Third Circuit Relies on Bridge and Holmes Factors to Reverse Lower Court Dismissal of a Civil RICO Action Which Had Found Inadequate Proximate Causation

St. Luke’s Health Network Inc. v. Lancaster General Hospital, __ F.3d __, 2020 WL 4197525 (3rd Cir. 2020)

The Court found the Plaintiffs’ theory of liability adequately alleged proximate causation and thus reversed the District Court’s dismissal, and thus remanded for further proceedings consistent with this opinion.

This case involves a state-run program to reimburse Pennsylvania hospitals for treating indigent patients. Plaintiffs-Appellants are a group of hospitals and their related health care networks that sought civil remedies from Defendants-Appellees, another hospital and hospital system, for “RICO” violations. Plaintiffs alleged that Defendants submitted fraudulent claims for reimbursement, in violation of the wire fraud statute, 18 U.S.C. § 1343, and received an unduly inflated proportion of the available funding. As a result, Plaintiffs claim they were reimbursed an artificially smaller share of funds. The District Court found that Plaintiffs failed to plead sufficient facts to demonstrate that their injury was caused by Defendants’ alleged fraud.

Specifically, Plaintiffs alleged that employees of Lancaster, “knew that [Lancaster’s] claims were grossly inflated but nevertheless continued to submit them even after being called out by the Auditor General.”  These actions were alleged to result in “massively inflated extraordinary expense claims,” which unjustly enriched Lancaster by $9 million during Fiscal Years 2010-2012. Since participating hospitals submitted claims that totaled more than was available in EE Program funding for Fiscal Years 2010-2012, Plaintiffs claim they were collectively undercompensated by $9 million during those years.

The Court discussed that in the RICO context, the focus [of proximate causation] is on the directness of the relationship between the conduct and the harm” rather than “the concept of foreseeability.” Hemi Grp., 559 U.S. at 12, 130 S.Ct. 983 (2010).   The court discussed that the allegations pertinent to the question of proximate cause are those of the purported injury.*4.

The court discussed that Plaintiffs’ theory of liability and alleged injury in the present case are nearly identical to that of the Bridge plaintiffs.  Because the EE Program has a fixed pool of assets, Defendants’ alleged manipulation to increase their share of the limited funding necessarily resulted in Plaintiffs receiving a decreased proportion of those assets.*5.  Moreover, Plaintiffs’ theory of proximate cause satisfies the Supreme Court’s three policy considerations for directness of injury. See Holmes, 503 U.S. at 269–70, 112 S.Ct. 1311.

Given that Plaintiffs have adequately alleged proximate causation, and because the Court did not find no “independent factors that account[ed] for [the plaintiffs’] injury … and no more immediate victim [was] better situated to sue,” the Court reversed the District Court. *6.

 

 

Court Affirms Dismissal of Civil RICO Claim Finding, Among Other Things, Inadequate Pleading of Proximate Cause

Collier v. LoGuidance, ___ Fed. Appx. ___, 2020 WL 3485704 (6th Cir. 2020)

The court affirmed the lower court decision dismissing a ‘wage theft scheme’ because it sought the same remedy provided by the FLSA, the recovery of unpaid overtime.  The court also affirmed the lower court decision that Collier did not adequately allege proximate cause with regard to the remaining two schemes (tax evasion and workers’ compensation insurance).

Regarding the first scheme, the district court did not address the preclusion argument and dismissed Collier’s RICO claims on different grounds. However, the court found that it could “affirm on any grounds supported by the record even if different from the reasons of the district court.’ at *3, citing cases. Therefore, like the Court in a previous case, i.e., Torres, the court affirmed the dismissal of Collier’s RICO claim as it relates to the ‘wage theft scheme’ because it sought the same remedy provided by the FLSA, i.e., the recovery of unpaid overtime.

