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noting that "the release would eliminate any pre-existing RICO predicate acts, but several allegations post-date the release"
Summary of this case from Equity Residential v. Kendall Risk Management, Inc.Opinion
Civil Action No. 02-CV-10654-PBS
November 26, 2002
MEMORANDUM AND ORDER
I. INTRODUCTION
Plaintiffs Divot Golf Corporation ("Divot") and Joseph R. Cellura, Divot's chairman and chief executive officer, contend that defendants Citizens Bank of Massachusetts ("Citizens") and two Citizens loan officers, Michael Bulman and Patrick Joyce (collectively, the "Citizens defendants"), are liable under the federal Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. § 1962 et seq., for substantive RICO violations and RICO conspiracy. Plaintiffs also argue that defendants are liable under Massachusetts common law for tortious interference with contract and conversion.
Citizens, Bulman, and Joyce have moved to dismiss all claims in the Amended Complaint against them. After hearing, the motion to dismiss is ALLOWED. The Court also DISMISSES the state law claim against Annis, Mitchell, Cockey, Edwards Roehn, P.A. ("Annis Mitchell") without prejudice.
II. STANDARD OF REVIEW
Generally, for purposes of a motion to dismiss the Court takes as true "the well-pleaded facts as they appear in the complaint, extending [the] plaintiff every reasonable inference in [her] favor." Coyne v. City of Somerville, 972 F.2d 440, 442-43 (1st Cir. 1992) (citing Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 51 (1st Cir. 1990)). However, where the complaint refers to — but does not attach as an exhibit — a key document upon which a claim is based, the moving party may introduce the document to attack the complaint's description of it. See e.g., Fudge v. Penthouse Int'l, Ltd., 840 F.2d 1012, 1014-15 (1st Cir. 1988). A complaint should not be dismissed under Fed.R.Civ.P. 12(b)(6) unless "'it appears beyond doubt that the plaintiff can prove no set of facts in support of [her] claim which would entitle [her] to relief.'" Roeder v. Alpha Indus., Inc., 814 F.2d 22, 25 (1st Cir. 1987) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). But while "the pleadings should generally be construed liberally . . . a greater level of specificity is required in RICO cases." Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 443 (1st Cir. 2000) (citing Garita Hotel Ltd. P'ship v. Ponce Fed. Bank.,958 F.2d 15, 17 n. 1 (1st Cit. 1992).
III. FACTUAL ALLEGATIONS
The amended complaint tells a tortuous tale. The Court will present the core allegations in the charitable light required by the standard of review, but will note conflicts with documents referenced by the complaint.
Because the initial complaint was difficult to understand, the Court ordered plaintiff to rewrite it for clarity. See Fed.R.Civ.P. 8(e)(1) ("Each averment of a pleading shall be simple, concise, and direct."). Despite the Court's order that new claims not be added because there were pending motions to dismiss, Divot added the two tort claims against Citizens Bank.
1. The Purchase of Miller Golf
In December 1997, Jeremiah Daly, then president of Divot, began negotiations with Robert Marchetti, Louis Katon, and John Carroll, the officers and shareholders of Miller Golf, Inc. ("Miller Golf"), for the sale of Miller Golf's stock to Divot. On January 29, 1998, the parties entered into a Stock Purchase Agreement for the sale of 100% of Miller Golf's stock. As consideration for the stock, Divot agreed to (1) pay $3 million in cash, (2) provide a promissory note for $1 million payable 180 days after the closing date, and (3) issue common stock valued at $300,000. Divot agreed to allow Marchetti, Katon, and Carroll to continue as employees of Miller Golf. Between April 1998 and June 1999, Divot was Miller Golf's sole stockholder. Cellura was Divot's Chairman and CEO. James McNulty was Divot's Chief Financial Officer.
