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Bankers Trust Co. v. Rhoades

decided: October 3, 1988.


Appeal from a judgment of the United States District Court for the Southern District of New York, William C. Conner, Judge, dismissing, pursuant to Fed. R. Civ. P. 12(b)(6), plaintiff's civil RICO complaint alleging that defendants, through common-law fraud, bankruptcy fraud, perjury, and bribery, attempted to prevent plaintiff from collecting a debt owed to it by defendant's bankrupt corporation. Reversed and remanded.

Author: Pratt

PRATT, Circuit Judge:

This case is now on its second trip through the federal appellate system. On the first appeal, Bankers Trust Company ("Bankers") avoided dismissal when our split decision, holding that Bankers had failed to state a claim under 18 U.S.C. §§ 1964(c) and 1962 because it had not suffered "a distinct RICO injury" from defendants' alleged RICO violation, was vacated by the Supreme Court. Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir. 1984), vacated, 473 U.S. 922, 87 L. Ed. 2d 673, 105 S. Ct. 3550 (1985).

This time the issues are different, but they still focus upon whether Bankers can press its civil RICO action against these defendants. First, does Bankers lack standing to bring a civil RICO action against the officers of a bankrupt corporation for injuries sustained as a result of the officers' fraudulent depletion of corporate assets? Second, is Bankers' action barred by the statute of limitations?

The district court decided both questions against Bankers and dismissed the action pursuant to Fed. R. Civ. P. 12(b)(6). We disagree with the district court and hold that (1) Bankers has standing to bring a civil RICO action against these defendants, and (2) that Bankers' action, at least in part, is not barred by the statute of limitations, but (3) that the portion of Bankers' claim seeking to recover for its lost debt is premature and therefore must be dismissed without prejudice. Accordingly, we reverse and remand.


In reviewing this motion to dismiss under Fed. R. Civ. P. 12(b)(6), we must accept the allegations of plaintiff's complaint as true. Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972); Cooper v. Pate, 378 U.S. 546, 546, 12 L. Ed. 2d 1030, 84 S. Ct. 1733 (1964).

Daniel Rhoades, Herman Soifer, and Milton Braten own, direct, and control Braten Apparel Corporation ("BAC"), a New York corporation grossing over $50 million per year through the import, manufacture, and sale of apparel. As with most businesses of this size, BAC has multiple creditors, the largest being Bankers--a banking company incorporated and headquartered in New York City--to which BAC currently owes over $4 million.

In August 1974, due to severe financial losses and in an effort to avoid BAC's liabilities to Bankers and other creditors, Braten and Soifer agreed to seek a reduction of the corporation's debts through a Chapter 11 bankruptcy proceeding. In so doing, they agreed to fraudulently conceal from BAC's creditors a major asset: Brookfield Clothes, Inc. ("Brookfield"), a recently acquired corporation specializing in the sale of apparel, with net assets in excess of $3 million.

To carry out this scheme, Braten and Soifer executed a sham document which they later claimed was a valid shareholders' agreement. The document required BAC or Braten to lend Brookfield $250,000 by a specified date, in default of which BAC's ownership of Brookfield would be transferred to Soifer. Soifer and Braten never intended that the loan be made, but expected that the bankruptcy court and BAC's creditors, upon being shown the sham document and being informed that the condition had not been met, would believe that BAC no longer had any ownership interest in Brookfield. Braten and Soifer agreed that Soifer would hold Brookfield in a secret trust during the pendency of BAC's Chapter 11 proceedings, and would return it only after BAC had achieved a substantial reduction in its debts through a confirmed reorganization plan.

After completing this fraudulent transfer, BAC filed a petition in bankruptcy on September 5, 1974. Rhoades acted as attorney for BAC and, along with Braten and Soifer, misrepresented to the court, to Bankers, and to other creditors that, because BAC had failed to issue the loan as required under the shareholders' agreement, it no longer had any ownership interest in Brookfield.

Relying on these misrepresentations, Bankers agreed to, and the bankruptcy court confirmed, a plan of arrangement for BAC under which Bankers received only 17.5% of its allowed claim. This plan relieved BAC of more than $4.3 million in debts, and permitted it to continue operating with Rhoades, Braten, and Soifer retaining control. Critical to Bankers' acceptance of the plan was its belief that all BAC assets were being made available to the Chapter 11 proceeding. Had it known of the fraudulent transfer of Brookfield, Bankers never would have consented to the reorganization plan.