Regarding the ‘tax evasion’ and ‘workers’ compensation insurance scheme,’ the dismissal of these  allegations were based on lack of proximate cause.  The court discussed that the central question” for purposes of proximate causation under RICO “is whether the alleged violation led directly to the plaintiff’s injuries.” at *3 citing to Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006) (emphasis added); see also Hemi Grp., LLC v. City of New York, 559 U.S. 1, 9–10, 130 S.Ct. 983, 175 L.Ed.2d 943 (2010) (plurality opinion) (explaining that RICO requires a “direct relationship” between the fraud and the injury).

Here, the court found that Collier did not sufficiently plead proximate cause as it relates to either the ‘Workers’ Compensation Insurance Scheme’ or the ‘Tax Evasion Scheme.’ As to the first scheme, Appellees conduct injured the employer’s insurance company, but Collier did not allege any facts which showed how she was injured by this scheme. Therefore, the district court properly dismissed Collier’s RICO claim to the extent that it relies on the alleged Workers’ Compensation Insurance Scheme.

As to the Tax Evasion Scheme, Collier alleges that Appellees did not pay the required amount of withholdings to tax authorities, which she argues injured her by lowering her future social security benefits and exposing her to tax liabilities and penalties.  The court found that the defendants’ misconduct (mailing false W-2s) did not lead directly to Collier’s injuries.  As in Hemi Group, “the conduct directly responsible for [Collier’s] harm was [her own] failure to pay [her] taxes,” not the defendants’ failure to report her cash wages. Hemi Grp., 559 U.S. at 11, 130 S.Ct. 983. Although most employees inherently rely upon the figures reported on their W-2s as accurate, when Collier filed her taxes she knew she received off-the-books cash payments for certain hours and knew her pay statements and W-2 statements did not include these off-the-books cash payments and she chose not to pay taxes on them. Therefore, the alleged violation of mailing false W-2s did not lead directly to Collier’s injuries.

 

 

 

 

District Court Addresses Several Novel Civil RICO Issues in Denying a Motion to Dismiss

In re Outlaw Laboratory LP Litigation, 2020 WL 1953584 (S.D. Cal., Apr. 23, 2020)

The District Court denied motions by third-party Defendants Michael Wear, Shawn Lynch, and Tauler Smith LLP (“Tauler Smith”) who argued that a Second Amended Countercomplaint (SACC) failed to plead RICO or rescission claims and is barred by the Noerr-Pennington doctrine.

The SACC asserted civil RICO violations as a result of settlement agreements entered into as a result of Outlaw’s extortionate demand letters. Specifically, Counterclaimants described a RICO enterprise between Outlaw, its attorneys, Tauler Smith LLP, and other as-yet-unnamed individuals, aimed at perfecting a legal “shakedown” of small-time San Diego convenience stores. Counterclaimants averred that the “TriSteel” products “were created as artifices” to “found the false advertising claims,” and that Outlaw itself was no more than a front for the unlawful enterprise.

Holding:   The Court found that the SACC adequately pleaded racketeering vis-à-vis mail fraud, the stores’ injury, and the “conduct” element as to Tauler Smith (law firm).

Issues:

  • Mail Fraud

The Court first discussed that the gravamen of the offense is the scheme to defraud, and any “mailing that is incident to an essential part of the scheme satisfies the mailing element,” Schmuck v. United States, 489 U.S. 705, 712 (1989).  Members of the Enterprise fielded a variety of arguments predicated on the mistaken notion that mail fraud must entail a false or misleading statement. Tauler Smith argued that the SACC fails to adequately plead the predicate acts of mail fraud because Outlaw’s demand letters allegedly contained no specific false statements, no actionable omissions, and no statements which together might be misleading.

The Court stated that the fact there is no misrepresentation of a single existing fact is immaterial.  It is only necessary to prove that it is a scheme reasonably calculated to deceive, and that the mail service of the United States was used and intended to be used in the execution of the scheme.*7.

  1. Pattern of Racketeering

The court stated that because the allegations of the SACC describe multiple instances of mail fraud, against different convenience stores, and in furtherance of the alleged scheme, the SACC adequately pleads a “pattern of racketeering activity” as required for RICO. *7.

