Continuity requirement, wrongful acts within a week did not satisfy RICO

 

Zastrow v. Houston Auto Imports, 789 F.3d 553 (7th Cir. 2015)

An automobile supplier is alleged to have terminated its relationship between an individual presented testimony against the manufacturer.  Even if true, the alleged wrongful acts occurring within a short time did not meet the RICO continuity requirement.

Plaintiffs-Appellants Mark Zastrow and his company Heights Autohaus (collectively, “Zastrow”) appeal from the district court’s grant of summary judgment on their claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO“), 18 U.S.C. §§ 1961-1968, and 42 U.S.C. §§ 1981 and 1982. For the reasons to be explained, we AFFIRM the district court’s judgment on Zastrow’s civil RICO claim and § 1982 claim, but VACATE its judgment on Zastrow’s retaliation claim under § 1981 and REMAND the case for further proceedings consistent with this opinion.

I.

Zastrow owns Heights Autohaus, an automobile repair shop that performs mechanical repairs on German cars. Zastrow previously purchased all of his Mercedes-Benz parts from Houston Auto M. Imports, Ltd. d/b/a Mercedes-Benz of Houston Greenway (“Mercedes Greenway”) at a 25% discount. In September of 2012, Zastrow’s customer and attorney in this action, Reginald E. McKamie, Sr., brought Zastrow a 2006 Mercedes-Benz CLK (“CLK”) to inspect. Unbeknownst to Zastrow at the time, the vehicle was the subject of a lawsuit against Mercedes Greenway that had been compelled to arbitration. The plaintiffs in that suit, Jesse Howard and JoAnn Jefferson-Howard (collectively, the “Howards”), also represented by McKamie, alleged that the CLK that Mercedes Greenway sold them was defective, and asserted claims against the dealership for fraud, negligence, breach of contract, breach of warranty, breach of fiduciary duty, credit discrimination, and racial discrimination and retaliation.

Zastrow inspected the CLK and discovered a number of mechanical problems with the vehicle. McKamie then asked Zastrow if he would testify as an expert witness in the Howards’ lawsuit and Zastrow agreed. Zastrow’s deposition was scheduled for January 8, 2013. Zastrow alleges that on January 7, 2013, he received a phone call from a Mercedes Greenway employee advising him not to sit for the deposition and warning him that he would regret it. Zastrow, however, appeared for the deposition and testified about his inspection of the vehicle. On January 9, 2013, the day after his deposition, Zastrow received a phone call from the same Mercedes Greenway employee, who then informed Zastrow that Mercedes Greenway would no longer sell parts to him.

The final arbitration hearing began the following week on January 14 and concluded on January 17, 2013. On January 14, Mercedes Greenway’s counsel, George A. Kurisky, Jr., mailed Zastrow a letter on behalf of Mercedes Greenway formally severing the dealership’s business relationship with Zastrow because of his deposition testimony.[1] Zastrow did not testify at the arbitration hearing and was unaware it was taking place. His deposition testimony, however, was read to the arbitrator.

On January 23, 2013, McKamie sent the arbitrator a letter captioned “Notice of Retaliation Against Witness in Discrimination Suit and Intent to Sue.” On March 4, 2013, Zastrow filed the instant lawsuit naming as defendants Mercedes Greenway, Kurisky, and Kurisky’s law firm, Johnson, Deluca, Kurisky & Gould, P.C. Although Zastrow propounds a potpourri of legal theories, the gravamen of his complaint is that Mercedes Greenway threatened him to prevent him from testifying and then, with the assistance of Kurisky, retaliated against him by refusing to sell him auto parts after he gave his deposition. The district court granted summary judgment to defendants on all claims, and Zastrow appealed the judgment as to his claims under Rico and 42 U.S.C. §§ 1981 and 1982.

II.

We review a district court’s grant of summary judgment de novo, applying the same legal standard as the district court. Performance Autoplex II Ltd. v. Mid-Continent Cas. Co., 322 F.3d 847, 853 559 (5th Cir.2003) (per curiam). Summary judgment is appropriate only if, interpreting all facts and drawing all reasonable inferences in favor of the non-moving party, “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a).

Where a summary judgment motion mounts challenges solely to the sufficiency of a plaintiff’s pleadings, we review those challenges under a motion to dismiss standard. Ashe v. Corley, 992 F.2d 540, 544 (5th Cir.1993). Under this standard, “[t]he plaintiff must plead enough facts to state a claim to relief that is plausible on its face.” Gines v. D.R. Horton, Inc., 699 F.3d 812, 816 (5th Cir.2012) (internal quotation marks omitted). “We accept all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff.” Id. (alteration and internal quotation marks omitted).

III.

Zastrow first argues that the district court erred in granting summary judgment to defendants on his civil RICO claim. A civil plaintiff has standing to sue under RICO if he has been “injured in his business or property by reason of a violation of section 1962.” 18 U.S.C. § 1964(c). Zastrow brought his claim under § 1962(c), which we have distilled to mean that “a person who is employed by or associated with an enterprise cannot conduct the enterprise’s affairs through a pattern of racketeering.” In re Burzynski, 989 F.2d 733, 741 (5th Cir.1993) (per curiam).[2] To succeed on his claim, Zastrow must provide evidence of the existence of “1) a person who engages in 2) a pattern of racketeering activity, 3) connected to the acquisition, establishment, conduct, or control of an enterprise.Id. (internal quotation marks omitted).

“Racketeering activity” means any of the predicate acts specified in § 1961(1). Zastrow alleges that defendants obstructed justice in violation of 18 U.S.C. § 1503 by attempting to intimidate him to prevent him from giving deposition testimony and testifying at the arbitration hearing.[3] As relevant here, that statute makes it a criminal offense to “corruptly or by threats or force, or by any threatening letter or communication…. endeavor[] to influence, obstruct, or impede, the due administration of justice.” 18 U.S.C. § 1503(a).[4] In support of his claim, Zastrow 560*560 identifies three purported criminal actions by defendants: (1) the January 7 phone call from Mercedes Greenway warning him not to testify; (2) the January 9 phone call from Mercedes Greenway informing Zastrow that it would no longer sell him auto parts; and (3) the January 14 letter from Kurisky officially ending Mercedes Greenway’s business relationship with Zastrow because of his deposition testimony.

A.

Zastrow’s claim fails initially because he cannot show the “pattern of racketeering activity” required to prosecute a civil RICO claim. A pattern of racketeering activity “consists of two or more predicate criminal acts that are (1) related and (2) amount to or pose a threat of continued criminal activity.” Abraham v. Singh, 480 F.3d 351, 355 (5th Cir.2007) (internal quotation marks omitted).

First, Zastrow has, at best, identified only a single predicate act under § 1503: the January 7 phone call. Although he attempts to squeeze all three of defendants’ actions under § 1503, an obstruction of justice statute, it is clear that the phone call and letter terminating Mercedes Greenway’s business relationship with Zastrow were not attempts “to obstruct or impede the proceeding,” United States v. Williams, 874 F.2d 968, 977 (5th Cir.1989), but, as Zastrow claims in his briefing, “retaliatory in nature.” (emphasis added). That is, Mercedes Greenway’s termination of dealings with Zastrow cannot be construed as threats to prevent his live testimony in the arbitration hearing because there was no threat of further penalty — the dealership unequivocally terminated its business with Zastrow because of his deposition testimony, it did not make future dealings contingent on his absence at the hearing (or indicate in any way that it would reconsider its decision if Zastrow did not testify).

Witness retaliation is a separate crime covered by 18 U.S.C. § 1513, the violation of which also qualifies as a predicate act under RICO. 18 U.S.C. § 1961(1). Defendants’ purported misconduct, however, clearly does not fall under this statute (and Zastrow does not argue that it does). See 18 U.S.C. § 1513(a)-(b) (prohibiting killing, causing bodily injury, or damaging the tangible property of another person, or threatening to do so, with the intent to retaliate against a witness); id. § 1513(e) (prohibiting the “interference with the lawful employment or livelihood of any person[] for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense”). Thus, even assuming the validity of Zastrow’s theory that threatening to sever a voluntary business relationship constitutes obstruction of justice under § 1503,[5] only Mercedes Greenway’s initial phone call warning Zastrow not to testify would qualify as a predicate act under RICO.

Moreover, even assuming that the two phone calls and the letter constitute three predicate acts under § 1503, 561 Zastrow would still fail to satisfy the continuity requirement. “To establish continuity, plaintiffs must prove `continuity of racketeering activity, or its threat.'” Word of Faith World Outreach Ctr. Church, Inc. v. Sawyer, 90 F.3d 118, 122 (5th Cir.1996) (quoting H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 241, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989)). “This may be shown by either a closed period of repeated conduct, or an open-ended period of conduct that `by its nature projects into the future with a threat of repetition.'” Id. (quoting H.J. Inc., 492 U.S. at 241, 109 S.Ct. 2893). Continuity over a closed period requires proof of “a series of related predicates extending over a substantial period of time.” H.J. Inc., 492 U.S. at 242, 109 S.Ct. 2893. “Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement….” Id. Continuity over an open period requires “a threat of continued racketeering activity.” Id. This may be established where the predicate acts “themselves involve a distinct threat of long-term racketeering activity” or “are part of an ongoing entity’s regular way of doing business.” Id. at 242-43, 109 S.Ct. 2893.

The alleged witness intimidation and retaliation were committed within one week and were directed towards, at most, two discrete events: Zastrow’s deposition and his possible testimony at the arbitration hearing. “[W]here alleged RICO predicate acts are part and parcel of a single, otherwise lawful transaction, a `pattern of racketeering activity’ has not been shown.” Word of Faith, 90 F.3d at 123. We have held that, where all of the alleged predicate acts took place in the context of defending a lawsuit, the unlawful conduct “did not constitute or threaten long-term criminal activity.” Burzynski, 989 F.2d at 742-43 (dismissing civil RICO claims because multiple acts of alleged mail and wire fraud were committed in an “otherwise lawful” defense of a lawsuit that was “now over”). As in Burzynski, the alleged predicate acts here were committed in the context of Mercedes Greenway’s defense of a lawsuit. Zastrow cannot credibly argue that obstructing justice is part of defendants’ regular way of doing business or that their purported attempts to intimidate him create a threat of long-term racketeering activity. The entirety of Zastrow’s claim is that Mercedes Greenway refused to sell him parts after he served as an expert witness against the dealership in an arbitration. Any argument that Mercedes Greenway’s business decision threatens long-term criminal activity is frivolous. Thus, Zastrow has not shown that defendants’ alleged predicate acts amount to or constitute a threat of continuing racketeering activity.

Jurisdiction and RICO

May the plaintiff sue a group of defendant in a state if minimum contacts with the forum state is not shown. Most courts have interpreted 18 U.S.C. section 1965(b) to confer nationwide jurisdiction in a RICO action over nonresident defendants if the plaintiff can establish personal jurisdiction over at least one defendant under section 1965(a). See Rolls-Royce Corp. v. Heros, Inc., 576 F.Supp.2d 765, 778-79 (N.D. Tex. 2008) (citing cases); Oblio Telecom, Inc. v. Patel, No. 3-08-CV-0279-L, 2008 WL 4936488 at *4 (N.D. Tex. Nov. 18, 2008) (citing cases).  If the RICO plaintiff can show that at least one defendant “resides, is found, has an agent, or transacts his affairs” in the forum, then jurisdiction is proper as to all other defendants if “the ends of justice require.” Rolls-Royce, 576 F.Supp.2d at 779; Paolino v. Argyll Equities, L.L.C., 401 F.Supp.2d 712, 718 (W.D. Tex. 2005). Rather than having to show the connection with the forum state, due process in such cases is satisfied if the nonresident defendant has sufficient minimum contacts with the United States. See Busch, 11 F.3d at 1258; Rolls-Royce, 576 F.Supp.2d at 782.

RICO STRATEGIES

  1. Defendant’s Approach

The astute defendant initially attacks the pleading.  Has the plaintiff explained precisely what was false or deceptive, and why it is false.  Under the Iqbal case, the plaintiff must explain precisely what is false or deceptive.  In the Madoff fraud, an administrative complaint was dismissed because the plaintiff’s statements about a widespread fraud were deemed  unsupportable speculation.

2. Plaintiff’s counsel’s approach
Even if he believes there to be a clear fraud, plaintiff’s counsel should not underestimate the defense.  I don’t know anything I cannot prove through admissible evidence.  Plaintiff’s counsel should not hesitate to press his client for concrete details about an alleged fraud or other unlawful conduct.

New York Court Permits RICO Claim in Automobile Fraud Case

Anwar Alkhatib v. New York Motor Group, LLC, et al., Defendants.

Nos. CV-13-2337 (ARR), (E.D.N.Y. 2015)

MEMORANDUM & ORDER AND REPORT & RECOMMENDATION

STEVEN M. GOLD, Magistrate Judge.

INTRODUCTION

Plaintiffs in these six related cases allege, among other things, that they were defrauded when they purchased automobiles and obtained financing from defendants. Plaintiffs allege multiple causes of action, including violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), the Truth in Lending Act (“TILA”), the Magnuson-Moss Warranty Act (“MMWA”), consumer protection laws of New York, and state common law.

Plaintiffs now move for leave to file Amended Complaints to bring the claims alleged in the related cases into conformity, to refine already asserted claims, and to address issues raised by defendants in pre-motion submissions. Docket Entry 71.[1] Defendants respond by crossmoving to dismiss the Proposed Amended Complaints pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), in large part by arguing that the complaints fail to satisfy the pleading standard of Rule 9(b). Docket Entry 77, Docket Entry 60 in 13-cv-5643.[2] Specifically, the used car dealership defendants, New York Motor Group and Planet Motor Cars, Mamdoh Eltouby, who owns and operates them, and Nada Eltouby, who was at relevant times employed by them, seek dismissal of the RICO claims against them.[3] M&T Bank moves to dismiss the RICO, TILA, MMWA, and state law consumer protection claims asserted by plaintiffs against it. Plaintiffs have filed opposition to defendants’ cross-motions and a reply in support of their original motion. Docket Entry 80, (“Pls. Reply”). The dealership defendants have filed a reply on their motion, arguing that the RICO claims, as pleaded in the proposed Amended Complaints, are legally deficient, Docket Entry 85, (“NYMG Reply”), as has M&T Bank, Docket Entry 66 in 13-cv-5643, (“M&T Bank Reply”), challenging the sufficiency of the RICO, TILA, MMWA, and state law consumer protection claims made against it.

United States District Judge Ross has referred plaintiffs’ motion to amend to me for decision and defendants’ cross-motions to dismiss for report and recommendation. Docket Entry 65. I heard oral argument on November 25, 2014. Docket Entries 88-89. Plaintiffs then filed a supplemental letter with a revised proposed amended complaint attached. Docket Entry 92. M&T Bank filed a letter in response. Docket Entry 75 in 13-cv-5643.

FACTS

The facts set out below are drawn primarily from plaintiffs’ Proposed Amended Complaints and are deemed true for purposes of the pending motions. Facts drawn from the Proposed Amended Complaint (“PAC”) filed by Alkhatib explain the retail installment contract (“RIC”) scheme in detail. Because the overall alleged scheme is similarly described in the remaining complaints, the discussion of the pleadings filed by the other plaintiffs is more limited and focuses on facts specific to their respective dealings with defendants.[4]

The Parties

Defendant Mamdoh Eltouby owns and operates defendant New York Motor Group and either owns or has an ownership interest in defendant Planet Motor Cars and non-party Hillside Motors. These entities are dealerships that sell used cars and advertise cars for sale on various Internet sites. A: ¶ 34; T: ¶ 16. Nada Eltouby is Mamdoh Eltouby’s daughter and was employed at New York Motor Group and Planet Motor Cars at times relevant to plaintiffs’ claims. Nada Eltouby assisted with the sale of automobiles and arranging financing for vehicle purchases. A: ¶ 28. Julio Estrada was an employee of the dealerships whose primary responsibilities included arranging financing for customers buying cars from the dealerships. A: ¶ 30. M&T Bank, Capital One Auto Finance, Inc. (“Capital One”), and Santander Consumer USA, Inc. (“Santander”) are financial institutions that provided financing to plaintiffs pursuant to Retail Installment Contracts fraudulently prepared by the dealership defendants.

