Opinion
Civil Action No. 3:01-CV-1754-L
October 29, 2002
ORDER
Before the court is the Motion to Dismiss for Failure to State a Claim of Defendants ACE Cash Express, Inc. ("ACE") and Goleta National Bank ("Goleta"), filed January 18, 2002. Upon consideration of the motion, response and reply, the court, for the reasons stated, grants the Motion to Dismiss for Failure to State a Claim.
I. Procedural Background
Plaintiff Beverly Purdie ("Purdie" of "Plaintiff") is employed by the Maryland Board of Parole and Probation. She describes herself as working-class or low-income, without access to, or lacking knowledge of, credit from banks or other mainstream credit providers. (Plf Second Am. Compl. ¶ 1 18). Beginning in May of 2000, Purdie applied for and obtained several "payday loans" at an ACE check cashing store. ( Id. ¶ 25).
On September 6, 2001, Purdie filed this action against ACE, and four of its officers as a class action on behalf of a nationwide class of consumers, alleging that the issuance of payday loans violated a host of federal and state laws. Specifically, Purdie claimed that the loan operations of ACE violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 (a), (c) (d), the Truth in Lending Act ("TILA)", 15 U.S.C. § 1602, et seq., the Electronic Funds Transfer Act ("EFTA"), 15 U.S.C. § 1693, the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692, et seq., state statutes regulating small loans, and the Texas Deceptive Trade Practices Act and other state consumer protection laws. In that complaint, Purdie sought a temporary and permanent injunction, declaratory relief, damages, and attorney's fees.
On October 4, 2001, Purdie filed an amended complaint, adding Goleta as a defendant. She asserted that the Defendants, in combination with ePacific, Inc. ("ePacific"), designed and executed an illegal enterprise, referred to as the "payday loan scheme." According to Purdie, these acts constituted violations of the provisions of RICO, TILA, EFTA, FDCPA, state small loan legislation, state consumer protection statutes, and the credit services organizations acts of various states.
In November of 2001, the Defendants moved to dismiss the action for want of subject matter jurisdiction and for failure to state a claim. In December of 2001, Purdie filed a motion to amend her complaint. The court granted the motion and Purdie filed her Second Amended Complaint on December 11, 2001. In that complaint, she names ACE and Goleta as the sole defendants. Purdie continues to assert her claims as a class representative. She identifies the class as all persons to whom ACE has lent money in the form of payday loans from April 1, 2000 until the filing of the complaint, as well as those persons to whom ACE will make loans in the future. (Plf Second Am. Compl. ¶ 10). Purdie alleges that the Defendants have violated §§ 1962(c) (d) of RICO and the anti-usury and small loan laws of Texas and other states. Purdie also asserts a common law claim of unjust enrichment.
On January 18, 2002, Defendants ACE and Goleta moved to dismiss Plaintiff's Second Amended Complaint. They argue that: (1) Plaintiff has failed to allege the existence of a RICO enterprise; (2) Plaintiff has failed to allege that Goleta operated or managed a RICO enterprise; and (3) the court should decline to exercise supplemental jurisdiction over Plaintiff's state law claims. II. Motion to Dismiss Standard
Defendants also move to dismiss Plaintiff's claims based on payday loans made by ACE prior to its relationship with Goleta because Plaintiff lacks standing to assert such claims. Plaintiff correctly notes that no such claims are asserted in this action. (Plf Opposition to Mot. to Dismiss at 8 n. 5). Accordingly, the court need not address this issue.
A motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6) "is viewed with disfavor and is rarely granted." Lowrey v. Texas A M Univ. Sys., 117 F.3d 242, 247 (5th Cir. 1997). A district court cannot dismiss a complaint, or any part of it, for failure to state a claim upon which relief can be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief" Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir. 1995). Stated another way, "[a] court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema, 122 S.Ct. 992, 998 (2002) (quoting Hishon v. King Spalding, 467 U.S. 69, 73 (1984)).
In reviewing a Rule 12(b)(6) motion, the court must accept all well-pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). In ruling on such a motion, the court cannot look beyond the pleadings. Id; Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir. 1999), cert. denied, 530 U.S. 1229 (2000). The ultimate question in a Rule 12(b)(6) motion is whether the complaint states a valid cause of action when it is viewed in the light most favorable to the plaintiff and with every doubt resolved in favor of the plaintiff. Lowrey, 117 F.3d at 247. A plaintiff, however, must plead specific facts, not mere conclusory allegations, to avoid dismissal. Guidry v. Bank of LaPlace, 954 F.2d 278, 281 (5th Cir. 1992).
