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METCALF v. PAINEWEBBER INC.

May 11, 1995

E. JEAN METCALF, and on behalf of herself and all others similarly situated, Plaintiff,
v.
PAINEWEBBER INCORPORATED, Defendant.



The opinion of the court was delivered by: SEAN J. MCLAUGHLIN

 McLAUGHLIN, J.

 This is an action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq. Defendant Painewebber Incorporated ("PaineWebber") has moved to dismiss Plaintiff's complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a cause of action on which relief can be granted. Plaintiff has asked this Court for leave to file a Second Amended Complaint. For the reasons that follow, Plaintiff's motion will be denied, Defendant's motion will be granted, and the complaint will be dismissed with prejudice. *fn1"

 This case arises as a result of Plaintiff's investment in PaineWebber Equity Partners I Limited Partnership ("EP-I"), a real estate limited partnership sold by PaineWebber in 1985 and 1986. EP-I used investment proceeds to acquire interests in more than one-half dozen commercial real estate properties throughout the United States. Unfortunately, these real estate ventures experienced financial difficulties and those who purchased an interest in EP-I lost the benefit of their investments.

 Plaintiff commenced this action on May 20, 1993. In her First Amended Complaint ("FAC"), *fn2" she pleads four counts under the private right of action of 18 U.S.C. § 1964(c), claiming that Defendant violated each of the four subsections of § 1962. *fn3" Plaintiff alleges that PaineWebber engaged in a pattern of racketeering activity identified as various acts of wire fraud in violation of 18 U.S.C. § 1343, mail fraud in violation of 18 U.S.C. § 1341, and securities fraud in violation of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10(b)-5.

 More specifically, Plaintiff avers that Defendant, in its sales materials, guaranteed prospective EP-I investors an annual return of nine percent of their investment and a return of capital at some future time. FAC P 1; Pl.'s RICO Case Statement P 4. The actual rate of return allegedly decreased during 1989, and distribution payments stopped completely during 1993. FAC P 4(c). Plaintiff also claims that Defendant failed to disclose information about tax legislation pending before the U.S. Congress during 1985 and 1986. FAC P 3(a)-(d). This legislation eventually became the Tax Reform Act of 1986 and included substantial changes in the tax rules with respect to investments in real estate. Plaintiff alleges that these changes had a negative effect on the performance of EP-I. FAC P 3(c). Plaintiff further claims that material mailed to her and other EP-I limited partners and information disseminated over telephone lines prevented her discovery of the true condition of her investments. FAC PP 1(c) and 2(a)-(d).

 Defendant allegedly offered other similar investments in addition to the EP-I offering. These investments were denominated PaineWebber Equity Partners II - Limited Partnership ("EP-II"), PaineWebber Equity Partners III - Limited Partnership ("EP-III"), PaineWebber Income Properties VI - Limited Partnership, and PaineWebber Income Properties VII -Limited Partnership. FAC P 4. Plaintiff maintains that PaineWebber aided and abetted in the formation of these various real estate limited partnerships, that it was responsible for selling interests in the partnerships, and that "affiliates" of PaineWebber were responsible for managing the partnerships. FAC PP 5-6. However, she does not claim to have invested funds in any of the limited partnerships other than EP-I.

 Plaintiff also asserts the existence of an "enterprise" or "unit of enterprises." As set forth in the First Amended Complaint, this "enterprise" appears to consist of PaineWebber and/or EP-I, EP-II and EP-III and their respective constituents. *fn4" All of the various members of the enterprise are allegedly related to or affiliated with Defendant. FAC PP 10, 14 and 16(a).

 Plaintiff's allegations regarding Defendant's substantive violations of § 1962(a)-(d) are set forth in FAC PP 5 through 11. Plaintiff claims that PaineWebber violated § 1962(a) in that it received income from its pattern of racketeering activity and then used and reinvested the unlawful income in the continuation of its enterprise by offering subsequent limited partnerships, thereby continuing to engage in interstate commerce with illicitly received proceeds. FAC P 7. Plaintiff further claims that Defendant violated § 1962(b) in that it has maintained an interest in and control of the enterprise through racketeering activity -- i.e. its involvement in selling the real estate partnerships and concealing their true investment performance. FAC P 8. It is alleged that Defendant violated § 1962(c) in that it employed or associated itself with the above-referenced "enterprise" to conduct the enterprise's affairs through a pattern of racketeering. In particular, Plaintiff avers that "[Defendant] had a shared purpose of gaining funds from the investing public itself and through its various affiliates" FAC P 9(a). Finally, Plaintiff alleges that Defendant violated § 1962(d) in conspiring to commit the prior three offenses. FAC P 11.

