasio began taking actions that Albunio viewed as contrary to the best interest of the business for the benefit of Certified.
Despite having allegedly assured Albunio and other investors that Certified would be merged into ISG imminently, in January 2013, Gianatasio stated that he was no longer willing to do so because he did not want to jeopardize Certified's status as a "Woman Owned Business." Id. ¶¶ 47, 53. Instead, Gianatasio promised that he would allow ISG's CFO, Robert Simoni, to audit Certified, id. ¶¶ 59-60, and that Certified's profits would be shared with ISG. With the exception of a few business contracts that Certified sent to ISG in February 2013, however, Certified never contributed any business or assets to ISG, id. ¶¶ 58-61, and when Mr. Simoni pressed Gianatasio for the promised audit, he was effectively fired on May 31, 2013, id. ¶ 61. Gianatasio then caused ISG's Form 8-K for the relevant period to reflect that Simoni had taken another position with an ISG subsidiary, which was false. Id. ¶¶ 61-62. By approximately August 2013, Gianatasio had fired all but two of the former Homeland employees, including every manager or "key person" at Homeland. Id. ¶¶ 63, 67.
Plaintiffs filed their initial Complaint in this action on January 8, 2015, which Defendants moved to dismiss. Plaintiffs then filed an Amended Complaint on August 14, 2015, which Defendants, again, have moved to dismiss.
"To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a complaint must allege sufficient facts, taken as true, to state a plausible claim for relief." Johnson v. Priceline.com, Inc., 711 F.3d 271, 275 (2d Cir. 2013) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." N.J. Carpenters Health Fund v. Royal Bank of Scot. Grp., PLC, 709 F.3d 109, 120 (2d Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). Courts must "accept all allegations in the complaint as true and draw all inferences in the non-moving party's favor." L.C. v. LeFrak Org., Inc., 987 F.Supp.2d 391, 398 (S.D.N.Y. 2013) (quoting LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009)). Furthermore, courts are generally confined to "the four corners of the complaint" and must "look only to the allegations contained therein." Perez v. Westchester Foreign Autos, Inc., No. 11-CV-6091(ER), 2013 WL 749497, at *5 (S.D.N.Y. Feb. 28, 2013) (citing Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007)).
Plaintiffs assert RICO violations under 18 U.S.C. §§ 1962(c) and (d). FAC ¶¶ 108-141. The civil RICO statute, 18 U.S.C. § 1962(c) makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt."
To establish RICO standing, a plaintiff must plead, at a minimum, "(1) the defendant's violation of § 1962, (2) an injury to the plaintiff's business or property, and (3) causation of the injury by the defendant's violation." Lerner v. Fleet Bank, N.A., 318 F.3d 113, 120 (2d Cir. 2003) (quoting Commercial Cleaning Servs., L.L.C. v. Colin Serv. Sys., Inc., 271 F.3d 374, 380 (2d Cir. 2001)). Defendants have moved to dismiss under 12(b)(6), not 12(b)(1), and the Court treats their standing argument as one that goes to the merits of Plaintiffs' RICO claims, rather than as one that challenges Plaintiffs' standing for jurisdictional purposes. See Lerner, 318 F.3d at 116-17, 129-30 ("[D]espite describing the proximate causation requirement as `RICO standing,' such standing is not jurisdictional in nature under Fed. R. Civ. P. 12(b)(1), but is rather an element of the merits addressed under a Fed. R. Civ. P. 12(b)(6) motion for failure to state a claim.").
Defendants argue that Albunio lacks standing because the injuries that he suffered as a shareholder are derivative of ISG's injuries and, therefore, are insufficiently direct to establish the necessary element of proximate causation. Defs. Mem. 21-24. Courts have generally held that a shareholder does not have standing to assert RICO claims in his or her individual capacity based on claims of injury suffered by a third-party in which he or she has a financial interest. See, e.g., Bingham v. Zolt, 66 F.3d 553, 561 (2d Cir. 1995) ("[T]he general principle [is] that a shareholder cannot sue in his individual capacity to redress wrongs inflicted upon a corporation in which he holds stock." (citing cases)); Manson v. Stacescu, 11 F.3d 1127, 1131 (2d Cir. 1993) ("Since the shareholder's injury . . . generally is derivative of the injury to the corporation, the shareholder's injury is not related directly to the defendant's injurious conduct." (citing Holmes v. Sec. Inv'r Prot. Corp., 503 U.S. 258, 268-69 (1992)). In so holding, the Second Circuit has noted that, under such circumstances, the interests of judicial economy generally favor derivative actions, where there can be "one damage award that will restore the corporation and, therefore, its shareholders, creditors, and employees." Manson, 11 F.3d at 1132 (2d Cir. 1993).
