ARNOLD ROSENSHEIN d/b/а PARK WEST REALTY CO., Plaintiff, v. DAVID KUSHNER, JEFFREY MESHEL, WAYNE STURMAN, PARADIGM CREDIT CORP., PARADIGM CAPITAL GROUP, LLC, PARADIGM CAPITAL FUNDING, LLC., MERCURY CREDIT CORP., MERCURY CAPITAL CORP. PARADIGM MONROE CENTER III, LLC, PARADIGM EXCHANGE LLC, EXCHANGE PARTNERS GROUP LLC, PCF EXCHANGE LLC, PARADIGM ELIZABETH LLC., PARADIGM EAST HANOVER LLC, EAST HANOVER PARTNERS LLC, TULIPAN INDURSKY & SONS LLC, and JOHN DOES and ABC CORPS., said names being fictitious, Defendants.
15cv7397(DLC)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
August 26, 2016
DENISE COTE, United States District Judge
APPEARANCES
For the plaintiff:
Michael Colin Barrows
Law Offices of Anthony A. Capetola
Two Hillside Avenue, Bldg. C
Williston Park, NY 11596
For the defendant Wayne Sturman:
Gerard A. Riso
Stein, Riso, Mantel, LLP
Chrysler Building
405 Lexington Avenue, 42nd Floor
New York, NY 10174
For the defendant Marc Gleitman:
David Edelberg
Nowell Amoroso Klein Bierman, P.A.
155 Polifly Road
Hackensack, NJ 07601
Larry Hutcher
Michael Wexelbaum
Richard C. Wolter
Davidoff Hutcher & Citron LLP
605 Third Avenue
New York, NY 10158
DENISE COTE, District Judge:
This case arises out of the 2008 financial crisis and the collapse in the real estate market. Frоm roughly 2002 to 2008, the plaintiff invested in real estate loans, which the defendants claimed were conservative and subject to a low degree of risk. According to the plaintiff, these loans were, in reality, highly risky. By 2009, many of the loans had experienced default. Seeking federal court jurisdiction, the plaintiff alleges that the defendants participated in a criminal enterprise in violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO“). The defendants hаve filed two motions to dismiss the first amended complaint (“FAC“). Because the RICO claims are time-barred, the defendants’ motions to dismiss the RICO claims are granted. The Court declines to
Background
The following facts are taken from the FAC and documents attached to or integral to the plaintiff‘s claims.
I. Overview of the Parties
The plaintiff, Arnold Rosenshein (“Rosenshein“), is a real estate investor. He engaged in investment transactions with the four individual defendants: David Kushner (“Kushner“), Jeffrey Meshel (“Meshel“), Wayne Sturman (“Sturman“) and Marc Gleitman (“Gleitman,” collectively the “Individual Defendants“). The Individual Defendants controlled various corporate entities (collectively, the “Corporate Defendants“). The Corporate Defendants include two categories: the Mercury entities (the “Mercury Defendants“) and the Paradigm entities (the “Paradigm Defendants“).
All of the Individual Defendants are alleged to have been principals, officers, members, and/or employees of the Mercury Defendants, which include Mercury Credit Corp. and Mercury Capital Corp. Mercury Credit Corp. created loans secured by mortgages and other collateral, while Mercury Capital Corp. acted as the servicer for Mercury Credit Corp.‘s loans.
II. Overview of the Loan Transactions
Rosenshein met Meshel in or around 2002 and the two developed a close relationship. Meshel convinced Rosenshein to invest funds in commercial loans sеcured by real property and arranged by the Corporate Defendants.
As described by Rosenshein, his arrangement with the defendants was that he made significant investments in various loans, but had no control over how his funds would be utilized, and obtained no security interest or collateral in any of the mortgaged properties. Meshel and Kushner falsely represented that the investments were conservative and would result in attractive returns with no risk of loss of principal becаuse the value of the security exceeded the value of the loans.
