06-5698-cv Spool v. World Child International Adoption Agency

1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 4 August Term 2007 5 6 7 (Argued: October 19, 2007 Decided: March 18, 2008) 8 9 Docket No. 06-5698-cv 10 11 _____________________________________ 12 13 ROGER SPOOL, CHILD & FAMILY ADOPTION, 14 BRUCE FERGUSON, CHARLENE FERGUSON, 15 Plaintiffs-Appellants, 16 17 -v.- 18 19 WORLD CHILD INTERNATIONAL ADOPTION AGENCY, 20 JENKINS & POVTAK, SUSAN DIBBLE, DOREEN WHITAKER,* 21 SHARRELL J. GOOLSBY, CARL A. JENKINS, 22 YAROSLAV PANASOV, FOUNDATION OF WORLD CHILD, INC., 23 Defendants-Appellees. 24 _____________________________________ 25 26 Before: SACK, HALL, and LIVINGSTON, Circuit Judges. 27 28 Domestic adoption agency, its founder, and two clients brought action

29 against former joint venture partner and related parties for civil violations of the

30 Racketeer Influenced and Corrupt Organizations Act (RICO) and the Computer

31 Fraud and Abuse Act (CFAA). The United States District Court for the

32 Southern District of New York, Charles L. Brieant, J., dismissed the amended

33 complaint. Plaintiffs appeal.

34 Affirmed.

* We direct the Clerk of the Court to amend the official caption to reflect this spelling of Ms. Whitaker’s last name. 1 MITCHELL I. WEINGARDEN, Marsh Menken 2 & Weingarden PLLC, White Plains, NY, for 3 Plaintiffs-Appellants. 4 5 DAVID HENRY SCULNICK, Gordon & 6 Silber P.C., New York, NY, for Defendants- 7 Appellees World Child International Adoption 8 Agency, Jenkins & Povtak, Susan Dibble, 9 Doreen Whitaker, Sharrell J. Goolsby, Carl A. 10 Jenkins, and Foundation of World Child, Inc. 11 12 LIVINGSTON, Circuit Judge:

13 Plaintiffs-Appellants appeal from a judgment of the United States District

14 Court for the Southern District of New York (Charles L. Brieant, J.) dismissing

15 their claims for substantive violations of the Racketeer Influenced and Corrupt

16 Organizations Act (RICO),

, RICO conspiracy, and

17 violation of the Computer Fraud and Abuse Act (CFAA),

§ 1030, for failure

18 to state a claim on which relief can be granted, and declining to exercise

19 supplemental jurisdiction over their related state law claims. Because we agree

20 with the district court that the facts alleged do not establish the continuity

21 required to prove a pattern of racketeering activity, and because the plaintiffs

22 do not challenge the district court’s dismissal of their CFAA claims, we affirm.

23

24 BACKGROUND

25 We are reviewing a motion to dismiss and therefore accept the facts

26 alleged in the amended complaint as true. GICC Capital Corp. v. Tech. Fin.

27 Corp.,

, 465 (2d Cir. 1995).

2 1 I. The Joint Venture

2 Child and Family Adoption (“CFA”) is an authorized adoption agency in

3 New York that was founded and managed by Roger Spool. In August 1994, CFA

4 entered into a joint venture with the World Child International Adoption Agency

5 (“World Child”), an international adoption agency based in Maryland and

6 managed by Sharrell Goolsby. As part of this joint venture, World Child located

7 children in foreign countries and processed international dossiers. CFA

8 marketed adoptions in the New York area, helped New York-area clients to

9 complete their international dossiers, and performed various social work services

10 for adoptive parents in New York.

11 CFA, Spool, World Child, and Goolsby worked together closely for many

12 years to build and expand international adoption services throughout New York.

13 Pursuant to their relationship, when clients of the joint venture wanted to adopt

14 a foreign-born child, they paid two fees directly to World Child: an agency fee

15 and a foreign program fee. CFA was paid a fixed amount of the agency fee — an

16 amount that remained essentially unchanged throughout its relationship with

17 World Child — but received no part of the foreign program fee. CFA and World

18 Child operated harmoniously under this arrangement for ten years, handling

19 over a thousand international adoptions, including the adoption of a Russian

20 child by plaintiffs Bruce and Charlene Ferguson. World Child grew into the

21 fourth or fifth largest international adoption agency in the United States.

