Opinion
Civil Action No. 99-3705, Section "C" (5)
May 2, 2000
ORDER AND REASONS
Defendants Corwyn Dale Wood ("Corwyn") and Corwyn Financial Services, Inc., ("Corwyn Financial") moved pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) for an order granting dismissal of plaintiffs claims against them. Defendants Miles B. Wood ("Miles"), Cheryl D. Wood ("Cheryl"), and Executive Benefits, Inc., ("Executive") filed a separate motion pursuant to the same Rules for an order granting dismissal of plaintiffs claims against them. For the following reasons the motion to dismiss is PARTIALLY GRANTED and PARTIALLY DENIED.
BACKGROUND
Plaintiff 5-Star Premium Finance, Inc.'s ("5-Star") allegations, taken as true, are as follows. 5-Star is in the business of providing financing for insurance premiums. Executive is an insurance broker and/or agent. Cheryl, Corwyn, and Miles were all officers or employees of Executive at times material to the allegations. 5-Star and Executive had an arrangement where 5-Star would finance insurance premiums for Executive clients who desired such financing. 5-Star issued checks to Executive; thereafter, Executive and its agents were able to make drafts on 5-Star's account (payable to the insurance agency) in the amount to be financed. After the check was drawn, defendants would then mail the original "Premium Finance Agreement" to 5-Star with a copy of the draft.
The gist of 5-Star's claim is that defendants created a number of fraudulent transactions to exact money from 5-Star. First, defendants would issue checks to Executive based on the "financing of premiums" to nonexistent persons or for nonexistent insurance policies. In combination with these bogus checks, defendants would then create fraudulent "Premium Finance Agreements" which would contain bogus names, policy numbers, and other policy information. Defendants would then send 5-Star the fraudulent "Premium Finance Agreement" along with a copy of the fraudulent check. Defendants would receive the money drawn from 5-Star's account and convert it for their own use. After Corwyn's relationship with Executive terminated, he then continued his pattern of wrongdoing through Corwyn Financial. 5-Star alleges that it was defrauded by defendants because of their execution of sixty-nine of these fraudulent transactions.
On December 9, 1999, plaintiff 5-Star filed the instant action against defendants alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). 18 U.S.C. § 1961-68. 5-Star alleged that defendants' acts of mailing fraudulent documents constituted mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343. Also, 5-Star's Complaint alleged that defendants' actions constituted theft, fraud, conversion, and unfair practices under Louisiana state law. After the filing of the Complaint, 5-Star was directed to and did file a RICO Case Statement.
ANALYSIS Rule 12(b)(1): Lack of Jurisdiction Over the Subject Matter
The standard of review for motions to dismiss under Rule 12(b)(1) is the same as the standard of review for failure to state a claim upon which relief can be granted under Rule 12(b)(6). See Benton v. United States, 960 F.2d 19, 21 (5th Cir. 1992). A 12(b)(1) motion should only be granted if it appears certain that the plaintiff cannot prove any set of facts in support of its claim that would entitle it to relief See Home Builders Association of Mississippi, Inc. v. City of Madison, Mississippi, 143 F.3d 1006, 1010 (5th Cir. 1998). In this case, 5-Star's basis for jurisdiction rests on its RICO claim ( 18 U.S.C. § 1964) and supplemental jurisdiction for its state law claims ( 28 U.S.C. § 1367).
RICO Claims
5-Star asserted a claim under RICO, specifically, Section 1962(c). The defendants attacked the sufficiency of the allegations with a number of arguments in their motions. Section 1962(c) provides as follows:
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
In order to prove a violation under section 1962(c) of RICO, the plaintiff must prove: (1) that an enterprise existed; (2) that the enterprise engaged in, or had some effect upon, interstate commerce; (3) that the defendant was employed by or associated the alleged enterprise; (4) that the defendant knowingly and willfully conducted or participated, directly or indirectly, in the conduct of the affairs of the alleged enterprise; and (5) that the defendant did so knowingly and willfully through a pattern of racketeering activity. See Brown v. Coleman Investments, Inc., 993 F. Supp. 416 (M.D. La. 1998) (citing Pattern Jury Instructions, Committee on Pattern Jury Instructions District Judges Association Fifth Circuit, § 8.1, p. 90 (1996)).
1. RICO "person" and "enterprise"
Defendants Corwyn and Corwyn Financial first argue that 5-Star failed to allege that Corwyn Financial is a RICO "person, " by listing it in the complaint as a corporation. The Court disagrees. Defendants concede that 5-Star did allege in its RICO statement that the corporations involved in the enterprise were legal persons. However, defendants argue that 5-Star did not allege that Corwyn Financial was included in the enterprise. While 5-Star did not explicitly state in the RICO Case Statement ("Statement") that Corwyn Financial was a member of the enterprise, the Court finds that it has in effect been so alleged. 5-Star did claim that the corporations involved were legal "persons" and that they were members of the enterprise. Furthermore, in paragraph 6 of the Statement, 5-Star indicates Corwyn Financial's alleged role in the enterprise and how it contributed to the illegal conduct.
