Opinion
Cause No. TH00-0028-C-T/H
July 17, 2000
ENTRY DISCUSSING DEFENDANTS' MOTION TO DISMISS
Plaintiffs, Albert L. Clark, Stanley J. Clark, Mark A. Clark, and Jeffrey L. Clark (collectively referred to hereafter as "Clark") have brought this action against corporate Defendant, Integrity Financial Group, Inc. ("Integrity"), and four individually named Defendants, Steven A. Wireman ("Wireman"), Doyle Abney ("Abney"), Dennis L. Starkey ("Starkey"), and John R. Smythe ("Smythe"). On January 6, 2000, Clark filed this lawsuit based on the diversity of the parties and the civil remedies available under the Racketeer Influenced and Corrupt Organizations ("RICO") provisions of the United States Code, pursuant to 28 U.S.C. § 1332(a)(1) and 18 U.S.C. § 1964(c), respectively. The lawsuit, 1 alleges, inter alia, that all of the Defendants were part of a scheme to defraud Clark of substantial sums of money in violation of RICO and section 35-43-5-5 of the Indiana Code governing check deception. Defendants Integrity, Abney, Starkey, and Smythe now move, separately and severally, to dismiss Starkey from the suit and to dismiss the Complaint in its entirety pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. Having considered this motion and the parties' briefs, the court decides as follows.
Somewhat confusingly, Plaintiffs argue that the RICO count is based on 18 U.S.C. § 1961(4)-the definition section for "enterprise." (Pls.' Opp. Defs.' Mot. Dismiss at 4.) The court assumes that Plaintiffs intended to refer to one or all subsections of 18 U.S.C. § 1962, the violation of which may be enforced by civil action. See 18 U.S.C. § 1964(c).
Ind. Code § 34-24-3-1 provides for civil actions for pecuniary losses associated with certain criminal violations, including check deception under § 35-43-5-5.
Wireman has not joined in this motion.
The structure of Defendants' Motion to Dismiss makes it appear that Rule 9(b) pleading requirements are somehow a consideration separate from Starkey's role as a Defendant. All wrongdoing alleged in the complaint, however, is fraudulent in nature and Plaintiffs have not contended otherwise. Thus, the pleading requirements of Rule 9(b) apply to Starkey's role as well. See discussion infra (discussing that Rule 9(b) requires particularized pleading as to the "who," as well as to the "what," "when," "where," and "how" of the fraudulent conduct).
I. Background
These facts are derived from the allegations of Plaintiffs' Complaint. See discussion infra. The allegations are taken as true with all reasonable inferences drawn in Plaintiffs' favor. This discussion of the Complaint's allegations does not constitute any findings of fact with respect to the issues in dispute regarding the merits of the litigation.
Integrity is an Illinois corporation with its principal place of business in Vermilion County, Illinois, and all individually named Defendants are Illinois residents. (Compl. at 1, ¶ 2; 2, ¶¶ 3-6.) Integrity provides financial and insurance services and has investment interests in Five Star Holdings, Ltd. ("Five Star") — a corporation organized (or to be organized) in the Cayman Islands for the purpose of operating life insurance or re-life insurance subsidiaries. (Id. at 3, ¶ 2.) Clark advanced funds to Integrity to assist in developing and financing Integrity's operations pending Integrity's anticipated return on its investment in Five Star. (Id. at 3, ¶¶ 3, 4.) Clark maintains that the advancements to Integrity were made in reliance on Defendants' false representations about the progress of Integrity and Five Star, and that Defendants issued checks to Clark knowing that the checks would not be honored. (Id. at 3, ¶ 5; 4, ¶ 7; 5, ¶¶ 10, 11, 13; 6 ¶¶ 14, 17.) Clark identifies the specific role of each Defendant in these actions to be as follows:
Albert and Stanley Clark are brothers, and Mark and Jeffrey Clark are sons of Stanley Clark. (Compl. at 1, ¶ 1.)
Integrity — Integrity falsely represented to Clark the need for additional advancements to protect sums previously advanced to Integrity by Clark. (Id. at 3, ¶¶ 4, 5.) Additionally, Integrity falsely promised prompt repayment "upon the imminent success of the [Five Star] investment of Integrity." (Id. at 3, ¶ 4.) These representations occurred on at least twenty-four occasions, (id. at ¶ 4), during a period of at least sixteen months. In reliance on these representations, Albert, Mark, and Jeffrey Clark made advances totaling over $700,000. (Id. at 3, ¶ 5.) Additionally, on June 1, 1999, Integrity specifically sought to induce an advancement from Stanley Clark by telling him that repayment of existing. obligations to Clark was dependent upon Five Star's success, and that Five Star was in need of additional financing. (Id. at 5, ¶¶ 10, 11.)
