Opinion
No. C 04-00738 JW (HRL).
September 27, 2004
I. INTRODUCTION
Defendants Joseph Cagno ("Cagno") and Chad Leith ("Leith") bring this motion to dismiss the First Amended Complaint with prejudice and to expunge the lis pendens filed by Plaintiff Keypoint Credit Union ("Keypoint") on the grounds the First Amended Complaint fails to state a claim under the Racketeering Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1962. Defendants also argue that the lis pendens should be expunged because the lis pendens are based solely on the RICO claims which do not state a claim upon which relief may be granted or alternatively, that the lis pendens fail to meet the requirements under California law. Defendants further request that the Court take judicial notice of state court filings pursuant to F.R.E. 201. In addition, Defendants ask the Court to retain jurisdiction for the limited purpose of determining the rights to funds remaining in an escrow account. The motion to dismiss was heard on September 27, 2004. Based upon all papers filed to date and the comments of counsel, the Court GRANTS Defendants' motion to dismiss the RICO claims for failure to state a claim, with prejudice as to Cagno and Leith and the Court GRANTS Defendant's motion to expunge the lis pendens. The Court also GRANTS Defendants' request for judicial notice of the state court filings as unopposed. The Court DENIES Defendants' request to retain jurisdiction to determine the rights to funds remaining in an escrow account. The Court declines to exercise supplemental jurisdiction over Plaintiff's remaining state law claim.
II. BACKGROUND
The Court must accept Plaintiff's alleged facts as true for purposes of this motion brought under F.R.C.P. 12(b)(6). Pareto v. F.D.I.C., 139 F. 3d 696, 699 (9th Cir. 1998).
This case involves activities in connection with real property in Los Gatos, California. The original property, commonly referred to as 15651 Blossom Hill Road ("Original Property"), was subdivided by defendants into three lots. Defendants obtained three secured loans on these three parcels, which are now commonly referred to as 123 Dover Street ("Lot 1"), 125 Dover Street ("Lot 2"), and 129 Dover Street ("Lot 3"). Keypoint concedes that it loaned money only on Lot 2 and 3.
In or about May 2000, Cagno purchased the Original Property for approximately $1,700,000. Defendants Cagno, Justin Gallego ("Gallego"), and Steve Nazzal ("Nazzal") entered into a written agreement to form a joint enterprise ("First Enterprise"), known as Dover Street Development ("DSD") for the purpose of subdividing and developing the Original Property into the three lots on which the new dwellings would be constructed. Defendant Stan Carnekie ("Carnekie") then acquired one-half of Cagno's interest in the development project and joint enterprise. In late 2001, the Town of Los Gatos approved the development plan. In November 2001, Cagno entered into a construction agreement with Nazzal's construction company. Cagno then obtained a construction loan in the amount of $3,670,000 to build houses on the three lots.
In or about March 2003, Nazzal relinquished his ownership interests in the First Enterprise to Cagno, but purported to retain an interest in the profits of that enterprise to be paid out of the ultimate sale of the three lots. By mid-2003 the construction loan became past due and Defendants needed to obtain financing to pay off the loan.
During the months of September and October 2003, Defendants formed another enterprise ("Second Enterprise") under the "Dover Agreement." This Second Enterprise involved multiple loans, leases, and other transactions and the execution of multiple instruments. These transactions included loans made by Plaintiff to Defendants.
Alleged misrepresentations made during these dealings later became known to Plaintiff. Plaintiff then accelerated the terms of its loan to Defendants which was allowable under the terms of the loan agreement. Defendants defaulted, and as of January 2, 2004 owed over $2,570,000 to Plaintiff. As a result, various parties filed lis pendens on Lots 1, 2, and 3. Defendants brought an action in the Superior Court of California, County of Santa Clara to expunge the three lis pendens. On May 18, 2004 the Honorable Socrates Peter Manoukian ordered the lis pendens expunged. Plaintiff then filed three lis pendens and brought the current action in federal court for judicial foreclosure and deficiency judgment, strapped to Plaintiff's RICO claims. In response, Defendant filed this motion to dismiss.
