author: Simons, J.

text:
    Simpson Electric Corporation, Respondent, v Leucadia, Inc., Defendant-Appellant and Third-Party Plaintiff, et al., Defendant, et al., Third-Party Defendant.
    Argued September 6, 1988;
    decided October 25, 1988

      POINTS OF COUNSEL

      Deborah Doty, Raymond Fitzgerald and Andrew W. Sidman for defendant-appellant and third-party plaintiff.
    I. The court below erred in holding that Federal courts have exclusive jurisdiction over civil RICO claims. (Gulf Offshore Co. v Mobil Oil Corp., 453 US 473; Dowd Box Co. v Courtney, 368 US 502; Claflin v Houseman, 93 US 130; California v Arizona, 440 US 59; Lou v Belzberg, 834 F2d 730; County of Cook v MidCon Corp., 773 F2d 892; Omega Constr. Co. v Altman, 667 F Supp 453; Brandenburg v First Md. Sav. & Loan, 660 F Supp 717; Village Improvement Assn. v Dow Chem. Co., 655 F Supp 311; Printing Mart-Morristown v Rosenthal, 650 F Supp 1444.) II. There is no express statutory directive mandating exclusive jurisdiction over civil RICO claims. (Gulf Offshore Co. v Mobil Oil Corp., 453 US 473; Dowd Box Co. v Courtney, 368 US 502; Lane v Central Bank, 756 F2d 814; Pendleton v Heard, 642 F Supp 940, 824 F2d 448; Kelly v Director, Fed. Emergency Mgt. Agency, 549 F Supp 8; Ted’s Tire Serv. v Chevron U. S. A., 470 F Supp 163; Bains v Hartford Fire Ins. Co., 440 F Supp 15; Burrell v Turner Corp., 431 F Supp 1018; Sands v Weingrad, 99 Misc 2d 598.) III. The legislative history of RICO contains no unmistakable implication of exclusive jurisdiction. (Lou v

      Belzberg, 834 F2d 730; Karel v Kroner, 635 F Supp 725; Gulf Offshore Co. v Mobil Oil Corp., 453 US 473; County of Cook v MidCon Corp., 574 F Supp 902, 773 F2d 892; Sedima, S. P. R. L. v Imrex Co., 473 US 479.) IV. There is no clear incompatibility between State court adjudication of civil RICO claims and Federal interests. (Gulf Offshore Co. v Mobil Oil Corp., 453 US 473; Brandenburg v First Md. Sav. & Loan, 660 F Supp 717; Sedima, S. P. R. L. v Imrex Co., 473 US 479; Lou v Belzberg, 834 F2d 730; Karel v Kroner, 635 F Supp 725; Martin v Hunter, 1 Wheat [14 US] 304.)

      Joseph J. Haspel, Harvey S. Barr and Craig D. Zlotnick for respondent.
    I. Exclusive Federal jurisdiction is mandated in RICO cases. (Cullen v Margiotta, 811 F2d 698; Intel Corp. v Hartford Acc. & Indem. Co., 662 F Supp 1507; Broadway v San Antonio Shoe, 643 F Supp 584; Spence v Flynt, 647 F Supp 1266; Massey v City of Oklahoma City, 643 F Supp 81; Kinsey v Nestor Exploration Ltd. — 1981A, 604 F Supp 1365; County of Cook v MidCon Corp., 574 F Supp 902, 773 F2d 892; Gulf Offshore Co. v Mobil Oil Corp., 453 US 473; Greenview Trading Co. v Hershman & Leicher, 108 AD2d 468.) II. Leucadia’s fifth counterclaim fails to allege the requirements of RICO. (Sedima, S.P.R.L. v Imrex Co., 741 F2d 482; Beauford v Helmsley, 843 F2d 103; Northern Trust Bank/O’Hare v Inryco, Inc., 615 F Supp 828; Superior Oil Co. v Fulmer, 785 F2d 252; Condict v Condict, 815 F2d 579; Marks v Pannell Kerr Forster, 811 F2d 1108; Torwest DBC v Dick, 810 F2d 925; Allington v Carpenter, 619 F Supp 474; United States v Ianniello, 808 F2d 184; Beck v Manufacturers Hanover Trust Co., 820 F2d 46.)
   OPINION OF THE COURT

Simons, J.

This appeal presents two questions: first, whether State courts enjoy concurrent jurisdiction with Federal courts over civil claims brought under the Racketeer Influenced and Corrupt Organizations Act (RICO) (18 USC §§ 1961-1968) and, second, whether defendant Leucadia has stated a cause of action for damages under the act in the fifth counterclaim of its amended answer. The Appellate Division answered the first question in the negative and thus did not pass on the second. We affirm but for different reasons. We hold that State courts enjoy concurrent jurisdiction over civil RICO claims, but that Leucadia has not pleaded a cause of action for damages under the RICO Act.

I

This dispute arises out of an alleged agreement between plaintiff Simpson Electric Corporation and defendant Leucadia, Inc. for the provision of electrical contracting work in rehabilitating a building, located at 315 Park Avenue South in Manhattan. The building was owned and operated by the defendant Grand-White Realty Corporation and its president and majority shareholder, third-party defendant Issac Silver-man. At the time of the agreement Leucadia was the mortgagee in possession. Simpson commenced the action to recover damages in excess of $13 million representing the balance due on the electrical renovation work. Leucadia denied the essential allegations of the complaint and interposed several counterclaims. One of them, the fifth, purported to allege a statutory RICO violation.

RICO (18 USC §§ 1961-1968) is part of the Organized Crime Control Act of 1970. The object of that legislation was to prevent and punish "racketeering activity” (see, Sedima, S. P. R. L. v Imrex Co., 473 US 479, 480-482). Although the act was directed principally against persons affiliated with organized crime, it has evolved into something quite different because of its language. The act makes it unlawful to use income from a "pattern of racketeering activity” (1) to acquire an interest in or to establish or operate an enterprise engaged in or affecting interstate commerce (18 USC § 1962 [a]), (2) to acquire or maintain an interest in such an enterprise through a pattern of racketeering activity (§ 1962 [b]), (3) to conduct or participate in the conducting of such an enterprise through a pattern of racketeering activity (§ 1962 [c]) and (4) to conspire to do any of the foregoing acts (§ 1962 [d]). In addition to containing a criminal enforcement scheme (18 USC § 1963), the act establishes a civil enforcement scheme, including a private right of action, by providing that: "Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of suit, including a reasonable attorney’s fee” (18 USC § 1964 [c]).

In its fifth counterclaim Leucadia alleges first, in conclusory fashion, that Simpson, Silverman and Grand-White were an "enterprise” within the meaning of 18 USC § 1962 and then, specifically, that Simpson submitted its bills and invoices to Silverman, that the amount claimed due on them was grossly inflated, and that Silverman, with knowledge of the misrepresentation, submitted the bills and invoices to Leucadia who, relying upon their truthfulness and upon assurances of their accuracy made by Silverman, made additional loans to Silver-man’s corporation, Grand-White, in the form of payments to Simpson. Leucadia alleges that Silverman, for his part in these matters, received "kickbacks” from Simpson. It alleges that the United States mails were used in furtherance of this scheme and that Simpson committed at least two acts of mail fraud and thereby engaged in a "pattern of racketeering activity” as that phrase is defined in 18 USC § 1961 (5).

Simpson moved to dismiss Leucadia’s counterclaim contending that the Federal courts possessed exclusive jurisdiction over RICO civil claims and, alternatively, that a cause of action had not been stated. Supreme Court ruled that State courts have concurrent jurisdiction over RICO claims but that defendant’s claim did not come within the statute, principally because, as the United States Court of Appeals for the Second Circuit held in Sedima, S.P.R.L. v Imrex Co. (741 F2d 482), a RICO claimant must show that the defendant has been convicted of the underlying "predicate acts” in order to state a civil claim for damages.

Pending appeal from the order, the United States Supreme Court reversed the Second Circuit in Sedima (473 US 479, supra) and held that a RICO claimant need not establish that the defendants had been convicted of the underlying "predicate acts” supporting the action for money damages. The Appellate Division affirmed dismissal of Leucadia’s fifth counterclaim. It did not reach the question of whether a cause of action had been stated in light of the Supreme Court’s decision in Sedima but held instead that the Federal courts possessed exclusive jurisdiction over civil RICO actions. Two Justices dissented and voted to reverse and deny the motion to dismiss, concluding that the State courts had concurrent jurisdiction and that a cause of action had been stated. The court granted Leucadia’s motion for leave to appeal and certified the following question: "Was the order of this court dated May 18, 1987 properly made?” By the terms of the certified question we are authorized to address whether Leucadia has stated a cause of action if we first conclude that State courts have concurrent jurisdiction over RICO claims (see, CPLR 5602 [b] [1]).

