UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW …inudocs.buffalotrace.com/BreakthruReliableMTD.pdf · 2017-01-22 · plaintiffs, v. reliable churchill lllp, et al., defendants

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK EMPIRE MERCHANTS, LLC and EMPIRE MERCHANTS NORTH, LLC,

Plaintiffs,

v. RELIABLE CHURCHILL LLLP, et al.,

Defendants.

No. 16-CV-05226(ARR)(LB)

MEMORANDUM OF LAW IN SUPPORT OF RELIABLE CHURCHILL LLLP AND BREAKTHRU BEVERAGE GROUP LLC’S

MOTION TO DISMISS PURSUANT TO FED. R. CIV. P. 12(b)(6) AND 9(b) AND MOTION TO STRIKE PURSUANT TO FED. R. CIV. P. 12(f)

BOIES, SCHILLER & FLEXNER LLP Harlan A. Levy Sean F. O’Shea 575 Lexington Avenue New York, New York 10022

Telephone: (212) 446-2300 Facsimile: (212) 446-2350 Helen M. Maher 333 Main Street Armonk, New York 10504 Telephone: (914) 749-8200 Facsimile: (914) 749-8300 Attorneys for Defendants Breakthru Beverage Group, LLC, Reliable Churchill LLLP, Charles Merinoff, Gregory L. Baird, and Arlyn B. Miller

TABLE OF CONTENTS TABLE OF AUTHORITIES .......................................................................................................... iii

PRELIMINARY STATEMENT .......................................................................................................1

SUMMARY OF ALLEGATIONS ...................................................................................................7

I. EMPIRE MERCHANTS’ RICO ALLEGATIONS AGAINST RELIABLE. ......................7

A. Allegations That Reliable Executives “Must Have Known” About and/or Covered-Up the Purported Scheme. ........................................................................9

B. The Alleged Scheme to Evade New York Excise Taxes through Cross-Border Sales of Liquor from Maryland. ......................................................12

II. THE EMPIRE COMPANIES’ ALLEGATIONS OF AN INTRA-CORPORATE CONSPIRACY BETWEEN BREAKTHRU AND ITS SUBSIDIARY TO VIOLATE THE CIVIL RIGHTS OF TWO LIMITED LIABILITY COMPANIES. ........20

A. Sunbelt’s Services Agreement with EMN..............................................................21

B. Alleged Delays in Breakthru’s Provision of Services to EMN. .............................22

C. Breakthru’s Alleged Termination of Empire Merchants’ Insurance Coverage ................................................................................................................23

D. Breakthru’s “Sham Acquisition Proposal” for Empire Merchants. .......................24

E. Breakthru Executive Sobel’s November 17, 2016 Declaration. ............................25

LEGAL STANDARD ....................................................................................................................25

ARGUMENT .................................................................................................................................29

I. EMPIRE MERCHANTS’ RICO CLAIMS MUST BE DISMISSED. ..............................29

A. Empire Merchants Lacks Standing to Assert Its RICO Claim Because Its Injuries Were Not Directly Caused by the Alleged Scheme. .................................30

B. The RICO Claims Are Time-Barred. .....................................................................38

C. Empire Merchants’ Allegations Do Not State a Claim Under 18 U.S.C. § 1962(c). ..................................................................................................................46

1. Empire Merchants Has Not Alleged That Reliable Participated in the “Operation or Management” of Any RICO Enterprise. .......................46

2. Empire Merchants Does Not Allege Facts Sufficient to Establish the Existence of a RICO Enterprise. ................................................................51

3. Empire Merchants Fails to Allege a Pattern of Predicate Acts of Racketeering with the Requisite Particularity. ...........................................57

D. Empire Merchants Fails to State a Cause of Action Under the RICO Conspiracy Statute, 18 U.S.C. § 1962(d). ..............................................................67

II. The Empire Companies claim under 42 u.S.C. § 1985 is an abuse of the civil rights laws. ...................................................................................................................................69

A. EMN Lacks Statutory Standing Under 42 U.S.C. § 1985(2) Because It Was Not a Party or Witness In Any Proceeding at the Time of the Alleged Retaliatory Conduct. ..............................................................................................70

B. The Empire Companies Cannot Satisfy the Requirements of Statutory Standing to Sue Under 42 U.S.C. § 1985(2). .........................................................72

C. The Purported Intra-Corporate Conspiracy Alleged by The Empire Companies Cannot Sustain a Claim Under 42 U.S.C. § 1985. ..............................76

MOTION TO STRIKE ..................................................................................................................79

I. ALL ALLEGATIONS REFERRING TO RNDC AND THE RNDC INDICTMENT SHOULD BE STRICKEN FROM THE FAC UNDER RULE 12(f)....................................................................................................................................79

CONCLUSION ..............................................................................................................................85

iii

TABLE OF AUTHORITIES

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Aliev v. Borukhov, No. 15-CV-6113 (ERK) (JO), 2016 WL 3746562 (E.D.N.Y. July 8, 2016) ...................... 29, 46

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Amsterdam Tobacco Inc. v. Philip Morris Inc., 107 F. Supp. 2d 210 (S.D.N.Y. 2000) ................................................................................ passim

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Brawer v. Horowitz, 535 F.2d 830 (3d Cir. 1976) ...................................................................................................... 73

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Cooper v. N. J. Trust Co. of Ridgewood, N.J., 10 Fed. R. Serv. 2d 127, 1966 WL 86611 (S.D.N.Y. 1966) ..................................................... 83

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First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159 (2d Cir. 2004) .......................................................................................... 27, 57, 67

First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994) ........................................................................................................ 38

Furlong v. Long Island Coll. Hosp., 710 F.2d 922 (2d Cir. 1983) ...................................................................................................... 26

Geaney v. McCarron, 01 Civ. 9260 (BSJ), 2003 U.S. Dist. LEXIS 4994 (S.D.N.Y. Mar. 31, 2003) .......................... 71

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Griffin v. Breckenridge, 137 F. Supp. 2d 575 (D.N.J. 2001) ........................................................................................... 73

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Hecht v. Commerce Clearing House, Inc., 897 F.2d 21 (2d Cir. 1990) ........................................................................................................ 68

Hemi Grp., LLC v. City of New York, 559 U.S. 1 (2010) ............................................................................................................... 31, 33

Hill v. Washburn, No. 08-CV-6285-CJS-JWF, 2011 WL 4807921 (W.D.N.Y. Oct. 11, 2011) ............................. 74

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In re Aluminum Warehousing Antitrust Litigation, No. 13-md-2481(KBF), 2015 WL 6472656 (S.D.N.Y. Oct. 23, 2015) .................................... 77

vii

In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 218 F.R.D. 76 (S.D.N.Y. 2003)................................................................................................. 81

In re Merrill Lynch Ltd. P’ships Litig., 154 F.3d 56 (2d Cir. 1998) .................................................................................................. 39, 40

In re Tableware Antitrust Litig., 363 F. Supp. 2d 1203 (N.D. Cal. 2005) .................................................................................... 28

Innovative Metal Design, Inc. v. U.S. Bank Nat’l Ass’n, No. 3:15-CV-00560(SB), 2015 WL 9434779 (D. Or. Nov. 18, 2015) ..................................... 27

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Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) ...................................................................................................... 42

Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d Cir. 1976) ................................................................................................ 80, 81

viii

Lorber v. Winston, 962 F. Supp. 2d 419 (E.D.N.Y. 2013) ....................................................................................... 39

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Loughrin v. United States, 134 S. Ct. 2384 (2014) ................................................................................................. 58, 59, 63

Lundy v. Catholic Health Sys. of Long Island Inc., 711 F.3d 106 (2d Cir. 2013) ...................................................................................................... 46

Lynch v. Southampton Animal Shelter Found. Inc., 278 F.R.D. 55 (E.D.N.Y. 2011) .......................................................................................... 80, 82

Madanes v. Madanes, 981 F. Supp. 241 (S.D.N.Y. 1997) ............................................................................................ 50

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Martinez v. Cty. of Suffolk, 999 F. Supp. 2d 424 (E.D.N.Y. 2014) ....................................................................................... 76

Matsumura v. Benihana Nat’l Corp., 542 F. Supp. 2d 245 (S.D.N.Y. 2008) ....................................................................................... 26

Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir. 1993) ................................................................................................ 27, 59

Montesa v. Schwartz, 836 F.3d 176 (2d Cir. 2016) ...................................................................................................... 72

Moore v. City of N.Y., No. 08-CV-2449 RRM LB, 2011 WL 795103 (E.D.N.Y. Feb. 28, 2011) ................................ 50

Moore v. PaineWebber, Inc., 189 F.3d 165 (2d Cir. 1999) ...................................................................................................... 58

N.Y. State Catholic Health Plan, Inc. v. Acad. O & P Assocs., 312 F.R.D. 278 (E.D.N.Y. 2015) .............................................................................................. 59

N.Y. v. United Parcel Serv., Inc., No. 15-CV-1136 (KBF), 2016 WL 4203547 (S.D.N.Y. Aug. 9, 2016) .................................... 47

Nakahata v. N.Y.-Presbyterian Healthcare Sys., Inc., 723 F.3d 192 (2d Cir. 2013) ................................................................................................ 27, 57

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O’Malley v. N.Y. City Transit Auth., 896 F.2d 704 (2d Cir. 1990) ...................................................................................................... 29

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Pasquantino v. United States, 544 U.S. 349 (2005) ................................................................................................................. 35

Pelletier v. Zweifel, 921 F.2d 1465 (11th Cir. 1991) ............................................................................................. 2, 16

Perkins v. Kamco Supply Corp., No. 06 CIV, 5054 DAB/DF, 2007 WL 4207193 (S.D.N.Y. Nov. 27, 2007) ............................. 76

Reves v. Ernst & Young, 507 U.S. 170 (1993) ..................................................................................................... 46, 47, 48

Rode v. Dellarciprete, 845 F. 2d 1195 (3d Cir. 1988) ............................................................................................. 71, 72

Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) ...................................................................................................... 26

Rotella v. Wood, 528 U.S. 549 (2000) ................................................................................................................. 39

RSM Prod. Corp. v. Freshfields Bruckhaus Deringer U.S. LLP, 682 F.3d 1043 (D.C. Cir. 2012) .......................................................................................... 68, 81

RSM Prod. Corp. v. Fridman, 387 Fed. App’x 72 (2d Cir. 2010) ............................................................................................ 81

S.Q.K.F.C., Inc. v. Bell Atl. TriCon Leasing Corp., 84 F.3d 629 (2d Cir. 1996) ........................................................................................................ 58

Salinas v. United States, 522 U.S. 52 (1997) ................................................................................................................... 68

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Shahzad v. Meyers, 95 CIV. 6196 (DAB), 1997 WL 47817 (S.D.N.Y. Feb. 6, 1997) ............................................. 81

Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406 (2d Cir. 2008) ................................................................................................ 40, 42

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Tancredi v. Metro Life Ins. Co., 256 F. Supp. 2d 196 (S.D.N.Y. 2003)......................................... 75

Tancredi v. Metro Life Ins. Co., 378 F.3d 220 (2d Cir. 2004) ....................................................... 75

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Toto v. McMahan, Brafman, Morgan & Co., No. 93-CIV-5894 (JFK), 1995 WL 46691 (S.D.N.Y. Feb. 7, 1995) .................................. 82, 84

Town of Mamakating, New York v. Lamm, 651 Fed. App’x 51 (2d Cir. 2016) ............................................................................................ 39

United Food & Commercial Workers Unions & Emp’rs Midwest Health Benefits Fund v. Walgreen Co.,

719 F.3d 849 (7th Cir. 2013) .................................................................................................... 51

United States v. Anderson, 626 F.2d 1358 (8th Cir. 1980) .................................................................................................. 57

United States v. Archer, 486 F.2d 670 (2d Cir. 1973) ...................................................................................................... 66

United States v. Bonanno Org. Crime Family of La Cosa Nostra, 683 F. Supp. 1411 (E.D.N.Y. 1988) .......................................................................................... 81

United States v. Bonanno Org. Crime Family of La Cosa Nostra, 879 F.2d 20 (2d Cir. 1989) ........................................................................................................ 81

United States v. Bustamante, 493 F.3d 879 (7th Cir. 2007) .................................................................................................... 52

United States v. Dvorak, 617 F.3d 1017 (8th Cir. 2010) .................................................................................................. 65

United States v. Esterman, 324 F.3d 565 (7th Cir. 2003) .................................................................................................... 65

United States v. Int’l Longshoremen’s Ass’n, 518 F. Supp. 2d 422 (E.D.N.Y. 2007) ........................................................................... 52, 54, 55

United States v. Jenkins, 502 U.S. 1014 (1991) ............................................................................................................... 65

United States v. Jenkins, 943 F.2d 167 (2d Cir.)............................................................................................................... 65

United States v. Maher, 108 F.3d 1513 (2d Cir. 1997) .................................................................................................... 63

United States v. McNeal, 77 F.3d 938 (7th Cir.1996) ....................................................................................................... 66

United States v. O'Connor, 635 F.2d 814 (10th Cir. 1980) .................................................................................................. 66

United States v. Persico, 832 F.2d 705 (2d Cir. 1987) ............................................................ 28, 46

United States v. Private Sanitation Indus. Ass’n of Nassau/Suffolk, Inc., 899 F. Supp. 974 (E.D.N.Y. 1994) ............................................................................................ 82

United States v. Private Sanitation Indus. Ass’n of Nassau/Suffolk, Inc., 47 F.3d 1158 (2d Cir. 1995) ...................................................................................................... 82

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United States v. Townsend, 924 F.2d 1385 (7th Cir. 1991) .................................................................................................. 69

United States v. Turkette, 452 U.S. 576 (1981) ................................................................................................................. 51

xii

United States v. Zichettello, 208 F.3d 72 (2d Cir. 2000) ........................................................................................................ 68

Valley Forge Christian Coll. v. Ams. United for Separation of Church and State, Inc., 454 U.S. 464 (1982) ................................................................................................................. 72

Warth v. Seldin, 422 U.S. 490 (1975) ................................................................................................................. 72

Watts v. Jackson Hewitt Tax Serv. Inc., 579 F.2d 334 (E.D.N.Y. 2008) .................................................................................................. 27

Wild Edibles Inc. v. Indus. Workers of the World Local 460/640, No. 07 CIV. 9225 (LLS), 2008 WL 4548392 (S.D.N.Y. Oct. 9, 2008) .............................. 51, 54

Wine Markets Int’l, Inc. v. Bass, 177 F.R.D. 128 (E.D.N.Y. 1998) .............................................................................................. 84

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Wrenn v. Sec’y, Dep’t of Veterans Affairs, 918 F.2d 1073 (2d Cir. 1990) .................................................................................................... 75

Zaro Licensing, Inc. v. Cinmar, Inc., 779 F. Supp. 276 (S.D.N.Y. 1991) ............................................................................................ 59

Zavala v. Wal-Mart Stores, Inc., 393 F. Supp. 2d 295 (D.N.J. 2005) ........................................................................................... 64

Zavala v. Wal-Mart Stores, Inc., 691 F.3d 527 (3d Cir. 2012) ...................................................................................................... 64

Statutes Page(s)

18 U.S.C. § 1961(4) ...................................................................................................................... 51

18 U.S.C. § 1961(5) ...................................................................................................................... 57

18 U.S.C. § 1962(c) ...................................................................................................................... 46

18 U.S.C. § 1962(d) ...................................................................................................................... 68

18 U.S.C. § 1964(c) (2012) ........................................................................................................... 31

27 C.F.R. § 6.153(a) .......................................................................................................... 10, 49, 61

xiii

42 U.S.C. § 1985(2) (2012) ................................................................................................... passim

Alco. Bev. Cont. L. § 99-b ............................................................................................................ 35

Alco. Bev. Cont. L. § 99-g ............................................................................................................ 35

Md. Code Regs. § 03.02.04.01(A)(1) .......................................................................................... 16

Md. Code Ann., Al. Bev. § 2-316(b)………………………………………………………....passim

Rules Page(s)

Fed. R. Civ. P. 9(b) ................................................................................................................. passim

Fed. R. Civ. P. 11(b) ...................................................................................................................... 75

Fed. R. Civ. P. 12(b)(6) ....................................................................................................... 1, 28, 65

Fed. R. Civ. P. 12(f) ............................................................................................................. 1, 80, 81

Fed. R. Evid. 402 .................................................................................................................... 82, 83

Fed. R. Evid. 403 .................................................................................................................... 82, 83

Defendants Reliable Churchill LLLP (“Reliable”) and Breakthru Beverage Group,

LLC (“Breakthru”) submit this Memorandum of Law in Support of their Motion to

Dismiss the federal claims in the First Amended Complaint (“Amended Complaint” or

“FAC”) pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) (“Motion”) and

Motion to Strike Allegations pursuant to Federal Rule of Civil Procedure 12(f) (“Motion

to Strike”).10

PRELIMINARY STATEMENT

Relying almost entirely on citations to a dismissed indictment of a company that

has not been named as a defendant in this action, FAC ¶ 1 n.2, Empire Merchants, LLC

(“Empire Merchants”) alleges that Reliable illegally deprived the City and State of New

York of liquor excise taxes and also deprived Empire Merchants of sales in the New York

City area. Specifically, Empire Merchants claims that liquor retailers in New York and

Maryland engaged in a “smuggling scheme” that was “predicated on selling liquor across

state lines to take advantage of discrepancies between the applicable excise taxes in

Maryland and New York,” and that Reliable encouraged this scheme by offering volume

discount sales incentives to retailers to increase the size of their purchase orders. Id. ¶¶ 5-6,

9, 20, 82. Empire Merchants has sought to bolster its claims by mischaracterizing

declarations that it obtained from one employee and one proprietor of two liquor stores that

10 During the parties’ December 7, 2016 pre-motion conference, the Court instructed that the defendants’ motions to dismiss should “address only plaintiff’s federal law claims,” which arise under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(c), (d), and the Ku Klux Klan Act, 42 U.S.C. § 1985(2). See Order of Dec. 15, 2016, ECF 53 at 2-3. Accordingly, this Motion is directed only at those federal claims. Empire Merchants asserts no federal causes of action against Defendants Charles Merinoff, Gregory L. Baird, or the General Counsel of Breakthru (“General Counsel”).

have been named as defendants in this action. These “witnesses” and their liquor stores

were released from liability in this litigation in exchange for providing their declarations

and paying a de minimis amount of $10,000 to Empire Merchants (a fraction of the cost to

defend oneself even in a completely meritless RICO case like this one).11 FAC ¶ 7, § II.B.1

(citing FAC Exs.12 X ¶ 24; Ex. Y ¶ 22; Ex. EE at 2 ¶ 1; Ex. KK at 2 ¶ 1); see Pelletier v.

Zweifel, 921 F.2d 1465, 1522 (11th Cir. 1991) (“When used improperly, as in this case,

[the Civil RICO] provisions allow a complainant to shake down his opponent and, given

the expense of defending a RICO charge, to extort a settlement.”). But rather than having

their intended effect, the declarations undermine Empire Merchants’ claims and support

Reliable’s account of its sales to the liquor store defendants. After stripping away

allegations relating to the dismissed nonparty indictment, reading the declarations for what

they actually say (and not what Empire Merchants would like them to say), and ignoring

Empire Merchants’ conclusory allegations, the Court is left with the unremarkable story

that Reliable, a licensed Maryland wholesaler, filled the purchase orders of licensed

Maryland retailers in compliance with applicable laws. These allegations do not provide

Empire Merchants with standing to bring a civil RICO claim, and otherwise fail to plead

facts sufficient to survive a motion to dismiss.

Similarly, Empire Merchants and Empire Merchants North, LLC’s (“EMN”)

(jointly, “Plaintiffs” or the “Empire Companies”) claim under the Ku Klux Klan Act, 42

U.S.C. § 1985(2), must be dismissed. Notwithstanding Plaintiffs’ attempt to manufacture

11 Empire Merchants has also significantly recast its allegations in a vain attempt to avoid the allegations of a Rule 11 notice sent to them on November 23, 2016, and to avoid advancement and indemnification obligations to Messrs. Merinoff and Baird. 12 Exhibits to the FAC are denoted as “FAC Ex.” Exhibits to the accompanying Declaration of Sean F. O’Shea, dated Jan. 20, 2017, are denoted as “Mot. Ex.”

federal jurisdiction (in order to retain it once the RICO claims are dismissed), their

allegations of an intra-corporate conspiracy under the Ku Klux Klan Act (the “Civil Rights

Claim”) do not state a claim for relief because, inter alia, a company cannot conspire with

itself (or its subsidiaries). Moreover, the ordinary commercial nature of Plaintiffs’

allegations in support of their Section 1985(2) claim are flatly inconsistent with the

purposes of the Reconstruction Era law, which was enacted to protect witnesses, jurors,

and parties from harassment and intimidation.

However, even assuming all Plaintiffs’ allegations are true, the FAC’s federal

claims must be dismissed because (1) Empire Merchants lacks standing to bring the RICO

claims; (2) the RICO claims are time-barred; (3) none of the federal claims meets the

exacting scrutiny and pleading requirements applicable to RICO claims and fraud-based

claims, or even the plausibility standard under Twombly/Iqbal; and (4) the Civil Rights

Claim fails for lack of standing and because a company cannot conspire with itself or its

subsidiaries.