Defendants Cheryl, Miles, and Executive also allege that 5-Star's RICO claim must fail for similar reasons. They also argue that 5-Star did not claim that Executive was a RICO person. This argument must fail for the same reasons as described in the previous paragraph: 5-Star did allege that all corporations were legal persons; in the case of Executive, 5-Star explicitly alleged that Executive was a member of the enterprise; and in paragraph 6 of the Statement, 5-Star described Executive's alleged role in the enterprise.
Defendants next point to inconsistencies in 5-Star's pleadings. They indicate that in its Statement 5-Star alleged that Executive was a legal person and a member of the enterprise. In addition, they indicate that 5-Star alleged in its Complaint that Executive constituted a RICO enterprise. Apart from the inconsistency, they correctly point out that under the Fifth Circuit's interpretation of Section 1962(c) a RICO person and enterprise must be distinct. See Landry v. Air Line Pilots Ass'n Int'l AFL-CIO, 901 F.2d 404, 425 (5th Cir. 1990).
While the Complaint and Statement read together would be inconsistent and possibly lead to fatal error, this Court does not read them like this. Rather, the Court finds that the Statement takes precedence over the Complaint as it relates to the RICO claims. The Complaint outlined the general allegations of all of 5-Star's claims; while the Statement, which followed, served to detail 5-Star's allegations concerning its RICO claim. In effect, the Statement amends the Complaint. Therefore, the Court will focus on the RICO allegations as they are detailed in the Statement. In the Statement, 5-Star does not allege that Executive is a RICO enterprise by itself but rather that the enterprise was the business relationship between 5-Star Premium Finance, Inc. and Executive Benefits, Inc. The defendants are correct however in that Executive Benefits, Inc. cannot be both a "person" under § 1962(c) and also a member of the "enterprise." A RICO person cannot associate with himself. See Crowe v. Henry, 42 F.3d 198, 205 (5th Cir. 1995). Hence, the § 1962(c) claim against Executive Benefits, Inc. is dismissed. The other defendants however are sufficiently distinct from the enterprise to avoid dismissal on these grounds. See Khurana v. Innovative Health Care Systems, Inc., 130 F.3d 143, 156 (5th Cir. 1997).
2. Pattern of Racketeering Activity
Defendants also argue that 5-Star has not sufficiently alleged a "pattern of racketeering activity' as required under RICO. To establish a "pattern of racketeering activity, " a RICO plaintiff must prove "at least two acts of racketeering activity, one of which occurred after the effective date of this chapter [October 5, 1970] and the last of which occurred within ten years (excluding any time of imprisonment) after the commission of a prior act of racketeering activity." See 18 U.S.C. § 1961 (5). The Supreme Court has interpreted the "pattern" requirement under a two-prong analysis: (1) the relationship between the predicate acts, and (2) the continuity of the activity. See H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 2900 (1989). The Court explained that in this last prong what the plaintiff must prove is the continuity of racketeering activity, or its threat. See id. at 241, 109 S.Ct. at 2902. It explained that continuity is "centrally a temporal concept-and particularly so in the RICO context, where what must be continuous, RICO's predicate acts or offenses, and the relationship these predicate acts bear to one another, are distinct requirements." Id. at 242, 109 S.Ct. at 2902 (italics in original). The Court noted that continuity, being both a closed- and open-ended concept, refers to either a "closed period of repeated conduct" or by "past conduct that by its nature projects into the future with a threat of repetition." Id. The Court further stated that continuity over a closed period may be shown "by proving a series of related predicates extending over a substantial period of time." Id. In cases where the period does not extend over a "substantial period of time," a RICO claim might nevertheless be still valid if the threat of continuity can be shown. See id. Notably, the Supreme Court did not define what constitutes a "substantial period of time." Rather, noting the interrelatedness of the two prongs, the Court refused to create a bright-line rule for the amount of time required for the finding of a pattern. See id. at 243, 109 S.Ct. at 2902-03.
Defendants do not challenge 5-Star's allegations concerning the relationship of the predicate acts, so the Court will focus its analysis on the second prong. Even if challenged, the relatedness is present in that the challenged transactions had similar purposes: the same victim and the same method of commission.
Defendants allege that the continuity requirement has not been met because the alleged acts did not occur over a substantial period of time or had the threat of continuing into the future. Defendants claim that the general rule for closed-end continuity is one year. See Streck v. Peters, 855 F. Supp. 1156, 1164 (D. Haw. 1994). Assuming but not deciding whether one year is the appropriate minimum for a closed period, the Supreme Court has acknowledged that "[o]ften a RICO action will be brought before continuity can be established in this way." H.J. Inc., 492 U.S. at 242, 109 S.Ct. at 2902. In such a situation, which is arguably the case here, liability can be established if the plaintiff demonstrates the continuity was threatened, even though thwarted. 5-Star had alleged sufficient facts to show that the fraudulent transactions were the result of an ongoing activity that threatened to continue indefinitely into the future but for being curtailed by disclosure. Thus, continuity is sufficiently alleged to survive a motion to dismiss.