II

The jurisdictional issue has been considered by several appellate courts, including two in this State. The Second Department, in this case, and the First Department, in Greenview Trading Co. v Hershman & Leicher (108 AD2d 468), have both found exclusive jurisdiction in the Federal courts. Nationwide the decisions pro and con are about evenly split as to result (compare, e.g., Lou v Belzherg, 834 F2d 730 [9th Cir], cert denied — US —, 108 S Ct 1302; Karel v Kroner, 635 F Supp 725, 730; Cianci v Superior Ct. [Poppingo], 40 Cal 3d 903, 710 P2d 375; Rice v Janovich, 109 Wash 2d 48, 742 P2d 1230 [concurrent jurisdiction]; with Intel Corp. v Hartford Acc. & Indem. Co., 662 F Supp 1507 [ND Cal]; Spence v Flynt, 647 F Supp 1266 [D Wyo]; Maplewood Bank & Trust Co. v Acorn, Inc., 207 NJ Super 590, 504 A2d 819; Levinson v American Acc. Reinsurance Group, 503 A2d 632 [Del Ch] [exclusive jurisdiction]). We find the arguments in favor of concurrent jurisdiction more persuasive.

Analysis starts with the rule that presumptively State courts have concurrent jurisdiction with Federal courts over Federal claims (see, Gulf Offshore Co. v Mobil Oil Corp., 453 US 473, 478; Dowd Box Co. v Courtney, 368 US 502, 507-508; Brown v Gerdes, 321 US 178, 188 [Frankfurter, J., concurring]; Claflin v Houseman, 93 US 130, 136). This presumption of concurrent jurisdiction can be rebutted, however, by (a) an explicit statutory directive (b) unmistakable implication from legislative history or (c) clear incompatibility between State court jurisdiction and Federal interests (Gulf Offshore Co. v Mobil Oil Corp., supra, at 478; Claflin v Houseman, supra, at 137). We proceed to examine those considerations.

A

The statute does not explicitly provide for exclusive Federal jurisdiction. Section 1964 (c), which creates the private right of action, does direct that the action may be brought in "any appropriate United States district court” but that language cannot be interpreted as creating exclusive Federal jurisdiction for "[i]t is black letter law * * * that the mere grant of jurisdiction to a federal court does not operate to oust a state court from concurrent jurisdiction over the cause of action” (Gulf Offshore Co. v Mobil Oil Corp., 453 US 473, 479, supra, citing United States v Bank of N. Y., 296 US 463, 479; see also, Dowd Box Co. v Courtney, 368 US 502, 506, supra; and compare, statutes in which "exclusive” jurisdiction has been specified, e.g., Federal Tort Claims Act [28 USC § 1346 (b)]; Securities and Exchange Act of 1934 [15 USC § 78aa]; ERISA [29 USC § 1132 (e)]; admiralty [28 USC § 1333]; Patent and Copyright [28 USC § 1338 (a)]).

B

Nor is an "unmistakable” intent to restrict jurisdiction to be found in the legislative history. The committee reports, floor debates and sponsors’ memoranda do not even address the question of jurisdiction. Nevertheless, several courts have relied on a statement made by G. Robert Blakey, a principal architect of RICO and former Chief Counsel of the Senate Subcommittee on Criminal Laws and Procedures, as evidence of congressional intent. He has stated: "There is nothing on the face of the statute or in the legislative history” that touches the question of concurrent jurisdiction. "To my knowledge, no one even thought of the issue * * * Had anyone brought up the question” of State court jurisdiction, "we would have said no.” (Flaherty, Two States Lay Claim to RICO — Interview with G. Robert Blakey, Nat LJ, May 7, 1984, at 10, col 2, reprinted in Greenview Trading Co. v Hershman & Leicher, 108 AD2d 468, 472, supra). The statement was made long after the act was passed, however, and his after-the-fact opinion is insufficient to rebut the presumption of concurrent jurisdiction (see also, Lou v Belzberg, 834 F2d 730, 736, n 4, supra; Rice v Janovich, 109 Wash 2d 48, 742 P2d 1230, 1234-1235, supra; Cianci v Superior Ct. [Poppingo], 40 Cal 3d 903, 914, n 3, 710 P2d 375, 380, n 3, supra).

The most widely accepted argument for finding that Congress intended exclusive jurisdiction to reside in the Federal courts relies on analogy to the antitrust laws and rests on the following line of reasoning: (1) the private right of action under the Federal antitrust laws, now found in section 4 of the Clayton Act and codified at 15 USC § 15 (a), has been uniformly interpreted as being maintainable only in Federal court (see, General Inv. Corp. v Lake Shore Ry., 260 US 261, 287; but see, Marrese v American Academy of Orthopaedic Surgeons, 726 F2d 1150, 1152-1153, revd on other grounds 470 US 373); (2) the language of the RICO statutes parallels that of the antitrust statutes in many respects and, in particular, the language of section 1964 (c) is modeled on 15 USC § 15 (a); and (3) Congress is presumed to know what the existing Federal law is at the time it enacts a new law. Therefore, it is argued that because Congress used similar language in the two statutes and Federal courts have exclusive jurisdiction in antitrust cases, it must have intended that the Federal courts have exclusive jurisdiction of RICO claims also.

Several courts have found the reasoning persuasive (see, e.g., Greenview Trading Co. v Hershman & Leicher, 108 AD2d 468, 470-471, supra; County of Cook v MidCon Corp., 574 F Supp 902, 912, affd on other grounds 773 F2d 892; Maplewood Bank & Trust Co. v Acorn, Inc., 207 NJ Super 590, 504 A2d 819, 820-821, supra; Levinson v American Acc. Reinsurance Group, 503 A2d 632, 635 [Del Ch], supra), but the two Federal circuits that have considered the argument have rejected it (Lou v Belzberg, 834 F2d 730, 737, supra; see, County of Cook v MidCon Corp., 773 F2d 892, supra [dictum]). We reject it on several grounds.

First, although the courts have uniformly held that the Federal courts have exclusive jurisdiction over private causes of action brought under the Clayton Act, it cannot be that the language of the statute led to this interpretation. The private right of action provision of the Clayton Act (15 USC § 15 [a]) simply gives the district courts jurisdiction over suits for violation of the antitrust laws. It does not state or even suggest that such jurisdiction shall be exclusive. "It provides that suits of the kind described 'may’ be brought in the federal district courts, not that they must be” (see, Dowd Box Co. v Courtney, 368 US 502, 506, supra; see also, Marrese v American Academy of Orthopaedic Surgeons, supra, at 1152 [contrasting 15 USC § 15, with 28 USC § 1338 (a)]).

Moreover, the language of RICO and of the Clayton Act is not significantly different from the language contained in section 301 (a) of the Labor Management Relations Act of 1947 which the Supreme Court held, in Dowd Box, did not confer exclusive jurisdiction in the Federal courts (368 US, at 506, supra), or the language contained in former 43 USC former § 1333 (b) (recodified at 43 USC § 1349 [b] [1]) which the Supreme Court held, in Gulf Offshore Co., did not confer exclusive jurisdiction in the Federal courts (453 US, at 479, supra). Indeed a review of the cases holding that Federal jurisdiction is exclusive for actions to enforce the antitrust laws reveals no clear rationale as to why such a rule exists given the wording of the statute. Some commentators have suggested that the reason appears to be that "the antitrust laws are uniquely Federal in that they pertain to issues of national commerce” (Redish & Muench, Adjudication of Federal Cause of Action in State Court, 75 Mich L Rev 311, 316-317). If that is the basis for the rule, then it should not be applied to RICO because RICO is not a "uniquely” Federal law in the same way as the antitrust laws. For policy reasons, the antitrust laws place limitations on freedom of contract. They make unlawful agreements that would otherwise be lawful because of their effect on the national economy. "The antitrust laws * * * were enacted for the 'the protection of competition, not competitors’ ” (Brunswick Corp. v Pueblo Bowl-O-Mat, 429 US 477, 488, quoting Brown Shoe Co. v United States, 370 US 294, 320). In contrast, the underlying "predicate acts” of a RICO violation are themselves illegal acts, and the evinced legislative intent is that the private right of action was designed to provide a legal remedy to individuals wronged by racketeering activity (see, Sedima, S. P. R. L. v Imrex Co., supra, at 487).

Second, as the dissent below noted, in the aftermath of the Supreme Court’s decision in Sedima, RICO can no longer be analogized with assurance to the antitrust legislation (see, dissenting opn of Spatt, J., 128 AD2d 339, 353). Although the Supreme Court did not address the jurisdictional issue, it did suggest that section 1964 (c) should be broadly and liberally construed to effectuate its remedial purposes (Sedima, S. P. R. L. v Imrex Co., supra, at 494-495). Those remedial purposes are most evident in the provision creating a private right of action for parties injured by racketeering activity (id.). Whatever the proper scope of RICO’s substantive provisions, a determination of exclusive Federal jurisdiction would place an obstacle in the way a private litigant who, for a variety of reasons, might prefer a State forum. A congressional intention to limit jurisdiction to Federal courts should not be read into the statute when it would thwart the remedial objectives of the act. The Supreme Court also rejected the analogy to the antitrust laws in Sedima insofar as it held that a RICO claimant was not required to show an independent "racketeering injury” similar to the antitrust injury that a Clayton Act claimant must prove in order to obtain money damages under that act (Sedima, S. P. R. L. v Imrex Co., supra, at 498-499).