  1. Injury –  Loss of Sales

The court had previously held the loss of sales by the stores constitutes an adequate injury finding a reduction to Plaintiff’s sales is a “business or property interest,” and the “alleged [RICO] violation led directly to the plaintiff’s ”loss of sales,   The court also found the stores incurred a “concrete financial loss,” and at the motions stage the Stores need not plead more specific facts as to which items were removed from the Stores shelves. *8, citing cases.

  1. Injury – Legal Fees

The court addressed whether legal fees and costs incurred by the Stores were legitimate injuries because it was an “express purpose of the Outlaw Enterprise’s scheme was to extract settlement money,” thus requiring the stores to obtain counsel. The Stores asserted that, the collection of settlements was central to the Enterprise’s scheme and thus the Stores’ attorneys’ fees incurred in pursuing settlement are a direct injury of the scheme.  Because the subject attorney fees were directly incurred by the convenience stores after receiving the demand letters, the Court found that they are cognizable as an injury to the Stores’ “business” for the purposes of RICO.  Thus, unlike some other district court cases, the Stores have alleged facts showing that the fraudulent scheme had caused them to incur attorney fees.

  1. Attorneys and Reves Violations

The Court considered the “conduct” element as challenged by Tauler Smith, attorneys who were part of the Enterprise and a third party defendant.   The court cited to the Ninth Circuit’s interpretation of the Reves test and found in light of this disjunctive, multi-factor test, Tauler Smith’s argument’s was unpersuasive.  For one, it is simply not true that the RICO claim fails if “Tauler Smith did not manage or control Outlaw Laboratory, LP  as a subordinate in the enterprise may satisfy the “conduct” element by demonstrating some control over the scheme.  Tauler Smith argued that “[s]imply performing [legal] services for the [association-in-fact] enterprise” could not create RICO liability but here the allegations against Tauler Smith repeatedly indicate that the firm was “giving, or taking, direction” and became “indispensable to achiev[ing] of the enterprise’s goal” and such conduct is enough to establish the firm’s influence and control over some of the operations of the Enterprise and exceeds the conduct inherent in a firm’s representation of Outlaw as a client. *11, citing cases.

  1. Noerr-Pennington Doctrine and Proximate Cause

Enterprise members’ argued that their alleged conduct was protected from suit by the Noerr-Pennington doctrine. Under the Noerr–Pennington doctrine, those who petition any department of the government for redress are generally immune from statutory liability for their petitioning conduct”  unless the letters are a “mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor.”  The court found the sham litigation exception applied and thus third-party defendants could not rely on the doctrine.  In this finding, the court rejected Tauler Smith’s argument that there was probable cause to threaten a RICO suit because, contrary to the Court’s prior rulings, Outlaw’s alleged harm could have been proximately caused by the Stores’ alleged misconduct.

 

District Court Denies Summary Judgment of Complaint with RICO Claims finding Sufficient Genuine Dispute of Facts Regarding Section 1962(b), a Rarely Successful Allegation

Laurel Gardens LLC v. Timothy McKenna et al., 2020 WL 1875609 (E.D. Pa., April 15, 2020)

After remand, the court denied summary judgment finding there was a genuine dispute of material fact as to each count of the Complaint, including the RICO count.

Plaintiffs alleged that, despite warnings to the contrary, the Julicher Defendants conducted business with a Timothy McKenna, a Plaintiff employee, in furtherance of his goals to harm Plaintiffs.  Plaintiffs further allege that, through a pattern of threats of physical violence and financial ruin, as well as misuse of Plaintiffs’ proprietary information, the Julicher Defendants coordinated with Timothy McKenna, and his son Michael McKenna, to cause Plaintiffs to go out of business.

The Julicher Defendants asserted that “Plaintiffs have patently failed to establish any facts supporting…” their RICO claims, calling them “frivolous, baseless, and made without cogent facts…” but the court found the Plaintiffs adequately alleged that Julicher Defendants engaged in various violations including threats against Plaintiff to compel an unfavorable agreement and threatened Plaintiff with financial ruin with the aim of acquiring Plaintiffs’ clients.