The Fraudulent Retail Installment Contract Scheme

The following facts are drawn from the PAC filed by plaintiff Alkhatib and generally resemble those alleged by the other plaintiffs. In December 2012, Anwar Alkhatib saw a 2008 Honda Odyssey mini-van advertised on cars.com for a purchase price of $14,995. A: ¶ 34. A few days later, Alkhatib went to New York Motor Group to inquire about purchasing the vehicle and saw the sale price advertised as $16,995 on the car’s window. A: ¶¶ 35-36. After some negotiation, Alkhatib agreed to purchase the car for $14,995, with $10,000 down and the remaining $4,995 financed. A: ¶¶ 37-38. A salesperson then agreed to lower the price to $13,995 and prepared a purchase invoice listing this amount as the sales price. A: ¶¶ 39-40. The salesperson asked Alkhatib to leave a deposit of $200 to keep the deal open and to return the next day to make the financing arrangements. A: ¶¶ 41-42. Although he originally refused to do so, the salesperson also provided Alkhatib with a photocopy of a portion of a service invoice that reflected the $200 deposit. A: ¶¶ 43-44.

When Alkhatib returned the next day, the salesperson told him he had to pay the remainder of the $10,000 down payment before he would be allowed to complete a loan application. A: ¶ 46. After giving the salesperson $9,800, Alkhatib waited approximately two hours before he was introduced to a man identified as “John Figueroa,” but who, plaintiffs contend, was in fact defendant Julio Estrada. A: ¶¶ 47-50. Even though Alkhatib had not yet signed a loan application, Figueroa/Estrada (referred to as “Figueroa” below) informed him that two banks had already declined his credit request. A: ¶¶ 51-52. Figueroa refused to provide Alkhatib with the rejection documents and assured him that the banks would send letters to him directly by mail. A: ¶ 53. Alkhatib never received any such letters. A: ¶ 54. Figueroa then reported that Alkhatib had bad credit, leaving him with two options for financing the vehicle, each of which would result in a drastic increase in the car’s cost: one option included a $4,500 processing fee, an annual percentage rate of 15%, and a prepayment penalty, while the other required a $1,750 processing fee, an annual percentage rate of 10%, a $2,700 insurance policy, and a $3,000 service contract. A: ¶ 55.

At this point, Alkhatib sought to get his deposit back and go elsewhere, but Figueroa told him that the financing process had begun and that Alkhatib could not cancel it or leave without incurring a penalty equal to 35% of the car’s cash price. A: ¶ 56-57. Figueroa also asserted that, if Alkhatib canceled the deal, the dealership would retain the $10,000 cash deposit and Alkhatib would be required to hire a collection company to get even a portion of it back. A: ¶ 58. Alkhatib then offered to pay the entire price for the car in cash. A: ¶ 59. Figueroa, though, insisted that was no longer possible and that, if Alkhatib wished to buy the vehicle and avoid the penalty, he would have to select one of the dealership’s financing options. A: ¶ 60.

Alkhatib reluctantly selected the second financing option and was told the $7,450 in additional charges were “security conditions” necessary to obtain the loan. A: ¶¶ 62-63. Figueroa prepared a retail installment contract and purchase agreement that stated the vehicle price was $21,457.50 and failed to itemize the additional processing, insurance and service contract charges. A: ¶ 64. The final retail installment contract indicated that the amount financed was $13,309.53 with a $4,034.67 finance charge and an annual percentage rate of 10.76% — amounting to $17,344 in financing and fees and a total cost exceeding $27,000 for a car that had been advertised for $14,995 and for which Alkhatib at one point offered to pay the full amount in cash. A: ¶¶ 66-68. Although Alkhatib had responded to an Internet ad for New York Motor Group and had traveled to a dealership by that name, the $3,000 service contract indicated that the selling dealership was Planet Motor Cars and listed the vehicle’s purchase price as $20,000. A: ¶¶ 76-77.

Figueroa represented to Alkhatib that the insurance policy for which Alkhatib was charged $2,700 would mature into a policy with complete automobile insurance coverage after six months. A: ¶ 72. However, the product was not in fact a replacement for car insurance, but a “Theft Deterrent Product Protection policy.” A: ¶ 70. Although Figueroa promised Alkhatib that an insurance card would be mailed to him, Alkhatib never received one. A: ¶¶ 73-74. Moreover, when Alkhatib contacted the provider of the Theft Deterrent policy in attempt to cancel it, he learned he could not do so because the providers of that plan had no record of him having a policy with them in the first place. A: ¶¶ 80-81. Alkhatib contacted both NYMG and Planet Motors Cars about cancelling the “insurance policy” and the service contract, but neither responded to his inquiries. A: ¶¶ 82-86.

New York Motor Group sent the retail installment contract and other information to Capital One via either fax or the Internet. A: ¶ 79. Capital One successfully became an assignee of Alkhatib’s loan and continued to send him billing statements and receive monthly payments, at least up to the time Alkhatib filed his complaint. A: ¶ 87.

The other plaintiffs had similar experiences with the dealership defendants. Some were exposed to additional tactics, including promises that the financing discussions were being recorded, G: ¶ 53; T: ¶ 28; pressure to sign the documents quickly, F: ¶ 68; G: ¶ 63; T: ¶ 31; and false assurances or avoidance during subsequent visits, T: ¶ 48; C: ¶¶ 86, 92; F: ¶¶ 72, 76, 82-83; G: ¶¶ 123-25.

On June 19, 2013, Shahadat Tuhin went to NYMG to purchase a vehicle he had seen advertised on the dealership’s website for $14,995. T: ¶ 16. When he arrived there, Estrada told Tuhin he would have to sign a sales contract before he could obtain financing, and that the car would be financed at 5.84% interest for six months and at 2.17% interest for the remaining 54 months of the loan if Tuhin made the first six payments on time. T: ¶¶ 18, 23. Estrada falsely explained that if Tuhin made these payments, he would pay $2,000 down and $9,529.86 in financing payments for a car advertised at $14,995 on the Internet. T: ¶ 27. When Tuhin questioned a sales contract showing $22,795.87 as the sales price, Estrada showed him a new contract reflecting the lower agreed upon price of $12,000. T: ¶¶ 29-30. Estrada rushed Tuhin to sign this document, obscured the areas surrounding the signature block, and refused to immediately provide Tuhin with a copy. T: ¶¶ 30-31. When Tuhin returned home, he saw that the document he signed was in fact the original sales contract with the higher sales price. T: ¶ 35. Tuhin had also unknowingly signed a retail installment contract for $26,209, which included $4,997.96 in finance charges, a $3,000 service contract, and other unrequested and previously undisclosed “add-ons.” T: ¶ 35. Moreover, the car itself was not merchantable in that it shook violently when driven. T: ¶ 53. Tuhin tried to return the vehicle to NYMG but was met with resistance from Nada Eltouby, Mamdoh Eltouby, and other NYMG employees. T: ¶¶ 59-65.

In December 2012, plaintiff Simon Gabrys went to NYMG in response to an Internet advertisement for a used car. G: ¶ 40. When he arrived, Gabrys agreed to pay $10,000 in a bank check and borrow $9,000 to purchase a vehicle. G: ¶ 48. Gabrys met with Estrada, who told Gabrys that he had poor credit and could only obtain a loan from M&T Bank at a rate of 5.7%. G: ¶ 54. Estrada represented, however, that the loan could be refinanced at a rate of 2.13% if Gabrys made the first eight loan payments on time. G: ¶ 55. Estrada also stated that this deal required purchasing a package of additional products, including a $3,995 service contract, but that Gabrys was entitled to a refund of $3,920 of that charge if Gabrys cancelled the service contract after six months. G: ¶¶ 57-59. Gabrys signed a retail installment contract listing a vehicle cash price of $30,895, a down payment of $10,000, and an unpaid balance of $20,895. G: ¶¶ 63-65. Gabrys was able to receive only $2,2246.36 after cancelling the service contract, and the loan was never refinanced at a lower rate as promised despite Gabrys’ payments and multiple attempts to have Estrada process his refinancing application. G: ¶¶ 77, 101-06.

In February 2013, plaintiff Boris Freire sought to buy a vehicle after seeing it advertised on NYMG’s website for $14,900.[5] F: ¶¶ 42-43. Freire met with a representative of the dealership who identified himself as John Dos Santos, but who plaintiffs contend was in fact defendant Estrada. F: ¶¶ 15-16, 49. Dos Santos presented Freire with two financing options after telling Freire that he had a poor credit rating. F: ¶ 51. Freire agreed to the second option, which Dos Santos represented would allow Freire to refinance his loan and reduce his monthly payments from $624.72 to $155.27 after four payments. F: ¶ 51. Freire, having agreed to the deal, made arrangements to return with a down payment of $7,500. F: ¶ 53. When Freire returned the next day with the down payment, he questioned the RIC presented to him because it listed a vehicle cash price of $30,199.96, showed a down payment of $10,500, and required $22,999.96 to be financed. F: ¶¶ 56, 58. The contract also stated that Freire was obligated to pay the higher payments over the entirety of the loan period and did not memorialize the promised opportunity to refinance after four payments. F: ¶ 57. Additionally, Dos Santos told Freire that the lender required Freire to purchase a package of products including insurance priced at $5,500 and a service contract costing $3,000. F: ¶¶ 59-60. Dos Santos made a number of fraudulent assurances to convince Freire to sign the contract. F: ¶¶ 61-64, 66-67. Four months later, Dos Santos convinced Freire to pay an additional $3,000 to receive the refinancing he had been promised earlier. F: ¶¶ 85, 87, 90. In this interaction, Dos Santos told Freire that if he did not pay the additional $3,000, he would be bound by the terms of the high interest loan for another 56 months. F: ¶ 88. After paying the $3,000, Freire signed a new RIC providing for a lower monthly payment, but the loan was never refinanced as promised. F: ¶ 90, 98-99.

In April 2013, plaintiff Zeng Hui Dong went to NYMG and inquired about a car she saw on the lot. D: ¶ 43. After Dong put down $7,000 in cash towards the purchase of the car she had selected, Estrada advised her she would have to purchase insurance and service contracts that would add more than $6,000 to the price of the car. D: ¶ 51. When Dong said she was not interested and wanted to leave, Estrada threatened that she would lose all but $2,000 of her deposit if she declined to proceed with the purchase and arrange for financing. D: ¶¶ 54-55. Although Dong proceeded to sign a RIC, it was never processed, and the lending bank, Capital One, never contacted her. D: ¶¶ 57, 60-62. On July 30, 2013, Dong returned to the dealership at Estrada’s request. D: ¶¶ 64-65. When she arrived, Estrada tried to present her with another RIC, and Dong responded by offering to pay off the balance due for her car in cash. D: ¶¶ 66-67. After some negotiations, Estrada accepted her cash and prepared a document crediting Dong for her two lump sum payments, indicating $0 financed, 0% interest charged, and a total down payment matching the car’s sale price. D: ¶¶ 68, 70-73. Despite this new arrangement, though, in December 2013, Dong received a certificate of title for the purchased vehicle in the mail that listed Santander Consumer USA as a lienholder. D: ¶¶ 81-82. Dong later learned that Santander had received a third RIC in her name dated August 2013, bearing a signature distinctly different from her own and indicating an unpaid balance of $18,041.23. D: ¶¶ 85, 88, 93. Dong returned to the dealership in February 2014 and showed a copy of the third RIC to Nada Eltouby. D: ¶ 105. Nada Eltouby denied knowing about the RIC and advised Dong that the dealership could not do anything to help her because Estrada no longer worked there. D: ¶ 105. On March 24, 2014, Santander repossessed Dong’s car for not making payments on the third RIC and returned the car to Dong only after this lawsuit was filed. D: ¶¶ 119, 130.

In January 2013, plaintiff Nasrin Chowdhury went to NYMG after seeing an Internet advertisement for a car for sale there. C: ¶ 41. A salesperson rejected her offer to pay for the car in cash, and Chowdhury ultimately agreed to pay $10,000 in cash and to finance $3,500 of the purchase price. C: ¶¶ 43, 44, 47. Estrada offered Chowdhury two financing options with the shorter term, lower interest option requiring a warranty or service contract on the vehicle. C: ¶¶ 61, 63-64. Chowdhury received a sales contract reflecting a sale price of $13,500 and understood that the total price of the vehicle would be $16,556.10 including interest and the service contract. C: ¶¶ 57, 67. However, when Chowdhury received the RIC, it stated a total price of $24,471.00 with $14,911.99 of that amount financed. C: ¶ 77. Estrada assured Chowdhury that a final lump sum payment on the seventh month would pay off the loan in full and that their original agreement was not altered by the RIC. C: ¶ 82. In August 2013, Chowdhury’s son gave Estrada the final lump sum payment and Estrada assured him, both verbally and in writing, that the debt on the car had now been fully paid. C: ¶¶ 89-90. However, the lender, M&T Bank, continued to bill Chowdhury and sent her a letter asserting that she was behind in her payments. C: ¶ 96. Chowdhury’s son spoke with Nada Eltouby in early October and explained to her that the loan had been paid, and Nada Eltouby assured him that the dealership would take care of everything. C: ¶¶ 101-03. Nada Eltouby spoke with Chowdhury’s son again in mid-October and told him that he should speak with the bank because there was nothing she or the dealership could do to assist him. C: ¶¶ 104-05. In early November 2013, Estrada called Chowdhury at her home and threatened to divulge her personal financial information to others and to call her at work in possible retaliation for her persistence. C: ¶ 116. After police intervention, Estrada had Nada Eltouby prepare a money order from the dealership in the amount of the August 2013 lump sum payment. C: ¶¶ 124-25. Around this time, Chowdhury also discovered that her signature had been forged on the service contract and that the contract contained other falsified information. C: ¶¶ 131, 133-34. Chowdhury was able to recover only 45% of the $2,314 she paid for the service contract despite Estrada’s earlier assurance that she would be eligible for a full refund. C: ¶¶ 139-40.

Chowdhury, Tuhin, and Gabrys, the only plaintiffs suing M&T Bank, allege that M&T Bank agreed to fund their loans despite knowing or recklessly disregarding that they had been fraudulently induced to agree to financing agreements. G: ¶ 20. In June 2013, Tuhin called M&T Bank immediately after NYMG electronically sent the assignment documents to M&T Bank, but before the bank had paid any funds to NYMG. T: ¶¶ 44-45. Although Tuhin told an M&T Bank representative he had been defrauded and wanted to cancel his loan, the M&T representative responded that the Bank could not cancel the transaction once the dealership submitted a RIC with his signature. T: ¶ 45. In October 2013, approximately ten months after their loans had been processed and issued, Gabrys and Chowdhury contacted M&T Bank as well. G: ¶ 126; C: ¶ 106. M&T Bank at first made assurances that it would investigate further, but then generally told each plaintiff that there was nothing the bank could do to cancel the loans. T: ¶ 46; G: ¶ 127; C: ¶¶ 107, 112-14. A bank representative suggested to Chowdhury, through her son, that she should retain an attorney, and another bank representative advised Tuhin that he could report any claim of fraud to the New York State Attorney General. C: ¶ 114; T: ¶ 45.

Plaintiffs allege that Nada Eltouby was a key participant who knowingly assisted the dealerships’ fraudulent scheme throughout the relevant period. At separate points, plaintiffs observed Nada Eltouby faxing documents to an apparently nonexistent person, G: ¶ 117, and creating a money order at Estrada’s request, C: ¶ 125. Nada Eltouby served as a manager with authority to act on behalf of the dealership. C: ¶ 122; T: ¶¶ 47, 61. For instance, she spoke with police officers responding to a protest held by fraud victims, C: ¶ 122; D: ¶ 107, and received a cash down payment made by one of the plaintiffs and signed a receipt for it, T: ¶ 18. Plaintiffs further allege that Nada Eltouby often spoke on behalf of the dealership to the plaintiffs and, at times, made assurances on NYMG’s behalf. C: ¶¶ 102-03; T: ¶ 19; F: ¶ 83.

Mamdoh Eltouby was present for various interactions between the dealerships and the plaintiffs and also authorized numerous actions by his subordinates. Eltouby hired Estrada to serve as a finance manager only weeks after Estrada had been indicted and arrested on multiple counts of theft, larceny, forgery, and fraud related to his actions as the finance manager of another dealership. T: ¶¶ 79, 82. Eltouby hired Estrada despite a public announcement from the Queens County District Attorney that Estrada had defrauded more than 23 consumers out of more than $115,000 with the promise that they could return to him to refinance their high interest loans after six months of timely payments. T: ¶ 80. Plaintiffs allege that Mamdoh Eltouby continues to operate the fraudulent scheme even after Estrada’s re-arrest in March 2014 and even without Estrada’s continued participation. T: ¶ 85.