First, Empire Merchants cannot establish standing to assert RICO claims against

Reliable based on an alleged scheme to avoid New York City and State alcohol excise

taxes. See Anza v. Ideal Steel Supply Co., 547 U.S. 451, 460 (2006); Amsterdam Tobacco

Inc. v. Philip Morris Inc., 107 F. Supp. 2d 210, 219 (S.D.N.Y. 2000) (“Where, as here, the

primary purpose of an alleged racketeering enterprise is to avoid paying taxes or otherwise

defraud the government, indirectly injured parties do not have standing to bring RICO

claims.”).

Second, Empire Merchants’ claims are time-barred. Even assuming that alcohol

sold by Reliable in Maryland was transported to New York and eventually deprived

Empire Merchants of sales there, Empire Merchants admits in the FAC, and judicially

noticeable documents confirm, that Empire Merchants was at least on inquiry notice of any

alleged injuries well outside the four-year statute of limitations that applies to private civil

RICO claims. According to the FAC, Empire Merchants’ RICO claims are predicated on

allegations that Reliable “must have known” of the alleged smuggling scheme because

“sophisticated” liquor distributors have detailed systems for tracking sales data, which they

monitor constantly . FAC ¶ 84.13 By the same token, the FAC pleads that Empire

Merchants—a distributor no less sophisticated than Reliable—was “suspicious” of its

purported injuries outside the limitations period and that evidence of “conspicuous” sales

losses was shown by Empire Merchants’ own data as early as 2009. FAC ¶¶ 184-185, 196.

Thus, Empire Merchants has had at least seven years to investigate its claims. In addition,

affidavits publicly filed by federal law enforcement agents, evidence of cross-border liquor

sales in Connecticut perpetrated by another distributor owned by 50% of Empire

Merchants’ owners, and testimony concerning bootlegging before a New York State

13 Notably, in the now dismissed RNDC case, a former Director of the

Comptroller of Maryland, Alcohol and Tobacco Division stated in an affidavit, “I am not aware of any Maryland statutory or regulatory obligation or duty requiring wholesalers to investigate or inquire regarding the subsequent sales of a licensed retailer of products purchased from the wholesaler.” See U.S. v. Republic Nat’l Distrib. Co., LLC (“U.S. v. RNDC”), No. 16-CR-00258(MJG), ECF 38-2 (D. Md. Oct. 31, 2016) (Aff. of Charles W. Ehart, dated Aug. 1, 2016). Beyond having no duty or obligation to investigate or inquire about a retailer’s subsequent sales of products, both the relevant federal and state regulations were crafted with the express purpose of dissuading any involvement by a wholesaler into the business of a retailer, in order to prevent wholesalers from exerting any undue influence on a retailer, particularly with respect to a retailer’s purchasing decisions. Maryland enforces this purpose by imposing various restrictions on the interactions between wholesalers and retailers. Moreover, the Alcohol Administration Act was designed to “[p]revent wholesaler, importer and producer control over retailer[s] . . . .” See Mot. Ex. 5, Presentation, Alcohol & Tobacco Tax & Trade Bureau, U.S. Dep’t of Treasury, Federal Alcohol Administration Act Trade Practice: Law and Regulation 12 (2009).

Senate committee by one of Empire Merchants’ owners and managers, Antonio a/k/a

“Nino” Magliocco, Jr., each demonstrate that Empire Merchants knew or should have

known of any alleged injuries prior to September 20, 2012. It is no coincidence that

Empire Merchants sat on its hands and refrained from pursuing litigation until it found

itself embroiled in a tense business environment of industry consolidation and fearing its

loss of industry relevance.14 The Court should not tolerate Empire Merchants’ “abuse of

RICO’s potent provisions.” Curtis & Assocs., P.C. v. Law Offices of David M. Bushman,

Esq., 758 F. Supp. 2d 153, 167 (E.D.N.Y. 2010), aff’d, 443 Fed. App’x 582 (2d Cir. 2011).

Third, the FAC fails to allege that a RICO enterprise existed; that any enterprise

was managed or operated by Reliable; or that Reliable engaged in any predicate criminal

acts—let alone a pattern thereof. Indeed, there are no allegations showing:

• Any agreement, cooperation, or even mutually beneficial conduct on the

part of Reliable and other RICO defendants;

• Any actual knowledge on the part of Reliable of the Cecil County Retailers’

illegal bootlegging scheme;

• Any conduct by Reliable that harmed Empire Merchants;

• Any conduct by Reliable directing any retailer to engage in cross-border

sales;

• Any conduct by Reliable coordinating any cross-border sales;

• Any illegal conduct by any Reliable employee; or

• Any false or fraudulent statements or conduct by Reliable or any of its

14 See Mot. Ex. 6 (stating that consolidation reached “new heights in recent months” in the spirits and wine distribution business).

executives.

Fourth, Empire Merchants’ failure to plead adequately a substantive RICO claim

necessarily defeats its effort to plead a RICO conspiracy, as does its inability to allege that

Reliable ever agreed to participate in any conspiracy.

Finally, this Court should reject Plaintiffs’ Civil Rights Claim as a desperate and

offensive attempt to dress up a run-of-the-mill state law contract dispute as “witness

intimidation”15 for the purpose of gaining access to this federal court. The statute under

which Plaintiffs bring their claim, known as the Ku Klux Klan Act, was intended to protect

real civil rights violations, not to provide sophisticated corporations with a hook for federal

jurisdiction arising out of ordinary business conduct. The Court should reject this abuse of

the federal civil rights laws because both Empire Companies lack standing to bring these

claims, and because the FAC otherwise fails to plead a claim for relief under 42 U.S.C. §

1985(2). Section 1985(2) provides a cause of action for parties, witnesses, and jurors to

recover damages arising out of actions to deter them from testifying in a pending federal

proceeding through intimidation or harassment. EMN lacks standing under Section

1985(2) because the FAC does not allege any specific facts showing that EMN is an actual

or potential witness in Empire’s pending RICO action. Moreover, Plaintiffs cannot

demonstrate that their commercial disagreement falls within the “zone of interests” that 42

15 Plaintiffs’ assertion that they, as savvy commercial entities and the fifth largest distributor in the United States with over $1.6 billion in combined revenue with highly sophisticated owners, management, and outside legal counsel, are being intimidated is risible, particularly given that this entire litigation and the “criminal overtones” of Empire Merchants’ RICO allegations provide a clear example of the improper use of litigation as a strong-arm tactic. See Oram v. SoulCycle LLC, 979 F. Supp. 2d 498, 511 (S.D.N.Y. 2013); see also Mot. Ex. 6 at 21.

U.S.C. § 1985(2) was enacted to protect. But regardless of whether Plaintiffs can establish

standing (and they cannot), the intra-corporate conspiracy doctrine precludes them from

bringing a claim under Section 1985(2) based on an alleged intra-corporate conspiracy

among Breakthru, its executives, and its subsidiary Reliable.

SUMMARY OF ALLEGATIONS

I. EMPIRE MERCHANTS’ RICO ALLEGATIONS AGAINST RELIABLE.

On September 20, 2016, Empire Merchants16 commenced this litigation, asserting

claims under both federal and New York law against Reliable,17 Merinoff, Baird, and

several liquor retailers in New York and Maryland who have been accused or convicted of

smuggling liquor from Maryland to New York with Reliable’s competitor, Republic

National Distributing Company (“RNDC”). ECF 1. The initial Complaint, like the

Amended Complaint, relied almost exclusively on allegations derived from the

now-dismissed indictment of RNDC, alleged scant facts about Reliable, and conspicuously

omitted the fact that Reliable has never been indicted. Shortly after the Complaint was

16 Empire Merchants and EMN are both beverage alcohol distributors operating in New York State. See FAC ¶¶ 28-29. Empire Merchants was formed in July 2006, and is 50%-owned by Charmer Industries, Inc. (“Charmer”), and 50%-owned by Bulldog Ventures, Ltd. (“Bulldog”). See id. ¶ 28. EMN was formed in February 2007, and is 25%-owned by Bulldog, see id. ¶ 29, and 50%-owned by Service Universal Distributors, Inc. (“Service Universal”) (which, along with Charmer, is owned by the Merinoff-Drucker Family) and 25%-owned by another company. Bulldog is a holding company owned by the Magliocco family. See id. ¶ 74. 17 Reliable is a beverage alcohol distributor operating in Maryland. Id. ¶ 30. Reliable is a wholly-owned subsidiary of Breakthru, which was formed through a merger of Sunbelt Holding, Inc. (“Sunbelt”) and the beverage alcohol operations of Wirtz Corporation (“Wirtz”) on January 1, 2016. Id. Prior to the formation of Breakthru, Reliable was a wholly-owned subsidiary of Sunbelt. The operating subsidiaries of Sunbelt, along with Empire Merchants and EMN, were collectively referred to as “The Charmer Sunbelt Group.” See id. ¶ 22 n.34.

filed, the indictment against RNDC was dismissed in its entirety on October 31, 2016. See

U.S. v. RNDC, ECF 79.

In its October 27, 2016 letter requesting a pre-motion conference for its motion to

dismiss (ECF 30), and in its November 23, 2016 Rule 11 notice to Empire Merchants,

Reliable pointed out numerous deficiencies and outright falsehoods in the Complaint,

including many significant and fatal deficiencies in Empire Merchants’ RICO claims.

On December 9, 2016, Plaintiffs filed the FAC. ECF 46. The FAC asserts fourteen

causes of action, but only three federal claims—(1) a substantive RICO claim brought by

Empire Merchants against Reliable (FAC ¶¶ 237-286); (2) a RICO conspiracy claim

brought by Empire Merchants against Reliable (id. ¶¶ 287-293); and (3) the Civil Rights

Claim brought by both Plaintiffs against Breakthru and Reliable (id. ¶¶ 294-300).

Although the FAC expands upon the initial pleading by thirty-eight pages and includes

fourteen new exhibits, Empire Merchants’ RICO allegations against Reliable are

supplemented only by redacted declarations obtained from an employee and a proprietor

of two liquor stores that were sued by Empire Merchants in this litigation. 18 The

declarations contain vague statements that either contradict or fail to add any meaningful

substance to the FAC. Id. ¶¶ 91-105 (citing FAC, Exs. X and Y). The FAC also adds the

Civil Rights Claim, which accuses Breakthru and Reliable of a conspiracy to “discriminate

and retaliate” against the Empire Companies for pursuing this litigation. FAC ¶¶ 213-236,

294-300.

18 Empire Merchants has not provided Reliable with unredacted versions of the declarations.

A. Allegations That Reliable Executives “Must Have Known” About and/or Covered-Up the Purported Scheme.

The FAC does not allege specific facts showing that any Reliable executives

actually knew about any alleged scheme. Indeed, the sum total of Plaintiffs’ allegations

that Reliable executives participated in any purported scheme is that, Reliable executives

allegedly: (1) set sales targets, (2) incentivized their employees to meet those sales targets,

and (3) subsequently reviewed the sales data. See FAC ¶¶ 98-99. Conclusory allegations

notwithstanding, the FAC only posits that Reliable’s executives “must have known” about

the alleged bootlegging because the sales data available to them would have shown that

Reliable’s sales in one county were too large to be confined to that county. Id.

The FAC makes much of its scant allegations that Breakthru executives “misled

Empire Merchants to put it at ease” concerning a federal investigation into bootlegging in

Maryland by denying that Reliable had engaged in any criminal misconduct. FAC ¶ 100.

Out of the 373 paragraphs in the FAC, only three contain allegations of specific interstate

communications, transactions, or travel specifically related to Reliable. See id. ¶¶ 100,

101 (repeating part of alleged statements in ¶ 100), 204 (repeating alleged statements from

¶ 100). According to the FAC, the General Counsel sent e-mails on July 15, July 16, and

July 23, 2013 to organize a July 31, 2013 meeting in New York, which included Nino

Magliocco, an Empire Merchants owner from Bulldog. Id. ¶ 100. At that July 31, 2013

meeting, the General Counsel allegedly made the following representations, which Empire

Merchants claims were “knowingly false when they were made” and upon which Empire

Merchants hangs all of its allegations of fraud against Reliable:

(1) “There was no criminal misconduct by Reliable”;

(2) “Reliable Churchill and its employees had no knowledge of any shipments

being smuggled by the Cecil County Retailers into New York”;

(3) Reliable “had no reason or ability to do anything other than to fulfill the Cecil

County Retailers’ orders”; and

(4) The General Counsel “was confident Reliable Churchill would be able to

resolve the issue through a modest civil settlement.” Id.19

The FAC and judicially noticeable facts show that none of these statements were

false when they were allegedly made and, in fact, have been proven true over time. First,

Reliable has never been indicted in connection with any of the bootlegging activity alleged

by Empire Merchants. Indeed, even the RNDC indictment—upon which Empire

Merchants primarily relies for its RICO claims—was dismissed altogether. See U.S. v.

RNDC, ECF 79. Second, no specific facts show that Reliable executives had any actual

knowledge of any illegal out-of-state sales.20 Third, Reliable’s position regarding its

obligations to fulfill retailer purchase orders is supported by federal and Maryland laws

that prohibit liquor wholesalers from picking and choosing whether and to what extent they

will fulfill those orders. See 27 C.F.R. § 6.153(a); Md. Code Ann., Al. Bev. § 2-316(b)(1).

And, it bears repeating that Empire Merchants has not alleged and cannot allege that any of

these sales were not duly reported to the Maryland liquor authorities or that Reliable ever

failed to pay Maryland taxes on them. Finally, Reliable has never been required to pay

19 Plaintiffs also allege that the General Counsel repeated a statement to this effect during a September 23, 2013 conference call with Nino Magliocco. FAC ¶ 101. 20 Plaintiffs allege that “Merinoff and Miller knew that Reliable Churchill and at least three employees were targets of a criminal federal investigation into bootlegging” (FAC ¶ 204), but even if that were true, knowing of an “investigation into bootlegging”—one that did not result in an indictment of Reliable or any Reliable employees—is very different from knowing that actual bootlegging was taking place.

even the “modest civil settlement” that was allegedly predicted and, indeed, the FAC does

not allege the contrary.

Plaintiffs allege as motive that Merinoff’s “ultimate goal” was “to coerce the

principals of Empire Merchants to cede control of Empire Merchants as an independent

operation by combining it completely with the larger Charmer Sunbelt Group (now merged

into Breakthru), which Merinoff controlled.” FAC ¶ 23. Even though Merinoff had

interests in both Empire Merchants and Reliable, Plaintiffs allege that “Merinoff profited

more when Reliable Churchill made a sale, as opposed to when Empire Merchants made a

sale,” and so “knowingly and actively participated” in a “bootlegging scheme” effectively

to steal from himself. Id. Plaintiffs also allege that Merinoff’s goal in running a

bootlegging scheme that purportedly began “in at least 2008” was “to diminish the value of

Empire Merchants so that when Empire Merchants’ other principals eventually

contemplated selling their Empire Merchants interests to take a minority interest in The

Charmer Sunbelt Group, they would be paid less than their Empire Merchants interests

should have been worth.”21 FAC ¶ 23. Notably, the FAC does not allege that any

acquisition offer was made for Empire Merchants until November 11, 2016, almost eight

years into the alleged bootlegging scheme, when Breakthru, which is not named as a

“RICO Defendant,” made an offer to acquire Empire Merchants. FAC ¶ 25(c). If not

21 Such a claim is implausible given that even if every single case of the $23.408 million of Reliable’s sales to Cecil County Retailers in 2011—the last full year of the alleged scheme—were bootlegged into New York, the total would amount to only 2% of Empire Merchants’ $1.125 billion sales. Such a de minimis amount would hardly be a crippling blow to Empire Merchants.

altogether implausible, Merinoff’s patience is certainly astounding.22

B. The Alleged Scheme to Evade New York Excise Taxes through Cross-Border Sales of Liquor from Maryland.

Empire Merchants alleges that between “at least 2008” and “at least 2014,” a group

of liquor retailers engaged in an unlawful scheme “predicated on selling liquor across state

lines to take advantage of discrepancies between Maryland’s and New York’s excise

taxes,” and that Reliable must have been complicit in this scheme because it fulfilled and

received payment for purchase orders from Maryland retailers. See FAC ¶¶ 1, 82, 91-105.

According to Empire Merchants, the alleged scheme involved the following steps:

First, Empire Merchants alleges that Reliable sold alcohol products to retailers

(i.e., liquor stores) located in Cecil County, Maryland (“Cecil County Retailers”)—an

unremarkable fact given that Reliable is not only a licensed wholesale distributor of

alcohol to Maryland retailers, but is required by both federal and Maryland law to fulfill

those retailers’ purchase orders. See id. ¶¶ 91-93; 27 C.F.R. § 6.153(a) (prohibiting

practices that undermine retailer independence, including any practice that “restricts or

hampers the free economic choice of a retailer to decide which products to purchase or the

quantity in which to purchase them for sale to consumers”) (emphasis added); Md. Code

Ann., Al. Bev. § 2-316(b)(1) (providing that it is unlawful for licensed Maryland

wholesalers “to discriminate directly or indirectly in price [or] discounts”). Empire

Merchants also alleges that Reliable incentivized the Cecil County Retailers to purchase

large quantities of alcohol by offering non-discriminatory, volume discounts. FAC ¶ 93

(“These volume discounts applied both to the alcohol that was sold to New York buyers as

22 See Alexandre Dumas, The Count of Monte Cristo, Vol. II, 464 (Chapman & Hall 1846) (“all human wisdom was contained in these two words, —‘wait and hope’”).

well as any alcohol sold in the retail stores to legitimate consumers.”) (quoting FAC Ex. X

¶ 6). Empire Merchants further alleges that due to the discounts offered by Reliable, one

employee of one Maryland retailer23 “felt pressure to increase the size of [its] purchases,”

id. (citing FAC Ex. X ¶¶ 8-9), and that Reliable sometimes delivered liquor to Cecil County

Retailers by one type of truck instead of another to accommodate the volume of purchases.

Id. ¶ 94.

Next, Empire Merchants alleges that certain retailers located in New York (“New

York Retailers”) picked up alcohol in Maryland and transported it back to New York

without paying New York’s liquor excise taxes, which are higher than Maryland’s. Id.

¶¶ 82-83. The FAC does not allege that Reliable participated in the transportation of any

alcohol to New York, or that it used any interstate facilities to arrange for any such sales or

transport.

Finally, Empire Merchants alleges that the New York Retailers sold the bootlegged

alcohol to customers in New York. Id. ¶¶ 1, 8. Empire Merchants acknowledges,

however, that Reliable did not sell any liquor directly to customers in New York. See id. ¶

8 (“To avoid detection, the Maryland Wholesalers did not sell directly to out-of-state

retailers.”). Of course, Empire Merchants’ allegation is preposterous, in stating that in

order to “avoid detection,” Reliable did not commit a crime. The same ridiculous

proposition could be made about any citizen not committing a crime “to avoid detection.”

Empire Merchants alleges only that the “Maryland Wholesalers” received checks from

23 Reliable has approximately 450 employees and services approximately 5,386 retailers in Maryland, so it beggars belief that Empire Merchants is asking this Court to rely on allegations concerning a single employee interaction with a single employee of a single retailer to justify the use of the “thermonuclear litigation device” of civil RICO claims.

Cecil County Retailers consistent with normal business practices. Id. ¶ 82. Notably, the

FAC alleges no direct effect on Empire Merchants from this scheme, which it expressly

alleges was “predicated on . . . tak[ing] advantage of discrepancies between Maryland’s

and New York’s excise taxes.” Id.; see also id. ¶ 83. Instead, the FAC claims the alleged

scheme ultimately harmed Empire Merchants downstream as a New York wholesaler,

because rather than buying alcohol from licensed distributors in New York, the New York

Retailers were reselling alcohol unlawfully purchased from Cecil County Retailers. Id. ¶

89 (“In addition to profiting from the scheme, the Defendants knew that the scheme

harmed Empire Merchants’ business . . . .”) (emphasis added). Under well-established law,

the chain linking Reliable’s alleged conduct (selling beverage alcohol at wholesale in

Maryland) to Empire Merchants’ alleged harm (losing sales in New York) is too attenuated

to support a RICO claim.

Indeed, Empire Merchants’ most prejudicial allegation against Reliable—that

RNDC and Reliable “participated in the same smuggling enterprise”—lacks any factual

basis or even a scintilla of support from “on information and belief” allegations. FAC ¶¶ 1

n.2, 244(a). To dispel any confusion intentionally created by Plaintiffs: RNDC is not, and

never has been affiliated with or related to Reliable. To the contrary, RNDC is a direct

competitor of Reliable and sells different brands from Reliable. Despite the FAC’s

conclusory allegations of a single enterprise, Empire Merchants does not allege any

agreement, cooperation, or other mutually beneficial conduct of any kind between Reliable

and RNDC. See FAC ¶ 1, n.2.

The FAC is littered with references to RNDC’s alleged conduct for one reason: to

tar Reliable (and its parent, Breakthru) publicly with scandalous allegations connecting

them to RNDC. On May 24, 2016, RNDC was indicted by the U.S. Attorney’s Office for

the District of Maryland (“Maryland USAO”) on or around May 24, 2016 for allegedly

conspiring with the Cecil County Retailers and New York Retailers to commit wire fraud.

