New York Commercial and Construction Lawyer Blog
Disputes between owners of construction projects and contractors occasionally include allegations of fraud and intentional wrongdoing. In these instances, it is sometimes tempting to include a claim for civil liability under the Federal Racketeer Influenced and Corrupt Organizations Act (“RICO”). Successful prosecution of a civil RICO violation includes the recovery of treble damages and attorneys’ fees, among other things. However, successful RICO claims in the civil context are relatively rare. The courts have interpreted the RICO statute to make it exceedingly difficult for a construction law dispute to turn into a recoverable RICO violation. The case of Grace International Assembly of God v. Festa, (17-CV-7090)(E.D.N.Y. April 1, 2019) highlights the difficulties in bringing a civil RICO case.
In Grace, the Plaintiff retained defendant Falcon General Construction Services Inc. (“Falcon”) to act as its general contractor for a project involving Grace’s religious sanctuary. Defendant Festa, the president and sole shareholder of Falcon, met with representatives of Grace and allegedly made numerous fraudulent misrepresentations which Grace divided into two different categories. One set of misrepresentations related to the need for advance payment of certain monies, the use of those monies on the project, and the progress of the construction on the project (“The Project Invoices Fraud Scheme”). According to Grace, it relied on the misrepresentations of defendants when it made payments to them. Furthermore, according to Grace, defendants improperly failed to make payments to subcontractors who had fully performed their work while representing to Grace that those payments had been made (the “Subcontractor Nonpayment Fraud Scheme”).
After Grace terminated defendant Falcon from the project, it commenced a legal action in the federal district court for the Eastern District of New York, alleging, in part, the two related schemes referenced above. Plaintiff also relied on the same basic set of facts to allege various state law contract and fraud-based claims.
In order to state a claim under RICO, a plaintiff must meet various pleading and factual thresholds. A plaintiff must sufficiently allege “(1) that the defendant (2)through the commission of two or more acts (3) constituting a ‘pattern’ (4) of ‘racketeering activity’ (5) directly or indirectly… participates in (6) an ‘enterprise’ (7) the activities of which affect interstate or foreign commerce.” Grace citing Moss v. Morgan Stanley, Inc, 719 F.2d 5, 17 (2d Cir. 1983). Racketeering “’includes a host of so-called predicate acts,’ Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 647 (2008), including ‘any act which is indictable under… section 1343 (relating to wire fraud).’ 18 U.S.C. §1961 (a). A ‘pattern’ of racketeering activity requires a showing of at least two predicate acts of racketeering within ten years of one another 18 U.S.C. § 1961(5).” (Grace, citations omitted). Where the predicate acts sound in fraud, the complaint must also satisfy the provision in Federal Rule of Civil Procedure 9(b) that “in all averments of fraud or mistake, the circumstances constituting fraud or mistake [must] be stated with particularity.” FRCP 9(b). “[O]ne must also allege and prove the existence of two distinct entities: (1) a ‘person’; and (2) an ‘enterprise’ that is not simply the same ‘person’ referred to by a different name.” Grace, citing Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001).
Plaintiff’s Complaint in Grace was sufficient in order to meet the pleading requirements regarding an “enterprise.” Plaintiff also sufficiently pleaded that certain predicate acts were related enough to meet that portion of the “pattern of racketeering” test. However, the Complaint did not allege sufficient specific facts to establish the continuity under either of the two tests courts have utilized: the open ended pattern standard (“past criminal conduct coupled with the threat of future criminal conduct”) or the closed-ended pattern (“past criminal conduct for a substantial period of time.”) Grace, citing First Capital Management, Inc. v. Satinwood, Inc., 385 F. 3d 159, 180 (2d Cir. 2004). The Court found the allegations in the Complaint to be merely “conclusory” in important respects. It further found that while the allegations in the Complaint might constitute state law fraud or contract violations, it did not plead the kinds of criminal conduct necessary to meet the RICO Standard. Thus, the RICO claims were dismissed.
Once the RICO claims could not be sustained, all that was left was state law claims for breach of contract, negligence, fraud, and breach of trust. The Court declined to exercise supplemental jurisdiction and thus dismissed all those claims without prejudice.
Grace underscores the difficulty of meeting all the RICO pleading standards. Moreover, because all of the plaintiff’s state law claims were dismissed as well, it would have to start all over again in state court if it decided to pursue those claims. While it is always easy to exercise “20-20 hindsight,” the plaintiff in Grace would probably have been better off if it had pursued all its state law claims in state court in the first instance.