III. Losses on the Transactions
By 2009, many of the loans in which Rosenshein invested had experienced defaults by the borrowers.1 When this happened, Kushner and Meshel assured Rosenshein that they would act promptly to foreclose on the collateral property, allowing them to pay off the loan in full, and possibly providing a windfall to Rosenshein.
In order to effectuate a delay in the foreclosure and sale of the properties, the defendants falsely represented that they had entered into contracts for sale of the collateral. Kushner also gave Rosenshein various excuses, including blaming delays on borrowers, municipal regulatоrs, brokers, and attorneys. Rosenshein alleges that the defendants failed to foreclose on the collateral properties in a timely fashion because they benefitted from a delay in foreclosure. The defendants profited by executing extension, forbearance, and modification agreements
IV. Specific Transactions
Rosenshein brings claims relating to eleven investments he entered into with the defendants. These eleven investments share many characteristics. In each, the defendants extended loаns to borrowers for several million dollars, of which Rosenshein invested several hundred thousand dollars. Each loan was secured by residential or commercial property. Rosenshein invested in the loans between 2002 and 2008 and the loans each experienced defaults by the borrowers between 2003 and 2011, with defaults on ten of the eleven loans occurring by February 2009. For purposes of illustration, two of the investments at issue are described in some detail here: the Bеdford Place Investment and the East Haven Investment.
A. The Bedford Place Investment
In or around September 2004, Rosenshein invested $250,000
In 2005, the defendants entered into a loan extension agreement with the borrower in exchange for a fee of $70,000. The agreement also provided that the interest rate on the loan would increase from 11% to 12%. In 2008, the borrower defaulted and the defendants commenced foreclosure proceedings. Due to title issues, the foreclosure litigation has been ongoing since then, and the Rosenshein‘s capital continues to be tied up in the investment. Rosenshein claims that the defendants would have known of the title issues had they exercised due diligence, and that they induced Rosenshein to invest in this loan by misrepresenting the risk involved with the investment.
B. The East Haven Investment
In or about 2008, Rosenshein invested $250,000 in the East Haven investment. The loan was arranged by the defendants and had a total value of $5.3 million. The defendants falsely represented that (1) the total value of the security was $10,850,000, (2) the LTV ratio2 for the loan was 49%, (3) the
The borrower defaulted in January 2009. In Novembеr 2009, Rosenshein and other investors obtained ownership interests in one the properties through a deed in lieu of foreclosure.3 In September 2013, the third property was sold but no funds were distributed to Rosenshein. The other two properties have not been sold.
C. Overview of All Investments
The following chart describes all eleven loans at issue in this case:
| Loan | Total Loan Value | Collateral | Rosenshein‘s Investment | Approximate Date of Rosenshein‘s Investment | Approximate Date of First Default | Approximate Date of Foreclosure |
|---|---|---|---|---|---|---|
| The Lordstown Investment | $1,500,000 | 2 properties in Ohio | $100,000 | May 2002 | 2003 | 2003 |
| The Bedford Place Investment | $3,500,000 | 13 residential properties in New York | $250,000 | September 2004 | 2008 | 2008 |
| The 24th Street Investment | Not alleged | Not alleged | $500,000 | 2008 | 20084 | October 2011 |
| The Tarpon Springs Investment | $2,350,000 | Residential property in Florida | $250,000 | February 2006 | January 2007 | 2008 |
| The Tern Landing Investment | $14,000,000 | Residential property in New Jersey | $500,000 | October 2006 | August 2008 | September 2009 |
| The Shabbat Investment | $7,500,000 | Two properties in New York | $500,000 | March 2007 | May 2008 | 2008 (forbearance agreement) Date of foreclosure not alleged |
| The D‘Anconia Investment | $5,000,000 | Oceanfront property in the Virgin Islands | $250,000 | November 2007 | July 2011 | Not alleged |
| The Exchange Tarragon Investment | $12,000,000 | Real property located in Florida | $750,000 | November 2007 | January 2009 | January 2009 |
| The East Haven Investment | $5,300,000 | Three properties in Connecticut | $250,000 | 2008 | January 2009 | November 2009 (deed in lieu of foreclosure) |