Third, the creation by Congress of a private right of action does not necessarily entail exclusive Federal jurisdiction (Cianci v Superior Ct. [Poppingo], 40 Cal 3d 903, 913, 710 P2d 375, supra). For example, in the Petroleum Marketing Practices Act (15 USC §§ 2801-2841), Congress created a private right of action (§ 2805 [a]) and it has been held that jurisdiction over this action is not limited to the Federal courts (Ted’s Tire Serv. v Chevron U. S. A., 470 F Supp 163, 165). An even better example is the private right of action created by Congress to enforce the antitying provisions of the Bank Holding Company Act (12 USC § 1975). This statute, which contains virtually identical language to that of RICO found in 18 USC § 1964 (c), was described as a " 'valuable supplement’ ” to the antitrust laws (see, Lane v Central Bank, 756 F2d 814, 817, quoting 1970 US Code Cong & Admin News 5519, 5559) and yet it has been held that States can exercise concurrent jurisdiction over private actions to enforce it (Lane v Central Bank, supra).

Finally, there is little support for exclusive jurisdiction found in other aspects of the statutory scheme. RICO statutes include provisions concerning Federal venue and service of process (18 USC § 1965), vesting the United States Attorney General with investigative powers (18 USC § 1968), granting the district court jurisdiction to prevent and restrain violations of section 1962 (18 USC § 1964 [a]) and allowing the Attorney General to expedite cases brought by the United States (18 USC § 1966) but other Federal acts have similar enforcement and venue provisions and they have been interpreted as permitting concurrent jurisdiction in the enforcement of Federal rights created (e.g., Labor Management Relations Act of 1947 interpreted by the Supreme Court in Dowd Box Co. v Courtney, 368 US 502, supra; antitying provisions of Bank Holding Company Act [12 USC §§ 1971-1978] interpreted by the Eleventh Circuit in Lane v Central Bank, 756 F2d 814, supra; Petroleum Marketing Practices Act [15 USC §§ 2801-2841] interpreted by the District Court for District of Connecticut in Ted’s Tire Serv. v Chevron U. S. A., 470 F Supp 163, supra). The fact that the United States Attorney may choose to bring his lawsuits on behalf of the United States in Federal court sheds no light on whether Congress intended to preclude a private litigant from bringing suit in State court.

C

The final factor identified in Gulf Offshore (supra) is whether Federal interests are clearly incompatible with State

court jurisdiction. That determination requires consideration of "the desirability of uniform interpretation, the expertise of federal judges in federal law, and the assumed greater hospitality of federal courts to peculiarly federal claims” (Gulf Offshore Co. v Mobil Oil Corp., 453 US 473, 483-484, supra). These considerations do not warrant a finding that the presumption of concurrent jurisdiction has been rebutted in this case. To be sure, uniformity in this area is desirable, and the Federal courts have had difficulty in reaching a consensus on the requirements necessary to state a cause of action under RICO. But there is no reason why State courts cannot interpret the language of section 1962 (c) and apply the law as well as the Federal courts. Given the split within the Federal circuits on the question, the State courts will not likely cause further division; true uniformity must come, apparently, from pronouncements by the United States Supreme Court. Significantly, the Clayton Act predicates recovery on an "antitrust injury”, an element which requires national uniformity. RICO contains no similar "racketeering injury” requirement (see, Sedima, S. P. R. L v Imrex Co., supra, at 493-500; see also, Cianci v Superior Ct. [Poppingo] 40 Cal 3d 903, 915, n 4, 710 P2d 375, 381, n 4). Moreover, complete uniformity in interpreting and applying crimes that qualify as "predicate acts” under RICO is not necessary because section 1961 provides that State criminal laws, in addition to Federal crimes, can serve as the RICO predicate acts. In short, RICO incorporates by reference both State and Federal law and there is little difference between State Judges interpreting Federal criminal law if the predicate act alleged is a Federal law violation and Federal Judges interpreting State criminal law if the predicate act alleged is a State law violation. Although it may be fairly assumed that Federal Judges have greater familiarity with interpreting Federal violations, it may also be assumed that State court Judges have greater familiarity in interpreting State criminal law violations. Moreover, while the Federal courts are indeed divided over the question of what a RICO claimant must plead to state a cause of action, there is not, to our knowledge, a significant split with respect to interpreting the underlying predicate acts.

Finally, the majority below referred to the New York Legislature’s passage of a so-called little RICO, the Organized Crime Control Act (L 1986, ch 516), and claimed that the existence of such a law militates against a conclusion of concurrent jurisdiction (see, 128 AD2d 339, 346). We agree, for the reasons stated by the dissenters below, that the argument is unpersuasive. We add only that because the question of whether State courts have concurrent jurisdiction over civil RICO actions is a Federal question, we fail to see the relevance of the Legislature’s passage of OCCA. The present inquiry is the intention of the Congress, not the intention of the State Legislature. If the State Legislature’s action suggests anything, it suggests that the State is not unsympathetic to RICO claims (cf., Rice v Janovich, 109 Wash 2d 48, 742 P2d 1230, 1235, supra; Cianci v Superior Ct. [Poppingo], 40 Cal 3d 903, 916, 710 P2d 375, supra).

Accordingly, we hold that the presumption that State courts have concurrent jurisdiction over RICO claims has not been rebutted.

III

Our conclusion that the State courts have concurrent jurisdiction over RICO civil claims requires us to determine whether Leucadia’s fifth counterclaim states a cause of action under the statute.

RICO provides that anyone injured by "enterprises” conducted through a "pattern of racketeering activity” shall have a cause of action and can recover treble damages (18 USC §§ 1962, 1964 [c]). A "pattern of racketeering activity” is defined as "at least two acts of racketeering activity” within a 10-year period (§ 1961 [5]). "Acts of racketeering” are defined as a variety of acts chargeable under State law and indictable under Federal law (§ 1961 [1]). Thus, the statute on its face would appear to allow plaintiffs to make a Federal case (and obtain treble damages) out of garden variety fraud, provided that the defendants have committed two predicate acts, which might be as simple as mailing fraudulent bills or making interstate phone calls for the purpose of defrauding a victim.

To restrict abuses resulting from such an expansive reading, the Second Circuit held, in Sedima, that (1) to have standing to bring a civil RICO claim, the claimant must allege a "racketeering injury”, carrying with it "at least * * * the obligation that the plaintiff show injury different in kind from that occurring as a result of the predicate acts themselves, or not simply caused by the predicate acts, but also caused by an activity which RICO was designed to deter” and (2) that a prior criminal conviction is a prerequisite to the civil RICO action (741 F2d, at 496, supra). In that case, a supplier of equipment to aerospace and defense industries brought an action containing a RICO claim against a New York exporter of aviation parts alleging that the exporter had mailed inflated copies of purchase orders and credit memorandums thereby receiving payment under a cost plus contract in excess of its actual costs. The Second Circuit dismissed the complaint stating: "there is simply no evidence that in creating RICO, Congress intended to create the broad civil cause of action that the reading of the statute given by its proponents would allow” (741 F2d 482, 487, supra).

The United States Supreme Court reversed, holding that there was neither a separate racketeering injury nor a prior criminal conviction component to a civil RICO action. The court left open the question of whether Sedima had stated a cause of action, but noting that a violation of section 1962 (c) requires "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity” (Sedima, S. P. R. L. v Imrex Co., 473 US, at 496, supra), pointed out, in footnote 14, that the definition of "a pattern of racketeering activity” differs from other provisions in section 1961 in that it states that a pattern "requires” at least two acts of racketeering activity, not that it "means” two acts. The implication is that while at least two acts are necessary to state a RICO action, they may not be sufficient. The court suggested that this restrictive interpretation of the term pattern had support in common parlance and in the legislative history. Quoting from the legislative history, it stated " '[t]he term "pattern” itself requires the showing of a relationship * * * So, therefore, proof of two acts of racketeering activity, without more, does not establish a pattern’ ” (id., at 496, n 14, quoting 116 Cong Rec 18940 [1970] [statement of Senator McClellan]). The lower Federal courts have followed Sedima’s footnote 14 to place one limitation or another on the scope of civil RICO, primarily adopting two lines of reasoning.

The first theory, adopted by a majority of courts and called the multiple episodes theory, focuses on the word "pattern” in the statute. These courts interpret the word pattern as embracing two concepts: the relationship of the predicate acts and the continuity of the racketeering activity beyond the one criminal scheme or episode. A plaintiff must be able to satisfy the relationship requirement of Sedima, that is, he must show that the predicate acts are part of a common scheme. He must also show that the pattern is continuing because the act was not designed to apply to "sporadic activity” or reach the "isolated offender” (see, Sedima, S. P. R. L. v Imrex Co., supra, at 496, n 14). Although defining the continuity requirement has been the source of some difficulty, courts are in general agreement that a plaintiff must demonstrate at least a threat of ongoing illegal conduct by the RICO enterprise. "A scheme to achieve a single discrete objective does not in and of itself create a threat of ongoing activity, even when that goal is pursued by multiple illegal acts, because the scheme ends when the purpose is accomplished” (Condict v Condict, 826 F2d 923, 928-929 [10th Cir]; see also, Torwest DBC v Dick, 810 F2d 925; Schreiber Distrib. Co. v Serv-Well Furniture Co., 806 F2d 1393, 1399 [9th Cir]; Holmberg v Morrisette, 800 F2d 205, 210 [8th Cir], cert denied 481 US 1028; Superior Oil Co. v Fulmer, 785 F2d 252, 257 [8th Cir]; Marks v Pannell Kerr Forster, 811 F2d 1108, 1111-1112 [7th Cir]; Lipin Enters. v Lee, 803 F2d 322, 323-324 [7th Cir]).

