Case Name: Aaron J. FURMAN, Martin J. Joel, Jr., Alvin Katz, Francis P. Maglio, Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs, Martin J. Joel, Jr., Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs-Appellants, v. John CIRRITO, Harold S. Coleman, John A. Miller, Francis G. Rea, Peter M. Toczek and A.J. Yorke, Defendants-Appellees
Court: United States Court of Appeals for the Second Circuit
Jurisdiction: United States
Decision Date: 1987-09-01
Citations: 828 F.2d 898
Docket Number: No. 18, Docket 86-7283
Parties: Aaron J. FURMAN, Martin J. Joel, Jr., Alvin Katz, Francis P. Maglio, Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs, Martin J. Joel, Jr., Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs-Appellants, v. John CIRRITO, Harold S. Coleman, John A. Miller, Francis G. Rea, Peter M. Toczek and A.J. Yorke, Defendants-Appellees.
Judges: Before VAN GRAAFEILAND, NEWMAN and PRATT, Circuit Judges.
Reporter: Federal Reporter 2d Series
Volume: 828
Pages: 898–910

Head Matter:
Aaron J. FURMAN, Martin J. Joel, Jr., Alvin Katz, Francis P. Maglio, Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs, Martin J. Joel, Jr., Harvey Sheid, Everard M.C. Stamm and Robert C. Stamm, Plaintiffs-Appellants, v. John CIRRITO, Harold S. Coleman, John A. Miller, Francis G. Rea, Peter M. Toczek and A.J. Yorke, Defendants-Appellees.
No. 18, Docket 86-7283.
United States Court of Appeals, Second Circuit.
Argued Oct. 20, 1986.
Decided Sept. 1, 1987.
Seymour Shainswit, New York City (Cooper Cohen Singer Ecker & Shainswit and Steven E. Levitsky, New York City, of counsel), for plaintiffs-appellants.
Max Gitter, New York City (Paul, Weiss, Rifkind, Wharton & Garrison and Dorothy E. Roberts, New York City, of counsel), for defendants-appellees.
Before VAN GRAAFEILAND, NEWMAN and PRATT, Circuit Judges.

Opinion:
VAN GRAAFEILAND, Circuit Judge:
This is an appeal from an order of the United States District Court for the Southern District of New York (Cooper, J.) granting appellees' motion under Fed.R.Civ.P. 12(b)(1) and (6) to dismiss appellants' complaint, and from the judgment entered pursuant thereto. For the reasons that follow, we affirm.
Appellants' complaint states three causes of action, two that are state law claims of partnership fraud and breach of fiduciary duty and a third grounded on the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961-68. It twice has been dismissed by the district court. The first dismissal was based on appellants' failure to allege a separate, distinct racketeering enterprise injury. 578 F.Supp. 1535 (S.D.N.Y.1984). This Court's affirmance of that decision, 741 F.2d 524, was vacated by the Supreme Court, 473 U.S. 922, 105 S.Ct. 3550, 87 L.Ed.2d 672 (1985), on the basis of its holdings in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), and American Nat'l Bank & Trust Co. v. Haroco, Inc., 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985) (per curiam). Following remand to the district court, appellees moved to dismiss for failure to allege a "pattern of racketeering activity", 18 U.S.C. § 1962(c), or, in the alternative, to compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 1-14. Relying on Sedima, .supra, 473 U.S. at 496 n. 14, 105 S.Ct. at 3285 n. 14; id. at 527-28, 105 S.Ct. at 3289-90 (Powell, J., dissenting), and cases that followed, the district court held that racketeering activity must be continuous and related in order to constitute a pattern and must be ongoing or occur in more than one criminal episode. Although the district court felt that appellees' alleged acts were related, it concluded that the complaint failed to allege any continuity of activity, and dismissed the RICO cause of action. The district court held that it then lacked subject matter jurisdiction over appellants' state law claims and refused to address appellees' motion to arbitrate.