The court addressed the section 1962(b) claim and found that it was adequately alleged that the Julicher Defendants, through a pattern of financial assistance to McKenna, physical and financial threats to Plaintiffs, and misusing Plaintiffs’ proprietary information, may have exercised a degree of “operation of management” over the alleged RICO enterprises, which were two Plaintiff sponsored legal entities.  In addition to this pattern of threats (presumably racketeering activity including extortion), Plaintiffs adequately alleged a misuse of proprietary information and company property, and collaboration among Timothy McKenna, Michael McKenna, and the Julicher Defendants to ‘acquire an interest’ in the alleged RICO enterprises, in violation of section 1962(b).

The court also found that the RICO defendants were clearly “distinct” from the legal entity enterprises.

Accordingly, there was sufficient evidence that there was genuine dispute of material fact to deny the motions for summary judgment.

Ed Note:    Section 1962(b) is a subsection of section 1962 and a violation which is rarely successfully alleged.

Be Careful Alleging Money Laundering as a Predicate: Ninth Circuit Affirms Dismissal of Civil RICO Claim Finding Money to Trace Alleged Money Laundering of Proceeds in U.S. Did Not Proximately Cause RICO “Injury”

City of Almaty v. Viktor Kharpunov, ___F.3d ___, 2020 WL 1933125 (9th Cir., April 22, 2020)

Facts:

The panel affirmed the district court’s dismissal for failure to state a claim of an action brought under RICO by a city in Kazakhstan (City) against defendant Victor Khrapunov which had alleged his family engaged in a scheme to defraud the City of millions of dollars in Kazakhastan. After absconding with the money to Switzerland, the City alleged that it was forced to spend money and resources in the United States to trace where its money was laundered as the Khrapunovs cycled the stolen money in and out of California real estate and other investments in order to prevent the City from locating and recovering the funds.

Holding:  The panel held that the city failed to state any cognizable injury other than the foreign theft of its funds, and its voluntary expenditures in the United States were not proximately caused by defendants’ alleged acts of money laundering. Accordingly, the City failed to state a RICO claim.

The Court held that it did not need to determine the question of how to determine whether an injury is domestic or foreign after RJR Nabisco.  This is because Plaintiff’s alleged injury was  merely a consequential effect of its admittedly foreign injury, and not an independent injury cognizable under § 1964(c).  The Court explained that the district court properly determined that Plaintiff’s alleged injury was a mere downstream effect of the Khrapunovs’ initial theft and not an independent harm itself.

Analysis:  The Defendants’ predicate acts of money laundering were not the actual cause of the City’s  expenditure of monies, and thus the Plaintiff failed the proximate cause test, i.e., “some direct relation between the injury asserted and the injurious conduct alleged.” Holmes v. Sec. Inv’r Prot. Corp., 503 U.S. 258, 268 (1992).  The Court explained that the Plaintiff was not separately harmed by the money laundering, and the amount allegedly due to it has not been devalued as a result of Defendants’ money laundering.

Accordingly, the Court need not determine whether Plaintiff states a domestic or foreign injury, since Plaintiff failed to state a cognizable injury at all. The City of Almaty’s expenditure of funds to trace its allegedly stolen funds is a consequential damage of the initial theft suffered in Kazakhstan and is not causally connected to the predicate act of money laundering.

Ed Note:   The court is correct; predicate acts are actionable if they are the proximate and direct cause of injury.  Money laundering, section 1956 and 1957, are predicates and are an important predicate in the hands of the government bringing criminal cases, who do not have to allege and prove “domestic injury.”   But, this decision points out that money spent to trace dollars in the United States the subject of money laundering does not proximately and directly cause injury, a requirement for civil RICO. This case is more properly before a USAO.

This is a well-thought out argument by the Circuit.  I cannot imagine the Supreme Court taking this case given that it is not an interpretation of RJR at odds with any other circuit.