22 Relations between CFA and World Child began to sour in 2002 or 2003

3 1 when World Child, although receiving more services from CFA for no additional

2 money, began to demand a greater portion of the fees that the joint venture

3 generated, to refuse to pay invoices, and to contest the legitimacy of CFA’s

4 charges. In the fall of 2003, World Child’s payments to CFA grew increasingly

5 delinquent. Spool and Goolsby attempted to settle the dispute over several

6 months, with Spool requesting payment of outstanding invoices and Goolsby

7 proposing a change to the joint venture’s payment structure that would reduce

8 CFA’s per-case payments by almost 40%. During this period, Goolsby also

9 proposed that World Child hire Susan Dibble, a longtime CFA employee.

10 On April 2, 2004, at the conclusion of these unsuccessful efforts at

11 conciliation, Carl Jenkins, a partner in the Jenkins & Povtak law firm that

12 represented World Child, sent Spool a letter accusing CFA of terminating the

13 joint venture and revoking CFA’s authority to act on World Child’s behalf. The

14 day after he received Jenkins’s letter, Spool left for a one-week vacation, leaving

15 the management of CFA in the hands of Dibble and Dorene Whitaker, another

16 longtime CFA employee. As it turned out, Spool chose an inopportune time to

17 leave.

18 On April 7, 2004, in the middle of Spool’s vacation, Jenkins faxed a letter

19 to CFA confirming a threatened “shut-off” of World Child’s New York operations

20 and offering to transfer business matters, including the costs of telephones, mail

21 handling, and other incidentals, from CFA to World Child. According to the

22 amended complaint, another fax had been sent shortly before from CFA’s office

4 1 to its telecommunications provider instructing the latter to forward calls placed

2 to CFA’s toll-free number to a different phone number. Spool’s and Goolsby’s

3 names were affixed to this fax, but Spool did not authorize the instruction. The

4 next day, Jenkins wrote the telecommunications provider on World Child

5 letterhead that World Child was no longer sharing office space with CFA and

6 requesting that all billing for the toll-free number be redirected. Dibble wrote

7 to Spool, resigning from CFA.

8 The amended complaint alleges that on April 8, 2004, Dibble and Whitaker

9 took various client files, agency licenses, office supplies, and marketing

10 materials, including agency letterhead, from CFA’s office. They used these

11 materials to open their own branch office of World Child from Dibble’s residence.

12 World Child sent letters to its New York clients announcing that World Child’s

13 New York office was relocating and that the enterprise operated by Dibble and

14 Whitaker would continue to provide client representation. Over the next several

15 weeks, this enterprise engaged in various forgeries with respect to client

16 documents, signing Spool’s name without authorization, improperly notarizing

17 signatures, and falsely affixing CFA’s agency license on client documents that

18 were submitted to the INS and foreign governments in connection with pending

19 adoptions. Dibble and Whitaker were eventually arrested for theft and forgery;

20 Dibble pled guilty in 2005 to forgery charges involving several CFA clients. The

21 amended complaint alleges that even after their arrests, Dibble and Whitaker

22 continued to operate the New York branch office of World Child in substantially

5 1 the same manner until at least April 19, 2005, on which date Dibble and Goolsby

2 issued some sort of “joint communiqué” to World Child’s employees and

3 affiliates.

4

5 II. The Fergusons’ Adoption

6 The Fergusons were among the clients swept up in the fracas between

7 CFA and World Child. Having successfully adopted a child through the joint

8 venture in its happier days, the Fergusons began the process of applying to

9 adopt a second child in January 2003. Along with World Child’s other clients in

10 the New York area, they received a letter in April 2004 informing them that

11 World Child’s New York office had relocated, but failing to indicate that this new

12 office was no longer affiliated with CFA. In May 2004, the Fergusons paid World

13 Child $12,200 in foreign program fees in connection with their application to

14 adopt a Russian child.

