Friedler v. Cole

Full title: STANLEY FRIEDLER, M.D., ET AL. v. HENRY L. COLE, JR., ET AL

Court: United States District Court, D. Maryland

Date published: Feb 28, 2005

Civil Action No. CCB-04-1983 (D. Md. Feb. 28, 2005)

Opinion

Civil Action No. CCB-04-1983.

February 28, 2005

MEMORANDUM

CATHERINE BLAKE, District Judge

The present dispute concerns the alleged defrauding of individual plaintiffs Stanley Friedler, M.D. and Selvin Passen, M.D., along with various limited liability partnerships and corporations directed by them, by defendants Henry L. Cole, Jr. and his associates in a series of real estate investments in the Baltimore, Maryland area from March 2000 to January 2004. The plaintiffs, including Stanley Friedler, M.D., Selvin Passen, M.D., SG Padonia, LLC, Lighthouse Point Family, LLC, Padonia Tower Associates, LLP, Three Centre Park, LLC, 200 Washington Avenue, LLC, Gemini Realty, LLC, Riderwood, LLC, 6325 Woodside, LLC, Padonia West, LLC, and Slip Shore, LLC, assert three counts of violations of the Racketeering Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et. seq., as well as nine state law counts of fraud, negligent misrepresentation, negligence, negligent hiring and supervision, civil conspiracy, breach of fiduciary duties, breach of assignment agreement, and accounting fraud, against defendants Henry L. Cole, Jr., BN Realty Inc., Padonia Management, LLC, Patricia Bart, NRT Mid-Atlantic Title Services, LLC (Coldwell Banker Title Services), NRT Mid-Atlantic, Inc. (Coldwell Banker Commercial), David I. Miller, M.D., DLS Exchange Corporation, Corridor RFS Real Estate, LLC, 200 L.P., Inc., H-200 Limited Partnership, VI-4 Limited Partnership, Old Pad, LLC, and Old Pad II, LLC.¹ Plaintiffs originally filed suit in the Circuit Court for Baltimore County on May 21, 2004. Defendants removed the case to the United States District Court for the District of Maryland on June 25, 2004, on the basis that this court has original jurisdiction over the federal RICO claims and supplemental jurisdiction over the state law claims. The various defendants have filed motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). The issues have been fully briefed and no hearing is necessary. See Local Rule 105.6. As discussed in detail below, the plaintiffs' RICO claims will be dismissed because they have failed to allege a pattern of racketeering activity. Because the RICO claims are the sole basis for federal jurisdiction, I find it would be more in keeping with the principles of judicial economy, convenience, fairness, and comity, to decline to exercise supplemental jurisdiction over the pendent state law claims and remand them to state court. See Hinson v. Norwest Financial South Carolina, Inc., 239 F.3d 611, 616 (4th Cir. 2001) (holding that under 28 U.S.C. § 1367(c) a district court has discretion to remand removed state claims when the federal claims drop out of the case) (citing Carnegie-Mellon University v. Cohill, 484 U.S. 343, 357, 108 S.Ct. 614 (1988)).

1 Defendants DLS Exchange Corp., Corridor RFS Real Estate, LLC, 200 L.P., Inc., H-200 Limited Partnership, and VI-4 Limited Partnership entered into a settlement agreement with the plaintiffs, and all claims asserted against these defendants were dismissed with prejudice on October 4, 2004.

FACTS

In early 2000, defendant David I. Miller, M.D. a personal and professional acquaintance of Stanley Friedler, introduced Friedler to Henry Cole. (Compl. ¶ 34.)² Cole, described by the plaintiffs as "one of Coldwell Banker Commercial's top producing commercial real estate brokers," was seeking investors for various real estate opportunities in the Baltimore area. (¶ 29.) According to the plaintiffs, Cole represented to Friedler that due to his position with Coldwell Banker Commercial, he was well positioned to identify and acquire office properties that represented good investment opportunities. (¶ 35.) Because Cole had previously filed for bankruptcy and could not obtain financing, he proposed that Friedler and Miller fund several commercial real estate acquisitions. (¶¶ 35, 36.) In exchange for financing from Friedler and Miller, Cole offered to locate office properties, often before they were listed for sale and negotiate favorable sales contracts. Once the properties were acquired, Cole would manage them on behalf of a real estate management company in which they would all be equal partners. (¶ 36.) Cole represented to Friedler that he would not receive any sales commissions or other payments in relation with transactions made with Friedler. (¶ 39.) He explained that this would be particularly beneficial to Friedler because normally Cole was entitled to receive eighty percent of any commission earned on properties where Coldwell Banker was involved as an agent, and that this commission was typically included in the purchase price. (¶ 41.) Cole represented that Friedler would save money on the purchase price because Cole would waive his commission fee and the sellers would only pay twenty percent of the customary commission to Coldwell Banker. (¶ 42.) He also represented that he would forego compensation for managing the properties and that in all major management decisions, he would consult and obtain approval from all members before taking any action. Throughout their discussions, Cole represented that Coldwell Banker Commercial was aware of his private investment activities and approved of them, and moreover, that Coldwell Banker Commercial was willing to assist Cole in completing such transactions. (¶ 37.) This assurance, along with Cole's proposal to forego commission and management fees in exchange for one-third ownership in the properties, convinced Friedler that Cole's proposal represented a "reasonable and safe" investment opportunity. (¶ 44.) Friedler appreciated the arrangement because his medical practice did not afford him the time to locate, acquire and manage real estate investment opportunities. (¶ 43.)