In this action Leucadia has not satisfied the continuity requirement. It has failed to allege that the Silverman — Simpson — Grand-White scheme was not an isolated episode and the court cannot infer from the fact that the scheme progressed over a number of months and that several predicate acts occurred during that time that some ongoing illegal conduct is being committed by the enterprise. Accordingly, Leucadia’s fifth counterclaim fails to state a RICO claim under the multiple episodes theory.

A different approach has been taken by the Second Circuit; it has limited the scope of RICO by focusing on the "enterprise” requirement. Post-Sedima decisions in the Second Circuit, including United States v Ianniello (808 F2d 184, cert denied 482 US —, 107 S Ct 3230), Beck v Manufacturers Hanover Trust Co. (820 F2d 46, cert denied — US —, 108 S Ct 1588), Furman v Cirrito (828 F2d 898), Albany Ins. Co. v Esses (831 F2d 41) and Creative Bath Prods. v Connecticut Gen. Life Ins. Co. (837 F2d 561) are extensively reviewed by the Second Circuit’s opinion in Beauford v Helmsley (843 F2d 103) and need not be reexamined here. In Beauford the court summarized its position: "Although * * * we speak in terms of 'enterprise’ rather than 'pattern’, we nonetheless require continuity in any event, and find insufficient evidence of continuity in a single criminal episode regardless of how many fraudulent acts it entails. In other words, a single criminal episode or scheme does not charge a claim under RICO because it lacks sufficient continuity to constitute an enterprise, even if its fraudulent acts constitute a pattern” (Beauford v Helmsley, supra, at 110). The court in Beauford held that a single alleged scheme to defraud buyers and tenants in a cooperative conversion of an apartment complex into over 8,000 condominium units did not state a RICO cause of action, even though the alleged enterprise was ongoing and still offering condominiums for sale pursuant to the alleged fraudulent plan. If the Beauford plaintiffs did not state a cause of action under RICO on those facts because of the lack of continuity to constitute an enterprise, then it would appear that Leucadia has failed to state a cause of action here because it has not pleaded that Simpson, Silverman and Grand-White ever defrauded others in a like manner in the past or that they will continue to defraud others in the future by using a similar kickback scheme.

We have no need to define with precision the minimum requirements for a RICO causé of action or even to choose whether the continuity component of a civil RICO action should be related to the term "pattern” as it has been held by most of the Federal circuits or to the term "enterprise”, the approach taken by the Second Circuit. Regardless of the approach used, Leucadia fails to state a RICO cause of action because there is no factual allegation that the Simpson— Silverman — Grand-White enterprise is continuing with racketeering activity.

Accordingly, the order of the Appellate Division should be affirmed, with costs, and the certified question answered in the affirmative.

Chief Judge Wachtler and Judges Kaye, Alexander, Titone, Hancock, Jr., and Bellacosa concur.

Order affirmed, etc.

       That is not to say that the Legislature is not permitted to amend the CPLR to provide that New York State courts should not exercise jurisdiction over RICO claims (see generally, Brown v Gerdes, 321 US 178, 188-189 [Frankfurter, J., concurring]), but only that this is not the question before us inasmuch as there is nothing contained in OCCA warranting such an inference.


source: Caselaw Access Project

author: Simons, J. Bellacosa, J.

license: Public Domain

text:
    In the Matter of William V. Cawley, Appellant, et al., Petitioner, v SCM Corporation, Respondent.
    Argued September 15, 1988;
    decided October 27, 1988

      POINTS OF COUNSEL

      Michael J. Malone, Battle Fowler and Kathy A. Ahearn for appellant.
    The decision of the court below contravenes Business Corporation Law § 623. (Anderson v International Mins. & Chem. Corp., 295 NY 343; Alpert v 28 Williams St. Corp., 63 NY2d 557.)

      Nancy E. Barton for respondent.
    I. Application of the relevant criteria under Business Corporation Law § 623 mandates a finding that the fair value per share of SCM Corporation common shares was no more than $75 per share. (Anderson v International Mins. & Chem. Corp., 295 NY 343; Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585; Matter of Marcus [Macy & Co.], 273 App Div 725; Alpert v 28 Williams St. Corp., 63 NY2d 557.) II. The tax effects applicable to individual shareholders are not relevant criteria of fair value under Business Corporation Law § 623. (Fe Bland v Two Trees Mgt. Co., 66 NY2d 556; Alpert v 28 Williams St. Corp., 63 NY2d 557.)
   OPINION OF THE COURT

Simons, J.

The issues presented in this stock appraisal proceeding under Business Corporation Law § 623 (h) (4) are: (1) whether, in assessing the fair value of SCM Corporation stock, the courts below abused their discretion by disregarding the tax deduction that SCM became entitled to upon the consummation of its merger with HSCM Merger Company, Inc. and, if so, (2) whether the value of this postmerger factor should have been distributed equally among all of SCM’s stockholders or solely to those stockholders whose shares were responsible for this tax advantage. We hold dissenting shareholders are entitled to receive fair value for their securities as determined by a consideration of all relevant factors, including the prospective, nonspeculative tax benefits accruing to the acquired corporation from the merger. Furthermore, because each share of stock within a given class must be treated equally, the tax advantages attendant to corporate actions must be distributed proportionately among all shareholders in calculating fair value and the dissenters (in this case petitioner is the only dissenter) given their aliquot share of the benefit. Accordingly, we reverse the Appellate Division order and remit the matter for a hearing.

The present dispute arises out of the March 31, 1986 merger between SCM and HSCM, two New York corporations, whereby SCM became an indirect wholly owned subsidiary of Hanson Trust PLC. SCM is a multinational company engaged in the production of chemicals, coatings and resins, paper products, foods and typewriters whose common stock, prior to the merger, was traded on the New York and Pacific Stock Exchanges. Through its subsidiaries, Hanson renders various services, and manufactures and supplies a diverse line of products, including bricks, building materials, construction equipment, food processing and footwear. Its ordinary shares are traded on the London Stock Exchange.

Hanson began a hostile tender offer for all outstanding shares of SCM common stock (par value $5 per share) on August 26, 1985 by offering $60 per share in cash, over $14 per share higher than the preannouncement market price for SCM’s stock. SCM’s board of directors had previously recommended that such an offer be rejected as inadequate. On September 3, 1985, SCM announced it had executed a merger agreement with Merrill Lynch Capital Markets, providing for the leveraged buyout of SCM by Merrill Lynch and senior members of SCM’s management for $70 per share in cash and subordinated debentures (junk bonds) on a fully diluted basis. SCM’s financial advisor, Goldman, Sachs & Company, informed the SCM board that in its opinion this price was fair.

In response to the agreement between SCM and Merrill Lynch, Hanson raised its takeover bid from $60 to $72 per share in cash, conditioned upon SCM’s not granting any lockup devices. SCM and Merrill Lynch, in turn, ended their prior agreement and executed a new one, providing for a leveraged buyout of SCM at $74 per share in cash and junk bonds on a fully diluted basis. Goldman, Sachs & Company approved this price as fair. SCM granted Merrill Lynch an option to purchase two of SCM’s "crown jewels”, its consumer foods and pigments divisions, for $80 million and $350 million respectively, thereby attempting to discourage Hanson from seeking control of SCM. On October 8, 1985, however, Hanson increased its tender offer price for SCM shares to $75 per share in cash, contingent upon the termination or judicial invalidation of this lock-up option. Following a Federal court order preliminarily enjoining SCM and others from exercising the lock-up option (see, Hanson Trust PLC v ML SCM Acquisition, 781 F2d 264 [2d Cir]), Hanson completed the first step of the merger by purchasing over 50% of SCM’s outstanding shares at the $75 tender offer price. At that time, Hanson having wrested control of SCM’s board of directors, SCM and HSCM entered into a merger agreement under which the remaining common stock of SCM including exercised and unexercised stock options, would be purchased at $75 in cash. At a special shareholders’ meeting on March 27, 1986, the "squeeze out” merger was approved, effective March 31, 1986. In connection with the merger, Goldman, Sachs & Company again expressed its opinion that the $75 per share price was fair.

At the time of the merger, the sale of shares acquired through the exercise of stock incentive options, referred to as ISO shares, was taxed as follows. If ISO shareholders transferred their securities within one year of the exercise of their incentive stock options (or within two years of the grant of these options), the transaction constituted a "disqualifying disposition” under Federal tax law (see, 26 USC § 421 [a], [b]; § 422A [a] [1]; § 425 [c] [1]). As such, the difference between (1) the exercise price and (2) the lesser of the fair market value on the date of exercise and date of sale was treated as ordinary income to the ISO shareholder, and the remaining profit (if any) was treated as a capital gain (long-term gain if the shares were held more than six months, and short-term gain otherwise (see, 26 USC § 1222; Fed Tax Regs § 1.421-5 [b] [2], [3] [26 CFR]). If ISO shareholders held their stock beyond the holding period, the entire difference between the exercise price and fair market value on the date of sale was taxed more favorably as a long-term capital gain (see, Fed Tax Regs § 1.421-5 [a]). Concomitantly, to the extent ISO shareholders recognized ordinary income because of "disqualifying dispositions”, the issuing company was entitled to take a tax deduction in the nature of trade or business expense (26 USC §§ 162, 421 [a], [b]).