According to Divot, the Miller Golf group — Marchetti, Katon, and Carroll — joined together surreptitiously to maintain control of Miller Golf after the closing date, and to cause "financial ruin" to Divot. In RICO lexicon, they formed an illegal "enterprise." The ultimate goal was to force Divot to sell Miller Golf back to Marchetti, Katon, and Carroll. One method they allegedly used was manipulating or misstating the accounts receivable to diminish the amount of income Miller Golf owed Divot.
2. The Citizens Loan
Citizens Bank of Massachusetts became a lender to Miller Golf. Michael Bulman, a friend of Carroll, was a Citizens loan officer responsible for the Miller Golf account. Patrick Joyce, another Citizens loan officer, also assumed certain responsibilities for the Miller Golf account beginning in February 1999. In April 1998, Citizens Bank and Bulman issued Miller Golf a $2 million line of credit that prevented Miller Golf from making "any loans, dividends or advances to affiliates greater than $100,000" or "[p]aying any dividends or mak[ing] any distributions . . . to any officer, stockholder, or beneficial owner" without Citizens' approval. (Defs.' Ex. B ¶¶ 5.1(m), 5.2(c).) The Citizens line of credit replaced Fleet Bank's ("Fleet") existing line of credit, which precluded Miller Golf from paying any dividends or distributions or making any loans or advances without Fleet's consent. (Defs.' Ex. C ¶¶ 24, 26, 40.)
Divot claims that at some point, Citizens and its loan officers joined the former shareholders of Miller Golf to gain control over the Miller Golf stock through fraudulent acts, including the substitution of the Citizens line of credit for the Fleet line in order to restrict the dividends payable to Divot shareholders. Divot alleges (incorrectly) that there were no restrictions under the Fleet line of credit.
At the closing of Divot's purchase of Miller Golf on April 3, 1998, defendants Marchetti, Katon, Carroll and Bulman failed to advise Divot of this change in terms in the revolving line of credit, although it was aware of the change in banks. Divot was represented by counsel, Annis Mitchell, which has also been sued in this case.
In September 1998 Marchetti approached Daly about payment on Divot's promissory note to him. Divot asked Bulman at Citizens Bank whether it could pay $500,000 of the promissory note from Miller Golf's line of credit with Citizens Bank. Bulman told Divot the line of credit was sufficient to accommodate this request, but did not advise Divot that using the money from the line of credit would violate the terms of the loan agreement, specifically ¶ 5.1(m), which generally precluded "any loans, dividends or advances to affiliates greater than $100,000." Based on Bulman's representations, in late September 1998 Divot used $500,000 from Miller Golf's line of credit to help pay off the promissory note.
3. Default on the Citizens Loan
Throughout the late summer and early fall of 1998, Divot had discussed a potential business venture with Bulman and Citizens Bank. Divot had informed Bulman that Divot intended to purchase Pro-Active Sports ("Pro-Active"), an Oregon company that sold a product similar to Miller Golf's. When Divot asked Bulman whether Citizens would be interested in financing the deal, Bulman referred Divot to Citizens Capital, which was affiliated with Citizens. Divot discussed financing terms with Citizens Capital, but the negotiations ultimately failed.
In late October 1998, Bulman, allegedly angered over Divot's rejection of Citizen Capital's equity loan terms for the Pro-Active deal, informed Divot that because it looked as though the Pro-Active deal was "dead," Miller Golf would be required to immediately return the $500,000 used to pay the promissory note.
On November 1, 1998, despite his earlier consent, Bulman sent Miller Golf a letter informing Miller Golf that, as a result of paying off the promissory note using $500,000 from the Citizens loan, Miller Golf was in default. Bulman pointed to paragraph 5.1(m) of the loan agreement, which limited loans, dividends, and advances to affiliates to $100,000. On January 14, 1999, Citizens mailed a Notice of Default.
On February 4, 1999, Citizens Bank filed a verified complaint signed by Joyce, seeking damages from Miller Golf and Divot for the alleged loan default. The plaintiffs allege this suit was fraudulent because Miller Golf was not in default at the time of the filing. On February 5, 1999, Citizens demanded that Divot pledge its stock ownership in Miller Golf to Citizens in consideration of Citizens' 90-day forbearance from suit and certain advances. Cellura was forced to resign as CEO in favor of Kenneth Craig because Citizens refused to deal with Cellura.