III. Factual Allegations Made in Plaintiff's Second Amended Complaint
ACE owns and operates over 1200 check-cashing stores in thirty-four states and the District of Columbia. (Plf. Second Am. Compl. ¶ 16). On or around April 1, 2000, ACE began issuing payday loans under the product name "Advance Cash Express." ( Id. ¶ 21). The forms used by ACE state the loans are a product of Goleta, and that ACE is not involved in the decision to make the loan and does not extend credit, but only transmits the information between Goleta and the borrower. ( Id.). In reality, Goleta "routinely grants all or almost all loan applications" forwarded by ACE, so that ACE is actually deciding whether to make a loan to the borrower. ( Id. ¶ 22). Moreover, pursuant to agreements between ACE and Goleta, ACE purchases a 90% to 95% interest in all the payday loans. ACE thus assumes "substantially all of the risk of nonpayment" and "substantially all of the liability" in return for "substantially all of the interest." ( Id. ¶ 21).
In making a payday loan, the borrower enters into a loan agreement with Goleta. ACE arranges for the opening of an account at Goleta in the borrower's name, in the amount of the loan, and issues an ATM card to the borrower. The borrower uses the card at the ACE store to withdraw funds from the account. In return, the borrower agrees to repay the principal, plus interest, within two weeks. ( Id. ¶ 23). To ensure against default, the borrower also authorizes an automatic debit to his or her personal bank account for the principal and interest. The borrower may renew the loan up to three times by paying the interest plus five percent of the principal. ( Id.). Plaintiff also alleges generally that "ACE has a policy and practice of making threats of arrest, criminal prosecution and imprisonment to payday loan borrowers who default on their loans." ( Id. ¶ 29).
Beginning on or about June 1, 2001, in response to new state regulations, ACE and Goleta began requiring borrowers in Maryland to pledge personal property as security. The loan application requires the borrower to "briefly describe" the personal property pledged; however, ACE and Goleta require no proof of ownership, perform no investigation regarding the existence of the property and do not move to obtain the collateral in the event of default. ( Id. ¶¶ 24 28).
Plaintiff applied for and obtained payday loans at ACE check cashing stores in Maryland on May 1, 2000, August 1, 2000, November 1, 2000, May 1, 2001, July 1, 2001 and August 24, 2001. On each occasion, Purdie obtained two week loans in amounts ranging from $300 to $450 by signing a promissory note, providing ACE a voided personal check for amounts from $335 to $528.75 and authorizing automatic debits from her checking account. ( Id. ¶ 25). Purdie refinanced several of those loans by paying the interest due, five percent of the principal and signing a promissory note listing the interest rate as 391%. ( Id. ¶ 27).
Defendants entered into a series of agreement in August 1999 to operate and manage the payday loan operations. The agreements obligate the sale of 90% to 95% of the payday loans from Goleta to ACE. The agreements further outline procedures for the loan processing, the training of ACE personnel and joint development of software for issuing and collecting the loans as well as providing information regarding the loans. Defendants have also agreed to collaborate in the establishment and implementation of credit criteria. Further, ACE has purchased from Goleta a controlling interest in ePacific, a former subsidiary of Goleta. ePacific provides ACE with debit card and electronic funds transfer services used by borrowers. Goleta and ACE operate and manage ePacific jointly. ( Id. ¶ 30).