At the time of the merger, petitioner Cawley had worked at SCM for 23 years and was its treasurer. He owned 9,539 shares of SCM common stock, 7,000 of which he had bought in January 1986 by exercising his incentive stock options. Cawley rejected the $75-per-share price and commenced this proceeding, alleging the merger’s tax consequences made his 7,000 ISO shares worth much more. Cawley pointed out that the Hanson-SCM merger, which, in effect, forced him to sell his stock, entitled SCM to take a $354,437.50 tax deduction for Cawley’s ISO shares, and a $3,852,031.77 tax deduction for the remaining ISO shares because the stock was sold before the end of the requisite holding period. Given the 46% corporate tax rate, SCM thus obtained a substantial posttax benefit of $163,041.25 and $1,771,934.60 respectively. Cawley asserts that these tax consequences should have been weighed in assessing fair value; and, specifically, that his ISO shares were worth $43 per share more than SCM’s common stock because SCM derived this tax benefit directly and exclusively from the ISO shares. He also asserts, that because he was forced to sell his stock prematurely, his profit from the sale of his ISO shares was subject to tax as ordinary income (not more favorably as capital gains), thereby requiring him to pay $107,100 in excess taxes. Cawley urges that this too should have been considered in valuing his ISO shares. Supreme Court, New York County, dismissed Cawley’s petition seeking a determination of the fair value of his shares; the Appellate Division unanimously affirmed, without opinion.

As a threshold issue, we note that a court’s appraisal of dissenting shareholders’ interests, "to the extent that it is confined to issues of fact, rests largely within the discretion of the lower courts” (Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 588 [citing Cohen and Karger, Powers of the New York Court of Appeals § 148, at 589-590 (rev ed)]). Our decision here is confined to whether the courts below abused their discretion in disregarding the tax consequences of the Hanson-SCM merger.

Under the Business Corporation Law, two or more domestic corporations in New York can merge into a single corporation, with one of the constituent corporations surviving (Business Corporation Law § 901 [a] [1]). The board of directors of a corporation that participates in a merger must follow certain procedures in adopting a plan of merger (Business Corporation Law § 902) and in submitting it to the shareholders for their approval by a two-thirds vote (Business Corporation Law § 903). Shareholders who do not assent to the merger have the right to receive payment for the "fair value” of their shares (Business Corporation Law § 910 [a]). The remedy available to those who have perfected their status as dissenting shareholders — through compliance with the various procedures set forth in section 623 — is to enforce this right through an appraisal proceeding (Business Corporation Law § 623 [h] [4]). As we noted in Alpert v 28 Williams St. Corp. (63 NY2d 557), this remedial mechanism protects minority shareholders "from being forced to sell at unfair values imposed by those dominating the corporation while allowing the majority to proceed with its desired merger” (id., at 567-568; see also, Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 590, supra; Anderson v International Mins. & Chem. Corp., 295 NY 343, 349-350). Where, as here, equitable relief based upon unlawful or fraudulent corporate action is not pursued, the appraisal proceeding is the dissenting shareholders’ exclusive remedy (see, Business Corporation Law § 623 [k]; Breed v Barton, 54 NY2d 82, 85-87; cf., Alpert v 28 Williams St. Corp., 63 NY2d 557, 568, supra).

Prior to 1982, Business Corporation Law § 623 (h) (4) prevented courts from considering postmerger factors in assessing "fair value” by expressly excluding from the calculus "appreciation or depreciation directly or indirectly induced by [the] corporate action or its proposal” (L 1982, ch 202, §9; see, Matter of Endicott Johnson Corp. v Bade, supra, at 587, 590-591). Case law held that fair value was determined by considering, as of the date of merger, net asset value, investment value and market value, and according weight to each as the facts and circumstances of a particular case dictated (Matter of Endicott Johnson Corp. v Bade, supra, at 587; Klurfeld v Equity Enters., 79 AD2d 124, 137). To assure that fair value determinations reflected the business realities of a given corporate action, the Legislature in 1982 amended paragraph (4) of Business Corporation Law § 623 (h) to provide a more expansive and flexible case-by-case approach to the valuation of shares (see, L 1982, ch 202, § 1; Bill Jacket, L 1982, ch 202, at 18-19). In fixing fair value under the statute as amended, courts must examine "the nature of the transaction giving rise to the shareholder’s right to receive payment for shares and its effects on the corporation and its shareholders, the concepts and methods then customary in the relevant securities and financial markets for determining fair value of shares of a corporation engaging in a similar transaction under comparable circumstances and all other relevant factors” (Business Corporation Law § 623 [h] [4] [emphasis added]). By including the phrase "all other relevant factors” and deleting the phrase "excluding any appreciation or depreciation directly or indirectly induced by such corporate action or its proposal”, the Legislature evinced its intent that postmerger factors enter valuation computations (see, Bill Jacket, L 1982, ch 202, at 20; cf, Business Corporation Law § 1118 [fair value of interest in a close corporation excludes any element of value arising from the filing of the judicial dissolution petition under Business Corporation Law § 1104-a]). However, in amending section 623 (h) (4), the Legislature was not encouraging the abandonment of the three basic methods of valuation delineated in Endicott. Rather, it intended courts to supplement these approaches by also considering "[elements of future value arising from the accomplishment or expectation of the merger which are known or susceptible of proof as of the date of the merger and not the product of speculation” (Alpert v 28 Williams St. Corp., 63 NY2d, at 571, supra; see, Weinberger v UOP, Inc., 457 A2d 701, 713 [Del]).

Here, pursuant to CPLR 409 (b), Supreme Court made a summary determination, based upon the parties’ submissions, that no issue of fact existed regarding the fairness of the $75 price per share, basing its conclusion on the recommendations of SCM’s financial experts, the active bidding contest between Hanson and Merrill Lynch centering on a price in the low 70’s, and the trading history of the stock in the years immediately prior to the merger. The factors discussed by Supreme Court were plainly significant. The letter from Goldman, Sachs & Company demonstrated that the $75 figure was comparable to an amount that would have been set by arm’s length negotiations (see, Alpert v 28 Williams St. Corp., 63 NY2d 557, 572, supra) while the other two factors were an excellent indication of the market value for SCM stock on the day the merger was approved (see, Matter of Behrens, 61 NYS2d 179, 183, affd without opn 271 App Div 1007). In that SCM and Cawley contest only the relevancy of the tax consequences of the merger, it is law of the case that the $75-per-share figure is otherwise a fair amount (see, e.g., Martin v City of Cohoes, 37 NY2d 162, 165-166). Accordingly, we reach only the questions whether the tax deductibility of ISO shares was improperly disregarded and, if so, how an aliquot valuation of this tax benefit should be accomplished upon remittal.

Citing Matter of Endicott Johnson Corp. v Bade (37 NY2d 585, 587, supra), Supreme Court stated that the tax consequences of the acquisition were a postmerger factor not subject to valuation. Business Corporation Law § 623 (h) (4), enacted after our decision in Endicott, authorizes courts to consider and accord weight to relevant postmerger factors, however, including the prospective tax benefits of a given transaction. Thus, the court should have addressed the tax benefits from the transfer of ISO shares. The deduction for acquisition of the ISO shares was, as the dissent concedes, a corporate asset of SCM, admittedly susceptible to precise calculation before the merger, that represented value to SCM and arose from the accomplishment of the merger. However, the record is silent on whether the tax deductibility of ISO shares was considered in arriving at the $75-per-share figure (cf., Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 591, supra). In fact, SCM’s director of taxes, William V. Meltzer, averred that "this future tax benefit * * * is not properly considered an element of fair value”, indicating the tax deductibility of ISO shares was not considered at all. Upon remittal, Supreme Court should determine, among other things, whether the $75-per-share figure included consideration of the tax deductibility of ISO shares.

The next issue raised is whether the value of the tax deduction should be spread among ISO shareholders, their securities solely being responsible for the tax advantage, or should be spread equally among all shareholders of SCM common stock. Business Corporation Law § 623 does not resolve this question. On the one hand, section 623 (g) promotes uniformity of treatment by requiring the surviving corporation of a merger to offer to pay all dissenting shareholders of the same class the same price per share when that corporation makes its fair value offer. On the other hand, in support of Cawley’s position, this subdivision allows a corporation and an individual dissenting shareholder to agree upon a price for his or her shares after the former has made its fair value offer. This conflict is resolved, however, by Business Corporation Law § 501 (c) which provides that "[s]ubject to the designations, relative rights, preferences and limitations applicable to separate series, each share shall be equal to every other share of the same class.” Because the record indicates ISO shares were identical in all respects to SCM common stock held by the investment public, section 501 (c) mandates that ISO shareholders be treated no differently from other SCM common stockholders (see also, Fe Bland v Two Trees Mgt. Co., 66 NY2d 556, 568-569). Thus, if Supreme Court concludes that the $75 price per share did not include consideration of the deductibility of ISO shares, the tax benefits that accrued to SCM are to be spread among all of its common stockholders, for calculation purposes, and petitioner is to be awarded his proportionate share of this corporate asset.3

Finally, petitioner contends that his personal income tax situation should have been considered. However, personal income tax liability is not an element of future value to SCM arising from the merger (Alpert v 28 Williams St. Corp., 63 NY2d 557, 571, supra; see, Weinberger v UOP, Inc., 457 A2d 701, 713 [Del], supra). As the Supreme Court of Delaware stated in defining fair price: "The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder’s proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger” (457 A2d, supra, at 713 [quoting TriContinental Corp. v Battye, 31 Del Ch 523, 74 A2d 71, 72]). Manifestly, Cawley’s $107,100 increased tax liability had no bearing on the value of SCM’s common stock and thus was properly disregarded below.