On February 26, 1999, Divot, under financial pressure, entered into a forbearance agreement that included a general release of any claims Miller Golf or Divot had against Citizens. The forbearance agreement allowed Miller Golf to obtain financing from another lending institution. Bulman and Carroll agreed to provide documentation necessary for Miller Golf to obtain outside financing. Divot also pledged all of its stock in Miller Golf to Citizens as additional collateral for the defaulted debt during the forbearance period.
4. The Denouement
Divot was unable to refinance allegedly due to Citizens' failure to provide financial documents and Citizens' position that Miller Golf had been in default. The former Miller Golf shareholders proposed purchasing from Divot their Miller Golf stock through Wynmar, Inc. ("Wynmar") in June 1999. Divot agreed to sell its pledged Miller Golf stock to Wynmar, which was owned by Marchetti, Katon, Carroll, and Thomas Wynn.
On June 1, 1999, Kenneth Craig, the new chief executive officer of Divot, informed Bulman that after the sale closed Divot and Miller Golf would be pursuing claims for damages against Citizens for misusing the restrictive covenant 5.1(m) of the Loan Security Agreement to attempt to regain control of Miller Golf. Citizens sought unsuccessfully to get a release from Divot.
Before the Wynmar deal closed, on June 2, 1999, Citizens advised Divot via a letter sent in the U.S. mail that it intended to sell Miller Golf's collateral at a private sale, and misled Divot into believing the private sale was to Wynmar. Citizens, with the knowledge of Carroll, but not Marchetti or Wynmar, sold its interest in the loan agreement to third parties who subsequently foreclosed the pledged stock and took control of Miller Golf. This was done with the assistance of Divot CFO McNulty. Specifically, defendants Ronald Dick, Robert Cinnotti, and Rick Kroos purchased the loan agreement on June 27, 1999 for $1.3 million. On July 1, 1999, Dick, Cinnotti, and Kroos foreclosed on the Miller Golf stock, seizing ownership of Miller Golf. Dick, Cinnotti, and Kroos have retained ownership of Miller Golf since that date.
IV. LEGAL ANALYSIS
Citizens argues that the Amended Complaint must be dismissed for the following reasons: (1) Cellura's loss of his position as chairman and CEO of Divot does not give him standing to maintain this RICO action, see Willis v. Lipten, 947 F.2d 998, 999-1002 (1st Cir. 1991); (2) the general release in the Forbearance Agreement, which is dated February 26, 1999, bars any claims arising from the loan documents prior to that date; and (3) the Amended Complaint does not allege cognizable RICO claims for a variety of reasons, including the failure to plead a pattern of racketeering activity. While the first two arguments may have merit, the Court will address only the third point, which is cross-cutting.
The release would eliminate any pre-existing RICO predicate acts, but several allegations post-date the release.
1. RICO
To state a RICO claim under § 1962(a), (b) and (c), plaintiff must allege "a pattern of racketeering activity." Under the RICO statute, a "pattern of racketeering is defined 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." Id. § 1961(5). Predicate acts are defined to include violations of the mail and wire fraud statutes. 18 U.S.C. § 1961(1)(B). To prove a pattern of racketeering activity, a plaintiff "must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989). Thus, two tests must be satisfied: relatedness and continuity. See id.
The RICO statute provides
(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. . . .
(b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.
(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.18 U.S.C. § 1962 (2000).
Divot contends that the "RICO enterprise" consisted of the Miller Golf defendants (Marchetti, Katon and Carroll), the Citizens defendants (Citizens, Bulman and Joyce), and others, and that the enterprise's goal was to regain control over Miller Golf through a fraudulent scheme. The linchpin of that scheme, in Divot's view, was the Miller Golf defendants' surreptitious replacement of a Fleet line of credit with a more restrictive line of credit from Citizens. (Am. Compl. ¶ 196(b).) But comparison of the Citizens and Fleet lines of credit reveals that the Citizens line of credit was not more onerous or restrictive. With this key predicate act eliminated, Divot's RICO claim totters.
