Opinion
Civil Action No. 3: 04-CV-0134-B.
March 14, 2005
MEMORANDUM ORDER
Before the Court are Defendants' Motions to Dismiss (docs. 36, 37, 38, 50), filed in response to Plaintiffs' Second Amended Complaint. Because Plaintiffs have not adequately pled their RICO cause of action after three attempts, the Court GRANTS Defendants' Motions and DISMISSES Plaintiffs' RICO claims against all Defendants. Because there is no longer any federal cause of action, the Court DISMISSES this case in its entirety without prejudice.
I. BACKGROUND FACTS
The facts that led to this suit have their origin in business dealings between Plaintiff William Murphy ("Murphy") and Defendant Jerry Grisaffi ("Grisaffi"). In November 2001, Murphy and Grisaffi agreed to create a new company, Plaintiff Atexco, Inc. ("Atexco"), and invest their own funds in the company. (Pls.' Sec. Am. Compl. ¶ 7) Grisaffi's investment of stock was allegedly worthless, although he represented to Murphy that the stock had value. ( Id. at ¶ 8) Murphy and Grisaffi became the sole directors and officers of Atexco. ( Id. at ¶ 9) In November 2001, Grisaffi allegedly held a secret Atexco board meeting, where he was the only one present. ( Id. at ¶ 10) At the meeting, Grisaffi voted to elect himself as the sole owner of Atexco stock and issued 100% of the stock to himself. ( Id. at ¶ 11) In January 2003, Grisaffi convinced Murphy to buy Grisaffi's interest in Atexco for $40,000. ( Id. at ¶ 12)
The Court takes its factual account from Plaintiffs' Second Amended Complaint. Lovick v. Ritemoney Ltd., 378 F.3d 433, 437 (5th Cir. 2004) (stating that in deciding a motion to dismiss, all well-pleaded factual allegations are taken as true).
In late 2002, Murphy and Grisaffi agreed to form Plaintiff MicroTelematics, Inc. ("MicroTelematics"), a company that would sell global positioning satellite ("GPS") equipment. ( Id. at ¶¶ 14, 15) Murphy reserved the name "MicroTelematics" with the Texas Secretary of State in July 2003. ( Id. at ¶ 15) In May 2003, Grisaffi induced Murphy to invest his own money, as well as Atexco's assets, in MicroTelematics. ( Id. at ¶ 17) The total investment was more than $150,000. ( Id.)
During this time, Plaintiffs allege that Grisaffi was corresponding with Defendant William Stock ("Stock") to secretly divert MicroTelematics' assets to Defendant National Automotive Technologies, Inc. ("NAS"), a Texas company created in October 2002. ( Id. at ¶ 16) Grisaffi introduced Stock to Murphy as a person who could help attract investors for MicroTelematics. ( Id. at ¶ 18) In exchange for attracting investors to MicroTelematics, Stock demanded that he be named the Chief Financial Officer of MicroTelematics. ( Id. at ¶ 19) Stock then set up Defendant Microtrak GPS ("Microtrak") as a Nevada corporation in November 2003. ( Id. at ¶ 22) Stock also attempted to register the name "MicroTelematic, Inc." (the singular version of MicroTelematics) for NAS, but was ultimately unsuccessful. ( Id. at ¶¶ 20-22) Stock and Grisaffi then began to allegedly divert MicroTelematics' assets to Microtrak. ( Id. at ¶ 23)
When Murphy confronted Grisaffi and Stock with these allegations, Grisaffi "empt[ied]" Atexco's bank account and Stock threatened to initiate bankruptcy proceedings against MicroTelematics. ( Id. at ¶ 24) Grisaffi and Murphy then attended a mediation at which a settlement was reached; however, Grisaffi did not fulfill his terms of the settlement. ( Id. at ¶¶ 25, 26) Murphy alleges that Stock and Grisaffi have now "illegally taken over control" of MicroTelematics and intend to make it a public company. ( Id. at ¶ 27) They also are allegedly defrauding investors in MicroTelematics by not telling them that they are diverting MicroTelematics' assets to Microtrak or that they are being sued by MicroTelematics. ( Id.)
