Opinion
3:18-cv-1366-JR
06-14-2019
LAURA L. UNDERWOOD, Plaintiff, v. 1450 SE ORIENT, LLC dba KALEAFA, et al, Defendants.
FINDINGS & RECOMMENDATION :
Plaintiff Laura Underwood originally brought this action against 226 defendants alleging violation of the Racketeer Influenced and Corrupt Organizations ACT (RICO), 18 U.S.C. § 1962 related to marijuana production on property adjacent to her property. Plaintiff grouped defendants into the following categories: (1) defendants who purchased the neighboring property, "Candy Farm Property," in order to produce marijuana and marijuana products on that Property; (2) defendants who cultivated marijuana for the Candy Farm Property on properties other than the Candy Farm Property; and (3) defendants who sold marijuana products produced by the Candy Farm Property at their retail outlets. On March 18, 2019, the court severed the retail defendants from this action.
On April 16, 2019, plaintiff filed a RICO case statement. Defendants 7Points, Inc., Robert Marion Elam, Michael R. Munzing, Certified Portland, LLC, Adam Kirkwood, East Fork Agriculture LLC, Joel Matthew Fischer, Aaron Howard, Nathan Cole Howard, Joseph River Perkins, Mason Reed Walker, High Noon Farm LLC, Tyson Lewis, Gregory Perrin, Willamette Valley Resources, LLC, David Kline, Darlene Siegel, Sugar Tree Farm, LLC, Steven Penman, and Jason Reynolds now move to dismiss. The other defendants joined in the motion to dismiss. The court held oral argument on June 12, 2019. For the reasons stated below, defendants' motion to dismiss should be granted, and plaintiff's request for leave to file a second amended complaint should be allowed.
ALLEGATIONS
Plaintiff is an Oregon property owner who lives immediately adjacent to the former Oregon Candy Farm located at 48620 SE Highway 26 in Sandy, Oregon (Candy Farm Property). First Amended Complaint (doc. 127) at ¶ 1. Defendants Alexander Pavich, Evette Pavich and Nicholas Pavich own and control defendant N&A (the Pavich Defendants). Plaintiff alleges that in August 2013, defendant N&A acquired the Candy Farm Property for the purposes of cultivating marijuana, manufacturing concentrated marijuana extracts and producing marijuana-infused products to sell. Plaintiff alleges these activities constitute a criminal enterprise (the Marijuana Operation). Plaintiff further alleges each of the Pavich defendants agreed to make a financial investment in the Marijuana Operation, and in exchange, each of them would receive a portion of the Marijuana Operation proceeds. Id. at ¶¶ 231-32.
Plaintiff alleges the Pavich defendants and defendant Aligra Marie Rainy developed the Candy Farm Property beginning in September 2013 in preparation for the Marijuana Operation. Id. at ¶¶ 233-344. Plaintiff further alleges the Pavich defendants formed other companies such as defendant Chronic Creations, LLC and defendant Oregon Candy Farm, LLC to manufacture marijuana products and market and sell those products. Id. at e.g., ¶¶ 236-37.
Plaintiff alleges other defendants such as defendant 7Points, Inc. also joined in the Marijuana Operation to produce marijuana for Chronic Creations and OCF. Id. at e.g., ¶¶ 423-24. In addition, plaintiff alleges numerous other defendants such as Alpha Alternative Solutions, LLC joined in the Operation to sell the marijuana products at the retail level. Id. at e.g., ¶¶ 243-45.
As noted above, the retail defendants have been severed from this action. --------
Plaintiff alleges all defendants engaged in the production and sale of a controlled substance in violation of the Controlled Substances Act. 21 U.S.C. §§ 812 , 823, 841, 844. Plaintiff further alleges violation of the Controlled Substances Act and other criminal statutes through advertisements of marijuana products, facilitation of financial transactions, and reinvestment of proceeds from marijuana sales. 21 U.S.C. §§ 843 , 854; 18 U.S.C. §§ 1956 , 1957. First Amended Complaint (doc. 127) at ¶ 453. Plaintiff alleges defendants' violation of the Controlled Substances Act and involvement in money laundering constitutes a conspiracy to engage in a pattern of racketeering activity. First Amended Complaint (doc. 127) at ¶¶ 457-558. Accordingly, plaintiff asserts all defendants violated RICO by conspiring to conduct the affairs of the Marijuana Operation. Id. at ¶¶ 561-64. Plaintiff alleges all defendants specifically violated 18 U.S.C. § 1962(c) (use of an enterprise to conduct a pattern of racketeering activity) and 18 U.S.C. § 1962(d) (conspiracy to conduct such activity).
