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ZIMMER v. GRUNTAL & CO.

December 12, 1989

JAMES D. ZIMMER and JANIS L. ZIMMER; LAWRENCE R. LENARZ and MARYE E. LENARZ; LEONIDES BAVAS and MARIA BAVAS; and DAVID M. WEBER and CLARA M. WEBER, Plaintiffs
v.
GRUNTAL & CO., INCORPORATED and REALQUEST CORPORATION OF WESTLAND, INC., Defendants



The opinion of the court was delivered by: SMITH

 D. BROOKS SMITH, UNITED STATES DISTRICT JUDGE

 Plaintiffs have filed a complaint alleging that defendants Gruntal & Co., Incorporated ("Gruntal") and Realquest Corporation of Westland, Inc. ("Realquest") violated the Racketeer Influenced and Corrupt Organizations statute, 18 U.S.C. §§ 1961 et seq. ("RICO"), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Plaintiffs also bring pendent state claims for common law fraud, breach of fiduciary duty and breach of the rules of the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD"). Plaintiffs' claims in this action arise from defendants' involvement in an allegedly fraudulent selling scheme designed to induce plaintiffs to invest in a real estate concern known as Woodcrest Associates Limited Partnership. Complaint, Preliminary Statement.

 Defendants move to dismiss plaintiffs' RICO, Securities Act and common law fraud claims on grounds that they are insufficiently pleaded. Defendants also assert that the securities and fraud claims are time-barred by the applicable limitation periods. Finally, defendants contend that no cause of action exists for violating the NYSE and NASD Rules. *fn1" In evaluating a motion to dismiss, we are obligated to construe the allegations of the complaint liberally and to provide the nonmoving party with the benefit of the doubt; therefore, if plaintiffs may prove a set of facts which would entitle them to relief, the complaint may not be dismissed. Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988). *fn2"

 A. Count I: Plaintiffs' Section 1962(c) RICO Claims

 Defendants attack plaintiffs' Count I for failing to identify any defendant as a "person" within the meaning of Section 1962(c) of RICO. *fn3" Plaintiffs correctly counter that they have identified defendant Gruntal as a "controlling person" in paragraph 6 of the Complaint, which paragraph is incorporated into Count I at paragraph 31. Even though plaintiffs' designation of Gruntal as a "person" appears to be limited by the phrase "with respect to all brokers selling units to any of the [plaintiffs]," we will accept for purposes of this motion plaintiffs' representation that they intended to allege that Gruntal was the person perpetrating the allegedly illegal activity which is the subject of Count I. A corporation is a legal entity which satisfies the definition of "person" for purposes of a RICO Section 1962(c) claim. Haroco Inc. v. American National Bank & Trust Co., 747 F.2d 384, 402 (7th Cir 1984), aff'd, 473 U.S. 606, 105 S. Ct. 3291, 87 L. Ed. 2d 437 (1985).

 Because there is no corresponding allegation as to Realquest, however, Count I is dismissed as to defendant Realquest. Leonard v. Shearson Lehman/American Express, Inc., 687 F. Supp. 177, 182 (E.D.Pa. 1988) (plaintiff can proceed under RICO only against individual defendants alleged to be persons).

 While Count I passes muster for having alleged that a person, i.e., Gruntal, perpetrated acts violative of RICO, defendants contend that Count I is nevertheless flawed because it also alleges that defendant Gruntal is both a person and an "enterprise[] within the meaning of 18 U.S.C. § 1961. . . ." Complaint, para. 32.

 In Hirsch v. Enright Refining Co., 751 F.2d 628 (3d Cir. 1984) ("Hirsch"), the Third Circuit Court of Appeals held that a single defendant cannot be both the perpetrator and the affected enterprise in a claim brought under Section 1962(c). See also, Paradise Hotel Corp. v. Bank of Nova Scotia, 842 F.2d 47, 53 (3d Cir. 1988) (single entity cannot be both defendant and enterprise for Section 1962(c) purposes). Subsequently, our Court of Appeals further elaborated on its holding in Hirsch as well as the standard for stating a claim under Section 1962(c):

 
We explained in [ Hirsch v.] Enright that § 1962(c) was drafted in such a way that Congress must have intended the "person" and the "enterprise" to be distinct entities under that provision. . . . [Section] 1962(c) was intended to govern only those instances in which an "innocent" or "passive" corporation is victimized by the RICO "persons" and either drained of its own money or used as a passive tool to extract money from third persons.

 Petrotech Inc. v. Western Co. of N.A., 824 F.2d 1349, 1359 (3d Cir. 1987).

 We read Hirsch and its progeny as standing for the proposition that a plaintiff has not adequately alleged a claim under Section 1962(c) where only one entity is identified as serving in both the perpetrator and enterprise roles. Thus, plaintiff's allegations in Count I that Gruntal was both the perpetrator and the enterprise in the questioned scheme clearly are insufficient to allege a claim under the Court's reasoning in the Hirsch line of cases. However, these cases involved a complaint wherein plaintiffs alleged a scheme naming only one defendant who allegedly served as both the enterprise as well as the perpetrator. Here, plaintiffs also name Realquest as an enterprise. *fn4" We do not hold, as defendants urge, that to identify one entity as serving both functions along with other entities means plaintiffs are automatically out of court. Gruntal and Realquest are distinct legal entities; therefore, it is possible that Gruntal was a perpetrator and Realquest was the enterprise in the scheme.

 We are also cognizant of the United States Supreme Court's holding in H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 57 U.S.L.W. 4951, 109 S. Ct. 2893, 106 L. Ed. 2d 195 (1989), that a plaintiff must show that alleged "racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." 57 U.S.L.W. at 4953 (emphasis in the original). In Northwestern Bell, plaintiff alleged a course of conduct by multiple defendants of bribing five members of the Minnesota Public Utilities Commission over a 6 year period. 57 U.S.L.W. at 4956. The Supreme Court held that a showing of frequent predicate acts over a six year period or, ...


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