See FAC, Ex. A ¶ 10. The FAC refers to the dismissed RNDC Indictment 47 times. See,

e.g., FAC. ¶¶ 12, 14, 20, 21, 71, 81, 82, 83, 87, 88, 108, 110, 112, 113, 116, 124, 126, 135,

142, 143, 149, 200, 201, 202. But the RNDC Indictment does not at implicate or even

mention Reliable and, in any event, all charges against RNDC were dismissed on October

31, 2016. See U.S. v. RNDC, ECF 79.24

Similarly, Plaintiffs try to muddy the waters by referencing the indictments or

guilty pleas of certain Cecil County Retailers and New York Retailers (“Retailer

Defendants”) arising out of their participation in an alleged scheme with RNDC, but none

of those documents so much as mention Reliable. See FAC ¶ 26, Exs. A, E, G, H, I, J, K, L,

M. Notwithstanding the dismissal of the RNDC indictment, Empire Merchants

gratuitously alleges—“on information and belief”—that Reliable “remains under

investigation for its participation in this bootlegging scheme.” FAC ¶ 26. But Empire

Merchants does not—and cannot—allege that Reliable has been indicted.25

Empire Merchants’ RICO allegations against Reliable overwhelmingly rely on

unreasonable inferences drawn from the vague, redacted declarations of one employee and

one proprietor of two Retailer Defendants, whom Empire Merchants’ attorneys comically

24 It goes without saying that an indictment is merely a charge, not evidence of wrongdoing. See, e.g., Devos, Ltd. v. Record, 15-CV-6916(ADS)(AYS), 2015 WL 9593616, at *15 (E.D.N.Y. Dec. 24, 2015) (“It is well-settled that an indictment is merely an accusatory instrument, and lacks probative value of any wrongdoing.”) (collecting cases). Additionally, RNDC was not charged under RICO. See generally FAC, Ex. A.

refer to as having “flipp[ed].” ECF 50 at 2. See Pelletier, 921 F.2d at 1522 (“When used

improperly, as in this case, [the Civil RICO] provisions allow a complainant to shake down

his opponent and, given the expense of defending a RICO charge, to extort a settlement.”)

To the extent those declarations provide any specific facts concerning Reliable, they can be

distilled to the following:

(1) liquor stores were incentivized to buy large quantities of alcohol due to

non-discriminatory sales incentives offered by Reliable, FAC,Ex. X ¶ 6;

(2) liquor stores bought large quantities of alcohol from Reliable and Reliable was

aware of the quantities of alcohol that the retailers bought,26 FAC Ex X. ¶ 15; id.,

Ex. Y ¶¶ 13-15;

(3) at the request of liquor store employees, Reliable shipped alcohol to their stores

without the stickers that Reliable uses for its own convenience, or showed liquor

store employees how to remove those stickers, FAC Ex. X ¶ 17; id., Ex. Y ¶¶ 19-20;

(4) on several occasions, one New York retailer was aware of the prices for liquor

in Maryland before one Cecil County Retailer, FAC Ex. Y ¶ 16;

(5) one Reliable salesperson “once asked [one liquor store employee] why ‘my

26 The State of Maryland was equally aware of the quantities of alcohol sold to the Cecil County Retailers based on the required sales reports filed by Reliable, as well as the excise taxes paid on those sales. FAC ¶ 87; see also Md. Code Ann. Tax-Gen § 5-201(b) (providing that wholesalers “shall complete, under oath, and file with the Comptroller an alcoholic beverage tax return” on or before the 10th day of the month that follows the month in which the “wholesaler sells or delivers any alcoholic beverages in the State.”); Md. Code Regs. § 03.02.04.01(A)(1). For every order sold, a wholesaler must generate and retain invoices which identify, among other things, the product sold, the amount sold, the date, the customer name and account number, the customer’s outstanding balance, and the name of the Reliable salesperson making the sale. Id. All of these records, and many more, must be disclosed to the State of Maryland any time they are requested by the Maryland Comptroller. Id.

guy’ stopped ordering certain high end brands from me in bulk, when ‘other guys’

were buying those products in bulk from other local stores,” FAC Ex. X ¶; id., Ex.

Y ¶ 11; and

(6) when asked by one liquor store employee how many sales Northside Liquor,

another Cecil County Retailer, “was doing ‘out the back door,”—a purported

reference to out-of-state sales— a Reliable salesmen told him on multiple

occasions “that they did not know the answer because they were not involved in

sales to Northside Liquor.” FAC Ex. X ¶ 19.

Neither the declarations nor the FAC assert any specific communications,

agreements, or exchange of payments between Reliable and any New York Retailer, or

indeed, any use of interstate facilities by Reliable in furtherance of the alleged scheme.

Neither the declarations nor the FAC show how the non-discriminatory volume discounts

offered by Reliable violated either federal or Maryland law. The declarations do not state

that Reliable salesmen did anything other than receive and fulfill purchase orders made by

the Cecil County Retailers and—taking both declarations at face value—respond to two

individual liquor store employees’ requests to remove Reliable’s own stickers from its

shipments.

The FAC’s remaining allegations also fail to support a RICO claim, and some key

allegations are contradicted by the sources on which they purportedly rely. For example,

Empire Merchants alleges “upon information and belief” that Reliable’s agents “provided

kickbacks to the Cecil County Retailers” and that “these kickbacks violated both federal

and state law.” FAC ¶ 91 & n.88. Yet, the FAC provides no specific details regarding

these “kickbacks” or what, if anything, made them illegal, which is required by Fed. R.

Civ. P. 9(b). Moreover, this allegation is contradicted by a subsequent paragraph in the

FAC, which that quotes from one of the liquor store employee declarations and describes

the discounts that Reliable provided to retailers as non-discriminatory—consistent with

both federal and Maryland law. Id. ¶ 93 (stating that Reliable’s volume discounts were

applied equally to all liquor sold) (quoting FAC Ex. X ¶ 6).

As another example, Empire Merchants alleges that “Maryland Wholesalers and

Cecil County Retailers discussed their criminal scheme in code: They referred to alcohol

intended for New York as sales of liquor that were going ‘out the back door.’” FAC ¶ 200.

To support this allegation, Empire Merchants cites to (1) the RNDC Indictment, FAC Ex.

A, which does not reference Reliable at all; and (2) one of the declarations from the

Retailer Defendants of one of the two liquor store employees. Id. ¶ 200 n. 243 (citing FAC

Ex. X ¶ 10.) But that declaration does not state that any Reliable employee ever referred to

the alleged coded phrase. In fact, even with the cooperative gloss of a settling defendant

agreeing to a declaration no doubt drafted by Empire Merchants’ lawyers, the cited

declaration says the opposite, that Reliable salesmen told the liquor store employee on

multiple occasions “that they did not know the answer because they were not involved in

sales to Northside Liquor.” FAC Ex. X ¶ 10.

As a third example, Empire Merchants alleges that Reliable “provided [Cecil

County Retailers] with specific recommendations and assistance to further the bootlegging

scheme while avoiding law enforcement and regulatory detection,” including showing

Cecil County Retailers how to remove routing stickers27 from the liquor they ordered.

27 A distributor’s routing stickers are not legally required seals like excise tax stamps (and Empire Merchants does not allege that they are). Rather, the stickers are part of a

FAC ¶ 95; see also FAFC Ex. X ¶ 17. But neither declaration states that Reliable directed

the retailers to take any action for any reason, much less a nefarious one. Instead, the

declarations show that the Retailer Defendants or their employees expressly requested that

Reliable remove its routing stickers from their shipments and only allege that the Reliable

employees obliged and also showed them how to remove those stickers without providing

a reason for the request. See FAC Ex. X ¶ 17 (“I explicitly asked salesmen at Reliable

Churchill and RNDC to deliver cases of alcohol without the routing stickers that identify

Vlamis Liquors as the buyer and Maryland as the source of the alcohol.”); FAC Ex. Y ¶ 20

(“In order to prevent the smugglers from continuing to make a mess of my store, I asked the

salesmen at Reliable Churchill not to place the labels on the case of alcohol.”).28

As a fourth example, Empire Merchants’ conclusory allegation that Reliable

“communicated directly with smugglers from New York to further this bootlegging

scheme” is also unsupported by the cited declaration. FAC ¶ 97 (citing FAC Ex. Y ¶ 16);

see also FAC ¶ 82. This claim is based entirely on a speculative statement in one

declaration that a liquor store proprietor “suspected that [a New York retailer] had advance

warehouse management tool that allows a distributor to identify the product, the date of its receipt into inventory, its location in the warehouse, and the delivery location so that the product is placed on the appropriate delivery truck. Retailer customers sometimes ask distributors not to affix—as opposed to remove—these stickers so that they may create more attractive in-store displays. It is also common practice for a distributor with a sophisticated warehouse management system not to affix stickers to individual cases when a retailer orders a pallet of the same product; rather, just one routing sticker will be affixed to the outside of the shipment. 28 In both declarations, the names of the Reliable salesmen with whom the retailers supposedly worked are redacted. See FAC Ex. X ¶ 17; FAC Ex. Y ¶ 9. These unexplained redactions prevent Reliable from knowing the identities of the witnesses who might refute the declarations’ claims.

knowledge of the distributors’ pricing information from conversation he may have had

directly with the Maryland distributors.” FAC Ex. Y ¶ 16. Neither this declaration nor the

FAC identifies any communications between Reliable and any New York Retailer about

prices or any other subject, let alone that Reliable directed any Retailer Defendants to use

that information to make cross-border liquor purchases.

Still other key allegations in the FAC are made “on information and belief,”

without any specific details or documentary support--or worse, are derived entirely from

documents referring exclusively to RNDC, and not Reliable. See, e.g., FAC ¶¶ 13, 91, 95

n.95, 100 n.110, 119, 202. Setting aside the FAC’s conclusory allegations, the

unreasonable inferences drawn from the two biased (as well as vague and speculative)

Retailer Defendant declarations, and impermissible attempts to establish guilt by

association with RNDC,29 nothing remains but the innocuous and unremarkable allegation

that Reliable “delivered millions of dollars of alcohol to Cecil County Retailers [in

Maryland].” FAC ¶ 1 (emphasis added).

II. THE EMPIRE COMPANIES’ ALLEGATIONS OF AN INTRA-CORPORATE CONSPIRACY BETWEEN BREAKTHRU AND ITS SUBSIDIARY TO VIOLATE THE CIVIL RIGHTS OF TWO LIMITED LIABILITY COMPANIES.

Plaintiffs’ Civil Rights Claim entails allegations of a conspiracy to “intimidate” the

Empire Companies to prevent them from pursuing their claims against Reliable. FAC ¶¶

295-96. The FAC alleges a purported conspiracy on the part of Breakthru, Breakthru’s

executives, and its subsidiary Reliable, and does not implicate any actors that were outside

29 For the Court’s convenience, attached as Mot. Ex. 1 is a copy of the FAC with all references to RNDC and guilty pleas associated with it shaded, demonstrating the FAC’s lack of any substance as to the allegations against Reliable. See also Mot. to Strike, infra.

the corporate aegis of Breakthru at the time of their participation in this alleged scheme.

See FAC ¶¶ 213-236, 294-300.

A. Sunbelt’s Services Agreement with EMN.

On July 1, 2010, EMN entered into a Services Agreement (FAC Ex. FF) with

Sunbelt in which Sunbelt agreed to provide EMN with a suite of information technology

support services. FAC ¶¶ 215-16. “The initial term of the agreement was five years, with

[EMN] having the exclusive right to extend the Services Agreement ‘for up to twenty-four

(24) months, on the same terms and conditions . . . by giving S[unbelt] notice of the

extension and the length thereof, at least two (2) months before the end of the Term or any

extension under this Section.’” FAC ¶ 216 (alterations in original). The express terms of

the Services Agreement provide that any such notice must be in writing, as Plaintiffs’

implicitly acknowledged in their Motion for a Temporary Restraining Order. ECF 79 at 10

(acknowledging, without refuting, “Breakthru’s hypertechnical arguments that this

contract expired without an express prior writing extending it”); see FAC Ex. FF § 21.2

(“Except as otherwise specified in this Agreement, all notices, requests, consents,

approvals, agreements, authorizations, acknowledgements, waivers and other

communications required under this Agreement will be in writing.”). Critically, Plaintiffs

do not allege that EMN gave written “notice of the extension and the length thereof” at all,

let alone “at least two (2) months before the end of the Term” of the Services Agreement.

FAC Ex. FF § 2.2. Instead, Plaintiffs attempt to correct their mistake by alleging that “[b]y

course of performance and conduct, from July 1, 2015 going forward, both Sunbelt (and

then Breakthru) and EMN have continued performing and exchanging payment under the

Services Agreement, effectuating the two-year extension.” FAC ¶ 216. But absent a

waiver of the written notice requirement, see FAC Ex. FF §§ 21.2, which Sunbelt is not

alleged to have provided, the Services Agreement does not provide for an extension by any

means other than written notice, which EMN does not and cannot allege that it provided.

Thus, the Services Agreement, by its plain and express terms, expired at the end of the

initial 5-year term on July 1, 2015.30

After Sunbelt merged with Wirtz to form Breakthru on January 1, 2016, Breakthru

continued to provide various services to the Empire Companies while the parties attempted

to negotiate a post-merger relationship. FAC ¶ 221. The parties also attempted to negotiate

a date for the end of Breakthru’s provision of services to Empire Merchants and EMN.

FAC ¶¶ 228-231. During that time, Breakthru continued to provide EMN the services

described in the long-expired Services Agreement, FAC ¶ 222, notwithstanding the EMN’s

complaint that those services are not being delivered as quickly as it would like. FAC ¶¶

223-27.

B. Alleged Delays in Breakthru’s Provision of Services to EMN.

On September 20, 2016, Empire Merchants filed the present action against

Breakthru’s subsidiary, Reliable. ECF 1, ¶ 59 & n.39. The Empire Companies now allege

that, on September 21, 2016, Breakthru restricted EMN’s access to certain facets of its

services but continued to provide Empire Merchants with technical assistance for any

issues. FAC ¶ 224. The FAC also alleges that Breakthru reduced the responsiveness of its

technical services to EMN, but did not discontinue those services. Id. ¶ 225. Breakthru

informed EMN that service requests may be delayed because, as a result of the present

action brought by Empire Merchants, all communications between Breakthru and Empire

30 ECF 91 at 22.

Merchants or its affiliates “had to first be reviewed and approved by Breakthru’s legal

department.” FAC ¶ 226. Plaintiffs allege that the timing of Breakthru’s decision to review

carefully each communication between EMN and Breakthru was not a legitimate decision

by Breakthru’s legal department, even in light of the allegations in the Complaint. Rather,

Plaintiffs allege, Reliable “influenced Breakthru to retaliate against EMN for filing this

RICO action.” Id. As injury, Plaintiffs claim only that EMN’s IT systems “are not

performing in the efficient manner that they should be.” FAC ¶ 227.

C. Breakthru’s Alleged Termination of Empire Merchants’ Insurance Coverage

Plaintiffs claim that on October 14, 2016, Breakthru sent Empire Merchants a

notice stating that Breakthru “will no longer provide insurance and risk management

services to Empire [Merchants] . . . under the Breakthru Beverage Group Insurance

Program. . . . This termination of insurance and risk management services also includes

coverages provided through Clam Shell Insurance Company, the Sunbelt Holding, Inc.

captive insurance company.” FAC ¶ 232. Empire Merchants also claims that “just months

earlier, Breakthru had promised in writing to continue providing insurance coverage to

Empire [Merchants].” FAC ¶ 232. Yet, although Empire Merchants attached 37 exhibits

to the FAC, it did not attach either this purported written promise from “just months

earlier” or the October 14, 2016 letter.31 Empire Merchants does not allege that Breakthru

31 Breakthru sent a letter concerning insurance coverage to Empire Merchants on October 14, 2016, the same day it sent similar letters to other affiliated companies: EMN, Efficiency Enterprises, Inc., Charmer Industries, Inc., and Service Universal Distributors, Inc. See Mot. Ex. 2. The letters to Empire Merchants and EMN were identical to the letters to each of those other entities, except in the specifics of the policies discussed therein. In the Empire Merchants letter, like in all the other letters, Breakthru stated that it would not renew its coverage of Empire Merchants and its employees after the usual

has actually terminated Empire Merchants’ insurance coverage or that Empire Merchants

has suffered any injury as a result of the purported termination of insurance

coverage. Indeed, Plaintiffs know that their coverage was not terminated, and instead they

were told their policies would not be renewed. In fact, Plaintiffs are currently participating

in certain of Breakthru’s group coverage policies. Plaintiffs also neglect to mention that

once they commenced this litigation, Breakthru submitted an insurance claim for its

defense costs, which was denied pursuant to an “insured versus insured”

exclusion. Breakthru chose not to offer Plaintiffs the ability to continue to participate in

its group coverages for a valid business reason—in case Empire Merchants sued it or its

affiliates again—which, of course, the Empire Companies have done, by adding new

claims and adding Breakthru and its General Counsel to this litigation.

D. Breakthru’s “Sham Acquisition Proposal” for Empire Merchants.

Plaintiffs’ allege that, on November 11, 2016, Breakthru sent a “sham” proposal to

Empire Merchants’ Board of Managers to acquire the company. FAC ¶ 233. Plaintiffs

further allege that “before making this ‘offer,’ Breakthru had hired [Lloyd] Sobel and, on

information and belief, consulted him about the terms of the letter.” Id. 32 Empire

Merchants asserts that Breakthru’s offer was a “sham” because Empire Merchants

termination of the various policies under which Empire was covered. Mot. Ex. 2 at 1. For Empire’s policies, the termination dates ranged from December 1, 2016 (for Directors & Officers, employment, fiduciary, and crime insurance), to June 1, 2017 (for business travel insurance). Id. at 5-8. Breakthru’s letter also informed Empire Merchants that Breakthru was willing to extend any policy by thirty days to help Empire obtain a new insurance policy. Id. at 1. 32 Breakthru hired Sobel only after Empire Merchants terminated him concomitant with the filing of the original Complaint in this action. FAC ¶¶ 211-12.

considered the offer “unreasonably low.” Id. ¶ 25(c).33 Empire Merchants also alleges that

its principals were not interested in selling their stakes in the company at that time. Id.

Empire Merchants rejected the offer and stated publicly that Empire Merchants was not for

sale. Id. ¶ 234 & Ex. JJ (citing Greg Trotter, Breakthru Beverage Makes Offer for New York

Wholesaler That Is Suing Its Execs, Chi. Tribune (Nov. 11, 2016), http://trib.in/2hnmZVL).

E. Breakthru Executive Sobel’s November 17, 2016 Declaration.

Plaintiffs claim that the final aspect of the alleged conspiracy between Breakthru

and Reliable to deprive Plaintiffs of their civil rights was a November 17, 2016 declaration

from Lloyd Sobel (“Sobel”) that was filed in a litigation (in which Reliable and Breakthru

are not parties) brought by Bacardi against Empire Merchants, Charmer Industries, and

others. See Bacardi U.S.A., Inc. v. Alliance Beverage Distrib. Co., LLC et al.,

2016-019691-CA-01 (Fla. 11th Cir. Ct. Nov. 30, 2016). FAC ¶ 235. Empire Merchants

alleges that Sobel submitted this declaration, which divulged Empire Merchants’

privileged information, in his capacity “as a Breakthru executive and with the knowledge,

consent, and at the behest of the Breakthru Defendants.” Id.

LEGAL STANDARD

A motion to dismiss must be granted where a plaintiff has failed to plead sufficient

facts “to state a claim for relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550

U.S. 544, 555 (2007). The plausibility standard requires “more than a sheer possibility that

a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Where a

33 The FAC does not allege the value of the alleged “sham” offer, how the offer allegedly failed to capture accurately the value of the company, or what a more “reasonable” offer would look like. It is unclear whether Plaintiffs’ gripe is that Empire Merchants’ principals were not interested in selling their stakes or whether they simply thought they deserved more money.

complaint alleges facts “merely consistent with a defendant’s liability, it stops short of the

line between possibility and plausibility of ‘entitle[ment] to relief.’” Twombly, 550 U.S. at

557 (quoting Fed. R. Civ. P. 8(a)(2)) (alteration in original). “While allegations in a

complaint are deemed to be true for the purposes of a motion to dismiss, this Court need not

credit such allegations where they are wholly conclusory or rely on unreasonable

inferences and unwarranted deductions.” Schorr v. Dopico, No. 15 CIV. 4054, 2016 WL

4702444, at *3 (S.D.N.Y. Sept. 7, 2016) (citing Furlong v. Long Island Coll. Hosp., 710

F.2d 922, 927 (2d Cir. 1983)). In addition, “allegations contradicted by documents

submitted with the complaint or incorporated by reference in the pleadings are not accepted

as true.” Atkins v. Apollo Real Estate Advisors, L.P., No. CV-05-4365 (CPS)(CLP), 2008

WL 1926684, at *1 (E.D.N.Y. Apr. 30, 2008).

Federal Rule of Civil Procedure 9(b) imposes a heightened pleading standard that

requires a plaintiff to “state with particularity the circumstances constituting fraud or

mistake.” Fed. R. Civ. P. 9(b). This particularity requirement applies to all allegations that

“sound in fraud.” See Rombach v. Chang, 355 F.3d 164, 170-71 (2d Cir. 2004). Indeed,

“‘where the wording and imputations of the complaint are classically associated with

fraud,’ Rule 9(b) governs any nonfraud claim that the plaintiffs have made ‘little, if any,

effort to differentiate’ from the fraud allegations upon which the action is predicated.”