The Second Circuit has, however, recognized a "special duty exception" to the general rule against shareholder standing, which applies when the plaintiff alleges a "duty that was separate and distinct from the duty owed to" other shareholders. Id. at 1131 (citation omitted); see also Nordberg v. Lord, Day & Lord, 107 F.R.D. 692, 698 (S.D.N.Y. 1985) ("It is only where the injury sustained to one's stock is peculiar to him alone, and does not fall alike upon other stockholders, that one can recover as an individual."). Courts have generally applied this exception in cases involving claims of fraudulent inducement or breach of a duty owed uniquely to the plaintiff. For example, in Ceribelli v. Elghanayan, the Second Circuit found that RICO standing could exist when defendants fraudulently failed to disclose material information and made intentional misstatements to certain shareholders in connection with a stock sale. 990 F.2d 62, 64 (2d Cir. 1993). In Dep't of Econ. Dev. v. Arthur Andersen & Co. (U.S.A.), the court likewise found that standing could exist based on plaintiff's allegations that it was induced to invest as a result of defendants' misrepresentations and fraudulent omissions. 924 F.Supp. 449, 464 (S.D.N.Y. 1996) (citing cases).
Here, Albunio alleges that Defendants fraudulently induced him to exchange his Homeland shares for Benaco shares, and then improperly diverted Benaco's assets (consisting of business that was formerly Homeland's) to Certified. Id. ¶ 118. In asserting that Gianatasio used false promises that he would roll Certified into Benaco to fraudulently induce Albunio to cede control of Homeland and to trade his Homeland shares for Benaco shares, Albunio alleges an injury that is not common to all shareholders (such as Gianatasio, himself), and therefore Albunio would have standing if he could plausibly allege a RICO violation.
On the other hand, there is no logical basis for finding that Homeland has standing. While Plaintiffs claims that Homeland still exists as an "active" corporation, Pls. Opp. 8, Plaintiffs concede that Homeland was merged into Benaco, which later changed its name to ISG. FAC ¶¶ 22, 43. Because Plaintiffs fail to articulate how Homeland's interests or alleged injuries differ from those of its successor, Defendant ISG, and because Albunio disavows any attempt to sue derivatively on behalf of Homeland or ISG, Pls. Opp. 8 & n.1, it is unclear on what basis Homeland is a Plaintiff. The Court finds that Homeland lacks standing. Nonetheless, as described below, even if both of the Plaintiffs had standing, Plaintiffs' RICO claims fail because Plaintiffs do not plausibly allege a RICO violation.
Plaintiffs allege that Defendants fraudulently induced Albunio to merge Homeland into Benaco and then diverted Benaco's assets to Certified. Plaintiffs also allege that Defendants committed mail fraud, 18 U.S.C. § 1341, and wire fraud, 18 U.S.C. § 1343, between November 2012 and August 2013 "in pursuing the RICO scheme."
In order to plead a "pattern of racketeering," a plaintiff must plausibly allege multiple acts of racketeering activity occurring within 10 years of each other, see 18 U.S.C. § 1961(5); Elsevier, Inc. v. Grossman, No. 12 CIV. 51219(KPF), 2013 WL 6331839, at *9 (S.D.N.Y. Dec. 5, 2003), and the predicate acts must be "related" and "continuous." See H.J. Inc., et al. v. Northwestern Bell Tel. Co., 492 U.S. 229, 238-44 (1989). "Continuity" may be established through either "a closed period of repeated conduct, or [] past conduct that by its nature projects into the future with a threat of repetition." Id. at 241 (citation omitted); see also First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 180 (2d Cir. 2004) (RICO plaintiffs "must allege either an open-ended pattern of racketeering activity (i.e., past criminal conduct coupled with a threat of future criminal conduct) or a closed-ended pattern of racketeering activity (i.e., past criminal conduct extending over a substantial period of time)." (quoting GICC Capital Corp. v. Tech. Fin. Group, Inc., 67 F.3d 463, 466 (2d Cir. 1995))).