The dissenter questions the "purpose to be served” by this decision. He concedes, however, that the tax benefit respondent corporation derived from repurchasing ISO shares constituted a corporate asset. Indeed it did. Because of the tax treatment of respondent’s cost of repurchasing the ISO shares, the corporation was entitled to a deduction of more than four million dollars and a tax benefit of almost two million dollars. Petitioner contends that the statute contemplates that the fair value of his shares should reflect this corporate asset and that courts below erred interpreting the 1982 statute and a decision of this court superseded by the 1982 amendment when they failed to consider it. Although the dissenter would ignore this claim as merely an attempt to "sweeten” a "windfall”, we believe petitioner’s proceeding represents an appropriate request for judicial intervention to resolve a legal question of importance to New York’s business community. The dollar benefit to petitioner in the end, may be relatively small or even nonexistent, but that fact does not reflect the importance of the underlying statutory question presented by the case and could not justify our failure to answer it.

Nor have we, by our decision, unduly complicated these proceedings. Nothing in the statute or its legislative history supports the dissenter’s claim that the Legislature, in amending section 623, was concerned with a need to make the statutory remedy "fast and summary”. On the contrary, section 623 (h) gives the court plenary powers to adjudicate fair value issues (para [3]) and gives the parties broad pretrial disclosure rights to assist them in the presentation of their claims (para [4]). We assume jury trials are not permitted in these proceedings because corporate matters are traditionally equitable in nature and because difficult and technical valuation problems are commonly addressed by the court without a jury.

Accordingly, the order of the Appellate Division should be reversed and the matter remitted to Supreme Court to determine whether a summary determination was appropriate, and to reassess the fair value of SCM’s stock, in light of this decision.

Bellacosa, J.

(dissenting). I dissent and vote to affirm the order of the Appellate Division which affirmed the judgment of Supreme Court fixing the fair value of petitioner Cawley’s stock at $75 per share. My particular disagreement with the reversal is that it effects as a matter of law an asset-specific accounting in what is supposed to be simply a fair value appraisal of a minority shareholder’s stock. It would then necessitate a pro rata calculation of this minuscule asset relative to the 22,000 other shareholders.

The legal issue that separates us in this complex billion dollar corporate-financial merger is narrow. Did both lower courts correctly apply the fair value appraisal criteria of Business Corporation Law § 623 (h) (4), or must a sui generis tax factor of the kind implicated in this case be expressly considered? I would say "yes” to the first question and "no” to the second.

My difficulty is discerning a sufficient legal basis to disturb as a matter of law the lower courts’ determinations. Moreover, on a practical basis, there is no manifestation on the record and no purpose to be served in concluding that the Appellate Division did not weigh all the "relevant factors” in arriving at its fair value determination under the statute.

Cawley was the treasurer of SCM at the time that Hanson Trust PLC initiated its two-step merger acquisition of SCM (see, Alpert v 28 Williams St. Corp., 63 NY2d 557, 563; Brudney & Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale LJ 1354, 1356, 1358 [1978]). At the time of the merger, Cawley owned 9,539 shares of SCM common stock. All Cawley’s stock was purchased pursuant to incentive stock options ("an option granted to an individual for any reason connected with his employment by a corporation”, Internal Revenue Code § 422A [b] [26 USC]). Seven thousand of his shares were acquired five months after the initiation of the takeover, three months before Hanson sought to freeze out minority shareholders, and two days after Hanson acquired greater than a 50% controlling interest in SCM. There is no difference in class or in character between Cawley’s common stock and the over 12 million other outstanding shares of SCM common stock. The factors which Cawley parlays into a personal enhancement of his valuation treatment are the manner in which he purchased the shares and the tax consequences that emerged solely from the timing of his liquidation of his common stock.

An employer is not entitled to a trade or business expense deduction (Internal Revenue Code § 162 [26 USC]) for employee profit realized from an incentive stock option if the employee holds the shares for more than one year from the exercise of the option and more than two years from the grant of the option (Internal Revenue Code § 421 [a]; § 422A [a] [26 USC]). If the time periods are not satisfied, the employer becomes entitled to a tax deduction equal to the ordinary income compensation realized by the employee (Internal Revenue Code § 421 [b] [26 USC]; Fed Tax Regs § 1.421-5 [b] [3]; [e] [26 CFR]). By reason of forced buyout of 7,000 shares of Cawley’s common stock before he had held them for a year, Hanson-SCM acquired a pro rata tax deduction. That is the nub of this case.

As the sole remaining dissenting shareholder in this appraisal action, Cawley, through careful crafting of his legal argument, argued that the fair value of his common stock is greater than the fair value of all other stock in his class because of the tax deduction which inured to the acquiring corporation. The majority acknowledges that Cawley does not otherwise contest the $75 common stock fair value determination, calling it "law of the case” (majority opn, at 472). There is no dispute that the SCM’s independent financial advisor, Goldman, Sachs & Company, advised the SCM board of directors that the common stock offerings at $70, $74 and, finally, $75 all represented fair value offers. In fact, the tender offer price of $75 per share was $29 per share more than the pretakeover announcement market price. The record reveals not a hint of contradiction of Hanson-SCM’s cogent argument before the Trial Justice that its $75 freeze-out offer was fair value because it far exceeded the market value of the stock preceding the active bidding contest, that the offer exceeded the investment value of the stock, and that net value is not an appropriate measure of fair value of an ongoing concern (record on appeal, at 40-42).

Cawley was recipient of a most generous special stock preference (option price of $21 for 5,000 shares and $32.12 for remaining 2,000) owing to his status as an insider corporate treasurer (indeed a fully informed senior management officer). He was afforded in the midst of a corporate takeover battle a guaranteed substantial profit at 350% (the option price was $53 below market price on the day he exercised it and his over-all buyout from the corporation was characterized by the trial court as a "golden parachute”). He now argues that the successor to his benefactor, Hanson-SCM, should not incidentally benefit from the tax deduction accruing as a consequence of his special treatment, and that the fair value of his common stock should be different from the $75 uncontested "law of the case”, appraiser certified, common stock fair value, and should be sweetened by the value of the corporate deduction. Business Corporation Law § 623 gives dissenting minority shareholders like Cawley a fair value appraisal remedy, not the equivalent of an accounting and a windfall to boot.

The implementation of an appraisal proceeding requires that "shares of the same class be equal in all respects to every other share of the class” (Fe Bland v Two Trees Mgt. Co., 66 NY2d 556, 569; see, Katzowitz v Sidler, 24 NY2d 512, 518). Business Corporation Law § 623 (h) (4) provides that in appraising stock value of a dissenting shareholder, "the court shall consider the nature of the transaction giving rise to the shareholder’s right to receive payment for shares and its effects on the corporation and its shareholders, the concepts and methods then customary in the relevant securities and financial markets for determining fair value of shares of a corporation engaging in a similar transaction under comparable circumstances and all other relevant factors.” "[I]t is well established by case law that, in our State, the elements which are to enter into such an appraisal are net asset value, investment value and market value * * * [but] the weight to be accorded to each varies with the facts and circumstances in a particular case” (Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 587 [citations omitted]).

No rigid rule exists for determining the fair value because the appraisal will necessarily have to be flexible to the "existence of a state of facts peculiar to the situation” (Matter of Fulton, 257 NY 487, 494). "It follows that all three [appraisal methods] do not have to influence the result in every valuation proceeding. It suffices if they are all considered” (Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 588, supra). Additionally, "[e]vidence that an independent investment firm was retained to render a fairness opinion on the price offered to the minority” is one means of demonstrating the price was proper (see, Alpert v 28 Williams St. Corp., 63 NY2d 557, 572, supra). "The ultimate valuation to the extent that it is confined to the issues of fact, rests largely within the discretion of the lower courts” (Matter of Endicott Johnson Corp. v Bade, supra, at 588, citing Cohen and Karger, Powers of the New York Court of Appeals § 148, at 589-590 [rev ed]).