Matsumura v. Benihana Nat’l Corp., 542 F. Supp. 2d 245, 251 (S.D.N.Y. 2008) (quoting

Rombach, 355 F.3d at 172). “Additionally, all elements of a RICO claim must satisfy the

heightened pleading requirement set forth in Rule 9(b)”. D. Penguin Bros. v. City Nat’l

Bank, No. 13-CV-0041 (TPG), 2014 WL 982859, at *3 (S.D.N.Y. Mar. 11, 2014), aff’d

587 Fed. App’x 663 (2d Cir. 2014). Thus, plaintiffs “must also plead RICO predicate

crimes with the specificity necessary to satisfy Rule 9(b).” Innovative Metal Design, Inc.

v. U.S. Bank Nat’l Ass’n, No. 3:15-CV-00560(SB), 2015 WL 9434779, at *3 (D. Or. Nov.

18, 2015) (citing Desoto v. Condon, 371 Fed. App’x 822, 824 (9th Cir. 2010)).

Where a complaint relies on allegations of fraudulent representations, Rule 9(b)

“requires the plaintiff to ‘(1) specify the statements that the plaintiff contends were

fraudulent, (2) identify the speaker, (3) state where and when the statements were made,

and (4) explain why the statements were fraudulent.’” Nakahata v. N.Y.-Presbyterian

Healthcare Sys., Inc., 723 F.3d 192, 197–98 (2d Cir. 2013) (quoting Mills v. Polar

Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). For any fraud-based claim, the

plaintiff must also “‘allege facts that give rise to a strong inference of fraudulent intent.’”

Nakahata, 723 F.3d at 198 (quoting First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385

F.3d 159, 179 (2d Cir. 2004)).

Courts also place strict limitations on the use of allegations made “on information

and belief” in the context of claims subject to the heightened pleading standard of Rule

9(b). “[A]llegations of fraud generally cannot be based upon plaintiff’s information and

belief.” Alzheimer’s Found. of Am., Inc. v. Alzheimer’s Disease & Related Disorders

Ass’n, Inc., 796 F. Supp. 2d 458, 471-72 (S.D.N.Y. 2011) (citing Watts v. Jackson Hewitt

Tax Serv. Inc., 579 F.2d 334, 351 (E.D.N.Y. 2008)). That pleading restriction may be

relaxed only where “the matter is peculiarly within the knowledge of the defendant,” and

even in those circumstances, “the allegations must be accompanied by a statement of facts

upon which the belief is founded.” Id. at 472. Reliable has collected all such allegations by

Empire Merchants in a six-page chart. Mot. Ex. 3.

Plaintiffs cannot “hide behind” allegations that effectively “‘lump[] all the

defendants together in each claim and provid[e] no factual basis to distinguish their

conduct.’” Schwartzco Enters. LLC v. TMH Mgmt., LLC, 60 F. Supp. 3d 331, 356

(E.D.N.Y. 2014) (quoting Atuahene v. City of Hartford, 10 Fed. App’x 33, 34 (2d Cir.

2001)). “‘[G]roup pleading’ does not comply with the requirements of RICO or the

particularity standards of Rule 9(b).” Gross v. Waywell, 628 F. Supp. 2d 475, 495

(S.D.N.Y. 2009); see also United States v. Persico, 832 F.2d 705, 714 (2d Cir. 1987) (“The

focus of section 1962(c) is on the individual patterns of racketeering engaged in by a

defendant, rather than the collective activities of the members of the enterprise.”).

Finally, the existence of a governmental investigation “may not constitute the

entirety of nonconclusory allegations” against a defendant in order to plead adequately

claims under Rule 12(b)(6). Hinds Cty., Miss. v. Wachovia Bank N.A., 708 F. Supp. 2d

348, 361 (S.D.N.Y. 2010) (dismissing claim relying entirely on allegations concerning the

existence of government investigation into defendant’s conduct); accord In re Tableware

Antitrust Litig., 363 F. Supp. 2d 1203, 1205 (N.D. Cal. 2005) (“A plaintiff may surely rely

on governmental investigations, but must also, under FRCP 11, undertake his own

reasonable inquiry and frame his complaint with allegations of his own design. Simply

saying ‘me too’ after a governmental investigation does not state a claim.” (citing Cooter &

Gell v. Hartmarx Corp., 496 U.S. 384 (1990))). Moreover, given that the government

investigation into bootlegging in Maryland began as early as September 2011, see FAC Ex.

N., the dismissal of RNDC’s indictment, and that Reliable has never been indicted, the

existence of any purported investigation involving Reliable means little, if anything.

ARGUMENT

I. EMPIRE MERCHANTS’ RICO CLAIMS MUST BE DISMISSED.

Empire Merchants’ flimsy allegations against Reliable cannot support its RICO

claims—a cause of action described in this district as “the litigation equivalent of a

thermonuclear device.” Aliev v. Borukhov, No. 15-CV-6113 (ERK) (JO), 2016 WL

3746562, at *4 (E.D.N.Y. July 8, 2016) (citations and internal quotation marks omitted).34

“Because the ‘mere assertion of a RICO claim . . . has an almost inevitable stigmatizing

effect on those named as defendants, . . . courts should strive to flush out frivolous RICO

allegations at an early stage of the litigation.’” Katzman v. Victoria’s Secret Catalogue,

167 F.R.D. 649, 655 (S.D.N.Y. 1996) (quoting Figueroa Ruiz v. Alegria, 896 F.2d 645,

650 (1st Cir. 1990)), aff’d, No. 96-7929, 1997 WL 259746 (2d Cir. May 13, 1997). Thus, a

“plaintiff’s burden is high when pleading RICO allegations as courts look with particular

scrutiny at . . . civil RICO [claims], given RICO’s damaging effects on the reputations of

individuals alleged to be engaged in RICO enterprises and conspiracies.” Aerowest GmbH

v. Freitag, No. CV 15-2894, 2016 WL 3636619, at *3 (E.D.N.Y. June 28, 2016)

(alterations and internal quotation marks omitted). Subject to any level of scrutiny, and

especially the exacting scrutiny required by Rule 9(b), Empire Merchants’ intentionally

stigmatizing and disparaging RICO claims are deficient and should be dismissed.

First, under the Supreme Court’s holding in Anza, Empire Merchants’ purported

injury (i.e., lost sales) is far too remote to establish RICO standing based on an alleged

34 Even without further offense, the “utter inadequacy of the RICO claims alone would justify [Rule 11] sanctions given the stigma attached to RICO allegations.” Kochisarli v. Tenoso, No. 02-CV-4320 DRH/MLO, 2006 WL 721509, at *9 (E.D.N.Y. Mar. 21, 2006); see O’Malley v. N.Y. City Transit Auth., 896 F.2d 704, 709 (2d Cir. 1990) (reversing district court and imposing sanctions on plaintiff for pressing meritless RICO claims).

scheme to evade liquor excise taxes. See Anza, 547 U.S. at 60; Amsterdam Tobacco Inc.,

107 F. Supp. 2d at 219. Second, the four-year limitations period applicable to civil RICO

claims precludes Empire Merchants’ claims because it knew or should have known of its

alleged injuries—i.e., losses allegedly attributable to illegal cross-border sales—at least as

early as 2009 and certainly by September 2011. Third, the allegations fall short of pleading

the essential elements of a substantive RICO claim against Reliable, including the

existence of a RICO “enterprise” or that Reliable “operated or managed” any RICO

enterprise if one existed. Empire Merchants has not pled—and, indeed, cannot

plead—sufficient specific facts to support its outrageous, reputation-damaging claims of a

“reprehensible criminal scheme,” FAC ¶ 1, under any standard, let alone Rule 9(b)’s

heightened pleading standard.35 Finally, Empire Merchants’ failure to plead either a

substantive RICO violation or allegations showing that Reliable entered into an agreement

with any other defendant is fatal to its RICO conspiracy claim.

A. Empire Merchants Lacks Standing to Assert Its RICO Claim Because Its Injuries Were Not Directly Caused by the Alleged Scheme.

Empire Merchants’ RICO claims must be dismissed because, even assuming the

alleged scheme to avoid payment of excise taxes existed, only the City and State of New

York—and not Empire Merchants—have suffered the kind of direct injury required for

35 The irony of this baseless racketeering action is apparently lost on Nino Magliocco, Johnny Magliocco, and Joey Magliocco—the owners of Bulldog and a driving force behind Empire Merchants’ litigation—given the fact that they themselves are the descendants of Joseph Magliocco, a/k/a “Joe Malayak,” notorious New York racketeer and the boss of the Profaci crime family, later known as the Colombo crime family. See Joe Magliocco, http://americanmafiahistory.com/joe-magliocco/ (last accessed Jan. 19, 2017). Also ironic, and apparently lost on these three gentlemen is that their company, Peerless, is banned by the Department of Liquor License and Control in the State of Arizona from operating in the State of Arizona due to unsavory conduct.

http://americanmafiahistory.com/joe-magliocco/

RICO standing.

A private plaintiff has standing to assert a RICO claim only if the plaintiff is

“injured in [its] business or property by reason of a violation of section 1962.” 18 U.S.C. §

1964(c) (2012). Thus, the Supreme Court has long required RICO plaintiffs to

demonstrate a “direct relation between the injury asserted and the injurious conduct

alleged.” Holmes v. Sec. Inv. Prot. Corp., 503 U.S. 258, 268 (1992). Specifically, a

plaintiff must plausibly allege that the “defendant’s violation not only was a ‘but for’ cause

of his injury, but was the proximate cause as well.” Id. Although “direct relationship and

foreseeability are of course two of the ‘many shapes [proximate cause] took at common

law,’ . . . in the RICO context, the focus is on the directness of the relationship between the

conduct and the harm.” Hemi Grp., LLC v. City of New York, 559 U.S. 1, 12 (2010)

(quoting Holmes, 503 U.S. at 268) (alteration in original).

The Supreme Court addressed RICO’s direct injury requirement under analogous

circumstances in Anza, 547 U.S. at 460-61. In Anza, the plaintiff, Ideal Steel alleged that

its competitor National Steel had failed to charge New York sales tax to cash-paying

customers, thus allowing National to reduce prices without affecting its profit margin and

increasing its market share at Ideal’s expense. Id. at 454. The Court held that Ideal’s

alleged injury was too attenuated to satisfy RICO’s standing requirements, because “[t]he

direct victim of this conduct was the State of New York, not Ideal,” and Ideal’s alleged

injuries were caused by “a set of actions (offering lower prices) entirely distinct from the

alleged RICO violation (defrauding the State).” Id. at 458. The Court noted that “National

. . . could have lowered its prices for any number of reasons unconnected to the asserted

pattern of fraud,” and “Ideal’s lost sales could have resulted from factors other than

[National’s] alleged acts of fraud.” Id. at 458.

The Anza Court further remarked that “it would require a complex assessment to

establish what portion of Ideal’s lost sales were the product of National’s decreased

prices,” and stated that RICO’s direct causation requirement was intended to “prevent

these types of intricate, uncertain inquiries from overrunning RICO litigation,” particularly

“when applied to claims brought by economic competitors, which, if left unchecked, could

blur the line between RICO and the antitrust laws.” Id. at 459-60. Finally, the Court held

that the immediate victim—the State of New York—could “be expected to pursue

appropriate remedies,” such that there was “no need to broaden the universe of actionable

harms to permit RICO suits by parties who have been injured only indirectly.” Id. at 460.

The standing requirements set forth in Anza require dismissal of Empire

Merchants’ RICO claim for three reasons: (1) any harm suffered by Empire Merchants was

merely a byproduct of a scheme allegedly directed at avoiding excise taxes; (2) calculating

Empire Merchants’ alleged damages would require an “intricate, uncertain inquiry” of the

type that Anza cautioned courts to avoid; and (3) the alleged scheme’s immediate

victims—i.e., the City and State of New York—are fully capable of vindicating their rights

to the extent that any vindication is required.

First, even if this Court credits Empire Merchants’ unfounded and inadequately

pled RICO allegations, Empire Merchants admits in the FAC that “[t]he enterprise’s

scheme was predicated on selling liquor across state lines to take advantage of

discrepancies between Maryland’s and New York’s excise taxes.” FAC ¶ 82 (emphasis

added); see also id. ¶ 5.36 As the Supreme Court has emphasized, “the compensable injury

flowing from a [RICO] violation . . . ‘necessarily is the harm caused by [the] predicate

acts.’” Hemi Grp., 559 U.S. at 13 (alterations in original). Here, the FAC’s core allegation

is that “Defendants portrayed each transaction as a lawful sale from Maryland Wholesalers

to Cecil County Retailers, when in reality the sales were going to New York Retailers to be

sold without paying excise taxes.” FAC ¶ 249; accord id. ¶ 257. Because the alleged

scheme’s predicate acts were directed at, and had the alleged effect of avoiding payment of

New York excise taxes, any injury was suffered by the State of New York and the City of

New York. Any alleged harm allegedly suffered by Empire Merchants as a byproduct of

this alleged scheme is, therefore, impermissibly indirect and attenuated, mandating

dismissal under Anza.

Second, a determination of Empire Merchants’ damages would be so difficult as to

be virtually impossible, and would require precisely the type of “intricate, uncertain

inquiries” the Supreme Court cautioned against. Anza, 547 U.S. at 460.

Empire Merchants alleges that “every case of alcohol smuggled into New York

from Maryland was a lost sale by New York’s authorized distributors,” and that “[e]very

time Defendants illegally sold a case . . . in New York, New York’s authorized distributors

. . . lost a sale.” FAC ¶¶ 1, 4. Empire Merchants claims that Reliable “bootlegged an

36 The RNDC Indictment (FAC Ex. A), upon which the FAC relies heavily, alleges that “the object of the conspiracy was to take money from the New York excise tax and from the New York distributors, to reduce the New York retailers’ and their agents’ costs, to increase the sales and profits at the Cecil County retailers and at RNDC, and to increase the sales commissions of the salesmen of RNDC, including LOCKERMAN.” FAC Ex. A ¶ 10 (emphasis added). Empire Merchants, however, misleadingly omits this passage of the RNDC Indictment and claims that the only object of the conspiracy was to “‘take money from . . . New York distributors.’” Id. (quoted in FAC ¶ 81).

astounding amount of liquor,” FAC ¶ 92, and outlines anecdotes of discrete examples of

bootlegging in an attempt to suggest that Empire Merchants’ damages will be

straightforward to prove. See FAC ¶¶ 128, 137, 146. These allegations, however, simply

list purported sales by Reliable to Cecil County Retailers without connecting those sales to

any loss of sales suffered by Empire Merchants in New York.

These allegations, however, simply list purported sales by Reliable to Cecil County

Retailers without connecting those sales to any loss of sales suffered by Empire Merchants

in New York. These allegations fail to adequately describe Empire Merchant’s damages

because they fail to address the myriad of paths—both legally and illegally—on which

alcohol can travel away from a Cecil County Retailer, as well as the numerous ways—both

legally and illegally—in which alcohol can enter New York without being sold by a New

York wholesaler.

• A Cecil County Retailer could sell a case of alcohol legally to its customers in

Maryland;

• A Cecil County Retailer could sell a case of alcohol illegally within the State of

Maryland to smaller retailers who are unable to take advantage of volume discounts

from wholesalers;

• A Cecil County Retailer could sell a case of alcohol which is smuggled to

neighboring states with higher liquor costs for consumers such as Pennsylvania and

Virginia;37

37 See Scott Drenkard, “How High Are Taxes on Distilled Spirits in Your State? (2016),” Tax Foundation (June 2, 2016), http://taxfoundation.org/blog/how-high-are-taxes-distilled-spirits-your-state-2016 (compiling excise taxes per gallon of distilled spirits in all 50 states and the District of

https://protect-us.mimecast.com/s/QQ7VB8sz9RvwC6

• A Cecil County Retailer could sell a case of alcohol which is smuggled into

Canada, which also has high excise taxes;38

• A New York retailer may receive cases of alcohol that are smuggling into New

York from other states such as New Hampshire, which imposes no liquor excise

taxes, or West Virginia, and Massachusetts;

• A person may obtain a permit to purchase, receive, or sell alcoholic beverages that

were not purchased from a New York wholesaler or manufacturer;39

• A person may purchase alcohol from a private collection originating outside of

New York;40

• A New York retailer with an auction permit may sell alcohol purchased from an

entity located outside of New York; and41

• A New York consumer may purchase wine directly from an in state or out of state

supplier.42

Columbia, showing liquor in Virginia and Pennsylvania to be taxed at $19.86 and $7.23 per gallon respectively, compared to New York and Maryland, where spirits are taxed at $6.44 and $4.64 per gallon respectively). 38 See, e.g., Pasquantino v. United States, 544 U.S. 349, 372 (2005) (“The scheme at issue involves liquor purchased from discount sellers in Maryland, trucked to New York, then smuggled into Canada to evade Canada’s hefty tax on imported alcohol.”) (Ginsburg J., dissenting). 39 See Alcohol Beverage Control (“ABC”) Law § 99-b. Furthermore, New York retailers with an auction permit may sell alcohol in New York that was purchased from a non-licensed person or entity outside of New York. 40 See id. § 99-g. 41 See id. § 99-g(4). 42 Today, DtC sales of wine account for approximately $2.3 billion of total sales in the United States, and New York in ranked 3rd in the country for such sales. See Paul Franson, DtC Wine Shipments Reach $2.33 Billion,

Empire Merchants cannot plausibly trace the alcohol sold in particular locations

and during particular times to the scheme. See, e.g., FAC ¶ 167 (alleging that Defendant

Sam Liquors smuggled alcohol into New York between November 2013 and January 2015,

but also simultaneously purchased alcohol from Empire Merchants).

Third, the immediate victims of the alleged RICO violation—the City and State of

New York—are fully capable of vindicating their rights by pursuing their own claims

against any parties who evade their excise taxes. Accordingly, the requirement that Empire

Merchants show a direct causal relationship is particularly important here. See Anza, 547

U.S. at 460. But all that Empire Merchants can allege is that Reliable had a motive to

increase its sales at Empire Merchants’ expense, see FAC ¶¶ 23, 89, which the Supreme

Court has held is insufficient. See Anza, 547 U.S. at 46 (“A RICO plaintiff cannot

circumvent the proximate-cause requirement simply by claiming that the defendant’s aim

was to increase market share at a competitor’s expense”).

Another instructive case is Amsterdam Tobacco, in which a court in the Southern

District of New York dismissed a RICO claim for lack of standing on grounds similar to

Anza, in a case involving facts closely analogous to those here. In Amsterdam Tobacco,

New York cigarette wholesalers brought a RICO claim against the cigarette manufacturer

Philip Morris based on allegations that Philip Morris had encouraged Virginia retailers to

purchase large quantities of cigarettes at a discount, which those retailers then sold to

smugglers who transported the cigarettes to the New York City area and distributed them

to local retailers. 107 F. Supp. 2d at 212. After a grand jury in Virginia returned an

https://www.winesandvines.com/template.cfm?section=widc&widcDomain=dtc# (last accessed Jan. 18, 2017).

https://protect-us.mimecast.com/s/xNk2BzFlVNRDs8

indictment in which Philip Morris was not named as a defendant, the New York

wholesalers sued Philip Morris. Id. There, as here, the plaintiffs alleged that “more

cigarettes were sold in Virginia per capita ‘than could possibly have been consumed by the

residents of Virginia,’ while statistically fewer cigarettes were sold lawfully in New York

‘than had been consumed by residents of New York State in the past.’” Id. at 213; see FAC

¶ 15 (alleging Reliable’s constructive knowledge based on volumes of liquor sold “far in

excess of what Cecil County could possibly sell to consumers nearby”). The Amsterdam

Tobacco plaintiffs further alleged that the New York resellers were able to avoid New

York cigarette taxes, and that plaintiffs lost significant sales and profits as a result. 107 F.

Supp. 2d at 213.

The Amsterdam Tobacco court dismissed the plaintiffs’ RICO claim based on

several legal deficiencies that are virtually identical to those found in Empire Merchants’

Amended Complaint, including the plaintiffs’ failure to plead a direct causal relationship

between Philip Morris’ activities and the alleged harm in order to satisfy the proximate

causation requirement. The court found that “[t]he (direct) cause of Plaintiffs’ lost profits

was not any activity of Philip Morris,” but rather “the smuggling activity and the decision

by New York consumers not to purchase cigarettes from Plaintiffs.” Id. at 219. Just as the

Supreme Court would later hold in Anza, the Amsterdam Tobacco court noted that “it

would be highly speculative to conclude that Plaintiffs lost (any) particular sales of Philip

Morris cigarettes to the smugglers.”43 Id. Accordingly, the court held:

43 Empire Merchants’ assertion in its pre-motion letter (ECF 32 at 1) that causation is satisfied because Empire Merchants was the exclusive licensed distributor in New York of the products allegedly smuggled into New York ignores the lawful avenues—including

Where, as here, the primary purpose of an alleged racketeering enterprise is to avoid paying taxes or otherwise defraud the government, indirectly injured parties do not have standing to bring RICO claims. . . .

The proximate cause determination “is not free from normative legal policy considerations.” The purpose of the smuggling enterprise—to which Defendant was not a party—was to avoid payment of New York taxes, not to injure Plaintiffs or other New York cigarette retailers.

Id. at 219 (quoting First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir.

1994)) (internal citation omitted) (emphasis added). Because the primary purpose of the

alleged scheme, as in Amsterdam Tobacco, was to avoid taxes and not to injure Empire

Merchants, this Court should dismiss Empire Merchants’ RICO claims for lack of

standing.

B. The RICO Claims Are Time-Barred.

Reliable categorically rejects Empire Merchants’ theory that Reliable knowingly

participated in any scheme to smuggle alcohol into New York, or that the alleged scheme

could have causally harmed Empire Merchants. However, even if Empire Merchants’

theory were assumed to be true, its RICO claims are time-barred because there were

numerous storm warnings triggering Empire Merchants’ duty to inquire further, which it

failed to do within the four-year limitations period. Specifically, Empire Merchants filed

its Complaint on September 20, 2016, whereas there were storm warnings at least as early

as 2009.