DISCUSSION

  1. Standards Governing Leave to Amend and Judgment on the Pleadings

Leave to amend a pleading “should [be] freely give[n] . . . when justice so requires.” Fed. R. Civ. P. 15(a); see also Foman v. Davis, 371 U.S. 178, 182 (1962) (“In the absence of any apparent or declared reason — such as undue delay, bad faith . . . undue prejudice to the opposing party . . . futility of the amendment, etc. — the leave sought should, as the rules require, be `freely given.'”). Amendments are generally favored because they “tend to facilitate a proper decision on the merits.” Sokolski v. Trans Union Corp., 178 F.R.D. 393, 396 (E.D.N.Y. 1998) (internal quotation marks and citations omitted). The party opposing an amendment to the pleadings has the burden to establish “that leave to amend would be prejudicial or futile.” Id.; see also Block v. First Blood Assoc., 988 F.2d 344, 350 (2d Cir. 1993) (“The rule in this Circuit has been to allow a party to amend its pleadings in the absence of a showing by the nonmovant of prejudice or bad faith.”); Harrison v. NBD Inc., 990 F. Supp. 179, 185 (E.D.N.Y. 1998). Thus, “[i]f the movant has at least colorable grounds for relief, justice . . . requires that the court grant leave to amend the complaint.” Sokolski, 178 F.R.D. at 396 (quoting Golden Trade, S.r.L. v. Jordache, 143 F.R.D. 504, 506 (S.D.N.Y. 1992)) (internal quotation marks and brackets omitted).

Whether a proposed amendment to a pleading would be futile is decided pursuant to the same standard that applies to a motion to dismiss. “An amendment is considered futile if the amended pleading fails to state a claim or would be subject to a successful motion to dismiss on some other basis.” Chan v. Reno, 916 F. Supp. 1289, 1302 (S.D.N.Y. 1996). “In deciding whether an amended complaint meets this threshold, the Court is required to accept the material facts alleged in the amended complaint as true and draw reasonable inferences in the plaintiffs’ favor.” Mendez v. U.S. Nonwovens Corp., 2 F. Supp. 3d 442, 451 (E.D.N.Y. 2014) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009)). These principles apply as well when considering a motion to dismiss, whether under Rule 12(b)(6) or 12(c):

The standard for granting a Rule 12(c) motion for judgment on the pleadings is identical to that of a Rule 12(b)(6) motion for failure to state a claim. In both postures, the district court must accept all allegations in the complaint as true and draw all inferences in the non-moving party’s favor. The court will not dismiss the case unless it is satisfied that the complaint cannot state any set of facts that would entitle [the plaintiff] to relief.

Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir. 2011) (internal citations omitted).

To survive a motion to dismiss, “the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient to raise a right to relief above the speculative level.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)) (internal quotation marks omitted). In other words, “a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation omitted). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. While the court accepts all well-pleaded factual allegations as true, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. Dismissal is appropriate if the well-pleaded allegations in the complaint do not “nudge[] . . . claims across the line from conceivable to plausible.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).

Fraud claims are subject to a heightened pleading standard that requires plaintiffs to “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). “The complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements.” Lundy v. Catholic Health Sys. of Long Island Inc., 711 F.3d 106, 119 (2d Cir. 2013) (internal quotation marks and citation omitted). “To survive a motion to dismiss, a complaint alleging fraud must [also] `allege facts that give rise to a strong inference of fraudulent intent.'” Space Hunters, Inc. v. United States, 500 F. App’x 76, 78-79 (2d Cir. 2012) (citation omitted).

Because defendants who oppose leave to amend on futility grounds face the same standard as those who move for judgment on the pleadings under Rule 12, I address defendants’ motions to dismiss and their opposition to plaintiffs’ motion for leave to amend together.

  1. Plaintiffs’ RICO Claims

RICO provides a civil remedy to persons injured in their business or property by a violation of the statute. 18 U.S.C. § 1964(c). Plaintiffs assert RICO and RICO conspiracy claims pursuant to 18 U.S.C. §§ 1961(c) and (d) against the various dealership and financial institution defendants. Alkhatib PAC Count 2; Tuhin PAC Counts 1-2; Freire PAC Counts 3-4; Gabrys PAC Counts 2-3; Dong PAC Counts 1-2; Chowdhury PAC Counts 1-2.

A plaintiff asserting a civil RICO claim must allege “(1) a violation of the RICO statute, 18 U.S.C. § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962.” Spool v. World Child Int’l Adoption Agency, 520 F.3d 178, 183 (2d Cir. 2008) (quoting DeFalco v. Bernas, 244 F.3d 286, 305 (2d Cir. 2001)). A defendant may be held liable for violating RICO if the defendant, through the commission of two or more acts constituting a pattern of racketeering activity, directly or indirectly participated in the affairs of an enterprise involved in interstate commerce. Hemi Group, LLC v. City of New York, 559 U.S. 1, 6 (2010); Allstate Ins. Co. v. Valley Phys. Med. & Rehab., P.C., 2009 WL 3245388, at *3 (E.D.N.Y. Sept. 30, 2009) (quoting United States v. Turkette, 452 U.S. 576, 583 (1981)). Defendants challenge the sufficiency of plaintiffs’ RICO allegations on a number of grounds, each of which is addressed below.[6]

RICO Enterprise

In their proposed amended complaints, each plaintiff brings a RICO claim against Mamdoh Eltouby, Nada Eltouby and Julio Estrada that alleges an association-in-fact enterprise “comprised of the auto dealerships owned, operated, overseen or otherwise controlled by Mr. Eltouby, or in which Mr. Eltouby is an officer. They include New York Motor Group, Planet Motor Cars, and Hillside Motors, LLC.” T: ¶ 127.[7] This alleged enterprise is referred to below as the “Dealership Enterprise.” In addition, plaintiffs Chowdhury, Gabrys, and Tuhin each assert a RICO claim against New York Motor Group and M&T Bank that alleges an association-in-fact enterprise comprised of these two named defendants. T: ¶ 96; G: ¶¶ 146-47 (including Planet Motor Cars in addition to NYMG and M&T Bank), C: ¶¶ 148-49 (including Planet Motor Cars in addition to NYMG and M&T Bank). This second alleged enterprise is referred to below as the “M&T Enterprise.”

A RICO enterprise “includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. § 1961(4). An “association-in-fact” enterprise must have “at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.” Boyle v. United States, 556 U.S. 938, 956 (2009); see also United States v. Turkette, 452 U.S. 576, 583 (1981) (describing an enterprise as “a group of persons associated together for a common purpose of engaging in a course of conduct”); Hemmerdinger Corp. v. Ruocco, 976 F. Supp. 2d 401, 413 (E.D.N.Y. 2013) (same). Courts in this district have recognized that “Boyle establishes a low threshold for pleading such an enterprise.” Delgado v. Ocwen Loan Servicing, LLC, 2014 WL 4773991, at *16 (E.D.N.Y. Sept. 24, 2014) (quoting McGee v. State Farm Mut. Auto. Ins. Co., 2009 WL 21232439, at *4 n.7 (E.D.N.Y. July 10, 2009)). Formal hierarchy, role differentiation, regular meetings, or established procedures are not required; rather, an informal group may constitute an enterprise as long as “the group . . . function[s] as a continuing unit and remain[s] in existence long enough to pursue a course of conduct.” Boyle, 556 U.S. at 948.

A RICO enterprise must have an ascertainable structure distinct from the pattern of racketeering activity in which its members engage. Turkette, 452 U.S. at 583 (holding that “[t]he `enterprise’ is not the `pattern of racketeering activity;’ it is an entity separate and apart from the pattern of activity in which it engages”). Nevertheless, “the evidence used to prove the pattern of racketeering activity, and the evidence establishing an enterprise `may in particular cases coalesce.'” Boyle, 556 U.S. at 947 (quoting Turkette, 452 U.S. at 583); see also United States v. Int’l Longshoremen’s Ass’n, 518 F. Supp. 2d 422, 473 (E.D.N.Y. 2007). Finally, the enterprise as alleged must be distinct from the person or persons alleged to be conducting the affairs of the enterprise. See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001); Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 121 (2d Cir. 2013); Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 343-45 (2d Cir. 1994). This requirement is satisfied when an owner or employee of a corporation is the person alleged to be conducting the affairs of the enterprise and the enterprise is the corporation itself. Kushner, 533 U.S. at 163-64; see also, Palatkevich v. Choupak, 2014 WL 1509236, at *14-15 (S.D.N.Y. Jan. 24, 2014) (concluding, after close analysis of relevant precedent, that, “[a]fter Kushner and Riverwoods/Cruz, the distinctness rules are as follows: within the meaning of § 1962(c), a natural person named as the defendant `person’ is inherently distinct from a corporate entity `enterprise’ for which he acts as an agent; in such a case, the distinctness requirement is met”).

Defendants contend that plaintiffs’ enterprise allegations are insufficient. The dealership defendants argue that the plaintiffs fail to allege that the Dealership Enterprise has any hierarchical structure or an existence separate and apart from its alleged racketeering activity. NYMG Memorandum of Law in Support of Cross-Motion (“NYMG Mem.”), Docket Entry 79, at 12-13. This argument lacks merit for several reasons. First, “an established hierarchy is not essential to the existence of an enterprise.” U.S. v. Burden, 600 F.3d 204, 215 (2d Cir. 2010) (citing Boyle, 556 U.S. at 948). Even if it were, plaintiffs’ allegations would be sufficient; plaintiffs allege that NYMG is a limited liability company owned and operated by defendant Mamdoh Eltouby that employed defendants Nada Eltouby and Julio Estrada. T: ¶¶ 9, 11-13. Plaintiffs’ factual allegations describe actions taken by each of the individual defendants on behalf of NYMG from which their roles in the enterprise may be logically inferred. T: ¶¶ 23-34, 47-48, 56, 63, 65. Second, the facts alleged by plaintiffs indicate that NYMG and the other dealerships owned and operated by Mamdoh Eltouby were ongoing businesses that, among other things, advertised on the Internet, maintained lots where used cars could be viewed, and employed personnel with whom purchases of cars could be arranged. To the extent plaintiffs’ complaints suggest that the dealerships owned by Eltouby engaged in fraud as a matter of course, the alleged facts establishing the enterprise and the pattern of racketeering may “coalesce,” but that is no obstacle to concluding that the enterprise allegations are sufficient. Boyle, 556 U.S. at 947. Finally, as noted above, a complaint satisfies RICO’s distinctness requirement if it alleges an enterprise comprised of a corporation or related corporations and names as defendants natural persons who own or work for the corporations and participated in the corporation’s affairs through a pattern of racketeering.[8] That is certainly the case here. Accordingly, defendants’ challenge to the sufficiency of the allegations describing the Dealership Enterprise should be rejected.

Defendant M&T Bank similarly challenges the sufficiency of plaintiffs’ enterprise allegations. M&T Bank Memorandum of Law in Support of Cross-Motion (“M&T Bank Mem.”), Docket Entry 62 in 13-cv-5643, at 7-8. Here too, however, the allegations are sufficient. NYMG and M&T Bank are distinct legal entities, separate and apart from each other and hence from the alleged enterprise consisting of them both. Plaintiffs Chowdhury, Gabrys, and Tuhin allege that these entities developed an ongoing relationship whereby NYMG would arrange financing for its customers through M&T Bank. Even if most or even all of the financing NYMG provided to its customers involved fraud, the result would be only “coalescing” of the facts establishing the existence of the enterprise and those proving the pattern of racketeering, and would not undermine the sufficiency of plaintiffs’ allegations concerning the M&T Enterprise. Nor is it necessarily fatal to plaintiffs’ M&T Enterprise allegations that, as discussed below, I conclude that plaintiffs’ allegations against M&T Bank as a RICO defendant are insufficient. Courts have often found an association-in-fact enterprise to be properly pled even if some members of the alleged enterprise are not named as defendants in the case. See, e.g., City of New York v. Smokes-Spirits.com, Inc., 541 F.3d 425, 448, 451 (2d Cir. 2008), rev’d on other grounds, Hemi Grp., LLC v. City of New York 559 U.S. 1 (2010); Mark v. J.I. Racing, Inc., 1997 WL 403179, at *5 (E.D.N.Y. July 9, 1997); see also Three Rivers Provider Network, Inc. v. Meritain Health, Inc., 2008 WL 2872664, at *14-15 (S.D. Cal. July 23, 2008); Titan Int’l, Inc. v. Becker, 189 F. Supp. 2d 817, 820, 824 (C.D. Ill. 2001); Metrahealth Ins. Co. v. Anclote Psychiatric Hosp., Ltd., 1997 WL 728084, at *4 (M.D. Fla. Oct. 23, 1997) (motion to dismiss denied as to question of enterprise, but granted to the extent of requiring a more detailed RICO statement; Benard v. Hoff, 727 F. Supp. 211, 214-15 (D. Md. 1989). Accordingly, defendants’ challenge to the sufficiency of plaintiffs’ allegations with respect to the M&T Enterprise should be rejected as well.

  1. Conducting the Enterprise’s Affairs Through Racketeering Activity

RICO liability does not extend to all “persons” associated with an enterprise, but is limited to those who “conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.” 18 U.S.C. § 1962(c). Defendants challenge the sufficiency of plaintiffs’ allegations of racketeering activity. At least two defendants — Nada Eltouby and M&T Bank — argue as well that plaintiffs’ allegations about their participation in the conduct of an enterprise’s affairs through racketeering activity are insufficient to support RICO claims against them. Finally, defendants argue that, even if racketeering activity were otherwise properly alleged, plaintiffs’ RICO claims would be subject to dismissal because plaintiffs fail to allege a pattern of racketeering that satisfies RICO’s continuity requirement.

“Racketeering activity” is defined in the RICO statute as any of various state or federal crimes, including mail fraud, 18 U.S.C. § 1341, and wire fraud, 18 U.S.C. § 1343. See 18 U.S.C. § 1961(1)(B). A “pattern of racketeering activity” requires at least two predicate acts of racketeering activity committed within a ten-year period. 18 U.S.C. § 1961(5); First Capital Asset Mgmt., Inc. v. Satinwood, 385 F.3d 159, 178 (2d Cir. 2004). “To establish a pattern, a plaintiff must also make a showing that the predicate acts of racketeering activity by a defendant are `related, and they amount to or pose a threat of continued criminal activity.'” Cofacrèdit, S.A. v. Windsor Plumbing Supply Co., Inc., 187 F.3d 229, 242 (2d Cir. 1999) (quoting H.J., Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989)).

  1. Mail and Wire Fraud — Specificity

Mail and wire fraud under 18 U.S.C. §§ 1341 and 1343, respectively, require proof of three elements: (1) the existence of a scheme to defraud, (2) the defendant’s knowing or intentional participation in the scheme, and (3) the use of the mails or interstate transmission facilities in furtherance of the scheme. S.Q.K.F.C., Inc. v. Bell Atl. TriCon Leasing Corp., 84 F.3d 629, 633 (2d Cir. 1996) (quoting United States v. Gelb, 700 F.2d 875, 879 (2d Cir. 1983)). A scheme to defraud “has been described as a plan to deprive a person `of something of value by trick, deceit, chicane, or overreaching.'” United States v. Autori, 212 F.3d 105, 115 (2d Cir. 2000) (citations omitted).

As noted above, claims of fraud are subject to a heightened pleading standard. Allegations of predicate mail and wire fraud violations must state the “contents of the communications, who was involved, [] where and when they took place, and [] explain why they were fraudulent.” Spool, 520 F.3d at 185 (internal quotation marks and citation omitted). In addition, while a defendant’s “intent to defraud may be averred generally under Rule 9(b), such allegations of scienter must be supported by facts `giving rise to a strong inference that the defendant knew the statements to be false and intended to defraud the plaintiff’ at the time they were made.” U.S. Fire Ins. Co. v. United Limousine Service, Inc., 303 F. Supp. 2d 432, 443-44 (S.D.N.Y. 2004) (quoting Ouaknine v. MacFarlane, 897 F.2d 75, 79-80 (2d Cir. 1990)); see also First Capital Asset Mgmt., 385 F.3d at 179.

Defendants argue that plaintiffs’ complaints fail to plead the predicate acts with sufficient specificity and instead rely on mere “bare-boned conclusory allegations.” NYMG Mem. at 6; see also M&T Bank Mem. at 15. As the facts recounted above demonstrate, though, plaintiffs’ Proposed Amended Complaints are anything but bare-boned. Plaintiffs describe in exhaustive detail a sophisticated scheme pursuant to which the dealership defendants lure customers in with low advertised prices, use aggressive sales tactics and false promises to induce customers to enter into onerous financing agreements, and fraudulently conceal from customers that the documents presented to them contain undisclosed charges. Plaintiffs identify the particular individuals who made statements to them, what statements they made, and why the statements were part of a fraudulent scheme.