Relying on Cole's representations, Friedler proceeded to invest in six real estate properties, joined by Passen for the last three investments, between March 2000 and July 2003. The first investment was 22 West Padonia Road in Timonium, Maryland. Miller and Cole had acquired this property recently by acquiring all the partnership interests in Padonia Tower Associates, LLP. (¶ 46.) Some of the sellers of 22 West Padonia Road were principals of Coldwell Banker Commercial (also operating under the name NRT Mid-Atlantic, Inc., and the trade name O'Conor, Piper Flynn ERA). (¶¶ 48, 16.) Coldwell Banker Commercial, Coldwell Banker Title, and Cole each maintained offices at 22 West Padonia Road. (¶ 48.) Cole told Friedler that he could buy into the property at the same amount paid by Miller and Cole three months earlier. (¶ 47.) In order to do so, Cole asked Friedler to refinance the loan that was secured by the property. (¶ 50.) Friedler, acting with SG Padonia, an entity created by him to facilitate the like-kind exchange, personally guaranteed a loan for $4,000,000 from Harbor Bank. (¶¶ 49, 51.) Cole retained Coldwell Banker Title to serve as the settlement and escrow agent for the closing. (¶ 51.) After the refinancing, SG Padonia held a one-third interest in 22 West Padonia Road and Miller and Cole shared equally the remaining two-thirds interest held by Padonia Tower Associates. (¶ 52.) At the time that SG Padonia bought into the property, Friedler did not know that, contrary to their agreement, Cole had charged him more than he and Miller had paid three months earlier. (¶ 53.)

On May 21, 2001, Cole, Miller and Friedler purchased an office building at 201 West Padonia Road in Timonium, Maryland for $3,225,000. (¶ 57.) To fund the acquisition, Friedler borrowed $2,475,000 from Susquehanna Bank. (¶ 58.) Miller and Padonia West guaranteed the loan and Cole, Miller, and Friedler each obtained a one-third interest in the property. (¶¶ 58, 60.) Once again, Cole selected Coldwell Banker Title to serve as the settlement and escrow agent for the acquisition. (¶ 57.) Friedler did not know at the time that Cole directed Coldwell Banker Title to transfer $200,000 of the loan proceeds to BN, an entity which plaintiffs believe was controlled by Cole. (¶ 59.)

On June 21, 2001, Cole, Miller, and Friedler purchased their third investment property together, 1107 Kenilworth Avenue in Towson, Maryland, when they acquired all the membership interests in Riderwood from Riderwood Holdings, LLC for $2,300,000. (¶ 61.) According to plaintiffs, Cole "fraudulently induced" Friedler to borrow $1,620,000 from Susquehanna Bank to finance the acquisition. (¶ 62.) The loan was guaranteed by Miller and Riderwood. (¶ 62.) Coldwell Banker Title served as the settlement and escrow agent and Cole, without the knowledge and consent of Friedler, directed Coldwell Banker Title to divert $250,000 of the loan proceeds to BN and to pay Coldwell Banker Commercial a total of $102,000 at closing. (¶ 63.) Plaintiffs aver that some or all of the principals of the Riderwood Holdings extended financing, represented by a promissory note in the amount of $350,000 from Riderwood to DLS Exchange (a tax-free exchange entity on behalf of some of the former owners of Riderwood Holdings), for a portion of the purchase price. (¶ 64.)

Cole presented Friedler with a fourth investment opportunity in the summer of 2001. The office building was located at 200 Washington Avenue in Towson, Maryland. Cole represented to Friedler that the property was a sound investment because he could purchase it at a low price and he already had a buyer willing to purchase it a year later for a large profit because of its proximity to Towson University and a related parking facility. (¶ 65.) The purchase price was $7,250,000, significantly more than the previous properties. (¶ 66.) After Cole stated that Miller could not afford to contribute to the purchase of the 200 Washington Avenue property and that they would need to find a third investor, Friedler approached Passen and invited him to participate in the acquisition. Friedler explained to Passen the arrangement with Cole and the purchase plan for 200 Washington Avenue. (¶ 67.) Cole then met with Passen and confirmed that he would not accept any commission or fee in relation to properties in which they invested and that he would contribute his share of capital to the maintenance of the properties. (¶ 68.) Cole explained that in consideration for his efforts on behalf of the investment properties, Friedler and Passen would borrow or personally guarantee the acquisition financing. (¶ 68.) Like Friedler, Passen thought Cole's proposal represented a reasonable investment and he "believed that Cole was reputable and would deal fairly and honestly" because he was a Coldwell Banker Commercial agent. (¶ 69.) Cole then detailed the terms of the agreement for 200 Washington Avenue in a letter dated June 8, 2001 and faxed the letter to Passen using interstate telephone lines. (¶ 70; see also Exhibit A.) According to the letter, in exchange for a capital contribution of $200,000 in cash and a $1,250,000 loan, Passen would acquire and hold a 25% interest in 200 Washington Avenue Limited Partnership through Slip Shore, LLC. (¶ 74; Exhibit A.) Cole specified that $1,000,000 of Passen's contribution would be paid back within sixty days of settlement, and $250,000 was to be paid when the property was sold. ( Id.)