15 As the Fergusons prepared to travel to Russia to finalize their adoption,

16 they received instructions from the office now operated by Dibble and Whitaker

17 to bring large amounts of cash to use as gifts for Russian officials. When they

18 arrived in Russia in early August 2004, the Fergusons were met by defendant

19 Yaroslav Panasov, World Child’s Moscow-based representative who assisted the

20 Fergusons before the local court. The Fergusons were required to entertain and

21 feed Panasov, and several of the gifts they were instructed to provide went to

22 him and to World Child’s Moscow office, even though the Fergusons had already

6 1 paid over $12,000 in foreign program fees. On August 10, 2004, the Russian

2 court denied the Fergusons’ adoption application because it found irregularities

3 in their documentation. Panasov filed a handwritten appeal, which was denied

4 on August 27, 2004. The Fergusons later learned that several of their

5 documents, including the required update of a home study originally done by

6 CFA in 2003, had been falsified and forged by Dibble.

7 The amended complaint contains additional allegations about World

8 Child’s billing of foreign program fees allegedly based upon information to which

9 Spool was privy in his capacity as the head of CFA. In 2002, according to the

10 amended complaint, Spool was told by Goolsby and Jenkins that World Child

11 was increasing the foreign program fee that it charged to clients and that it was

12 using the extra payments to cover general expenses while informing clients that

13 the entire fee was necessary to pay foreign affiliates to process adoptions. The

14 plaintiffs allege that World Child deposited at least some of these extra fees into

15 the Foundation of World Child, Inc. (the “Foundation”), a purportedly not-for-

16 profit entity affiliated with World Child that was managed by Jenkins and

17 allegedly used to shelter World Child’s assets in order to avoid legal judgments.

18 The amended complaint does not allege that this activity caused damage to

19 Spool or CFA, nor that CFA objected to it.

20

21 III. District Court Proceedings

22 The plaintiffs commenced an action in the district court, alleging substan-

7 1 tive violations of RICO, RICO conspiracy, violations of the CFAA, and various

2 state law torts. Specifically, the plaintiffs allege the following RICO violations.

3 First, they allege that each defendant violated

(b) by main-

4 taining control of alleged RICO enterprises consisting of the Foundation and

5 Dibble and Whitaker’s New York branch office of World Child through a pattern

6 of racketeering activity — namely, the theft of CFA-related property and the

7 defrauding of the Fergusons and other joint-venture clients. Section 1962(c) was

8 allegedly violated when the defendants, being associated with the New York

9 branch office, engaged in this pattern of racketeering activity. Second, they

10 allege that the defendants violated § 1962(d) by conspiring to participate in the

11 illegitimate operation of the New York office, including the fraudulent acts

12 against the Fergusons and the theft of CFA’s property, and the alleged funneling

13 of money from the New York office to the Foundation to shield assets from

14 potential creditors. Finally, the plaintiffs allege that the defendants violated §

15 1962(a) by defrauding joint-venture clients and using the income derived from

16 their frauds to operate the Foundation.

17 The district court dismissed Panasov as a defendant on grounds of

18 insufficient process and service of process, dismissed the federal claims against

19 the remaining defendants, and declined to exercise supplemental jurisdiction

20 over the state claims. With respect to the RICO claims in particular, the district

21 court concluded that “the RICO allegations are present only as a jurisdictional

22 hook to access the federal courts with what may be valid state law claims for

8 1 fraud and breach of contract.” The court held that the amended complaint did

2 not allege a pattern of racketeering activity. The plaintiffs appeal this

3 determination.

4

5 DISCUSSION

6 We review the district court’s decision de novo, reading all well-pleaded

7 allegations in the plaintiffs’ favor. Commercial Cleaning Servs., L.L.C. v. Colin

8 Serv. Sys., Inc.,

(2d Cir. 2001). Although we construe the

9 pleadings liberally, “bald assertions and conclusions of law will not suffice.”

10 Leeds v. Meltz,

(2d Cir. 1996). The pleadings must create the

11 possibility of a right to relief that is more than speculative. ATSI Commc’ns, Inc.