As an initial matter, the headings of Plaintiffs' RICO claims assert that their RICO claims are based on "conduct [occurring] on and after November 12, 2013," FAC ¶¶ 108-41 (emphasis added), but all of the alleged predicate acts occurred prior to November 12, 2013. Id. ¶ 119. For example, Plaintiffs allege that, within nine months of Homeland's merger (or by approximately August 2013), Gianatasio terminated all of Homeland's employees and replaced them with employees of Certified, using either email or telephone to do so.
Plaintiffs' only attempt to resolve this glaring discrepancy is to assert, in conclusory fashion, that Defendants' conduct was "designed to extend indefinitely." FAC ¶ 130. Even if the Court were to accept this bare assertion, Plaintiffs would not succeed in alleging a related and continuous pattern of predicate acts.
An "`open-ended pattern of continuity' exists where defendants' predicate acts represent an ongoing way of conducting defendants' business." Kalimantano GmbH v. Motion in Time, Inc., 939 F.Supp.2d 392, 406 (S.D.N.Y. 2013) (citing H.J. Inc., 492 U.S. at 243). With respect to an enterprise that is primarily legitimate, there "must be some evidence from which it may be inferred that the predicate acts were the regular way of operating that business, or that the nature of the predicate acts themselves implies a threat of continued criminal activity." Kalimantano, 939 F. Supp. 2d at 406 (quoting DeFalco v. Bernas, 244 F.3d 286, 323 (2d Cir. 2001) (other citations omitted)); cf. SKS Constructors Inc. v. Drinkwine, 458 F.Supp.2d 68, 80 (E.D.N.Y. 2006) (plaintiffs' allegation that predicate acts were the only way the business operated were sufficient to establish open-ended continuity for purpose of motion to dismiss).
Plaintiffs concede that ISG conducts legitimate business in the site safety sector, and thus ISG is not an essentially illegitimate enterprise. FAC ¶¶ 45, 50, 67-71, 77-81, 119. Although Plaintiffs contend that "open end pattern continuity is satisfied" because the asserted predicate acts were the "regular way Defendants did business," FAC ¶ 130, Plaintiffs' allegations are insufficient as a matter of law. Plaintiffs have essentially alleged a single fraud that was carried out over the course of approximately nine months. In sum, Gianatasio made material misrepresentations and omissions in order to induce Albunio to merge Homeland into Benaco/ISG, with the goal of eliminating competition and increasing his own profitability in the site safety sector through his control of both ISG and Certified. Accepting all facts and drawing all inferences in Plaintiffs' favor, it is plain that this scheme had a clear starting point (in October or November 2012) and a clear end (in approximately July or August 2013). See, e.g., FAC ¶ 82 ("In just nine months, Defendants succeeded in their scheme to destroy a successful business competitor (Homeland) and to steal so much of its business as they could divert to Certified.").
It is well-established that such an "inherently terminable" scheme cannot establish openended continuity for RICO purposes.
As noted, supra, a plaintiff can also state a claim of open-ended continuity if the nature of the predicate acts themselves implies a threat of continued criminal activity. DeFalco, 244 F.3d at 323. The Second Circuit has clarified however, that this theory only applies to "inherently unlawful" criminal activities in pursuit of "inherently unlawful" goals, such as murder, obstruction of justice, narcotics trafficking, embezzlement, extortion, bribery, and money laundering. See United States v. Aulicino, 44 F.3d 1102, 1111 (2d Cir. 1995); World Wrestling Entm't. Inc, 530 F. Supp. 2d at 516 (citing cases); Kalimantano, 939 F. Supp. 2d at 407-08 (citing cases). In contrast, ordinary fraud is not considered "inherently unlawful" under this theory. See Aulicino, 44 F.3d at 1111 (citing cases); Int'l Bhd. of Teamsters v. Carey, 297 F.Supp.2d 706, 715 (S.D.N.Y. 2004) ("[F]raud (the object of which is by definition to obtain money or property from others) has been held not to be `inherently unlawful' in the RICO continuity context." (citation omitted)), aff'd sub nom. Int'l Bhd. of Teamsters v. Blitz, 124 F. App'x 41 (2d Cir. 2005); Econ. Opportunity Comm'n v. Cnty. of Nassau, 47 F.Supp.2d 353, 366-67 (E.D.N.Y. 1999) (mail fraud, wire fraud and Hobbs Act predicates are not inherently unlawful for purposes of RICO continuity). Because Plaintiffs' RICO claims are predicated solely on an allegation of fraud, Plaintiffs cannot establish open-ended continuity.