The acts Plaintiffs specifically attributed to Integrity are listed in this subsection. The court notes, however, that a "principal is liable even if an agent is acting solely to feather his own nest . . . [and] the principal's liability is derivative from the agent's fraud, and there is no need to allege a fraudulent representation by the principal." Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 471 (7th Cir.), cert. denied, 120 S.Ct. 178 (1999) (citing the doctrine of Gleason v. Seaboard Air Line Ry., 278 U.S. 349 (1929)).
Plaintiffs allege that at least some of their business with Integrity was transacted by "innumerable telephone calls by the Defendants from their homes and offices in Danville, Illinois to Clark at various business and residential locations in the State of Indiana." (Compl. at 8, ¶ 24.) Plaintiffs, however, do not provide any specific information about these telephone communications. The identities of persons placing or receiving individual telephone calls are not provided, nor are any of the calls specified by date or particular content.
This period of time is calculated from March 19, 1998 (when the Articles of Incorporation for Integrity were filed) through July 1999 (the last date Integrity solicited funds from Clark). (Compl. at 1, ¶ 2; 3, ¶ 4.) The overall period of contact might be longer given that Wireman, representing himself to be a principal of Integrity, began soliciting funds from Albert Clark in November 1997 and multiple checks were issued by Integrity in 1999, one or more of which may have been issued after July 1999. ( Id. at 3, ¶ 1; 4, ¶ 7.)
Plaintiffs allege that at least some of their business with Integrity was transacted by "wire transfers of funds." (Compl. at 8, ¶ 24.) Plaintiffs, however, do not specify the dates or amounts of any of these transfers, nor do they specify the identities of persons transmitting or receiving those transfers.
During 1999, Integrity executed and delivered at least seven checks in amounts totaling $428,500 that it knew would not be honored and, as a result, Clark was deprived of its property. (Id. at 4, ¶¶ 7, 8; 6, ¶ 17.) In particular, Integrity issued a $72,000 check payable to Stanley Clark (in repayment of obligations to Clark) on July 13, 1999. (Id. at 5, ¶ 13.) This check was not honored, and Plaintiffs allege the Defendants issued the invalid check as a means of retaining control of those funds. (Id. at 6, ¶¶ 14, 15.)
Wireman — Wireman is alleged to have been a shareholder and the Chairman of the Board of Directors of Integrity. (Id. at 2, ¶ 3.) He began soliciting funds from Albert Clark in November 1997, induced Albert Clark's investment in Integrity, and falsely represented to Clark the need for additional advancements to protect sums previously advanced to Integrity by Clark. (Id. at 3, ¶¶ 1, 3-5.) Additionally, Wireman falsely promised prompt repayment "upon the imminent success of the [Five Star] investment of Integrity." (Id. at ¶ 4) These representations occurred on at least twenty-four occasions, (id.), during a period of at least twenty months. In reliance on these representations, Albert, Mark, and Jeffrey Clark made advances totaling over $700,000. (Id. at 3, ¶ 5.) Additionally, on June 1, 1999, Wireman specifically sought to induce an advancement from Stanley Clark by falsely representing that repayment of Integrity's existing obligations to Clark was dependant upon Five Star's success, and that Five Star was in need of additional financing. (Id. at 5, ¶¶ 10, 11.)
This period of time is calculated from when Wireman began soliciting funds from Albert Clark in November 1997 through July 1999 (the last date Integrity solicited funds from Clark). (Compl. at 3, ¶¶ 1, 4.) The overall period of contact may be longer given that multiple checks were either issued or delivered by Wireman in 1999, one or more of which may have been issued after July 1999. ( Id. at 4, ¶ 7.)
During 1999, Wireman executed at least one check, and delivered at least seven checks, in amounts exceeding $420,000. (Id. at 4, ¶ 7; 6, ¶ 17.) Wireman knew that the credit institution on which the checks were drawn would not honor them and thereby deprived Clark of its property. (Id. at 4, ¶ 8.)
Abney — Abney is alleged to be a shareholder, member of the Board of Directors, and an officer of Integrity. (Id. at 2, ¶ 4.) During a period when Abney was an officer and member of Integrity's Board of Directors, Integrity made its false representations to Clark about the need for additional advancements to protect sums previously advanced to Integrity by Clark, and Integrity made its false promise prompt repayment. (Id. at 3, ¶¶ 4, 5.) Also during this period was when Albert, Mark, and Jeffrey Clark made advances totaling over $700,000 in reliance on Integrity's false representations and promises. (Id. at 3, ¶ 5.).