Shortly after confirmation of the plan and termination of the bankruptcy proceedings, Soifer, through a complicated series of transactions, returned ownership and control of Brookfield to BAC. At that time, Brookfield anticipated sales of $18 million in the coming year, had an annual net income in excess of $1.4 million, and had assets valued at well over $10 million.

In a further attempt to delay Bankers from collecting its debt, Rhoades, Braten and Soifer initiated frivolous lawsuits against Bankers in both New York and South Carolina state courts. In connection with the South Carolina action, in late 1978 Rhoades acquired, through a South Carolina corporation which he formed and which Soifer and Braten owned, a mortgage on which the judge presiding over the South Carolina action was personally obligated. Through an illegal agreement with the South Carolina judge, defendants then paid the judge's debt as the mortgage installments came due. In return, the judge rendered two decisions favorable to BAC: on November 9, 1978, he denied Bankers' motion to dismiss the action; and on January 18, 1979, he appointed a special referee who had ties to BAC and its counsel. These two bribed decisions caused Bankers to expend over $100,000 in legal fees.

In September 1976, upon learning of the transfer of Brookfield back to BAC, Bankers moved in the bankruptcy court to revoke BAC's confirmation plan, alleging that it had been procured by fraud. The record is unclear as to why the bankruptcy court did not act on this motion immediately; but whatever the reason, in 1981-82, over five years after Bankers moved to revoke but while that motion was still pending, Rhoades, Braten and Soifer, in a continuing attempt to prevent Bankers and other creditors from collecting their debts, conspired to and did in fact fraudulently conceal and deplete BAC assets through a wide variety of methods, including fraudulent stock transfers, transfers of corporate assets to other companies and individuals without fair consideration, and transfers of monies in corporate accounts to satisfy defendants' personal debts. Finally, on June 30, 1982, the bankruptcy court, holding that BAC had obtained its Chapter 11 reorganization by fraudulent means, revoked its confirmation plan and reinstated the bankruptcy proceedings Those proceedings are still pending in the bankruptcy court.

Bankers commenced this action against defendants in the district court on August 24, 1982. It alleged that the continuing actions of Rhoades, Braten and Soifer--the Common-law fraud and bankruptcy fraud in 1974-76, the frivolous lawsuits and bribery of the South Carolina judge in 1978-79, and the fraudulent conveyances in 1981-82--constituted a "pattern of racketeering activity" in violation of 18 U.S.C. § 1962(a)-(d).

In his first decision in 1983, Judge Conner found that plaintiff's complains alleged a violation of 18 U.S.C. § 1962, and that "the injuries suffered by Bankers were a direct consequence of the predicate acts." Bankers Trust Co. v. Feldesman, 566 F. Supp. 1235, 1242 (S.D.N.Y. 1983). Nevertheless, he dismissed the complaint because Bankers did not suffer a "competitive" injury. Id. at 1240-42. A divided panel of this court affirmed, Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir. 1983), but the Supreme Court subsequently vacated the judgment, see Bankers Trust Co. v. Rhoades, 473 U.S. 922, 87 L. Ed. 2d 673, 105 S. Ct. 3550 (1985), in light of its decision in Sedima v. Imrex Co., 473 U.S. 479, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985).

On remand, the district court received further briefing on two issues raised in defendants' initial motion to dismiss but not addressed in the court's first decision: standing and statute of limitations. Thereafter, on September 3, 1986, the district court issued an order (1) upholding the complaint as to Rhoades and Braten; (2) dismissing the claims of substantive RICO violations against Soifer as time-barred; but (3) upholding the claim that Soifer conspired with the other defendants to violate RICO. On the standing issue, the district court specifically held that Bankers had asserted "injuries * * * in its own right", not merely injuries to BAC which might be recoverable only by a bankruptcy trustee. Bankers Trot Co. v. Feldesman, 648 F. Supp. 17 (S.D.N.Y. 1986).

Defendants moved to reargue, and on December 22, 1987, the district court reversed itself in part and dismissed Bankers' complaint as to all defendants. Specifically, the district court held that Bankers lacked standing to pursue a civil RICO action based on defendants' common-law fraud, perjury and bankruptcy fraud--all alleged to be part of defendants' attempt to deplete BAC assets--because Bankers had suffered no injury from these illegal acts. Rather, the court stated, only BAC, as the corporation whose assets were fraudulently transferred, was injured by defendants' actions. In addition, applying a three-year statute of limitations, the district court held the bribery claims time-barred because the last ...

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