However, plaintiffs also allege that Citizens fraudulently consented to Divot's use of the line of credit to pay down the promissory note to Marchetti, knowing it would later renege on this consent (Id. ¶ 196(e)), and that the enterprise used the mails and telephone to implement the allegedly fraudulent scheme to foreclose on the line of credit. (Id. ¶¶ 196(f) (a November 1998 letter), ¶ 196(j) (a January 1999 letter).) Additional oral "wire" communications are not alleged with particularity. Collectively, the fraud allegations barely suffice.
Even assuming arguendo that plaintiffs have pled two or more related predicate acts, plaintiffs have not pled the requisite continuity. "'Continuity' is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." H.J. Inc., 492 U.S. at 241-42.
Here, plaintiffs' allegations do not support open-ended continuity, as once the alleged enterprise seized ownership of Miller Golf from Divot through foreclosure of Divot's pledged Miller Golf stock, the enterprise lost its raison d'etre. See Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 19 (1st Cir 2000) ("Schemes which have a clear and terminable goal have a natural ending point . . . [and] therefore cannot support a finding of any specific threat of continuity that would constitute closed-ended continuity.") (quoting Vicom, Inc. v. Harbridge Merchant Servs., 20 F.3d 771, 782 (7th Cir. 1994)).
Plaintiffs' allegations also fail to show closed-ended continuity, which requires "a series of related predicates extending over a substantial period of time." H.J. Inc., 492 U.S. at 242. The H.J. Inc. Court emphasized that "[p]redicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct." Id.
Later courts, including the First Circuit, have taken a jaundiced view of alleged patterns lasting less than two years. See, e.g., GE Inv. Private Placement Partners II v. Parker, 247 F.3d 543, 550-51 (4th Cir. 2001) (finding two year period of conduct insufficient); DeFalco v. Bernas, 244 F.3d 286, 321 (2nd Cir. 2001) ("Since the Supreme Court decided H.J., Inc., this Court has never held a period of less than two years to constitute a 'substantial period of time.'"); Efron, 223 F.3d at 17-21 (finding twenty-one month scheme did not constitute a pattern of racketeering). The Enterprise described by the amended complaint acted between January 1998 and June 1999: a year and a half.
Absent exceptional circumstances — which do not exist here — "a year and a half [period] . . . is of insufficient length to demonstrate closed-ended continuity." DeFalco, 244 F.3d at 321-22; see also GE Inv., 247 F.3d at 550-51; Efron, 223 F.3d 12, 15-21.
A single endeavor of limited duration directed at gaining control over a single company does not amount to a RICO violation. See Efron, 223 F.3d at 18-19 ("[T]he acts as alleged comprise a single effort, over a finite period of time, to wrest control of a particular partnership from a limited number of its partners. This cannot be a RICO violation."). The Efron case is instructive:
In essence, [plaintiff] alleges a scheme to diminish the value of [a] project in the short run, pressing plaintiff and two others to yield up their interest so that the schemers could own and control the whole project. Although multiple related acts of deception were claimed to underlay the faxes and mailings, all allegedly were aimed at the single goal of transforming the ownership of the [p]artnership during its early stages. . . . [T]he finite nature of the racketeering activities alleged here, together with their occurrence over a relatively modest period of time, cannot, in our view, support a jury finding of a RICO pattern under the "closed" continuity approach. Our own precedent firmly rejects RICO liability where "the alleged racketeering acts . . ., 'taken together, . . . comprise a single effort' to facilitate a single financial endeavor."223 F.3d at 18-19; see also Schultz v. Rhode Island Hosp. Trust Nat'l Bank, N.A., 94 F.3d 721, 732 (1st Cir. 1996) ("[C]ourts have tended to find RICO 'patterns' only where the defendant's conduct consists of 'multiple criminal episodes' extending over long periods of time.") (quoting Apparel Art Int'l v. Jacobson, 967 F.2d 720, 724 (1 Cir. 1992).
