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PERLMAN v. ZELL

July 16, 1996

RICHARD M. PERLMAN and PERLMAN MARKETPLACE INVESTORS, Plaintiffs,
v.
SAMUEL ZELL, et al., Defendants.



The opinion of the court was delivered by: CASTILLO

 Plaintiffs Richard Perlman and Perlman Marketplace Investors (collectively, "Perlman") bring this action against Samuel Zell; over one hundred entities associated with Zell, including a multitude of real estate partnerships; and several individuals associated with Zell and his businesses. Perlman charges that the defendants defrauded him in a variety of ways, primarily by inducing him to invest in certain real estate ventures and then either informing him that his interests in the ventures were illusory or stripping the projects of their value by transferring income or business opportunities to other projects. Perlman alleges that this conduct violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(b)-(d). Perlman also brings several state law claims. The defendants have moved to dismiss the RICO counts (Counts I-III) on a number of grounds, each of which will be discussed below.

 The following facts are drawn from the allegations of the complaint, which we take as true for the purposes of a motion to dismiss, see Mosley v. Klincar, 947 F.2d 1338, 1339 (7th Cir. 1992), and from the plaintiffs' RICO case statement *fn1" and response brief in opposition to the motion to dismiss. See Dausch v. Rykse, 52 F.3d 1425, 1428 (7th Cir. 1994) (facts contained in pleadings other than the complaint "are relevant to the extent that they 'could be proved consistent with the allegations.'").

 For about 15 years, from 1976 to 1990, Richard Perlman provided services to Equity Financial and Management Company ("Equity"), a corporation involved in operating and maintaining Samuel Zell's real estate empire, as a senior executive. During this period Perlman invested heavily in Zell's businesses, often at the invitation or urging of Zell or his associates (the individual defendants in this case). In June, 1990, Perlman ceased providing services to Equity. Thereafter, Perlman experienced difficulty in exercising the legal rights associated with some of his investment interests in Zell's businesses, and brought suit to enforce those rights in the Circuit Court of Cook County, Illinois. After obtaining discovery in that case, Perlman filed suit in this court claiming, inter alia, RICO violations, common law fraud, breach of fiduciary duty, and breach of contract.

 Perlman alleges the existence of six separate fraudulent schemes planned and carried out by the defendants. The first scheme alleges misrepresentations made to Perlman (and others) that induced him to invest in certain of the defendants' ventures. This scheme involved the issuance and sale of securities called "Participation Units" in 86 real estate ventures (referred to collectively as the "Class II partnerships"), over a period from 1983 through 1989. Perlman alleges that the defendants repeatedly misrepresented the value of, and the rights associated with, these Participation Units. As part of this scheme, specified defendants allegedly committed securities fraud and mail fraud.

 Perlman portrays the remaining schemes as the manifestations of a continuing desire by the defendants to freeze Perlman out of any involvement with any Zell-related project or entity, and otherwise strip him of his interests in those projects or entities. Some of these schemes involve the general diversion of funds away from "outside" investors to the individual defendants. Most of these schemes took place after Perlman left Equity in 1990.

 The second alleged scheme involves the conversion and embezzlement of $ 360,827 or more in distributions from the Class II partnerships, which Perlman claims should have been paid to him after he left Equity in 1990. The Participation Units allegedly gave Perlman the right to receive such distributions at specified times, including the sale or refinancing of the property for which the Units were issued. Although several sales and refinancing transactions occurred in connection with these properties, Perlman has not received the distributions. Perlman alleges that specified defendants committed mail fraud, wire fraud, and interstate transportation of converted funds in pursuit of this scheme.

 The third alleged scheme, which also began after Perlman left Equity, involves the conversion and embezzlement of the distributions due from another group of real estate ventures referred to in the complaint as the "Class I partnerships." The distributions owed to Perlman from these ventures total $ 1,061,238. The defendants allegedly committed mail and wire fraud in pursuit of this scheme.

 The fourth alleged scheme asserts the wrongful seizure and conversion of properties belonging to three partnerships in which Perlman had an interest. The properties allegedly were removed from the partnerships in 1993 and transferred to an entity controlled by Zell so that all of the proceeds of the real estate transactions involving those properties flowed to the defendants, rather than to Perlman and the other "outside" investors. This diversion of funds allegedly resulted in distributions of approximately $ 19 million to the defendants and large tax liabilities to Perlman and the other investors. Perlman further claims that the transactions relating to one of these partnerships were falsely "restructured" after the fact in violation of the Internal Revenue Code. Perlman alleges numerous acts of mail fraud and wire fraud in connection with this scheme.

