Birch St. Recovery v. Thomas CV-99-571-B 07/29/00

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Birch Street Recovery Corp., et al.

v. Civil N o . 99-571-B Opinion N o .

Thomas J. Thomas, Jr., et al.

MEMORANDUM AND ORDER

Birch Street Recovery Corporation and two other New

Hampshire corporations have filed suit against a host of

defendants, including a law firm and lawyers (the “law firm

defendants”), an accounting firm and accountants (the “accounting

firm defendants”), and individuals and entities associated with

the Gaudette family. Plaintiffs have brought claims for

violation of the Racketeer Influenced and Corrupt Organizations

Act (“RICO”),

, for civil conspiracy, and

for violation of the New Hampshire Consumer Protection Act, N.H.

Rev. Stat. Ann. chapter 358-A.1 Plaintiffs request injunctive

1 Plaintiffs also asserted a claim of bankruptcy fraud under

. See Verified Compl. (Doc. #1) ¶¶ 95-98 relief and damages (in the amount of 1.5 million dollars or

actual damages), plus attorney’s fees and costs. Plaintiffs also

seek treble damages for the alleged violations of RICO and the

New Hampshire Consumer Protection Act.2

The law firm defendants have moved to dismiss all claims

against them pursuant to Federal Rule of Civil Procedure

(Count I I ) . As plaintiffs have since conceded, see Mem. in Opp’n to Mot. by Law Firm Defs. to Dismiss (Doc. #16) at 2 , this criminal statute does not provide a civil cause of action. Accordingly, Count II is dismissed for failure to state a claim. I consider paragraphs 96 and 97 of the complaint as alleging predicate acts of racketeering in support of plaintiffs’ civil RICO claim. This reading of the complaint grants in substance plaintiffs’ request for leave to amend the complaint, see

without requiring them to file a formal amendment. 2 This court has subject matter jurisdiction based on the presence of a federal question arising under the RICO statute. See

(1994). However, contrary to plaintiffs’ suggestion, see Verified Compl. (Doc. #1) ¶ 6-7, jurisdiction based on diversity of citizenship does not appear to exist, because all three of the plaintiffs and at least some of the defendants are domiciled in New Hampshire. See id. ¶¶ 8-10, 25- 2 6 ; Ninigret Dev. Corp. v . Narragansett Indian Wetuomuck Hous. Auth.,

1 , 27 (1st Cir. 2000) (citing Caterpillar Inc. v . Lewis,

1 , 68 (1996); Strawbridge v . Curtiss

6 7 , 267 (1806)) (stating “complete diversity” rule).

-2- 12(b)(6). 3 For the following reasons, I grant the law firm

defendants’ motion.

I.

The allegations contained in plaintiffs’ complaint are vague

but voluminous. The following is a summary of those allegations,

construed in the plaintiffs’ favor.

The plaintiffs in this action are three New Hampshire

corporations known respectively as Birch Street Recovery Corp.,

GER Recovery Corp., and JAAJ Realty Corp. Plaintiffs describe

themselves as “holders of claims, judgments, attachments, and

3 The motion to dismiss was filed solely on behalf of the law firm defendants. The other defendants have attempted to adopt the arguments made in the motion to dismiss, see Defs.’ Report of Planning Meeting (Doc. #22) at 3, and also have identified many of those same arguments as affirmative defenses in their answers. See Answer and Affirmative Defenses of Ring, Black, Dolan, Wheeler, and Wheeler, Ring & Dolan, P.C. (Doc. #9) at 11-13; Answer and Statement of Affirmative Defenses of Defs. Gaudette, Robinson and Boulevard Drive-In, Inc. (Doc. #18) ¶¶ 105, 106, 108; Answer and Affirmative Defenses of Def. Maple Street, Inc. (Doc. #21) ¶¶ 105-11. Nevertheless, in the absence of a formal motion to dismiss by any of the other defendants, this order applies only to plaintiffs’ claims against the law firm defendants.

-3- causes of action against Louise L . Gaudette, Reginald L .

Gaudette, The Resource Clinic, Inc., OFS Lending, Inc., J&L

Family Limited Partnership I I I , Louise L. Gaudette Family Limited

Partnership I I , Gaudette Associates Pension Plan and Trust, and

OFS Pension Plan.” Verified Compl. (Doc. #1) ¶ 2 (footnote

omitted).

The many individuals and entities named as defendants appear

to fit roughly into three groups. The first group -- the “law

firm defendants” -- consists of four New Hampshire attorneys

(Thomas J. Thomas, Jr., Marc L. Van De Water, Glenn C . Raiche,

and Mitchell P. Utell) and two law firms (Thomas & Utell, a

general partnership, and Thomas, Utell, Van De Water and Raiche,

a partnership) in which the attorneys are partners. The second

group -- the “accounting firm defendants” -- consists of four New

Hampshire certified public accountants (Mark S . Ring, John S .

Dolan, David A . Wheeler, and Michael T . Black) and the

professional corporation (Wheeler, Ring & Dolan, P.C.) in which

they practice. The third group consists of various individuals

-4- (Louise L. Gaudette, Jeffrey Gaudette, Edith Gaudette, Lionel

Gaudette, and Lisa Robinson) and entities (Boulevard Drive-In,

Inc., and Maple Street, Inc.) apparently associated with the

Gaudette family.

As noted previously, plaintiffs allege that defendants

violated the federal RICO statute, engaged in a civil conspiracy,

and violated the New Hampshire Consumer Protection Act. All

three of these claims arise out of plaintiffs’ assertion that the

defendants fraudulently transferred and concealed assets and/or

income belonging to the Gaudettes or entities under their

control. According to plaintiffs, a primary purpose of this

“asset protection enterprise” was to hinder creditors of R&R

Associates of Hampton (hereinafter “R&R Associates”), a bankrupt

general partnership in which Reginald Gaudette was general

partner, from collecting on debts owed to them. The defendants

purportedly carried out their enterprise by forming various

limited partnerships and other entities (designated by plaintiffs

as the “enterprise entities”) and fraudulently transferring to

-5- those entities assets and/or income that otherwise would have

been part of the R&R Associates bankruptcy estate.4

Plaintiffs claim that the Gaudettes’ lawyers and accountants

played an integral role in the asset protection enterprise.