| The East Hanover Investment | $12,300,000 | Property in New Jersey | $500,000 | March 2008 | February 2009 | 2009 |
| The Remsen Street Investment | $2,500,000 | Property in New York | $250,000 | January 2006 | February 2009 | March 2009 |
V. Procedural History
Rosenshein filed his original complaint on September 18, 2015.5 On December 3, all defendants except Sturman and Gleitman
Discussion
When deciding a motion to dismiss under
“To survive a motion to dismiss under
I. Statute of Limitations for RICO Claims
Rosenshein‘s RICO claims are barred by the applicable statute of limitations. RICO claims are subject to a four-year
A RICO claim accrues when a plaintiff discovers, or through reasonable inquiry should have discovered, his injury, and does not await discovery of the pattern of racketeering activity. Rotella v. Wood, 528 U.S. 549, 553, 559 (2000) (rejecting a pattern-discovery rule in favor of an injury-discovery rule); see also In re Merrill Lynch Ltd. P‘ships Litig., 154 F.3d 56, 59 (2d Cir. 1998). A plaintiff is on inquiry notice of his injury when there are sufficient “storm warnings” such that “the circumstances would suggest to an investor of ordinary intelligence the probability that [he or] she has been defrauded.” Koch, 699 F.3d at 151 (citation omitted). “The triggering information need not detail every aspect of the subsequently alleged fraudulent scheme.” Cohen v. S.A.C. Trading Corp., 711 F.3d 353, 361 (2d Cir. 2013) (citation
Rosenshein‘s alleged injuries all stem from losses incurred from his investments in eleven loans. Rosenshein alleges that his injuries include “loss of investment principal and interest, his share of diverted proceeds, lost interest on the loans, [and] lost opportunity cost.” Rosenshein alleges that these injuries were proximately caused by the defendants’ misrepresentations concerning the quality and risk of the loans, and their follow-up communications regarding the investments. Rosenshein sustained his RICO injuries, therefore, at the time he entered into those loans. See Merrill Lynch, 154 F.3d at 59 (“[T]he investors sustained recoverable out-of-pocket losses when they invested; namely, the difference between the value of the security they were promised and the one they received which could not meet those objectives.“)7. As set forth in the chart
above, Rosenshein invested in the various loans between 2002 and 2008.
Rosenshein‘s RICO claims accrued as early as 2003, but no later than 2009. Starting in 2003 and continuing through 2009, most of the investments at issue experienced defaults by the borrower(s), resulting in economic losses to Rosenshein. Indeed, by the end of 2009, borrowers in ten of the eleven loans had defaulted, affecting over $3.8 million of Rosenshein‘s investment. According to the FAC, Rosenshein was aware of these defaults because the defendants attempted to reassure him that his investments were safe despite the growing number of defaults by borrowers. These assurances notwithstanding, the fаct that numerous borrowers had defaulted would have caused a reasonable investor to suspect the possibility of fraud and to make further inquiries into the accuracy of the defendants’ representations regarding the collateral for and risk associated with the loans. This is especially true given the fact that the defaults were occurring during the 2008 financial crisis. By the end of 2009, a reasonable investor would have suspected that the defendants
Another round of storm warnings occurred after the defendants foreclosed on the properties securing the loans, but failed to sell those properties and promptly repay Rosenshein‘s investment. By the end of 2009, the defendants had foreclosed on or obtained title to nine of the eleven properties. According to their representations, the defendants should have been able to sell these properties easily for amounts in excess of the loans, and quickly repay all of Rosenshein‘s investment. Instead, the defendants “gave [Rosenshein] various excuses, blaming sundry circumstances and others, including, but not limited to, borrowers, municipal regulators, brokers and attorneys.” When the defendants failed to sell the collateral properties and promptly rеpay Rosenshein, these developments constituted further storm warnings that would make a reasonable investor suspect fraud. Given these storm warnings, a reasonable investor would have suspected fraud by the end of 2009, at the latest. Rosenshein‘s RICO claims, therefore, have been time-barred since at least the end of 2013.