Because the issue on the first appeal was whether a RICO complaint must allege a racketeering injury separate and apart from that which resulted from "the predicate acts of using mail and wire facilities in violation of 18 U.S.C. § 1341 and 1343" (741 F.2d at 526), precise factual allegations were treated in summary fashion only and played no determinative role in our decision. Disposition of the present appeal requires that we take cognizance of certain conceded and undisputed facts and recent substantial changes in the law of mail fraud. Although appellees' motion was made under Rule 12(b)(1) and (6), the record before us consists of more than just the complaint. Specifically, it includes the partnership agreement, which spells out the rights and obligations of the parties, the contract for the sale of the partnership assets, whose terms appellants claim were unfair, and affidavits of counsel for both sides. The district court might have treated the motion as one for summary judgment. See In re G. & A. Books, Inc., 770 F.2d 288, 295 (2d Cir.1985), cert. denied, — U.S. -, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986); Grand Union Co. v. Cord Meyer Development Corp., 735 F.2d 714, 716—17 (2d Cir.1984). Despite its failure to do so, we nonetheless may refer to the partnership agreement and contract of sale, which are integral parts of appellants' claim and of the record before us. See Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 113 (2d Cir.1982); 5 Wright & Miller, Federal Practice and Procedure § 1327, 1357, at 593. Examining the complete picture thus presented, we are unable to discover a sufficient allegation of a "pattern of racketeering activity" conducted in the affairs of an "enterprise", United States v. Ianniello, 808 F.2d 184, 190 (2d Cir.1986), cert. denied, — U.S. -, 107 S.Ct. 3230, 976 Ed.2d 736 (1987); indeed, we have difficulty in discovering a sufficient allegation of racketeering activity at all.
In a complaint based almost entirely on information and belief, appellants accuse appellees of a RICO violation based on the predicate crime of mail fraud. We have, we believe, made it clear that we look with a jaundiced eye upon allegations of fraud based upon information and belief. Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir.1986); Decker v. Massey-Ferguson, Ltd., supra, 681 F.2d at 114. Nevertheless, we have carefully reviewed the complaint, in light of the undisputed documents, in an attempt to understand how appellants are attempting to meet their obligation to allege statutorily required charges of criminal wrongdoing. See United States v. Angelilli, 660 F.2d 23, 34-35 (2d Cir.1981), cert. denied, 455 U.S. 910, 945, 102 S.Ct. 1258, 1442, 71 L.Ed.2d 449, 657 (1982). Moreover, unlike the district court in the two hearings before it and this Court on the prior appeal, we have determined the sufficiency of appellants' allegations in accordance with the Supreme Court's "crabbed" construction of the mail fraud statute in McNally v. United States, — U.S. -, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987) (Quote is from Justice Stevens' dissenting opinion at 107 S.Ct. at 2889).
Appellants' RICO allegations, stated succinctly, are as follows:
1. Prior to August 7, 1981, appellants and appellees were general partners in a limited brokerage partnership known as Bruns, Nordeman, Rea & Co. (Bruns).
2. Appellees Coleman and Rea were Bruns Managing Directors, and, by the terms of the written partnership agreement, they "were empowered to sell all or substantially all the assets of Bruns 'on behalf of all of the partners' on such terms and conditions as they, in their sole discretion, approved."
3. During May and June of 1981, Rea and several members of the Executive Committee negotiated with Bache, Halsey, Stuart, Shields, Inc. (Bache) for the sale to Bache of all or substantially all of Bruns' assets.
4. A preliminary agreement on the terms of the purchase contract was reached on June 30, 1981, and a letter of intent was signed on July 2, 1981.
5. On July 6, 1981, appellants were informed of the deal, which was described as a fait accompli, whose terms could not be altered.
6. At a firm meeting on July 23, 1981, appellants learned for the first time that their signatures would be required on the purchase agreement that was to be executed.
7. On July 27,1981, all of the appellants executed the agreement.
8. Appellants were defrauded because they were not told "in a timely manner" that their signatures would be required, that as a result some of the partners were secretly favored over others and appellees did not discharge their "duty of finding the potential purchaser willing to make the largest offer for Bruns' assets."
It is readily apparent that the crucial element in appellants' claim of mail fraud is appellees' alleged failure to promptly inform them that they would have to sign an eventual agreement with Bache. We think that, as an allegation of criminal wrongdoing, this claim borders on the specious.
It is undisputed that, although appellants and appellees were general partners in Bruns, their interests in the firm were far from identical. The six appellees accounted for 75 percent of the general partners' equity, and the remaining 25 percent was allocated among seven partners, four of whom are now appellants. In view of appellees' substantially greater financial interests, it is not surprising that, between them, they comprised the firms' Managing Directors and Executive Committee, which together had the primary responsibility for Bruns' operations.