According to plaintiffs, both the law firm defendants and the

accounting firm defendants knowingly participated in various

aspects of the corrupt enterprise. Plaintiffs claim that the law

firm defendants, either acting alone or in conjunction with other

defendants, took a variety of specific actions in furtherance of

the asset protection scheme, including: creating and funding the

“enterprise entities”; preparing and filing the Chapter 11

petition and schedules in the R&R Associates bankruptcy

proceedings; making various misrepresentations to state and

4 The “enterprise entities” specifically identified by plaintiffs are: Reginald L . Gaudette Family Limited Partnership I , Louise L. Gaudette Family Limited Partnership I I , J&L Family Limited Partnership I I I , The Resource Clinic, Inc., OFS Lending, Inc., Gaudette Associates Pension Plan and Trust, OFS Pension Plan and Trust, LLG Services, Inc., and C&G Partnership. See Verified Compl. (Doc. #1) ¶ 3 4 . There is substantial overlap between these “enterprise entities” and the entities against which plaintiffs claim to hold “claims, judgments, attachments, and causes of action.” Compare

¶ 2 with

¶ 3 4 .

-6- federal courts; acting as counsel to R&R Associates as debtor-in-

possession; and reviewing, revising, and mailing fraudulent

financial statements to the FDIC, a creditor of the Gaudettes.

Plaintiffs also allege that the law firm defendants, along

with other defendants, engaged in wrongdoing in connection with

Reginald Gaudette’s Chapter 7 bankruptcy proceedings. Specifi-

cally, plaintiffs allege that the law firm defendants made

various misrepresentations to the bankruptcy court, to

unspecified tax authorities, and to an expert witness who

testified in the proceedings. All of these misrepresentations,

plaintiffs allege, were intended to persuade the bankruptcy court

that Reginald Gaudette’s pension plan should be excluded from his

bankruptcy estate on the ground that the plan was “ERISA

qualified.”

II.

To survive a Rule 12(b)(6) motion to dismiss for failure to

state a claim, a plaintiff’s complaint must “set forth ‘factual

allegations, either direct or inferential, regarding each

-7- material element necessary to sustain recovery.’” Doyle v .

Hasbro, Inc.,

(1st Cir. 1996) (quoting Gooley

v . Mobil Oil Corp.,

(1st Cir. 1988)). When

applying this standard, I must accept the well-pleaded facts of

the complaint as true and draw all reasonable inferences in favor

of the plaintiff. See Miranda v . Ponce Fed. Bank,

1 ,

43 (1st Cir. 1991). I may dismiss the complaint “only i f , when

viewed in this manner, the pleading shows no set of facts which

could entitle the plaintiff to relief.” Gooley,

(citing Conley v . Gibson,

1 , 45-48 (1957)).

The threshold for stating a claim under the federal rules

“may be low, but it is real.” Id. While I must construe all

well-pleaded facts in the plaintiff’s favor, I need not credit

“bald assertions, unsupportable conclusions, periphrastic

circumlocutions, and the like.” Doyle,

(quoting

Aulson v . Blanchard,

, 3 (1st Cir. 1996)) (internal

quotation marks omitted).

In civil RICO cases, which necessarily involve allegations

-8- of criminal conduct, “particular care is required to balance the

liberality of the Civil Rules with the necessity of preventing

abusive or vexatious treatment of defendants.” Miranda,

4 . The First Circuit has recognized that “[c]ivil RICO is an

unusually potent weapon--the litigation equivalent of a

thermonuclear device. The very pendency of a RICO suit can be

stigmatizing and its consummation can be costly.”

For these

reasons, the First Circuit has advised that “courts should strive

to flush out frivolous [civil] RICO allegations at an early stage

of the litigation.” Figueroa Ruiz v . Alegria,

(1st Cir. 1990).

III.

A. Civil RICO,

(Count I )

Plaintiffs’ civil RICO claim is founded on the assertion

that the defendants fraudulently conveyed and concealed assets

and/or income that would otherwise have been part of the R & R

Associates bankruptcy estate and thereby limited plaintiffs’

ability to collect on judgments and/or debts owed to them. See

-9- Verified Compl. (Doc. #1) ¶¶ 2 , 3 , 4 4 , 4 8 , 5 3 , 6 3 . Plaintiffs

allege that the law firm and accounting firm defendants counseled

and helped the Gaudettes to conceal such assets and/or income by

means of the “enterprise entities.” See id. ¶¶ 32-34, 45-49.

According to plaintiffs, the defendants committed a variety of

racketeering activities, including mail fraud, bankruptcy fraud,

witness tampering, and money laundering, in the course of

perpetrating the asset protection enterprise. See id. ¶¶ 1 , 3 6 ,

3 8 , 4 1 , 4 2 , 4 4 . Plaintiffs claim that the defendants are thus

liable for unlawful racketeering activity in violation of

(a), ( b ) , and ( c ) . See

¶¶ 3 7 , 3 9 , 4 0 .

1. Violation of § 1962(a)

Plaintiffs charge that the defendants violated

(a), which prohibits the use or investment of racketeering

proceeds in the acquisition, establishment, or operation of a

RICO enterprise.5 The law firm defendants argue that plaintiffs’

5

(a) provides in relevant part:

It shall be unlawful for any person who has received

-10- § 1962(a) claim must be dismissed because the allegations in

plaintiffs’ complaint fail to establish that plaintiffs have

standing to bring a civil action under the RICO statute.6 See

Mem. in Supp. of Law Firm Defs.’ Mot. to Dismiss (Doc. #8) at 5-

8. Because, as I explain below, plaintiffs have not alleged the

requisite “use or investment injury,” they lack standing to bring

a claim under § 1962(a). 7

any income derived, directly or indirectly, from a pattern of racketeering activity . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest i n , or the establishment or operation o f , any enterprise which is engaged i n , or the activities of which affect, interstate or foreign commerce.

