Court Denied Defendants’ Motion to Dismiss a Civil RICO Claim Finding Predicate Acts of Mail and Wire Fraud Adequately Alleged

MST Management, LLC v. Chicago Doughnut Franchise Company, LLC,  ___F. Supp.3d ___,  2022 WL 1001495, D. Nev., Feb. 9, 2022)

The four named plaintiffs/franchisees sued nine individuals and two companies under the federal Racketeer Influenced Corrupt Organizations (RICO) Act, the Sherman Antitrust Act, the Nevada Deceptive Trade Practices Act (DTPA), and state common law. They theorize that the defendants used false promises and misleading financial information to induce them into The Dapper Doughnut franchises and continued to defraud them in order to keep their investments.

The court found that in part plaintiffs’ RICO claim based on mail fraud and wire fraud claims, under the relaxed standard for Rule 9(b) was sufficiently plausible to survive dismissal, but claims based on the omissions and plaintiffs’ general allegations about impropriety in the procurement of the later-signed liability releases were not sufficiently pleaded to show predicate acts of mail or wire fraud.

The court stated that a mail-fraud violation requires plaintiffs to show that the defendant (1) “devised a scheme or artifice to defraud”; (2) “used the mails in furtherance of the scheme”; and (3) “did so with the specific intent to deceive or defraud.” Similarly, a wire-fraud violation requires a showing of (1) “the formation of a scheme or artifice to defraud”; (2) “use of the United States wires or causing a use of the United States wires in furtherance of the scheme”; and (3) “specific intent to deceive or defraud.” “Mail and wire fraud can be premised on either a non-disclosure or an affirmative misrepresentation.” But “[a]bsent an independent duty, such as a fiduciary duty or an explicit statutory duty, failure to disclose cannot be the basis of a RICO fraudulent scheme.” To be “in furtherance” of a fraudulent scheme, the use of the mails or wires need not be “an essential part of the scheme” or “occur concurrently with the fraudulent acts.” They need only be “made for the purpose of executing the scheme,” so the furtherance element is satisfied if the scheme is “in some way dependent upon” the mailings or wires.

A RICO claim predicated on fraud must meet the heightened pleading standard of FRCP 9(b), which “requires that, when fraud is alleged, ‘a party must state with particularity the circumstances constituting fraud” but the court stated that “the rule may be relaxed as to matters within the opposing party’s knowledge.”  This relaxed standard thus only requires plaintiffs alleging corporate fraud to plead the “facts on which the belief is founded” and “include the misrepresentations themselves with particularity and, where possible, the roles of the individual defendants in the misrepresentations.”

Under this relaxed standard, the court found plaintiffs’ RICO claim was sufficiently plausible to survive dismissal. See *3-*4. Plaintiffs allege that DFG, Chicago Doughnut Franchise Company, LLC (CDFC), and their officers and principals constitute an enterprise that routinely uses the wires and mails to enrich themselves by fraudulently inducing individuals into franchising, resulting in significant economic injury to plaintiffs and similarly situated people. The complaint lays out that defendants established The Dapper Doughnut as a fraudulent scheme disguised as a valuable franchising opportunity and that each defendant had the specific intent to defraud when, by mail and/or wire, they presented potential franchisees financial projections either based on an entirely different and long-established company’s franchise data or without any basis in fact.  

The fraudulent franchising scheme that plaintiffs allege depended “in some way” on these acts—it could not have functioned, and defendants could not have enriched themselves, without them. All the acts occurred in relative temporal proximity to one another, and every next act built on those that preceded it. The elements of these predicate acts having been met, the court found  plaintiffs stated a plausible claim for a RICO violation. 

Ed Note:   The court did not address whether the predicate acts constituted a “pattern of racketeering,” i.e., whether they met the “continuity” requirements as set forth by the Supreme Court and Circuit law.   Also, there is no requirement in Ninth Circuit law that “every act must be built on that preceding it,” as “relatedness” under Supreme Court (H.J. Inc.) and circuit law does not require such facts.

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