IV. Analysis
A. Plaintiff's Claims Under RICO
RICO provides a civil cause of action to recover treble damages for "[a]ny person injured in his business or property by reason of a violation of section 1962." See 18 U.S.C. § 1964. Plaintiff contends that ACE and Goleta have violated §§ 1962(c) and (d) of RICO. Reduced to their simplest terms, these subsections mean:
(c) a person who is employed by or associated with an enterprise cannot conduct the affairs of the enterprise through a pattern of racketeering activity [or collection of unlawful debt]; and (d) a person cannot conspire to violate subsections . . . (b), or (c).See Nolen v. Nucentrix Broadband Networks Inc., 293 F.3d 926, 928 (5th Cir. 2002), petition for cert. filed, 71 U.S.L.W. 3247 (U.S. Sep. 24, 2002); St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 439 (5th Cir. 2000). Liability under this section may be based on either "a pattern of racketeering activity, " or the "collection of unlawful debt." United States v. Aucoin, 964 F.2d 1492, 1495 (5th Cir. 1992) (quoting H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 232 (1989)). Unlawful debt is defined as "a debt . . . incurred in connection with . . . the business of lending money or a thing of value at a rate usurious under State or Federal law, where the usurious rate is at least twice the enforceable rate." 18 U.S.C. § 1961 (6).
Purdie alleges ACE, Goleta and ePacific (identified by Purdie as the "Payday Loan Enterprise") comprise an association-in-fact enterprise. The Fifth Circuit takes a strict approach in determining what constitutes an association-in-fact enterprise. Irrespective of whether the court believes that the Fifth Circuit's definition produces a harsh result for plaintiff's in Purdie's situation, it is bound by Fifth Circuit precedent and applies it as appropriate. To establish an association-in-fact enterprise, Purdie must set forth facts that show "evidence of an ongoing organization, formal or informal, and . . . evidence that various associates function as a continuing unit." Crowe v. Henry, 43 F.3d 198, 205 (5th Cir. 1995) (citations omitted). Because an association-in-fact enterprise must be shown to have continuity, Calcasieu Marine Nat'l Bank v. Grant, 943 F.2d 1453, 1461 (5th Cir. 1991); see also Crowe, 43 F.3d at 205; Delta Truck Tractor, Inc. v. J.I. Case Co., 855 F.2d 241, 243 (5th Cir. 1988), cert. denied, 489 U.S. 1079 (1989), the Fifth Circuit has stated that such an enterprise "(1) must have an existence separate and apart from the pattern of racketeering, (2) must be an ongoing organization and (3) its members must function as a continuing unit as shown by a hierarchical or consensual decision making structure." Crowe, 43 F.3d at 205; Calcasieu, 943 F.2d at 1461; Delta Truck, 855 F.2d at 243. "Since an association-in-fact enterprise must have an existence separate and apart from the pattern of racketeering, Delta Truck, 855 F.2d at 243, proof of a pattern of racketeering activity does not necessarily establish a RICO enterprise." Calcasieu, 943 F.2d at 1461 (citations omitted). Purdie must therefore plead specific facts which establish that the association exists for purposes other than simply to commit the predicate acts. Elliott v. Foufas, 867 F.2d 877, 881 (5th Cir. 1989); Montesano v. Seafirst Commercial Corp., 818 F.2d 423, 427 (5th Cir. 1987).
The enterprise alleged in this case as an association-in-fact is comprised of ACE, Goleta and ePacific. Purdie alleges that Defendants have formed "a structured and ongoing enterprise for the common purpose of making payday loans and collecting interest on those loans." (Plf. Second Am. Compl. ¶ 35). Plaintiff further alleges that the enterprise "facilitates and processes" the loans which "carry interest rates that are more than twice the interest rates allowed by the anti-usury laws of more than thirty states and the District of Columbia where ACE does business." ( Id. ¶ 36). These allegations do not, however, show the existence of an ascertainable structure separate and apart from the alleged collection of unlawful debt.
Plaintiff contends that she has sufficiently alleged an association-in-fact enterprise because the Payday Loan Enterprise "exists in the intervals between its predicate acts of unlawful debt collection." (Plf Opposition to Mot. to Dismiss at 15). This argument might have force if the association at issue had a formal legal structure, as a corporation for example; however, Purdie alleges that the Payday Loan Enterprise exists as an association-in-fact, without a formal legal existence. The existence of such an enterprise by definition is measured only to the extent it actually commits acts. Thus, in the intervals between those acts the enterprise has no existence. Clearly, Plaintiff's argument fails as a matter of logic alone.