(a) (1994). 6 While the law firm defendants’ standing argument is more clearly focused on plaintiffs’ § 1962(c) claim than their claims under §§ 1962(a) or ( b ) , see Mem. in Supp. of Law Firm Defs.’ Mot. to Dismiss (Doc. #8) at 5-8, the argument is sufficiently broad in scope to place plaintiffs on notice that their standing with regard to the entirety of their civil RICO claim was at issue. 7 Because I find that plaintiffs lack standing to bring a § 1962(a) claim, I need not address the law firm defendants’ other challenges to that claim. I note, however, that plaintiffs’

-11- The First Circuit has adopted the so-called “investment use

rule,” under which a plaintiff seeking to recover for a violation

of § 1962(a) must allege a specific injury caused by the

defendant’s use or investment of racketeering proceeds. See

Compagnie De Reassurance D’Ile de France v. New England

Reinsurance Corp.,

6 , 91 (1st Cir. 1995); System

Management, Inc. v . Loiselle,

(D. Mass

2000); Trustees of Boston Univ. v . ASM Communications, Inc.,

6 , 73 n.7 (D. Mass. 1998). This rule follows from

the statutory requirement that a plaintiff has standing to bring

a civil RICO claim only if he or she can establish an injury to

his or her “business or property by reason of a violation of

section 1962.”

(c) (Supp. 1996). 8 Accordingly,

failure to plead a pattern of racketeering activity, see infra, provides an independent basis for dismissal of their entire civil RICO claim, including the claim under § 1962(a). 8 Section 1964(c) provides in relevant part that:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of

-12- to recover based on a defendant’s violation of § 1962(a), a

plaintiff must show that his or her injury was caused by the

defendant’s use or investment of racketeering proceeds. See

Compagnie De Reassurance,

(citing

(a), 1964(c)). Because this “use or investment injury” must

be distinct from any injury caused by the predicate acts of

racketeering, a plaintiff cannot comply with the “investment use

rule” simply by “repeat[ing] the crux of [his or her] allegations

in regard to the pattern of racketeering.”

at 91-92 (quoting

Lightning Lube, Inc. v . Witco Corp.,

(3d Cir.

1993)) (alterations added and internal quotation marks omitted).

Even when read in the most favorable light, plaintiffs’

complaint fails to identify any distinct injury that flowed from

the law firm defendants’ use or investment of racketeering

proceeds. While the complaint recites the general language of §

1962(a), see Verified Compl. (Doc. #1) ¶ 3 7 , in the absence of

the suit, including a reasonable attorney’s fee . . . .

(c) (Supp. 1996).

-13- any supporting factual allegations such a recitation is

insufficient to satisfy the “investment use rule.” C f . Advocacy

Org. for Patients and Providers v . Auto Club Ins. Ass’n,

, 329 (6th Cir.) (determining that claim that merely

“parrot[ed]” analogous requirement under § 1962(b) was a

conclusion unsupported by factual allegations and thus

insufficient to withstand a Rule 12(b)(6) motion), cert. denied,

(1999). Plaintiffs’ bald assertion that they were

damaged as a direct and proximate result of the defendants’

conduct, see Verified Compl. (Doc. #1) ¶ 9 4 , which is similarly

unsupported by factual allegations linking any injury suffered by

plaintiffs with the law firm defendants’ use or investment of

racketeering proceeds, also fails to satisfy the “investment use”

rule.

Plaintiffs’ contention that the law firm defendants were

involved in funding the so-called “enterprise entities,” see id.

¶¶ 3 2 , 3 3 , 4 5 , 4 6 , 5 0 , fails for several reasons to state an “use

or investment injury.” First, the complaint does not allege that

-14- any funds purportedly invested by the law firm defendants in the

enterprise entities were the proceeds of racketeering activities.

Second, even assuming for purposes of analysis that plaintiffs

could surmount this first obstacle, many courts have concluded

that the mere reinvestment of racketeering proceeds in a

corporate enterprise, with the result that the enterprise

continues to engage in the predicate acts of racketeering, is

insufficient to give rise to a “use or investment injury” that is

distinct from the harm caused by the predicate acts. See, e.g.,

Fogie v . THORN Americas, Inc.,

, 896 (8th Cir. 1999);

Lightning Lube,

; Update Traffic Sys., Inc. v .

Gould,

7 4 , 282-83 (E.D.N.Y. 1994); Gelb v . American

Tel. & Tel. Co.,

(S.D.N.Y. 1993).

Perhaps in recognition of these inadequacies, plaintiffs

seek to bolster their § 1962(a) claim by including in their

opposition brief additional allegations and evidentiary material.

See Mem. in Opp’n to Mot. by Law Firm Defs. to Dismiss (Doc. #16)

at 4-5 (citing Appendices D, E , and F ) . Even if I could consider

-15- such allegations and evidence when evaluating a Rule 12(b)(6)

motion, the allegations and evidence presented in plaintiffs’

opposition brief merely support the contention that the law firm

defendants received fees for professional services rendered to

various “enterprise entities.” See id. Therefore, even if I

were to take the plaintiffs’ new allegations and evidence into

account, it would show only that the law firm defendants received

racketeering proceeds, not that they used or invested such

proceeds in a manner that caused plaintiffs to suffer a distinct

injury.

Accordingly, because the plaintiffs have failed to plead

that they suffered a distinct “use or investment injury,” they

have failed to state a viable claim based on § 1962(a).

2. Violation of § 1962(b)

Plaintiffs also claim that the defendants are liable for

violation of

(b), which makes it “unlawful for

any person through a pattern of racketeering activity . . . to

acquire or maintain . . . any interest in or control of any

-16- [RICO] enterprise.”

(b) (1994). The First

Circuit requires plaintiffs bringing a claim based on a violation

of § 1962(b) to plead a separate “acquisition injury” analogous

to the “use or investment injury” required by § 1962(a). See

Compagnie De Reassurance,

2 . In other words,

plaintiffs are required to allege “that they were harmed by

reason of [the defendant’s] acquisition or maintenance of [an

interest in or] control of an enterprise through a pattern of

racketeering activity.”

(alteration and emphasis added). It

is not enough for plaintiffs to claim that they were injured as a

result of the defendants’ predicate acts of racketeering. See

Even when viewed in the most favorable light, plaintiffs’

complaint cannot be reasonably construed to satisfy the

“acquisition injury” requirement. Simply put, nowhere in their

complaint do plaintiffs allege a distinct injury that stemmed

from the law firm defendants’ acquisition or maintenance of an

interest in or control of any RICO enterprise. As noted

-17- previously, the mere recitation of general statutory language

without the support of factual allegations, see Verified Compl.