It is likewise not surprising that, under the terms of the partnership agreement, the Managing Directors had "full power and authority on behalf of all of the partners, at any time, to sell or otherwise transfer all or substantially all of the assets and business of the partnership, on such terms and conditions as the Managing Directors, in their sole discretion, [might] approve." The agreement also provided that it would terminate automatically upon the sale of all or substantially all of the partnership assets as an entirety or the merger or consolidation of the partnership with or into another partnership or corporation. Upon such termination, the Executive Committee was to liquidate the partnership.
The rights and obligations of partners, as between themselves, are fixed by the terms of the partnership agreement. Levy v. Leavitt, 257 N.Y. 461, 466, 178 N.E. 758 (1931). "If complete, as between the partners, the agreement so made controls." Lanier v. Bowdoin, 282 N.Y. 32, 38, 24 N.E.2d 732 (1939). Even terms which permit self-dealing by a partner will be enforced. Riviera Congress Assocs. v. Yassky, 25 A.D.2d 291, 295, 268 N.Y.S.2d 854, aff'd, 18 N.Y.2d 540, 277 N.Y.S.2d 386, 223 N.E.2d 876 (1966); Raymond v. Brimberg, 99 A.D.2d 988, 473 N.Y.S.2d 437 (1984) (mem); Crane and Bromberg on Partnership, sec. 5, at 43 (1968). Since appellees were acting pursuant to their contractual authority in agreeing to sell the partnership assets, we find no merit whatever in appellants' contention that such sale constituted criminal wrongdoing. See Fershtman v. Schectman, 450 F.2d 1357, 1360 (2d Cir.1971), cert. denied, 405 U.S. 1066, 92 S.Ct. 1500, 31 L.Ed.2d 796 (1972). We find no support for this contention in appellants' allegation upon information and belief that, after appellees had agreed to sell to Bache, they were made aware that a principal of another brokerage firm "was prepared to negotiate the purchase of Bruns at a price that would match or exceed that offered by Bache", and that no appellee made any effort to ascertain whether the "offer" of that firm was superior to that of Bache. Of course, "preparedness] to negotiate" is not an "offer" to purchase. In view of the absolute and sole discretion vested in the Managing Directors and the preexisting sales agreement with Bache, this is a frivolous allegation of wrongdoing.
Equally frivolous is appellants' allegation that appellees were guilty of criminal conduct because they failed to promptly inform appellants that they would be re quired to sign the written contract between Bruns and Bache. Although Bruns' Managing Directors had the undoubted authority to agree to the sale of the partnership assets, they had no power or authority to deliver their partners to Bache along with the assets. "A contract of employment cannot arise against the will or without the consent of an alleged party thereto." 56 C.J.S. Master and Servant § 5 at 63; Morgan v. Wheland Co., 66 F.Supp. 439, 440 (E.D.Tenn.1946). Each Bruns partner and employee had the right to negotiate on his or her own behalf whether, and on what terms, he or she was willing to become associated with Bache.
We note that the partnership agreement required the Managing Directors to give the other partners notice of a proposed sale "not less than thirty (30) days prior to the effective date of the transaction." This was not a meaningless provision. See Andino v. Lincoln First Bank, 105 A.D.2d 1091, 1093, 481 N.Y.S.2d 928 (1984) (mem.), aff'd, 65 N.Y.2d 631, 491 N.Y.S.2d 158, 480 N.E.2d 747 (1985). Its obvious purpose was to give the other partners an opportunity to negotiate with Bache and to decide where their best interests lay. The contract between Bruns and Bache contains specific employment or compensation provisions, not only for the six appellees but also for four of the plaintiffs, two of whom are appellants. These provisions for the four plaintiffs would be meaningless if plaintiffs did not personally assent thereto, and, as experienced businessmen, plaintiffs surely knew that. Indeed, the contract provisions for salaries was expressly conditioned upon the recipients' agreement to become employees of Bache.
We note also that several of the partners, including plaintiffs Alvin Katz and Robert C. Stamm, were members of stock exchanges, and under the terms of the partnership agreement they had to determine what disposition was to be made of those memberships. Although the Bache contract provided for transfer of exchange memberships, this obviously could not be accomplished without the concurrence of individual members.