Alkhatib, for example, alleges that he arrived at NYMG interested in a car that was advertised for $14,995, only to be essentially coerced and defrauded into signing a retail installment contract with a total cost exceeding $27,000. Alkhatib’s complaint describes how a NYMG salesperson required that he turn over a $10,000 down payment that Estrada would later refuse to return when Alkhatib — unwilling to enter into the financing arrangements proposed by Estrada — asked for his deposit back. Alkhatib also alleges that Estrada falsely informed him that two banks denied his loan application before he had even made one, and refused to provide any documents evidencing the banks’ rejection, promising the bank would send the documents — which never arrived — directly to Alkhatib. Finally, Alkhatib alleges that he was promised, and paid for, insurance he never received, and was charged for processing, insurance and service fees that were never itemized.

Tuhin’s complaint is similarly specific. Among other allegations, Tuhin asserts that Estrada persuaded him to enter into a high-interest loan by falsely representing to him that the interest rate would drop markedly after six months if Tuhin made his first six payments on time. Tuhin also alleges that, when he questioned a sales contract showing a $22,795.87 sales price, Estrada showed him a new contract reflecting a lower agreed-upon price of $12,000, but then switched the documents, so that Tuhin ended up signing the first sales contract with the higher sales price. Gabrys and Freire allege, among other things, similar false representations about a reduction in the interest rates on their loans after a few months of timely payments. Dong alleges that she paid Estrada a lump sum equal to the amount owed on her car loan, but that her signature was forged on a retail installment contract and that she was provided a certificate of title encumbered by a lien in favor of a lender to whom she owed nothing. Like the other plaintiffs, Chowdhury found that she had signed a RIC with terms substantially different from those described to her by Estrada, and continued to receive billing notices from her lender even after paying off her loan in full by delivering cash directly to Estrada.

These are only some of the highly specific allegations of fraud set forth in plaintiffs’ complaints. Defendants’ contention that plaintiffs have failed to plead fraud with sufficient specificity should therefore be rejected.

  1. Mail and Wire Fraud — Use of the Mails and Interstate Wires

Defendants also challenge the adequacy of plaintiffs’ allegations that the mails or interstate wire communications were used in furtherance of the alleged fraudulent scheme. As defendants point out, while plaintiffs identify a large number of wire transmissions in their complaints, they do not allege that these transmissions crossed state lines. T: ¶¶ 104(b)-(g). Rather, the alleged wire transfers were between NYMG and M&T Bank, both of which are located in New York. T: ¶¶ 9-10. These allegations are therefore not sufficient to plead interstate use of the wires. See Bernstein v. Misk, 948 F. Supp. 228, 239 (E.D.N.Y. 1997) (“[W]here all parties are New York residents, `all telephone calls are presumed to be intrastate and, absent any indications otherwise, the predicate act of wire fraud is not stated.'” (citation omitted)).

Plaintiffs, however, also allege that NYMG used the Internet to advertise and that several of the plaintiffs came to the dealership in response to Internet ads. T: ¶ 104(a). The use of advertising on the Internet in furtherance of an alleged fraud satisfies the interstate wire requirement of § 1343. See DNJ Logistic Group, Inc. v. DHL Express (USA), Inc., 2010 WL 625364, at *6 n.4 (E.D.N.Y. Feb 19, 2010) (finding plaintiff adequately pleaded wire fraud even though plaintiff and defendant were located in New York because “recent cases appear to treat any use of the internet as sufficiently interstate in nature”). Because each plaintiff except Dong responded to an Internet advertisement posted by the dealership defendants, plaintiffs allege a pattern of use of the interstate wires in furtherance of the fraud occurring on multiple occasions within a period of ten years.

Plaintiffs either allege, or indicate they will allege, having received billing statements in the mail from the lender on their respective RICs. T: ¶ 104(h), (i), (k). While the dealership defendants may not have mailed these billing statements, it is well-settled that a defendant may be liable for mail fraud even if he or she did not personally use the mails; rather, a plaintiff need only show that “defendants could reasonably have foreseen that [a] third-party would use the mail in the ordinary course of business as a result of defendants’ act.” United States v. Bortnovsky, 879 F.2d 30, 36 (2d Cir. 1989); see also Pereira v. United States, 347 U.S. 1, 8-9 (1954) (holding that, “[w]here one does an act with knowledge that the use of the mails will follow in the ordinary course of business, or where such use can reasonably be foreseen, even though not actually intended, then he `causes’ the mails to be used” (citation omitted)). Certainly, repeated mailings of multiple billing statements by lenders to plaintiff borrowers were a reasonably foreseeable consequence of a scheme to defraud plaintiffs into entering into onerous retail installment contracts. The mailing to Dong of a certificate of title reflecting a lien despite the fact that Dong did not finance her purchase was reasonably foreseeable as well. Plaintiffs’ allegations therefore satisfy the element of use of the mails.

  1. Mail and Wire Fraud — Intent/Participation through a Pattern of Racketeering

To be held liable under RICO, a defendant must be shown to have participated in the conduct of the charged enterprise’s affairs through a pattern of racketeering activity. 18 U.S.C. § 1962(c). In the context of this case, then, plaintiffs must allege facts that, if true, establish that each defendant participated in the conduct of the affairs of the relevant enterprise, and that each did so at least in part by committing mail or wire fraud.

As noted above, to establish that a defendant committed mail or wire fraud, a complaint must allege “facts giving rise to a strong inference that the defendant knew the statements to be false and intended to defraud the plaintiff at the time they were made.” U.S. Fire Ins. Co., 303 F. Supp. 2d at 444 (internal quotation marks and citation omitted). A plaintiff contending that a defendant participated in conducting the affairs of an enterprise must allege that the defendant “participated in the operation or management of the enterprise itself.” Reves v. Ernst & Young, 507 U.S. 170, 183 (1993). While a person who participates in the conduct of an enterprise “must have some part in directing [the enterprise’s] affairs . . . RICO liability is not limited to those with primary responsibility” for those affairs, but may extend to “lower rung participants in the enterprise who are under the direction of upper management.” Id. at 179, 184; see also DeFalco v. Bernas, 244 F.3d 286, 309 (2d Cir. 2001); United States v. Diaz, 176 F.3d 52, 92 (2d Cir. 1999) (holding that a RICO defendant need “not act[] in a managerial role,” but may be held “liable for directing the enterprise’s affairs if he exercised broad discretion in carrying out the instructions of his principal”). Nonetheless, “the simple taking of directions and performance of tasks that are necessary or helpful to the enterprise, without more, is insufficient to bring a defendant within the scope of § 1962(c).” Diaz, 176 F.3d at 92 (citing United States v. Viola, 35 F.3d 37. 41 (2d Cir. 1994)); see also, United States v. Allen, 155 F.3d 35, 42 (2d Cir. 1998) (“In most of the cases in which we have held lower level employees to be RICO participants, the defendant was shown to have played some management role in the enterprise.”) (collecting cases).

  1. Mamdoh Eltouby and Nada Eltouby

Mamdoh Eltouby and Nada Eltouby are alleged to have participated in the conduct of the affairs of the Dealership Enterprise. T: ¶ 128. The facts alleged in the complaints with respect to Mamdoh Eltouby and Nada Eltouby are sufficient to establish their participation in the conduct of the charged enterprise and to give rise to a strong inference of intent to defraud.

Mamdoh Eltouby is alleged to have owned and operated NYMG at the time of the transactions involving the plaintiffs. T: ¶ 11. This alone indicates that he participated in the operation and management of the enterprise, and — particularly in light of the pervasiveness of the fraudulent scheme suggested by the number of plaintiffs who had similar experiences — gives rise as well to a strong inference that he knew of and abetted the scheme. In addition, plaintiff Tuhin alleges that, when he came to the dealership to participate in an organized protest, Mamdoh Eltouby identified himself as the owner of NYMG and attempted to assault the protestors by hitting them with his car. T: ¶ 56. Mamdoh Eltouby also refused to make arrangements for safekeeping of the car NYMG sold to Tuhin, even after Tuhin retained counsel and alerted NYMG to his complaints. T: ¶ 65. Plaintiffs have also identified a NYMG customer who has not filed suit but who met directly with Mamdoh Eltouby and was directed by Eltouby to meet first with Estrada and later with an employee at Hillside Motors. This customer, like plaintiffs, was urged to enter into a sub-prime loan and was falsely promised he could refinance the loan within six months. T: ¶¶ 138(a), (j). Finally, plaintiffs allege that Mamdoh Eltouby hired Estrada to work at NYMG even after Estrada had been indicted and arrested for defrauding customers while working at other used car dealerships, and that Estrada continued to work for NYMG even after the District Attorney for Queens County issued a press release announcing Estrada’s indictment. T: ¶¶ 79-83. These allegations are more than ample to demonstrate Mamdoh Eltouby’s participation in the conduct of the enterprise’s affairs and to give rise to a strong inference of knowledge of the scheme and intent to defraud.

The allegations concerning Nada Eltouby are likewise sufficient. Plaintiff Tuhin alleges that Nada Eltouby, after assuring Tuhin he was getting a good deal, took $2,000 from him and provided him with a receipt. T: ¶¶ 18-19. On each of several occasions when Tuhin returned to the dealership to complete his transaction, he observed Nada Eltouby there, interacting with other employees in what appeared to be a supervisory role. T: ¶ 34. On another occasion when Tuhin arrived at the dealership in an attempt to cancel the transaction, the employee he approached called over Nada Eltouby and Julio Estrada. Nada Eltouby urged Tuhin to trust Estrada and repeated the false representation, previously made by Estrada, that Tuhin’s interest rate would be reduced after six timely payments. T: ¶¶ 47-48. Subsequently, after Tuhin left the car he had purchased and the keys to it with NYMG, Nada Eltouby advised Tuhin’s attorney that NYMG had driven the car back to Tuhin’s neighborhood and parked it in the street near Tuhin’s home without license plates. T: ¶ 61. Plaintiff Chowdhury similarly alleges that, when her son went to the dealership to complain, it was Nada Eltouby who met with him, and who at first assured him the dealership “would take care of everything,” but later told him there was nothing the dealership could do and that he should “speak to `the bank.'” C: ¶¶ 102-05. Plaintiff Dong alleges that, upon returning to the dealership to complain about her transaction, she too met with Nada Eltouby. Nada Eltouby told Dong that there was nothing the dealership could do to help her. Dong then called for police assistance. When police officers arrived, Nada Eltouby met with them and spoke to them on NYMG’s behalf. D: ¶¶ 104-07. Finally, plaintiffs Freire and Gabrys also allege that Nada Eltouby was among the NYMG employees who met with them when they returned to NYMG after completing their transactions to complain that the representations made to them turned out not to be true. F: ¶¶ 83, 86; G: ¶¶ 116, 123.

Plaintiffs’ allegations give rise to a strong inference that Nada Eltouby’s role involved more than simply taking directions and performing tasks helpful to the enterprise, and that she was aware of the overall fraudulent scheme. By alleging that she spoke with disgruntled customers and gave them false assurances, met with police officers and presented NYMG’s position with respect to customer complaints to them, and even communicated with plaintiffs’ counsel about bringing a returned vehicle back to a customer’s neighborhood and leaving it there without license plates, plaintiffs allege that Nada Eltouby played a significant part in directing the affairs of the enterprise and advancing the goals of the scheme to defraud. Even if Nada Eltouby’s role were less clear, dismissal of plaintiff’s RICO claim against her would not be warranted at this stage of the case:

It is not always reasonable . . . to expect that when a defrauded plaintiff frames his complaint, he will have available sufficient factual information regarding the inner workings of a RICO enterprise to determine whether a defendant was merely “substantially involved” in the RICO enterprise or participated in the “operation or management” of the enterprise. Thus, where the role of the particular defendant in the RICO enterprise is unclear, plaintiffs may well be entitled to take discovery on this question.

Aiu Ins. Co. v. Olmecs Med. Supply, Inc., 2005 WL 3710370, at *8 (E.D.N.Y. Feb. 22, 2005) (citing Friedman v. Hartmann, 1994 WL 376058, at *2 (S.D.N.Y. July 15, 1994)).

  1. M&T Bank

Plaintiffs name M&T Bank and NYMG as defendants in a RICO count that charges an association-in-fact enterprise comprised of the two defendants and a pattern of racketeering activity consisting of mail and wire fraud. The allegations with respect to New York Motor Group’s participation in the fraud are plainly sufficient, as demonstrated by the discussion above of the facts asserted with respect to its owner and operator, Mamdoh Eltouby, and its employees, Julio Estrada and Nada Eltouby. The facts alleged with respect to M&T Bank, however, fall short.

Plaintiffs’ allegations with respect to M&T Bank’s scienter are limited. Plaintiffs suggest that M&T Bank continued to process and fund loans even after it knew or should have known of NYMG’s fraudulent scheme. Plaintiffs contend that M&T Bank should have known of the scheme because several customers had made complaints about NYMG and because of how the “value of the collateral . . . compared to the sale price and the amount of add-on charges.” T: ¶ 46. Plaintiffs’ specific allegations, however, simply do not give rise to a strong inference that M&T Bank knew of any false statements or intended to participate in defrauding any of the plaintiffs.

Plaintiffs place particular emphasis on M&T Bank’s decision to fund the Tuhin loan even after Tuhin called the bank and complained he had been defrauded. Plaintiffs allege that M&T Bank should have known when Tuhin called that NYMG was engaged in a fraudulent scheme because of complaints from other customers. T: ¶ 46. The only other customers plaintiffs specifically identify as having raised complaints with M&T Bank, however, are Gabrys and Chowdhury. Tuhin made his call to M&T Bank on June 24, 2013. T: ¶ 45. Gabrys and Chowdhury made their complaints to M&T Bank in October of 2013. G: ¶ 126, C: ¶ 106. Thus, the complaints made by Gabrys and Chowdhury could not possibly have informed M&T Bank’s response to Tuhin.

Moreover, plaintiffs do not adequately allege that any representative of M&T Bank made any false representation to any plaintiff. Tuhin alleges that an M&T Bank representative told him that the bank could not refuse to fund his loan once the dealership submitted an application with his signature. T: ¶ 45. Plaintiffs do not contend that this statement was false; indeed, although the complaint is not entirely clear in this regard, it appears that Tuhin left the dealership with the car he purchased on June 22, 2013, and had thus been in possession of the vehicle for two days when he asked M&T Bank not to fund his loan. T: ¶¶ 25-26. These circumstances suggest that the bank’s hands might well have been tied. Moreover, when Tuhin complained to M&T Bank about having been defrauded, the M&T Bank representative suggested that Tuhin contact the office of the New York State Attorney General. T: ¶ 45. A representative of M&T Bank who spoke to Chowdhury’s son similarly suggested that Chowdhury hire an attorney to pursue her claims against NYMG. C: ¶ 114. Suggestions like these hardly give rise to a strong inference of fraudulent intent.

Plaintiffs are also unable to point to anything about the Tuhin, Gabrys or Chowdhury retail installment contracts that would have alerted someone reviewing them that they were fraudulent. Although plaintiffs allege that the value of the cars sold was not consistent with the sales prices charged, they do not allege that personnel at M&T Bank were familiar with used car values or were called upon to verify them before approving loan documents. Moreover, to the extent the value of collateral would be of interest to a lender, the lender’s concern would no doubt be with the value of the collateral relative to the amount financed rather than the purchase price. There is similarly no reason to infer that the “add-on charges” also pointed to by plaintiffs would have alerted anyone at M&T Bank that the loan transactions were fraudulent.

Finally, the fact that the six transactions giving rise to these related lawsuits were financed by three different lending institutions further undermines any inference that mere participation as a lender in transactions conducted by NYMG is enough to suggest fraudulent intent. Had there been a corrupt understanding or relationship between NYMG and M&T Bank, it is unlikely that the dealership defendants would have steered purchasers to other banks to obtain financing.

Plaintiffs invoke the well-settled principle that “deliberate disregard” for the truth may satisfy the scienter requirement for fraud. See United States v. Precision Medical Laboratories, Inc., 593 F.2d 434, 443-44 (2d Cir. 1978); United States v. Sarantos, 455 F.2d 877, 880-81 (2d Cir. 1972). The facts alleged in plaintiffs’ complaint, though, fail to demonstrate that M&T Bank deliberately disregarded earmarks of fraud or had any authority or responsibility to intervene on plaintiffs’ behalf.