(Doc. #1) ¶¶ 3 2 , 3 3 , 3 9 , 9 4 , is not enough to withstand a Rule

12(b)(6) motion.

Accordingly, plaintiffs’ have failed to state a cognizable

claim based on a violation of § 1962(b). 9

3. Violation of § 1962(c)

The third and final part of plaintiffs’ civil RICO claim

rests upon the assertion that the defendants violated

(c). See Verified Compl. (Doc. #1) ¶ 4 0 . Section 1962(c)

provides in relevant part that “[i]t shall be unlawful for any

person employed by or associated with any [RICO] enterprise . . .

9 Because I find that plaintiffs’ § 1962(b) claim must be dismissed for lack of standing due to their failure to allege a distinct “acquisition injury,” I need not address the law firm defendants’ argument that plaintiffs also failed to plead that the law firm defendants acquired or maintained an interest in or control of an enterprise. See Mem. in Supp. of Law Firm Defs.’ Mot. to Dismiss (Doc. #8) at 3 . Furthermore, I note that plaintiffs’ failure to allege a pattern of racketeering activity, see infra, is as fatal to their claim under § 1962(b) as it is to the remainder of their civil RICO claim.

-18- to conduct or participate . . . in the conduct of such

enterprise’s affairs through a pattern of racketeering activity.”

(c) (1994). To be liable under § 1962(c), a

person must (1) conduct or participate in the conduct of (2) an

enterprise (3) through a pattern (4) of racketeering activity.

See Sedima, S.P.R.L. v . Imrex Co., Inc.,

(1985);

(c). In addition, to have standing to

bring a claim based on a violation of § 1962(c), a plaintiff must

plead (and ultimately prove) that he or she suffered an injury to

business or property as a result of the violation. See

(c); Sedima,

; Camelio v . American Fed’n,

(1st Cir. 1998).

As noted previously, the law firm defendants challenge

plaintiffs’ standing to bring the civil RICO claim set forth in

the complaint. See Mem. in Supp. of Law Firm Defs.’ Mot. to

Dismiss (Doc. #8) at 5-8. In addition, they argue that

plaintiffs have not adequately pleaded that defendants engaged in

a “pattern” of “racketeering activity,” both of which are

-19- essential elements of a § 1962(c) claim. See id. at 3-5, 8-9.

a. Standing

Section 1964(c) imposes a standing requirement under which a

plaintiff seeking civil remedies for a violation of § 1962(c)

must establish that the defendant’s racketeering activity caused

injury to the plaintiff’s business or property. See

(c); Sedima,

; Camelio,

.

More particularly, a plaintiff’s standing to sue depends upon a

finding that at least one of the defendant’s predicate acts of

racketeering was the proximate cause, as well as the but-for or

factual cause, of the plaintiff’s injury. See Holmes v .

Securities Investor Protection Corp.,

(1992); Camelio,

. The Supreme Court has

indicated that some direct relationship between the injury

claimed and the injurious conduct alleged is required to show

proximate causation; if the connection is too remote, the

standing requirement is not satisfied. See Holmes,

. The Court has also noted, however, that at the

-20- pleading stage general factual allegations that the plaintiff

suffered an injury as a result of the defendant’s conduct may be

sufficient to satisfy the standing requirement. See National

Org. for Women, Inc. v . Scheidler,

(1994).

Read in the most favorable light, plaintiffs’ complaint

provides two possible grounds for standing. First, plaintiffs

allege that the law firm defendants advised and assisted Reginald

Gaudette in claiming that his pension plan was “ERISA qualified”

and thus should be excluded from his Chapter 7 bankruptcy estate.

See Verified Compl. (Doc. #1) ¶¶ 76-90. Second, plaintiffs

allege that the asset protection enterprise, as effectuated by

various predicate acts of racketeering committed by the law firm

defendants and other defendants, depleted the bankruptcy estate

of R&R Associates and thereby impeded plaintiffs’ ability to

collect on debts owed to them. See

¶¶ 2 , 3 , 4 4 , 4 8 , 5 3 , 6 3 .

I examine each of these grounds in turn.

The allegations concerning Reginald Gaudette’s pension plan

do not confer RICO standing on these plaintiffs. Because

-21- Gaudette’s effort to have his pension plan characterized as

“ERISA qualified” was rejected by the bankruptcy court and by

this court on appeal, see Gaudette v . Erricola, CV-99-354-B

(D.N.H. February 2 8 , 2000), plaintiffs could not have suffered

any cognizable injury as a result of that effort.10 Accordingly,

plaintiffs lack standing to bring a civil RICO action based on

the allegations that the law firm defendants engaged in

racketeering activity when providing Gaudette with assistance in

this regard. Because these allegations do not provide plaintiffs

with a viable cause of action under the RICO statute, I do not

give them any consideration in the remainder of my civil RICO

10 That the bankruptcy court, and later this court, concluded that the pension plan in question was not “ERISA qualified” and therefore not exempt from Reginald Gaudette’s bankruptcy estate, see Gaudette v . Erricola, CV-99-354-B (D.N.H. February 2 8 , 2000), in no way supports an inference that the law firm defendants committed fraud or some other improper act in counseling Gaudette to make a claim to the contrary. As the opinions rendered by the bankruptcy court and this court in Gaudette v . Erricola should make clear, the legal status of the pension plan presented a complex issue over which reasonable people acting in good faith could disagree.

-22- analysis.11

Plaintiffs do have standing, however, based on the

allegations that the defendants fraudulently conveyed and

concealed assets and/or income that otherwise would have been

part of the R&R Associates bankruptcy estate. Although the law

on this issue is not uniform, there is at least some authority

for the proposition that a creditor of a bankrupt entity has

standing to bring a civil RICO claim against third parties when

the creditor is the target of those parties’ unlawful activity.