 The fifth alleged scheme involves a similar diversion of funds that took place from 1990 through 1994, in which insurance proceeds that should have been paid to various partnerships and/or properties as payment for property damage from fires, floods and other disasters were instead diverted to defendant Rocket Construction Company. The defendants allegedly engaged in several acts of mail fraud as part of this scheme.

 The sixth and final alleged scheme was the unauthorized cancellation of Perlman's stock in the law firm formerly known as Rosenberg Perlman & Associates, P.C., now called Rosenberg & Liebentritt, P.C., and a defendant in this lawsuit. This scheme is alleged to have involved two acts of mail fraud.

 Perlman alleges that the six schemes demonstrate a continuing pattern of racketeering activity in violation of RICO. The complaint contains three RICO counts: Count I alleges violations of § 1962(c); Count II alleges violations of § 1962(b); and Count III alleges violations of § 1962(d), the RICO conspiracy provision. The defendants have moved to dismiss all three RICO counts for failure to state a claim.

 APPLICABLE STANDARDS

 A motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. Triad Ass'n, Inc. v. Chicago Housing Auth., 892 F.2d 583, 586 (7th Cir. 1989), cert. denied, 498 U.S. 845, 112 L. Ed. 2d 97, 111 S. Ct. 129 (1990). When considering a motion to dismiss, the court views all facts alleged in the complaint, as well as any inferences reasonably drawn therefrom, in the light most favorable to the plaintiff. Doherty v. City of Chicago, 75 F.3d 318, 322 (7th Cir. 1996). A complaint should not be dismissed for failure to state a claim unless 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, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). In short, the only question is "whether relief is possible under any set of facts that could be established consistent with the allegations." Bartholet v. Reishauer A.G. (Zurich), 953 F.2d 1073, 1078 (7th Cir. 1992) (citations omitted).

 ANALYSIS

 In their motion to dismiss, the defendants attack the complaint using several broad approaches, arguing that: (1) the claims are barred by the statute of limitations; (2) Perlman has not adequately alleged the necessary predicate acts for RICO; (3) the allegations do not show the necessary pattern of racketeering; and Perlman has failed to properly allege the existence of (4) a RICO enterprise as required for his Count I claim under 42 U.S.C. § 1962(c), or (5) a RICO conspiracy as required for his Count III § 1962(d) claim. We examine each of these areas of attack in turn.

 I. Limitations Period

 The defendants' first broad attack is that all of Perlman's RICO claims are time-barred. The limitations period for RICO claims is four years. Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 156, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987). As the complaint was filed on July 21, 1995, the cut-off date for timeliness purposes is July 21, 1991. Any claims that accrued before that date would be barred as untimely, unless the limitations period was tolled.

 The limitations period for federal causes of action begins to run (accrues) when the plaintiff discovers, or reasonably should have discovered, that he or she has been injured. See Cada v. Baxter Healthcare Corp., 920 F.2d 446, 450-51 (7th Cir. 1990), cert. denied, 501 U.S. 1261, 115 L. Ed. 2d 1079, 111 S. Ct. 2916 (1991). Even after the limitations period clock begins to run, it may be stopped under circumstances amounting to either equitable estoppel or equitable tolling. "Equitable estoppel" may exist where the defendant "takes active steps to prevent the plaintiff from suing in time," such as by promising not to raise the statute of limitations as a defense. Id. "Equitable tolling," a separate concept, may apply where the plaintiff is prevented from gaining information that would indicate that the injury was caused by wrongdoing by the defendant. Id. at 451.

 The defendants assert that most or all of Perlman's claims are untimely because he reasonably should have discovered them well before July 21, 1991. As to Perlman's claims of securities fraud in connection with certain real estate partnerships (the Class II partnerships), the defendants argue that he had been put on notice of his potential claims through documents he received beginning in 1985. As to Perlman's claims of conversion and mail and wire fraud in connection with a $ 300,000 payment to him, the defendants contend that Perlman should have been aware of these claims no later than 1988. Finally, the defendants argue that most of the remainder of the alleged predicate acts are also time-barred, even if they occurred within the limitations period, because they are merely continuations of the old injuries. *fn2"

 A. Timeliness of the Securities Fraud Claims

 Perlman's securities fraud claims relate to the defendants' issuance of "Participation Units" in the Class II partnerships to him in lieu of bonuses and/or compensation for his services. *fn3" The defendants began issuing the Participation Units to Perlman in 1983, and continued to do so through 1989. After leaving Equity in June, 1990, Perlman was denied partnership rights relating to the Class II partnerships, such as the right of access to books and accounts of the partnerships, and so he filed suit in state court in December, 1992 to enforce those rights. Perlman alleges that it was not until July, 1994 that the defendants told him that the Participation Units he had received conveyed no partnership interests or other legal rights, and thus were essentially worthless.