Plaintiffs’ RICO claims against M&T Bank fail for a second, related reason: the role in the fraud attributed to M&T Bank in plaintiffs’ complaints does not rise to the level of participating in the conduct of the affairs of an enterprise.[9] In Reves v. Ernst & Young, 507 U.S. 170 (1993), defendants were accountants who drafted misleading financial statements and were subsequently sued under both the securities laws and RICO. The district court granted summary judgment to defendants on RICO on the grounds that the accountants’ conduct did not amount to participation in the operation or management of the claimed enterprise. The remaining securities fraud claims proceeded to trial, and the jury found for plaintiffs. Despite the jury’s finding that defendants had committed intentional fraud, the Supreme Court upheld the grant of summary judgment in favor of the accountants on plaintiffs’ RICO claim, holding that the mere drafting of statements based on misinformation supplied by the defendants’ clients did not rise to the level of directing the enterprise’s affairs and therefore did not constitute sufficient participation in the operation or management of the enterprise for RICO liability.

Reves involved a motion for summary judgment, and courts differ on the degree to which Reves applies to a motion to dismiss. Compare City of New York v. FedEx Ground Package System, Inc., 2015 WL 1013386, at *8 (S.D.N.Y. Mar. 9, 2015) (noting that, “[i]n this Circuit, the operation or management test typically has proven to be a relatively low hurdle for plaintiffs to clear, especially at the pleading stage.” (citations omitted)) with Zhu v. First Atlantic Bank, 2005 WL 2757536, at *5 (S.D.N.Y. Oct. 25, 2005) (stating, in the course of deciding a motion to dismiss, that “[t]he `operation and management’ [sic] test set forth by the Supreme Court in Reves is a very difficult test to satisfy,” and holding that providing banking services is insufficient to state a claim under Section 1962(c)) (citation omitted)).

Regardless of the test applied, plaintiffs’ allegations are insufficient. Pleadings asserting RICO claims against outside service professionals like banks, law firms, and accounting firms have been held sufficient after Reves only when they have alleged more substantial involvement by the outsider defendant in the charged racketeering activity than plaintiffs attribute to M&T Bank here. For example, in Ifill v. West, 1999 WL 690144, at *8 (E.D.N.Y. Aug. 24, 1999), the Court held that defendant bank employees provided services that were more than merely incidental to the fraudulent scheme when they recruited prospective victims by distributing brochures and conducting seminars the victims attended. Similarly, in Burke v. Dowling, 944 F. Supp. 1036, 1055 (E.D.N.Y. 1995), the Court declined to dismiss a RICO claim against a bank because of allegations that the bank helped initiate the alleged fraudulent syndication scheme and took advantage of the fact that other defendants owed money to the bank to exercise control over them.[10] See also Dep’t of Econ. Dev. v. Arthur Anderson & Co. (U.S.A.), 924 F. Supp. 449, 466 (S.D.N.Y. 1996) (noting that “[m]any other courts faced with post-Reves § 1962(c) claims against outside professionals have agreed that providing important services to a racketeering enterprise is not the same as directing the affairs of the enterprise”).

Here, plaintiffs allege that M&T Bank’s participation in the racketeering affairs of the enterprise consisted only of summarily granting the loan applications created by the dealership defendants, failing to investigate the plaintiffs’ claims of fraud, and collecting the payments due under the allegedly fraudulent loans. Although plaintiffs allege the funding was an integral part of the enterprise, these acts fall short of satisfying the “operation and management” test. See Burke, 944 F. Supp. at 1055 (noting that even a bank that knowingly received diverted funds or assisted in preparing a private placement memorandum did not operate or manage the enterprise). Rather, the allegations against M&T Bank made by plaintiffs are analogous to those described as inadequate in Arthur Anderson:

An accountant’s audit reports, or a lawyer’s opinion letters, are always “integral to the continuing operation” of the enterprise in the sense that professional services are essential to the continued existence of a business. But so is the electricity supplied to the enterprises’ offices, and it would be absurd to say that the public utility that provides the electricity participates in the operation or management of the enterprise. . . . [T]he rule, uniformly applied by the lower courts that have reached the issue, [is] that the provision of services — even essential services — to a RICO enterprise is not the same as controlling the enterprise’s affairs.

924 F. Supp. at 467-68 (citations omitted).

For all these reasons, I conclude that the allegations against M&T Bank are insufficient to give rise to a strong inference of knowing and intentional participation in a fraudulent scheme or to establish M&T Bank’s participation in the conduct of the affairs of an enterprise through a pattern of racketeering. I therefore recommend that the § 1962(c) claims against M&T Bank be dismissed.

  1. Relatedness and Continuity of Pattern

To constitute a pattern of racketeering activity, predicate acts must be “related” and “amount to or pose a threat of continued activity.” Cofacrèdit, 187 F.3d at 242 (emphasis omitted); see also United States v. Daidone, 471 F.3d 371, 375 (2d Cir. 2006). The continuity requirement may be satisfied by showing either close-ended continuity or open-ended continuity. Cofacrèdit, 187 F.3d at 242. Defendants challenge the relatedness of the predicate acts, M&T Bank Mem. at 10, and argue that plaintiffs have failed to establish continuity, NYMG Mem. at 9-12, M&T Bank Mem. at 12-15.

  1. Relatedness

A plaintiff must demonstrate that predicate acts are related both horizontally and vertically. Daidone, 471 F.3d at 375. Horizontal relatedness describes the relationship between the predicate acts themselves, while vertical relatedness describes the relationship between the predicate acts and the overall RICO enterprise. Id. In practice, these tests may be satisfied with a single showing that each individual predicate act is related to the RICO enterprise. Id. Here, the alleged predicate acts of mail fraud and wire fraud concern the sale of used cars and the financing arrangements made in connection with those sales. The enterprises are comprised of the used car dealerships that made the sales and the banks that provided the financing. The predicate acts are thus each related to the RICO enterprises described in the complaints, and plaintiffs therefore satisfy RICO’s relatedness requirement.

  1. Close-Ended Continuity

To demonstrate “close-ended continuity, the plaintiff must prove `a series of related predicates extending over a substantial period of time.'” Cofacrèdit, 187 F.3d at 242 (quoting H.J. Inc., 492 U.S. at 242). “Although close-ended continuity is primarily a temporal concept, other factors such as the number and variety of predicate acts, the number of both participants and victims, and the presence of separate schemes are also relevant in determining whether close-ended continuity exists.” Cofacrèdit, 187 F.3d at 242 (quoting GICC Capital Corp. v. Tech. Fin. Group. Inc., 67 F.3d 463, 467-68 (2d Cir. 1995)). Since the Supreme Court’s decision in H.J. Inc., the Second Circuit “has never held a period of less than two years to constitute a substantial period of time.” Cofacrèdit, 187 F.3d at 242; Spool, 520 F.3d at 184 (finding a sixteen-month period to be insufficient to establish close-ended continuity); DeFalco, 244 F.3d at 321-22. The relevant period when evaluating continuity “is the time during which RICO predicate activity occurred, not the time during which the underlying scheme operated or the underlying dispute took place.” Spool, 520 at 184 (citations omitted).

Plaintiffs allege that the association-in-fact enterprise was operating since at least 2012, Gabrys ¶ 40. However, time for purposes of close-ended continuity is calculated based upon when defendants committed predicate acts. See Cofacrèdit, 187 F.3d at 243; Delgado v. Ocwen Loan Servicing, 2014 WL 4773991, at *21 (E.D.N.Y. Sept. 24, 2014). Accordingly, the relevant time period here must begin in December of 2012, the date of the earliest alleged Internet advertisement. A: ¶ 34. Because the most recent of these related cases was filed in May 2014, only seventeen months after that advertisement, plaintiffs have failed to allege a pattern of racketeering activity occurring over a period of more than two years, and the allegations of their complaints thus fail to demonstrate close-ended continuity.

  1. Open-Ended Continuity

Plaintiffs do, however, plead facts supporting a finding of open-ended continuity. Openended continuity requires “a threat of continuing criminal activity beyond the period during which the predicate acts were performed.” Cofacrèdit, 187 F.3d at 242 (citation omitted); see also, GICC Capital, 67 F.3d at 466 (describing open-ended continuity as “past criminal conduct coupled with a threat of future criminal conduct”). In considering whether a continuing threat exists, a court looks at the nature of the enterprise and of the predicate acts. Cofacrèdit, 187 F.3d at 242. “Where the enterprise is engaged primarily in racketeering activity, and the predicate acts are inherently unlawful,” a threat of continued criminal activity is presumed. Id.; see also, Spool, 520 F.3d at 185. However, where an enterprise is primarily engaged in legitimate business practices, there is no such presumption, and courts look to “other external factors” to determine whether a threat of continued criminal activity exists. GICC Capital Corp., 67 F.3d at 466. In such cases, “there must be some evidence from which it may be inferred that the predicate acts were the regular way of operating that business, or that the nature of the predicate acts themselves implies a threat of continued criminal activity.” Spool, 520 F.3d at 185 (quoting Cofacrèdit, 187 F.3d at 243).

Whether predicate acts pose a threat of future conduct is evaluated as of the time the acts are committed. See United States v. Aulicino, 44 F.3d 1102, 1110-14 (2d Cir. 1995) (finding open-ended continuity despite the fact that scheme ended before any prosecution was commenced). Open-ended continuity may be shown if, “at the time of occurrence,” the racketeering activity threatens future criminal activity. City of New York v. LaserShip, Inc., 33 F. Supp. 3d 303, 311 (S.D.N.Y. 2014) (quoting Morrow v. Black, 742 F. Supp. 1199, 1207 (E.D.N.Y. 1990)). Only if an activity has an “inherently terminable” goal, such as a sale of land, is a threat of continued activity negated as a matter of law. DeFalco, 244 F. 3d at 324; Azrielli v. Cohen Law Offices, 21 F.3d 512, 521 (2d. Cir. 1994) (series of fraudulent sales of securities over at least one year, coupled with evidence that defendants were trying to continue to sell securities, permitted a jury to find a RICO pattern).

The fraudulent scheme alleged by plaintiffs had no obvious ending point. The dealerships were ongoing businesses that advertised used cars on the Internet to a virtually endless supply of consumers. In this regard, they are similar to the defendants in Liberty Mut. Ins. Co. v. Blessinger, 2007 WL 951905 (E.D.N.Y. Mar. 27, 2007). Defendants in Blessinger owned and operated taxi and limousine companies that were alleged to have made misrepresentations to their insurance carrier to obtain coverage without paying applicable premiums. The Court held that plaintiff, the allegedly defrauded insurance company, established open-ended continuity because defendants’ businesses had an ongoing need for insurance, and concluded that “the nature of the predicate acts alleged weighs in favor of a finding of openended continuity as they suggest a threat of repetition continuing into the future.” Id. at *13. Similarly, defendants here continue to operate dealerships, sell used cars to customers, and arrange financing for them. The threat of repetition into the future therefore establishes openended continuity.

Although defendants argue that continuity is defeated by Estrada’s indictment, this argument fails. First, as noted above, whether predicate acts pose a threat of future conduct is evaluated as of the time the acts are committed. Moreover, while Estrada was certainly a key player in the fraudulent scheme, he did not act alone. Plaintiffs make numerous allegations of fraudulent behavior by other employees of the dealerships. See, e.g., T: ¶¶ 18, 47-48, 56-57, 61, 65, 138(a), 138(f), 138(j), 138(k). Plaintiffs also allege that Mamdoh Eltouby continues to conduct the affairs of the enterprise as the president of non-party dealership Hillside Motors at an address formerly associated with Planet Motor Cars, the dealership that appeared on the plaintiffs’ service contracts. T: ¶ 127.

  1. Conclusion With Respect to RICO

For the reasons stated above, I respectfully recommend that plaintiffs be permitted leave to amend their claims under RICO against all defendants other than M&T Bank, and that the RICO claims against M&T Bank be dismissed.

III. Plaintiffs’ Truth in Lending Act Claims

Plaintiffs Gabrys and Tuhin assert claims against New York Motor Group and M&T Bank pursuant to the Truth in Lending Act (“TILA”). T: ¶¶ 151-69; G: ¶¶ 132-42. Tuhin and Gabrys claim they entered into consumer credit agreements but were not provided the disclosures required by law. Each seeks statutory damages, costs and attorney’s fees, and Tuhin also seeks rescission of his sales contract and voiding of any security interests in his car. G: ¶ 142; T: ¶ 169.

M&T Bank moves to dismiss the TILA claims against it, arguing that the statute applies only to creditors, a term defined by statute, and that it is not a creditor as defined by 15 U.S.C. § 1602(g) and Part 226 of Title 12 of the C.F.R., commonly known as Regulation Z.[11] M&T Bank Mem. at 16-17; see 12 C.F.R. § 226.1 (“Regulation Z . . . is issued by the Board of Governors of the Federal Reserve System to implement the federal Truth in Lending Act.”); Murphy v. Empire of Am., FSA, 746 F.2d 931, 933 (2d Cir. 1984).

M&T Bank relies upon Vincent v. Money Store, LLP, 736 F.3d 88 (2d Cir. 2013), to support its position. In Money Store, the Court of Appeals for the Second Circuit noted that TILA imposes general liability only on creditors and “greatly circumscribes the liability of assignees” such as M&T. 736 F.3d at 105. The Court stressed the statute’s definition of a creditor as

a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement.

15 U.S.C. §1602. The Court also relied on Regulation Z, which “interprets the second prong of this definition `as applying to only “[a] person . . . to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.'” 736 F.3d at 105 (quoting 12 C.F.R. § 226.2(a)(17)(i)).

The question in Money Store was whether the assignee of a mortgage could be held liable as a creditor within the meaning of 14 U.S.C. § 1602. The Court of Appeals affirmed the lower court’s decision to dismiss the TILA claim against the assignee on summary judgment and held that, even when the initial payment on a loan is made to the assignee, or even when a loan is assigned before funds are disbursed, the assignee is not exposed to the general liability reserved for the entity that appears on the face of the loan agreement. Id. at 107. The Court reasoned that TILA is primarily concerned with disclosures by the initial creditor, although it also noted that consumers could, under the statute, exercise their rights to rescission against assignees. Id. at 108. Liability may be imposed directly on an assignee, however, “only if the [TILA] violation . . . is apparent on the face of the disclosure statement.” Id. at 107 (quoting Taylor v. Quality Hyundai, Inc., 150 F.3d 689, 692 (7th Cir. 1998)); see also 15 U.S.C. § 1641 (“[A] violation apparent on the face of the disclosure statement includes, but is not limited to a . . . disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned. . . .”).

In reaching its holding, the Second Circuit in Money Store relied on a decision with facts similar to those presented here. In Riviere v. Baner Chevrolet, Inc., 184 F.3d 457 (5th Cir. 1999), plaintiff purchased a car from a dealer. Financing was arranged at the time of purchase, and the dealer assigned its interest in the loan to the financing entity. The Court held that, despite financing having been arranged at the time of purchase and the immediate assignment of the loan, the dealer was the creditor obligated to make the disclosures required by TILA and the only party that could be held liable for failing to make those disclosures. 184 F.3d at 460. Riviere relied in turn upon the following commentary of the Federal Reserve Board:

If an obligation is initially payable to one person, that person is the creditor even if the obligation by its terms is simultaneously assigned to another person. For example: An auto dealer and a bank have a business relationship in which the bank supplies the dealer with credit sale contracts that are initially made payable to the dealer and provide for immediate assignment of the obligation to the bank. The dealer and purchaser execute the contract only after the bank approves the creditworthiness of the purchaser. Because the obligation is initially payable on its face to the dealer, the dealer is the only creditor in the transaction.

12 C.F.R. pt. 226, supp. I, subpt. A, cmt. 2(a)(17)(i)(2) (emphasis added).

The example in the Federal Reserve Board commentary applies to the facts presented here. Indeed, Gabrys and Tuhin do not contend that their loan documents indicated that their debts were initially payable to M&T Bank. Instead, they argue that M&T Bank may be held liable because the TILA violations they allege were apparent on the face of their loan documents. Pls. Reply at 15. The only violation plaintiffs point to in support of this contention, however, is their claim that the purchase price exceeded the advertised price or fair market value of their cars. Pls. Reply at 16. As discussed above in connection with plaintiffs’ RICO claims, though, plaintiffs do not allege facts suggesting that any discrepancy between the purchase price and the advertised price or fair value of the cars they purchased would be apparent to persons at M&T Bank examining the loan documents. See Taylor, 150 F.3d at 694 (holding that “[o]nly violations that a reasonable person can spot on the face of the disclosure statement or other assigned documents will make [an] assignee liable under the TILA”).