The four-year limitations period for RICO claims “‘begins to run when the plaintiff

those specifically identified by New York statute—from which alcohol might have been resold in New York. See supra notes 30-32 (citing ABC Law § 99-b, g).

discovers or should have discovered the RICO injury.’” Town of Mamakating, New York v.

Lamm, 651 Fed. App’x 51, 53 (2d Cir. 2016) (quoting In re Merrill Lynch Ltd. P’ships

Litig., 154 F.3d 56, 58 (2d Cir. 1998)). “[I]n applying a discovery accrual rule, . . .

discovery of the injury, not discovery of the other elements of a claim, is what starts the

clock.” Koch v. Christie’s Int’l PLC, 699 F.3d 141, 149 (2d Cir. 2012) (quoting Rotella v.

Wood, 528 U.S. 549, 555 (2000)). Under this rule, a new limitations period does not start

with each new injury if all of the plaintiff’s injuries stem from one wrongful scheme by the

defendant. See Lorber v. Winston, 962 F. Supp. 2d 419, 448 (E.D.N.Y. 2013) (dismissing

RICO claim as time-barred where claim concerned “one singular scheme” that involved

fraudulently drawing from credit line in plaintiff’s name, even though defendant took out

numerous advances over eight-year period that continued until year before filing);

Bingham v. Zolt, 66 F.3d 553, 560 (2d Cir. 1995) (“[N]on-independent injuries will not

cause a new limitations period to accrue”); see also Merrill Lynch, 154 F.3d at 59-60

(“According to investors’ complaint, Merrill Lynch’s limited partnership scheme was

fraudulent at the outset. . . . Thus, we find that their later communications which put a

gloss on the losing investments were continuing efforts to conceal the initial fraud, and not

separate and distinct fraudulent acts resulting in new and independent injuries.”).44

44 Thus, Empire Merchants is incorrect in asserting in its pre-motion letter that the “limitations period is triggered anew with each injurious sale.” ECF 32 at 3. Empire Merchants relies upon Angermeir v. Cohen, 14 F. Supp. 3d 134, 158 (S.D.N.Y. 2014) (cited in ECF 32 at 3), but fails to acknowledge the Second Circuit’s clarifications in Bingham and Merrill Lynch that non-independent injuries do not trigger a new limitations period and that continuing efforts to conceal a fraudulent scheme also are not new injuries. In Angermeir, the triggering injury—a plaintiff’s retention of legal counsel—was clearly independent from her other injuries relating to payment under forged leases. 14 F. Supp. 3d at 158-59. Here, by contrast, Empire Merchants alleges an ongoing scheme “from at least 2008 into at least 2014” consisting of one ongoing course of conduct: unlawfully importing

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http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=1998181927&pubNum=506&originatingDoc=I46776ae66ea611dcb979ebb8243d536d&refType=RP&fi=co_pp_sp_506_59&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)#co_pp_sp_506_59

Discovery of the injury may be triggered by “inquiry notice,” where a court

“imputes to a plaintiff knowledge of facts sufficient to trigger the running of the statute of

limitations where the plaintiff could have discovered those facts by a reasonably diligent

investigation.” Koch, 699 F.3d at 144. Inquiry notice is often triggered by “storm

warnings.” Id. “[O]nce there are sufficient ‘storm warnings’ to trigger the duty to inquire,

and the duty arises, if a plaintiff does not inquire within the limitations period, the claim

will be time-barred.” Id. at 153. “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) (quoting Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d

406, 427 (2d Cir. 2008)) (alteration in original). Whether a plaintiff has received “‘inquiry

notice’ . . . is judged under an objective standard and requires an evaluation of the totality

of the circumstances.” Marshall v. Milberg LLP, No. 07-CV-6950 (LAP), 2009 WL

5177975, at *3 (S.D.N.Y. Dec. 23, 2009) (quoting Staehr, 547 F.3d at 427). In RICO

cases, “[a] plaintiff’s sophistication in the subject areas at issue is relevant in determining

whether inquiry notice exists.” Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris,

Inc., 113 F. Supp. 2d 345, 382 (E.D.N.Y. 2000) (citing Kinley Corp. v. Integrated Res.

Equity Corp., 851 F. Supp. 556, 568 (S.D.N.Y. 1994)). Importantly, the “question of

inquiry notice need not be left to a finder of fact” and is suitable for disposition at the

motion to dismiss stage. Merrill Lynch, 154 F.3d at 60.

Empire Merchants alleges an overarching scheme from “at least 2008 into at least

alcohol into New York for resale without paying excise taxes. FAC ¶ 81. Each alleged sale of smuggled alcohol in New York was not a separate injury to Empire Merchants triggering a new limitations period, but rather part of an alleged overarching smuggling scheme of which Empire Merchants had inquiry notice.

2014” to defraud New York of excise taxes that in turn purportedly deprived Empire

Merchants of sales. See FAC ¶¶ 81-82, 194. Accordingly, the question is when Empire

Merchants was first on inquiry notice of the alleged liquor smuggling scheme.

The FAC itself demonstrates that Empire Merchants’ review of its own sales data

should have put Empire Merchants on inquiry notice of any alleged lost sales at least as

early as 2009. It is reasonable to infer from the FAC that Empire Merchants—which is the

largest distributor in New York, a substantially larger market than Maryland (see id. ¶¶ 1,

17)—is among the “sophisticated distributors” that “maintain complex tracking systems

that detail which retailers are purchasing inventory and in what quantities,” and track those

“retail orders on a weekly, monthly, and yearly basis.” Id. ¶ 84. Empire Merchants alleges

that its “internal sales data show that several New York Retailers conspicuously reduced or

eliminated their purchases of alcohol products to which Empire Merchants was the

exclusive distributor during the same time period that these New York Retailers were

smuggling bootlegged alcohol from Maryland.” Id. ¶ 196 (emphasis added). Just as

Reliable supposedly “must have known” about the alleged liquor smuggling through

analysis of its own sales data (FAC ¶ 98), Empire Merchants also must have known about

any alleged injuries for the period of the alleged scheme, i.e., “June 2008 through June

2012” (id. ¶ 92). Moreover, even assuming that Empire Merchants lost sales from the

importation of Reliable’s alcohol, Empire Merchants concedes that its sales data revealed

that retailers had “suspiciously” reduced purchases of brands distributed by Reliable. Id. ¶

184. Specifically, Empire Merchants alleges that “in the year (2009) in which it was

caught receiving cases of liquor from Maryland, LTT Whiskey, Inc. conspicuously

reduced its purchases of Bacardi Light Superior products,” which was one of Reliable’s

brands at the time. Id. ¶¶ 185 (emphasis added), 188.

If Empire Merchants was not already aware of any alleged injury in 2009, the

connection between any “conspicuous” lost sales and alleged bootlegging was evidently

clear to Empire Merchants by March 24, 2010, when Nino Magliocco, an owner and board

member of Empire Merchants, testified before the New York State Senate Investigations

and Government Operations Committee regarding the smuggling of alcohol into New

York State. Specifically, Magliocco testified that liquor that was being “bootlegged into

the state” of New York to avoid excise taxes, and that the proposed “primary source law”

would facilitate tax audits:

[T]he primary source law would also facilitate sales tax audits because taxing agencies could go to retailers and look at their purchases from the registered distributors and they would have an idea by estimating the purchases what the sales tax should be because it is very, very unlikely that if wines and liquors are bootlegged into the state and the excise taxes are not paid on those wines and liquors that the retailers are then going to report the sales tax on the bootlegged goods.

Mot. Ex. 4 (emphasis added).45

45 The Court may take judicial notice of public records as well as the documents attached to the Motion to determine whether Empire Merchants’ claims should be time-barred on Empire Merchants’ inquiry notice of the alleged injury outlined in the Amended Complaint. See, e.g., Lentell v. Merrill Lynch & Co., 396 F.3d 161, 168 (2d Cir. 2005) (courts can “readily resolve the issue” of inquiry notice as a matter of law on a motion to dismiss where “the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of fraud can be gleaned from the complaint and papers. . . integral to the complaint”) (internal quotation marks omitted); Koch v. Christie’s Int’l PLC, 785 F. Supp. 2d 105, 111-12 (S.D.N.Y. 2011) (a district court may take judicial notice of “the fact that press coverage, prior lawsuits, or regulatory filings contained certain information, without regard to the truth of their contents, in deciding whether so-called ‘storm warnings’ were adequate to trigger notice” (quoting Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008)).

Empire Merchants’ core allegation—that it was injured by cross-border sales—is

particularly hypocritical because the Magliocco family was intimately familiar with illegal

cross-border sales as early as 2009. The Magliocco family, which owns 50% of Empire

Merchants, engaged in actual unlawful conduct through its wholly-owned Connecticut

distributor Brescome Barton (“Brescome”) during the time period alleged in the Amended

Complaint. This conduct puts in bold relief Empire’s intricate knowledge of cross-border

selling as early as August, 2009. Specifically, in 2012, Brescome paid a settlement of

$850,000 (out of a $1.7 million judgment) to the Connecticut Department of Consumer

Protection in connection with allegations that it engaged in illegal cross-border sales into

New York between August 2009 and January 2011, including physical smuggling of

alcohol across the New York border and unlawful resale to New York retailers.46 In its

pre-motion letter, Empire Merchants falsely characterizes Brescome’s settlement as

relating solely to the actions of a “rogue salesperson.” ECF 32 (“Empire Merchants

Pre-Motion Letter”), at 3 n.2. ECF 32. To the contrary, in the Hartford Courant article, the

Connecticut authority states that “‘[t]here was activity by the wholesaler and retailers to

disguise the activity,’” and Brescome’s lawyer even commented that the company had

“brought on new leadership in response to the investigation.” Moreover, that “rogue

salesperson,” Jim Lowe, a close friend of Johnny Magliocco, was kept on by Brescome for

nearly a year after Brescome management knew that he had been arrested in New York in

December 2009 for bootlegging offenses—and for several months after he was convicted

46 See Brian Dowling, Connecticut’s Largest Liquor Distributor Pays $850,000 Settlement to Resolve Investigation, Hartford Courant (June 9, 2012), http://articles.courant.com/2012-06-09/business/hc-brescome-barton-201206091_liquor-across-state-lines-internal-investigation-settlement.

on two charges in April 2010. It was not until September 2010—a month after the

Connecticut authorities sought information from Brescome regarding Mr. Lowe—that Mr.

Lowe “retired” from Brescome. Thereafter, his wife, Audrey Lowe, was awarded his sales

route and continued the same unlawful conduct.

Less than a year later, in February 2011, an industry analysis cited in the FAC made

the express connection between the “conspicuous” reduction in sales for New York

wholesalers and alleged bootlegging. According to the industry analysis—to which

Empire Merchants, the largest liquor distributor in New York, surely had access—“illicit

bootlegging ‘amount[s] to over 25% of taxed sales’ in New York,” and “‘eliminating

opportunities for tax evasion’ alone ‘could increase liquor and wine-related tax revenues

by $63 million each year.’” FAC ¶ 195 & n.238.

Finally, on September 12, 2011, the alleged Maryland scheme was

comprehensively presented in a Verified Complaint for Forfeiture (the “Forfeiture

Complaint,” FAC Ex. N) that was filed publicly by the Maryland USAO in the United

States District Court for the District of Maryland. Notably, the Forfeiture Complaint

attaches an affidavit dated January 3, 2011, from Special Agent Patrick Fyock of the

Bureau of Alcohol, Tobacco and Firearms (the “Fyock Affidavit”) referring to an

investigation of certain of the Cecil County Retailers that alleged that specific retailers

were “purchasing and selling distilled spirits at wholesale” and “were further reselling the

liquor and engaged with others in a scheme to defraud both New York State and New

York City of excise taxes.” FAC Ex. N, ¶ 7. The Fyock Affidavit also attaches bank

records from certain Cecil County Retailers and suggests that “cash deposits closely

precede the dates that checks were made payable to the liquor wholesalers (Reliable

Churchill; Republic National Distributing; Northeast Beverage; and Fredrick P. Winner)

used by” the Cecil County Retailers. Id. ¶ 21 (emphasis added). The September 2011

Fyock Affidavit not only identifies the contours of the alleged scheme more than a year

before the start of the limitations period, but reflects the entire factual basis of Plaintiff’s

allegations of money laundering. Compare Id. with FAC ¶ 82 (“The Cecil County

Retailers took the cash received from the New York Retailers, deposited it in their bank

accounts, and then wrote checks against these bank accounts to pay the Maryland

Wholesalers.”) (internal quotation marks and brackets omitted). Empire Merchants had

access to this public filing, attached it to its Complaint and, as a sophisticated distributor

and major player in the alcohol distribution industry, was undoubtedly aware of it.47 Thus,

the Forfeiture Complaint unquestionably would have triggered inquiry notice as of

September 2011.

Adding together (1) the years of “suspicious” and “conspicuous” losses in Empire

Merchants’ own sales data beginning in 2009; (2) Brescome, the Magliocco family’s

wholly-owned distributor’s illegal bootlegging at least as early as 2009; (3) Nino

Magliocco’s testimony regarding cross-border liquor sales in 2010; (3) the industry

analysis on the losses caused by liquor smuggling in New York in 2011; and (4) the

revelation of specific facts about the purported scheme in a publicly-filed affidavit from a

federal law enforcement agent in September 2011, there can be no doubt that a

“sophisticated distributor” like Empire Merchants had inquiry notice of any alleged

injuries or purported scheme more than four years before the Complaint was filed on

September 20, 2016.

47 See Mot. Ex. 6 at 20-21.

Thus, Empire Merchants’ RICO claims are time-barred.

C. Empire Merchants’ Allegations Do Not State a Claim Under 18 U.S.C. § 1962(c).

Empire Merchants’ RICO claims also fail because the FAC’s consistent reliance on

vague, conclusory, and internally contradictory allegations fails to establish each element

of the cause of action against Reliable. Aliev, 2016 WL 3746562, at *4 (“The elements of

a RICO offense must be established as to each individual defendant.” (citing Persico, 832

F.2d at 714)). To allege a violation of Section 1962(c), a plaintiff must establish “‘(1)

conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity.’” Anatian v.

Coutts Bank Ltd., 193 F.3d 85, 88 (2d Cir. 1999) (quoting Sedima, S.P.R.L. v. Imrex Co.,

473 U.S. 479, 496 (1985)). To satisfy the pattern requirement, a plaintiff must plead

adequately at least two predicate acts of racketeering. Lundy v. Catholic Health Sys. of

Long Island Inc., 711 F.3d 106, 119 (2d Cir. 2013). Empire Merchants fails to satisfy any

of these requirements as to Reliable.

1. Empire Merchants Has Not Alleged That Reliable Participated in the “Operation or Management” of Any RICO Enterprise.

Even assuming the FAC pleads a RICO enterprise, which it does not (see § C.2

infra), Empire Merchants has not shown that Reliable participated in the “operation or

management” of any enterprise in a way that satisfies the “conduct” element of a RICO

claim. Satisfying the conduct element of a claim under 18 U.S.C. § 1962(c) requires a

plaintiff to plead specific facts showing that a defendant played “some part in directing the

enterprise’s affairs” by virtue of participating “in the operation or management of the

enterprise itself.” Reves v. Ernst & Young, 507 U.S. 170, 179, 183 (1993). This

requirement is not met unless the complaint pleads specific facts showing that the

defendant acted as “part of upper management [of the enterprise] or by exerting control

over the enterprise.” Amsterdam Tobacco, 107 F. Supp. 2d at 216 (citing Reves, 507 U.S.

at 184). “‘[T]he ‘operation and management’ test set forth in Reves . . . is a very difficult

test to satisfy,’” and “[c]ourts within the Second Circuit have dismissed RICO claims

which failed to meet these stringent standards.” Id. (citing cases).

Courts have repeatedly rejected attempts to plead RICO claims against parties that

have provided goods or services to an alleged enterprise in the ordinary course of their own

business without “directing the affairs of [the] enterprise.” Id. at 217 (quoting Biofeedtrac,

Inc. v. Kolinor Optical Enters. & Consultants, S.R.L., 832 F. Supp. 585, 591 (E.D.N.Y.

1993)) (citing cases). To plead the conduct element of a civil RICO violation, “the

[Supreme Court] has instructed that it is not enough for a defendant to conduct or

participate in its own affairs—to be liable it must participate in the conduct of the

enterprise’s affairs.” New York v. United Parcel Serv., Inc., No. 15-CV-1136 (KBF), 2016

WL 4203547, at *4 (S.D.N.Y. Aug. 9, 2016) (emphasis original) (citing Reves, 507 U.S. at

185). Empire Merchants alleges no more than that Reliable simply conducted “its own

affairs,” i.e., fulfilling the purchase orders of Maryland retailers and otherwise addressing

the requests of its customers.

The Amsterdam Tobacco case is also instructive regarding this requirement. As

described above, see supra Argument § 1.A, the plaintiffs in Amsterdam alleged that

Virginia retail stores were illegally selling vast quantities of cigarettes to smugglers and

contended, as does Empire Merchants, that the “Defendant sold such high volumes to large

Virginia retailers and distributors . . . that the Defendant had to know, and [] the Defendant

did know, that these contraband cigarettes were being shipped out of Virginia for sale

unlawfully within the State of New York.” Id. at 217. The plaintiffs further alleged that

Philip Morris not only knew about the smuggling, but encouraged it “by selling unlimited

amounts of cigarettes to its wholesalers in Virginia and rewarding them for such large

sales, with the knowledge that said cigarettes could and would not be lawfully consumed in

Virginia.” Id. Accepting these allegations as true, the court nonetheless dismissed the

claim, ruling that “even if . . . Philip Morris salespeople were aware of smuggling activity,

that would not suffice to support a RICO claim.” Id. at 218. Notably, the court explicitly

rejected the theory “that Philip Morris was operating or managing the smuggling enterprise

by means of these programs” encouraging Virginia sellers to increase their purchases. Id.

at 217.

Empire Merchants’ meager assertions regarding Reliable’s conduct similarly allege

only innocuous (and legal) behavior and certainly do not show the kind of “operation and

management” required by Reves. Rather, Empire Merchants’ specific allegations with

respect to Reliable state only that (1) Reliable offered non-discriminatory, volume-based

discounts to all Maryland retailers, not just those in Cecil County; (2) those discounts

encouraged Maryland retailers, including the Cecil County Retailers, to place orders for

certain quantities of liquor; and (3) Reliable “must have known that sales of this

magnitude, which occurred in stores owned by numerous Cecil County Retailers, could

only be explained by the unlawful smuggling out of state of huge bulk orders of alcohol.”

FAC ¶ 98. These allegations amount to no more than entirely lawful conduct that is

insufficient to show the operation or management of a RICO enterprise. Reliable’s

fulfillment of its customers’ purchase orders, is required by the Federal Alcohol

Administration Act, which prohibits wholesalers like Reliable from engaging in any

practice that “restricts or hampers the free economic choice of a retailer to decide which

products to purchase or the quantity in which to purchase them for sale to consumers.”

27 C.F.R. § 6.153(a) (emphasis added). Maryland law similarly prohibits efforts by

wholesalers to limit the quantity of liquor sold to retailers. See Md. Code Ann., Al. Bev. §

2-316(b)(1). fEven if retailers “felt pressure” to purchase certain quantities of liquor in

order to receive Reliable’s volume discounts, Empire Merchants does not allege that

Reliable required any Maryland retailer to purchase any particular quantity of liquor.

Empire Merchants alleges only that Reliable supplied goods requested by its

customers “that were, thereafter, illegally transported from [Maryland] to New York,”

which “does not constitute operation or management sufficient to establish a RICO

violation.” Amsterdam Tobacco, 107 F. Supp. 2d at 217. Plaintiffs’ theory would impute

duties to monitor the lifecycle of every bottle of liquor after it is sold by the retailer.

While there are extensive regulations surrounding a wholesaler’s sale to a retailer,

Reliable has no affirmative duty to track each case or bottle of liquor it has sold to a retailer

after such liquor has been sold by the retailer. Imposing any such duty would run afoul of

the complex federal and state system of regulations for the beverage alcohol industry that

forbid exactly the kind of investigation Plaintiffs would have Reliable perform. Supra note

Next, Empire Merchants alleges that Reliable employees accommodated the

requests of its retailer customers to remove Reliable’s routing stickers from shipments of

liquor with a torch and delivered pallets of cases of liquor to retailers without Reliable’s

routing stickers affixed. FAC Ex. X ¶ 17; FAC Ex. Y ¶ 20. As discussed supra note 18,

routing stickers are used by distributors as warehouse tracking tools to identify the location

of the alcohol in the warehouse and ensure that it is placed on the correct truck for delivery.

Even assuming that Reliable did remove its internal routing stickers and further assuming

that this assisted any retailer in covering up cross-border liquor sales, merely fulfilling a

customer’s request for such assistance does not satisfy “the requisite element of

management” of an enterprise. Madanes v. Madanes, 981 F. Supp. 241, 257-58 (S.D.N.Y.

1997) (“[E]ven claims that [a RICO defendant] recommended certain courses of fraudulent

behavior, or that he had ‘substantial persuasive power to induce management to take

certain actions,’ are insufficient to establish § 1962(c) liability.”).