See Bivens Gardens Office Bldg., Inc. v . Barnett Banks of

Florida, Inc.,

(11th Cir. 1998) (citing Bankers

Trust C o . v . Rhoades,

(2d Cir. 1988)) 12 ;

11 In my reading of plaintiffs’ complaint, all of the allegations concerning the Reginald Gaudette bankruptcy relate to the characterization of the pension plan. While paragraphs 76 and 77 of the complaint set forth more general allegations of wrongdoing, see Verified Compl. (Doc. #1) ¶¶ 7 6 , 7 7 , the only reasonable inference based on the totality of the allegations in the complaint is that the conduct referred to in these paragraphs relates to the characterization of Reginald Gaudette’s pension plan. 12 While the Second Circuit in Bankers Trust concluded that a creditor of a bankrupt entity has RICO standing based on

-23- but see Dana Molded Prods., Inc. v . Brodner,

(N.D. Ill. 1986) (holding that plaintiff, a creditor of bankrupt

corporation, lacked standing to bring a civil RICO action based

on fraudulent transfer of corporation’s assets because injury

asserted by plaintiff derived from, and was indistinguishable

from, injury to corporation); cf. Fisher v . Apostolou,

(7th Cir. 1998) (suggesting that a RICO plaintiff’s

standing depends on showing that he or she suffered an injury

separate and distinct from the injury to the bankrupt corporation

and/or other creditors).

In the present case, plaintiffs identify themselves as

“holders of claims, judgments, attachments, and causes of action

against Louise L. Gaudette, Reginald L . Gaudette, The Resource

allegations of the fraudulent transfer of the entity’s assets, the court also found it “impossible to determine the amount of damages that would be necessary to make plaintiff whole, because it [was] not known whether some or all of the fraudulently transferred funds [would] be recovered by the corporation. . . . As a result, [the court reasoned that] the damages in this area [were] ‘speculative’ and ‘unprovable’ . . . .”

. Accordingly, even though it had found that the plaintiff had standing, the Second Circuit dismissed the RICO claim without prejudice. See

-24- Clinic, Inc., OFS Lending, Inc., J & L Family Limited Partnership

III, Louis L . Gaudette Family Limited Partnership I I , Gaudette

Pension Associates Plan and Trust, and OFS Pension Plan.”

Verified Compl. (Doc. #1) ¶ 2 (footnote omitted). Although only

one of the plaintiff corporations, GER Recovery, clearly asserts

any direct claim against R&R Associates, see id. ¶ 63 (describing

GER Recovery as “a successor-in-interest and present titleholder

of a claim in the R&R Bankruptcy”), the complaint generally

suggests that all three plaintiffs are creditors of the R&R

Associates bankruptcy estate and that they were the targets of

the defendants’ unlawful activity. See id. ¶ 48 (“The transfers

by the Gaudettes were fraudulent as to the plaintiffs herein and

other creditors of the R&R Bankruptcy . . . . ” ) . While

plaintiffs’ unaccountable failure to specify the particular

mechanism by which R&R Associates became indebted to them makes

an analysis of standing difficult, I resolve this issue by

inferring that all three plaintiffs are creditors of R&R

Associates. I note, however, that plaintiffs have standing only

-25- to the extent that they are creditors of R&R Associates, as

distinguished from merely having causes of action or other claims

against R&R Associates that have not yet been reduced to

judgment. In other words, if the only injury that plaintiffs

suffered as a result of the asset protection enterprise was that

they will be less likely to recover in the event that they win

some future judgment against R&R Associates, plaintiffs lack

standing to bring a civil RICO claim against the defendants. See

Lincoln House, Inc. v . Dupre,

(1st Cir. 1990).

Accordingly, it is only by construing the complaint as

alleging that plaintiffs are presently creditors of R&R

Associates that I conclude that they have standing to bring a

civil RICO claim against the law firm defendants. Having

concluded that plaintiffs have pleaded sufficient facts to

establish standing, I next address the law firm defendants’

contention that the complaint does not adequately allege a

pattern of racketeering activity.

-26- b. Racketeering Activity

To be liable for a violation of § 1962(c), a defendant must

engage in two or more of the predicate acts of racketeering

enumerated in

(1). See Miranda v . Ponce Fed.

Bank,

1 , 45 (1st Cir. 1991); Feinstein v . Resolution

Trust Corp.,

4 , 42 (1st Cir. 1991). The law firm

defendants dispute whether plaintiffs have adequately alleged

even a single predicate act of racketeering. See Mem. in Supp.

of Law Firm Defs.’ Mot. to Dismiss (Doc. #8) at 8 . Read in the

most favorable light, plaintiffs’ complaint identifies four

potential forms of racketeering activity: (1) mail fraud in

violation of

, see Verified Compl. (Doc. #1) ¶¶

1 , 3 6 , 4 9 , 7 2 , 8 3 ; (2) bankruptcy fraud in violation of

and/or 157, see

¶¶ 1 , 3 2 , 3 3 , 3 8 , 4 2 , 44-73, 96-97;

(3) money laundering in violation of

and 1957,

see

¶ 1 , 4 1 ; and (4) witness tampering in violation of 18

-27- U.S.C. § 1512, see id. ¶¶ 1 , 3 8 , 86-92.13 For the following

reasons, however, I determine that all of these allegations, with

the exception of those concerning bankruptcy fraud, fail to state

predicate acts of racketeering.

i. Mail Fraud

It is well established in the First Circuit that predicate

acts of mail fraud alleged in civil RICO actions must be pleaded

with particularity in accordance with the dictates of Rule 9(b)

of the Federal Rules of Civil Procedure. See Ahmed v .

13 Plaintiffs allude to several other offenses, e.g., conspiracy in violation of

and obstruction of a court order in violation of

. See Verified Compl. (Doc. #1) ¶ 1 . Because these offenses are not included within the statutory definition of “racketeering activity,” see

(1), they cannot constitute predicate acts. Plaintiffs also allege that “[t]he Law Firm and other Defendants used wire transactions to further the enterprise.” See Verified Compl. (Doc. #1) ¶ 9 3 . Because this general avowal is not supported by any factual allegations identifying any wire transactions, it does not state a predicate act. Moreover, the legal insufficiency identified in the text with respect to plaintiffs’ mail fraud allegations would similarly apply to plaintiffs’ conclusory allegation of wire fraud. See New England Data Servs., Inc. v . Becher,

(1st Cir. 1987) (holding that Rule 9(b) applies to alleged predicate acts of mail and wire fraud).

-28- Rosenblatt,

(1st Cir. 1997) (citing Feinstein,

2 ; New England Data Servs., Inc. v . Becher,

(1st Cir. 1987)), cert. denied,

(1998).