III. STANDARDS
A Rule 12(b)(6), Fed.R.Civ.P., motion to dismiss tests the legal sufficiency of a claim. Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). In ruling on a motion to dismiss, the court must accept as true all allegations of material fact and must construe said allegations in the light most favorable to the non-moving party. Western Reserve Oil Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir. 1985). Any existing ambiguities must be resolved in favor of the pleading. Walling v. Beverly Enterprises, 476 F.2d 393, 396 (9th Cir. 1973).
A complaint may be dismissed as a matter of law for two reasons: (1) lack of a cognizable legal theory or (2) insufficient facts stated under a cognizable theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). In order to grant a motion to dismiss, it must appear to a certainty that a plaintiff would not be entitled to relief under any set of facts which could be proved. Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
A. RICO
Civil liability under RICO is premised on a violation of one or more provisions of 18 U.S.C. § 1962. Causes of action claiming "a pattern of racketeering activity" must allege "(1) the [interstate] conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity."Turner v. Cook, 362 F.3d 1219, 1228 (9th Cir. 2004); citingSun Savings Loan Ass'n v. Dierdorff, 825 F.2d 187, 191 (9th Cir. 1987). In order to constitute a "pattern," there must be at least two acts of racketeering activity within ten years of one another. 18 U.S.C. § 1961(5). However, while two acts are required under the RICO Act, they are not necessarily sufficient. H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 237-38 (1989), citing Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n. 14 (1985). The Supreme Court has required "continuity" to establish a pattern of racketeering. H.J. Inc., at 241.
Continuity is a both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition . . . A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct.H.J. Inc., at 241-42. In order to allege open-ended continuity, Plaintiff must allege predicate misconduct that, "by its nature projects into the future with a threat of repetition." Turner, at 1229, citing Religious Tech. Ctr. V. Wollersheim, 971 F.2d 364, 366 (9th Cir. 1992). If Plaintiff fails to allege a pattern of racketeering that had either open- or closed-ended continuity, the district court may properly dismiss plaintiff's RICO claims. Id. at 1231. Leave to amend should be granted, "unless [the district court] determines that the pleading could not possibly be cured by the allegation of other facts." Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995).
B. Lis Pendens
"A lis pendens gives constructive notice to the world that an action has been filed affecting title or right to possession of the real property described in the notice." Richardson v. Hall, 1996 WL 308261, *1, No. C 95-2846 THE (N.D.Cal.). According to California Code of Civil Procedure § 405.32, "the court shall order that the notice be expunged if the court finds that the claimant has not established by a preponderance of the evidence the probable validity of the real property claim." Cal. Code Civ. Proc. § 405.32. The term "probable validity" means that more likely than not, claimant will obtain a judgment against the defendant on the claim." Cal. Code Civ Proc. § 405.3.
IV. DISCUSSION
A. Plaintiff has Failed to State a Cause of Action Under RICO for which Relief may be Granted.
At the heart of this matter is whether Plaintiff adequately alleged a "pattern of racketeering" in its First Amended Complaint. More specifically, the resolution of Defendants' motion hinges on whether the "continuity" element has been adequately alleged. After thoroughly reviewing the pleadings, the Court holds that the "continuity" element has not been met under the open- or closed-ended theory of continuity and that Defendants' motion to dismiss the RICO claims must be granted. Further, the pleadings could not possibly be cured by the allegation of other facts, and thus dismissal with prejudice of the RICO claims is appropriate. Since the "continuity" element is fatal to Plaintiff's RICO claims, this Court will not address Defendants' other arguments set forth in its motion to dismiss.
This Court views Plaintiff's RICO claim as an artful attempt at treble damages for a state foreclosure claim and deficiency judgment.
The "continuity" element can be alleged as either open- or closed-ended. A party "may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement." Turner, at 1229, citing H.J. Inc., at 241. In order to allege open-ended continuity, Plaintiff must allege predicate misconduct that, "by its nature projects into the future with a threat of repetition." Turner, at 1229, citing Religious Tech. Ctr. v. Wollersheim, 971 F.2d 364, 366 (9th Cir. 1992).