For all these reasons, M&T Bank’s motion to dismiss the TILA claims asserted against it should be granted to the extent plaintiffs seek damages and attorney’s fees, but denied to the extent plaintiffs seek rescission. Although only Tuhin explicitly seeks rescission as a remedy for the TILA violations he alleges, Gabrys seeks “further relief as the Court deems appropriate,” G: ¶ 142, and should be afforded an opportunity to clarify whether or not he seeks rescission as a remedy.

  1. Tuhin’s Magnuson-Moss Warranty Act Claim

Plaintiff Tuhin contends the car he was sold was not fit to drive. Based on this contention, he asserts a claim under the Magnuson-Moss Warranty Act (“MMWA”) against NYMG and M&T Bank. M&T Bank argues that Tuhin has not adequately stated a claim under the MMWA because he fails to allege a covered form of warranty, fails to establish a breach of the implied warranty of merchantability, and fails to meet the statutory dollar amount threshold under 15 U.S.C. § 2310(d)(3)(B). M&T Bank Mem. at 22-25. Because I conclude that Tuhin has failed to meet the statute’s monetary threshold, I do not reach the other arguments raised by M&T Bank.[12]

The Magnuson-Moss Warranty Act authorizes consumers to sue warrantors who fail to comply with any written or implied warranty “for damages and other legal and equitable relief.” 15 U.S.C. § 2310(d)(1). A claim under the Act may be brought either in state or federal court. 15 U.S.C. § 2310(d) (1)(A)-(B). However, “[n]o claim shall be cognizable [in federal court] . . . if the amount in controversy is less than the sum or value of $50,000 (exclusive of interests and costs).” 15 U.S.C. § 2310(d)(3)(B). Tuhin paid substantially less than $50,000 for his car. T: ¶ 35. It would seem, therefore, that Tuhin’s MMWA claim does not meet the statute’s amount-in-controversy requirement.

Tuhin argues that his MMWA claim should proceed for two reasons. First, Tuhin contends that his claim for punitive damages brings the amount in controversy over the statutory threshold. Generally, however, punitive damages are not recoverable under the MMWA; “[i]n breach of warranty suits, which is all that the MMWA permits, damages ordinarily are limited to the difference between the value of the goods accepted and the value they would have had if they had been as warranted.” Lieb v. Am. Motors Corp., 538 F. Supp. 127, 133 (S.D.N.Y. 1982). Moreover, Tuhin does not assert a claim for punitive damages under the MMWA in his Proposed Amended Complaint. T: ¶ 180.

Second, Tuhin argues that the statute’s $50,000 threshold must be satisfied only when the MMWA provides the sole basis for federal court jurisdiction. Tuhin’s RICO and TILA claims give rise to federal question jurisdiction. See 28 U.S.C. § 1331. Tuhin argues that this Court may therefore exercise supplemental jurisdiction over his MMWA claim pursuant to 28 U.S.C. § 1367 even if he cannot satisfy the statute’s dollar amount threshold.

Federal courts considering whether they may hear MMWA claims involving less than $50,000 pursuant to their supplemental jurisdiction have come to different results. Most courts in this Circuit, however, have held that, “[i]n enacting Magnuson-Moss, Congress implicitly negated pendent jurisdiction of claims made under the statute that amount to less than $50,000.” Lieb, 538 F. Supp. at 140; see also Jager v. Boston Road Auto Mall, 2015 WL 235342, at *4 (S.D.N.Y. Jan. 16, 2015) (concluding that, “by enacting the specific jurisdictional limitations for Magnuson-Moss claims in federal court, Congress foreclosed the exercise of supplemental jurisdiction” over MMWA claims for less than $50,000). But see Diaz v. Paragon Motors of Woodside, Inc., 424 F. Supp. 2d 519, 527 (E.D.N.Y. 2006) (concluding, albeit without analysis, that supplemental jurisdiction could be exercised over MMWA claim that did not involve more than $50,000); Barnes v. West, Inc., 249 F. Supp. 2d 737, 739 (E.D. Va. 2003) (holding that “MMWA claims that cannot independently be heard in federal court owing to the absence of the requisite amount in controversy, can still be heard in federal court in circumstances where supplemental jurisdiction is properly exercised under 28 U.S.C. § 1367”); Samuels v. American Motors Sales Corp., 1989 WL 95787, at *2-3 (N.D. Ill. Aug. 9, 1989).

I find the cases holding that supplemental jurisdiction is not available to be more convincing, at least in part because 28 U.S.C. § 1367 itself provides for supplemental jurisdiction “[e]xcept . . . as expressly provided otherwise by Federal statute.” Here, a federal statute expressly provides otherwise, and Tuhin’s MMWA claim should therefore be dismissed.

  1. Plaintiffs’ State Law Claims and Remaining Proposed Amendments
  1. Usury

Tuhin seeks to add a civil usury claim on the grounds that the loan created with NYMG and assigned to M&T Bank provided for interest at a rate higher than the legal limit. Plaintiffs’ Memorandum of Law in Support of Motion to Amend (“Pls. Mem.”), Docket Entry 72, at 22. This would conform Tuhin’s complaint to those filed by the plaintiffs in the related cases, each of whom other than Dong asserts a usury claim. Like Tuhin, plaintiffs Gabrys and Chowdhury obtained loans through NYMG that were assigned to M&T Bank, and each asserts a usury claim against M&T Bank as well as NYMG. M&T Bank moves to dismiss each of the usury claims pending against it. NYMG has not made a similar motion.

New York’s usury statute bars loans carrying annual interest rates of more than sixteen percent, subject to limited exceptions not relevant here. N.Y. Gen. Oblig. Law § 5-501; N.Y. Banking Law § 14-a(1). A usurious debt “shall be void.” N.Y. Gen. Oblig. Law § 5-511. See Gerstle v. Nat’l Credit Adjusters, LLC, 2015 WL 72789, at *6 (S.D.N.Y. Jan. 6, 2015). To determine whether a transaction is usurious, a court “looks not to its form, but its substance, or `real character.'” O’Donovan v. Galinski, 62 A.D.3d 769, 769 (N.Y. App. Div. 2009) (citations omitted). While the interest rate stated in the loan documents may be dispositive of whether a loan is usurious, see Concord Fin. Corp. v. Wing Fook, Inc., 1997 WL 375679, at *5 (S.D.N.Y. July 7, 1997), a court may properly consider whether a lender is extracting a usurious rate of interest through deceptive means, such as by imposing excessive fees or inflating the loan’s principal amount, see Hillair Capital Investments, L.P. v. Integrated Freight Corp., 963 F. Supp. 2d 336, 339 (S.D.N.Y. 2013).

M&T Bank contends that plaintiffs’ usury claims must be dismissed because each of the relevant RICs provides for interest at a rate below sixteen percent and because there is “NO substantive evidence submitted that M&T Bank has violated [New York’s usury law].” M&T Bank Mem. at 21 (emphasis in original). Plaintiffs do not dispute M&T Bank’s contention that the interest rates appearing on the RICs are below sixteen percent. Pls. Reply at 14. Plaintiffs contend, however, that the RICs obscure the actual rate of interest charged because they are based on higher sales prices for the purchased vehicles than agreed to and because they impose fees for unwanted products and services that functioned in reality as additional finance charges. T: ¶¶ 227-29; G: ¶¶ 218-20; C: ¶¶ 225-27.

Regarding fees, a lender may charge reasonable expenses “attendant on a loan without rendering the loan usurious,” provided that the expenses charged are not “a pretext for higher interest.” Lloyd Corp. v. Henchar, Inc., 80 N.Y.2d 124, 127 (1992). Reasonable expenses may include, for example, attorney’s fees associated with making the loan. Durante Bros. & Sons, Inc. v. Flushing Nat. Bank, 652 F. Supp. 101, 105 (E.D.N.Y. 1986). However, when fees do not in fact reimburse a lender for expenses incurred in extending a loan but are instead “a disguised loan payment,” the fees are appropriately considered when determining the effective interest rate. Hillair, 963 F. Supp. 2d at 339 (denying summary judgment on usury defense because, among other things, purpose of fee payments was unclear).

A court may also question the principal indicated in a loan agreement to determine whether the loan is usurious. In Durante, the court examined a loan with a disputed principal amount and granted summary judgment dismissing a usury claim only after concluding that the interest charged did not reach a usurious level even under the borrower’s calculation of the principal amount. 652 F. Supp. at 104; see also Hillair, 963 F. Supp. 2d at 339 (denying summary judgment on usury defense because, among other things, borrowers asserted that principal amount of loans was artificially inflated).

Here, plaintiffs argue that the difference between the prices they agreed to pay and the principal amounts that appear on their RICs should be counted as interest in determining whether their loans are usurious. Plaintiffs argue in addition that products and services that were purportedly required for financing were in reality disguised loan payments that should also be calculated as interest. If plaintiffs’ contentions are accepted, the figures that appear in plaintiffs’ pleadings yield rates far above those that appear on their respective RICs, and far above sixteen per cent per year. Tuhin, for example, claims that he agreed to purchase a car for $12,000, made a $2,000 down payment, and agreed to borrow $10,000 over six years. T: ¶¶ 18, 23, 26, 29-30. NYMG, however, had Tuhin sign a retail installment contract for $26,209. T: ¶ 35. Gabrys alleges that he agreed to pay $19,000 for his car, putting down $10,000 in cash and financing the remainder over five years. G: ¶¶ 48-49, 55. The RIC prepared by NYMG, however, listed a cash price of $30,895 and a total sales price of $34,966.48. G: ¶¶ 65, 67. Finally, Chowdhury agreed to a purchase price of $13,500 and made a down payment of $10,000. C: ¶¶ 55-57. Unlike Tuhin and Gabrys, Chowdhury orally agreed to a short-term loan. C: ¶ 67. NYMG nevertheless obligated her to a RIC with a cash price of $24,471 and an amount financed of $14,911.99. C: ¶ 77.

Clearly, if the allegedly undisclosed increases in purchase prices and fees for services and products are considered interest, each plaintiff was charged an annual rate far greater than sixteen per cent.[13] For these reasons, I recommend that M&T Bank’s motion to dismiss the usury claims asserted by Tuhin, Gabrys and Chowdhury against it be denied.

  1. New York General Business Law Section 349

Plaintiffs Chowdhury and Tuhin assert claims under Section 349 of New York’s General Business Law against NYMG and M&T Bank. Plaintiff Gabrys seeks to add a claim against M&T Bank under this statute, and Tuhin seeks to clarify the basis upon which he asserts M&T Bank’s direct liability for his pending Section 349 claim. Pls. Mem. at 19. M&T Bank opposes leave to amend and cross-moves to dismiss each of the Section 349 claims asserted against it. M&T Bank Mem. at 21-22.

Section 349 prohibits “[d]eceptive acts or practices in the conduct of any business, trade, or commerce or in the furnishing of any service.” N.Y. Gen. Bus. Law § 349(a). “To state a claim under § 349, a plaintiff must allege: (1) the act or practice was consumer-oriented; (2) the act or practice was misleading in a material respect; and (3) the plaintiff was injured as a result.” Spagnola v. Chubb Corp., 574 F.3d 64, 74 (2d Cir. 2009) (citing Maurizio v. Goldsmith, 230 F.3d 518, 521 (2d Cir. 2000) (per curiam)). Section 349 claims are not subject to Rule 9(b)’s heightened pleading standard. Ackerman v. Coca-Cola Co., 2010 WL 2925955, at *22 (E.D.N.Y. July 21, 2010) (citing Pelman ex rel. Pelman v. McDonald’s Corp., 396 F.3d 508, 511 (2d Cir. 2005)).

Plaintiffs allege that M&T Bank is liable under Section 349 because it claimed it could not undo the fraudulent transactions plaintiffs entered into with NYMG, promised an investigation it never conducted, and continued to collect on plaintiffs’ loans even after hearing plaintiffs’ complaints of fraud. T: ¶ 192; G: ¶¶ 258-60; C: ¶¶ 263-65. Although M&T Bank’s bases for challenging plaintiffs’ Section 349 claims are not articulated clearly in its submissions, M&T Bank apparently contends that plaintiffs fail to allege that its actions were materially misleading or that any actions it took were consumer-oriented. M&T Bank Mem. at 21-22; M&T Bank Reply at 12.

The New York Court of Appeals considered whether certain conduct was consumeroriented and therefore within the scope of Section 349 in Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20 (1995). The court held that

Consumer-oriented conduct does not require a repetition or pattern of deceptive behavior. The statute itself does not require recurring conduct. Moreover, the legislative history makes plain that this law was intended to “afford a practical means of halting consumer frauds at their incipiency without the necessity to wait for the development of persistent frauds” (see, Mem. of Governor Rockefeller, 1970 N.Y. Legis. Ann., at 472-73). Plaintiff, thus, need not show that the defendant committed the complained-of acts repeatedly — either to the same plaintiff or to other consumers — but instead must demonstrate that the acts or practices have a broader impact on consumers at large. Private contract disputes, unique to the parties, for example, would not fall within the ambit of the statute.

85 N.Y.2d at 25. The test is whether the actions complained of “potentially affect similarly situated consumers.” Id. at 26-27; see also, Wilson v. Nw. Mut. Ins. Co., 625 F.3d 54, 64 (2d Cir. 2010); MaGee v. Paul Revere Life Ins. Co., 954 F. Supp. 582, 586 (E.D.N.Y. 1997) (“[T]he injury must be to the public generally as distinguished from the plaintiff alone.” (citations omitted)).

Plaintiffs in Oswego were union pension funds that opened accounts with the defendant bank. Plaintiffs complained that the bank failed to pay appropriate interest on the balances in their accounts. Although plaintiffs were pension funds and not individuals or consumers as that term is typically used, the Court of Appeals held that plaintiffs satisfied the “consumer-oriented” element of Section 349, reasoning that “defendant Bank dealt with plaintiffs’ representative as any customer entering the bank to open a savings account, furnishing the [plaintiff] Funds with standard documents presented to customers upon the opening of accounts.” 85 N.Y.2d at 26. M&T Bank, it seems, likewise dealt with Tuhin, Gabrys and Chowdhury just like it would any other customer seeking a car loan; indeed, M&T Bank argues in opposition to plaintiffs’ other claims, at least implicitly, that there was nothing unusual about the RICs assigned to it by NYMG that should have raised a red flag. See M&T Bank Mem. at 15. Moreover, the ordinary meaning of the term “consumer” more clearly applies to plaintiffs here than to the pension funds in Oswego. Finally, the fact that M&T Bank treated all three plaintiffs in a similar manner lends further support to the conclusion that the “consumer-oriented” prong of a Section 349 claim has been sufficiently alleged. See Riordan v. Nationwide Mut. Fire Ins. Co, 977 F.2d 47, 53 (2d Cir. 1992) (holding that evidence of defendant insurance company’s similar practices in its dealings with other policyholders satisfied Section 349’s consumer-oriented element).

Plaintiffs fare less well, though, in their efforts to allege that M&T Bank engaged in materially misleading conduct that caused them injury. An act or practice is materially misleading if it is “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Oswego, 85 N.Y.2d at 26. Proof of scienter, though, is not required. Id.; Watts v. Jackson Hewitt Tax Serv. Inc., 579 F. Supp. 2d 334, 346 (E.D.N.Y. 2008). In addition to establishing having been misled, “a plaintiff must prove `actual’ injury . . ., though not necessarily pecuniary harm.” Stutman v. Chem. Bank, 95 N.Y.2d 24, 29 (2000) (citing Oswego, 85 N.Y. 2d at 26).

Plaintiffs fail to allege facts demonstrating that M&T Bank misled them or caused them injury. As noted above, plaintiffs first contend it was misleading for M&T Bank to claim that it could not cancel their loans based upon their complaints and to continue to collect payments from them despite those complaints. However, plaintiffs neither explain why, nor provide precedent establishing that, a consumer who is fraudulently induced by a retailer to make a purchase, and who finances that purchase with a loan assigned to a bank, is entitled to cease making loan payments prior to or while seeking legal redress from the retailer. Plaintiffs do not allege that M&T Bank sought to hinder their attempts to pursue legal remedies that could result in the rescission of their loans, and in fact acknowledge that M&T Bank suggested that plaintiffs might consult a lawyer or report NYMG to the New York State Attorney General.