Nor can Plaintiffs establish a pattern of racketing under a theory of "closed-ended continuity." Because "close-ended continuity" hinges primarily upon the duration of the alleged predicate acts, DeFalco, 244 F.3d at 321, a plaintiff seeking to establish continuity under this theory must prove "a series of related predicates extending over a substantial period of time." Id. (quoting H.J. Inc., 492 U.S. at 242). It is well-settled that "[p]redicate acts extending over a few weeks or months . . . do not satisfy this requirement." H.J. Inc., 492 U.S. at 242. Indeed, the Second Circuit "has never held a period of less than two years to constitute a `substantial period of time'" for purposes of demonstrating closed-ended continuity. DeFalco, 244 F.3d at 321 (citing cases). Plaintiffs have clearly stated that the alleged scheme was carried out over a period of only eight or nine months and, therefore, close-ended continuity cannot be pled. See, e.g., FAC ¶ 22 ("In less than eight months following that merger, Defendant Gianatasio . . . managed to realize Defendants' plan and scheme . . . ."); cf. Spool v. World Child Int'l Adoption Agency, 520 F.3d 178, 185 (2d Cir. 2008) (predicate acts spanning no more than sixteen months are "insufficient . . . to demonstrate closed-ended continuity under this Court's precedents" (citation omitted)); H.J. Inc., 492 U.S. at 242 ("Congress was concerned in RICO with long-term criminal conduct.").
Because Plaintiffs have failed to allege, as required, two or more predicate acts constituting a pattern of racketeering activity, Defendants' Motion is GRANTED with respect to Plaintiffs' claim under 18 U.S.C. § 1962(c), and Plaintiffs' claim under 1962(c) is dismissed.
It is well-settled that where a plaintiff has failed to plead a substantive RICO claim, related claims for RICO conspiracy claim under § 1962(d) must be dismissed. See, e.g., First Capital Asset Mgmt., 385 F.3d at 164 ("[B]ecause Plaintiffs' RICO conspiracy claims are entirely dependent on their substantive RICO claims, we also concur in the District Court's dismissal of the RICO conspiracy claims."); Helios Intern. S.A.R.L. v. Cantamessa USA, Inc., No. 12 Civ. 8205(RWS), 2013 WL 3943267, at *9 (S.D.N.Y. July 31, 2013) ("[I]n the absence of a validly pled substantive RICO claim, Plaintiffs' claim under 18 U.S.C. § 1962(d) for RICO conspiracy fails as well." (citation omitted)). For the reasons noted supra, Plaintiffs have failed adequately to allege a pattern of racketeering activity under RICO subsection 1962(c). Accordingly, Defendants' Motion is GRANTED with respect to Plaintiffs' claim under 18 U.S.C. § 1962(d), and Plaintiffs' RICO conspiracy claim is dismissed.
Having dismissed Plaintiffs' RICO claims, all that remains are Plaintiffs' state law claims. Pursuant to 28 U.S.C. § 1367(c)(3), district courts may decline to exercise supplemental jurisdiction over non-federal claims where the court "has dismissed all claims over which it has original jurisdiction." The Second Circuit has held that while section 1367(c) is permissive, rather than mandatory, "where all the federal claims have been dismissed at a relatively early stage, the district court should decline to exercise supplemental jurisdiction over pendent statelaw claims." Astra Media Grp., LLC v. Clear Channel Taxi Media, LLC, 414 F. App'x 334, 337 (2d Cir. 2011); see also Motorola Credit Corp. v. Uzan, 388 F.3d 39, 56 (2d Cir. 2004) ("if [all] federal claims are dismissed before trial . . . the state claims should be dismissed as well" (alterations and emphasis in Motorola) (internal quotation marks and citation omitted)); First Capital Asset Mgmt., 385 F.3d at 183 (finding no abuse of discretion in district court's declining to exercise supplemental jurisdiction over state law claims after dismissing RICO claims prior to trial). Plaintiffs' state law claims are therefore dismissed without prejudice to Plaintiffs' ability to renew them in a state court of competent jurisdiction.
For the foregoing reasons, the Moving Defendants' Motion is GRANTED. Plaintiffs' RICO claims are dismissed with prejudice and without leave to replead,
Plaintiffs' FAC explicitly references the SEA, FAC ¶ 43; Albunio Decl. ¶ 16, and the SEA is integral to the FAC because it is the agreement pursuant to which the reverse merger at issue was effected. As a party and signatory to the SEA, Plaintiffs had actual notice of, and relied upon, the contents of the SEA in framing the FAC. Accordingly, the Court may—and will—consider the SEA in deciding Defendants' Motion.