Plaintiff alleges defendants' violation of RICO caused her injury by:
interfering with Plaintiff's use and enjoyment of Plaintiff's Property, burdening it with noxious odors, diminishing its market value and making it more difficult to sell.
As a direct result of Plaintiff's Property's diminished market value, the amount of credit Plaintiff was able to obtain based upon the value of Plaintiff's Property was materially decreased.First Amended Complaint (doc. 127) at ¶ 566; see also ¶¶ 447-452 (describing in detail the impact on plaintiff's property).
DISCUSSION
Defendants assert the complaint must be dismissed because plaintiff has not and cannot allege an injury sufficient to state a RICO claim.
A civil RICO action allows "[a]ny person injured in his business or property by reason of a violation of" the RICO statute to bring a civil suit for treble damages. 18 U.S.C. § 1964(c). To demonstrate RICO standing, a plaintiff must allege that she suffered an injury to her business or property as a proximate result of the alleged racketeering activity. Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992). Thus, among other elements, in order to state a RICO cause of action, plaintiff must allege harm to a specific business or property interest cognizable under state law. Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1055 (9th Cir. 2008). Moreover, the harm must result in concrete financial loss and not mere injury to a valuable intangible property interest. Chaset v. Fleer/Skybox Int'l, 300 F.3d 1083, 1087 (9th Cir. 2002).
As noted above, plaintiff alleges three areas of injury: (1) diminished use and enjoyment of her property; (2) diminished ability to obtain credit against the property; and (3) diminished market value. A. Use and Enjoyment
Plaintiff alleges the Marijuana Operation causes a "skunk-like stench" to invade her property disrupting her use and enjoyment of her property. First Amended Complaint (doc. 127) at ¶ 448. Plaintiff further alleges guard dogs for the Operation disrupt the ability of her horses to use the pastures on her property and kill animals (not hers) on her property. Id. In addition, plaintiff alleges the Pavich defendants and other participants in the Marijuana Operation harass plaintiff and her guests, and create noise further reducing her use and enjoyment of her property. Id. at ¶ 449. Plaintiff alleges she incurred expenses implementing mitigation measures to curb the impact of the Marijuana Operation such as planting trees and installing video surveillance. Id. at ¶ 450.
Under Oregon law, interference with use and enjoyment of property caused by odors and fumes pertains to an invasion or interference with personal rights. Wilson v. City of Portland, 153 Or. 679, 684, 58 P.2d 257, 259 (1936). Diminution in enjoyment is not a tangible injury to property cognizable under RICO. Oscar v. Univ. Students Co-op. Ass'n, 965 F.2d 783, 787 (9th Cir. 1992); Ainsworth v. Owenby, 326 F. Supp. 3d 1111, 1122-23 (D. Or. 2018) (odorous nuisance, and out-of-pocket expenses for firearms, fencing, gates, and security cameras derived from personal injuries are not compensable under RICO). Accordingly, plaintiff's alleged injury arising from diminished use and enjoyment of her property fails to state a RICO claim. B. Credit
Plaintiff alleges she applied for a home equity loan to make home improvements. First Amended Complaint (doc. 127) at ¶ 452. Plaintiff further alleges her property appraised for materially less than it would have without the presence of the Marijuana Operation resulting in significantly reduced credit available for the loan. Id.
This District recently addressed this issue in a similar case:
it is inescapable that the Frink Plaintiffs' financial position is no worse than it would have been absent the racketeering activity. Specifically, in receiving a smaller loan, the Frink Plaintiffs incurred less debt and—all else being equal—paid less interest based on the smaller principal. That is not a financial loss. Plaintiffs, for instance,
do not allege that they were charged a higher interest rate or otherwise offered the same loan on less favorable terms, such that they were in a worse financial position than they would have been had the fair market value of their home not been depressed. To the contrary, throughout the loan period, the Frink Plaintiffs were in a better position than they otherwise would have been.Ainsworth v. Owenby, 2019 WL 1387681, at *2-3 (D. Or. Mar. 27, 2019).
Although the FAC also notes that the smaller loan prevented the Frink Plaintiffs from building a "more secure and aesthetically pleasing" fence which "would have added more value" to their property .... [A]ny forgone increase in the fair market value of the Frink Plaintiffs' property stemming from the difference between fences would be no less abstract or speculative—but certainly more attenuated from Defendants' racketeering activity—than the underlying drop in fair market value already found insufficient by the Court.... In sum, the Frink Plaintiffs' diminished borrowing capacity neither prevented them from realizing a capital gain (e.g., through actual or attempted sale of their property or other investment opportunity) nor forced them to spend additional funds (e.g., through the payment of a higher interest rate on their loan). They have, as such, alleged no concrete financial loss and fail to state a claim under RICO.