Plaintiffs contend that Cole falsely represented to Passen that these loans would be used to acquire 200 Washington Avenue and that Cole would not receive any payment for his services in association with the transaction. (¶ 75.) Cole directed Coldwell Banker Title, the settlement and escrow agent for the transaction, to pay Cole through BN $500,000 and $100,500 to Coldwell Banker Commercial from Passen's contribution. (¶ 76.) Cole then paid Coldwell Banker Commercial another $104,500 as a "leasing commission," without the knowledge or consent of the other partners. (¶ 76.) Plaintiffs aver that the lease for which Coldwell Banker Commercial received the commission was already in place at the time of the sale. (¶ 77.)

In the summer of 2002, Cole informed Friedler and Passen that Miller could not afford to participate in future real estate investments. Cole offered to continue to locate properties on the same terms as before with Friedler and Passen as the only other investors. (¶ 78.) On July 17, 2002, Cole, Friedler, and Passen became the owners of Three Centre Park in Columbia, Maryland when they purchased all the ownership interests in TCP from Corporate Office Properties, L.P., for $7,175,000. (¶ 79.) Passen invested in the property through Slip Shore, LLC. (¶ 80.) Friedler borrowed $5,760,000 from Susquehanna Bank to finance the purchase; this loan was guaranteed by TCP. (¶ 81.) Cole directed Coldwell Banker Title to transfer $600,000 from the loan proceeds to BN, an entity controlled by Cole, and $201,000 to Coldwell Banker Commercial, without the knowledge or consent of Friedler and Passen (¶ 82.) The plaintiffs also claim that, without the knowledge or approval of Friedler and Passen, Cole paid $125,000 "disguised as a financing fee" to the seller Corpo, $110,000 to Coldwell Banker Commercial, and $31,500 to Dennis German, an individual who worked for Cole and Coldwell Banker Commercial. (¶ 83.) After closing, Cole, Friedler and Slip Shore, LLC each owned a one-third interest in TCP. (¶ 84.)

In the spring of 2003, Cole informed Friedler and Passen that because of financial difficulties, Miller needed to sell his interest in Padonia Tower, Padonia West, and Riderwood. Miller had previously sold all of his interest in 200 Washington Avenue to Passen's children. (¶ 85.) Cole represented to Friedler and Passen that Miller had not sold or transferred anything of value related to his interests and that his capital accounts for the properties were paid in full; he also assured them that he could negotiate a "good price" for Miller's interests. (¶ 86.) Cole provided Passen with records for the properties indicating they were in good financial condition. (¶ 87.) In response to Cole's assurances, Passen agreed to buy out Miller. Cole then handled the negotiations with Miller on Passen's behalf. (¶ 88.) On April 1, 2003, Miller assigned to Gemini Realty, an entity that held some of Passen's real estate investments, all of his right, title, and interest in Padonia Tower, Padonia West, and Riderwood. (¶ 89; see Exhibit B, Miller Assignment Agreement.) As of that date, Miller was no longer an investor in any of the properties that Cole had identified and purchased with Friedler and Passen. (¶ 90.)

Passen and Friedler made their last real estate investment with Cole on July 8, 2003 when they obtained 6325 Woodside Drive in Columbia, Maryland by purchasing all the ownership interests in Woodside for $4,750,000. (¶ 91.) At Cole's direction, Passen borrowed $3,300,000 from Susquehanna Bank in order to pay for Woodside; this loan was guaranteed by Woodside. (¶ 92.) Cole told Friedler and Passen that the seller would take back financing for a portion of the purchase price in the form of promissory note for $1,000,000 from Woodside. (¶ 92.) At closing, Cole instructed Coldwell Banker Title to pay Coldwell Banker Commercial $100,000, $18,000 more than they were entitled to receive. (¶ 93.) Cole also directed Coldwell Banker Title to pay Corridor RFS $82,000. (¶ 93.) Cole, Friedler, and Passen each obtained a one-third interest in Woodside. (¶ 94.)

For each of the above investments, Cole discouraged Friedler and Passen from attending the closings, explaining that investors tended to negotiate too much away. (¶ 95.) Based on his assurances, Friedler and Passen agreed to sign all the closing documents ahead of time and let Cole attend the closings alone. (¶ 95.) Plaintiffs contend that they felt their interests were protected because Coldwell Banker Title was acting as the settlement and escrow agent. (¶ 97.) In addition, Cole represented to Friedler and Passen that he would retain an attorney to handle the transactions on behalf of the investors; Cole controlled all communications with counsel. (¶ 96.) Throughout their investment endeavors, Cole represented to Friedler (and later Passen as well) that he was not earning commission or management fees in relation to the properties and that he was continuing to make capital contributions to the properties in the same amount as the other partners. (¶ 55.) Cole handled all day-to-day management of the properties and, along with his assistant Patricia Bart, retained exclusive control over the rent rolls, books, and records of Padonia Tower Associates, Padonia West, Riderwood, 200 Washington Avenue, TCP, and Woodside. (¶¶ 98, 99.) Throughout March 2000 and January 2004, Cole made monthly payments to Friedler and Passen that he represented to be distributions from their investments in the above property interests. (¶ 100.)