12 v. Shaar Fund, Ltd.,

(2d Cir. 2007).

13 “To establish a RICO claim, a plaintiff must show: ‘(1) a violation of the

14 RICO statute,

; (2) an injury to business or property; and (3)

15 that the injury was caused by the violation of Section 1962.’” DeFalco v. Bernas,

16

, 305 (2d Cir. 2001) (quoting Pinnacle Consultants, Ltd. v. Leucadia

17 Nat’l Corp.,

, 904 (2d Cir. 1996)). This case implicates the first of

18 these three requirements, namely, whether the plaintiffs have adequately

19 alleged a violation of the RICO statute.

20 To establish a substantive RICO violation, a plaintiff must show a “pattern

21 of racketeering activity,”

(a)-(c), and to establish a RICO

22 conspiracy, a plaintiff must show a conspiracy to commit a substantive RICO

9 1 violation,

§ 1962(d). Thus, “[u]nder any prong of § 1962, a plaintiff in a civil

2 RICO suit must establish a ‘pattern of racketeering activity.’” GICC Capital

3 Corp., 67 F.3d at 465. To survive a motion to dismiss, this pattern must be

4 adequately alleged in the complaint.

5 According to RICO’s definitional section, a “‘pattern of racketeering

6 activity’ requires at least two acts of racketeering activity, . . . the last of which

7 occurred within ten years . . . after the commission of a prior act of racketeering

8 activity.”

(5). The acts of racketeering activity that constitute

9 the pattern must be among the various criminal offenses listed in § 1961(1), and

10 they must be “related, and [either] amount to or pose a threat of continuing

11 criminal activity.” Cofacrèdit, S.A. v. Windsor Plumbing Supply Co.,

(2d Cir. 1999) (emphasis omitted) (quoting H.J. Inc. v. Nw. Bell Tel. Co.,

13

(1989)) (internal quotation marks omitted). The latter so-

14 called “continuity” requirement can be satisfied either by showing a “closed-

15 ended” pattern — a series of related predicate acts extending over a substantial

16 period of time — or by demonstrating an “open-ended” pattern of racketeering

17 activity that poses a threat of continuing criminal conduct beyond the period

18 during which the predicate acts were performed. H.J. Inc.,

;

19 DeFalco, 244 F.3d at 320; Cofacrèdit,

; GICC Capital Corp., 67

20 F.3d at 466. We agree with the district court that the plaintiffs here have

21 alleged neither a closed-ended nor an open-ended pattern of racketeering

22 activity.

10 1

2 I. Closed-Ended Continuity

3 “To satisfy closed-ended continuity, the plaintiff must prove ‘a series of

4 related predicates extending over a substantial period of time.’” Cofacrèdit, 187

5 F.3d at 242 (quoting H.J. Inc.,

). Although factors such as the

6 number and variety of predicate acts and the number of participants may be

7 germane to this showing, “closed-ended continuity is primarily a temporal

8 concept.”

The relevant period, moreover, is the time during which RICO

9 predicate activity occurred, not the time during which the underlying scheme

10 operated or the underlying dispute took place. DeFalco, 244 F.3d at 321;

11 Cofacrèdit,

; cf. GICC Capital Corp., 67 F.3d at 467 (“Because

12 GICC does not allege any racketeering activity in connection with the individual

13 CRI defendants’ takeover of CRI, the takeover cannot form the starting point of

14 defendants’ pattern of racketeering activity.”).

15 Since the Supreme Court decided H.J. Inc., we have “never held a period

16 of less than two years to constitute a ‘substantial period of time.’” Cofacrèdit,

17

. This conception of the substantiality requirement accords with

18 that of other circuits. See GICC Capital Corp., 67 F.3d at 468. Although we

19 have not viewed two years as a bright-line requirement, it will be rare that

20 conduct persisting for a shorter period of time establishes closed-ended

21 continuity, particularly where, as here and as in GICC Capital Corp., “[t]he

22 activities alleged involved only a handful of participants” and do not involve a

11 1 “‘complex, multi-faceted conspiracy.’” Id. (quoting Polycast Tech. Corp. v.