II. PROCEDURAL HISTORY
On January 23, 2004, Murphy, Atexco, and MicroTelematics filed suit against Grisaffi, Stock, and Microtrak. Plaintiffs' claims included a variety of fraud claims, violations of several Texas statutes, breach of contract and fiduciary duty, and several other state law claims. Of note, Plaintiffs also pleaded that Defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961, et seq. (2000 Supp. 2004). Grisaffi and Stock filed Motions to Dismiss based on Plaintiffs' alleged failure to properly plead a RICO claim. Plaintiffs did not respond to the merits of the Motions to Dismiss, but instead asserted that they had the right to amend their Complaint. The Court granted Plaintiffs' Motion for Leave to File First Amended Complaint and denied Defendants' Motions to Dismiss, but stated Defendants could file new motions to dismiss regarding Plaintiffs' First Amended Complaint if they deemed it appropriate.
Plaintiffs' First Amended Complaint added NAS as a defendant, dropped Plaintiffs' claims for wire fraud and mail fraud, added a claim for misappropriation of trade secrets, and was almost double the length of the original Complaint. Grisaffi and Stock again filed Motions to Dismiss Plaintiffs' RICO claims. This time, Plaintiffs responded to the substantive allegations, but again requested permission to amend their Complaint. The Court permitted Plaintiffs to file their Second Amended Complaint and denied Defendants' Motions to Dismiss. However, the Court instructed Plaintiffs that no further amendment of pleadings would be permitted until the Court addressed any pending motions to dismiss.
Grisaffi, Stock, and Microtrak all filed identical Motions to Dismiss Plaintiffs' Second Amended Complaint based on Plaintiffs' alleged failure to properly plead a RICO cause of action. Defendants responded substantively, but did not request permission to amend. After this Court issued a show cause order regarding Plaintiffs' failure to serve NAS, Plaintiffs served NAS, who then filed a Motion to Dismiss identical to the ones filed by the other defendants. Thus, there are four identical Motions to Dismiss pending before the Court, and the Court now turns to the merits of the Motions.
III. ANALYSIS
Motions to dismiss under Rule 12(b)(6) are disfavored and rarely granted. Priester v. Lowndes County, 354 F.3d 414, 418 (5th Cir. 2004). In deciding a motion to dismiss, the Court must construe the complaint in the light most favorable to Plaintiffs and draw all reasonable inferences in Plaintiffs' favor. Lovick v. Ritemoney, Ltd., 378 F.3d 433, 437 (5th Cir. 2004). However, the Court need not rely on "conclusional allegations or legal conclusions disguised as factual allegations." Id.
Plaintiffs have premised federal subject matter jurisdiction on allegations that Defendants violated RICO, specifically 18 U.S.C. § 1962(c) and (d). The essential elements of a RICO claim are (1) a person who engages in (2) a pattern of racketeering activity (3) connected to the acquisition, establishment, conduct, or control of an enterprise. In re Burzynski, 989 F.2d 733, 741 (5th Cir. 1993); see also 18 U.S.C. § 1962(c). In their Motions, Defendants challenge whether Plaintiffs have sufficiently pleaded the second and third elements of this test under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.
A. Corporate Defendants
Defendants Microtrak and NAS (the "Corporate Defendants") move for dismissal of all RICO claims against them because Plaintiffs fail to plead a RICO enterprise, the existence of which is essential to a RICO claim. Plaintiff's Complaint does not appear to allege a RICO cause of action against the Corporate Defendants; however, because the Corporate Defendants have filed Motions to Dismiss Plaintiffs' RICO claims, the Court will analyze the Motions.