In late 2003, Friedler and Passen became suspicious of Cole. After Friedler approached Cole with his concerns, Cole went to Passen and stated that he could no longer work with Friedler because Cole did not trust him. Cole therefore offered to sell his interests in the properties to Passen for a "good price." (¶ 101.) Although Cole initially refused to turn over the books and records relating to the investment properties prior to entering into an agreement to sell his share of the investment properties to Lighthouse Point Family, LLC (an entity in which Passen is the managing member), Passen ultimately entered into an assignment agreement with Cole on January 1, 2004 whereby Cole transferred all his interests in the properties to Lighthouse Point Family, LLC for $2,000,000. (¶¶ 102-103; see Exhibit C.) In consideration for the Cole assignment, Friedler and Passen assigned their interests in Old Pad and Old Pad II to Cole in a separate agreement executed on January 1, 2004. (¶ 104; see Exhibit D.)

Under the terms of the Cole assignment, Cole was to immediately transfer all books and records regarding the investment properties to Passen. (¶ 105.) Cole turned over some, but not all of the records. (¶ 106.) Passen and Friedler were able to obtain additional records from other individuals. Upon reviewing the records, Passen and Friedler learned for the first time that Cole had deviated from their agreements and had, according to plaintiffs, engaged in fraudulent conduct. (¶ 107.) For example, Friedler and Passen learned that Cole had entered into contracts of sale with the sellers of the properties prior to inducing them to purchase the properties. Coldwell Banker Commercial was listed as the broker in the contracts for sale. (¶ 108.) Friedler and Passen realized that the contracts for sale that Cole presented to them to persuade them to invest in the properties differed from the contracts which were actually executed with the sellers. Specifically, they learned that Cole and the sellers entered into addenda to the contracts that directed payments to be made to individuals, such as brokers or agents with whom Cole worked, as well as entities that the plaintiffs claim Cole controlled or held an interest. These arrangements, which were concealed from Friedler and Passen, significantly increased the purchase price paid by Friedler and Passen. (¶ 109.) The purchase price for the properties was further increased by the fact that Cole had offered the sellers premium prices for the properties, prices which included large payments to Cole at settlement. According to the plaintiffs, this arrangement of paying additional sums to "Cole-controlled entities, other OPF and/or Coldwell Banker Commercial agents or brokers, or brokerage firms with whom principals of the sellers were affiliated" had not previously been revealed to them. (¶ 110.) The plaintiffs allege that for at least three properties, Coldwell Banker Commercial's President, John Evans, instructed Coldwell Banker Title to make payments to BN based solely on the settlement sheets, even though Coldwell Banker Title did not have copies of the contracts for sale or other written confirmation that BN was entitled to commissions. (¶¶ 153-57; see Exhibit E.) Plaintiffs aver that Coldwell Banker Commercial and Coldwell Banker Title knew that BN was an entity controlled by Cole. (¶ 156.)

Plaintiffs also learned that although Cole had frequent contact with the loan officers handling the loans for the acquisitions, Cole never disclosed to them that he was earning substantial fees in the transactions. (¶ 111.) To conceal this information, Cole provided the lending institutions, Friedler, and Passen with the body of the contracts only, omitting the addenda which included the fee payments to Cole by Coldwell Banker Title. (¶ 112.) To further conceal the fee arrangements, Cole directed Coldwell Banker Commercial to prepare two sets of settlement documents, one containing only the buyers' expenses and credits and the other showing only the sellers' expenses and credits. According to plaintiffs, the payments to Cole and his affiliates were only listed in the sellers' settlement sheets. (¶ 113.) Plaintiffs allege that Cole, working with others under his control, intentionally concealed the original contracts of sale or the sellers' side of the agreements from Friedler, Passen, and the lending institutions before and after the settlements. These documents were omitted from the closing binders that Cole and his associates prepared for Friedler, Passen, and the lending institutions. (¶ 115.)

Friedler and Passen also uncovered a number of financial irregularities as well as transactions they had not approved once they obtained the investment property records from Cole and others. For example, they learned that Cole never contributed his share of the capital required to acquire the properties. (¶ 116.) Instead, Cole manipulated his capital accounts so they would appear higher than they really were; in fact, they were over $1,000,000 short. (¶ 116.) On January 30, 2004, Friedler and Passen discovered that Cole had opened a money market account in the name of Woodside at Susquehanna Bank in July 2003. (¶ 117.) They learned of a series of checks that had been issued to Woodside and deposited in the money market account, as well as several checks that had been drawn on the account, without their knowledge, even though they were equal partners in the Woodside investment. (¶¶ 119-123.) The plaintiffs allege that after Cole and Passen entered into the Cole assignment, Bart directed Susquehanna Bank to continue to send all account information for the Woodside money market account to Cole's business address rather than to Passen, as the bank had been directed to do. (¶ 126.) Furthermore, the plaintiffs contend that someone who had previously been an authorized signatory on the secret Woodside account attempted to close the account by requesting a check for approximately $25,000 (the remaining balance in the account), made payable to Woodside. (¶ 127.)

