Johnson v. Heath, __4th__, 2022 WL 17971709 (10th Cir. Dec. 28, 2022)
This case arises from a business deal gone sideways. Defendants Michael and Dawn Heath sold Plaintiff Harry Johnson a gasoline and automobile-service station in Wells, Nevada. But soon after the sale, Plaintiff allegedly discovered that the property had material, undisclosed defects and that Defendants had artificially inflated the business’s profits by scamming customers over the years.
Defendants tricked some customers into believing that Defendants were selling gasoline at the less expensive propane price. Twenty-four customers filed complaints about this alleged practice. Besides their alleged customer scams, Defendants allegedly performed little maintenance on the property, leaving the gasoline storage tanks, propane tanks, and sewage system in disrepair. In 2013, Defendants decided to sell the Wells station and allegedly inflated the profitability data by basing it on revenue from overcharging the customers. Defendants also allegedly failed to disclose that they spent little revenue on necessary repairs to the property, further inflating the property’s value.
Defendants also bought a gas and service station in New Harmony, Utah, which they currently operate. Defendants have allegedly continued to charge customers for unnecessary tires and automobile repairs at the New Harmony station.
Plaintiff sued Defendants in the District of Utah, asserting nine state-law claims and a federal RICO claim against Defendant Michael Heath alleging Heath ran his company, Heath Enterprises Inc., as a racketeering scheme Plaintiff calls “burning the station.” The district court dismissed the RICO claim for failure to state a claim and declined to exercise supplemental jurisdiction over Plaintiff’s remaining state claims. Defendants then moved for attorney’s fees, which the district court denied.
Plaintiff alleged that Defendant Michael Heath conducted the affairs of Heath Enterprises Inc., an enterprise, through a pattern of wire fraud, bank fraud, and access-device fraud—crimes that § 1961(1) classifies as racketeering activity. According to Plaintiff, Defendant committed these crimes by fraudulently inducing customers to use their credit cards to buy gasoline and services and then fraudulently inducing Plaintiff to buy the station for more than it was worth. Plaintiff alleged that these predicate crimes formed the RICO pattern.
The Court agreed with the district court that even assuming Plaintiff adequately alleged predicate racketeering acts, he failed to state a RICO claim because he did not adequately allege a RICO pattern.
Relatedness:
Plaintiff alleges the following predicate acts: the fraudulent sale of the Wells station to him, the fraudulent charges to customers of the Wells station, and the fraudulent charges to customers of the Elko and New Harmony stations. We agree with the district court that the predicate acts involving the Wells Station relate to each other. Plaintiff alleged that the fraudulent charges to the customers of the Wells station were part of a broader scheme to fraudulently sell the station to Plaintiff at an inflated price. According to Plaintiff’s allegations, Defendants defrauded the Wells-station customers so that the station would seem more profitable to a purchaser of the station. Thus, the fraudulent sales to the customers of the station and the fraudulent sale of the station to Plaintiff made up a common scheme, had similar purposes, and were interrelated under the loose relationship standard.
Open-Ended Continuity
Plaintiff alleged that Defendants operated the Wells station for about eleven years. In that span, Defendants allegedly scammed at least twenty-four customers by tricking them into thinking the propane price applied to gasoline. Defendants also allegedly fraudulently overcharged at least twenty-five customers for gasoline, tires, or automobile repairs. And then Defendants allegedly fraudulently sold Plaintiff the station. Plaintiff argues that each fraudulent transaction constituted a RICO predicate and that the RICO predicates are a regular way Defendants conduct their business—thus establishing open-ended continuity. Although Plaintiff alleged some unrelated fraudulent sales at the Elko and New Harmony stations, he failed to connect those sales to any similar scheme to “burn the station.” Thus, Plaintiff failed to allege that “burning the station” presents Defendants’ regular way of conducting business or that it threatens future repetition.*4.
Closed-Ended Continuity
We thus consider two factors when determining the existence of closed-ended continuity—the duration of the related predicate acts and the extensiveness of the racketeering scheme. Id. at *4, citing cases. Although the majority agreed that duration existed, it noted that duration alone may not establish closed-ended continuity—we also consider the extensiveness of the alleged racketeering scheme in which they consider “the number of victims, the number of racketeering acts, the variety of racketeering acts, whether the injuries were distinct, the complexity and size of the scheme, and the nature or character of the enterprise.” No factor is required or dispositive; the factors merely guide us in seeking “a natural and commonsense result.”
Analyzing these factors, the court found the scheme Plaintiff alleged—a scheme to inflate the value of a single property by overcharging some customers and then selling that property to an unwitting buyer without disclosing needed repairs—was neither large nor complex. Id. But Plaintiff alleged that Defendant has performed this scheme only once. Although Plaintiff alleged that Defendant overcharged customers at the Elko and New Harmony stations, Plaintiff failed to allege that any of those transactions formed part of a similar scheme to “burn” those stations. Thus, the court concluded that Plaintiff alleged only a single scheme with the discrete goal of “burning” the Wells station—inflating its value and dumping it off on an unsuspecting buyer. Id. at 6.
Dissent
Judge Bacharach however stated that the dismissal should have been overturned because in his view, however, the district court should have considered the allegations that Mr. Heath had inflated profits by cheating customers of the gas station. Unlike the majority, I believe that these allegations establish continuity. *8. The Judge found that Mr. Heath allegedly deceived not only customers but also Mr. Johnson through electronic communications–• containing false information about the profitability of the gas station and• failing to disclose defects in the gas station’s fuel tanks and sewer system.
The Judge found that Mr. Johnson adequately pleaded wire fraud through misrepresentations to customers.*10. The majority failed to apply the party-presentation rule and misapplies the standards for dismissal and closed-ended continuity.
Though the majority discounts the extent of the scheme, Mr. Heath never questioned satisfaction of this factor. In district court, Mr. Heath challenged closed-ended continuity based only on the lack of “any viable predicate criminal acts.”. And on appeal, Mr. Heath argued only that the allegations had amounted to “common-law fraud” rather than “RICO fraud.” But Mr. Heath has never questioned the extent of the alleged scheme. Because Mr. Heath hasn’t questioned the extent of the alleged scheme, I don’t think we should, for “we don’t typically ‘craft[ ] arguments for affirmance completely sua sponte and, more specifically, without the benefit of the parties’ adversarial exchange.’ ”
Also, by denying continuity based on extensiveness, the majority overrides the most important factor: duration. Although the extent of the scheme is also pertinent, we should generally focus on whether the wrongful acts are “sporadic” or part of a greater pattern. As a result, closed-ended continuity is often found whenever the duration is sufficient. At the motion-to-dismiss stage, the Judge questioned how we can shoehorn Mr. Johnson’s allegations into a single scheme directed at a single individual.
The Judge stated that even when the predicate acts “arise under a single scheme,” closed-ended continuity may exist when the conduct reflects a regular way of conducting business.* Editor Note: Pattern is complex, and courts have usually followed the “regular way of conducting business” as a factor in determining whether there is open-ended continuity, not closed-ended continuity. See H.J. Inc. 492 U.S. at 493. Accordingly, I would not base a finding of closed-ended continuity on regular way of doing business, as the dissent implies, but rather argue that the factors showing ‘extensiveness’ as the dissent implies, but rather argue that the factors showing ‘extensiveness’ are sufficient to show closed-ended continuity in this case.
Stander Law RICO Report 