Purdie also argues that the Payday Loan Enterprise engages in activities outside of the predicate acts. According to Plaintiff, the Payday Loan Enterprise engages in some payday lending that is not usurious. (Plf Opposition to Mot. to Dismiss at 15 n. 9). According to Purdie, the loans made by Payday Loan Enterprise in states that do not have interest rate ceilings do not violate RICO. The court first notes that this argument is made solely in a footnote in Plaintiff's response to the Motion to Dismiss. This placement alone causes the court to doubt the strength of this argument. Moreover, despite twice amending her complaint, Purdie makes no specific allegations in the complaint identifying those states or asserting that any transactions have taken place in those states during the time period at issue. This argument is insufficient to establish a RICO enterprise.
The fact that Plaintiff does not seek leave to amend her complaint casts additional doubt on the validity of this contention.
Purdie further maintains that, in addition to the predicate acts, the Defendants market payday loans, set credit criteria, make loans, disburse loans, determine profit shares and develop software and training programs. These activities, however, all revolve around the making of the allegedly usurious payday loans. In other words, there are no allegations that the Payday Loan Enterprise exists separate and apart from the alleged collection of unlawful debts. As such, Purdie has failed to show continuity — that the Payday Loan Enterprise exists for any purpose other than to commit the predicate offenses, that is, unlawful debt collection. See Landry v. Air Line Pilots Ass'n Intern. AFL-CIO, 901 F.2d 404, 434 (5th Cir. 1990) (dismissing RICO claim because association of defendants had no alleged purpose other than to commit the predicate acts); see also State Farm Mutual Auto. Ins. Co. v. Giventer, 212 F. Supp.2d 639, 650 (N.D. Tex. 2002) (dismissing RICO claims against alleged enterprise consisting of law offices and chiropractic clinics because, aside from shared purpose of defrauding insurance company, nothing bound association together); Walsh v. America's Telenetwork Corp., 195 F. Supp.2d 840, 848 (ED. Tex. 2002) (dismissing RICO claim because complaint explicitly alleged the purported enterprise existed only for purpose of committing predicate acts of mail and wire fraud); Rivera v. AT T Corp., 141 F. Supp.2d 719, 725 (S.D. Tex. 2001) (dismissing RICO claim because plaintiff stated no facts to show defendants existed as entity apart from business of providing cable services which allegedly collected unlawful debt). Accordingly, the court concludes that Purdie's civil RICO claim under § 1962(c) fails as a matter of law for failing to plead the existence of a RICO enterprise.
Defendants also seek dismissal of the section 1962(c) claim because Goleta does not operate or manage a RICO enterprise. Based on the conclusion that Purdie has failed to allege the existence of a RICO enterprise, the court need not address this argument.
Purdie also asserts a claim under § 1962(d), contending that ACE and Goleta conspired to violate subsection (c). Because Purdie has failed to show the existence of an association-in-fact enterprise, it cannot establish that ACE and Goleta conspired to violate subsection (c). Purdie's claim for conspiracy under § 1962(d) therefore necessarily fails as a matter of law. See Nucentrix Broadband Networks Inc., 293 F.3d at 930 (failure to plead requisite elements of § 1962(c) violation implicitly means plaintiff cannot plead a conspiracy to violate that section).
B. Plaintiff's State Law Claims
The court has jurisdiction over the state law claims only through the exercise of its supplemental jurisdiction pursuant to 28 U.S.C. § 1367 (c). "[W]hen all federal claims are dismissed or otherwise eliminated from a case prior to trial, [the Fifth Circuit has] stated that [its] `general rule' is to decline to exercise jurisdiction over the pendent state law claims." McClelland v. Gronwaldt, 155 F.3d 507, 519 (5th Cir. 1998) (citing Wong v. Stripling, 881 F.2d 200, 204 (5th Cir. 1989)). The relevant considerations are "judicial economy, convenience, fairness, and comity." Batiste v. Island Records, Inc., 179 F.3d 217, 227 (5th Cir. 1999). The strongest consideration here is that state courts are more familiar with, and better equipped to address, the remaining state law causes of action. The court therefore exercises its discretion and declines supplemental jurisdiction over the remaining claims. Accordingly, the court dismisses without prejudice Purdie's state law claims against ACE and Goleta.
V. Conclusion
For the reasons stated herein, the Motion to Dismiss of Defendants ACE and Goleta is granted. Purdie's RICO claims against ACE and Goleta are dismissed with prejudice, and her state law claims against ACE and Goleta are dismissed without prejudice. Judgment will issue by separate document as required by FED. R. Civ. P. 58.