Antitrust Law Daily Wrap Up, RICO—E.D. Mich.: RICO claims tossed in landlord/tenant dispute over security deposits, (Jun 23, 2016)

By Mark Engstrom, J.D.

In a landlord/tenant dispute over the misuse of security deposits, three tenants failed to allege the predicate acts of mail and wire fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, the federal district court in Detroit has ruled (Wall v. Michigan Rental, June 22, 2016, Cohn, A.). The tenants also failed to plead an injury to their business or property, as required by RICO. The RICO claims were dismissed, with prejudice, and the defendants’ request for sanctions was denied.

Three tenants—Mariah Wall, Christopher Boston, and Craig Mulhinch—sued Michigan Rental, ZA Holding Company, and Zaki Alawi, under RICO and Michigan law, for damages that arose from the defendants’ misuse of the their security deposits while they were tenants in the defendants’ rental properties. More specifically, the tenants alleged that the defendants either "withdrew or transferred" their security deposits, which either "were or were not deposited"—initially at Michigan Commerce Bank (MCB)—without notifying them. In doing so, the tenants claimed that the defendants had misappropriated those deposits and had converted and embezzled their money. The defendants filed a motion to dismiss the tenants’ complaint as legally deficient. They also sought sanctions against the plaintiffs for their litigation conduct.

Under Michigan Compiled Laws §554.604—a provision governing a landlord’s treatment of a tenant’s security deposit—a security deposit "shall be deposited in a regulated financial institution," and a landlord may use the deposited money "for any purposes he desires if he deposits with the secretary of state a … surety bond" that met certain requirements. The Michigan statute limited the use of security deposits by landlords and gave tenants the right to sue if a violation occurred. The statute did not, however, give tenants the right to receive damages for violations of the statute.

Mail and wire fraud. Under RICO, the predicate acts of mail and wire fraud were subject to the heightened pleading requirements of Rule 9(b), which required specific allegations regarding the time, place, and content of the purportedly fraudulent misrepresentation, the fraudulent scheme, the fraudulent intent of the defendants, and the injury that resulted from the asserted fraud. In addition, the plaintiff had to proffer a sufficient factual basis to support an inference that the fraudulent misrepresentations were knowingly made.

In this case, the court required the tenants to file a RICO case statement, but the case statement did not disclose the required details. In lieu of particular dates, names, and locations, the plaintiffs referred to unknown fraudulent acts that had occurred "on one or more occasions" over a two-year period.

In addition, the tenants failed to provide sufficient details about the misuse of their security deposits. In particular, they did not say if or when the deposits were withdrawn from their accounts or where the funds went after removal. Instead, the tenants vaguely reasserted the allegations that the defendants "either did not deposit, or withdrew or transferred the deposited funds" from MCB, and then somehow used the funds for their own benefit.

Ultimately, the tenants did not describe a predicate act of fraud. Their case statement merely left the court to guess if or when any funds were taken, and where the funds were taken. In the court’s view, the case statement provided no basis for concluding that the defendants had spent or used the tenants’ security deposits.

Injury. The tenants failed to adequately plead an injury to their business or property, as required by RICO. Significantly, the security deposits had been returned to the tenants, less deductions. According to the court, the tenants were clearly not entitled to have or use the security deposits. Even if the landlord had mishandled their security deposits, the tenants failed to allege a financial injury as a result.

Sanctions. The defendants sought Rule 11 sanctions. Although the tenants failed to describe facts that were sufficient to support their RICO claim, the imposition of sanctions was not warranted. The record did not show that the tenants had litigated their case for an improper reason, or had made false allegations or unjustified legal arguments.

The defendants argued that the tenants should be sanctioned because their lawsuit was precluded by collateral estoppel based on prior state litigation that involved different plaintiffs. Because collateral estoppel could not be used as a defense against persons who were not parties to the tenants’ lawsuit, that argument lacked merit.

The case is No. 15-13254.

Attorneys: John J. Cooper (The Cooper Law Firm) for Mariah Wall. Mark A. Hopper (Seeligson, Deloof, Hopper & Dever, PLLC) for Michigan Rental.

Companies: Michigan Rental; ZA Holding Company, LLC

Cases: RICO MichiganNews