District Court Rules that Based Upon Liberal Construction of Civil RICO Plaintiffs’ Claims Under Section 1962(c)- Substantive RICO- are Sufficient, But Finds Claims Under Section 1962(a) Inadequately Alleged

In re National Prescription Opiate Litigation-   West Boca Medical Center v. Amerisource Bergen Drug Corporation, et al,  ___F.Supp.3d ___, 2020 WL 1669655 (N.D. Ohio, Apr. 3, 2020)

In this multi-district court litigation, the Court considered the claims of Plaintiff West Boca Medical Center and based upon previous rulings reaffirmed that the Plaintiff adequately alleged a violation of section 1962(c) of RICO.  West Boca alleged that all Defendants (Distributors, Manufacturers, and Pharmacies) conducted and participated—through various acts of mail and wire fraud – in an enterprise and created the opioid epidemic and injured West Boca, in violation of 18 U.S.C. § 1962(c).  West Boca further alleges each Defendant derived income and invested the proceeds in an enterprise that injured West Boca, in violation of § 1962(a), and that each Defendant conspired with one another to do so in violation of § 1962(d).

Standing/Proximate Cause

With regard to the section 1962c claim, the Court also explained in depth how the Plaintiff’s RICO’s civil-suit provision adequately satisfied standing and proximate cause, and thus there was sufficient jurisdiction to bring the suit.  See pages *7-*13.

Other Legal Requirements For a Section 1962c Claim Adequately Alleged

The District Court stated that there was nothing in the parties’ briefs to cause the Court to revisit any of its prior analysis of the applicable RICO standards. Given the RICO statute should be liberally construed and should apply broadly in civil cases the court reaffirmed its holdings that plaintiff adequately alleged (1) the existence of an enterprise, (2) predicate acts, (3) conspiratorial agreement, and met (4) Fed. R. Civ. P. 9(b)’s particularity requirement (citing Boyle v. United States, 556 U.S. 938, 944 (2009)); Doc. #: 1203 at 6 (citing Sedima, SPRL v. Imrex Co., Inc., 473 U.S. 479, 498 (1985)). *14.

Section 1962(a)

The court, however, did not agree with West Boca’s claim that Defendant Pharmacies violated section 1962(a) finding as West Boca did not allege an injury specifically caused by any of the Defendants’ investment of income obtained through racketeering activity, a requirement under section 1962(a).   The court explained that a majority of the Circuits, including the Sixth, have concluded that, “in order to state a claim under § 1962(a), a plaintiff must plead a specific injury to the plaintiff caused by the investment of income into the racketeering enterprise, distinct from any injuries caused by the predicate acts of racketeering,”  and the court explained that Section 1962(c) is the proper avenue to redress injuries caused by the racketeering acts themselves.

The court concluded that West Boca alleged that the Defendants merely reinvested their allegedly ill-gotten racketeering income in themselves as enterprises and used that reinvestment to further propagate their alleged pattern of racketeering activity (false marketing and failure to prevent diversion). Under controlling Sixth Circuit precedent, these allegations were insufficient to confer standing on West Boca to assert a § 1962(a) claim, and West Boca’s Second Claim for Relief was dismissed.

Ed Note:   This case is useful in (1) its broad construction of civil RICO substantive provision section 1962(c), which is the “proper avenue to redress injuries” caused by racketeering activity; (2) its expansive view of standing and proximate cause and its detailed analysis; and (3) the strict construction of section 1962(a), in conformance with the majority of the circuits.

Second Circuit Reverses Dismissal of Sherman Act and RICO Action Finding Sufficient Injury for Article III Standing

Sonterra Capital Master Fund Ltd., v. UBS AG,  ___ F.3d ___, 2020 WL 1544478 (2d Cir., Apr., 1, 2020)

A group of investment funds brought action against collection of financial institutions, asserting claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (RICO), and common law based on allegations that financial institutions conspired to manipulate the benchmark interest rates used to price financial derivatives in the Japanese Yen currency market.