As the solicitation of funds was said to have continued through July 1999, Abney also was likely to have been an officer and member of Integrity's Board of Directors on June 1, 1999, when Integrity specifically sought to induce an advancement from Stanley Clark by telling him that repayment of existing obligations to Clark was dependant upon Five Star's success and that Five Star was in need of additional financing. ( Id. at 5, ¶¶ 10, 11.)
During 1999, Abney executed at least one check, and delivered at least seven checks, in amounts exceeding $420,000. (Id. at 4, ¶ 7; 6, ¶ 17.) Abney knew that the credit institution on which the checks were drawn would not honor them and thereby deprived Clark of its property. (Id. at 4, ¶ 8.) In particular, Abney issued a $72,000 check payable to Stanley Clark (in repayment of obligations to Clark) on July 13, 1999, that was not honored and was calculated to allow Integrity to retain control of those funds. (Id. at ¶ 5, 13; 6, ¶¶ 14, 15.)
Smythe — Smythe is alleged to be a shareholder, member of Integrity's Board of Directors, and an officer of Integrity. (Id. at 2, ¶ 5.) He induced Albert Clark's investment in Integrity, and falsely represented to Clark the need for additional advancements to protect sums previously advanced to Integrity by Clark. (Id. at 3, ¶¶ 3-5.) Additionally, Smythe falsely promised prompt repayment "upon the imminent success of the [Five Star] investment of Integrity." (Id. at 3, ¶¶ 4, 5.) These representations occurred on at least twenty-four occasions, (id. at ¶ 4), during a period sometime between November 1997 and July 1999. In reliance on these representations, Albert, Mark, and Jeffrey Clark made advances totaling over $700,000. (Id. at 3, ¶ 5.)
Plaintiffs' Complaint does not specify the exact period of Smythe's involvement. It is taken to have occurred sometime after Wireman began soliciting funds from Albert Clark in November 1997 and the last date Integrity solicited funds from Clark. (Compl. at 3, ¶¶ 1, 4.) This period of contact may have extended beyond July 1999 given that checks were either issued or delivered by Smythe in 1999, one or more of which may have been issued after July 1999. ( Id. at 4, ¶ 7.)
During 1999, Smythe executed at least one check, and delivered at least seven checks, in amounts exceeding $420,000. (Id. at 4, ¶ 7; 6, ¶ 17.) Smythe knew that the credit institution on which the checks were drawn would not honor them and thereby deprived Clark of its property. (Id. at 4, ¶ 8.)
Starkey — Starkey is alleged to be a shareholder, member of Integrity's Board of Directors, and a former, if not presently, an officer of Integrity. (Id. at 2, ¶ 6.) During a period when Starkey was an officer and member of Integrity's Board of Directors, Integrity made its false representations to Clark about the need for additional advancements to protect sums previously advanced to Integrity by Clark, and Integrity made its false promise of prompt repayment. (Id. at 3, ¶¶ 4, 5.) Also during this period was when Albert, Mark, and Jeffrey Clark made advances totaling over $700,000 in reliance on Integrity's false representations and promises. (Id. at 3, ¶ 5.)
As the solicitation of funds was said to have continued through July 1999, Starkey also was likely to have been an officer and member of Integrity's Board of Directors on June 1, 1999, when Integrity specifically sought to induce an advancement from Stanley Clark by telling him that repayment of existing obligations to Clark was dependant upon Five Star's success, and that Five Star was in need of additional financing. ( Id. at 5, ¶¶ 10, 11.) It is not clear whether Starkey would or would not have been an officer and member of Integrity's Board of Directors when the dishonored checks were either issued or delivered.
On January 6, 2000, the Plaintiffs filed their Complaint against the Defendants. At a minimum, the Complaint alleges statutory check deception under Indiana law in Counts V and VI, and it alleges a federal RICO violation predicated on wire fraud in Count VII. Counts I, II, III and IV contain the factual allegations cited in support of Counts V-VII and.imply claims sounding in common law fraud. Integrity, Abney, Starkey, and Smythe filed their Motion to Dismiss on March 14, 2000. In that Motion, Defendants argue that Plaintiffs have failed to state a claim upon which relief may be granted against Defendant Starkey because Plaintiffs allege only that he was a shareholder, an officer, and a director of Integrity, and that these allegations alone are inadequate. Defendants also argue that Plaintiffs have failed to state any claim upon which relief may be granted because the claims sound in active fraud in one form or another and were not alleged with particularity. Each of these contentions will be discussed in turn.