Finally, plaintiffs allege that the records they obtained demonstrate that Cole failed to manage the investment properties in a commercially reasonable manner. While Cole was managing the properties, real property taxes were not paid on three of the properties; in fact, one of the properties was sold at a tax sale. (¶ 128.) Moreover, Cole did not disclose that he leased a Mercedes $500 under the Padonia Towers Assoc. LP name. (¶ 129.) The plaintiffs discovered that the capital accounts maintained on the books of the various entities did not conform to the members' tax returns. (¶ 130.) Additionally, Cole owed $150,000 for an "undisclosed and unauthorized" loan made to Cole by Padonia Tower Associates and another $1,072,430.28 in capital contributions he failed to make to the various interests before he sold his interests to Passen. (¶¶ 130-31.)

ANALYSIS

I. Standard of Review

"The purpose of a Rule 12(b)(6) motion is to test the sufficiency of a complaint; importantly, a Rule 12(b)(6) motion does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999) (internal quotation marks and alterations omitted). When ruling on such a motion, the court must "accept the well-pled allegations of the complaint as true," and "construe the facts and reasonable inferences derived therefrom in the light most favorable to the plaintiff." Ibarra v. United States, 120 F.3d 472, 474 (4th Cir. 1997). Consequently, a motion to dismiss under Rule 12(b)(6) may be granted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Edwards, 178 F.3d at 244. In addition, because the court is testing the legal sufficiency of the claims, the court is not bound by the plaintiff's legal conclusions. See, e.g., Young v. City of Mount Ranier, 238 F.3d 567, 577 (4th Cir. 2001) (noting that the "presence . . . of a few conclusory legal terms does not insulate a complaint from dismissal under Rule 12(b)(6)" when the facts alleged do not support the legal conclusions); Labram v. Havel, 43 F.3d 918, 921 (4th Cir. 1995) (affirming Rule 12(b)(6) dismissal with prejudice because the plaintiff's alleged facts failed to support her conclusion that the defendant owed her a fiduciary duty at common law).

II. RICO Claims

The plaintiffs bring three counts under the Racketeer Influenced and Corrupt Organizations Act (RICO), Pub.L. 91-452, 18 U.S.C. §§ 1961- 1968, the law designed by Congress to combat organized crime. RICO contains a civil provision that enables private citizens to bring suit against individuals and entities that have injured them in their business or property through racketeering activity. 18 U.S.C. § 1964(c).³ The prevailing plaintiff is entitled to treble damages, costs and attorney's fees. Id. RICO defines racketeering activity as any felony act "chargeable" under several generic state laws (e.g., murder, kidnaping, arson, bribery), or any act "indictable" under several listed federal criminal provisions, including mail and wire fraud. 18 U.S.C. § 1961(1). Courts have struggled to balance the statute's directive that it "be liberally construed to effectuate its remedial purposes," with the need to limit its severe penalties to offenders engaged in ongoing criminal activity, rather than isolated wrongdoers. See, e.g., Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 498-500, 105 S.Ct. 3275, 3286-87 (1985) (acknowledging the expansion of civil RICO litigation due to the "breadth of the predicate offenses, in particular the inclusion of wire, mail, and securities fraud, and the failure of Congress and the courts to develop a meaningful concept of `pattern,'" but holding that the language and approach of RICO dictated a broad reading of the statute).

3 "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 the suit, including a reasonable attorney's fee . . ."

The plaintiffs allege violations of 18 U.S.C. § 1962(a) (investment of proceeds from racketeering activity in acquiring, establishing, or operating an enterprise) (Count 1); 18 U.S.C. § 1962(c) (conducting an enterprise through a pattern of racketeering activity) (Count 2); and 18 U.S.C. § 1962(d) (conspiracy to violate subsection (a) and (c)) (Count 3). While the investment and conspiracy elements are particular to subsections (a) and (d) respectively, in order to establish a violation of § 1962(c),⁴ the plaintiff must show "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, 473 U.S. at 496. The Supreme Court has defined each of these elements more specifically, including the concept of "pattern," the element most important to the analysis in this case.

4 18 U.S.C. § 1962(c) provides "[i]t shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt."

In order to prove that the enterprise has engaged in a "pattern" of racketeering activity, the plaintiffs must demonstrate that defendants engaged in at least two acts of racketeering activity, at least one of which occurred within ten years. 18 U.S.C. § 1961(5). Merely alleging two or more predicate acts will not suffice; in order to satisfy the pattern requirement, plaintiffs must demonstrate that the "racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." H.J. Inc. v. Northwestern Bell Telephone, 492 U.S. 229, 239, 109 S.Ct. 2893, 2900 (1989). "[C]riminal acts that 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" indicate relatedness. Id. at 240 (quoting Title X pattern definition of the Organized Crime Control Act of 1970 (OCCA); RICO was Title IX of the OCCA). In order to satisfy the continuity requirement of the pattern element, a plaintiff must demonstrate that the racketeering activity was either "closed," referring to a closed period of repeated conduct, or "open-ended . . . past conduct that by its nature projects into the future with a threat of repetition." Id. at 241. The "continuity requirement is likewise satisfied where it is shown that the predicates are a regular way of conducting defendant's ongoing legitimate business (in the sense that it's not a business that exists for criminal purposes) . . ." Id. at 243. The Court cautioned that "[p]redicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct." Id. at 242.