Article III Standing

The District Court for the Southern District of New York dismissed for lack of standing. The Court of Appeals reversed finding that the investment funds plausibly pleaded that they suffered monetary loss in their derivative transactions as result of financial institutions’ alleged manipulation of benchmark interest rates, and thus asserted sufficient injury in fact for Article III standing.

The Court explained plaintiffs have alleged enough details about their derivative transactions to “affirmatively and plausibly suggest that [they have] standing to sue,” including identifying numerous instances when Plaintiffs entered into derivatives transactions at prices that were “artificial” due to Defendants’ price fixing and manipulation.  These actions harmed Plaintiffs and favored Defendants who took the other side of these transactions.

Ed Note:   Interestingly, the Second Circuit does not discuss its prior precedent and/or Supreme Court precedent setting forth the “directness” standards for finding standing for civil RICO actions.   Hope all be and stay well during this difficult time.  

 

Citing Civil RICO’s Breadth, Sixth Circuit Finds, as a Matter of First Impression, Civil RICO Claims Based on Predicate Activity Distinct From Unpaid Wages Not Precluded by the FLSA

Torres v. Vitale, __ F.3d ___, 2020 WL 152289 (6th Cir., Mar. 31, 2020)

Citing Civil RICO’s Breadth, Sixth Circuit Finds, as a Matter of First Impression, Civil RICO Claims Based on Predicate Activity Distinct From Unpaid Wages Not Precluded by the FLSA

Emilio Torres, Plaintiff, was a long-time employee at several locations of Vitale’s Italian Restaurant Inc. and alleged employees were deprived of overtime pay.  Torres filed suit, seeking damages under RICO but the district court dismissed his complaint, holding that the remedial scheme of the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq., precluded the RICO claim.

The Court of Appeals reversed, and remanded, finding that although it agreed with the district court that Torres could not proceed on his claims based on lost wages from the alleged “wage theft scheme” he could recover because the FLSA does not preclude RICO claims when a defendant commits a RICO-predicate offense giving rise to damages distinct from the lost wages available under the FLSA.

The Court construed RICO broadly explained that contrast with the FLSA’s “unusually elaborate enforcement scheme,” Kendall, 174 F.3d at 443, to remedy a particular type of misconduct, RICO has a “virtually unlimited sweep,” providing a remedy for the broad range of wrongdoing that fits within its scope.  The Supreme Court has reaffirmed RICO’s breadth time and time againSee, e.g.Sedima S.R.P.L. v. Imrex Co., 473 U.S. 479, 499, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) (“[T]he fact that RICO has been applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth.”) (alteration in original) (quoting Haroco, Inc. v. Am. Nat’l Bank & Tr. Co. of Chi., 747 F.2d 384, 398 (7th Cir. 1984)).

The Court stated that even though district courts have dismissed duplicative FLSA-based RICO claims as precluded by the FLSA because the FLSA provides the exclusive remedy for wage and overtime disputes, other courts have held that the FLSA’s savings clause suggests that Congress did not intend for the FLSA to provide the exclusive remedy for the violations of its provisions and therefore does not preclude even duplicative claims.

The Court held that the FLSA precluded RICO claims to the extent that the damages sought were  for unpaid minimum or overtime wages. However, when a RICO claim that is based on a dispute between an employer and an employee alleges damages that are distinct from unpaid wages, even if the RICO-predicate act arises from conduct that also violates the FLSA, then the RICO remedies do not fall within the ambit of the FLSA’s remedial scheme and are therefore not precluded.

Ed. Note:   It is important to not merely allege injury caused by unpaid minimum or overtime wages in a civil RICO suit.  If so, the action will be precluded.  Injury based on commission of racketeering predicates distinct from the unpaid wages are actionable, at least in the Sixth Circuit.

 

Civil RICO Report- April 2020 Lead Article Published by David J. Stander “Circuits’ Divergent Views of Civil RICO’s Closed-Ended Continuity Principle”

This very informative article analyzes each Circuit’s view of RICO’s “closed-ended continuity” requirement and describes the significant differences in how the Circuits view this requirement.