II. Analysis
The court notes that both parties failed to support their arguments with any citations to the significant body of federal and state case law relevant to this motion. Although the court is quite capable of researching the relevant case law on its own (and, indeed did so here), citations and case discussions by the parties are helpful and often speed the court's resolution of the many pending motions before it.
A complaint may be dismissed for "failure to state a claim upon which relief may be granted." Fed.R.Civ.P. 12(b)(6). A motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. See Hirata Corp. v. J.B. Oxford Co., ___ F.R.D. ___, ___, No. IP 1425-C-B/S, 2000 WL 721824, at *1 (S.D.Ind. May 30, 2000) (citing Gibson v. City of Chicago, 910 F.2d 1510, 1520-21 (7th Cir. 1990)). The only question is whether relief is possible under any set of facts that could be established consistent with the allegations. See Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777, 782 (7th Cir. 1999). All well-pleaded facts are taken as true, all inferences are drawn in favor of the plaintiff, and all ambiguities are resolved in favor of the plaintiff. See id.; see also Hartford Fire Ins. Co. v. California, 509 U.S. 764, 811 (1993).
In reviewing the sufficiency of a complaint that contains allegations of fraud, however, the court also must be mindful of the pleading standard for fraud which requires that the circumstances constituting the fraud be stated with particularity. See Fed.R.Civ.P. 9(b). The Rule 9(b) standard applies to general claims of fraud as well as to claims under RICO, and "[i]n order to survive dismissal on a Rule 12(b)(6) motion, the complaint must plead the who, what, when, and where of the alleged fraud." See Lachmund, 191 F.3d at 782 (quotations omitted); see also DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir.), cert. denied, 498 U.S. 491 (1990) (including "how" to the list factors to be addressed with particularity). In other words, the plaintiff must specify the nature of the fraudulent conduct, provide the identity of the person(s) who engaged in that conduct, as well as specify the time, place, content, and methods by which the fraud was perpetrated. See General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1078 (7th Cir. 1997).
Ordinarily, a plaintiff is not required to plead all of the facts underlying an alleged claim, and "a short and plain statement of the claim showing that the pleader is entitled to relief . . ." is sufficient. Fed.R.Civ.P. 8(a)(2). However, averments of fraud require the plaintiff to provide sufficient detail "to assure that the charge of fraud is responsible and supported, rather than defamatory and extortionate." Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir.), cert. denied, 120 S.Ct. 178 (1999).
A. Starkey
Defendants contend that Plaintiffs do not state a claim against Starkey because the Complaint contains allegations only that Starkey was connected to Integrity by his alleged positions as a shareholder, Board member, and former officer. Plaintiffs respond that allegations need not be made individually against each Defendant and that general averments of Defendants' collective knowledge of fraudulent conduct are sufficient. The court finds the Plaintiffs' arguments unpersuasive.
Rule 9(b) requires facts to be alleged that demonstrate how each defendant personally participated in fraudulent conduct. See Ackerman, 172 F.3d at 471 (holding that "plaintiffs were required to specify which defendants said what to whom and when, unless they could show . . . that the requisite information was within the defendant's exclusive knowledge") (quotation omitted); Goren v. New Vision Int'l, 156 F.3d 721, 726 (7th Cir. 1998) ("[I]n a multiple defendant case, Rule 9(b) requires a RICO plaintiff to plead sufficient facts to notify each defendant of his alleged participation in the scheme."); Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 778 (7th Cir. 1994) (citing the 7th Circuit's history of rejecting complaints of fraud that "lump" multiple defendants together). Moreover, merely pleading a defendant's position in a corporation is inadequate to establish personal liability for corporate acts or the acts of other corporate agents, as are conclusory allegations that the fraud was perpetrated with such a defendant's direction, supervision, knowledge, or consent. See Ackerman, 172 F.3d at 471; Goren, 156 F.3d at 726; Vicom, Inc., 20 F.3d 771; see also Citizens Elec. Corp. v. Bituminous Fire Marine Ins. Co., 68 F.3d 1016, 1021 (7th Cir. 1995) (noting that "[c]orporations are liable for the acts of their officers and directors, not the other way 'round"); State of Indiana Civil Rights Comm'n v. County Line Park, Inc., 718 N.E.2d 768, 772 (Ind.App. 1999) (requiring corporate agents to have personally participated in fraudulent acts before imposing personal liability).