Under the First Circuit’s interpretation of Rule 9(b)’s

particularity requirement, a civil RICO plaintiff alleging

predicate acts of mail fraud must specify the time, place, and

content of allegedly false mail communications. See Ahmed,

; Doyle v . Hasbro,

(1st Cir. 1996);

Becher,

8 8 , 290.

Each of the mailings identified in plaintiffs’ complaint

fails to meet this particularity requirement. In paragraph 7 2 ,

plaintiffs allege that certain “financial statements upon the

direction of the Law [F]irm and Accounting Firm and in

furtherance of the enterprise, were submitted via the U.S. mail

to the Federal Deposit Insurance Corp. (FDIC), a creditor of the

Gaudettes for the purpose of inducing reliance thereon by the

FDIC to gain a favorable settlement of any claim lawfully due

from the defendants to the FDIC.” Verified Compl. (Doc. #1) ¶

-29- 72. Although plaintiffs assert that the financial statements

sent to the FDIC were “false [and] misleading,” see

¶ 7 3 , and

that the defendants reviewed and revised the statements on or

about May 8 , 1992, see

¶ 7 1 , nowhere in the complaint do they

identify when the financial statements were mailed, the location

from which they were mailed, or the specific representations in

the statements that were false or misleading.

The other relevant allegations of mail fraud relate to the

formation of certain limited partnerships through which assets

and/or income of the Gaudettes were purportedly concealed.14

Paragraph 49 states in relevant part that “[t]he Certificate of

Limited Partnership signed by Gaudette was forwarded through the

U.S. mail by the Law Firm Defendants to and filed by the New

14 The mailings alleged in paragraphs 83 and 85 of the complaint relate to defendants’ efforts to have Reginald Gaudette’s pension plan characterized as “ERISA qualified” and thus exempt from his Chapter 7 bankruptcy estate. See Verified Compl. (Doc. #1) ¶¶ 8 3 , 8 5 . As noted previously, plaintiffs lack standing to sue based on these allegations because they suffered no cognizable injury as a result of Gaudette’s unsuccessful attempt to have the pension plan excluded. I also note that these allegations, like the others discussed in the text, fail to satisfy the particularity requirement.

-30- Hampshire Secretary of State on May 9, 19991 [sic].”

¶ 4 9 .

Paragraph 46 asserts that “[t]he limited partnerships were formed

and funded, directly or indirectly, by the Law Firm and

Accounting Firm Defendants and others through the use of the

United States mail system in furtherance of the enterprise.” Id.

¶ 46. Although the first of these allegations provides some

information as to time and place, both allegations completely

fail to specify the content of any misrepresentations.

Because plaintiffs’ allegations of mail fraud are not

pleaded with particularity, the complaint as currently presented

fails to state any predicate acts of mail fraud.

The First Circuit has devised a special approach for civil

RICO cases in which alleged predicate acts of mail and/or wire

fraud fail to meet the standard required under Rule 9 ( b ) . In

such cases, “a district court should make a second determination

as to whether further discovery is warranted and, if s o , the

plaintiff should be provided with the opportunity to amend the

complaint after the completion of this discovery.” Ahmed, 118

-31- F.3d at 890 (citing Becher,

9 0 ) ; see also Feinstein,

3 . A plaintiff is not, however, automatically

entitled to such discovery and opportunity to amend. See Ahmed,

; Feinstein,

4 . For example, when a

plaintiff “fail[s] to supply specific allegations which would

indicate that critical information was in the sole possession of

the defendants,” he or she may not be entitled to discovery or

the opportunity to amend. See Ahmed,

. Moreover,

the First Circuit has stated that “[i]n a RICO action where fraud

has not been pleaded against a given respondent with the

requisite specificity and Rule 9(b) has been flouted, dismissal

should follow as to that respondent unless the plaintiff, at a

bare minimum, suggests to the district court, in a timely manner,

that a limited period of discovery will likely allow him to plug

the holes in the complaint and requests leave (i) to conduct

discovery for this limited purpose and (ii) thereafter to amend

his complaint. It is only then that a district court must take a

second look to ascertain whether a particular case is

-32- ‘appropriate’ for the special unguent of deferral.” Feinstein,

(internal citation omitted).

Plaintiffs have not requested leave to conduct limited

discovery regarding the alleged mailings or to amend their

complaint to specify the time, place, and content of the alleged

fraudulent representations. Neither have plaintiffs pleaded

specific facts from which I could reasonably conclude that

information regarding the time, place, and content of such

misrepresentations are in the exclusive possession of the

defendants. To the contrary, the attestation appended to

plaintiffs’ complaint asserts that plaintiffs have already

discovered and reviewed “over twenty-five thousand (25,000) pages

of business, real estate, mortgages, pension plan and tax

documents produced . . . by Gaudette and the Gaudette Entities.”

Verified Compl. (Doc. # 1 ) , Verification of James J. Lyons, Jr. ¶

7. Because plaintiffs have been unable to plead predicate acts

of mail fraud with the requisite specificity even with the

benefit of such a wealth of discovery material, any additional

-33- discovery on the issue would be futile. Moreover, I reject the

suggestion, made by plaintiffs in their opposition brief, see

Mem. in Opp’n to Mot. by Law Firm Defs. to Dismiss (Doc. #16) at

4 , that they are excused from the requirement that predicate acts

of mail fraud be pleaded with particularity because the trustee

of Reginald Gaudette’s Chapter 7 bankruptcy estate previously

brought similar allegations against the same defendants.15

Accordingly, because plaintiffs have failed to plead mail

fraud with particularity, they have not alleged any viable

predicate acts of mail fraud. Further, plaintiffs are not

entitled to an opportunity to conduct limited discovery or amend

their complaint to remedy this failing.

ii. Bankruptcy Fraud

Plaintiffs allege that the law firm defendants, in

15 Plaintiffs may not cure deficiencies in their complaint by appending evidentiary material to their opposition brief. Accordingly, when determining whether plaintiffs have pleaded the predicate acts of mail fraud with particularity in the present action, I do not consider the pleadings from other proceedings that plaintiffs have appended to their opposition brief. See Mem. in Opp’n to Mot. by Law Firm Defs. to Dismiss (Doc. #16) at 4 (referring to appendices A , B , and C ) .