Accordingly, plaintiff's allegations of diminished ability to obtain credit against the property fail to state a RICO claim. C. Diminished Market Value
Plaintiff alleges:
The Marijuana Operation on the Candy Farm Property not only unreasonably interferes with Plaintiff's quiet enjoyment of her property, it also has a material adverse impact on the market value of Plaintiff's Property. When prospective purchasers discover that marijuana concentrate manufacturing using large quantities of highly flammable ethanol is taking place on the Candy Farm Property, they will be discouraged from purchasing Plaintiff's Property because of the well-publicized explosions that regularly take place at marijuana concentrate production facilities and because of marijuana facilities' patently illegal nature and reputation for attracting burglaries, armed robberies, conflicts involving firearms, and other types of dangerous criminal activity. If the prevailing winds are unfavorable, prospective purchasers will immediately notice the unmistakable, skunk-like stench of marijuana emanating from the Candy Farm Property, and might very well end their Viewing of Plaintiff's Property without ever getting out of their vehicles. No one's idea of a dream home includes noxious odors or a location adjacent to an illegal drug manufacturing site that might easily explode and set the whole neighborhood on fire,
particularly in a forested area with limited fire fighting resources. As a result, Plaintiff's Property is worth materially less than it otherwise would be, and will be harder to sell at any price.First Amended Complaint (doc. 127) at ¶ 451.
The court in Ainsworth determined that while a reduction in the fair market value of land is an injury to property, a RICO claimant must still allege a concrete financial loss. Ainsworth,326 F. Supp. 3d at 1124. Accordingly, Ainsworth concluded a plaintiff who has not alleged specific prior attempts to monetize a property interest must plausibly allege at least a present intent or desire to do so. Id. at 1125. Similarly, in another case from this District, the court held a RICO plaintiff must allege in good faith that she attempted or currently desires to convert her property interest into a pecuniary form. Shoultz v. Derrick, 369 F. Supp. 3d 1120,1128 (D. Or. 2019). Plaintiff asserts both of these cases were incorrectly decided.
Plaintiff contends neither Ninth Circuit nor Oregon case law require a sale or an attempt to sell property that has lost value in order to state a RICO claim. However, the requirement of a concrete financial loss does, in fact, require an attempt to monetize the alleged loss. The cases cited by plaintiff do not show anything to the contrary.
As noted above, a RICO injury requires proof of concrete tangible financial loss. Oscar, 965 F.2d at 785. Thus, Oscar determined that a decrease in the property value due to racketeering activity next door does not entail financial loss to a renter of the property. Id. at 786. While the plaintiff in Oscar was a renter and thus not impacted by any loss in property value, the court noted the plaintiff's failure to allege that she attempted to or even desired to sublet the apartment rendered any alleged loss purely speculative. Similarly, here, plaintiff has not alleged a desire to sell her property and thus any alleged diminution in value represents a purely speculative loss.
Conversely, the plaintiffs in Mendoza v. Zirkle Fruit Co., 301 F.3d 1163 (9th Cir. 2002), alleged the leveraged hiring of undocumented workers to depress wages of legally documented employees. The court found the plaintiffs had alleged an injury to property in the form of lost wages. The court specifically found a legal entitlement to business relations unhampered by a scheme prohibited by the RICO predicate statutes. Id. at 1168, n. 8. Thus, the Mendoza plaintiffs alleged a concrete financial loss with respect to an intent to earn wages.
In another case, the Ninth Circuit determined that California protected the legal entitlement to both current and prospective contractual relations. Accordingly, a plaintiff who alleged lost employment opportunities because he was rendered unable to pursue them due to fabricated evidence resulting in his incarceration, stated a RICO injury to his business or property. Diaz v. Gates, 420 F.3d 897, 900 (9th Circ. 2005). Stated differently, the plaintiff alleged an intent to seek employment that was damaged by alleged RICO predicate acts. As noted above, plaintiff in this case does not allege an attempt to sell her property.
Plaintiff asserts Oregon cases allow recovery for damage to property caused by another's negligence by simply measuring the diminished property value without requiring an intent to sell. See, e.g., Furrer v. Talent Irr. Dist., 258 Or. 494, 520, 466 P.2d 605, 618 (1970) (instructed jury to measure damages by comparing the value of plaintiff's real property immediately prior to defendant's alleged acts or omissions with the value of plaintiff's real property following defendant's alleged acts or omissions). Although the courts look to state law to provide a cognizable property interest, for purposes of RICO, the injury must be concrete as demonstrated by an intent to monetize the property interest. Indeed, plaintiff cites a District of California case in which the court concluded prospective harm for diminution in value was not available where the RICO defendant agreed to abate marijuana cultivation activities causing the nuisance that allegedly reduced the property value. Bokaie v. Green Earth Coffee LLC, 2018 WL 6813212, at *6 (N.D. Cal. Dec. 27, 2018) ("If a nuisance is a use which may be discontinued at any time, it is considered continuing in character and persons harmed by it may bring successive actions for damages until the nuisance is abated.... Recovery is limited, however, to actual injury suffered prior to commencement of each action. Prospective damages are unavailable.").