Here, the alleged enterprise engaged in efforts to wrest control of Miller Golf from Divot lasting for at most one year and a half. The activities had a finite nature — they ended when Divot lost its Miller Golf stock through foreclosure — and did not threaten recurrence. The scheme had one victim, and only two or three specified predicate acts of mail fraud. In short, the picture sketched by the Amended Complaint does not adumbrate the long-term, complex, multi-victim criminal conduct with which RICO was concerned. See Efron, 233 F.3d at 19 (citing H.J. Inc., 492 U.S. at 242). Because the pleadings do not state a substantive RICO claim, then the RICO conspiracy claim also falls. See Id. at 21.
2. State Law Claims Against Citizens
Plaintiff added Massachusetts tort claims in the Amended Complaint despite the Court's order not to do so. Aside from this procedural violation, the counts are deficient as a matter of law. In Count VIII, plaintiff alleges that Citizens and Bulman tortiously interfered with the contract with Divot for the sale of Miller Golf's stock to Divot by working with the Miller Golf defendants to engineer a default on the line of credit, which resulted in loss of the stock. But as Citizens points out, the Miller Golf defendants fulfilled their obligations under the Stock Purchase Agreement when they sold their Miller Golf stock to Divot.
Moreover, to the extent Citizens interfered with the fruits of this contract through its actions on the loan, plaintiff signed a general release that precludes this claim. Plaintiffs argue that the release is invalid because it was the product of fraud, namely, Citizens' false assertion that Miller Golf was in default. However, to show the release was the product of fraud, plaintiffs would need to show that Divot reasonably relied on a false representation. Cf. Metro Life Ins. Co. v. Ditmore, 729 F.2d 1, 4 (1st Cir. 1984). Plaintiffs cannot show the requisite reliance, as Divot, represented by counsel, believed the default to be groundless and fabricated when Divot signed the release.
Divot also suggests that it was induced to enter the contract fraudulently because Citizens later broke its oral promise to provide documentation to facilitate refinancing. (Am. Compl. ¶ 100). That is not sufficient to support a fraudulent inducement claim. See P.L.A.Y., Inc. v. Nike, Inc., 1 F. Supp.2d 60, 65 (D.Mass. 1998) ("[P]romises of future performance which are later breached cannot form the basis of a rescission action.") The Amended Complaint does not allege that Citizens' oral promise was false when made. (See Am. Compl. ¶¶ 100-104).
In Count XII, plaintiffs allege that Citizens and other defendants converted plaintiffs' property by illegally foreclosing Divot's stock in Miller Golf on July 1, 1999, although the Citizens loan had been paid in full. However, the Amended Complaint states that Citizens sold the loan to Dick, Cinnotti, and Kroos (id. ¶ 124), who then foreclosed on the stock. Therefore, Citizens has no liability for conversion.
3. State Law Claim against Annis Mitchell
In the absence of diversity jurisdiction, the court declines supplemental jurisdiction over the remaining state law claims against defendant Annis Mitchell. See 28 U.S.C. § 1367(c) (2000) ("The district court may decline to exercise supplemental jurisdiction . . . [if] the district court has dismissed all claims over which it has original jurisdiction.").
V. ORDER
The Motion to Dismiss of Defendants Citizens Bank of Massachusetts, Michael Bulman, and Patrick Joyce (Docket No. 28) is ALLOWED. The remaining state law claim against Annis, Mitchell, Cockey, Edwards Roehn, P.A., is DISMISSED without prejudice. Plaintiff's cross-motion for leave to amend complaint pursuant to Fed.R.Civ.P. 15(a) (Docket No. 33) is DENIED. The motion to exclude the affidavits of Joseph R. Cellura and Kenneth W. Craig (Docket No. 39) is ALLOWED.