-34- conjunction with other defendants, committed various acts of

fraud in connection with the Chapter 11 bankruptcy proceedings of

R&R Associates. See Verified Compl. (Doc. #1) ¶¶ 1 , 32-33, 4 2 ,

44-73, 96-97. Although it appears that certain forms of

bankruptcy fraud are excluded from the statutory definition of

“racketeering activity,”16 I assume for purposes of analysis that

plaintiffs’ complaint states at least two predicate acts of

bankruptcy fraud.

16 Congress added § 157, captioned “bankruptcy fraud,” to Title 18 of the U.S. Code in 1994. See

(1994). At the same time, Congress expressly exempted from the statutory definition of “racketeering activity” “a case under section 157 of that [subsequently amended to “this”] title.”

(1)(D) (1994 & Supp. 1996). As a result, § 1961(1)(D) as currently in force includes within its list of racketeering activities “any offense involving fraud connected with a case under title 11 (except a case under section 157 of this title).” Id. (emphasis added). While many of the allegations in the complaint appear to fall within the scope of § 157 and the complaint both refers to and tracks the language of that section, see Verified Compl. (Doc. #1) ¶¶ 1 , 7 3 , 9 6 , and unnumbered paragraph at 1 4 , I assume for purposes of analysis that plaintiffs have pleaded at least two predicate acts of bankruptcy fraud that fall outside of the statutory exemption. This assumption is consistent with plaintiffs’ intention to plead non- exempted acts of bankruptcy fraud in violation of

in support of their civil RICO claim. See

¶¶ 1 , 4 2 , 9 7 ; Mem. in Opp’n to Mot. by Law Firm Defs. to Dismiss (Doc. #16) at 2 .

-35- iii. Witness Tampering

Plaintiffs also allege that the law firm defendants

improperly influenced the testimony of an expert witness in the

Reginald Gaudette bankruptcy proceedings. See Verified Compl.

(Doc. #1) ¶¶ 86-90. Even assuming for purposes of analysis that

such allegations state a violation of

, I have

already determined that plaintiffs lack standing to bring a civil

RICO action in relation to this episode. Accordingly, the

allegations of witness tampering cannot constitute “racketeering

activity” in support of their claim.

iv. Money Laundering

Finally, plaintiffs allude to a predicate act or acts of

money laundering in violation of

and/or 1957.

See Verified Compl. (Doc. #1) ¶¶ 1 , 4 1 . However, because their

money laundering claim is purely conclusory and unsupported by

any factual allegations, plaintiffs have not adequately pleaded

money laundering as a predicate act.

In sum, plaintiffs’ complaint does not adequately allege

-36- predicate acts of mail fraud, witness tampering, or money

laundering. I assume for purposes of analysis, however, that the

complaint does allege multiple predicate acts of bankruptcy

fraud. Accordingly, I must consider whether those acts of

bankruptcy fraud constitute a “pattern” as required to state a

violation of § 1962(c).

c. Pattern

To recover based on a defendant’s violation of § 1962(c), a

plaintiff must show that the defendant engaged in a “pattern” of

racketeering activity. See

(c); Sedima,

. Although I have assumed for purposes of analysis that

the complaint alleges at least two predicate acts of bankruptcy

fraud, it is impossible to conclude that those acts formed a

“pattern” as that term has been defined by Congress and the

courts.

According to the RICO statute, a pattern of racketeering

activity “requires at least two acts of racketeering activity, .

. . the last of which occurred within ten years . . . after the

-37- commission of a prior act of racketeering activity.”

(5) (1994). While two predicate acts of racketeering are

necessary to satisfy the pattern requirement, they are not in

themselves sufficient. See H.J. Inc. v . Northwest Bell Tel. Co.,

(1989); Feinstein v . Resolution Trust Corp.,

4 , 44 (1st Cir. 1991). The Supreme Court and the First

Circuit have explained that in addition to a minimum of two

predicate acts, a plaintiff seeking to demonstrate a pattern of

racketeering activity “must show that the racketeering predicates

are related [“the relatedness requirement”], and that they amount

to or pose a threat of continued criminal activity [“the

continuity requirement”].” H.J. Inc.,

; see also

Ahmed v . Rosenblatt,

(1st Cir. 1997), cert.

denied,

(1998); Schultz v . Rhode Island Hosp. Trust

Nat’l Bank, N.A.,

(1st Cir. 1996). Racketeering

activities do not constitute a pattern if they are “sporadic” or

“widely separated and isolated” occurrences. H.J. Inc.,

(internal quotation marks omitted); see also Feinstein,

-38-

6 .

The relatedness requirement is not difficult for a plaintiff

to satisfy. See Libertad v . Welch,

(1st Cir.

1995) (“T]he relatedness test is not a cumbersome one for a RICO

plaintiff.”) (quoting Feinstein,

) (internal

quotation marks omitted). Predicate acts of racketeering are

related if they “have the same or similar purposes, results,

participants, victims, or methods of commission, or otherwise are

interrelated by distinguishing characteristics and are not

isolated events.” H.J. Inc.,

(internal quotation

marks omitted); see also Ahmed,

. Plaintiffs’

allegations of bankruptcy fraud meet this standard because all of

the alleged acts shared the same basic purpose (e.g., to conceal

assets and/or income from the bankruptcy court and from creditors

of R&R Associates), the same or similar participants (e.g., the

law firm defendants, the accounting firm defendants, and/or

members of the Gaudette family), and the same victims (e.g., the

bankruptcy estate and creditors of R&R Associates). Accordingly,

-39- the predicate acts pleaded by plaintiffs are sufficiently

related.

Plaintiffs are less successful, however, in meeting the

continuity requirement. A plaintiff may satisfy the continuity

requirement in one of two ways: either (1) by showing that the

predicate acts amount to continuing racketeering activity; or (2)

by showing that the predicate acts constitute a threat of

continuing racketeering activity in the future. See H.J. Inc.,

; Ahmed,

; Libertad,

. To establish continuity by the first method, a plaintiff

must establish that the predicate acts extended over “a

substantial period of time.” H.J. Inc.,

; see

also Feinstein,

5 . A period of several or more

years may be “substantial”; a period of several weeks or months

is clearly insufficient. See H.J. Inc.,

;

Libertad,

; Feinstein,

5 ; Fleet Credit

Corp. v . Sion,

(1st Cir. 1990). To establish

continuity by the second method, a plaintiff must show that while

-40- the predicate acts were committed over a relatively short period

of time, there is a realistic possibility that they will continue

to occur in the future. See H.J. Inc., 491 U.S. at 242;

Libertad,

; Fleet,

.