The Fourth Circuit has similarly required that a pattern demonstrate a sufficient threat of continued or widespread racketeering activity, in keeping with Congress' intent that only parties who engage in widespread fraud be subject to the serious liability imposed by RICO. See, e.g., Eplus Technology, Inc. v. Aboud, 313 F.3d 166, 182 (4th Cir. 2002) ("[I]t is clear that predicate acts of racketeering activity must be part of a prolonged criminal endeavor."); Al-Abood v. El-Shamari, 217 F.3d 225, 238 (4th Cir. 2000) ("We have reserved RICO liability for `ongoing unlawful activities whose scope and persistence pose a special threat to social well-being.'") (quoting Menasco, Inc. v. Wasserman, 886 F.2d 681, 683-84 (4th Cir. 1989)) (citing Congressional reports which state that RICO was not intended for isolated offenders).

The Fourth Circuit has carefully distinguished between "ordinary or garden-variety fraud claims better prosecuted under state law and cases involving a more serious scope of activity." Al-Abood, 217 F.3d at 238. For example, the court has cautioned against basing a RICO claim on predicate acts of mail and wire fraud because "it will be the unusual fraud that does not enlist the mails and wires in its service at least twice." Id. (quoting Anderson v. Foundation for Advancement, Educ. and Employment of Am. Indians, 155 F.3d 500, 506 (4th Cir. 1998). Accordingly, the Fourth Circuit has carefully applied the pattern requirement, only finding RICO claims where the pattern is sufficiently "criminal [in] dimension and degree." Int'l Data Bank, Ltd. v. Zepkin, 812 F.2d 149, 155 (4th Cir. 1987).

The defendants argue that the plaintiffs' RICO claims should be dismissed because they are nothing more than "garden-variety fraud" claims and because the plaintiffs have not sufficiently pled the required elements demonstrating RICO violations. Specifically, the defendants argue that plaintiffs have failed to allege: (1) a RICO enterprise with a unified structure separate and apart from the pattern of racketeering activity; (2) a pattern of racketeering activity; (3) the necessary effect on interstate commerce; (4) as to Count One, 18 U.S.C. § 1962(a), investment of proceeds from racketeering activity; (5) as to Count Three, 18 U.S.C. § 1962(d), lack of conspiracy because there was no underlying RICO violation; and (6) as to NRT Mid-Atlantic and NRT Mid-Atlantic Title, conduct necessary to establish respondeat superior liability under RICO. In addition, the defendants argue that the plaintiffs have failed to plead the predicate acts of mail and wire fraud with particularity as required by Fed.R.Civ.P. 9(b). Because the plaintiffs' RICO claims fail to allege a pattern of racketeering activity, it is not necessary to analyze each of the defendants' other arguments.

The plaintiffs contend that Cole was the leader of the enterprise, consisting of BN, Padonia Management, Bart, Coldwell Banker Commercial, Coldwell Banker Title, and/or Miller (¶¶ 138, 186), and that each defendant played a role in carrying out the enterprise's illegitimate activities in order to receive income and use that income in furtherance of the enterprise's activities. ( See, e.g., ¶¶ 141, 199, 200.) The plaintiffs' RICO claims are predicated on multiple acts of mail and wire fraud, which plaintiffs assert were carried out to further the overall fraudulent scheme orchestrated by Cole. ( See, e.g., ¶ 140.) Plaintiffs state that they suffered significant financial injury to their business and property interests as a result of the alleged racketeering activity.

As plaintiffs correctly explain, determining whether a pattern exists is a "commonsensical, fact-specific inquiry," not a "mechanical" one determined solely by the number of predicate acts over a given time period. ( See Pls.' Memo. in Opp'n at 10) (quoting Eplus Technology, 313 F.3d at 182.) Although the plaintiffs allege multiple predicate acts of mail and wire fraud involving at least six transactions over a three and a half year time period, "[t]he number of predicate acts is not an appropriate litmus test, as the perpetration of numerous acts of mail and wire fraud may be no indication of the requisite continuity of the underlying fraudulent scheme." Zepkin, 812 F.2d at 155 (internal quotations and citations omitted). Rather, the critical inquiry is whether the predicate acts demonstrate the kind of relatedness and continuity that distinguish widespread fraud threatening long-term criminal activity from ordinary fraud not properly subject to RICO's penalties. The Maryland-National Capital Park and Planning Comm'n v. Boyle, 203 F.Supp.2d 468, 476 (D. Md. 2002) (explaining that the Fourth Circuit emphasizes that "the heightened civil penalties of RICO `are reserved for schemes whose scope and persistence set them above the routine'") (quoting HMK Corp. v. Walsey, 828 F.2d 1071, 1074) (4th Cir. 1987).