Finally, Empire Merchants alleges in entirely conclusory fashion that Reliable

“communicated directly with New York Retailers” regarding the wholesale liquor prices in

Maryland. FAC ¶ 97. This allegation is based entirely on one Maryland liquor store

employee’s speculative statement, on pain of not receiving Empire Merchants’

ridiculously favorable settlement, that he “suspected that [a New York retailer] had

advance knowledge of the distributors’ pricing information from conversations he may

have had directly with the Maryland distributors.” Id. Ex. Y ¶ 16 (emphases added).

However, this type of conclusory and speculative allegation is not entitled to the

“presumption of truth by a court deciding whether to grant a motion to dismiss.” Moore v.

City of N.Y., No. 08-CV-2449(RRM)(LB), 2011 WL 795103, at *6 (E.D.N.Y. Feb. 28,

2011).48 But even taking this allegation as true, Empire Merchants does not allege that

Reliable directed any New York Retailer to buy liquor from any of the Cecil County

Retailers. To the extent any New York Retailer found the wholesale liquor price in

48 These vague and speculative statements also fail to satisfy the particularity requirements of Rule 9(b). See supra Legal Standard section.

Maryland to be worth the risk of smuggling, Empire Merchants fails “to provide a plausible

basis for inferring that [the New York Retailers] acted ‘on behalf of the enterprise as

opposed to on behalf of [themselves] in their individual capacities, to advance their

individual self-interests.’” D. Penguin Bros. v. City Nat’l Bank, 587 Fed. App’x 663, 668

(2d Cir. 2014) (quoting United Food & Commercial Workers Unions & Emp. Midwest

Health Benefits Fund v. Walgreen Co., 719 F.3d 849, 854 (7th Cir. 2013)).

Empire Merchants thus pleads no facts to support a finding that Reliable

participated in the “operation or management” of any purported RICO enterprise.

2. Empire Merchants Does Not Allege Facts Sufficient to Establish the Existence of a RICO Enterprise.

The Supreme Court has defined a RICO enterprise as a “group of persons

associated together for a common purpose of engaging in a common course of conduct . . .

proved by evidence of an ongoing organization, formal or informal, and by any evidence

that the various associates function as a continuing unit.” United States v. Turkette, 452

U.S. 576, 583 (1981). Importantly, “[t]he enterprise is not the ‘pattern of racketeering;’ it is

an entity separate and apart from the pattern of racketeering activity in which it engages.”

Id. Defendants in a civil RICO case “cannot be ‘grouped together for the sole reason that

they all allegedly had [a hand]’ in the alleged acts.” Aerowest GmbH, 2016 WL 3636619,

at *4. “When, as here, the alleged enterprise is a ‘group of individuals associated in fact

although not a legal entity,’ . . . the RICO claim requires proof that the conspirators formed

and organized a separate entity (whether formal or informal) on whose behalf they acted.

Wild Edibles Inc. v. Indus. Workers of the World Local 460/640, No. 07 CIV. 9225 (LLS),

2008 WL 4548392, at *1 (S.D.N.Y. Oct. 9, 2008) (quoting 18 U.S.C. § 1961(4)). This

specifically requires that a RICO plaintiff allege that the “association-in-fact enterprise” be

“comprised of individuals or entities operating as a unit toward some common purpose or

goal.” United States v. Int’l Longshoremen’s Ass’n, 518 F. Supp. 2d 422, 471 (E.D.N.Y.

2007).

Empire Merchants has, at most, alleged multiple “hub-and-spoke” conspiracies,

which are insufficient to constitute a RICO enterprise. A “hub and spoke” conspiracy is

one in which there are “separate and parallel vertical, bilateral relationships between one

central actor and several independent actors one level removed from the central actor in the

scheme.” City of N.Y. v. Chavez, 944 F. Supp. 2d 260, 271 (S.D.N.Y. 2013). “For a hub

and spoke conspiracy to function as a single unit,” as is required in a RICO enterprise, “a

rim must connect the spokes together, for otherwise the conspiracy is not one but many.”

United States v. Bustamante, 493 F.3d 879, 885 (7th Cir. 2007). Here, the FAC alleges that

RNDC and Reliable acted as the “hubs” of two completely distinct conspiracies and that

the Retailer Defendants acted as spokes, but fails to allege any “rim,” i.e., any agreements

or other evidence of a mutually beneficial relationship between Reliable and RNDC or

among the Retailer Defendants, as required to make the conspiracies into a “single unit” or

“enterprise.” Id.; Chavez, 944 F. Supp. 2d at 277. (“There is no allegation in this case of

any symbiosis, of any meeting of the minds among the various actors acting as a single unit

. . . .”).

The “majority of courts within this Circuit have found the ‘hub-and-spokes’

associations alleged in the complaints before them were insufficient to constitute a RICO

enterprise.” Gucci Am., Inc. v. Alibaba Grp. Holding Ltd., No. 15-CV-3784(PKC), 2016

WL 6110565, at *5 (S.D.N.Y. Aug. 4, 2016). In reaching its conclusion that the “hub and

spoke” conspiracy in the complaint at issue did not amount to a RICO enterprise, the Gucci

court noted the characteristics of alleged conspiracies that fail to state a RICO enterprise:

[W]hen all the evidence shows is a series of similar but essentially separate frauds carried out by related entities—when those frauds are independent of one another; can be effective without the perpetration of any of the other frauds proven; provide no benefit or assistance to the perpetration of any of the other frauds proven; and in no way require coordination or collaboration among the actors perpetuating the fraud—then no RICO enterprise exists. The difference can really be boiled down to a simply-stated distinction: If each act of fraud is equally effective without the perpetration of any other act of fraud—even if perhaps effective to a far lesser or different magnitude—then there is no RICO enterprise. If each act of fraud is not effective without the other acts of fraud, then a RICO enterprise exists.

Gucci, 2016 WL 6110565, at *6 (citation and quotation marks omitted). The court applied

the preceding analytical framework to dismiss a RICO claim for failure to plead a RICO

enterprise with respect to Gucci’s claim that online marketplace Alibaba and fourteen

merchants on the Alibaba platform had conspired to sell counterfeit goods. Id. at *3, *6.

Gucci alleged that Alibaba had provided the Merchants with services to facilitate the sale

of counterfeit goods, that each merchant transacted business over Alibaba, and that

Alibaba profited from and provided incentives to encourage those sales, even though

Alibaba knew or should have known that the Merchants sold counterfeit goods. Id. at *6.

In dismissing the RICO claim, the Court found that the complaint “failed to plausibly

allege that the Merchant Defendants engaged in anything but independent conduct, without

coordination and for their own economic self-interest,” noting that the relationships

between each of the fourteen merchants was “not alleged to be any different from their

relationships with the millions of other Merchants operating on the Alibaba Marketplaces.”

Id. at *7.

The few specific allegations in the FAC concerning conduct by Reliable reveal an

alleged “enterprise” that is nothing more than alleged “separate frauds carried out by

related entities,” id. at *6, and thus cannot qualify as a RICO enterprise. A close reading of

the FAC reveals that the only factual allegations relevant to Reliable’s involvement in a

purported RICO enterprise are: (1) Reliable was the exclusive distributor of certain brands

of liquor in Maryland; (2) Reliable filled orders for the Cecil County Retailers; (3) at the

Cecil County Retailers’ request, Reliable removed, or showed the Cecil County Retailers

how to remove, Reliable’s routing stickers; (4) the orders requested by the Cecil County

Retailers were “excessively large”; and thus (5) Reliable executives, who set sales targets

and monitored sales performance, “knew or must have known” that the Cecil County

Retailers were shipping some liquor out-of-state. FAC ¶¶ 70, 78-79, 84-85.

Empire Merchants fails to provide any information, let alone “the requisite ‘solid

information’ about the enterprise’s ‘hierarchy, organization, and activities.’” Greenberg v.

Blake, No. 09-CV-4347(BMC), 2010 WL 2400064, at *6 (E.D.N.Y. June 10, 2010)

(quoting Wild Edibles, 2008 WL 4548392, at *1). Rather, Empire Merchants’ allegations

concerning the different participants in the purported scheme are consistent with nothing

more than “various entities interconnected in a web of personal and commercial

relationships that evolves organically as each entity pursues its own interests, some of

which coincide with those of other denizens of the [liquor sales] commercial habitat and

others being quite adversely aligned.” United States v. Int’l Longshoremen’s Ass’n, 518 F.

Supp. 2d 422, 476 (E.D.N.Y. 2007).

As in Gucci, the relationships alleged among the Cecil County Retailers are no

different from the relationship between any Cecil County Retailer and any other Maryland

retailer. 2016 WL 6110565, at *7. “The fraud perpetrated by each [Cecil County retailer]

could be accomplished without any assistance from any other [Cecil County Retailer].” Id.

The only common thread between the Cecil County Retailers was that they each bought

liquor from Reliable as they had always independently done for years. Otherwise, the FAC

alleges only that the Cecil County Retailers each engaged in parallel smuggling

transactions with various New York Retailers. See, e.g., id., at *6 (“[W]hen all the

evidence shows is a series of similar but essentially separate frauds carried out by related

entities . . . then no RICO enterprise exists.”). In fact, Empire Merchants alleges that each

of the Cecil County Retailers was in competition with every other Cecil County Retailer.

See, e.g., FAC ¶ 93 (alleging that “in order to compete in Cecil County” with other retailers

like Northside Liquors, Vlamis Liquors “had to make similar bulk quantity sales to New

York purchasers”) (quoting Ex. X ¶ 6). Pleading a RICO enterprise requires a plaintiff to

“allege ‘something more than parallel conduct of the same nature and in the same time

frame by different actors in different locations.’” Gucci, 2016 WL 6110565, at *6 (quoting

Elsevier Inc. v. W.H.P.R., Inc., 692 F. Supp. 2d 297, 306-07 (S.D.N.Y. 2010)). Thus,

Empire Merchants’ allegations fall short.

The FAC also shows that the various sets of actors in the alleged scheme had

competing purposes rather than a common purpose. For example, the New York Retailers’

purposes were at odds with the Cecil County Retailers’ goals, demonstrating that these

actors were only pursuing their own economic self-interest, rather than the economic

interests of a common enterprise. See Int’l Longshoremen’s Ass’n, 518 F. Supp. 2d at 476

(dismissing RICO claims because, inter alia, alleged RICO “enterprise” featured

“adversely aligned” members). The Patel Declaration shows that when a New York

Retailer learned about wholesale liquor prices in Maryland, he used that knowledge to

improve his own profits at the expense of Cecil County Retailers, not for the benefit of any

enterprise. Id. Ex. Y ¶ 16 (“Because [the one New York Retailer] had this information, it

greatly improved his ability to negotiate prices for bulk quantities of alcohol and greatly

reduced North East Liquors’ profit margins on the sales [to the one New York Retailer].”).

Moreover, the FAC pleads no facts showing any agreement, cooperation, or other mutually

beneficial conduct among the Cecil County Retailers or among the New York Retailers.

Nor does Empire Merchants allege adequately that the purported enterprise had

“‘an ascertainable structure beyond that inherent in the racketeering activity.’” Greenberg,

2010 WL 2400064, at *7 (quoting Boyle v. United States, 556 U.S. 938, 955-56 (2009)). In

Boyle, the Supreme Court held that an association-in-fact constituted a RICO enterprise

where thieves not only “planned and executed dozens of thefts from bank night-deposit

boxes over a nine-year period,” but there was also evidence that “the group gathered before

each theft to plan, collect tools, and assign the role that each member would play” and “[i]f

successful, [the thieves would] split the loot.” Greenberg, 2010 WL 2400064, at *7

(discussing Boyle); see also Boyle, 556 U.S. at 941. Empire Merchants’ allegations of

casual contact among the Retailers and between Reliable and the retailers of an enterprise

pale in comparison to the gang of thieves in Boyle. The FAC contains no non-conclusory

allegations that Reliable participated in the coordination of any transactions between the

retailers, allocated responsibilities within the scheme, interacted with RNDC, or engaged

in any profit-sharing arrangement that would indicate that Reliable and the retailers in New

York and Cecil County were more than “merely acting together to commit the [alleged]

wrong[s].” Greenberg, 2010 WL 2400064, at *7.

Amsterdam Tobacco is also instructive on this point. 107 F. Supp. 2d at 211.

There, the court granted a motion to dismiss on facts closely analogous to this case

because, inter alia, “there [wa]s no legally discernible and sufficient distinction between

the alleged enterprise and the alleged pattern of racketeering activity.” Id. at 215. The

court concluded that the plaintiff’s alleged description of the RICO enterprise was “merely

a reiteration of the (alleged) racketeering activity.” Id. The Second Circuit has since

confirmed that a RICO enterprise that is not a legal entity must be a “‘discrete economic

association existing separately from the racketeering activity.’” First Capital, 385 F.3d at

173 (quoting United States v. Anderson, 626 F.2d 1358, 1372 (8th Cir. 1980)). Excluding

the conclusory allegations in Empire Merchants’ threadbare recital of the elements of the

purported RICO enterprise, FAC ¶¶ 242-44, the FAC offers no concrete details on the

organizational structure of the alleged enterprise, how the enterprise operated, how

members of the enterprise allocated responsibilities, or shared the proceeds of the

enterprise.

Therefore, Empire Merchants fails to allege a RICO enterprise.

3. Empire Merchants Fails to Allege a Pattern of Predicate Acts of Racketeering with the Requisite Particularity.

Empire Merchants fails to allege adequately a single predicate act by Reliable. To

plead a claim, a plaintiff must allege that each RICO defendant committed at least two

predicate acts of racketeering activity within the last 10 years. 18 U.S.C. § 1961(5). Rule

9(b) “requires the plaintiff to (1) specify the statements that the plaintiff contends were

fraudulent, (2) identify the speaker, (3) state where and when the statements were made,

and (4) explain why the statements were fraudulent.” Nakahata, 723 F.3d at 197–98

(internal quotation marks omitted). “In addition to alleging the particular details of a fraud,

‘the plaintiffs must allege facts that give rise to a strong inference of fraudulent intent.’”

Id. at 179 (quoting Moore v. PaineWebber, Inc., 189 F.3d 165, 173 (2d Cir. 1999)); see

also Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54 (2d Cir. 1995) (observing “[i]f scienter

could be pleaded on [the] basis [of a desire to increase compensation] alone, virtually every

company in the United States” would face fraud liability). “Moreover, such allegations

may not merely rest upon statements based on ‘information and belief.’” Asdourian v.

Konstantin, 77 F. Supp. 2d 349, 354 (E.D.N.Y. 1999) (quoting Di Vittorio v. Equidyne

Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987)). Where multiple defendants

are involved in the alleged fraud, it is especially important that the fraud be particularized

as to each of them. See Lou v. Belzberg, 728 F. Supp. 1010, 1022 (S.D.N.Y. 1990)).

The complete set of predicate acts alleged by Empire Merchants includes (1) mail

fraud; (2) wire fraud; (3) bank fraud; (4) money laundering; and (5) violations of the Travel

Act. Under any standard, let alone Rule 9(b)’s heightened pleading standard applicable to

fraud-based predicates, Empire Merchants has not pleaded sufficient, specific facts to

establish any of the five predicate acts it asserts against Reliable.

a. Empire Merchants’ Allegations Against Reliable Do Not Adequately Plead Predicate Acts of Mail Fraud, Wire Fraud, or Bank Fraud.

To plead predicate acts of wire or mail fraud, Empire Merchants must allege facts

showing “(1) the existence of a scheme to defraud, (2) defendant’s knowing or intentional

participation in the scheme, and (3) the use of interstate mails or transmission facilities in

furtherance of the scheme.” S.Q.K.F.C., Inc. v. Bell Atl. TriCon Leasing Corp., 84 F.3d

629, 633 (2d Cir. 1996). Bank fraud further requires facts sufficient to show that a

defendant “obtain[ed] . . . bank property by means of false or fraudulent pretenses,

representations, or promises.” Loughrin v. United States, 134 S. Ct. 2384, 2389 (2014).

Mail fraud, wire fraud, and bank fraud claims are all subject to the heightened

pleading standard of Rule 9(b), which requires that plaintiffs specifically allege, with

respect to the alleged predicate communications, “the contents of the communications,

who was involved, where and when they took place, and explain why they were

fraudulent.” Polar Molecular Corp., 12 F.3d at 1176. Finally, “[a]llegations of mail or

wire fraud must also ‘specify the use of the mails and wires with particularity.’” N.Y. State

Catholic Health Plan, Inc. v. Acad. O & P Assocs., 312 F.R.D. 278, 298 (E.D.N.Y. 2015)

(quoting Zaro Licensing, Inc. v. Cinmar, Inc., 779 F. Supp. 276, 281 (S.D.N.Y. 1991)).

Any mail, wire, or bank fraud claim must “plead either ‘affirmative

misrepresentations’ or ‘material omissions’” or must allege a fraud scheme “premised on

false or deceptive ‘pretenses.’” Lavastone Capital LLC v. Coventry First LLC, No.

14-CV-7139 (JSR), 2015 WL 1939711, at *4 (S.D.N.Y. Apr. 22, 2015). To constitute

bank fraud, the conduct at issue must “have some real connection to a federally insured

bank.” Loughrin, 134 S. Ct. at 2394. The federal bank fraud statute does not “federaliz[e]

frauds that are only tangentially related to the banking system” nor does it “cover every

pedestrian swindle happening to involve payment by check.” Id. at 2392-93 (internal

quotation marks omitted).

Here, Empire Merchants fails to allege any specific representations or omissions

made by Reliable or its employees to any financial institution. Plaintiff’s only allegations

of mail fraud, wire fraud, or bank fraud are six substantially identical “Interstate Wire

Communications.” FAC App’x A at A-2–A-3 (listing communications by the General

Counsel on July 15, 16, and 25, 2013, and Sept. 10, 16 and 23, 2013). According to the

FAC, three of these six “Interstate Wire Communications” were e-mails used to organize a

July 31, 2013 meeting, two of the remaining three were e-mails to organize a September

23, 2013 conference call with Empire Merchants representatives, and the last

communication was the September 23, 2013 conference call itself. FAC ¶¶ 100 n.109, 101

n.111. None of these communications involved, or were even related to, a bank or banking

matters.

Second, Empire Merchants fails to plead any facts showing that the General

Counsel made statements to Empire Merchants that were inaccurate in any way, much less

“knowingly false.” FAC ¶ 100. Instead, Empire Merchants’ own allegations, and

judicially noticeable facts, reflect the truth of her statements. Empire Merchants alleges

that in response to press reports of a federal investigation into bootlegging, the General

Counsel stated on behalf of Reliable:

[T]hat, among other things, there was no criminal misconduct by Reliable Churchill. [The General Counsel] further stated that Reliable Churchill and its employees had no knowledge of any shipments being smuggled by the Cecil County Retailers into New York, and that they had no reason or ability to do anything other than to fulfill the Cecil County Retailers’ orders. Moreover, she stated that she was confident Reliable Churchill would be able to resolve the issue through a modest civil settlement, in part, because Reliable Churchill had done nothing wrong and, in part, because the Assistant United States Attorney overseeing the investigation specialized in civil forfeitures, not criminal prosecutions, to make it appear that the federal government’s investigation was merely a modest civil forfeiture action.

Id. ¶ 100; see also id. ¶ 101 (alleging General Counsel repeated statement regarding

expectation of “modest civil settlement” during September 23, 2013 conference call with

Empire Merchants representatives).

Empire Merchants does not, and cannot, show how any of these statements were

false when spoken because each has been proven true over time. In the three years since

the General Counsel allegedly made those statements, Reliable has not been indicted, nor

has it paid any civil settlement at all. Additionally, the General Counsel’s alleged

statement regarding her confidence that the alleged investigation would be resolved

favorably is a statement of opinion or “expression of corporate optimism” regarding

Reliable’s future and thus cannot support a mail or wire fraud claim. See Nelson v.

Publishers Circulation Fulfillment, Inc., No. 11-CV-1182(TPG), 2012 WL 760335, at *4

(S.D.N.Y. Mar. 7, 2012) (“Under . . . the federal mail and wire fraud statutes, ‘opinions and

puffery or ultimately unfulfilled promises’ are not actionable as fraud.”) (citing Lasker v.

New York State Elec. & Gas Corp., 85 F.3d 55, 59 (2d Cir. 1996)); see also Sanchez v. ASA

Coll., Inc., No. 14-CV-5006 (JMF), 2015 WL 3540836, at *9 (S.D.N.Y. June 5, 2015)

(“‘[O]pinions about [ASA’s] business’ as well as ‘expression[s] of corporate optimism,’

however . . . do not give rise to a fraud claim.”) (quoting Hampshire Equity Partners II,

L.P. v. Teradyne Inc., No. 04-CV-3318 (LAP), 2005 WL 736217, at *4 n.4 (S.D.N.Y. Mar.

30, 2005) (brackets in Sanchez; ellipses added). Finally, as discussed above, the General

Counsel’s statement that Reliable was obligated to continue to fulfill its customers’ orders

is consistent with requirements (and prohibitions) of federal and Maryland law. See 27

C.F.R. § 6.153(a); Md. Code Ann. Art. 2B, § 12-102(a) (West). Thus, Empire Merchants

fails to plead facts showing that the General Counsel made any false statements.

Empire Merchants also fails to show how any of these alleged statements were

made “in furtherance of” any fraudulent scheme. In Brooke v. Schlesinger, 898 F. Supp.