Rosenshein‘s arguments to the contrary are without merit.
Moreover, Bankers Trust is distinguishable. In that case the defendants initiated multiple frivolous lawsuits against the plaintiff in an attempt to prevent or dissuade the plaintiff from collecting a valid debt. The Second Circuit held that each new lawsuit was a distinct injury. Bankers Trust, 859 F.2d at 1105. But, it has also held that, “non-independent injuries will not cause a new limitations period to accrue.” Bingham v. Zolt, 66 F.3d 553, 560 (2d Cir. 1995). Here, Rosenshein has not alleged that he suffered new injuries in 2011, but rather that effects of the injury he sustained from his fraudulently-induced investments continued to be disclosed as late аs 2011. This argument fails, however, because although the storms warnings continued to occur as late as 2011, there had already been sufficient storm warnings by 2009, at the latest, to put Rosenshein on inquiry notice of his injuries.
Similarly, Rosenshein argues that the determination of whеn he had sufficient storm warnings to put him on inquiry notice of his injuries is a fact-intensive inquiry that cannot be decided on a motion to dismiss. The Second Circuit has held, however, that “the question of inquiry notice need not be left to a finder of fact.” Merrill Lynch, 154 F.3d at 60. In a RICO case, the Court may determine as a matter of law whether sufficient storm warnings existed such that a reasonable
II. Leave to Amend RICO Claims
Rosenshein seeks leave to amend his pleadings for the second time in the event that the Court finds that his “RICO claims require further development.”
Rosenshein‘s request to amend is denied. Rosenshein has already amended his complaint once in response to the defendants’ prior motions to dismiss. He does not explain how a further amendment would be productive, identify what additional facts he would like to add, or supply a proposed amended pleading. Moreover, Rosenshein‘s RICO claims are time-barred as a matter of law and Rosenshein has made no showing that аny amendment could cure that defect.
III. Supplemental Jurisdiction
The remainder of Rosenshein‘s claims arise under state statutory or common law. Although the Court has supplemental jurisdiction over these claims, it may, in its discretion, decline to exercise such jurisdiction where it has “dismissed all claims over which it has original jurisdiction.”
It is well to recall that in the usual case in which all federal-law claims are eliminated before trial, the balance of factors to be considered under the pendant jurisdiction doctrine —- judicial economy, convenience, fairness, and comity —- will point toward declining to exercise jurisdiction over the remaining state-law claims.
Pension Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Centers Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc., 712 F.3d 705, 727 (2d Cir. 2013). Because all of the federal claims are dismissed and because this action is still in its early stagеs, the Court declines to exercise supplemental jurisdiction over the state law claims.
IV. Sturman‘s Motion to Strike Portions of the Amended Complaint
Sturman has moved to strike paragraphs 29 and 30 of the FAC. Those paragraphs allege, inter alia, that (1) Sturman was convicted and incarcerated for the felony charge of making false statements to financial institutions, (2) Sturman had been subject to involuntary bankruptcy proceedings, and (3) Sturman deprived his sister of her inheritance. With respect to the latter two allegations, the FAC quotes a prior judicial opinion in In re Sturman, 222 B.R. 694, 696 (Bankr. S.D.N.Y. 1998). Under
Conclusion
The defendants’ February 26 motions to dismiss are granted. Rosenshein‘s RICO claims are dismissed with prejudice. Rosenshein‘s state law claims are dismissed without prejudice to him refiling them in state court. Sturman‘s motion to strike is denied. The Clerk of Court shall enter judgment for the defendants on the RICO claims and close the case.
Dated: New York, New York
August 26, 2016
DENISE COTE
United States District Judge