Even if we accept appellants' implicit contention that they lacked sufficient sophistication to know that they could not be bonded over to Bache without their consent, they make no allegation of anything that prevented them on July 23 from refusing to sign the Bache contract unless they received more favorable personal treatment. Indeed, appellants were in as good, if not better, position to demand more favorable treatment on July 23 than they were a month earlier. At this stage in the proceedings, there certainly was more pressure on the parties to complete the transaction than there was at the outset of negotiations. Moreover, the written contract specifically provided that it could be amended or supplemented if the parties decided that such amendment was "necessary, desirable or expedient to facilitate the consummation of the transactions contemplated hereby." Appellants' contention that their signatures were coerced by criminal conduct on the part of appellees and that they were "forced to accept employment" on unfavorable terms is too conclusory to support a charge of criminal wrongdoing.
Assuming for the argument that appellants have spelled out some form of criminal fraud on appellees' part, they have not alleged a pattern of racketeering activity conducted in the affairs of an "enterprise". In Sedima, supra, 473 U.S. 479, 496 n. 14, 105 S.Ct. 3275, 3285 n. 14, the Court held that in order for there to be a pattern of racketeering activity, there must be continuing activity or continuity in the conduct at issue. There, the Court was concerned whether there was sufficient continuity and relatedness in the allegedly wrongful acts that they could be said to constitute a pattern. In United States v. Weisman, 624 F.2d 1118 (2d Cir.), cert. denied, 449 U.S. 871, 101 S.Ct. 209, 66 L.Ed.2d 91 (1980), and again in United States v. Ianniello, supra, 808 F.2d 184, this Court faced the question whether RICO also requires continuity and relatedness in the alleged "enterprise". We answered this question in the affirmative:
As discussed above, we believe that the inquiry as to relatedness and continuity is best addressed in the context of the concept of "enterprise" expressed in section 1962(c), and to a lesser extent, the ten year requirement of section 1961(5). An enterprise is "a group' of persons associated together for a common purpose of engaging in a course of conduct" and "is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981). This circuit requires that, under section 1962(c), the enterprise be a continuing operation and that the acts be related to the common purpose.
Ianniello, supra, 808 F.2d at 191; see also Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 51-52 (2d Cir.1987).
Appellants contend that the Bruns partnership was the "enterprise" required by RICO, but assert in the same breath that the partnership was dissolved by the sale to Bache on August 7, 1981. Moreover, the very acts of which appellants complain were part of the dissolution process. Although, at first blush, the mere existence of a partnership entity would seem to satisfy the requirement of "enterprise", see 28 U.S.C. § 1961(4), if an inquiry as to the necessary elements of continuity and relatedness is directed at the enterprise, then just being a partnership is not enough. The statute says that "enterprise" includes partnerships, corporations, etc.; it does not say that all these entities always must be considered to be "enterprises". The existence of an enterprise "is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." United States v. Turkette, supra, 452 U.S. at 583, 101 S.Ct. at 2528 (emphasis supplied). According to appellants' complaint, at the time the allegedly wrongful acts occurred, the Bruns partners were not functioning as a continuing unit in an ongoing organization. Instead, the Bruns Managing Directors were said to be acting solely on their own to prevent the alleged enterprise from being an ongoing, continuing unit. While appellees' conduct need not have been in furtherance of the partnership affairs in order to bring their acts within the ban of RICO, United States v. LeRoy, 687 F.2d 610, 616-17 (2d Cir.1982), cert. denied, 459 U.S. 1174, 103 S.Ct. 823, 74 L.Ed.2d 1019 (1983), since the effect of their acts was to remove Bruns from the very definition of enterprise, the requirement of continuity was not satisfied. We need not determine whether any basis other than RICO exists on which liability might be properly alleged. We simply conclude that a RICO violation has not been adequately pleaded.
The instant case is a paradigmatic example of the unfairness that results when RICO, a statute intended to be an "assault upon organized crime and its economic roots", Russello v. United States, 464 U.S. 16, 26, 104 S.Ct. 296, 302, 78 L.Ed.2d 17 (1983), is used in an attempt to make a "federal case" of a simple falling out between partners. Giving appellants the benefit of every doubt, we conclude they have not succeeded in their attempt. For all of the foregoing reasons, the judgment of the district court is affirmed.