It is undisputed that the "person" who is allegedly violating RICO must be different than the RICO "enterprise." Cedric Kishner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001) (stating that the "person" and the "enterprise" must be two distinct entities); St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 447 (5th Cir. 2000) (noting that a defendant may not be both a person and an enterprise); Bishop v. Corbitt Marine Ways, Inc., 802 F.2d 122, 123 (5th Cir. 1986) (per curiam) (affirming dismissal when RICO person and enterprise were same defendant). In their Complaint, Plaintiffs specifically allege that the Corporate Defendants are the RICO enterprises. (Pls.' Sec. Am. Compl. ¶¶ 60, 61) Thus, because they are allegedly RICO enterprises, the Corporate Defendants are precluded from being liable to Plaintiffs as RICO persons. Therefore, the Court GRANTS the Corporate Defendants' Motions to Dismiss and DISMISSES Plaintiffs' RICO claims against the Corporate Defendants.
An enterprise can be a legal entity or an association-in-fact. 18 U.S.C. § 1961(4) (2000 Supp. 2004); St. Paul, 224 F.3d at 440. Here, Plaintiffs specifically alleged that the Corporate Defendants, as legal entities, were enterprises and did not allege that the Corporate Defendants were members of a larger association-in-fact enterprise, nor did they provide any argument on that point. Therefore, the Court need not address whether an association-in-fact enterprise was properly alleged.
B. Individual Defendants
The Court now turns to the arguments of Defendants Grisaffi and Stock (the "Individual Defendants") in support of dismissal of Plaintiffs' RICO claims against them.
1. Wire Fraud
As noted above, an essential element of a RICO cause of action is a "pattern of racketeering activity." Section 1961 defines "racketeering activity" as the violation of certain statutes that are listed within the section. 18 U.S.C. § 1961(1). In this case, Plaintiffs base their RICO claim on underlying violations of the mail fraud and wire fraud statutes. See 18 U.S.C. §§ 1341, 1343 (2000 Supp. 2004). Defendants move for dismissal of Plaintiffs' RICO claims to the extent they are based on violations of the wire fraud statute because Plaintiffs failed to plead an interstate use of wires.
To constitute wire fraud under 18 U.S.C. § 1343, the transmission must occur in "interstate or foreign commerce." Smith v. Ayres, 845 F.2d 1360, 1366 (5th Cir. 1988). An examination of Plaintiffs' Complaint reveals that Plaintiffs have not alleged any specific interstate transmissions that would support a wire fraud claim. In the fact-specific portions of their Complaint, Plaintiffs only mention communications that occur entirely within the state of Texas. (Pls.' Sec. Am. Compl. ¶¶ 8, 12, 16, 17, 18). In the RICO section of Plaintiffs' Complaint, Plaintiffs continually refer to "the use of facsimile, wire, radio, internet, electronic, and/or television communication, in the form of writings, signs, signals, pictures, and/or sounds, in violation of 18 U.S.C. § 1343, and in interstate commerce. . . ." ( Id. at ¶¶ 63, 64, 65, 66, 67) However, Plaintiffs do not identify a single interstate wire communication anywhere in their Complaint, relying solely on vague and conclusory allegations of interstate conduct. The Court cannot permit this general allegation of interstate wire fraud to suffice to support a RICO cause of action. See Lovick, 378 F.3d at 437 (stating court does not have to accept conclusional allegations). As such, the Court DISMISSES Plaintiffs' RICO claims to the extent they are premised on wire fraud.
Indeed, with the exception of NAS, all of the parties in this case are Texas citizens, which makes the interstate use of wires unlikely. (Pls.' Sec. Am. Compl. ¶¶ 1-3).
2. Claims Regarding Initial Investment in Atexco
Plaintiffs' first RICO allegation is that "Between 2001 and 2002, Defendant Grisaffi injured Plaintiff Murphy by misrepresenting that his investment in Plaintiff Atexco was worth between $75,000 and $375,000, when in fact it was worthless, and then selling to Plaintiff Murphy for $40,000 the interest in Plaintiff Atexco that he had fraudulently acquired." (Pls.' Sec. Am. Compl. ¶ 63) Defendants move to dismiss Plaintiffs' RICO claims based on this incident because Plaintiffs fail to plead an enterprise.