The complained of scheme, in which the plaintiffs were allegedly defrauded of millions of dollars in a series of real estate investments orchestrated by defendant Cole, ended in January 2004, when Cole transferred all his interests to Passen. Throughout the three and a half years in which plaintiffs invested with Cole, they apparently fell victim to several predicate acts of mail and wire fraud that were related inasmuch as they shared "the same or similar purposes, results, participants, victims, or methods of commission." H.J. Inc., 492 U.S. at 239. Cole's intent was to defraud the plaintiffs of their financial investment in real estate ventures identified and managed by him; according to the plaintiffs' complaint, Cole largely succeeded in this goal. The plaintiffs maintain that the scheme also demonstrates sufficient continuity to satisfy the pattern requirement. They argue that the alleged pattern of activity should be considered "open-ended" because it would have continued if Cole had not been caught and that the defendants' fraudulent conduct "by its nature projects into the future with a threat of repetition until it is exposed." (Pls.' Memo. in Opp'n at 13) (quoting H.J. Inc., 492 U.S. at 242.)

The Fourth Circuit has identified several factors to consider when determining whether a RICO pattern exists. These factors, including, "the number and variety of predicate acts and the length of time over which they were committed, the number of putative victims, the presence of separate schemes, and the potential for multiple distinct injuries," should be considered along with "all the facts and circumstances of the particular case — with special attention to the context in which the predicate acts occurred." Brandenburg v. Seidel, 859 F.2d 1179, 1185 (4th Cir. 1988), overruled on other grounds by Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 116 S.Ct. 1712 (1996). See also Park et al. v. Jack's Food Systems, Inc., 907 F. Supp. 914, 920 (D.Md. 1995).

Using the above factors to analyze whether the plaintiffs' claims are sufficiently "outside the heartland of fraud cases to warrant RICO treatment," Al-Abood, 217 F.3d at 238, it is apparent that this case does not present the sort of "ongoing unlawful activities whose scope and persistence pose a special threat to social well-being." Menasco, 886 F.2d at 684. The alleged pattern of racketeering activity in this case, consisting only of acts of mail and wire fraud, was carried out as part of a single scheme directed against the two plaintiffs and their closely-held investment companies. As described in plaintiffs' complaint, Cole used virtually the same methods, relying principally on his status as a broker for Coldwell Banker Commercial, to induce the plaintiffs to invest in six commercial properties. The plaintiffs argue in their opposition brief that there may be other victims to Cole's scheme, and that whether they exist "will only be revealed through the discovery process." (Pls.' Memo. in Opp'n at 15.) The complaint, however, is bereft of any allegations that support even an inference that Cole's investment scheme extended beyond the plaintiffs. See, e.g., Menasco, 886 F.2d at 684 (plaintiffs' allegations that defendants committed fraud against "various other individuals" was too general to satisfy Fed.R.Civ.P. Rule 9(b) and therefore could not be relied upon to establish a pattern).

In similar circumstances, the Fourth Circuit has determined that the "narrow focus of the scheme . . . combined with the commonplace predicate acts persuades us that the facts here do not satisfy the pattern requirement." Al-Abood, 217 F.3d at 238. In Al-Abood, "formerly close family friends" defrauded the plaintiffs of several million dollars through a real estate investment, a charitable trust, and a brokerage account, over several years. The court, focusing on the limited number of victims and the nature of the fraud, concluded that "this case does not involve a scope of unlawful activity that exceeds that found in customary fraud cases." Id. at 239. See also Lowry's Reports, Inc. v. Legg Mason, Inc., 186 F.Supp.2d 592, 593-94 (D.Md. 2000) (observing that a "purely durational approach" to determining whether a RICO pattern exists is "overly simplistic and outdated, in view of recent Fourth Circuit case law, especially Al-Abood, which took a more substantive approach . . . focusing on what is — and what is not — within the heartland of a simple fraud"). In Menasco Inc. v. Wasserman, 886 F.2d 681 (4th Cir. 1989), a case quite similar to this case, the defendant induced the two plaintiffs to invest with him in the oil business. The defendant explained that the investors would share both development costs and net revenues, and to facilitate the investment he set up two companies which would be directed by the plaintiffs. Id. at 682. The plaintiffs alleged that the defendants misrepresented to them that as partners in the venture, they would all pay the same price for oil and gas properties, when in fact, the defendants inflated the price by two to five times more than they had paid. Id. Reasoning that "the pattern requirement in § 1961(5) . . . acts to ensure that . . . the multiple state and federal laws bearing on transactions such as this one are not eclipsed or preempted," the court held that the narrow and limited scope of the fraud failed to satisfy the continuity prong of the RICO pattern requirement. Id. at 683-84. See also Anderson v. Foundation for Advancement, Educ. and Employment of Am. Indians, 155 F.3d 500, 506 (4th Cir. 1998) (alleged racketeering acts, consisting of the failure to pay two real estate commissions, and another "unrelated" scheme, did not "bear such relationship to each other or to any external organizing principle to support a civil RICO claim"); Flip Mortgage Corp. v. McElhone, 841 F.2d 531, 538 (4th Cir. 1988) (citing Zepkin, 812 F.2d at 155) (in a corporate fraud case spanning seven years and involving one victim, the court found that the single scheme "does not rise above the routine, and does not resemble the sort of extended, widespread, or particularly dangerous pattern of racketeering which Congress intended to combat with federal penalties"); Zepkin, 812 F.2d at 155 (holding that a single, limited fraudulent scheme, involving a misleading prospectus that went to ten investors, did not satisfy the RICO pattern requirement).

