As noted in the title, civil RICO claims are on such a bad losing streak at the pleading stage in the Commercial Division that they’re beginning to rival the New York Mets. And that’s coming from a die-hard Mets fan.

As my colleague, Viktoriya Liberchuk, recently blogged, judges in the Commercial Division are quick to dismiss civil RICO claims when plaintiffs use the statute to dress up fraud or breach-of-contract claims. A recent decision from Manhattan Commercial Division Justice Andrea Masley only adds to that growing list.

Background:

In Enterprise, et al. v Shvo, et al., the underlying dispute traces back to the BSD Partnership, a 2018 joint venture among defendant Michael Shvo, the defendant German investors, and a non-party that invested over $1 billion in landmark U.S. properties. Plaintiffs, the operators of CORE, a high-profile luxury club in New York, alleged that when the non-party discovered defendant Shvo was charging millions of dollars in personal expenses to the BSD Partnership, he was paid $50 million to exit the partnership.

Beginning in 2020, Plaintiffs were approached by Shvo, his affiliated entities, and the German investors, with a proposal to help expand CORE’s brand in Milan, New York, and San Francisco. According to Plaintiffs, Defendants represented that they would fund $100 million to develop three “turn-key” CORE locations at properties acquired by the BSD Partnership. Plaintiffs allege that the funds, in reality, would be diverted by Defendants to bankroll their lavish lifestyles.

In reliance on these representations, Plaintiffs executed four interrelated agreements between May 2021 and January 2022: (i) two lease agreements for the New York and San Francisco locations; (ii) an option agreement granting Defendants the irrevocable right to purchase 50% of CORE Holdings for $1.00 in exchange for a $1 million loan; and (iii) a promissory note memorializing the $1 million loan.

According to Plaintiffs, Defendants failed to deliver on any of these promises. Plaintiffs allege that the New York project was plagued by construction failures, and the Milan and San Francisco projects were abandoned altogether. Plaintiffs further allege that Defendants diverted project funds for personal use and that the resulting financial distress forced Plaintiffs to draw on the promissory-note credit, triggering Defendants’ option to acquire half of CORE for just $1.00. 

Plaintiffs commenced their lawsuit in June 2024, asserting 18 causes of action. Following a decision on Defendants’ motion to dismiss, the case was substantially narrowed, leaving Plaintiffs with only three causes of action.  Seeking to recast their grievances, Plaintiffs moved for leave to file a second amended complaint, alleging five new causes of action, including civil RICO, and conspiracy to commit civil RICO.  

Analysis:

The Court’s analysis of the civil RICO claim turned on the elements of the claim. To establish a civil RICO claim under 18 U.S.C. §1962(c), “a plaintiff must show that he was injured by defendants’ (1) conduct; (2) of an enterprise; (3) through a pattern; (4) of racketeering activity.”  

The Court noted that such claims must be pleaded with particularity, and that it must be “more than an ordinary fraud case clothed in the Emperor’s trendy garb” (Schmidt v Fleet Bank, 16 F Supp 2d 340, 346 [SDNY 1998]). Unfortunately for Plaintiffs, the Court found that this “appears to be such a case.”

On the enterprise element, the Court held that Plaintiffs failed to allege a RICO enterprise separate and distinct from the pattern of racketeering activity. Specifically, Plaintiffs alleged that the BSD Partnership was hijacked by Defendants to enrich themselves. But as the Court explained, it was precisely because Defendants acted to enrich themselves, rather than to benefit the BSD Partnership, that the pleading failed to allege an association-in-fact enterprise on whose behalf the Defendants acted.

The Court also found that Plaintiffs failed to plead loss causation. The Court concluded that the allegations that CORE was fraudulently induced to execute four long-term agreements and suffered injuries from defective construction, project abandonment, and fund diversion, were “more appropriately categorized as a claim for fraudulent inducement and/or breach of contract.” Because the underlying civil RICO claim failed, the conspiracy to commit civil RICO claim necessarily failed as well.

Upshot:

The Enterprise decision reinforces a straightforward lesson – namely, that simply adding civil RICO claims to a complaint will not have the effect of transforming a standard business dispute into a racketeering case. The Commercial Division has made clear that it will continue to examine substance over labels, particularly where the underlying dispute sounds in fraud or breach of contract. In the meantime, we here at New York Commercial Division Practice will continue to keep a close eye out for any future civil RICO claims in the Commercial Division that actually survive the pleading stage and/or a motion to dismiss. Stay tuned…