As noted above, the only properly alleged RICO enterprises are Microtrak and NAS. According to Plaintiffs' Second Amended Complaint, Microtrak was not formed until November 2003. ( Id. at ¶ 22) However, according to Plaintiffs, Grisaffi's investment and sale of his interest in Atexco was complete by January 2003. ( Id. at ¶ 12) As such, Microtrak could not be a RICO enterprise for events that transpired well before it was even formed. Plaintiffs further make no attempt to connect Microtrak or NAS to the above-described allegations regarding Grisaffi's investment in Atexco. Indeed, Microtrak and NAS are not even mentioned in the paragraphs of Plaintiffs' Second Amended Complaint that describe Grisaffi's investment and sale of interest in Atexco. ( Id. at ¶¶ 7-13, 63) Without a connection between the enterprise and the alleged fraudulent scheme, there can be no RICO claim. See Jackson v. Radcliffe, 795 F. Supp. 197, 207 (S.D. Tex. 1992) (holding there must be a nexus between the racketeering activity and the enterprise). Therefore, the Court GRANTS Defendants' Motions to Dismiss Plaintiffs' RICO claims based on Grisaffi's alleged worthless investment in Atexco, as described in Paragraph 63 of Plaintiffs' Second Amended Complaint.
3. Continuity
Finally, as noted above, Plaintiffs must allege a "pattern of racketeering activity" in order to bring a RICO claim. 18 U.S.C. § 1962(c). A pattern of racketeering activity has two elements: (1) predicate acts and (2) a pattern of such acts. In re Burzynski, 989 F.2d at 742. Because the Court has dismissed Plaintiffs' claims based on wire fraud, the only predicate acts alleged are various instances of mail fraud. The Court makes no determination of whether Plaintiffs' allegations of mail fraud are sufficient under Rule 9(b), but turns instead to the "pattern" element.
To demonstrate a pattern of predicate acts, Plaintiffs must show that the predicate acts are related to each other and that they constitute or threaten long-term criminal activity. Id. In other words, a pattern requires allegations of relatedness and continuity. Id. According to the Supreme Court, continuity can be either closed-ended or open-ended. H.J. Inc. v. Northwestern Bell Tele. Co., 492 U.S. 229, 241 (1989). Specifically, continuity can be either a closed period of repeated conduct or past conduct that by its nature projects into the future with a threat of repetition. Id.; Word of Faith World Outreach Ctr. Church, Inc. v. Sawyer, 90 F.3d 118, 122 (5th Cir. 1996). Plaintiffs allege that they have sufficiently pleaded RICO continuity under both a closed-ended and an open-ended concept.
(a) Closed-ended Continuity
To demonstrate continuity over a closed period, a party must show a series of related predicates that extend over a substantial period of time. H.J. Inc., 492 U.S. at 242. Predicate acts that extend only a few weeks or months and threaten no future criminal conduct do not satisfy this requirement. Id. (noting Congress was concerned with long-term criminal conduct in enacting RICO). According to Plaintiffs' Second Amended Complaint, sometime in May 2003, Grisaffi used mail fraud to convince Murphy and Atexco to invest over $150,000 in MicroTelematics. (Pls.' Sec. Am. Compl. ¶ 17) The Individual Defendants then diverted these funds to Microtrak and NAS at some point. ( Id.) Then, prior to November 2003, Murphy discovered the alleged fraud and confronted Grisaffi and Stock. ( Id. at ¶¶ 24, 25) Thus, presumably, Plaintiffs have not made any more investments in MicroTelematics, and none are alleged. Therefore, as regards past conduct, Plaintiffs have alleged one investment within a seven (7) month period that was diverted to another company.