Starkey is specifically identified in the Complaint only as a shareholder, Board member, and officer of Integrity during times when Wireman and Smythe were inducing advancements from Clark. All other allegations implicate Starkey only indirectly as one of the "Defendants" having knowledge that checks issued to Clark would be dishonored and having directly or indirectly received income from the alleged scheme to defraud Clark. Unlike the allegations of specific wrongdoing by Wireman, Smythe, and Abney, Plaintiffs have alleged no specific facts beyond Starkey's position in Integrity to connect him to the fraudulent conduct of the corporation or its other officers and directors. General averments of Starkey's "knowledge" of fraudulent conduct, without more, is insufficient to state a claim against this Defendant. See Ackerman, 172 F.3d at 471 (affirming dismissal of common law fraud claims under 9(b) that alleged only in general terms that corporate officers "inspired, encouraged, and condoned" misrepresentations by the corporation's sales agents); Goren, 156 F.3d at 730 (affirming dismissal of RICO claims against part owners of an alleged enterprise who were implicated only by conclusory allegations that they "conducted or participated in the conduct of the affairs of the enterprise . . . through a pattern of racketeering activity"). Although Plaintiffs have not alleged Starkey's role in the underlying fraud claims with particularity as required by Rule 9(b), they may have such information in their possession to correct the pleading deficiencies. The court therefore GRANTS IN PART WITHOUT PREJUDICE Defendants' Motion to Dismiss Plaintiffs' Complaint against Starkey.
In opposition to Defendants' Motion to Dismiss regarding Starkey, Plaintiffs point to averments in the Complaint that implicate Starkey specifically by way of such wording as "each Defendant," "the Defendants," or "Integrity and its officers." (Compl. at 6, ¶¶ 17; 6, ¶ 15; 7, ¶ 20; 8, ¶¶ 23, 26.) Regardless of the wording, Starkey's role is not sufficiently individualized to allege his personal participation in a fraudulent act.
B. RICO
Defendants contend that Plaintiffs did not plead their claims of fraud, including those based on the federal RICO statutes, with sufficient particularity. Plaintiffs contend, in conclusory fashion, that the factual allegations in the Complaint as a whole support a RICO claim. Plaintiffs do not specify under which subsection of 18 U.S.C. § 1962 that their claim arises, although the language of Count VII indicates that, at a minimum, they are wishing to invoke subsections (a) and (c). (Compl. at 8, ¶¶ 23-26.) "A section 1962(a) violation . . . requires the receipt of income from a pattern of racketeering activity, and the use of that income in the operation of an enterprise," Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 778 (7th Cir. 1994) (quotation omitted), and to state a claim under § 1962(c), a RICO plaintiff "must show (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity," Lachmund, 191 F.3d at 783 (quotation omitted). To state a claim under either of these subsections, Plaintiffs must plead "a pattern of racketeering activity" with particularity.
It should be noted that a § 1962(a) claim may require the use or investment of racketeering income to proximately cause a plaintiff's injury that is in addition to any injury caused by the predicate racketeering acts. See Vicom, Inc., 20 F.3d at 779 n. 6.
Plaintiffs would have to plead "a pattern of racketeering activity" to establish claims under the other two subsections of 18 U.S.C. § 1962 as well. Subsection (b) makes it "unlawful for any person through a pattern of racketeering activity . . . to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in . . . commerce." 18 U.S.C. § 1962(b). Subsection (d) makes it unlawful for "any person to conspire to violate" section 1962(a), (b), or (c). See 18 U.S.C. § 1962(d).
To plead a pattern of racketeering activity adequately, a plaintiff must allege that at least two predicate acts of racketeering have been committed within a ten-year period. See 18 U.S.C. § 1961(1)(B), (5); Goren, 156 F.3d at 728. A "predicate act" of racketeering is any act indictable under specified provisions of the United States Code, including 18 U.S.C. § 1343 (wire fraud). See 18 U.S.C. § 1961(1)(B). Predicate acts of fraud must be alleged with sufficient particularity. See Fed.R.Civ.P. 9(b); Lachmund, 191 F.3d at 784; Goren, 156 F.3d at 726 ("Rule 9(b) is of course applicable to allegations of fraud in a civil RICO complaint."). In the case of mail or wire fraud,
Pleading the statutory minimum of two predicate acts is necessary to establish a pattern of racketeering activity, but pleading two acts alone rarely will be sufficient to create the requisite pattern. See H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 237 (1989) (citation omitted); Corely v. Rosewood Care Ctr., Inc., 142 F.3d 1041, 1048 (7th Cir. 1998).
loose references to mailings and telephone calls in furtherance of a purported scheme to defraud will not do. Instead, the plaintiff must, within reason, describe the time, place, and content of the mail and wire communications, and it must identify the parties to these communications. . . . Moreover, when the complaint accuses multiple defendants of participating in the scheme to defraud, the plaintiffs must take care to identify which of them was responsible for the individual acts of fraud. . . . The complaint must also allege facts from which it reasonably may be inferred that a defendant engaged in the scheme with fraudulent intent.Jepson, Inc. v. Makita Corp., 34 F.3d 1321, 1328 (7th Cir. 1994) (citations omitted); see also Goren, 156 F.3d at 727 (noting that in a RICO claim "[i]t is not enough . . . for a plaintiff simply to allege . . . elements in boilerplate fashion; instead, she must allege sufficient facts to support each element."). These specificity requirements are loosened only to the extent a plaintiff demonstrates that such details are within the exclusive knowledge of a defendant. See Corely, 142 F.3d at 1050.
