Antitrust Law Daily Wrap Up, RICO—EDCal: Physician Investors in Gas Stations/Convenience Stores Failed to Adequately Allege RICO Claim, (Jun 14, 2013)

By Peter Reap, J.D., LL.M.

Two Canadian physicians investing in California gas stations/convenience stores failed to state a claim under the federal RICO law against a franchisee and developer of ARCO AM PM outlets because the physicians failed to adequately allege an “enterprise” or a pattern of racketeering activity,” failed to claim damages, and failed to meet the particularity in pleading requirement to support a RICO claim, the federal district court in Fresno, California, has decided (Dhaliwal v. Singh, June 11, 2013, O’Neill, L.) Thus, the physician’s RICO claim was dismissed with prejudice.

Background. The defendants included Nirmal Singh, a franchisee and developer who sought investors to partner with him and his brother and sister-in-law (Mr. Chandi and Ms. Chandi, also named as defendants) to purchase and develop AM PM gas station/convenience stores. Three entities, of which Mr. Singh was either an officer or an entity, were also defendants.

The physicians asserted that the defendants defrauded them of $3.5 million to invest in AM PM’s and alleged common law and statutory claims. The defendants moved to dismiss the complaint as either inadequately pled and/or time barred.

RICO

The complaint’s RICO claim alleges that defendants “have been running a criminal scheme and have defrauded Plaintiffs.” The claim accuses defendants of mail fraud and/or wire fraud based on “fraudulent conveyance of Plaintiff’s assets to Defendants,” “mailing of documents,” and “wire fraud by the transfer of funds thru the Federal Reserve Bank.” The physicians accused defendants of “bank fraud by intentionally misrepresenting their ownership of corporations with the intent to defraud the bank and investors” and “extortion by making repeated threats that Defendants will not return Plaintiffs’ money” unless plaintiffs obtain dismissal of a pending lawsuit.

A violation of § 1962(c) of the federal RICO law requires: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity, the court noted. The plaintiff must, of course, allege each of these elements to state a claim.

Enterprise. Section 1962(c) requires that the person named as the defendant cannot also be the entity identified as the enterprise. For a RICO claim, an alleged “enterprise” requires an independent legal entity such as a corporation or an “association in fact” of individuals. 18 U.S.C. § 1961(4). To avoid dismissal for failure to state a claim, a plaintiff must plead specific facts, not mere conclusory allegations, which establish the existence of an enterprise.

The defendants faulted the complaint’s failure to identify the requisite criminal enterprise, since the complaint alleges that “each of the Defendants was associated with the association-in-fact enterprise which was engaged in and the activities of which affected intra and interstate commerce—the purpose of which was to further the goals of the enterprise.” The investors responded that the “enterprise” defendants “have mounted might best be dubbed the ‘Chandi Family RICO Enterprise.’ This criminal endeavor includes Defendant Nirmal Singh, his brother and sister-in-law, other named individuals who serve as buffers and expeditors [sic] and an assortment of holding companies named as additional Defendants.”

The investors offered nothing credible to support the requisite enterprise element, the court held. They offered no meaningful challenge to defendants’ arguments that the complaint failed to allege a RICO enterprise. The investors’ hyperbole and regurgitation of the complaint failed to support the enterprise element, the court said.

Pattern of racketeering activity. “Racketeering activity” is any act indictable under several provisions of Title 18 of the United States Code. Subsection (5) of 18 U.S.C. § 1961defines “pattern of racketeering activity” to require “at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity.” Section 1961provides the minimum necessary condition for the existence of such a pattern, the court observed.

Here, the complaint lacked sufficient facts to establish an enterprise’s conduct of a pattern of racketeering activities, especially given the absence of a factual basis for state or federal crimes to constitute the necessary predicate acts within the definition of “racketeering activity,” according to the court. The complaint lacked sufficient allegations that the defendants or others engaged in an enterprise or two or more criminal acts to support a pattern of racketeering activity under sections 1961(5) and 1962. The investor’s reliance on unsupported mail and bank fraud was unavailing.

Damages. The complaint further failed to satisfy the damages requirement for a RICO claim, the court determined. The language of the RICO statutory provisions made clear that a plaintiff seeking civil damages for a violation of section 1962(a) must allege facts tending to show that he or she was injured by the use or investment of racketeering income.

A purported RICO claim is vitiated by the absence of sufficient facts of an enterprise, pattern of racketeering activity, unlawful debt, and recoverable damages. The investor’s complaint alleged no injury to business or property by a racketeering activity or sufficiently alleged violation identified under RICO. The complaint was devoid of facts to satisfy sections 1961 and 1962.

Particularity in pleading. Finally, the investor’s RICO claim, with its absence of facts to support RICO elements, was further susceptible to challenge given the complaint’s failure to satisfy particularity in pleading requirements. The Ninth Circuit applies F.R.Civ.P. 9(b) particularity requirements to RICO claims under section 1962.

The absence of facts to support RICO elements illustrated the complaint’s failure to satisfy F.R.Civ.P. 9(b) and warranted dismissal of the claim. The investors offered nothing to support a RICO claim, which was dismissed with prejudice, the court explained.

The case is No. CV F 13-0484 LJO SKO.

Attorneys: Lee H. Durst (The Durst Firm) for Jagjeevan K. Dhaliwal. Matthew Bradford (Robinson Bradford LLP) for Nirmal Singh.

Cases: RICO CaliforniaNews