Plaintiffs also allege that two MicroTelematics products, Hogstar and Autostar, were also diverted to Defendants, but make no allegations of the predicate act of mail fraud in association with this conduct. ( Id. at ¶ 23) Further, although Defendants may be continuing to use Hogstar and Autostar, the act of diverting the products to the RICO enterprises is complete and cannot be repeated, eliminating the threat of long-term criminal conduct.
The Fifth Circuit is clear that where the alleged predicate acts are part and parcel of a single, otherwise lawful transaction, there is no pattern of racketeering activity. Word of Faith, 90 F.3d at 123; In re Burzynski, 989 F.2d at 743; Delta Truck Tractor, Inc. v. J.I. Case Co., 855 F.2d 241, 244 (5th Cir. 1988). Here, Plaintiffs have alleged only a single act of investment, prompted by prior predicate acts of mail fraud. Under Fifth Circuit precedent, this is insufficient to establish a closeended pattern of racketeering activity. See Word of Faith, 90 F.3d at 123. Thus, Plaintiffs must attempt to show that Defendants' conduct constitutes an ongoing threat.
(b) Open-ended Continuity
The Supreme Court examined open-ended continuity in H.J. Inc. v. Northwestern Bell Telephone Company, 492 U.S. 229 (1989), giving several examples of what might suffice. The threat of long-term criminal conduct may be explicit, such as when a hoodlum offers to sell "insurance" to storekeepers to cover window breakage, telling his victims he intends to return and collect "premiums" each month. Id. at 242. In other cases, the threat of long-term criminal conduct can be shown be establishing that the predicate acts are part of an entity's regular way of doing business. Id. Here, Plaintiffs' have not alleged any explicit threats by Defendants of long-term conduct, instead relying on allegations that the predicate acts are Defendants' usual way of doing business.
Plaintiffs' only allegation to this extent is as follows:
On information and belief, Defendants Stock and Grisaffi have illegally taken over control of Plaintiff MicroTelematics for the sole purpose of making it a public company through the means of a stock offering. On information and belief, Defendants Stock and Grisaffi have defrauded, and are defrauding, other investors in Plaintiff MicroTelematics. On information and belief, Defendants Stock and Grisaffi have not revealed to the investor community that they have diverted Plaintiff MicroTelematics' assets to its direct competitor, Defendant Microtrak, or that they have been sued by Plaintiff MicroTelematics, the very company that they are attempting to raise money for.
(Pls.' Sec. Am. Compl. ¶ 27) Plaintiffs do not identify any potential investors who are being defrauded, when and where the fraud takes place, or whether Defendants acts constitute the predicate act of mail fraud. Instead, Plaintiffs simply claim fraud is occurring "on information and belief."
The Fifth Circuit has indicated that the requirement to plead fraud with particularity may be relaxed when the facts relating to the alleged fraud are peculiarly within the perpetrator's knowledge. U.S. ex rel. Willard v. Humana Health Plan of Tex., Inc., 336 F.3d 375, 385 (5th Cir. 2003). However, the Fifth Circuit has also warned that this exception "must not be mistaken for license to base claims of fraud on speculation and conclusory allegations." Id.
The Court finds that Plaintiffs' pleading in this regard is similar to that of the plaintiff in In re Burzynski, 989 F.2d 733 (5th Cir. 1993). In that case, the plaintiff made allegations of a "nationwide scheme conceived and executed by defendants to defraud insured persons and their treating physicians by wrongfully denying health insurance benefits which Aetna and other insurers are lawfully obligated to provide. . . ." Id. at 744. The court found that the plaintiff's pleading was too general, speculative, and unsupported by facts and that if permitted, it would allow "conclusory pleading to erode the substance of the `continuity,' `enterprise,' and `pattern' requirements" of RICO. Id. Similarly here, Plaintiffs seek to establish long-term criminal conduct by simply claiming that Defendants are engaged in defrauding others in the same way they defrauded Plaintiffs. They provide no specifics or details. While Plaintiffs assert that the details are known only by the Defendants, Plaintiffs' allegations are so vague that their RICO claims appear to be speculative, rather than founded on known facts. As such, the Court finds that Plaintiffs have not adequately pleaded the continuity element of a RICO violation. Because Plaintiffs have not sufficiently pleaded a RICO violation, their RICO conspiracy claims also fail. 18 U.S.C. § 1962(d) (requiring an underlying RICO violation to support a conspiracy claim). Therefore, the Court GRANTS the Individual Defendants' Motions to Dismiss and DISMISSES Plaintiffs' RICO claims.
