The opinion of the court was delivered by: POLLAK
This case is before me on defendants' motions to dismiss. The complaint of plaintiffs Gary and Anita Odesser
alleges that defendants Continental Bank ("Continental") and Gary Jaffe, Esq. ("Jaffe"), acting through a pattern of racketeering, and by conspiring with, aiding and abetting Howard Vogel ("Vogel"), participated in wrongfully obtaining control over Philadelphia Video Exchange ("PVE," "the company") and ousting its founder and former president, Gary Odesser ("Odesser") from the company. The complaint also alleges a variety of pendent state claims against Jaffe and Continental, and one against a third defendant, Frankford Trust Company ("Frankford"). Frankford cross-claimed against Continental and Jaffe, incorporating the allegations of Odesser's complaint against them. Defendants Jaffe and Continental have each moved on substantially similar grounds to dismiss the complaint for failure to state a claim. Continental has also moved to dismiss Frankford's cross-claim, incorporating by reference its motion to dismiss Odesser's complaint.
The complaint presents nine counts. The first four counts allege RICO violations under 18 U.S.C. § 1962(a)-(d). Count I alleges that Jaffe and Continental aided and abetted Vogel in receiving income from a pattern of racketeering activity and investing that income to acquire an interest in and operate PVE in violation of § 1962(a). The pattern is alleged as comprised of acts of mail and wire fraud, obstruction of justice, and interstate transportation and sale of stolen goods. Count II alleges that Jaffe and Continental aided and abetted Vogel in maintaining an interest in and control of PVE through a pattern of racketeering activity in violation of § 1962(b). Count III alleges that Jaffe and Continental are directly liable for violating § 1962(c), which prohibits those associated with or employed by an enterprise from conducting the enterprise's affairs through a pattern of racketeering. Count IV alleges that Jaffe, Continental and Vogel conspired to violate § 1962(a)-(c), as prohibited by § 1962(d).
The remaining five counts are a variety of pendent state law claims, including: violation of Pennsylvania's RICO provision, 18 Pa.C.S.A. § 911(b)(1)-(4); fraudulent breach of fiduciary duty in violation of 7 Pa.C.S.A. §§ 6381, 6392; civil conspiracy; intentional infliction of emotional distress; and a ninth count against Jaffe alone for legal malpractice. Only the sixth count, the state law claim for breach of fiduciary duty, does not name Jaffe, and names defendant Frankford Trust Company alongside Continental. Continental and Jaffe are the defendants in all counts except for the sixth and ninth.
The factual allegations of Odesser's complaint against Continental, Jaffe, and Frankford are as follows: Odesser in 1981 established a wholesale business that dealt in used video film in the Philadelphia area. (Para. 9). Odesser incorporated Philadelphia Video Exchange in Pennsylvania in 1983. (Para. 10). By 1984, PVE was run by co-owners Odesser and David Schaffer, (Para. 10), had annual sales of $9 million, 17 employees, and dealt with over 1,700 video retailers as customers. (Para. 11). During the second half of 1984, Vogel allegedly infiltrated and took control of PVE. (Paras. 12-13). He bought a one-third interest in PVE for $100,000 cash and a $200,000 letter of credit, (Para. 13), and soon increased his interest to one-half in February of 1985 by arranging for PVE to borrow $225,000 from defendant Continental Bank and to use those funds to repurchase Schaffer's interest. (Para. 14).
Vogel next worked with the help of Continental to remove Odesser from the corporation. Vogel created a cash flow shortage in PVE, arranged for the company to borrow needed cash from Vogel, and induced Odesser to pledge his shares as security for Vogel's loan. (Paras. 15-16). He then prevented PVE from repaying the loan, so that Odesser would have to surrender his shares. (Para. 17). The loan agreement, signed on August 31, 1985, was drafted on August 15, 1985, by defendant Gary Jaffe, Esq., who was at that time lawyer for Odesser, Vogel, and PVE, but is alleged to have acted only in the interests of Vogel. (Para. 16). After the loan was secured, Vogel continued to create a bank overdraft on PVE's account with Continental Bank that reached approximately $80,000 by the end of October, 1985. (Para. 18). When Odesser made an attempt to repay $77,000 of the loan before it became due on October 31, 1985, (Para. 17), Vogel refused to accept payment, instead directing Odesser to deposit the payment in PVE's overdrafted Continental account. (Para. 18). On October 31, 1985, Vogel demanded delivery of Odesser's shares. (Para. 19). Odesser, by an attorney, directed Jaffe not to deliver the shares, and consequently Jaffe still holds those shares in escrow on Odesser's behalf. (Para. 19).
Despite Odesser's continuing interest in PVE, and his position as the Company's president, (Para. 19), Continental Bank officer Gary Warnalis, together with Vogel, represented to PVE employees that Odesser was no longer an officer or director of PVE. (Para. 21). Warnalis told Odesser and PVE employees that Odesser would no longer be able to draw checks on PVE's bank account at Continental. (Para. 21). Vogel locked Odesser out of PVE's offices and warehouses. (Para. 20). Vogel and Warnalis on November 1, 1985 "caused a false and fraudulent 'Board of Directors' resolution to be created, which stated that Vogel was President and his wife was secretary of PVE and that only Vogel, as 'President,' was empowered to draw funds from PVE's authorized bank account at Continental." (Para. 22). Odesser never received notice of any shareholders' meeting, shareholders' election of directors, or directors' election of new officers, all of which he alleges would be required by PVE by-laws and Pennsylvania state law for Vogel's and Warnalis' resolution to be valid. (Para. 23).