 The defendants argue that, to the extent that Perlman was injured by his purchase of the Participation Units, those injuries accrued long before the timeliness cut-off date of July 21, 1991. First, the defendants note that, beginning in 1985, Perlman received Participation Memoranda containing statements that should have tipped him off that he did not own any true interests in the partnerships. (For example, one such Memorandum states that "the 'Participation Units' entitle the beneficiary to share in the profits or losses of properties without a direct ownership position." Complaint, Ex. A at 2.) We have examined the Participation Memorandum attached to the complaint, and find that its references to ownership interests in the partnerships are at best ambiguous. Even the statement quoted above is ambiguous: while it states that the holder of Participation Units has no "direct ownership" interest in the partnership, it also implies that such a holder does have a property interest of some sort, since he or she is "entitled" to share in profits.

 Ambiguous written descriptions of securities interests do not start the limitations period running on a claim sounding in securities fraud. See McCool v. Strata Oil Co., 972 F.2d 1452, 1463 (7th Cir. 1992) (holding that ambiguous statements in the first agreement signed by investors would not reasonably alert them to possible fraud, and stating, "we require the sellers of securities to explain themselves in simple, plain language that a reasonable investor can understand."). Especially given the context of a motion to dismiss, in which we view the complaint in the light most favorable to the plaintiff, we do not find that the statements in the Participation Memorandum attached to the complaint were sufficiently clear that they should reasonably have alerted Perlman to his injury.

 Second, the defendants point out that Perlman was aware, since 1983, that Zell and his partner Robert Lurie were deliberately understating the values of the Participation Units on the Annual Statements they issued. (Perlman alleges that "on numerous occasions between 1983 and 1990, Zell and Lurie represented to [him] that the values set forth on the Annual Statements were significantly understated, and the actual values were at least twice the amounts reported on the statements." Compl. P 65.) The defendants argue that Perlman knew they were "intentionally misrepresenting" the Units' values, and thus should have suspected some fraud. As Perlman describes Zell's and Lurie's statements in his complaint, however, they are perfectly consistent with an innocent explanation for the discrepancy between written and oral estimates of value--that Zell and Lurie were being appropriately conservative in providing written valuations, while privately believing that the Units were worth much more. In fact, Perlman specifically alleges that Lurie told him from the beginning that "the stated values would be extremely conservative, and that the actual values of the properties and of the participation units would be at least twice the value stated in the annual summaries." Id. P 56. On a motion to dismiss, the court views all facts alleged in the complaint, as well as any inferences reasonably drawn therefrom, in the light most favorable to the plaintiff. Doherty v. City of Chicago, 75 F.3d 318, 322 (7th Cir. 1996). We reject the argument that Zell's and Lurie's private estimates of greater value should have alerted Perlman to some wrongdoing.

 Finally, the defendants argue that Perlman should reasonably have discovered his injuries by June, 1990, when he left Equity and the defendants began denying him his partnership rights with respect to the Class II partnerships. The complaint does not state the exact date on which the defendants began denying Perlman those rights, however. All that can be gathered from the complaint is that Perlman became suspicious about the management of the Class II partnerships some time between June, 1990 and December, 1992, when he filed suit in state court to enforce his partnership rights. The complaint thus leaves open the possibility that Perlman was not reasonably alerted to the defendants' belief that the Participation Units conveyed no partnership rights until after July 21, 1991. In that case, Perlman's securities fraud claim would have accrued within the limitations period. We are obliged to draw this inference in the plaintiffs' favor when considering a motion to dismiss. Id.

 Moreover, Perlman alleges that the defendants took additional steps to ensure that he did not discover the true nature of the Participation Units by suggesting that they might buy the Units from him at various times after he left Equity. Compl. PP 79-82. These ongoing negotiations or "lulling" statements could imply that the Units had value as Perlman had been told, and would justify his delay in realizing the truth. Taking all of the allegations into consideration and drawing the necessary inferences, we find that Perlman's securities fraud claims are not time-barred.