The record here amply demonstrates that the trial court was cognizant of the fact that the tender offers made throughout these takeover proceedings far exceeded the market value of the stock prior to the initiation of the buyout. The court also had Hanson-SCM’s uncontested arguments before it regarding the investment and net asset value of the stock. Heavy reliance was placed on the fair value appraisals of the independent financial advisors Goldman, Sachs & Company. It is of no legal consequence that the Trial Justice refused to engage in tax asset accounting, because there is no error in discounting such tax consequences as "particularizations of a conscientious step-by-step analysis of relevant income account factors rather than as added aliquot valuations” (Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 591, supra). The tax consequences of Cawley’s option exercise and freeze-out-compelled distribution, together with those of the two other senior executive officers privileged to own incentive stock option shares, were among the myriad of factors that produced a merger price of $75 per share, which was by all accounts fair and generous as far as Cawley was concerned. By this analysis, I do not propose that the courts "ignore” or "refuse” to answer the key question; rather I say the lower courts have answered it — correctly for the parties and for New York’s business community.

Alternatively, even if we were to assume, however, that the tax factor is a mandatory relevant factor under the Business Corporation Law § 623 "catch all” — cogent legislative history and close analysis of the law and evidence here suggest that is not necessarily so — and even if we were to assume further that the lower courts did not consider that factor at all, I still arrive at the same result. A remittal for what is likely to be a relatively fruitless exercise should produce no or de minimis effects in this case. The tax asset acquired by Hanson-SCM from the buyout of Cawley’s stock must be given specific recognition under the majority’s holding and must be spread equally among all common stock shareholders. This would result in an increase in value of 1.3 cents per share ($163,041 12,172,340 shares — 1.3 cents [this calculation is made, of course, on the only shares for which appraisal is sought— Cawley’s — and will no doubt be the subject of proof by the contending accountants at the trial]). The holding that the corporate tax benefits, derived from the freeze out of all incentive stock option shares, be accounted for and then calculated pro rata as among all of SCM’s former shareholders with Cawley being awarded his proportionate share grants relief never requested by Cawley and also necessarily deals with the fair value of common stock of nondissenting shareholders. This was not within the purview of Cawley’s Business Corporation Law § 623 fair value proceeding and functionally grants a kind of class action relief.

Only Cawley’s shares (7,000 out of 12 million) are really involved, and not all stock and shareholders, as is required, are really affected by Cawley’s "red herring”, "relevant” factor. Individualization of this kind of tax consideration could not have realistically been intended by the Legislature and it seems to me may be fraught with mischief and impracticality. The holding in this case may flip like proceedings into full scale accountings, with all the delay, uncertainty and speculation of such matters (see, Johnson v Manhattan & Bronx Surface Tr. Operating Auth., 71 NY2d 198; Matter of Lanzano v City of New York, 71 NY2d 208). The Business Corporation Law § 623 remedy is supposed to be relatively fast and summary, which is why jury trial is forbidden. That procedural goal wdll be negated or at least frustrated by the interpretation given the statute in this case as applied to the numerous vexatious cases sure to be generated.

I agree with the majority that Cawley is not entitled to an increase in the fair value of his common stock equal to the difference between the ordinary income tax treatment of the profits from his stock and the capital gains treatment he would have received had he held the stock for more than the six-month capital gains period.

Both irrelevant tax factors were correctly excluded or discounted from this fair value determination by the courts below, and I would affirm.

Chief Judge Wachtler and Judges Kaye, Alexander, Titone and Hancock, Jr., concur with Judge Simons; Judge Bellacosa dissents and votes to affirm in a separate opinion.

Order reversed, with costs, and matter remitted to Supreme Court, New York County, for further proceedings in accordance with the opinion herein.

      . HSCM Merger Co., Inc., was an indirect wholly owned subsidiary corporation of Hanson Trust PLC and was a corporate shell used by Hanson to facilitate the merger with SCM.

      . Individual income derived as capital gains is now taxed at the same rate as ordinary income (see, 26 USC former § 1202, repealed by Pub L 99-514, tit III, § 301 [a], 99 US Stat 2216).

      . The relief granted is consistent with the relief demanded in petitioner’s pleading although the incremental increase in the value of petitioner’s shares after a new hearing may be less than petitioner requests. That is not a determination to be made by this court, however, and the speculative computation of the increase and its amount, recited in the dissent, is unsupported by evidence in the record or statements in the briefs.
      Finally, in answer to the dissent, this proceeding is not in any sense a class action or the functional equivalent of a class action. Petitioner was the only shareholder to perfect his right to a fair valuation determination, as provided by statute, and thus he will be the only shareholder entitled to a value greater than $75 if the court finds the shares have a greater value after considering the tax benefit to the corporation.

      . We would note that the exercise of stock options, earned long before merger was contemplated, and the valuation of shares purchased under them, has nothing to do with "golden parachutes” and the trial court did not so characterize this transaction.


author: Alexander, J.

text:
    The People of the State of New York, Respondent, v Samuel N. Knight, Appellant.
    Argued September 13, 1988;
    decided October 27, 1988

      POINTS OF COUNSEL

      Bruce K. Carpenter for appellant.
    I. Evidence that the arresting officer measured the speed of defendant’s automobile by a radar device mounted in the officer’s moving vehicle should have been excluded on objection, the scientific reliability of such a device not having been established. (People v Magri, 3 NY2d 562; Cowley v People, 83 NY 464; People v Bellizzi, 108 Misc 2d 209; People v Friend, 117 Misc 2d 392; People v Conlon, 109 Misc 2d 729.) II. The radar device was not tested properly, the tuning forks being inaccurate, and its measurement of defendant’s speed should not have been allowed into evidence. (People v Magri, 3 NY2d 562; People v Heyser, 2 NY2d 390.) III. The unaided opinion of the officer that defendant was speeding does not support conviction as a matter of law nor does it buttress the moving radar reading. (People v Olsen, 22 NY2d 230.) IV. The return on appeal by the Trial Judge grossly failed to set forth, or even summarize, the evidence, and appellant has been deprived of his right to a full and fair review on appeal. (People v Hines, 57 App Div 419; People v Mason, 307 NY 570; People v White, 56 NY2d 110; People v Saalfield, 14 NY2d 915; People v Eldridge, 31 NY2d 820, 412 US 909; People v Wilkins, 281 NY 224; People v Giles, 152 NY 136.) V. CPL 460.10 (3) (a), (d), insofar as it permitted the trial court to avoid making available a stenographic, verbatim record, or its equivalent, is unconstitutional. (Griffin v Illinois, 351 US 12; Eskridge v Washington Prison Bd., 357 US 214; Draper v Washington, 372 US 487; Evitts v Lucey, 469 US 387; People v Rivera, 39 NY2d 519.)

      Larry M. Himelein, District Attorney, for respondent.
    I. Testimony concerning the moving radar unit was properly received into evidence. (People v Magri, 3 NY2d 562.) II. Evidence of defendant’s speed obtained from the radar device was properly admitted. (People v Magri, 3 NY2d 562; People v Dusing, 5 NY2d 126; People v Lynch, 61 Misc 2d 117; People v Stephens, 52 Misc 2d 1070; People v Heyser, 2 NY2d 390; People v Higley, 55 Misc 2d 460; Matter of Graf v Foschio, 102 AD2d 891; People v Maniscalco, 94 Misc 2d 915.) III. The opinion testimony of the officer was properly admitted. Not only does it support the radar evidence but the testimony alone is sufficient to support conviction. (People v Dusing, 5 NY2d 126; People v Higley, 55 Misc 2d 460; People v Olsen, 22 NY2d 230.) IV. The trial court’s return on appeal is not inadequate as a matter of law and, in any event, defendant failed to avail himself of procedural remedies below. V. There is no constitutional violation in permitting local courts to conduct trials without a stenographic record.

      Robert Abrams, Attorney-General (O. Peter Sherwood, Peter H Schiff and Joseph Koczaja of counsel), for Division of State Police, amicus curiae.

    I. Judicial notice can be taken of the general scientific reliability of moving radar. (Matter of Lahey v Kelly, 71 NY2d 135; People v Middleton, 54 NY2d 42; People v Magri, 3 NY2d 562; People v Friend, 117 Misc 2d 392; People v Bellizzi, 108 Misc 2d 209; People v Dusing, 5 NY2d 126.) II. There is no basis for defendant’s challenge to the constitutionality of CPL 460.10 (3). (McKane v Durston, 153 US 684; People v Cousart, 58 NY2d 62; People v Dimmie, 42 Misc 2d 251, 15 NY2d 578; People v Omans, 306 NY 375; Lindsey v

      Normet, 405 US 56; Griffin v Illinois, 351 US 12; Matter of Mitchell, 40 NY2d 153; Bearden v Georgia, 461 US 660; People v Whidden, 51 NY2d 457; McGowan v Maryland, 366 US 420.)
   OPINION OF THE COURT

Alexander, J.

In People v Magri (3 NY2d 562), we recognized the general reliability of stationary traffic radar as an instrument for measuring the speed of a moving vehicle, and held such radar evidence admissible without the need for expert testimony explaining the underlying scientific principles of traffic radar. Today, we are called upon to decide whether such expert testimony is a prerequisite to the admissibility of radar evidence against defendant, where the evidence was derived from a radar device that was moving at the time it recorded the speed of defendant’s vehicle. Notwithstanding that the accuracy of "moving” radar implicates several variables not relevant to the accuracy of stationary radar, we conclude that such evidence is admissible without the need for expert testimony explaining the scientific principles on which it is founded.