Because of editorial restrictions the Law Office is not able to generally publish the article.  However, for a complimentary copy, please contact Mr. Stander’s office at dstanderlaw@gmail.com or by phone at (240) 643-2723.

District Court Denies Defendants’ Motion to Dismiss Civil RICO Claim Finding ‘Open-Ended’ Continuity Adequately Alleged When Defendant Defrauded Other Victims

MAY JOSEPH, FADI ESSA, HOTEL FURNITURE LIQUIDATORS INC, and PARKING LOT SERVICE INC, Plaintiffs, v. NEVAR JAHWARY, YOUSIF DAMMAN, and TANYA KLATT Defendants, 2020 WL 1249291 (E.D. Mich, March 16, 2020)

The Court denied Defendants’ motion to dismiss a civil RICO claim finding that predicate acts of wire fraud adequately constituted a pattern of racketeering meeting the “open-ended” continuity test.

Plaintiff Fadi Essa served as a mentor and provided financial assistance and financial opportunities to defendant Jahwary for several years, and alleges that defendants perpetrated a scheme to swindle Plaintiffs out of hundreds of thousands of dollars.

Specifically, in October 2017, Plaintiff Essa asked Defendant Jahwary to partner with him in purchasing a hotel in Ferndale, Michigan. Both men were supposed to contribute $150,000 dollars to the venture, work to refurbish the hotel, and ultimately run the hotel for profit.  Essa made his contribution as required by the agreement, but Jahwary collected the funds to make his own contribution through a fraud scheme referred to by Plaintiffs’ as the West Coast Wholesale fraud scheme.

Plaintiffs claim Defendants have a history of conducting fraudulent schemes similar to the West Coast Wholesale scheme, including running hotel furniture fraud schemes. Plaintiffs also allege that there were multiple victims of the West Coast Wholesale fraud scheme, and allege that Defendants engaged in various insurance fraud schemes, some of which related to their hotel businesses. Plaintiffs generally allege that Defendant Jahwary has “coordinated the actions of others” to commit insurance fraud.

The Court set forth the general principles involving open-ended continuity based on the Supreme Court’s H.J. Inc. case.*7.  Although not finding the various insurance fraud schemes sufficiently related to the West Coast Wholesale fraud scheme (which injured Plaintiffs) the Court found that Defendants ran a related scheme through an entity called Hotel Liquidators, LLC in which Jahwary and his associates allegedly duped consumers into paying for furniture while never delivering the goods. The Court found that this scheme is sufficiently related to the West Coast Wholesale fraud to support a pattern of racketeering. The two schemes share the same general purpose, category of victims, and results. The methods of the commission were slightly different: in the West Coast Wholesale scheme, Defendants reached out directly to Plaintiffs via e-mail, while the Hotel Liquidators scheme was allegedly run through a website. But conceptually the two schemes are similar—Defendants allegedly offered for sale hotel furniture at liquidation prices with the intent to never complete the sale.

Thus, the Court found that this conduct together with the West Coast Wholesale scheme was sufficiently related to the West Coast Wholesale fraud to support a pattern of racketeering.  There was no inherent limit to the number of potential customers who could fall victim to these schemes. And the allegation that Defendants still controlled the entity and website involved in the Hotel Liquidators scheme raises a potential inference that Defendants are or may still be running the scheme.  The Court also found that the plaintiffs’ allegations that the Defendants continued or attempted to continue the West Coast Wholesale scheme beyond the single encounter with Plaintiffs here, i.e., an unrelated customer (another victim) were sufficient to raise factual questions about the continuity element of the general scheme involved in the West Coast Wholesale scam to survive a motion to dismiss.

Ed Note:   The Court did not find the scheme met the “closed-ended’ continuity test, failing to meet some of the factors, but the finding of adequate allegation of the open-ended test was sufficient to sustain the Amended Complaint.