2 Uniroyal, Inc.,

(S.D.N.Y. 1989)).

3 Even under the most liberal reading of the amended complaint, the

4 plaintiffs’ allegations fall short of this benchmark. The amended complaint

5 alleges that some unspecified RICO predicates began occurring in January 2004

6 and continued “at least” through April 19, 2005, when Dibble and Goolsby issued

7 their “joint communiqué”: “Upon information and belief, the Defendants engaged

8 in the above activities and conduct between January 2004 and at least April 19,

9 2005.” (First Am. Compl. ¶ 126.) This sixteen-month period of time is insuffi-

10 cient to establish closed-ended continuity — particularly in the absence of

11 separate schemes or large numbers of participants and victims. See DeFalco,

12 244 F.3d at 322.

13 Neither does this conclusion change if we construe the amended complaint

14 to allege that the defendants began conspiring in late 2003 to steal CFA’s

15 confidential files. The law is clear that “the duration of a pattern of racketeering

16 activity is measured by the RICO predicate acts” that the defendants are alleged

17 to have committed. Cofacrèdit,

; accord DeFalco, 244 F.3d at 321.

18 Ordinary theft offenses and conspiracies to commit them are not among the

19 predicate activities defined in

(1). Such a conspiracy, even if it

20 had been properly pled, therefore cannot establish a period of racketeering

21 activity beginning in 2003. Even if the plaintiffs had adequately alleged a RICO

22 predicate that commenced in late 2003, moreover, the period would still be

12 1 insufficient.

2 Nor can the defendants’ alleged overcharging of foreign program fees in

3 late 2002 begin the reference period. The amended complaint does not allege

4 these excessive charges to constitute any particular RICO predicate. Even if we

5 assume that these activities could constitute mail fraud or wire fraud if proved,

6 moreover, the amended complaint is still legally insufficient because the

7 allegations regarding the foreign program fees have not been pled with the

8 requisite particularity. See First Capital Asset Mgmt., Inc. v. Satinwood, Inc.,

9

(2d Cir. 2004) (“[A]ll allegations of fraudulent predicate acts[]

10 are subject to the heightened pleading requirements of Federal Rule of Civil

11 Procedure 9(b).”). Allegations of predicate mail and wire fraud acts “should state

12 the contents of the communications, who was involved, [and] where and when

13 they took place, and [should] explain why they were fraudulent.” Mills v. Polar

14 Molecular Corp.,

(2d Cir. 1993). Here, the only specifically

15 identified individuals who are alleged to have paid foreign program fees are the

16 Fergusons, who did so in 2004. The amended complaint, moreover, does not

17 allege any specific fraudulent communications about foreign program fees to

18 them or to anyone else. The sole allegation with regard to fraudulent represen-

19 tations in connection with these fees consists of the allegation that Spool was

20 told by Jenkins and Goolsby in 2002 that they were increasing the foreign

21 program fee and using the increase to cover general expenses while informing

22 clients that the extra fee was necessary to pay foreign affiliates. This spare

13 1 pleading is insufficient to satisfy Rule 9(b) of the Federal Rules of Civil

2 Procedure. See Lerner v. Fleet Bank,

(2d Cir. 2006); Mills, 12

3 F.3d at 1175.

4 Accordingly, we agree with the district court and find that the alleged

5 predicate acts span a period of no more than sixteen months, a “period . . . of

6 insufficient length to demonstrate closed-ended continuity under this Court’s

7 precedents.” DeFalco, 244 F.3d at 322.

8

9 II. Open-Ended Continuity

10 “To satisfy open-ended continuity, the plaintiff . . . must show that there

11 was a threat of continuing criminal activity beyond the period during which the

12 predicate acts were performed.” Cofacrèdit,

. This threat is

13 generally presumed when the enterprise’s business is primarily or inherently

14 unlawful. Id. at 242-43; GICC Capital Corp., 67 F.3d at 466; see also United

15 States v. Aulicino,

(2d Cir. 1995) (“[W]here the acts of the

16 defendant or the enterprise were inherently unlawful, such as murder or

17 obstruction of justice, and were in pursuit of inherently unlawful goals, such as

18 narcotics trafficking or embezzlement, the courts generally have concluded that

19 the requisite threat of continuity was adequately established . . . .”); United

20 States v. Indelicato,

(2d Cir. 1989) (en banc) (“Where the

21 enterprise is an entity whose business is racketeering activity, an act performed

22 in furtherance of that business automatically carries with it the threat of

14 1 continued racketeering activity.”).