 B. Timeliness of the Claims Related to the $ 300,000 Payment

 Perlman alleges that Equity paid Perlman's company Integrated Financial Corporation ("Integrated") $ 300,000 for Perlman's services in 1988. For tax and accounting purposes, Equity listed the payment on its books as a loan rather than payment for services, but Lurie told Perlman that the "loan" would be written off at some later time and no one would require repayment of the "loan." Integrated accepted the payment for Perlman's services on those terms. Neither Perlman nor Integrated signed a promissory note or other instrument agreeing to repay the money. Equity mailed Integrated invoices showing the loan (and interest on it) beginning in November, 1988. On July 24, 1991, the defendants mailed Perlman the first in a series of letters explaining that the Class I partnerships in which Perlman held interests would be withholding partnership distributions owed to Perlman because the "loan" had not been repaid. Perlman alleges that the withheld distributions total at least $ 1,061,238.

 The defendants contend that Perlman's mail fraud, wire fraud and conversion claims related to these events are time-barred because the 1988 invoices should have alerted Perlman that the defendants were seeking repayment of the loan. Perlman objects that the invoices were entirely consistent with Lurie's earlier statements to him, and that the invoices could not have alerted him to his eventual injury: the withholding of the Class I partnership distributions that were due to him as recoupment of the "loan" to Integrated. We find that the complaint does not demonstrate any reason why Perlman should have discovered this eventual injury prior to the time that he received the July 24, 1991 letter. Because Perlman filed suit less than four years after he received that letter, these claims were timely filed.

 C. Timeliness of Remaining Claims

 The defendants ask that we dismiss Perlman's remaining claims as untimely because they are merely continuations of an injury originally discovered outside the limitations period--the securities fraud related to the issuance of the Participation Units. The defendants have offered almost no explanation of how the other injuries that Perlman claims are related to the securities fraud, however, and our own review of the complaint does not support their argument. Plus, the argument depends on there being an old, untimely injury that produced all the more recent claims. We have held above that neither the claims related to the Participation Units nor the claims related to the $ 300,000 payment were untimely. It thus follows that even if these older claims gave rise to all of Perlman's other claims, none of the claims are time-barred. In sum, we must reject the defendants' attempt to dismiss Perlman's claims based upon the four-year limitations period.

 II. Predicate Acts

 The defendants' second broad attack on the complaint is a series of arguments that Perlman has not adequately pled the predicate acts on which a RICO claim rests. A RICO claim generally must conform only to the standards set out in FED. R. CIV. P. 8(a), which require "a short and plain statement of the claim showing that the pleader is entitled to relief." See Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 776 (7th Cir. 1994); see also McLaughlin v. Anderson, 962 F.2d 187, 194 (2d Cir. 1992) (applying Rule 8(a) standard to RICO extortion claim). When the predicate acts upon which the RICO claim is based sound in fraud, however, the plaintiff must comply with the more stringent demands of FED. R. CIV. P. 9(b) and plead the particulars of those acts. Buck Creek Coal, Inc. v. United Workers of America, 917 F. Supp. 601, 611 (S.D. Ind. 1995).

 The predicate acts identified in the complaint include securities fraud, mail and wire fraud, and interstate transportation of converted funds. The defendants claim that, for various reasons, none of these acts is adequately pled.

 A. Securities Fraud

 As noted above, Perlman's securities fraud claim arises from the defendants' issuance of the Participation Units in the Class II partnerships. The defendants initially claim that the entire securities fraud claim must fail because it is contradicted by another of Perlman's claims.

 On one hand, Perlman alleges that misleading statements by the defendants, including representations about the rights and values associated with the Participation Units, caused him to accept the Units in lieu of compensation and bonuses, and thereby caused him loss. On the other hand, Perlman also separately alleges a scheme by the defendants to convert, embezzle, and strip him of the rights and benefits associated with the Participation Units.

 The defendants argue that Perlman cannot have it both ways. If the Units conveyed no rights, then Perlman may have a claim for securities fraud but cannot claim that the Units' (nonexistent) value was stripped or converted. If on the other hand the Units did convey the promised rights, then Perlman might have a claim for conversion of the proceeds he was due pursuant to these rights, but not one for securities fraud.


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