1076 (S.D.N.Y. 1995), the Southern District of New York dismissed a civil RICO claim

based on similar allegations. There, the Court held that the complaint failed to plead a mail

fraud predicate act based on allegations that a civil RICO defendant used the mails to cover

up an allegedly fraudulent scheme rather than to further the substantive scheme. Id. at

1083 (“The complaint does not state that Stieglitz directed employees to engage in the

invoicing fraud; rather, he merely directed them to conceal its effects from plaintiff.”).

Here, too, Empire Merchants alleges only that Reliable’s representations were made to

conceal the alleged scheme, not to further it. See FAC ¶ 100 (alleging General Counsel

made statements that Reliable and its employees had no knowledge of any bootlegging “to

put Empire Merchants at ease”), ¶ 204 (alleging statements made by General Counsel

“misled and lulled [Empire Merchants] into a false sense of security”). As in Brooke, the

Court should find that none of the alleged communications were made in furtherance of

any fraud.

With respect to all other references to alleged representations or omissions by

Reliable, the FAC relies only on general and conclusory allegations of fraud that are

plainly insufficient under Rule 9(b). For instance, Empire Merchants’ allegation “on

information and belief” that “Reliable Churchill communicated directly with smugglers

from New York to further this bootlegging scheme” fails to specify the time, place, or

method of communication, as well as the speaker or the recipient, and further fails to

provide any factual basis to support that conclusory allegation. See FAC ¶ 97. Similarly,

Empire Merchants’ assertion that, “[o]n information and belief, the Cecil County Retailers

had similar communications with Reliable Churchill salesmen in order to negotiate

discounts and other benefits that would enhance profits for both the Cecil County and New

York Retailers” fails to specify the time, place, method of communication, speaker, or

recipient, and otherwise fails to provide a sufficient factual basis. FAC ¶ 119; see also id. ¶

82.

Empire Merchants’ also fails to plead with the requisite specificity any other

conduct that would support a bank fraud predicate. The FAC alleges no facts to show that

Reliable engaged in fraudulent conduct directed at any financial institution—only that the

“Maryland Wholesalers” may have received checks from the Cecil County Retailers to pay

for the liquor they purchased. Id. ¶ 82. Furthermore, there are zero transactions involving

Reliable in the three exhibits that Plaintiff offers as setting forth “examples of particular

transactions where fraudulent transfers were made in furtherance of Defendants’ scheme to

defraud.” Id. ¶ 256 (citing Exhibits A, Q, and T). The Supreme Court’s holding in

Loughrin prohibits plaintiffs from relying on such meager allegations to plead a violation

of the federal bank fraud statute. 134 S. Ct. at 2394.

b. Empire Merchants’ Allegations Against Reliable Do Not Adequately Plead Money Laundering.

Under any pleading standard, Empire Merchants fails to allege adequately that any

conduct on the part of Reliable amounts to money laundering. A plaintiff seeking to

maintain a money laundering claim must allege: “(1) that the defendant conducted a

financial transaction; (2) that the transaction in fact involved the proceeds of specified

unlawful activity . . . ; (3) that the defendant knew that the property involved in the

financial transaction represented the proceeds of some form of unlawful activity; and (4)

that the defendant knew that the financial transaction was designed in whole or in part to

conceal or disguise the source, ownership, control, etc., of those proceeds.” United States

v. Maher, 108 F.3d 1513, 1527-28 (2d Cir. 1997).

Empire Merchants’ scant allegations regarding Reliable’s dealings with Cecil

County Retailers as a group are insufficient to plead a predicate act of money laundering.

Empire Merchants primarily claims that examples of the alleged acts of “money laundering

transactions are set forth in Exhibits A, N, P, Q, and T” (FAC ¶ 265)—none of which

contain any mention of Reliable, other than a single paragraph in Exhibit N noting that one

retailer made check payments to Reliable, a “legitimate liquor wholesaler.” FAC Ex. N at

6, ¶ 21.

Empire Merchants also fails to identify any transaction connecting Reliable to the

sale of any bootlegged liquor. The few allegations that even arguably concern allegations

of money laundering related to Reliable fail to assert anything more than that

(1) “Maryland Wholesalers” received checks from the Cecil County Retailers, (2) the Cecil

County Retailers had been purchasing quantities of liquor that were allegedly large relative

to the size of their stores, and (3) as a result, the “Maryland Wholesalers” should have

known that the checks it received were the proceeds of the alleged illegal bootlegging. Id.

¶¶ 82-84. Empire Merchants “do[es] not identify the relevant financial transactions or

conduct” by Reliable, and thus has “failed to allege sufficient facts to state predicate acts of

money laundering.” Zavala v. Wal-Mart Stores, Inc., 393 F. Supp. 2d 295, 315-16 (D.N.J.

2005), aff’d, 691 F.3d 527 (3d Cir. 2012).

Further, the FAC does not allege any efforts by Reliable to conceal or disguise the

source of any payments it received from Retailers. Instead, Empire Merchants alleges only

that “New York Retailers typically paid for . . . bootlegged alcohol . . . in cash” and “[t]he

Cecil County Retailers, in turn, laundered this cash through their bank accounts, and then

paid RNDC and Reliable Churchill from those accounts.” FAC ¶ 13. This statement

shows only the unremarkable fact that Reliable, as it does with all of its routine business

transactions, received payments by check for liquor sold to retailers in Maryland,

undisguised in any fashion. See United States v. Dvorak, 617 F.3d 1017, 1022 (8th Cir.

2010) (“[W]e have stressed that the mere transfer and spending of funds is not enough to

sweep conduct within the money laundering statute; instead, subsequent transactions must

be specifically designed to hide the provenance of the funds involved.” (internal quotation

marks omitted) (quoting United States v. Esterman, 324 F.3d 565, 570 (7th Cir. 2003)).

Thus, Empire Merchants’ allegations of a money-laundering RICO predicate act

fail to meet the plausibility standards of Rule 12(b)(6), let alone the strict requirements of

Rule 9(b).

c. Empire Merchants’ Allegations Against Reliable Do Not Adequately Plead Violations of the Travel Act.

“The Travel Act is violated when (1) a person uses a facility of interstate or foreign

commerce, such as the telephone, (2) with intent to facilitate the promotion, management,

establishment, or carrying on, of any unlawful activity and (3) thereafter performs an

additional act in furtherance of the specified unlawful activity.” Bernstein, 948 F. Supp. at

236 (citing United States v. Jenkins, 943 F.2d 167 (2d Cir.), cert. denied, 502 U.S. 1014,

(1991)); see also Worldwide Directories, S.A. De C.V. v. Yahoo! Inc., No. 14-CV-7349

(AJN), 2016 WL 1298987, at *7 (S.D.N.Y. Mar. 31, 2016).

The allegations undergirding the Travel Act predicate act that Empire Merchants

asserts against Reliable are concurrent with the mail fraud and wire fraud predicate acts

alleged against Reliable, and they fail for the same reasons. Empire Merchants alleges that

Reliable did not sell any liquor to out-of-state buyers. See FAC ¶ 8. Instead, Empire

Merchants alleges only that Reliable sold and shipped liquor intrastate to the Cecil County

Retailers. See FAC ¶ 264 (referring only to “transactions whereby [the Defendants] sold

products secretly and illegally, from Maryland Wholesalers to Cecil County Retailers to

New York Retailers.”). Thus, Empire Merchants’ Travel Act predicates can survive only if

Reliable’s alleged use of the mails or interstate wires “relate[s] significantly, rather than

incidentally or minimally,” to the alleged bootlegging. United States v. McNeal, 77 F.3d

938, 944 (7th Cir.1996) (internal quotation marks omitted); see also United States v.

O'Connor, 635 F.2d 814, 818 (10th Cir. 1980) (noting the “Second Circuit has

distinguished cases in which the use of interstate telephone calls had been the ‘fulfillment

of an integral part’ of a criminal plan,” as opposed to merely “causal and incidental” to the

alleged criminal activity in evaluating Travel Act charge) (quoting United States v. Archer,

486 F.2d 670, 680, 682 (2d Cir. 1973) (citing cases)).

None of Reliable’s alleged uses of the mails or wires is sufficiently “integral” or

“significant” to the alleged bootlegging scheme to satisfy the interstate facilities element of

the Travel Act. Reliable’s only alleged uses of mails or wires are the same five e-mails and

single conference call used to set up the July and September 2013 business meetings during

which the General Counsel made the statements that Empire Merchants claims to be a

cover-up. See Argument § I.C.3.a, supra; FAC. ¶¶ 100-01, nn. 109, 111 & App’x A, at

A-2–A-3. As with its alleged mail fraud and wire fraud predicate acts, Empire Merchants

cannot show that the General Counsel’s purported representations facilitated or intended to

facilitate any unlawful activity because those representations were (1) not false; and/or (2)

non-actionable statements of opinion or “expressions of corporate optimism.” See

Argument § I.C.3.a, supra. Even if it were adequately pled, because the Travel Act

predicate act is based on the same statements that allegedly support Empire Merchants’

mail and fraud claims, this Travel Act predicate “is repetitive of the wire fraud claim and

should not be counted again to create a pattern.” Bernstein, 948 F. Supp. at 236 (E.D.N.Y.

1997). Moreover, Empire Merchants has not and cannot identify how it was harmed by the

accurate content of the General Counsel’s communications.

Finally, Empire Merchants has not adequately alleged that Reliable engaged in any

“additional act in furtherance of the specified unlawful activity,” except the lawful

intrastate sales of liquor. Setting aside Empire Merchants’ conclusory allegations, the

Amended Complaint shows that Reliable engaged only in lawful acts, which is insufficient

to state a RICO predicate. Jenkins v. Sw. Gas Corp., No. CV09382-TUCJMRJCG, 2009

WL 6302956, at *6 (D. Ariz. Oct. 5, 2009) (finding Travel Act predicate was inadequately

pled where plaintiff failed to sufficiently allege underlying wrongdoing), report and

recommendation adopted, 2010 WL 1194486 (D. Ariz. Mar. 22, 2010).

Thus, Empire Merchants has failed to allege with the requisite particularity a

pattern of predicate acts.

D. Empire Merchants Fails to State a Cause of Action Under the RICO Conspiracy Statute, 18 U.S.C. § 1962(d).

Because Empire Merchants has failed to plead a substantive RICO violation,

Empire Merchants’ RICO conspiracy claim also must fail. See United Parcel, 2016 WL

4203547, at *4 (“Courts in this Circuit have repeatedly held that ‘[a]ny claim under §

1962(d) based on conspiracy to violate the other subsections of section 1962 necessarily

must fail if the substantive claims are themselves deficient.’ (quoting Discon, Inc. v.

NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996) (internal quotation marks omitted));

accord First Capital, 385 F.3d at 182 (“Since we have held that the prior claims do not

state a cause of action for substantive violations of RICO, the present claim does not set

forth a conspiracy to commit such violations.”) (citation omitted).

Even assuming that the Amended Complaint adequately pleads a § 1962(c)

violation, it still does not sufficiently allege facts required to support a § 1962(d)

conspiracy. Under § 1962(d), “the complaint must allege that (1) two or more people

agreed to commit a subsection (c) offense, and (2) a defendant agreed to further that

endeavor.” RSM Prod. Corp. v. Freshfields Bruckhaus Deringer U.S. LLP, 682 F.3d 1043,

1048 (D.C. Cir. 2012). “Because the core of a RICO civil conspiracy is an agreement to

commit predicate acts, a RICO civil conspiracy complaint, at the very least, must allege

specifically such an agreement.” Hecht v. Commerce Clearing House, Inc., 897 F.2d 21,

25 (2d Cir. 1990); see United States v. Zichettello, 208 F.3d 72, 99 (2d Cir. 2000) (holding

that for a violation of the RICO conspiracy statute, the conspirator must actually “‘agree to

facilitate the scheme’” (quoting Salinas v. United States, 522 U.S. 52, 66 (1997))). Thus,

in addition to providing individualized factual support for all the elements of a § 1962(c)

claim, a plaintiff must show a “subjective agreement” to commit predicate acts. Doe I v.

State of Israel, 400 F. Supp. 2d 86, 120 (D.C. Cir. 2005) (citing Salinas v. United States,

522 U.S. 52, 63–65 (1997)). Using words such as “‘knowingly’ as a bare, conclusory

assertion, but without sufficient allegations of basic awareness” does not show “subjective

agreement.” Id.49

Empire Merchants has alleged no facts that show that Reliable and any other

member of the alleged conspiracy had a “subjective agreement” to engage in any purported

bootlegging or other predicate acts. Empire Merchants relies instead on general

conclusory allegations and group pleading to show the existence of any agreement to

49 See also RSM Prod. Corp., 682 F.3d at 1048 (affirming dismissal of § 1962(d) claim because the complaint’s six allegations regarding the defendant’s knowledge did not show that it knew of and “agreed to foster” the conspiracy).

participate in a bootlegging conspiracy, referring only to agreements among “Defendants”

generally, without specifically identifying any agreement entered into by any Reliable

Defendant, or even any conduct evincing agreement on the part of any Reliable Defendant.

See FAC ¶¶ 290-91. At most, Empire Merchants alleges Reliable, in response to a

retailer’s request, “agreed not to include stickers on some of the cases [of liquor] it sold.”

See, e.g., id. ¶ 95; Ex. Y, 20. But this allegation of a limited agreement for Reliable to

remove its routing sticker cannot be the basis for charging Reliable with having signed on

to the entirety of the wide-ranging, eight-year conspiracy that Empire Merchants asserts.

“The scope of a conspiracy is determined by the scope of the agreement” and where a seller

provides goods to a buyer, the seller’s “agreement to join other endeavors and distributors

‘cannot be drawn merely from knowledge the buyer will use the goods illegally.’” United

States v. Townsend, 924 F.2d 1385, 1392 (7th Cir. 1991) (quoting Direct Sales Co. v.

United States, 319 U.S. 703, 709 (1943)). Here, Empire Merchants has not alleged that

Reliable actually knew of the bootlegging conspiracy at issue, let alone agreed to

participate in it.

Thus, Plaintiff’s RICO conspiracy claim should be dismissed.

II. THE EMPIRE COMPANIES CLAIM UNDER 42 U.S.C. § 1985 IS AN ABUSE OF THE CIVIL RIGHTS LAWS.

Cognizant of the tenuous nature of its RICO claim brought for the improper

purpose of reputational harm to Breakthru, Empire Merchants has attempted to concoct

another method to preserve this ill-begotten litigation. It has brought a claim under the Ku

Klux Klan Act. The desperation of Empire Merchants’ new pleading is palpable. First and

foremost, neither of the Empire Companies can establish statutory standing under Section

1985(2). Extensive research reveals no other case in which a federal court was confronted

with a claim under 42 U.S.C. § 1985(2) brought by a for-profit corporation against another

for-profit corporation arising out of the latter’s ordinary business decisions taken while

federal litigation was pending. This would not only be unprecedented but an unprincipled

result. Permitting corporations like Empire Merchants to plead Section 1985(2)

claims—even based on arguably adverse commercial conduct during the pendency of

litigation proceedings—would have the effect of creating a “general federal tort law”

governing any ongoing business between parties engaged in federal litigation. In addition,

EMN cannot establish standing to sue under Section 1985(2) because it was not a party or

witness in any pending federal proceeding at the time the Complaint was filed.

Nonetheless, even if the Empire Companies could establish standing, the Intracorporate

Conspiracy Doctrine bars their Section 1985(2) claim.

The Court should dismiss this meritless claim to protect the integrity of the civil

rights statute against its debasement by commercial actors such as the Empire Companies

that are merely seeking to obtain an advantage in business negotiations.

A. EMN Lacks Statutory Standing Under 42 U.S.C. § 1985(2) Because It Was Not a Party or Witness In Any Proceeding at the Time of the Alleged Retaliatory Conduct.

The clause of § 1985(2) under which the Empire Companies bring their claims

covers the following conduct: “two or more persons in any State or Territory conspire to

deter, by force, intimidation, or threat, any party or witness in any court of the United States

from attending such court, or from testifying to any matter pending therein, freely, fully,

and truthfully, or to injure such party or witness in his person or property on account of his

having so attended or testified.” Id. Thus, to establish standing to sue under 42 U.S.C. §

1985(2), the plaintiff must plead that the defendant engaged in conduct “to deter a witness

[or a party] by force, intimidation or threat from attending court or testifying freely in any

pending matter, which . . . results in injury to the plaintiff.” Chahal v. Paine Webber, Inc.,

725 F.2d 20, 23 (2d Cir. 1984) (emphasis added).

But EMN was not a party in the RICO case filed by Empire Merchants against

Reliable. Nor does EMN qualify as a witness within the meaning of Section 1985(2). Not

“all persons that are in some way connected to a federal court proceeding qualify as a

witness within the meaning of § 1985(2).” Geaney v. McCarron, 01 Civ. 9260 (BSJ), 2003

U.S. Dist. LEXIS 4994, at *13 (S.D.N.Y. Mar. 31, 2003). In Geaney, the court dismissed a

Section 1985(2) claim where Geaney failed to allege that “plaintiffs intended to call her as

a witness,” even where she pled that she “was a likely witness for the [] plaintiffs in their

pending federal court proceeding” and had “assisted the [] plaintiffs in their investigation.”

Id. at *14-*15. The FAC lacks even those threadbare allegations. The FAC only makes a

vague and conclusory reference to “anticipated testimony” on the part of the Empire

Companies and makes no reference to any actual or potential testimony by EMN

specifically. FAC ¶¶ 295-298.

The FAC also “makes no claim that [EMN] was intimidated or hampered from

being a witness” or that the Empire Companies “sustained any injury as a result of [any

retaliation against EMN] or that the integrity of the federal court proceedings has been

affected or impugned by the alleged conspiracy.” Rode v. Dellarciprete, 845 F. 2d 1195,

1207 (3d Cir. 1988). Read generously, EMN “contends only that [it] suffered an injury in

the course of a conspiracy to intimidate [Empire Merchants].” Id. As the Third Circuit

held in Rode, to find “standing under such circumstances would require [the court] to

extend section 1985(2)’s protection beyond the parties or even the witnesses to the federal

suit.” Id. The Third Circuit declined to permit such a massive expansion of standing under

Section 1985(2) in Rode, thereby keeping the floodgates closed to unwarranted civil rights

litigation. Id. Accordingly, this Court should dismiss EMN’s Section 1985(2) claim for

lack of standing.

B. The Empire Companies Cannot Satisfy the Requirements of Statutory Standing to Sue Under 42 U.S.C. § 1985(2).

The Supreme Court has long articulated “prudential rules of standing” (today

known as “statutory standing”) that exist apart from Article III’s minimum requirements

and “serve to limit the role of the courts in resolving public disputes.” Warth v. Seldin, 422

U.S. 490, 500 (1975). Modern prudential standing “encompasses the rule against the

adjudication of generalized grievances, the rule prohibiting plaintiffs from asserting the

rights of third parties, and the rule barring claims that fall outside ‘the zone of interests to

be protected or regulated by the statute or constitutional guarantee in question.’” Montesa

v. Schwartz, 836 F.3d 176, 195 (2d Cir. 2016) (quoting Valley Forge Christian Coll. v. Ams.

United for Separation of Church and State, Inc., 454 U.S. 464, 475 (1982)). As described

below, the “zone of interest” that Section 1985 is designed to protect is the integrity of

judicial process and the civil rights of American citizens from attack by hate groups, such

as the Ku Klux Klan. The routine commercial sparring alleged here does not implicate the

kind of conduct that Section 1985 was intended to protect or regulate.

There is no precedent to support the Empire Companies effort to manufacture a

basis for federal jurisdiction. Excluding claims involving class-based discrimination

(which are inapplicable here), extensive research reveals no other case in which a federal

court was confronted with a claim under 42 U.S.C. § 1985(2) analogous to the Empire

Companies’ Civil Rights Claim. Permitting sophisticated corporations like the Empire

Companies to plead a claim under the Ku Klux Klan Act, would essentially create a

“general federal tort law” governing any ongoing business between parties engaged in

federal litigation. Thomas v. Ford Motor Co., 111 F. Supp. 2d 529, 534 (D.N.J. 2001),

rev’d in part on other grounds, 137 F. Supp. 2d 575 (D.N.J. 2001) (citing Griffin v.

Breckenridge, 403 U.S. 88, 99-101 (1971)).

“While section 1985(2) is applicable to private actions, ‘[t]hat the statute was

meant to reach private action does not, however, mean that it was intended to apply to all

tortious, conspiratorial interferences with the rights of others.’” Thomas, 137 F. Supp. 2d

at 587 (quoting Griffin, 403 U.S. at 101). “To avoid the ‘constitutional shoals’ attendant an

impermissibly overbroad statutory interpretation, therefore, we must look to the specific

conspiracies proscribed by Congress.” Brawer v. Horowitz, 535 F.2d 830, 839 (3d Cir.

1976) (quoting Griffin, 403 U.S. at 101); accord Brown v. Chaffee, 612 F.2d 497, 502 (10th

Cir. 1979) (to state a claim under Section 1985(2), alleged conspiracy “must be one that has

the requisite statutory purpose”). “The debates on the Ku Klux Klan Act as they relate to

what is now § 1985(2) bespeak a Congressional intent to insulate witnesses, parties and

grand or petit jurors from conspiracies to pressure or intimidate them in the performance of

their duties, and an intent to guard against conspiracies the object of which is to deny

citizens the equal protection of the laws.” Brawer, 535 F.2d at 839 (citations omitted).

