A RICO Claim in an Ordinary Business Dispute? Not So Fast, Says the Commercial Division
June 07, 2022
Courts continue to refer to federal Racketeering Influenced and Corrupt Organizations Act (“RICO”) claims as “potent weapons” that are equivalent to a “thermonuclear device” in cases involving criminal racketeering activity. So why are we seeing RICO claims in ordinary business litigation disputes, including in the Commercial Division, that bear little to no resemblance to criminal racketeering activity? Perhaps because civil litigants are using RICO claims and the associated remedy of treble damages and attorneys’ fees awards to instill fear of public embarrassment and reputational damage in their adversary and to force defendants to settle or at least to get them to the bargaining table.
RICO was enacted in 1970 to combat organized crime. But RICO has a civil component as well that provides plaintiffs with a private right of action to sue for injuries to their business or property. To establish a civil RICO claim, a plaintiff must show “(1) a violation of the RICO statute, 18 USC § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962” (Daskal v Tyrnauer,, 961 NYS2d 357 [Sup Ct, Kings County 2012], aff’d, 123 AD3d 652, 998 NYS2d 412 [2d Dept 2014]).
Among other activities prohibited by RICO, Section 1962(c) prohibits a person from conducting the affairs of an enterprise through a pattern of racketeering. To state a claim for RICO under § 1962(c), a plaintiff must establish that he was injured by the defendant’s “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity” (Invacare Supply Group, Inc. v Star Promotions, Inc., 27 Misc 3d 1202[A] [Sup Ct, Kings County 2010]; 18 USCA § 1962).
In Chana Vashovsky, individually and derivatively on behalf of Hudson Valley NY Holdings LLC, v Yosef Zablocki and National Jewish Convention Center, a matter pending in the Kings County Commercial Division, plaintiff formed an entity, Hudson Valley NY Holdings LLC (“HVNY”), which purchased the Hudson Valley Resort. Plaintiff entered into an agreement with defendant Yosef Zablocki, which gave him a 50% interest in HVNY and caused him to become the managing member in exchange for an investment of $500,000. As with any ordinary business dispute, disagreements arose between Vashovsky and Zablocki with respect to the manner in which the business was being run. .
Plaintiff initially commenced this lawsuit seeking claims for (i) violation of New York Business Corporation Law § 720(a)(1)(b); (ii) usurpation of corporate opportunities; (iii) conversion; (iv) accounting; (v) breach of fiduciary duty; (v) breach of contract; (vi) indemnification; (vii) unjust enrichment; (viii) fraudulent inducement; (ix) negligent misrepresentation; (x) misappropriation of corporate funds; (ix) fraudulent transfer of assets; and (xiii) dissolution.
In January 2022, approximately ten months after plaintiff commenced this lawsuit, plaintiff filed a motion seeking leave to amend the complaint to include additional causes of action, including a RICO claim. Kings County Commercial Division Justice Leon Ruchelsman denied plaintiff’s motion seeking to amend the complaint to add a RICO claim.
Specifically, Justice Ruchelsman denied plaintiff’s motion because plaintiff failed to demonstrate that defendants engaged in an enterprise – an essential element of a RICO claim. A RICO enterprise is “any individual, partnership, corporation, association or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” To state a valid RICO claim, a plaintiff must plead the existence of an enterprise that is “distinct from the alleged pattern of racketeering activity” (Daskal, 37 Misc 3d 1214[A]). Put differently, “if the sole purpose of the alleged enterprise is to perpetrate the alleged fraud, there can be no enterprise for RICO purposes” (Goldfine v Sichenzia, 118 F Supp 2d 392, 401 [SDNY 2000]).
In this case, the court determined that the complaint did not allege “the enterprise served a purpose other than to engage in the alleged fraud.” In the proposed amended complaint, plaintiff asserted that the RICO defendants “acquired and maintained, directly and indirectly, an interest in and control of,” HVNY, “which enterprise was engaged in, and the activities of which affect, interstate commerce.” The allegations in the proposed amended complaint focused on the fact that defendants were purportedly diverting business opportunities and revenue from HVNY. The court found that the entire enterprise alleged in the proposed amended complaint existed solely to defraud the plaintiffs. Accordingly, Justice Ruchelsman held that plaintiff failed to show the existence of an enterprise and, thus, denied plaintiff’s motion to add a RICO claim.
Interestingly, Justice Ruchelsman denied a motion for leave to amend a complaint to add a RICO claim in a case in which my firm represented defendant CoolFrames, LLC. In that case, the court similarly held that where the sole alleged purpose of the purported enterprise was to perpetuate a fraud, plaintiff failed to “demonstrate the existence of an enterprise.”
We are seeing more and more litigants attempt to include civil RICO claims in ordinary business disputes. Be mindful of the fact that if a party successfully establishes a RICO claim, they will be entitled to both treble damages and attorney fees. Luckily courts do not favor RICO claims in civil matters in large part because the elements of a civil RICO claims are hard to establish, especially in business disputes.