Lastly, the defendants appear to take the position that at least two separate categories of offense must be alleged to constitute two predicate acts. The Court disagrees. The plaintiffs have alleged sixty-nine instances of mail fraud. Each incident constitutes a predicate act.
Therefore, this Court finds that 5-Star's allegations in the Complaint and Statement are sufficient to establish jurisdiction. Because this Court has jurisdiction over the RICO claim, it will also exercise supplemental jurisdiction over the related state law claims. For these reasons, the Court denies partially denies and partially grants dismissal under Rule 12(b)(1).
Rule 9(b): Failure to Plead Fraud with Sufficient Particularity
Defendants next argue that 5-Star has failed to plead wire and mail fraud with the particularity required by Rule 9(b). However, this Court disagrees. The Fifth Circuit has stated that "[p]leading fraud with particularity in this circuit requires "time, place and contents of the false representations, as well as the identity of the person making the representation and what [that person] obtained thereby.'" Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir. 1997) (citing Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1995)).
5-Star has met its burden of pleading mail fraud with particularity. In its Statement, 5-Star lists sixty-nine separate allegedly fraudulent transactions between defendants and itself. For each one, 5-Star states the application number, the check date, the insured's name, and the check amount. This list clearly avers the time of the allegedly fraudulent transactions. As far as the place, 5-Star states in its Statement that the applications were created at defendants' place of business and mailed to 5-Star. 5-Star sufficiently alleges the contents of the false representations in its Statement. 5-Star further alleges that the misrepresentations variously included fictitious applicant names, or names of persons who had not actually bought insurance, fake policy numbers, fake premium amounts, and fake amounts to be insured.
While 5-Star concedes that it was unable to state which specific application was mailed by which specific defendant, the Court finds that 5-Star has provided sufficient allegations to meet its burden. 5-Star alleges that either Corwyn, Miles, or Cheryl initiated each of the fraudulent transactions; that these three defendants operated out of a one-room office; that all were either employees or officers of Executive; and that all participated in the scheme. In fact, the pleadings provided enough particularity for Miles to swear in his affidavit that some of the particular transaction were in fact legitimate ones. See Miles Wood Aff. ¶ 11. Therefore, defendants' Rule 9(b) motions are denied.
Rule 12(b)(6): Failure to State a Claim Upon Which Relief Can be Granted
Defendants also move under to Rule 12(b)(6) for a dismissal of 5-Star's claims for failure to state claims upon which relief can be granted. In support of their motions, defendants have submitted to the Court several affidavits and other documents.
Defendants Cheryl, Executive, and Miles have submitted affidavits averring that in previous negotiations, 5-Star has recognized that none of these three defendants performed any of the predicate acts and that 5-Star would not involve them in any subsequent lawsuit. They also aver that several of the allegedly fraudulent transactions are in fact legitimate. In addition, they also argue that contrary to 5-Star's allegations, they could not be found liable under the RICO statute because they could not fall under its provisions.
This Court finds that it is unable to grant these three defendants' 12 (b)(6) motion to dismiss. Their claims that several of the transactions were in fact legitimate and that they could not fall under the provisions of the RICO statute are contrary to 5-Star's allegations and are factual issues that go to the merits of the claim. Therefore, dismissal of 5-Star's claim on these grounds is improper.
The Court will not convert this dismissal motion into a summary judgment motion without plaintiff having the opportunity also to provide affidavits and other evidence.
All of the defendants also rely on affidavits and other documents to argue that the existence of a novation (La. Civ. Code. art. 1881) and/or a transaction or compromise (La. Civ. Code. art 3071) have extinguished any possible claim that 5-Star might have against defendants on this matter. However, this argument relies on evidence outside the pleadings and is inappropriate on a motion to dismiss. Therefore, defendants' Rule 12(b)(6) motions are denied.
Rule 11: Sanctions 28 U.S.C. § 1927: Liability for Excessive Costs
Defendants Cheryl, Executive, and Miles have also moved for sanctions, costs, and fees under Rule 11 and 28 U.S.C. § 1927. Because the Court partially denies defendants' motions to dismiss, the Court thus denies their motion for sanctions, costs, and fees.
Having so ruled, the Court is nonetheless concerned with regard to this lawsuit and the RICO allegations in particular as lodged against defendants Cheryl, Executive, and Miles. The RICO claims allege criminal conduct against these parties. Federal Rule of Civil Procedure 11 requires that any factual claim made have evidentiary support. This is particularly compelling when a claim, as here, alleges criminal conduct. The three previously mentioned defendants have asserted their noninvolvement in the challenged transactions and, more significantly, the acknowledgment by 5-Star of their non-involvement. While these are factual contentions that cannot be considered in a motion to dismiss, if they are true then the plaintiff need to re-evaluate whether to proceed with those allegations in light of Rule 11.
CONCLUSION
Therefore, for the reasons explained above, IT IS ORDERED that defendants' motions are hereby PARTIALLY GRANTED and PARTIALLY DENIED.