Article

Note:Applicant, FD Property Holding, Inc. and Fresh Direct, Inc., contracted with Beneficiary, US Traffic Corp., to design and construct a 90-by-65 foot electronic sign to advertise Applicant's new store. Applicant desired that sign was to be constructed as soon as possible to certain technical specifications. Beneficiary offered to construct the sign as requested stating that they "lead the industry" in this type of work, have a proven track record, and could build the sign in the time desired. Applicant, believing the claims of Beneficiary, agreed to purchase the sign for US$ 1.3 million, payable in four installments based on the progress of the work. The contract also required Applicant to secure the transaction with a US$ 500,000 standby LC. Beneficiary took much longer to complete the project than was expressed to Applicant. Applicant refused to make the fourth and final payment until the sign had been fully installed and operational for 30 days as provided in the contract.

In response to Applicant's refusal to pay, Beneficiary signed and faxed a "Drawing Certificate Statement" to Issuer certifying that the amount remaining under the contract was "due and unpaid and held in Escrow by a Court of Competent Jurisdiction [sic] pending final resolution and full payment." Issuer sent a check to the Beneficiary's law firm, "then transmitted to [Beneficiary] but was not 'put into Escrow with the Court,' as required by the terms of the letter of credit." A few days letter, Issuer charged Applicant's bank account for the requisite amount.

Applicant rejected an offer to complete the project for an additional US$ 98,000 and filed a complaint in U.S. federal court against Beneficiary alleging two counts of violating the RICO (Racketeering Influenced and Corrupt Organizations) Act, breach of contract, and fraudulent inducement. Beneficiary moved to dismiss the RICO counts for failure to state a claim. The United States District Court for the Eastern District of New York, Glasser, J., granted Beneficiary's notion to dismiss the RICO claims and declined to exercise pendant jurisdiction over the state claims.

The court ruled that the continuity pattern of a RICO claim may be satisfied by alleging an "openended" (threat of future criminal conduct) or "closeended" (past criminal conduct over a substantial period of time) pattern of racketeering activity. Of the "open-ended" pattern, the court states "Allegations of conduct that by its nature or design has an intended and foreseeable endpoint will not constitute open-ended continuity...here (the allegations of the acts) were committed in connection with the isolated sale of the one product." The factors considered in deciding a closed-ended pattern of racketeering in addition to the period of time are (1) the number and variety of acts (2) the number of participants (3) the number of victims and (4) the presence of separate schemes. The court stated that "the criminal conduct alleged involves a limited number of perpetrators and an alleged non-complex scheme to obtain monies."

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.