RICO plaintiffs also must plead sufficient facts to satisfy a "continuity plus relationship test." Vicom, Inc., 20 F.3d at 779; see also H.J., Inc., 492 U.S. at 241-42. To establish the relationship prong of this test, a plaintiff must demonstrate that the predicate acts are not random or isolated events, but are interrelated with respect to such factors as purpose, results, participants, or victims. See H.J., Inc, 492 U.S. at 240. The continuity prong seeks to determine if the predicate acts demonstrate that "they amount to or pose a threat of continued criminal activity." Id. at 239. In this case, Plaintiffs have alleged that all of the Defendants' conduct described in the Complaint relates to a single scheme to defraud Clark. (Compl. at 8, ¶ 23.) The court will accept the Plaintiffs' general allegation that telephone calls and wire transfers were used to help execute this scheme as sufficient to establish the relationship prong. Thus, the court's analysis will focus on whether Plaintiffs have pleaded sufficient facts to establish the continuity prong.
The "pattern" requirement that has emerged in Supreme Court and Seventh Circuit precedent seeks to prevent RICO from becoming a surrogate for actions regarding "garden-variety" fraud, routine commercial business disputes, or sporadic criminal activity that belong in state court. See Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1022 (7th Cir. 1992). "While it is clear that the scope of civil RICO extends beyond the prototypical mobster or organized crime syndicate, it is equally evident that RICO has not federalized every state common-law cause of action available to remedy business deals gone sour." Id. at 1025 (citation omitted).
The continuity of predicate acts necessary to establish a pattern of racketeering activity can be either open-ended or closed-ended in nature. See H.J., Inc., 492 U.S. at 241-42; Corely, 142 F.3d at 1048. Where alleged predicate acts are few in number and occur over a relatively short period of time, open-ended continuity may be demonstrated if the nature of the predicate acts are such that they are likely to recur in the future. See id. A RICO plaintiff establishes open-ended continuity by specific allegations that "(1) a specific threat of repetition exists, (2) the predicates are a regular way of conducting [an] on-going legitimate business, or (3) the predicates can be attributed to a defendant operating as part of a long-term association that exists for criminal purposes." Id. at 1049 (quotations omitted). In this case, Plaintiffs' Complaint indicates that the alleged scheme to defraud them has come to an end-Plaintiffs do not allege that the scheme requires them to advance any more sums to the Defendants in the future. Nor have Plaintiffs alleged any facts that indicate that the alleged fraudulent conduct extends to the whole of Defendants' on-going business, or that any predicate act attributable to any Defendant is part of a long-term criminal operation. Thus, the court will consider whether Plaintiffs have alleged facts sufficient to establish the closed-ended continuity of predicate acts necessary to create a pattern of racketeering activity.
Closed-ended continuity refers to a "series of related predicates extending over a substantial period of time," H.J., Inc., 492 U.S. at 242, and whether a plaintiff has pleaded it with sufficient particularity requires consideration of "the number and variety of predicate acts and the length of time over which the acts were committed, the number of victims, the presence of separate schemes and the occurrence of distinct injuries." Corely, 142 F.3d at 1049 (quotation omitted). These factors are to be considered as a whole, with no one factor being dispositive, and courts are to seek a "natural and commonsense result, recognizing that Congress was concerned in RICO with long-term criminal conduct." Vicom, Inc., 20 F.3d at 780-81 (quoting H.J., Inc., 492 U.S. at 237). While this is necessarily a case-by-case analysis, Seventh Circuit precedent clearly disfavors finding closed-ended continuity where the period of time in which predicate acts were committed was less than one year in duration or where a single scheme, regardless of its duration, has relied on multiple instances of mail and wire fraud. See Vicom, Inc., 20 F.3d at 781; Midwest Grinding Co., 976 F.2d at 1024. Additionally, repeated infliction of an economic injury to a single victim may weigh in favor of finding the closed-ended continuity necessary for a pattern of racketeering activity; however, the greater the number of different types of injuries to greater numbers of victims increases the support for such a finding. Compare Jones v. Lampe, 845 F.2d 755, 756 (7th Cir. 1988), with Brandon Apparel Group, Inc. v. Quitman Mfg. Co., 52 F. Supp. d 913, 920 (N.D.Ill. 1999). With these principles in mind, the court will review Plaintiffs' Complaint in relation to the five-factor closed-ended analysis.