The Empire Companies allege merely that Breakthru and its executives have

engaged in conduct adverse to their commercial interests with respect to the terms of the

contractual relationship between EMN and Breakthru. Notoriously absent are any

allegations that Breakthru took any action specifically directed at the EMN intended “to

deter a witness by force, intimidation or threat from attending court or testifying freely in

any pending matter.” Hill v. Washburn, No. 08-CV-6285-CJS-JWF, 2011 WL 4807921, at

*3 (W.D.N.Y. Oct. 11, 2011). Indeed, the FAC does not allege any conduct on the part of

any defendant directed at any witness nor does it plead any fact showing how any

defendant used—or even could have used—“force, intimidation, or threat” to deter the

exercise of rights by limited liability companies. The FAC further fails to provide any

allegations that the Empire Companies have, in fact, been impaired in their ability to

present its case here in any way. Conclusory allegations aside, the FAC pleads only that a

pre-existing dispute between Breakthru and the Empire Companies somehow transformed

into a civil rights violation as soon as Empire Merchants filed its original Complaint on

September 20, 2016. However, the Empire Companies cannot credibly co-opt the civil

rights laws simply because Breakthru may have taken actions that the Empire Companies

consider “undesirable.” See Thomas, 137 F. Supp. 2d at 588 (“[A]ctions may occur during

the course of litigation which may be objectionable, undesirable or even subject to court

discipline, but such actions are not necessarily violative of section 1985(2).”); see also

Dauven v. U.S. Bancorp, No. 3:13-CV-00844-AC, 2015 WL 2239407, at *7 (D. Or. May

12, 2015) (adopting report and recommendation of magistrate judge) (observing that

litigants “are not permitted to use § 1985 as a mechanism to pursue satisfaction of their

disagreements” given the historical purpose of statute to stem “rising tide of [Ku Klux]

Klan terrorism against blacks and union sympathizers”). Permitting the Empire

Companies to fabricate a federal civil rights claim out of an otherwise garden-variety state

law commercial dispute is not only inconsistent with the purpose of Section 1985, it would

also have a chilling effect on any ongoing business between parties engaged in federal

litigation.

This abuse of Section 1985 is particularly troubling given the statute’s “noble

purpose” of deterring actual intimidation tactics by shadow organizations such as the Ku

Klux Klan.50 See Dauven, 2015 WL 2239407, at *7 (“The legislative history and statutory

language indicate Congress’s focus with regard to the interference with legal proceedings

[in] provisions of § 1985 were unjust acquittals of Ku Klux Klan conspirators.”); Wrenn v.

Sec’y, Dep’t of Veterans Affairs, 918 F.2d 1073, 1075 (2d Cir. 1990) (holding, with respect

to plaintiff’s myriad discrimination suits, that plaintiff’s “abuse of the civil rights laws to

manufacture litigation is most distressing” because his “unfounded civil rights challenges

bring the noble purposes of the Civil Rights Acts into disrepute, turning attention away

from the need to alleviate, and eventually eradicate, prejudice and discrimination, and

focusing attention instead upon unwarranted costs and injustices that are suffered by

defendants who must mount and fund a defense to groundless civil rights claims.”).

Indeed, the sanctity of this purpose is why “courts [are] free to deter abuse of our civil

rights laws” through the award of attorneys’ fees for frivolous claims. Tancredi v. Metro

Life Ins. Co., 256 F. Supp. 2d 196, 201 (S.D.N.Y. 2003), rev’d on other grounds, 378 F.3d

220 (2d Cir. 2004); see also Andrade v. Jamestown Hous. Auth., 82 F.3d 1179, 1193 (1st

Cir. 1996) (affirming award of attorneys’ fees to defendant under § 1988 with respect to

frivolous § 1985 claim).

50 It also comes on the heels of a baseless RICO action falsely alleging a “reprehensible criminal scheme” by Reliable, which it has put Empire Merchants on notice of in Reliable’s Rule 11 letter. ECF 51-1 (providing “notice that the Reliable Defendants intend to file a motion for sanctions in this case on the grounds that the Complaint was filed for the improper purpose of harassing the Reliable Defendants, and numerous allegations in the Complaint are patently and demonstrably false and unfounded, and could not have been made ‘after an inquiry reasonable under the circumstances’” (quoting Fed. R. Civ. P. 11(b)).

Thus, the Court should find that the Empire Companies have failed to establish

statutory standing under Section 1985(2) because the Empire Companies’ ordinary

commercial interests are plainly not within the “zone of interests” that Section 1985(2) was

enacted to protect.

C. The Purported Intra-Corporate Conspiracy Alleged by The Empire Companies Cannot Sustain a Claim Under 42 U.S.C. § 1985.

The Empire Companies cannot state a claim for a conspiracy in violation of 42

U.S.C. § 1985(2) because the FAC only alleges an intra-corporate conspiracy among

Breakthru, its officers, and its subsidiary.

“Under the intracorporate conspiracy doctrine, officers, agents and employees of a

single corporate or municipal entity, each acting within the scope of his or her

employment, are legally incapable of conspiring together.” Martinez v. Cty. of Suffolk, 999

F. Supp. 2d 424, 432 (E.D.N.Y. 2014) (quoting Talley v. Brentwood Union Free Sch. Dist.,

728 F. Supp. 2d 226, 233 (E.D.N.Y. 2010)). It is well-established in the Second Circuit

that “section 1985 does not extend to discriminatory business decisions participated in by

members of one business entity.” Sauls v. Bristol-Myers Co., 462 F. Supp. 887, 889

(S.D.N.Y. 1978); accord Perkins v. Kamco Supply Corp., No. 06-CV-5054(DAB)(DF),

2007 WL 4207193, at *4 (S.D.N.Y. Nov. 27, 2007) (“[A]s a matter of law, the agents and

employees of a single corporate entity . . . acting within the scope of their employment, are

legally incapable of conspiring with each other for purposes of Section 1985”). The

intracorporate conspiracy doctrine, which originates from the Supreme Court’s holding in

Copperweld Corp. v. Independence Tube Corp., provides that a conspiracy is inadequately

pled by allegations of “joint action of wholly owned subsidiaries of a single entity,

unincorporated divisions of a company, or employees of a single entity acting within the

scope of their employment.” Johnson v. Nyack Hosp., 954 F. Supp. 717, 722 (S.D.N.Y.

1997) (citing Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752 (1984)). The

Copperweld Court explained the basis for this rule as follows:

A parent and its wholly owned subsidiary have a complete unity of interest. Their objectives are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousnesses, but one. They are not unlike a multiple team of horses drawing a vehicle under the control of a single driver. With or without a formal “agreement,” the subsidiary acts for the benefit of the parent, its sole shareholder. If a parent and a wholly owned subsidiary do ‘agree’ to a course of action, there is no sudden joining of economic resources that had previously served different interests . . . .

467 U.S. at 771 (rejecting Sherman Act § 1 antitrust conspiracy claim).51

The rationale described in Copperweld has been imported to the Section 1985

context. See Murphy v. City of Stamford, 634 Fed. App’x 804, 805 (2d Cir. 2015)

(affirming district court’s dismissal of § 1985(3) claims against tax assessor and

assessment appeals board under “intracorporate conspiracy doctrine” because “the

defendants were employees or agents of Stamford” and “‘officers, agents, and employees

of a single corporate entity are legally incapable of conspiring together’” (quoting Hartline

v. Gallo, 546 F.3d 95, 99 n.3 (2d Cir. 2008)); Martinez, 999 F. Supp. 2d at 432.

The FAC reflects a “complete unity of interest” between every single member of

the alleged “conspiracy” at the time of each member’s alleged participation in the

conspiracy. According to the FAC, the conspiracy did not begin until after “[a]fter the

51 More recently, “courts have held that affiliated corporations that are less than wholly owned have been found incapable of conspiring under Copperweld.” In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481(KBF), 2015 WL 6472656, at *9 (S.D.N.Y. Oct. 23, 2015) (citing Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 201 F. Supp. 2d 236, 275 (S.D.N.Y. 2002)).

filing of this suit”—i.e., in September 2016. FAC ¶ 213. The FAC further acknowledges

that Reliable has been “ultimately owned” by Breakthru since before this action was filed.

Id. ¶¶ 30-34. The FAC also makes clear that the general “corporate actions” of Breakthru

and Reliable “are guided or determined not by two separate corporate consciousnesses, but

one,” given that the executives from Reliable assumed positions at Breakthru.

Copperweld, 467 U.S. at 771; see FAC ¶¶ 30-34, 55. Reliable would have acted “for the

benefit of” its parent, Breakthru, and any agreement on a course of action to take with

respect to Plaintiffs—namely, the alleged conduct related to the Service Agreement,

insurance coverage, Breakthru’s offer to acquire Empire Merchants, and the Sobel

Declaration—would not have been taken through a “sudden joining of economic resources

that had previously served different interests.” Copperweld, 467 U.S. at 771.

The same goes for non-party Sobel, whom the Empire Companies allege

participated in this so-called “conspiracy,” and whom the FAC acknowledges was a

Breakthru executive at the time of his alleged participation in the “conspiracy.”52 The

Empire Companies allege that Sobel participated in the conspiracy solely by providing a

declaration on November 17, 2016 in the Bacardi litigation, which he executed in his

capacity “as a Breakthru executive and with the knowledge, consent, and at the behest of

the Breakthru Defendants.” FAC ¶ 236.

Plaintiffs’ sole allegation that Sobel participated in any purported conspiracy prior

to joining Breakthru is this conclusory statement: “on information and belief, [Sobel]

conspired with Breakthru regarding its strategy and contents before he was hired as an

52 The Empire Companies do not assert the Civil Rights Claim against Merinoff, Baird, or Breakthru’s General Counsel. In any event, however, the FAC makes clear that all three became Breakthru executives “[o]n or about January 1, 2016.” FAC ¶ 235.

executive there.” Id. ¶ 212. Plaintiffs do not plead a single specific fact showing that

Sobel joined or engaged in any conduct in furtherance of the alleged conspiracy prior to

joining Breakthru. Although Plaintiffs imply that stock appreciation rights (SARs) Sobel

received from Sunbelt suggest complicity in the purported conspiracy, id. ¶¶ 211-12, it is

inconceivable how a benefit Sobel received in 2006 could be part of a conspiracy to

retaliate against the company for litigation that was not filed until a decade later.

Thus, the FAC confirms that the purported “conspiracy” does not involve two

“independent centers of decision[-]making,” Am. Needle, Inc. v. NFL, 560 U.S. 183, 196

(2010),53 but a single locus of decision-making within Breakthru. This is unsurprising,

given that the purported basis of the alleged conspiracy to violate the Empire Companies’

“civil rights” is nothing more than the Empire Companies’ frustration with perceived

tactics in ongoing business negotiations between Empire Merchants and Breakthru, two

large and sophisticated commercial actors. The Empire Companies’ Civil Rights Claim

therefore should be dismissed.

MOTION TO STRIKE

I. ALL ALLEGATIONS REFERRING TO RNDC AND THE RNDC INDICTMENT SHOULD BE STRICKEN FROM THE FAC UNDER RULE 12(F).

Absent complete dismissal of the Amended Complaint, the Court should strike all

of the allegations related to RNDC’s now-dismissed indictment. Pursuant to Federal Rule

53 While American Needle is a case from the antitrust context, the doctrine of intracorporate conspiracy “is drawn from Section 1 of the Sherman Act,” Everson v. New York City Transit Auth., 216 F. Supp. 2d 71, 75 (E.D.N.Y. 2002), and has been “imported . . . into Section 1985 jurisprudence” by the Second Circuit, Tufano v. One Toms Point Lane Corp., 64 F. Supp. 2d 119, 125 (E.D.N.Y. 1999) (citing Hermann v. Moore, 576 F.2d 453 (2d Cir. 1978)).

of Civil Procedure 12(f), all of those must be stricken because they are immaterial and

unfairly prejudicial to Breakthru, Reliable, and their executives. Similarly, Plaintiffs’

efforts to introduce against Reliable irrelevant, improper, and prejudicial allegations

against RNDC through the guilty pleas of any retailer defendants, as well as the

declarations of the two settling defendants, should be rejected and impermissible

references to those declarations should be stricken accordingly. For the Court’s

convenience, a copy of the FAC highlighting the portions that should be stricken is

attached to this motion to strike at Mot. Ex. 1.

Rule 12(f) provides that a “court may strike from a pleading an insufficient defense

or any redundant, immaterial, impertinent, or scandalous matter.” Fed. R. Civ. P. 12(f). A

motion to strike may be granted upon a showing that “(1) no evidence in support of the

allegations would be admissible; (2) the allegations have no bearing on the relevant issues;

and (3) permitting the allegations to stand would result in prejudice to the movant.” Lynch

v. Southampton Animal Shelter Found. Inc., 278 F.R.D. 55, 63 (E.D.N.Y. 2011) (citation

and quotation marks omitted); accord Lipsky v. Commonwealth United Corp., 551 F.2d

887, 893 (2d Cir. 1976) (requiring that party moving to strike show that “no evidence in

support of the allegation would be admissible”). In particular, courts apply a relaxed

standard on Rule 12(f) motions “in the context of scandalous allegations, i.e., those that

improperly cast a derogatory light on someone,’” Blevins v. Piatt, No. CV ELH-15-1551,

2015 WL 7878504, at *2 (D. Md. Dec. 4, 2015), including where the allegations “have

criminal overtones.” Oram v. SoulCycle LLC, 979 F. Supp. 2d 498, 511 (S.D.N.Y. 2013)

(citations and internal quotation marks omitted).

Empire Merchants has pled no facts showing any conspiracy, cooperation, or

mutually beneficial conduct between RNDC and Reliable and has introduced these

allegations for the sole purpose of coloring Reliable with “criminal overtones.” The

RNDC Indictment has no bearing on claims against Breakthru, Reliable, or their

executives, the dismissed indictment would not be admissible, and permitting the

allegations involving RNDC to stand would be highly prejudicial to those Defendants.

First, the dismissed indictment is immaterial as a matter of law because it is a

preliminary step in a criminal proceeding that has not resulted in adjudication on the merits

or findings of fact. See In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 218

F.R.D. 76, 78 (S.D.N.Y. 2003) (stating that Second Circuit precedent clearly holds that

“preliminary steps in litigations and administrative proceedings that did not result in an

adjudication on the merits or legal or permissible findings of fact are, as a matter of law,

immaterial under Rule 12(f)”) (citing Lipsky, 551 F.2d at 892-94); RSM Prod. Corp. v.

Fridman, 643 F. Supp. 2d 382, 403 (S.D.N.Y. 2009), aff’d, 387 Fed. App’x 72 (2d Cir.

2010) (“[P]aragraphs in a complaint that are either based on, or rely on, complaints in other

actions that have been dismissed, settled, or otherwise not resolved, are, as a matter of law,

immaterial within the meaning of Fed. R. Civ. P. 12(f)”). Moreover, the RNDC Indictment

is immaterial because it is unrelated to the present case, as RNDC is not a named

Defendant. See Shahzad v. Meyers, No. 95-CV-6196(DAB), 1997 WL 47817, at *14

(S.D.N.Y. Feb. 6, 1997) (striking paragraphs of complaint that “refer[red] to a pending

action not related to the present case”); United States v. Bonanno Org. Crime Family of La

Cosa Nostra, 683 F. Supp. 1411, 1430 (E.D.N.Y. 1988), aff’d, 879 F.2d 20 (2d Cir. 1989)

(striking indictment against non-parties, and all references to indictment, as immaterial to

civil RICO complaint). RNDC is not named as a Defendant and there are no claims against

RNDC because, unlike Reliable, RNDC does not distribute the same products as Empire

Merchants. See FAC ¶ 1 n.2. RNDC and Reliable compete with each other by selling

different brands through their respective exclusive distribution agreements in Maryland.

Notwithstanding any entirely conclusory allegations to the contrary, Empire Merchants has

not pled any specific facts demonstrating coordinated action between Reliable and RNDC.

See, e.g., id. ¶ 1 (alleging that “Maryland Wholesalers” “conspired with retailers in rural

Cecil County, Maryland . . . and retailers in New York City”). Thus, references to RNDC’s

indictment merely concern an alleged parallel conspiracy involving RNDC that has no

bearing on allegations concerning Reliable.

Second, references to the RNDC Indictment are inadmissible under the Federal

Rules of Evidence because they are irrelevant or otherwise more prejudicial than probative.

See Toto v. McMahan, Brafman, Morgan & Co., No. 93-CIV-5894 (JFK), 1995 WL 46691,

at *17 (S.D.N.Y. Feb. 7, 1995) (striking complaint’s reference to indictment against

defendant’s former employee and rejecting argument that indictment was relevant); United

States v. Private Sanitation Indus. Ass’n of Nassau/Suffolk, Inc., 899 F. Supp. 974, 985

(E.D.N.Y. 1994), aff’d, 47 F.3d 1158 (2d Cir. 1995) (striking portions of record referring to

non-party’s guilty plea because not relevant under Fed. R. Evid. 402 and inadmissible

under Fed. R. Evid. 403); Lynch, 278 F.R.D. at 68 (striking complaint’s account of criminal

investigation and allegations against non-party because irrelevant).

The RNDC Indictment confuses the issues by focusing on whether a non-party

engaged in the alleged conspiracy instead of whether Reliable engaged in the alleged

conspiracy. This is highly prejudicial to Reliable because it creates the appearance that,

because RNDC operates a similar business and was criminally investigated for conspiring

with the Cecil County Retailers and New York Retailers, Reliable must have conspired

with those retailers as well. That inference is highly misleading, not only because the

indictment was dismissed but also because there is no basis for equating Reliable’s

behavior with RNDC’s. See Cooper v. N. Jersey Trust Co. of Ridgewood, New Jersey, 10

Fed. R. Serv. 2d 127, 1966 WL 86611 at *3 (S.D.N.Y. 1966) (striking complaint’s reference

to indictment of non-party co-conspirators and rejecting argument that indictment was

relevant because it “rose out of the same course of dealing and scheme as do the

complaints”); see also Park W. Radiology v. CareCore Nat’l LLC, 675 F. Supp. 2d 314, 325

(S.D.N.Y. 2009) (excluding nonparty fraud allegations under Fed. R. Evid. 402 and 403

because of “risk of turning the trial into a multi-ringed sideshow of mini-trials on collateral

issues pertaining to the conduct and relationships of third parties that may have only

tangential bearing, if at all, to the issues and claims disputed in this case”) (internal

quotation marks and citation omitted).

Finally, the allegations regarding the RNDC Indictment are prejudicial to

Breakthru, Reliable, and their executives in light of the negative media attention, the

discovery burden, and the risk of future consideration by a jury. Courts have found media

attention to constitute sufficient prejudice for a motion to strike. See Dent v. U.S. Tennis

Ass’n, Inc., No. CV-08-1533 RJD VVP, 2008 WL 2483288, at *4 (E.D.N.Y. June 17, 2008)

(striking allegations of discrimination in complaint because of prejudice from potential

media attention). Media attention is a significant concern here, as Breakthru and Reliable

have received and continue to receive undue negative press referring to the Empire

Companies’ allegations concerning RNDC. See, e.g., Annie Hayes, “Breakthru to

‘Aggressively’ Fight Fraud Allegations,” The Spirit Business (Sept. 22, 2016), available at

http://tinyurl.com/gr8svkp. Moreover, the FAC’s extensive allegations against RNDC

would needlessly extend the scope of discovery to include the conduct of RNDC, further

prejudicing Reliable and Breakthru. See Wine Markets Int’l, Inc. v. Bass, 177 F.R.D. 128,

134-35 (E.D.N.Y. 1998) (striking portions of complaint to, among other reasons, avoid

“unnecessary costs in discovery, including expert fees, and in order to avoid unnecessarily

prolonging and confusing the case”). Permitting allegations regarding the dismissed

RNDC indictment to remain in the FAC also creates a risk of exposing a jury to those

allegations and unfairly and unnecessarily imputing similar conduct to Reliable and

Breakthru. Toto, 1995 WL 46691, at *17 (“If the jury is ultimately made aware of these

matters at trial through reading the Amended Complaint, defendants will be prejudiced.”).

Here, the FAC references RNDC’s allegedly criminal behavior from the dismissed

indictment in no fewer than forty-seven paragraphs. See FAC ¶¶ 1, 2, 4, 6, 7, 13, 15, 16,

17, 18, 20, 21, 22, 71, 72, 81, 82, 83, 87, 88, 106, 107, 108, 109, 110, 111, 112, 113, 114,

124, 126, 133, 135, 142, 143, 149, 150, 200, 205, 243, 253, 244(a), 244(e), 244(f), 244(g),

Ex. A, Ex. B.

For the foregoing reasons, absent dismissal of the Amended Complaint in its

entirety, all such references should be stricken from the FAC.

CONCLUSION

Based on the foregoing, the federal causes of action against Reliable and Breakthru

should be dismissed, and absent dismissal of the Amended Complaint in its entirety, all

paragraphs in the FAC referring to RNDC should be stricken.

Dated: January 20, 2017 New York, New York

BOIES, SCHILLER & FLEXNER LLP /s/ Sean F. O’Shea

Harlan A. Levy ([emailprotected]) Sean F. O’Shea ([emailprotected]) 575 Lexington Avenue New York, New York 10022 Telephone: (212) 446-2300 Facsimile: (212) 446-2350 Helen M. Maher ([emailprotected]) 333 Main Street Armonk, New York 10504 Telephone: (914) 749-8200 Facsimile: (914) 749-8300 Attorneys for Defendants Breakthru Beverage Group, LLC, Reliable Churchill LLLP, Charles Merinoff, Gregory L. Baird, and Arlyn B. Miller

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