As in other respects, plaintiffs’ complaint is not a model

of clarity and specificity when it comes to alleging when and how

often the alleged acts of bankruptcy fraud were committed. It is

possible, however, to glean from the complaint a rough sense of

the time period during which the alleged acts occurred. The

earliest specific date identified by plaintiffs is December 1990,

when the law firm defendants allegedly made misrepresentations in

furtherance of the enterprise to the Hillsborough County Superior

Court. See Verified Compl. (Doc. #1) ¶ 5 1 . According to

plaintiffs, the law firm defendants had already “initiated the

fraudulent transfer of Gaudette assets prior to December . . .

1990.”

¶ 5 2 . Plaintiffs allege that several months later,

on or about February 2 6 , 1991, “the Law Firm Defendants discussed

with the Gaudettes a ‘bankruptcy filing to strike preferential

-41- attachment.’”

¶ 5 4 . In April, 1991, the law firm defendants

began to assist R&R Associates in its Chapter 11 bankruptcy

proceeding. Specifically, plaintiffs assert that the law firm

defendants filed the bankruptcy petition, helped to prepare

bankruptcy schedules, and sought appointment as counsel to R&R

Associates. See

¶¶ 5 7 , 5 9 , 64-67.

The time frame delineated in the complaint then jumps

forward approximately one year to May 1992, when the law firm and

accounting firm defendants allegedly met with the Gaudettes for

the purpose of reviewing and revising false and misleading

financial statements. See

¶ 7 1 , 7 3 . These financial

statements were allegedly submitted to the FDIC “in furtherance

of the enterprise.”

¶ 7 2 .

Read generously, the predicate acts of bankruptcy fraud

alleged in the complaint revolve around two main transactions:

(1) the fraudulent concealment of assets and/or income during

1990 and 1991; and (2) the preparation in May 1992 of the false

financial statements subsequently mailed to the FDIC. Assuming

-42- that all of these acts give rise to separate offenses and were

sufficiently related to one another,17 the crucial question is

whether these acts satisfy the continuity requirement. Even if

the length of time involved -- from sometime before December 1990

to May 1992, or approximately one-and-a-half years -- was

sufficient to satisfy the requirement of a “substantial” period,

see, e.g., H.J. Inc.,

(concluding that period of

at least six years was sufficient); Fleet,

(finding period of four-and-a-half years sufficient), the

plaintiffs have failed to allege that the acts occurred with

regular frequency during that period. Accordingly, I conclude

that the acts as alleged are too “sporadic” to satisfy the

continuity requirement by the first method. Compare H.J. Inc.,

17 The complaint does not clearly identify a relationship between the preparation and mailing of financial statements submitted to the FDIC and the other acts committed in furtherance of the alleged asset protection enterprise during the 1990-1991 period. However, because plaintiffs assert that the financial statements were mailed to the FDIC “in furtherance of the enterprise,” see Verified Compl. (Doc. #1) ¶ 7 2 , I assume that they were sufficiently related to the acts committed in 1990 and 1991.

-43-

(finding that racketeering activities that

“occurred with some frequency over at least a 6-year period,”

were sufficient); Fleet,

(finding that 95

fraudulent mailings over a four-and-a-half year period satisfied

the continuity requirement); Zee-Bar, Inc.-N.H. v . Kaplan,

(D.N.H. 1992) (concluding that a series of acts

committed “on a regular basis” over “a twenty-three-month period”

was sufficient “to suggest ‘long-term criminal conduct’”), with

Lincoln House, Inc. v . Dupre,

(1st Cir.

1990) (suggesting in dictum that six acts of mail fraud over 26

months were too sporadic to satisfy continuity requirement).

Plaintiffs’ complaint similarly fails to allege facts from

which I could reasonably infer the existence of an open-ended

threat that defendants will continue to commit related acts of

bankruptcy fraud in the future. In fact, the complaint does not

allege any acts of fraud in connection with the R&R Associates

bankruptcy any time after May 1992.

Accordingly, because plaintiffs have failed to satisfy the

-44- continuity requirement, they have not adequately alleged a

“pattern” of racketeering activity. This failure is fatal to

their § 1962(c) claim.

IV.

For the foregoing reasons, plaintiffs have failed to state a

civil RICO claim against the law firm defendants. Plaintiffs

claims based on alleged violations of

(a) and

(b) fail for lack of standing. While plaintiffs have standing to

bring a claim based on § 1962(c), this claim fails because the

viable predicate acts pleaded by plaintiffs do not establish a

pattern of racketeering activity. Accordingly, the law firm

defendants’ motion to dismiss (Doc. #8) is granted as to

plaintiffs’ civil RICO claim (Count I ) . Moreover, because

plaintiffs have conceded that they have no separate cause of

action under

, the law firm defendants’ motion is

also granted as to Count I I .

Although I dismiss Counts I and II only as alleged against

the law firm defendants, I note that the analysis set forth in

-45- this memorandum and order would seem to apply equally well to the

other defendants in this action. Accordingly, I will similarly

dismiss the civil RICO and bankruptcy fraud claims against those

defendants unless plaintiffs file a motion and supporting

memorandum opposing such dismissal on or before September 1 5 ,

2000.

Finally, because of the possibility that the federal claims

against all defendants in this action will be dismissed, I defer

ruling on the merits of the state-law civil conspiracy and

consumer protection claims (Counts III and IV) and therefore deny

the motion to dismiss these claims without prejudice. In the

event that all federal claims against all defendants are

dismissed, I will decline to exercise supplemental jurisdiction

over those state-law claims.

SO ORDERED.

Paul Barbadoro Chief Judge July 2 9 , 2000

-46- cc: Michael Atkins, Esq. Ronald Caron, Esq. Rodney Stark, Esq. Robert Daniszewski, Esq. David Carr, Esq.

-47-