"[A]buse of civil RICO stems from the fact that all modern business transactions entail use of the mails or wires-giving plaintiffs a jurisdictional hook-and the fact that RICO offers a far more generous compensation scheme than typically available in state court." Midwest Grinding Co., 976 F.2d at 1025 (citations omitted).
The Complaint indicates that on at least twenty-four occasions over approximately twenty months, Integrity, Wireman and Smythe, induced the advancement of funds from Clark by falsely representing the need for Clark to protect prior investments in Integrity and falsely promising prompt repayment when Integrity received a return on its investment in Five Star. Plaintiffs' reliance on these false representations resulted in the advancement of over $700,000 from three members of the Clark family. Plaintiffs allege these actions amount to a single scheme to defraud Clark utilizing only one type of predicate act of racketeering-wire fraud via telephone calls and wire transfers of funds.
While the complaint also alleges the issuance or delivery of over $420,000 in bogus checks to Clark by Integrity, Wireman, Abney, and Smythe, it is not clear that any of these transactions were facilitated by wire communications of any sort. Additionally, the degree to which Stanley Clark was a victim is not apparent from the complaint. Only Albert, Mark, and Jeffrey Clark were alleged to have advanced funds (in an unspecified number of distinct transactions, and without allegations of any solicitations being made of Mark and Jeffrey Clark). The invalid check issued in Stanley Clark's name was in repayment of Defendants' obligation to Clark collectively, and it is not clear whether Wireman's June 1, 1999 representations to him resulted in the advancement of any funds.
The number of these predicate acts cannot be determined with precision as Plaintiffs have not provided details for any particular telephone call or wire transfer of funds, and the lack of detail does not appear attributable to a lack of access to the information. The dates, specific content, and identities of persons party to these communications would appear to be as readily within Plaintiffs' knowledge as within any of the Defendants' knowledge. Without such detail, the court cannot reasonably attribute the alleged predicate acts of wire fraud to any of the individually named Defendants. See Jepson, Inc., 34 F.3d at 1328-29 (finding insufficient allegations of "multiple instances" of defendants using the mails and wires to contact a plaintiff's customers, identifying only the general nature of purported misrepresentations to those customers, and providing no detail as to which customers were contacted and when, and no detail as to which defendants specifically made the contacts); see also Brandon Apparel Group, Inc., 52 F. Supp.2d at 919 (accepting as adequately alleged only those wire communications that were identified by approximate dates and the names of the particular individuals party to the communications). Even assuming any and all wire communications were made with the requisite fraudulent intent, the court can reasonably attribute only the minimum threshold of two predicate acts of wire fraud to Integrity, being derivatively responsible for all acts of its agents (i.e., Wireman or Smythe on at least one occasion made the false representations by telephone communication, reliance on which resulted in at least one wire transfer of funds).
In sum, Plaintiffs have alleged with particularity only a minimal number of predicate acts of wire fraud committed during a period of less than two years. The wire fraud was alleged to be in the furtherance of a single scheme to inflict economic injury on three members of a single family. Taken as a whole, the court does not find the allegations to indicate anything more than ordinary fraud or a business deal gone awry. See Talbot v. Robert Matthews Distrib., Co., 961 F.2d 654, 663 (7th Cir. 1992) (finding no pattern of racketeering activity from multiple acts of mail fraud occurring over a period of years in furtherance of a single scheme to defraud over two dozen plaintiffs of their employment). The allegations do not establish the kind of closed-ended continuity necessary to establish a pattern of racketeering activity that is indicative of "long-term criminal activity carry[ing] some quantum of threat to society." Midwest Grinding Co., 976 F.2d at 1025. Although Plaintiffs have not alleged a pattern of racketeering activity with sufficient particularity to state a federal RICO claim, Plaintiffs may have such information in their possession to correct the pleading deficiencies. The court therefore GRANTS IN PART WITHOUT PREJUDICE Defendants' Motion to Dismiss with respect to Count VII of Plaintiffs' Complaint.
