Antitrust Law Daily Wrap Up, RICO—EDMich: Oil Company Investors Fail to State RICO Claim over Alleged Four-Decade Failure to Pay Return on Investment, (Jan 28, 2013)

By Tobias J. Gillett, J.D., LLM.

Investors in an oil and gas exploration and extraction operation did not state a RICO claim against the operation and its principals over an alleged failure to pay a promised return on their investment because the investors did not allege sufficient facts regarding a purported scheme to defraud them, the federal district court in Bay City, Michigan, has ruled (Albert v. Fair Assocs., January 24, 2013, Ludington, T.).

During the 1970s, the principals of the operation convinced the investors to purchase partnership interests in three limited partnerships engaging in oil and gas exploration. According to the investors’ complaint, the principals promised the investors a return of up to 100 times their initial investment.

Although the operation did allegedly discover oil, and oil companies agreed to pay royalties on wells drilled on the operation’s oil fields, the investors purportedly never received any return on their investment, although the court noted the complaint did not clearly specify whether the investors had received nothing or whether they had received distributions of partnership revenue but not a return of capital. The investors alleged that the principals instead used the funds to pay dividends to themselves or to otherwise employ the funds for their own purposes.

The investors filed suit in April 2012 against the limited partnerships and their principals, asserting a variety of claims including violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The defendants filed a motion for summary judgment or to dismiss.

The court granted the motion, concluding that the investors’ allegations that the principals had employed wire and mail communications to execute a scheme to “defraud” the investors of their money were insufficient to state a RICO claim. The court observed that the investors had not identified what “fraudulent misrepresentations or omissions” the principals had made, pointed out how the investors had relied on those misrepresentations, or specified that the principals had made the misrepresentations “with the specific intent to defraud the” investors.

The court explained that a RICO complaint must specify the “fraudulent misrepresentations or omissions with particularity,” including “their contents and the time and place they were made”; must demonstrate “both continuity in the misrepresentations and a relationship between them”; must allege facts suggesting that the misrepresentations were made with the specific intent to deprive the plaintiffs of property; and must show that the plaintiffs relied on the misrepresentations to their detriment. As the investors had not alleged facts that satisfied these conditions, the court dismissed their RICO claim.

The court also granted the defendants’ motion to dismiss as it pertained to a breach of contract claim, a claim for fraudulent inducement, and a conversion claim. The court denied the motion to dismiss as it pertained to a request for a declaratory judgment under Michigan law, a request for an accounting, and a request for an inspection of the partnerships’ books and records.

The court ordered dismissal of the complaint without prejudice, but stated that if the investors did not file an amended complaint by the deadline, the RICO claim would be dismissed. Since the RICO claim was the sole basis for federal jurisdiction, the court would decline jurisdiction over the remaining counts, and dismiss the case.

The case is No. 12-11812.

Attorneys: David R. Skinner (Skinner Professional Law Corp.) for Else Marie Albert. Richard O. Milster (Lambert, Leser, Isackson, Cook & Giunta, P.C.) for Fair Associates

Companies: Fair Associates

Cases: RICO MichiganNews