Plaintiffs claim that continuity is shown by their allegation that on March 10, 2004, NAS sent an invoice to Sewell Cadillac, one of its own customers, that stated NAS was "formerly MicroTelematic, Inc." (Pls.' Sec. Am. Compl. ¶ 28) However, there is no allegation that Sewell Cadillac was trying to do business with MicroTelematics or was defrauded in any way. Further, from Plaintiffs' allegations in Paragraphs 20, 21, and 22 of their Second Amended Complaint, NAS's statement of its former name may well be true.
C. Leave to Amend
Because the Court has dismissed Plaintiffs' RICO claims, the Court must determine whether Plaintiffs will be given leave to replead their RICO claims. In making this determination, the Court notes that this is the third Complaint Plaintiffs have filed in this case. It is approximately twice as long as Plaintiffs' initial Complaint; yet, it provides almost no more factual detail than their Original Complaint with respect to the RICO allegations, instead using conclusory statements to attempt to demonstrate the elements of a RICO cause of action. As noted above, both Plaintiffs' First and Second Amended Complaint were filed in direct response to Defendants' Motions to Dismiss, and Grisaffi's first Motion to Dismiss specifically raised the issue of continuity as grounds for dismissal. The Court finds that three attempts is sufficient, and, thus, will not permit Plaintiffs to replead their RICO claims for a fourth time. See Price v. Pinnacle Brands, Inc., 138 F.3d 602, 608 (5th Cir. 1998) (denying leave to amend after plaintiff had been given three chances to articulate a RICO claim).
D. Supplemental Jurisdiction
As Plaintiffs' RICO claims — the sole source of this Court's original jurisdiction — have been dismissed, the Court must next decide whether to maintain jurisdiction over the remaining state law claims. See 28 U.S.C. § 1367(c)(3) (1993 Supp. 2004) (stating that a court may decline to exercise supplemental jurisdiction over state law claims after the court has dismissed all claims over which it had original jurisdiction). The Fifth Circuit advises district courts to decline jurisdiction over supplemental state law claims when all federal claims have been dismissed or otherwise eliminated from a case prior to trial. See Parker Parsley Petroleum Co. v. Dresser Indus., 972 F.2d 580, 585 (5th Cir. 1992). Considerations of judicial economy, convenience, and fairness to the parties should inform the Court's decision on whether to retain jurisdiction over supplemental claims. Id. Here, the Court finds that such interests are best served by declining to exercise such jurisdiction. Although this case has been on file since January 2004, there is no trial setting as yet and no scheduling order has been entered. See Carnegie Mellon Univ. v. Cohill, 484 U.S. 343, 351 (1988) (recognizing that a district court has a "powerful reason" to decline jurisdiction when the single federal claim is eliminated early on in the litigation). In short, the Court finds that the circumstances of this case do not warrant a departure from the general rule and DISMISSES Plaintiffs' remaining state law claims without prejudice.
IV. CONCLUSION
Therefore, because Plaintiffs have failed to adequately plead a RICO cause of action against Defendants, the Court GRANTS Defendants' Motions to Dismiss and DISMISSES Plaintiffs' RICO claims. Because the Court has dismissed the only federal cause of action, the Court declines to exercise supplemental jurisdiction over the remaining state law claims and DISMISSES Plaintiffs' claims without prejudice.