It is clear in the present matter that Plaintiff has not alleged any misconduct that projects into the future with a threat of repetition. The First Amended Complaint does not allege any misconduct on the Defendants' part occurring, or threatening repetition, after October 2003. The Defendants sought a loan to develop the Original Property. This is not conduct that by its nature projects into the future.
The question that requires a more detailed inquiry is whether Plaintiff has alleged closed-ended continuity. Plaintiff's allegations, viewed in a light most favorable to it, can be summed up as follows: (I) Defendants formed a First Enterprise in May 2000 to acquire the Original Property (First Amended Complaint ¶ 9); (ii) Defendants formed a Second Enterprise in October 2003 to raise funds to develop the Lots (First Amended Complaint ¶ 15); (iii) during September and October of 2003 Defendants engaged in several acts of predicate misconduct to carry out their plan (First Amended Complaint ¶ 17-19); and (iv) Plaintiff became aware of the scheme and provided Notice of Acceleration on the loans in late December 2003 (First Amended Complaint ¶ 20).
In Turner, the Ninth Circuit applied the closed continuity analysis and held that plaintiff failed to state a claim. The Court ruled that since almost all the alleged predicate acts occurred during a two month period and the other acts "occurred only sporadically" in previous years, the district court properly dismissed the RICO claims. Turner, at 1231. Here, the Court is faced with a similar scenario and reaches the same conclusion — Plaintiff has not alleged continuity and the RICO claims must be dismissed. Further, since almost all the alleged predicate acts transpired between Plaintiff and Defendants between September 2003 and December 2003, there are no additional allegations that Plaintiff can set forth to satisfy the continuity requirement. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not suffice for closed-ended continuity. Id. at 1229. Therefore, dismissal without leave to amend is proper. Doe, at 497.
B. This Court Declines to Exercise Supplemental Jurisdiction with Regard to Plaintiff's Remaining State Law Claim.
Pursuant to 28 U.S.C. § 1367 (c), the Court declines to exercise supplemental jurisdiction over Plaintiff's state law claim for judicial foreclosure and deficiency judgment.
C. The Lis Pendens Filed by Plaintiff must be Expunged Since the Federal Causes of Action Have Been Dismissed.
The Court expunges the lis pendens to the extent that the lis pendens provides notice of the RICO action. Since this Court has dismissed the RICO claims without leave to amend, as a matter of law Plaintiff cannot show the "probable validity" of the claim. This ruling is not intended to affect Plaintiff's ability to file a lis pendens in the future if Plaintiff proceeds in the state court.
D. This Court will not Retain Jurisdiction for the Limited Purpose of Determining the Rights to Funds Remaining in the Escrow Account.
Although Defendants have asked, and this Court has granted dismissal of the only claim creating federal jurisdiction, Defendants also ask this Court to exercise jurisdiction to resolve the escrow matter, which is essentially a state court claim. As a preliminary matter, the request to resolve the escrow matter was set forth in supplemental papers, and is procedurally improper. The Local Rules only allow Supplemental Material in the form of a Statement of Recent Decisions. Otherwise, once a reply is filed, no additional memoranda, papers, or letters may be filed without prior court approval. Civil L.R. 7-3(d). Defendants never sought prior court approval to submit the supplemental papers.
On the merits, Defendants' request for the Court to resolve the escrow matter is made without any supporting caselaw. Furthermore, pursuant to 28 U.S.C. § 1367 (c), this Court has declined to exercise supplemental jurisdiction since the Court has dismissed all claims over which it has original jurisdiction. Therefore, retaining jurisdiction over the escrow matter is improper. As referenced in Defendants' Supplemental Memorandum, the appropriate action for Defendants is to amend one of the lawsuits now pending in the state court to include a request for the monies taken from the escrow account.
V. CONCLUSION
For the reasons set forth above, the Court GRANTS Defendants' motion to dismiss the RICO claims for failure to state a claim, with prejudice. The Court declines to exercise supplemental jurisdiction over Plaintiff's remaining state law claim. Further, the Court GRANTS Defendants' motion to expunge the lis pendens. The Court DENIES Defendants' request to retain jurisdiction to determine the rights to funds remaining in an escrow account.