In late 1985 and early 1986, "Continental allowed Vogel to draw checks totalling at least $1,200,000 on PVE's account at Continental. Continental claimed that the fraudulent and void November 1, 1985, resolution was valid and controlling. Continental honored the November 1, 1985, fraudulent and void resolution despite its knowledge that Vogel had not foreclosed Odesser's stock and therefore was not the sole owner of PVE." (Para. 25). Odesser alleges that Continental demonstrated its knowledge that the November, 1985, resolution was fraudulent when, by letter dated March 4, 1986, it acknowledged the validity of a February, 1985, Board of Directors' resolution authorizing both Odesser and Vogel to draw checks on PVE accounts. (Para. 28).
Defendants Continental and Jaffe nonetheless continued to cooperate with Vogel to deprive Odesser of control over PVE and access to funds, to allow Vogel control and access, to frustrate Odesser's attempts to abolish his fraudulently created loan obligation to Vogel, and to press for payment by Odesser to Vogel and other creditors of PVE. Specifically, the complaint alleges that in October, 1985, Vogel directed Jaffe to have East Texas Distributing Company ("East Texas"), a longstanding creditor of PVE, shift the $50,000 lien it held on Odesser's personal residence as security for a PVE debt to a new personal home Odesser purchased in June, 1985. (Para. 32). Jaffe arranged to add a confession of judgment clause to Odesser's guarantee, and to eliminate such a clause with respect to PVE. Jaffe misrepresented to Odesser the terms of the agreement between PVE and East Texas. (Para. 33). When, in October, 1985, Odesser appeared at the closing on the sale of his old residence, "Jaffe advised Odesser that, unless he agreed to grant East Texas a $50,000 lien on his old residence; Odesser would be unable to sell his old residence; and Odesser would be in breach of the contract to the buyer of his old residence." (Para. 33).
The complaint further alleges that "from March 4 to 14, 1986, Continental and Vogel conspired to have the PVE account at Continental overdrawn at all times so that Odesser could not withdraw any funds from that account." (Para. 29). Despite notice from Odesser's attorney that PVE funds could not be transferred without authorization by the Board of Directors, "on or about March 14, 1986, all of the corporate funds of PVE were transferred at Vogel's direction from Continental to Frankford." (Para. 30). "To accomplish this transfer, Continental agreed to indemnify and hold Frankford harmless against all loss." (Para. 30).
Continental also allegedly participated in ensuring that Odesser had no resources, even independent of PVE's account, with which to contest Vogel's scheme to control PVE. "On or about May 7, 1986, Continental entered a confession of judgment in the amount of $761,917.63 against plaintiffs on an Unlimited Surety Agreement executed by plaintiffs on September 26, 1984, pursuant to which plaintiffs guaranteed certain indebtedness of PVE to Continental." (Para. 34). Odesser alleges that Continental wrongfully confessed judgment, because Odesser's obligation to repay on PVE's behalf extended only "until one month after written notice of termination was given to Continental by Odesser." (Para. 35). Only $250,000 of the $ 475,000 obligation underlying Continental's confession of judgment was incurred prior to November 1, 1985, (Para. 35) -- the date of the fraudulent Board of Directors' resolution pursuant to which Continental had stopped recognizing Odesser's role in PVE -- and "Continental had already collected more than $250,000 from the proceeds of sales of assets of PVE." (Para. 35). The complaint thus suggests that when Continental confessed judgment against Odesser to collect on PVE's indebtedness, the only portion of the debt that Odesser might plausibly be held responsible for had already effectively been repaid.
Defendants Continental Bank and Gary Jaffe now move to dismiss the RICO counts for failure to state a claim. The defendants also seek dismissal of the state claims because they are pendent from the challenged federal claims. Jaffe's motion opposes the state claims on their merits in addition to asserting that they have no jurisdictional basis.
The Requirement of a Pattern of Racketeering Activity
The first basis of each defendant's contention that plaintiffs have not sufficiently pleaded a RICO claim is that plaintiffs have not met the requirement of showing a "pattern" of racketeering activity. As defendants point out, each subsection of 18 U.S.C. § 1962 requires allegations of predicate acts of racketeering which comprise a pattern of racketeering activity. Defendants contend that plaintiffs must plead predicate acts that comprise more than a single scheme of racketeering activity in order to fulfill the statutory pattern requirement. As defendants read Odesser's complaint, it does not allege multiple schemes, but only multiple acts in furtherance of a single scheme to remove Odesser from his position of control in PVE.
In my opinion disposing of Howard Vogel's motion to dismiss plaintiff's complaint against him, I considered the scope of the pattern requirement in view of Sedima v. Imrex, 473 U.S. 479, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985), and found plaintiff's allegations of predicate acts No. 85-6931, slip op. at 20 - 22 (E.D.Pa. Nov. 5, 1986). The pattern allegations here are substantially the same as those in the Vogel case, and I find them still sufficient on the grounds there stated. The correctness of that analysis is confirmed by ...