In contrast, the Fourth Circuit has recognized a RICO claim when the fraudulent scheme operated over only a few months but the plaintiffs demonstrated that the defendant had orchestrated other, similar schemes. Eplus Technology, Inc. v. Aboud, 313 F.3d 166, 182-83 (4th Cir. 2002). In Eplus Technology, the Fourth Circuit affirmed the lower court's finding after a bench trial that the defendant had violated RICO by operating a "bust-out scheme" that defrauded more than fifty creditors of roughly $10,000,000. Id. at 174. In that case, the defendant lured creditors into extending larger and larger lines of credit before selling all of its inventory at bargain prices, resulting in bankruptcy and leaving the creditors with uncollectible debts. In analyzing the continuity requirement of the pattern element, the court observed that the bust-out scheme was necessarily closed-ended because its success depended upon the bankruptcy of the company. Id. at 182. The court noted that the bust-out scheme lasted only a few months, and that although the "underlying conspiracy victimized numerous creditors," it did not "necessarily establish the requisite pattern of racketeering activity." Id. The court compared the case to GE Inv. Private Placement Partners II v. Parker, 247 F.3d 543, 549 (4th Cir. 2001), a case involving a scheme to defraud potential investors in the defendant's company, noting that "[e]ven where many investors had been misled, we concluded that the required continuity had not been established." Id. The court emphasized that if the bust-out scheme "had operated over a longer period or employed a variety of predicate offenses, it might have involved the required pattern of racketeering activity." Id. Ultimately, however, the court found the pattern requirement was satisfied in Eplus Technology because the plaintiffs presented evidence at trial that the defendant had carried out previously at least two very similar bust-out schemes. Id. at 183.

The investment dispute at the center of this case is most closely aligned with the cases described above, where the Fourth Circuit has determined that the predicate acts, consisting mainly of mail and wire fraud, fail to establish a RICO pattern. The complaint describes a fraudulent scheme spearheaded by Cole and narrowly targeted to misappropriate the plaintiffs' investments. Cole allegedly repeated the same predicate offenses, mail and wire fraud, to effectuate his scheme. If plaintiffs had alleged a more widespread scheme, involving various predicate acts and other offenders and victims, then the fraud they suffered would more closely resemble the kind that "rises above the routine" and "poses a threat to social well-being." See, e.g., Superior Bank, F.S.B. v. Tandem Nat'l Mortgage, Inc., 197 F. Supp.2d 298, 324 (D.Md. 2000) (finding the RICO pattern requirement satisfied where over thirty defendants coordinated a mortgage flipping scheme involving twenty-three transactions); Thomas v. Ross Hardies, 9 F.Supp. 2d 547, 555 (D.Md. 1998) (finding a RICO pattern existed where the defendants directed a broad, open-ended scheme to recruit and defraud homeowners through a mortgage scheme).⁵

5 The plaintiffs argue that their case is similar to Kerby v. Mortgage Funding Corp., 992 F.Supp. 787 (D. Md. 1998), a putative class action suit involving real estate fraud where the court found the plaintiffs had stated a RICO claim against mortgage and title companies. Kerby, however, focused on whether the plaintiffs' pleadings satisfied Rule 9(b), and did not discuss the pattern requirement which is critical to the plaintiffs' allegations in this case.

The plaintiffs urge the court to infer that Coldwell Banker Commercial and Coldwell Banker Title were knowing participants in Cole's scheme. ( See Pls.' Memo. in Opp'n at 15-19.) The plaintiffs argue that Coldwell Banker Commercial and Coldwell Banker Title benefitted economically from Cole's conspiracy, that they violated numerous Maryland real estate laws when they transferred money to BN, a non-licensed entity, and that they should known it was illegal and unethical to authorize financial transfers requested by Cole when they lacked the necessary settlement documentation. While these violations, if true, might subject Coldwell Banker Commercial and Coldwell Banker Title to liability for many of the common law claims asserted by plaintiffs (such as negligence), the allegations do not suggest that CBC and CBT knowingly participated in Cole's scheme to defraud Passen and Friedler. Moreover, "acts of negligence are not predicate acts under the RICO statute," and therefore cannot be relied upon to establish a RICO pattern. Brandenburg, 859 F.2d at 1188.

In short, while the court recognizes that the plaintiffs apparently have suffered significant financial losses as a result of Cole's scheme, their allegations represent the type of "ordinary fraud claim better prosecuted under state law." Anderson, 155 F.3d at 506. For the reasons outlined above, the defendants' motions to dismiss the RICO claims for failure to state a claim will be granted. The remaining state law claims will be remanded to state court.

A separate Order follows.

ORDER

For the reasons stated in the accompanying Memorandum, it is hereby Ordered that:

1. the defendants' Motions to Dismiss (docket entries Nos. 9, 10, 11, 12) are Granted as to the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961 et. seq. claims (Counts 1, 2, and 3);

2. the plaintiffs' state law claims are Remanded to state court;

3. copies of this Order and the accompanying Memorandum shall be mailed to counsel of record; and

4. the clerk of the court shall CLOSE this case.