2 When “the enterprise primarily conducts a legitimate business,” however,

3 no presumption of a continued threat arises. Cofacrèdit,

. In

4 such cases, “there must be some evidence from which it may be inferred that the

5 predicate acts were the regular way of operating that business, or that the

6 nature of the predicate acts themselves implies a threat of continued criminal

7 activity.”

In this case, we have no difficulty concluding that the enterprise

8 alleged here falls into the category that is primarily legitimate given that the

9 joint venture between World Child and CFA managed over one thousand

10 successful adoptions during the ten-year period predating this dispute.

11 The plaintiffs cannot avoid this determination by framing the RICO

12 enterprise as consisting solely of the Foundation and the New York branch office

13 operated by Dibble and Whitaker, or by otherwise separating the alleged RICO

14 enterprise from World Child’s previously legitimate business. “[T]he RICO

15 statute defines an ‘enterprise’ as ‘includ[ing] any individual, partnership,

16 corporation, association, or other legal entity, and any union or group of

17 individuals associated in fact although not a legal entity.’” DeFalco, 244 F.3d at

18 306-07 (second alteration in original) (quoting

(4)). The

19 enterprise can be any “‘ongoing organization, formal or informal,’” that

20 “‘function[s] as a continuing unit.’” United States v. Morales,

(2d

21 Cir. 1999) (quoting United States v. Turkette,

(1981)). The

22 amended complaint makes clear that World Child was not a disconnected entity

15 1 but part of whatever enterprise existed. Indeed, in a letter to Goolsby that is

2 quoted in the amended complaint and dated July 28, 2004, during the height of

3 the dispute, Spool acknowledged as much, referring to Dibble and Whitaker as

4 “personnel in the World Child New York office.” Furthermore, the Foundation

5 was allegedly funded by World Child using money collected through World

6 Child’s allegedly fraudulent billing practices. Thus, the amended complaint

7 itself makes apparent that World Child was not merely a part, but a central and

8 necessary part, of an “organization” that “function[ed]” as a “unit” “for a common

9 purpose of engaging in a course of conduct.” See Turkette,

.

10 Viewed in this manner, the enterprise cannot be said to pose a threat of

11 continuing conduct. At most, the amended complaint states that World Child’s

12 branch office fraudulently continued to process client cases over a period of

13 several months following the fallout between Spool and Goolsby and the

14 defection of Dibble and Whitaker. A scheme of this sort is “inherently termina-

15 ble” because once the defendants conclude the fraudulent “processing,” they have

16 no more CFA-related files with which to work. See Cofacrèdit,

17 (“[A]n ‘inherently terminable’ scheme does not imply a threat of continued

18 racketeering activity.”); GICC Capital Corp., 67 F.3d at 466 (“It defies logic to

19 suggest that a threat of continued looting activity exists when, as plaintiff

20 admits, there is nothing left to loot.”). This case is thus distinguishable from

21 cases such as Beauford v. Helmsley,

(2d Cir.) (en banc), vacated

22 and remanded mem.,

, adhered to on remand,

(2d Cir.

16 1 1989), in which we held that a “one-time” barrage of fraudulent mailings was

2 “sufficient to plead a pattern of racketeering activity” because “there was a basis

3 to infer that similar mailings would occur in the future.” GICC Capital Corp.,

4 67 F.3d at 466 (citing Beauford,

). Here, in contrast, the

5 amended complaint alleges only “a serious, but discrete and relatively short-

6 lived scheme to defraud a handful of victims,” which is insufficient to establish

7 open-ended continuity. Cofacrèdit,

.

8

9 CONCLUSION

10 For the foregoing reasons, we affirm the judgment of the district court.

11

17