Defendant was charged in a Simplified Traffic Information with operating his vehicle at 71 miles per hour in a 55 miles per hour zone in violation of Vehicle and Traffic Law § 1180 (b). The velocity of defendant’s automobile was recorded by a moving radar device mounted on a patrol vehicle that was approaching defendant from the opposite direction on Route 17 in the Town of Randolph. The radar device at issue — a Kustom Signals KR-10 SP — is an advanced traffic radar system capable of operating either from a stationary patrol vehicle or from one that is moving.

The record establishes that on the date in question, the radar was in "moving” mode, and was being operated by J. R. Hall, Chief of Police for the Town of Randolph. After visually estimating defendant’s speed at 70 miles per hour, Chief Hall switched on the radar unit which recorded defendant’s speed at 71 miles per hour, thus confirming Hall’s visual estimate. The trial evidence demonstrates that the radar unit had been laboratory tested for proper calibration and that Hall had tested the unit before and after his tour of duty, using both internal and external calibration methods to ensure that the unit was operating properly. Defendant challenged the admissibility of the radar evidence, however, contending that moving radar had not yet been proven reliable in speed detection, and that expert testimony was required to establish "the operative principles” of such radar and to explain how it can "accurately compensate for the relative speeds and directions of the respective vehicles”.

Randolph Town Court rejected defendant’s contention, admitted the radar evidence, and convicted defendant of speeding. County Court affirmed the judgment of conviction, and leave to appeal was granted by a Judge of this court. On this appeal, defendant repeats his contention that moving radar evidence is inadmissible at trial unless expert testimony explaining the underlying principles of such radar is received. He argues further that the evidence is, in any event, legally insufficient to sustain his speeding conviction. We disagree and, for the reasons that follow, affirm the conviction.

This court has previously recognized the basic validity of the Doppler Principle — the scientific principle underlying all traffic radar. Thus, in People v Magri (3 NY2d 562, supra), we held that "it will no longer be necessary to require expert testimony in each case as to the nature, function or scientific principles underlying” stationary traffic radar (People v Magri, supra, at 566). In so holding, we noted that the use of radar for speed detection was but one of a variety of scientific methods routinely accepted in our courts for their general reliability, including "reproductions by photography * * * X rays, electroencephalograms, electrocardiograms, speedometer readings, time by watches and clocks, identity by fingerprinting, and ballistic evidence” (People v Magri, supra, at 566).

Like stationary traffic radar, moving radar is also based upon the Doppler Principle. That principle, as explained in the "Trainee Instructional Manual” prepared by the National Highway Traffic Safety Administration as part of its "Basic Training Program in RADAR Speed Measurement”, describes the frequency change that occurs when there is relative motion between two objects, one of which is transmitting wave energy. Such relative motion will occur whenever the distance between the transmission source and the receiver of the wave energy is changing. Thus, when the transmission source is stationary and the receiver is moving — as typically occurs when a radar device mounted on a stationary police vehicle is focused on an approaching target vehicle — there will be relative motion. Similarly, when both the transmission source and the receiver are moving at different speeds or in different directions — as typically occurs when a police vehicle carrying a radar device is approaching a moving target vehicle from the opposite direction — there also will be relative motion (see, Natl Highway Traffic Safety Admin, Basic Training Program in RADAR Speed Measurement, Trainee Instructional Manual, at 3-3 [hereinafter NHTSA Manual]; Note, Radar Speed Detection: Homing in on New Evidentiary Problems, 48 Ford-ham L Rev 1138, 1140).

In each case, traffic radar units can measure the resulting change in frequency, and convert that frequency change into a speed measurement (see, e.g., People v Magri, 3 NY2d, at 565, supra [in stationary radar case, radar unit "measures the difference in the frequencies of the transmitted wave and the received wave” which is then "translated into miles per hour”]). In the case of moving radar, two speed measurements are taken — that of the target vehicle in relation to the patrol vehicle and that of the patrol vehicle in relation to the surrounding terrain. The moving radar unit computes the difference between the frequency change produced by the approaching target vehicle and the typically lesser frequency change produced by the lower relative speed of the patrol vehicle, and then translates this differential into a speed measurement for the target vehicle (see, NHTSA Manual, at 3-10; Note, Radar Speed Detection, op. cit., 48 Fordham L Rev, at 1142). We conclude, therefore, that insofar as the underlying scientific principles of moving and stationary radar are the same, evidence derived from either should be admissible without the need for expert testimony. Although moving radar functions somewhat differently in that it must compensate for the speed of the patrol vehicle, it does not rely on any new technical principles that require justification. This being the case, evidence of speeding obtained by means of moving radar generally will be admissible and "may be sufficient in [itself] if there be reasonable proof of [its] accuracy” (People v Dusing, 5 NY2d 126, 128; see, People v Magri, 3 NY2d, at 566-567, supra; People v Heyser, 2 NY2d 390, 393; People v Marsellus, 2 NY2d 653, 655).

It is generally recognized, however, that because moving radar must measure the speed of the patrol vehicle in addition to that of the target vehicle, there is greater opportunity for error when it is used. Such error may result from distortion of the radar signal resulting in an artificially low speed reading for the patrol vehicle which, in turn, may cause an artificially high speed reading for the target vehicle (see, NHTSA Manual, at 3-11, 3-12; Note, Radar Speed Detection, op. cit., 48 Fordham L Rev, at 1142-1143; Goodson, Technical Shortcomings of Doppler Traffic Radar, 30 J Forensic Sciences 1186 [1985]). Moreover, in heavy traffic, moving radar may make it more difficult to correctly identify the target vehicle (see, Radar Speed Detection, op. cit., 48 Fordham L Rev, at 1146). Since the potential for error is greater, the prosecution will bear a greater burden of proof in demonstrating the accuracy of the particular radar unit involved. Thus, in addition to establishing that the moving radar was in proper working condition and that it was operated correctly by one who was qualified and experienced in the operation of traffic radar, the evidence should show that the police officer independently verified the speed of the patrol vehicle (e.g., by comparing the speed registered by the radar unit with the speed indicated by the patrol vehicle speedometer), and that the radar was used in an area posing a minimal risk of misidentification or distortion (i.e., from heavy traffic, large trucks or large roadside objects such as billboards) (see, NHTSA Manual, at 3-11, 3-12; Note, Radar Speed Detection, op. cit., 48 Fordham L Rev, at 1161; see also, State v Hanson, 85 Wis 2d 233, 245, 270 NW2d 212 [establishing foundation requirements for the admissibility of moving radar evidence in Wisconsin]).

In the instant case, the evidence adduced at trial was legally sufficient to sustain defendant’s conviction of speeding. The record clearly establishes that the KR-10 SP moving radar unit had been correctly calibrated; that Chief Hall was a qualified Doppler Traffic Radar Operator; that he had independently verified the speed of his patrol vehicle by comparing the speed registered by the radar unit with the patrol vehicle speedometer; and that the road and traffic conditions were such that any distortion or misidentification was highly unlikely. The independent verification of the patrol vehicle speed eliminates any significant possibility that signal distortion could have caused an artificially high speed reading for the target vehicle. In any event, even if the radar evidence standing alone were deemed insufficient to support the conviction, there is additional evidence here that sufficiently corroborates the accuracy of the radar reading so as to establish defendant’s guilt beyond a reasonable doubt. Chief Hall testified that he was trained in speed estimation and that he visually estimated the speed of the target vehicle to be 70 miles per hour prior to switching on the radar unit. In light of this corroborative evidence, any perceived deficiency in the radar evidence is of no consequence (see, People v Olsen, 22 NY2d 230; People v Dusing, 5 NY2d 126, supra; People v Magri, 3 NY2d 562, supra; People v Heyser, 2 NY2d 390, supra). Finally, we note that defendant has failed to preserve his challenge to the sufficiency of the trial court’s return by not moving, pursuant to CPL 460.10 (3) (e), to require the filing of an amended return, and that his other contentions are either unpreserved or without merit.

Accordingly, the order of the County Court should be affirmed.

Chief Judge Wachtler and Judges Simons, Kaye, Titone, Hancock, Jr., and Bellacosa concur.

Order affirmed.

      . The external calibration method used by Chief Hall involves placing a vibrating tuning fork near the radar unit’s antenna while observing the speed registered by the radar. The tuning fork is calibrated to oscillate at a frequency corresponding to a particular speed, thus permitting verification of the radar unit’s accuracy. The internal calibration method relies on an integral oscillator contained within the radar unit that is preset to display a certain speed when activated (see generally, Note, Radar Speed Detection: Homing in on New Evidentiary Problems, 48 Fordham L Rev 1138, 1153 [1980]).

      . This type of error can sometimes occur if a large stationary roadside object, such as a billboard or building, distorts the signal received by the radar unit. Similar errors can result if the patrol vehicle passes, or is passed, on the road by other vehicles, or if the patrol vehicle does not maintain a constant velocity (see, Note, Radar Speed Detection: Homing in on New Evidentiary Problems, 48 Fordham L Rev 1138, 1143; Goodson, Technical Shortcomings of Doppler Traffic Radar, 30 J Forensic Sciences 1186 [1985]).

      . Chief Hall had been on the town’s police force 15 years and was certified as a Doppler Traffic Radar Operator. He had received training on the KR-10 SP radar device and was also expert at estimating the speed of moving vehicles from either a moving or standing patrol vehicle.