 With respect to her own losses, Plaintiff avers that she and the other members of the investing public are victims of Defendant's racketeering activity and have been injured "in that funds turned over to PaineWebber, as a result of its fraudulent, willful, deliberate activity in direct disregard of the truth has led to PaineWebber making enormous sums of money" FAC P 17(a). Plaintiff seeks to recover damages in the amount of three times her investment pursuant to the treble damages provision of § 1964(c).

 Defendant offered the instant Motion to Dismiss on September 29, 1993. Among other things, Defendant argues that Plaintiff has failed to allege a cause of action under RICO. *fn5" With respect to 18 U.S.C. § 1962 (a) and (b), Defendant argues that Plaintiff has failed to properly allege an injury resulting from the specific racketeering activity proscribed by those sections. Defendant maintains that the § 1962(c) claim should be dismissed because Plaintiff has failed to identify an "enterprise" distinct from the "person" being sued --i.e. PaineWebber. Defendant also argues that the allegation that Defendant conspired in violation of § 1962(d) to violate RICO fails because Plaintiff has not successfully alleged a violation of any other subsection of § 1962.

 Plaintiff initially sought to stay her response to Defendant's motion to dismiss, but the Court denied her request in an Order dated February 14, 1994. In her response filed on March 16, 1994, Plaintiff briefly addressed the motion to dismiss each of her claims under § 1962 but essentially took the position that additional time for discovery was needed in order to fully address the Rule 12(b)(6) motion. Defendant filed its reply brief on April 19, 1994, arguing that Plaintiff's responsive brief failed to rehabilitate any of her claims.

 Thereafter, the Court entered orders allowing the parties more than six months to conduct discovery confined to the issue of whether Plaintiff had identified a RICO violation. *fn6" At the close of this period, Plaintiff moved for leave to file its Second Amended Complaint. *fn7" In addition, the parties have submitted supplemental briefs addressing PaineWebber's original motion to dismiss. In short, both Plaintiff's motion for leave to file a Second Amended Complaint and Defendant's motion to dismiss have now been exhaustively briefed and are ripe for decision.

 II. STANDARD OF REVIEW

 On a motion to dismiss under Rule 12(b)(6), the Court accepts as true all allegations in the complaint and draws all reasonable inferences therefrom in the light most favorable to the plaintiff. Rocks v. City of Philadelphia, 868 F.2d 644, 654 (3d Cir. 1989). Accordingly, this Court must consider "whether relief could be granted . . . 'under any set of facts that could be proved consistent with the allegations.'" Gasoline Sales, Inc. v. Aero Oil Co., 39 F.3d 70, 71 (3d Cir. 1994) (quoting National Organization for Women, Inc. v. Scheidler, 127 L. Ed. 2d 99, 114 S. Ct. 798, 803 (1994)). If no cause of action can be identified, dismissal is ordinarily proper.

 As noted above, however, Plaintiff has moved this Court for leave to file a Second Amended Complaint. Accordingly, the Court will test the First Amended Complaint against the alleged deficiencies and then, where necessary, look to the proposed Second Amended Complaint. The Court will not grant Plaintiff's motion for leave to amend if the proposed Second Amended Complaint would not cure any fatal defects that the First Amended Complaint may contain. Gasoline Sales, 39 F.3d at 73-74 (citing Foman v. Davis, 371 U.S. 178, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962)).

 III. DISCUSSION

 RICO affords a private right of action for "any person injured in his business or property by reason of a violation of [18 U.S.C. § ] 1962." 18 U.S.C. § 1964(c). The four subsections of § 1962 each recognize one type of substantive RICO violation:

 
(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of unlawful debt . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.
 
(b) It shall be unlawful for any person through a pattern of racketeering activity or collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.
 
(c) It shall be 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.
 
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.

 Plaintiff claims that PaineWebber's conduct in relation to EP-I was violative of all four of these subsections. The Court will examine each of the alleged RICO violations to determine whether Plaintiff has adequately stated a claim as to any.

 A. Plaintiff's Claim under § 1962(a)

 Defendant argues that Plaintiff's claim under § 1962(a) fails because she does not properly allege injury resulting from the use or investment of racketeering income. Upon review of the controlling case law and the pleadings of ...


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