Although plaintiff suggests Oregon does not bar recovery for diminution in property value where nuisance could be abated, she provides the court with no authority allowing recovery for prospective damages. In fact, in Oregon, in an action to recover for an alleged nuisance, testimony as to depreciation in market value caused by the alleged nuisance is inadmissible if the alleged nuisance is temporary and can be abated because when the cause for depreciation is removed, the market value is restored to its normal figure. Porges v. Jacobs, 75 Or. 488, 493, 147 P. 396, 398 (1915). Here, plaintiff alleges damage to her property value related to the ongoing marijuana cultivation and she does not allege that damage will continue even if the operation is abated. As noted above, because there is no allegation of an attempt to monetize the property's value and thus incur an alleged loss, plaintiff has not alleged a concrete financial loss. Accordingly, the operative complaint fails to state a RICO claim and should be dismissed. D. Leave To Amend
Plaintiff seeks leave to file a second amended complaint to allege that her property is in fact currently for sale. Defendants, however, request the court take judicial notice of the Clackamas County Planning and Zoning Division's decision to grant the Pavich defendants' alteration of the nonconforming use of the Candy Farm Property. Generally, a court may not consider materials not included in the pleadings in deciding a Rule 12 motion. Fed. R. Civ. P. 12(d). Nonetheless the court "may take judicial notice of matters of public record" and consider them without converting a Rule 12 motion into one for summary judgment. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (internal quotation marks and citation omitted). Judicial notice is appropriate for records and "reports of administrative bodies." Interstate Natural Gas Co. v. S. Cal. Gas Co., 209 F.2d 380, 385 (9th Cir. 1954). Accordingly, the court takes judicial notice of the application and decision which is available at https://accela.clackamas.us/citizenaccess/#. The Record Number is Z0094-19.
In the application, defendant Alex Pavich represents that the Candy Farm Property has not produced marijuana since March 14, 2019, and that he received permission from the Oregon Liquor Control Commission to transfer the licensed marijuana production operation to a different property. Pursuant to the application, the commercial production and processing of marijuana will no longer occur on the property, and has not occurred for the past three months. The Commission granted the application. Plaintiff, however, filed an appeal based on a concern the Candy Farm Property could be used for making "malodorous hot sauce or products containing durian fruit." Nonetheless, it is unclear from the judicially noticed materials whether the Marijuana Operation is abated given that the application remains on appeal. Plaintiff notes the Commission does not show the license transfer as of the date of oral argument and suggests the outcome of the appeal may result in the defendants resuming the Marijuana Operation on the Candy Farm Property.
Fed. R. Civ. P. 15(a) provides leave to amend "shall be freely given when justice so requires." See Bowels v. Reade, 198 F. 3d 752, 757 (9th Cir. 1999). However, the court need not grant the amendment when it: (1) prejudices the opposing party; (2) is sought in bad faith; (3) causes undue delay; or (4) is futile. Id . at 758; Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990). A proposed amended complaint is futile if it would be immediately "subject to dismissal." Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1298 (9th Cir. 1998). "Futility of an amendment can by itself, justify the denial of a motion for leave to amend." Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995). While the judicially noticed application strongly suggests futility of amendment, the court cannot determine on the record before it, on a motion to dismiss, that the Marijuana Operation has, in fact, abated and thus precludes any economic harm associated with plaintiff's alleged intent to sell her property. As such, plaintiff should be granted leave to amend the complaint.
CONCLUSION
Defendants' motion to dismiss (doc. 412) should be granted. If this Findings and Recommendation is adopted, however, plaintiff should be granted leave to amend the complaint within 60 days from the date of adoption.
This recommendation is not an order that is immediately appealable to the Ninth Circuit Court of appeals. Any notice of appeal pursuant to Rule 4(a)(1), Federal Rules of Appellate Procedure, should not be filed until entry of the district court's judgment or appealable order. The parties shall have fourteen (14) days from the date of service of a copy of this recommendation within which to file specific written objections with the court. Thereafter, the parties shall have fourteen (14) days within which to file a response to the objections. Failure to timely file objections to any factual determination of the Magistrate Judge will be considered as a waiver of a party's right to de novo consideration of the factual issues and will constitute a waiver of a party's right to appellate review of the findings of fact in an order or judgment entered pursuant to this recommendation.
DATED this 14th day of June, 2019.
/s/ Jolie A. Russo
JOLIE A. RUSSO
United States Magistrate Judge