C. State Law Claims
Check deception requires a plaintiff to show a defendant intentionally or knowingly issued or delivered a check that the defendant knew would not be honored. See Ind. Code 35-43-5-5(a). Common law fraud under Indiana law requires demonstration of a plaintiff's detrimental reliance on a defendant's statements of material fact, the falsity of which was either intended, known, or recklessly disregarded by the defendant. See Adoptive Parents of M.L.V. A.L.V. v. Wilkens, 598 N.E.2d 1054, 1058 (Ind. 1992). To adequately state a claim under either theory, a complaint must provide more than conclusory allegations to connect a defendant to the fraudulent conduct, and it must provide a basis for believing that the plaintiff could prove general averments of knowledge. See Ackerman, 172 F.3d at 471; Goren, 156 F.3d at 726.
Defendants contend generally that Plaintiffs' Complaint has not pleaded fraud with particularity, (Defs.' Mot. Dismiss ¶ 2), and specifically argue that checks which were not honored should have been attached to the Complaint or described as to how they were made out, dishonored or returned, (Defs.' Mem. at 2). Plaintiffs argue that fraud claims based on the issuance of invalid checks require only allegations that Defendants knew the checks would not be honored, and that fraud is otherwise alleged with particularity regarding the false representations and promises. The court finds Plaintiffs' allegations to be somewhat flawed, but not to such a degree as to require dismissal.
Regarding Abney (and Integrity derivatively), the Complaint alleges that, at a minimum, he issued at least one invalid check payable to Stanley Clark in the amount of $72,000 on 7/13/99. Although this check, or any of the other invalid checks, could have been attached to the Complaint as an exhibit, see Fed.R.Civ.P. 10(c), Rule 9(b) creates no obligation to attach documents upon which an action is based. See Hirata Corp., 2000 WL 721824, at *3. Not only is this allegation specific as to date, payee, identity of person signing the instrument, and amount, it provides a reasonable basis for believing Abney's knowledge that the check would be dishonored could be proved at trial. See Ind. Code 35-43-5-5(c) (allowing the fact of issuance or delivery, or evidence of insufficient funds in the account at time of issuance or delivery, as prima facie evidence of knowledge that the check would not be honored).
Although somewhat less specific than for Abney, the Complaint alleges Wireman and Smythe (and Integrity derivatively) issued or delivered at least one of seven invalid checks to Clark during 1999. These allegations, in light of Indiana statute, connect each of these Defendants personally to the knowing commission of check deception similar to the conduct of Abney. Additionally, the Complaint specifies that three members of the Clark family advanced Integrity $700,000 in reliance on false representations by Wireman and Smythe regarding Clark's need to advance additional funds to protect prior investments and promises of prompt repayment upon Five Star's imminent success. These representations were specified to have occurred on at least twenty-four occasions between November 1997 and July 1999-a period of time in which Wireman's and Smythe's positions in Integrity would have made them privy to information regarding the true business progress of Integrity and Five Star. Thus, Plaintiffs also have sufficiently stated a claim of common law fraud against Wireman and Smythe.
Plaintiffs' Complaint does sufficiently allege the who, what, where, when, and how of at least one claim of fraud under Indiana law against Integrity, Wireman, Abney, and Smythe. The factual allegations relating to the fraudulent inducement of funds and issuance and delivery of invalid checks delineate with some particularity the role each Defendant played in the overall scheme to defraud Clark. Thus, liberally construed, Counts I-VI sufficiently allege fraud, and Plaintiffs claims under state law survive the motion to dismiss.
III. Conclusion
Because Plaintiffs' Complaint alleges that Integrity, Wireman, Abney, and Smythe each personally participated in the fraudulent inducement of advancements from Clark or the issuance or delivery of invalid checks to Clark, Plaintiffs allege a valid fraud claim under Indiana state law against these four Defendants. But because Plaintiffs have not adequately alleged Starkey's personal participation in any fraudulent activity, Plaintiffs' Complaint fails to state any claim against this Defendant. Additionally, because Plaintiffs have not adequately alleged that any of the Defendants engaged in a pattern of racketeering activity, Plaintiffs' Complaint fails to state a civil RICO claim. Thus, with respect to Count VII in its entirety, and with respect to Counts I-VI regarding Starkey, the Defendants' Motion to Dismiss is GRANTED WITHOUT PREJUDICE.
The Plaintiffs' state law claims allege fraud against Integrity, Wireman, Abney, and Smythe with adequate particularity. Defendants' Motion to Dismiss therefore is DENIED with respect to these four Defendants in Counts I-VI.
The Plaintiffs have thirty (30) days from this date within which to submit a proposed amended complaint curing the deficiencies of the Complaint, provided they can do so consistent with their obligations under Fed.R.Civ.P. 11.
ALL OF WHICH IS ORDERED.