M&T Bank’s representations about investigating plaintiffs’ complaints may or may not have been accurate, but in either case plaintiffs fail to identify any injury they suffered as a result of those representations. Plaintiffs do not point to any authority suggesting that M&T Bank owed them a duty to investigate. Nor do they contend that, in reliance on M&T Bank’s representations, they put off taking action to protect their rights, or if they did, that they were as a result hindered in any way in asserting their rights later.

For all these reasons, Gabrys’ motion for leave to amend to add a Section 349 claim against M&T Bank should be denied, and M&T Bank’s motion to dismiss the Section 349 claims brought against it by Tuhin and Chowdhury should be granted.

  1. Negligent Hiring

Plaintiff Tuhin moves for leave to add a negligent hiring claim against NYMG and Mamdoh Eltouby. Pls. Mem. at 23; T: ¶¶ 245-97. The other plaintiffs also seek to assert negligent hiring claims. A: ¶¶ 194-203; F: ¶¶ 301-09; G: ¶¶ 289-97; D: ¶¶ 272-80; C: ¶¶ 291-99. A claim for negligent hiring requires a showing that “the employer knew or should have known of the employee’s propensity for the conduct which caused the injury.” Dewitt v. Home Depot U.S.A., Inc., 2012 WL 4049805, at *6 (E.D.N.Y. Sept. 12, 2012) (quotation marks and citations omitted).

Mamdoh Eltouby opposes the motion on the ground that personal liability for corporate acts requires proof that the individual engaged in wrongdoing, and that plaintiffs fail to allege facts suggesting any malfeasance on his part. NYMG Reply at 3. Plaintiffs, however, do allege facts giving rise to a plausible inference that Mamdoh Eltouby knew of Estrada’s propensity for fraud, hired him anyway, and refused to consider complaints made against him. As discussed above in connection with plaintiffs’ RICO claims, Mamdoh Eltouby is alleged to have owned and operated NNYMG at the time plaintiffs’ transactions took place, attempted to assault customers complaining about having being defrauded, and hired Estrada after he had been indicted and arrested for defrauding customers while working at other used car dealerships. It is plausible to infer that an individual who owns a used car dealership would be aware that someone working in the same field had been indicted for fraud in connection with the sale of used cars. Indeed, plaintiffs allege that Eltouby hired Estrada despite a public announcement from the Queens County District Attorney that Estrada had defrauded more than 23 consumers out of more than $115,000 with the promise that they could return to him to refinance their high interest loans after six months of timely payments. T: ¶ 80.

This aspect of plaintiffs’ motion should therefore be granted, and plaintiffs should be permitted to pursue their negligent hiring claims against NYMG and Mamdoh Eltouby.

  1. Remaining Issues

Tuhin seeks to add a negligence claim against M&T Bank based on information he obtained after filing his complaint. Pls. Mem. at 24-25. Additionally, Tuhin, Gabrys, and Chowdhury seek leave to identify properly as Manufacturers and Traders Trust Company the entity they incorrectly sued as “M&T Bank Corporation.” Pls. Mem. at 24. M&T Bank has not submitted any opposition to either of these applications, and these aspects of plaintiffs’ motion should therefore be granted.

CONCLUSION

Plaintiffs’ motion for leave to amend their complaints is granted except with respect to those claims I recommend be dismissed. For all the reasons stated above, I respectfully recommend that defendants’ motions to dismiss be denied, except that the following claims be dismissed:

1) Plaintiffs’ RICO claims against M&T Bank;

2) Plaintiffs’ TILA claims for damages (but not rescission) against M&T Bank;

3) Plaintiff Tuhin’s Magnuson-Moss Warranty Act claim; and

4) Plaintiffs’ New York General Business Law claims against M&T Bank.

Any objections to the recommendations made in this Report must be filed within fourteen days of this Report and Recommendation and, in any event, on or before June 22, 2015. Failure to file timely objections may waive the right to appeal the District Court’s Order. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72; Small v. Sec’y of Health & Human Servs., 892 F.2d 15, 16 (2d Cir. 1989).

[1] Unless otherwise indicated, all docket entry numbers listed in the text refer to docket entries in the first of these related cases to be filed, Alkhatib v. New York Motor Group, LLC, et al., 13-cv-2337.

[2] Defendants Santander Consumer USA and Capital One Auto Finance, Inc. have settled with plaintiffs and have not submitted any motions or briefing. Dealership defendants have not submitted any briefing on the pending motions in the Tuhin matter and did not submit a letter joining in the other arguments submitted by M&T Bank or by the dealership defendants in the other cases.

[3] Although NYMG does not oppose amendment or seek dismissal of plaintiffs’ non-RICO claims, individual defendants Mamdoh and Nada Eltouby challenge plaintiffs’ contention that they may be held personally liable on several of plaintiffs’ claims. NYMG Mem. at 14-15. Plaintiffs have indicated that they do not seek personal liability of these defendants on their claims under TILA, the New York Motor Vehicle Retail Installment Sales Act, New York General Business Law and New York’s usury law, or their common law claims for fraud, breach of contract or rescission. Pls. Reply at 23.

[4] Paragraphs from Alkhatib’s PAC, Docket Entry 73-1, are referred to herein as A: ¶ __. The PACs filed on behalf of the remaining plaintiffs, other than Tuhin, are similarly referenced: the Freire PAC, Docket Entry 73-2, as F: ¶ __; the Gabrys PAC, Docket Entry 73-3, as G: ¶ __; the Dong PAC, Docket Entry 73-4, as D: ¶ __; and the Chowdhury PAC, Docket Entry 73-5, as C: ¶ __. Tuhin submitted a revised PAC after oral argument together with a letter brief stating that all plaintiffs intend to file similarly revised proposed amended pleadings if permitted to do so. This Tuhin PAC, Docket Entry 70-1 in 13-cv-5643, is referenced as T: ¶ __. When a single complaint is cited, the Tuhin PAC is used because it is the most complete and most recently submitted complaint.

[5] Freire and Miriam Osario, an unmarried couple, are both named as plaintiffs, but there are no facts specifically involving Osario relevant to the pending motions.

[6] To establish a RICO conspiracy pursuant to Section 1962(d), a plaintiff must prove that a defendant entered into an agreement to form a RICO enterprise and violate RICO’s substantive provisions. See United States v. Applins, 637 F.3d. 59, 74 (2d Cir. 2011). Defendants do not raise any arguments directed specifically to plaintiffs’ RICO conspiracy claims, and I therefore do not separately address those claims here.

[7] Although the wording they use is slightly different, the other complaints include similar enterprise allegations. A: ¶ 105, F: ¶ 173, G: ¶ 178, D: ¶ 169, C: ¶ 180.

[8] The Alkhatib PAC appears to name the dealership entities as defendants alongside the natural persons in violation of Kushner. I do not dwell on this deficiency because, if leave to amend is granted, the Alkhatib Amended Complaint will be revised to conform to the most recent Tuhin PAC. This PAC, attached to the plaintiffs’ letter submitted after oral argument, names the defendants in a manner consistent with Kushner.

[9] Plaintiffs’ complaints define the relevant enterprise as comprised of M&T Bank and NYMG. M&T Bank of course participated in the conduct of the affairs of M&T Bank, and therefore may be said to have participated in the conduct of the affairs of the associated entities M&T Bank and NYMG. But Section 1962(c) requires that a defendant participate in the conduct of the affairs of an enterprise through a pattern of racketeering activity, and M&T Bank’s alleged role in the racketeering activity is too indirect to amount to participation in the conduct of the affairs of the M&T enterprise.

[10] These cases may be further distinguished by their reliance on the pleading standard that prevailed before Iqbal and Twombly were decided.

[11] Although M&T Bank moves to dismiss TILA claims brought by both Gabrys and Tuhin, Docket Entry 60 in 13cv-5643, M&T Bank addresses only Tuhin’s claim in its memorandum. As mentioned above, the dealership defendants have not submitted any motions in the Tuhin matter and NYMG does not move to dismiss Gabrys’ TILA claim. Docket Entry 79.

[12] NYMG has not moved to dismiss Tuhin’s MMWA claim. Because the deficiency in Tuhin’s claim identified by M&T Bank applies as well to NYMG, though, I conclude that his MMWA claim should be dismissed in its entirety.

[13] The total interest owed on Tuhin’s $10,000 loan would be $5,198.68 if amortized over five years at 16%. Similarly, the total interest owed on Gabrys’ $9,000 loan would be $3,827.91 if amortized over six years at 16%. The interest payments at 16% amount to only a fraction of each plaintiff’s agreed upon principal. Given that the fees, interest, and difference in principal on the RICs require the plaintiffs to pay a figure more than double the amounts financed, it is clear that the loans exceed 16%. As stated above, Chowdhury differs from Tuhin and Gabrys in that she did not orally agree to a multi-year loan and arranged for only $3,500 in financing. However, it is equally clear that the loan she received was usurious since the “amount financed” on the RIC, $14,911.99, is quadruple the amount she actually agreed to borrow.

RICO continuity requirement applied to bank fraud: Brandenburg v. Seidel

This case involved the continuing requirement in RICO cases.

“The district court found these allegations insufficient
to set forth a RICO pattern. The court reasoned
that while the predicate acts alleged were sufficient in
number, adequately related, and spread out over time,
they lacked the requisite “continuity” to make out a
RICO pattern. See Brandenburg v. First Maryland
Sav. & Loan, 660 F.Supp. 717, 727 (D.Md.1987).
This was so, said the district court, because they were
all in furtherance of a single “limited” scheme to encourage
the public to deposit money in First Maryland
and other MSSIC-insured savings and loans by
representing deposits in those institutions to be more
secure than they actually were. See id. at 727-28. In
the district court’s view, this scheme-which it characterized
as a “one-time plan to accomplish a single
goal”-did not “set forth the type of continuous criminal
endeavor that will establish a pattern of racketeering.”

OPINION
Brandenburg v. Seidel, 859 F.2d 1179 (4th Cir. 1988)
Julian SEIDEL; Frank, Phillips Circuit Judge:

Plaintiffs, depositors in the insolvent First Maryland
Savings and Loan Association (First Maryland),
appeal the dismissal of their action against certain
former officers, directors, and senior management
personnel of First Maryland (the First Maryland defendants),
as well as certain former officers and directors
of the Maryland Savings-Share Insurance
Corporation (MSSIC) and the individual savings and
loan institutions with which those individuals were
affiliated during their tenure at MSSIC (the MSSIC
defendants). Their amended complaint contained two
counts based on the civil provisions of the Racketeer
Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. §§ 1961-1968, as well as several pendent
state law claims. The district court dismissed the action
prior to trial. The court dismissed the civil RICO
count against the MSSIC defendants for failure to
state a claim and declined to exercise its discretionary
jurisdiction over the pendent state claims against
those defendants. It then dismissed the claims-both
federal and state-against the First Maryland defendants
on abstention grounds, in deference to the ongoing
state receivership proceedings. We affirm,
though on somewhat different grounds as to the
MSSIC defendants.
I
The Maryland Savings-Share Insurance Corporation
(MSSIC) was a quasi-public non-profit corporation
established by the Maryland legislature in 1962
to insure accounts in state-chartered savings and loan
associations. MSSIC was given substantial regulatory
control over its member institutions, which by 1985
numbered approximately 100.FN1 In May 1985, rumors
of financial instability at two savings and loans
insured by MSSIC-Old Court and Merritt-triggered a
general run on MSSIC-insured thrifts. The resulting
panic threw MSSIC itself into financial peril and
threatened to lead to the collapse of the state’s savings
and loan industry. In response, the Governor of
Maryland declared a state of public crisis, issued an
Executive Order limiting withdrawals from all
MSSIC-insured institutions to a maximum of $1,000
per account per month, and called the Maryland General
Assembly into emergency session. In special
sessions held in May and October-November of
1985, the General Assembly passed a package of
legislation designed to deal comprehensively with the
crisis in the state’s savings and loan industry. See
1985 Md.Laws, 1st Sp.Sess., ch. 1-11; 1985
Md.Laws, 2d Sp.Sess., ch. 3-6. Further refinements
were added in the legislature’s regular session in
1986. See 1986 Md.Laws, ch. 11-12.
FN1. MSSIC was governed by an elevenmember
Board of Directors. Three of the
eleven directors were appointed by the Governor;
the remainder were elected by
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MSSIC’s member institutions.
*1182 This legislative effort had two principal
components. First was the creation of a state-operated
deposit insurance fund, the Maryland Deposit Insurance
Fund (MDIF), to replace the ruined MSSIC.
MDIF was given all of MSSIC’s powers, duties, and
responsibilities and assumed all of its assets and liabilities,
including its insurance obligations to depositors
at member institutions. See generally
Md.Fin.Inst.Code Ann. §§ 10-101 to 10-121 (establishing
and defining structure and powers of MDIF).
Second, and of particular importance here, was the
establishment of a comprehensive framework for the
administration of conservatorship and receivership
proceedings for insolvent savings and loan associations.
See Md.Fin.Inst.Code Ann. §§ 9-701 to 9-712.
Section 9-709 gave MDIF the right to be appointed
conservator or receiver of any savings and loan association
insured by it. Section 9-710 gave the state
court administering the conservatorship or receivership
of such an institution “exclusive and plenary
jurisdiction over all claims, actions, and proceedings
that are brought by any person and that are related to
the assets, property, powers, rights, privileges, duties
and liabilities” of that institution or of MDIF in its
capacity as conservator or receiver.FN2 To implement
this comprehensive scheme, the Maryland Court of
Appeals appointed a single judge, Judge Joseph Kaplan
of the Circuit Court for the City of Baltimore, to
adjudicate all claims arising out of the conservatorship/
receivership proceedings for the failed savings
and loan associations.
FN2. Section 9-710 reads as follows:
§ 9-710. Jurisdiction of circuit court.
(a) In general.-(1) Notwithstanding any
other provision of law and to the maximum
extent permitted under the federal
and State constitutions, the circuit court
administering a conservatorship or receivership
under this title shall have exclusive
and plenary jurisdiction over all claims,
actions, and proceedings that are brought
by any person and that are related to the
assets, property, powers, rights, privileges,
duties, and liabilities of:
(i) The savings and loan association and
its subsidiaries, affiliates, or holding company;
(ii) The receivership or conservatorship
estate; and
(iii) The State of Maryland Deposit Insurance
Fund Corporation in its capacity as
receiver or conservator of the savings and
loan association.
(2) A court other than a court administering
a conservatorship or receivership under
this title may exercise jurisdiction
over claims and actions if:
(i) The court would have jurisdiction over
the claims or actions but for this section;
and
(ii) The court administering the conservatorship
or receivership approves:
1. The initiation and prosecution, or the
continued prosecution, of the claims or actions
in the other court by the conservator
or receiver; or
2. The continued prosecution of claims or
actions in the other court by any person
other than the conservator or receiver.
(b) Transfers.-Except as otherwise ordered
by the court administering the conservatorship
or receivership, any action or
proceeding described in subsection (a)(1)
of this section that is pending at the time
the conservatorship or receivership is established
under this title shall be transferred
to the circuit court administering
the conservatorship or receivership.
(1986, ch. 11, § 2.)
First Maryland was a state-chartered savings and
loan association formerly insured by MSSIC. In November
1985, Judge Kaplan found First Maryland to
be in an impaired condition and appointed MDIF as
its conservator. The conservatorship order froze the
interest rates on most First Maryland accounts at 5
1/2 % per annum. But First Maryland’s financial
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problems proved insurmountable, and on June 19,
1986, Judge Kaplan formally placed First Maryland
in receivership, appointing MDIF receiver and giving
it total control over First Maryland’s assets. The receivership
order terminated the continuing accrual of
interest of all First Maryland accounts as of that date.
No appeal was taken from that order.
In carrying out its statutory duty as receiver to
consolidate First Maryland’s assets for distribution to
its depositors and other creditors, MDIF has filed
actions in state court against various parties believed
to have participated in the misappropriation of the
institution’s assets. Chief among these is an action
against First Maryland’s former officers and directors
seeking $45 million in compensatory and punitive
damages for their wrongful depletion of the thrift’s
assets, based on theories of fraud, *1183 breach of
fiduciary duty, conspiracy, negligence, gross negligence,
waste, and conversion. MDIF v. Seidel, No.
13408 (Cir.Ct. of Mont.Co). MDIF has also instituted
a state court action against certain former directors of
MSSIC, seeking damages for their alleged complicity
in the fraud perpetrated by the former directors of
First Maryland and other insolvent thrifts. MDIF v.
Hogg, No. 113102 (Cir.Ct. Anne Arundel Co.).
To date, MDIF has distributed over $110 million
in First Maryland assets to the institution’s depositors.
In July 1986, MDIF returned up to $5,000 of principal
to each depositor, depending on the amount in his
or her account. In December 1986, MDIF distributed
another $41 million generated through the sale of
First Maryland’s assets to its depositors. As additional
assets are collected and liquidated, MDIF will distribute
the proceeds to the depositors. MDIF estimates,
however, that the depositors may not be repaid
the entire principal of their accounts until 1990 or
thereafter, and that they may never be compensated
for the interest lost on their accounts during First
Maryland’s insolvency.
Not satisfied with MDIF’s efforts, the plaintiffs
filed this action in federal court on behalf of themselves
and a class consisting of all persons who had
money deposited in First Maryland as of August 23,
1985.FN3 Named as defendants are First Maryland and
a number of its former officers, directors, and senior
management personnel (the First Maryland defendants),
as well as 12 former officers and directors of
MSSIC and the various savings and loan associations
with which those individuals were affiliated during
their tenure at MSSIC (collectively, the MSSIC defendants).
In this action, the plaintiffs seek damages
to compensate them for being deprived of the use of
their savings-and of the interest thereon-during the
period in which First Maryland has been in conservatorship
or receivership.
FN3. According to the amended complaint,
the class consists of more than 22,000 individuals.
The amended federal complaint, which is the
subject of this appeal, contains seven counts. Count I
asserts a civil RICO claim against both the First
Maryland defendants and the MSSIC defendants,
based on allegations that they used the mails and interstate
wires to make a series of fraudulent misrepresentations
about the security of deposits at First
Maryland and other MSSIC-insured savings and
loans, in order to induce the public to deposit money
in those institutions. Count II asserts a civil RICO
claim against the First Maryland defendants only,
based on allegations that they misappropriated the
thrift’s assets through numerous acts of self-dealing
extending over a number of years. The remaining
counts assert a number of pendent state claims.
Counts III and IV assert claims against the MSSIC
defendants for fraud, deceit, negligent and intentional
misrepresentation, and civil conspiracy, based on
their dissemination of allegedly false information
about the security of accounts at First Maryland and
other MSSIC-insured institutions. Count V asserts
claims against First Maryland for conversion and
breach of contract arising out of its failure “through
its conservator MDIF,” to release or pay interest on
the plaintiffs’ accounts.FN4 Counts VI and VII assert
claims against the MSSIC defendants for negligence,
gross negligence, and breach of fiduciary duty, based
on their alleged failure to exercise adequate regulatory
control over financial practices at First Maryland
and other MSSIC-insured institutions.
FN4. First Maryland has been voluntarily
dismissed from the action and is not a party
to this appeal.
The district court dismissed the plaintiffs’ claims
against all defendants prior to trial. The court held
first that the civil RICO count against the MSSIC
defendants should be dismissed under Fed.R.Civ.P.
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12(b)(6) for failure to allege a legally sufficient pattern
of racketeering activity and that the pendent state
claims against those defendants should be dismissed
under United Mine Workers v. Gibbs, 383 U.S. 715,
86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). The court then
concluded that the claims against the First Maryland
defendants-under both civil RICO and state lawshould
be dismissed on abstention grounds, *1184 in
deference to the ongoing state receivership proceedings.
This appeal followed.
II
We consider first the dismissal of the counts
against the MSSIC defendants. We agree with the
district court that the civil RICO count against those
defendants fails to state a claim, but we reach that
conclusion by a somewhat different route.
The district court dismissed on the basis that the
complaint failed adequately to allege a RICO “pattern.”
It did not address an alternative basis urged by
defendants: that even were a pattern sufficiently alleged,
an adequate causal connection between pattern
and cognizable injury to plaintiffs was not.
Because we have serious reservations about the
district court’s “no-pattern” conclusion, we rest affirmance
on the alternative “no-causal connection”
ground, a theory advanced by defendants both in the
district court and here. See Stern v. Merrill Lynch,
Pierce, Fenner and Smith, Inc., 603 F.2d 1073, 1093
(4th Cir.1979) (proper to affirm on alternative ground
advanced but not considered in trial court).
Though in the end we rest affirmance on the alternative
ground, we believe it nevertheless prudent
first to discuss in some detail the “no-pattern” basis
relied upon by the district court in order to indicate
why we decline to affirm on that basis. We do so out
of considerations of fairness to the litigants, concern
for the doctrinal integrity of our ongoing applications
of the difficult “pattern” concept, and, most importantly,
because of the special need in this case to emphasize
the conceptual independence, despite their
close relationship, of the pattern and causation elements
of the civil RICO claim.
A
To discuss the “pattern” issue, we begin at the
beginning. 18 U.S.C. § 1964(c) provides a private
action for treble damages and attorneys’ fees to
“[a]ny person injured in his business or property by
reason of a violation of section 1962 of this chapter.”
The civil RICO claim at issue here is based on alleged
violations of §§ 1962(a), (c), and (d). All of
these subsections require a showing that the defendants
engaged in a “pattern of racketeering activity.”
FN5 The RICO statute defines “racketeering activity”
to include, inter alia, any act indictable under certain
provisions of the federal criminal code, including 18
U.S.C. § 1341 (mail fraud), 18 U.S.C. § 1343 (wire
fraud), and 18 U.S.C. § 2314 (interstate transportation
of fraudulently obtained funds). See 18 U.S.C. §
1961(1). A “pattern of racketeering activity” is in
turn *1185 defined as at least two acts of racketeering
activity within ten years of each other. See 18 U.S.C.
§ 1961(5). In Sedima, SPRL v. Imrex Co., 473 U.S.
479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme
Court noted that while two such acts are necessary
to make out a RICO pattern, they may not be
sufficient. Id. at 496 n. 14, 105 S.Ct. at 3285 n. 14.
To constitute a pattern, the Court indicated, predicate
acts of racketeering activity must reflect both “continuity”
and “relationship.” Id.
FN5. 18 U.S.C. § 1962 provides:
§ 1962. Prohibited Activities
(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 in which such person
has participated as a principal within the
meaning of section 2, title 18, United
States Code, 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. A purchase
of securities on the open market for
purposes of investment, and without the
intention of controlling or participating in
the control of the issuer, or of assisting
another to do so, shall not be unlawful under
this subsection if the securities of the
issuer held by the purchaser, the members
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of his immediate family, and his or their
accomplices in any pattern or [sic] racketeering
activity or the collection of an unlawful
debt after such purchase do not
amount in the aggregate to one percent of
the outstanding securities of any one class,
and do not confer, either in law or in fact,
the power to elect one or more directors of
the issuer.
(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 subsections (a), (b), or (c) of this section.
Since Sedima, this court has wrestled with the
concept of a RICO pattern on a number of occasions,
see, e.g., Walk v. Baltimore & Ohio RR, 847 F.2d
1100 (4th Cir.1988); Eastern Publishing & Advertising,
Inc. v. Chesapeake Publishing & Advertising,
Inc., 831 F.2d 488 (4th Cir.1987); HMK Corp. v.
Walsey, 828 F.2d 1071 (4th Cir.1987); International
Data Bank v. Zepkin, 812 F.2d 149 (4th Cir.1987). In
these cases, we have deliberately declined to adopt
any mechanical rules to determine the existence of a
RICO pattern, holding instead that the issue is a
“matter of criminal dimension and degree” to be decided
on a case-by-case basis. See Zepkin, 812 F.2d
at 155. Factors relevant to this inquiry include the
number and variety of predicate acts and the length of
time over which they were committed, the number of
putative victims, the presence of separate schemes,
and the potential for multiple distinct injuries. See
Morgan v. Bank of Waukegan, 804 F.2d 970, 975
(7th Cir.1986). These factors are not exclusive, and
no one of them is necessarily determinative; instead,
a carefully considered judgment taking into account
all the facts and circumstances of the particular casewith
special attention to the context in which the
predicate acts occur-is required. See Walk, 847 F.2d
at 1103-04; HMK, 828 F.2d at 1074. The mere fact
that the predicate acts alleged can be characterized as
part of the same overall scheme does not automatically
prevent their constituting a RICO pattern. See
Walk, 847 F.2d at 1106; Zepkin, 812 F.2d at 155.
Similarly, the fact that a scheme to defraud requires
several acts of mail or wire fraud in order to accomplish
its objective does not automatically make it a
RICO pattern. See Walk, 847 F.2d at 1104; Zepkin,
812 F.2d at 154-55. With us, the pattern inquiry remains
a flexible one whose ultimate focus must always
be on whether the related predicate acts indicate
“ongoing criminal activity of sufficient scope and
persistence to pose a special threat to social wellbeing.”
Walk, 847 F.2d at 1106; See Zepkin, 812 F.2d
at 155.
In this case, the civil RICO count against the
MSSIC defendants is based on allegations that they
made a series of misleading statements in order to
induce the public to deposit money in First Maryland
and other MSSIC-insured institutions, including:
(1) running print and broadcast advertisements designed
to create the misimpression that MSSIC was
an agency of the state of Maryland;
(2) distributing various documents-including a brochure
entitled “We Have the Answers” and a letter
entitled “An Open Letter to a Potential MSSIC
Saver”-designed to create the misimpression that
MSSIC was an agency of the state of Maryland and
that it effectively regulated its member institutions
to insure the safety of deposits therein;
(3) giving false assurances of security, both in writing
and over the telephone, to depositor inquiries
about the safety of accounts in MSSIC-insured institutions;
(4) encouraging member institutions to use the
MSSIC seal, which is similar to the State of Maryland’s
seal, in print and broadcast ads, in order to
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create the misimpression that their accounts were
insured by the state of Maryland;
(5) deliberately concealing adverse information
about member institutions from the press; and
(6) distributing documents and running print and
broadcast advertisements misrepresenting the nature
and value of the insurance offered by MSSIC.
See Amended Complaint paragraphs 81-84. The
plaintiffs allege that the MSSIC defendants thereby
committed multiple acts of mail and wire fraud, as
well as interstate transportation of fraudulently obtained*
1186 funds, all of which are proper predicate
offenses under the RICO statute.
The district court found these allegations insufficient
to set forth a RICO pattern. The court reasoned
that while the predicate acts alleged were sufficient in
number, adequately related, and spread out over time,
they lacked the requisite “continuity” to make out a
RICO pattern. See Brandenburg v. First Maryland
Sav. & Loan, 660 F.Supp. 717, 727 (D.Md.1987).
This was so, said the district court, because they were
all in furtherance of a single “limited” scheme to encourage
the public to deposit money in First Maryland
and other MSSIC-insured savings and loans by
representing deposits in those institutions to be more
secure than they actually were. See id. at 727-28. In
the district court’s view, this scheme-which it characterized
as a “one-time plan to accomplish a single
goal”-did not “set forth the type of continuous criminal
endeavor that will establish a pattern of racketeering
as defined in Sedima and [Zepkin ].” Id. at 727.
Though the issue is a close one and the district
court’s analysis arguably faithful to our precedents,
we are sufficiently concerned with its accuracy that
we choose not to rest affirmance upon it. The predicate
acts alleged here spanned a period of more than
three years and were directed at more than 22,000
putative victims. Though they can be characterized as
part of a single scheme, it was not a scheme that is
easily treated as one limited in scope to the accomplishment
of a single discrete objective. This is not a
case, for example, like Zepkin, where the predicate
acts alleged were all designed to defraud a small
group of victims in connection with a single transaction.
Instead, the predicate acts of fraud, as alleged
here, were directed at an enormous group of personsthe
investing public-in connection with a virtually
limitless number of deposit transactions. Nor is this
case easily likened to Walk, where the predicate acts
alleged, though occurring in connection with several
related transactions spread out over a number of
years, were all steps in the path to the accomplishment
of a single limited goal-squeezing out the minority
in a particular corporate structure. Unlike the
scheme in Walk, the scheme as alleged here did not
involve the commission of multiple preparatory acts
aimed at the infliction of a single basic injury, but the
commission of a series of independent acts that were
distinct criminal ends in themselves.FN6 In contrast to
the scheme in Walk, this scheme as alleged had no
limiting goal whose accomplishment would bring the
criminal activity it spawned to an end. Indeed, the
criminal activity as pleaded here threatened to continue
unabated, driven by the possibility of repeated
economic gain, until the defendants were caught.
Such a scheme-though “single”-is arguably of the
type whose very scope and persistence poses a special
threat to social well-being, a possibility we have
recognized. See Zepkin, 812 F.2d at 155; see also
Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1304-05
(7th Cir.1987) (allegations that defendants mailed 19
separate false shipping invoices over a period of
seven months were sufficient to state a pattern, because
each false invoice threatened an independent
economic injury); Illinois Dept. of Revenue v. Phillips,
771 F.2d 312, 313 (7th Cir.1985) (allegations
that defendant mailed nine separate fraudulent sales
tax returns to the state were sufficient to state a pattern,
because each false return threatened an independent
economic injury).
FN6. The fact that the discrete objectives of
each of the predicate acts were all of the
same basic type would not, of course, prevent
the predicate acts from constituting a
pattern. As we said in Walk, the pattern requirement
cannot be avoided by “ ‘the semantical
game of generalizing th [e] illegal
objective’ ” of the related predicate acts. See
847 F.2d at 1106, quoting Montesano v. Seafirst
Comm. Corp., 818 F.2d 423, 426 (5th
Cir.1987).
As this analysis indicates, the district court’s
conclusion that a RICO pattern had not been sufficiently
alleged is open at least to serious question
under our precedents. Because the issue therefore is
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close, the pattern concept a difficult one whose outer
bounds are yet unclear, and the question as presented
here one of the sufficiency of bare-bones pleading
allegations, we decline to pass upon it. We may
*1187 do so because of our conclusion that affirmance
is compelled on the much firmer, alternative
causation ground.
Accordingly, we assume, without deciding, that
a RICO pattern was sufficiently alleged and turn, as
this assumption requires, to the causation question.
Before doing so, we emphasize that to find, or assume,
that a RICO pattern of racketeering activity
consisting of acts of mail and wire fraud has been
shown does not also establish that its intended victims
were injured, nor beyond that, that any injury
suffered by them was sufficiently caused by the acts
to create RICO liability. This follows because indictable
acts of mail or wire fraud may be proven without
any proof of detrimental reliance by, hence of injury
to, the intended victims. See Armco Indus. Credit
Corp. v. SLT Warehouse Co., 782 F.2d 475, 481-82
(5th Cir.1986).
B.
To make out a civil action for damages under the
RICO statute a private plaintiff must demonstrate not
only that the defendants have violated § 1962, but
also that he has been “injured in his business or property
by reason of [the alleged] violation of section
1962.” 18 U.S.C. § 1964(c).FN7 The quoted language
requires the plaintiff to make two closely related
showings: (1) that he has suffered injury to his business
or property; and (2) that this injury was caused
by the predicate acts of racketeering activity that
make up the violation of § 1962. See Nodine v. Textron,
Inc., 819 F.2d 347, 348 (1st Cir.1987).FN8 As the
Seventh Circuit has said, “[a] defendant who violates
section 1962 is not liable for treble damages to everyone
he might have injured by other conduct, nor is
[he] liable to those who have not been injured.” See
Haroco, Inc. v. American Nat’l Bank & Trust Co.,
747 F.2d 384, 398 (7th Cir.1984), aff’d, 473 U.S. 606,
105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). The Supreme
Court has explained these injury and causation requirements
as aspects of standing, rather than elements
of the civil RICO plaintiff’s prima facie case.
See Sedima, 473 U.S. at 496-97, 105 S.Ct. at 3285
(Under § 1962(c), a “plaintiff only has standing if,
and can only recover to the extent that, he has been
injured in his business or property by the conduct
constituting the violation.”). In any event, it is clear
that a civil RICO complaint is vulnerable to a motion
to dismiss if it fails to allege either an adequate injury
to business or property, see, e.g., Drake v. BF Goodrich
Co., 782 F.2d 638, 644 (6th Cir.1986), or an
adequate causal nexus between that injury and the
predicate acts of racketeering activity alleged, see,
e.g., Pujol v. Shearson/American Express, Inc., 829
F.2d 1201, 1204-06 (1st Cir.1987); Nodine, 819 F.2d
at 348-49; Morast v. Lance, 807 F.2d 926, 932-33
(11th Cir.1987); In re Gas Reclamation, Inc. Securities
Litigation, 663 F.Supp. 1123, 1124-26
(S.D.N.Y.1987).
FN7. Section 1964(c) reads in full as follows:
Any person injured in his business or
property by reason of a violation of
section 1962 of this chapter may sue
therefor in any appropriate United States
district court and shall recover threefold
the damages he sustains and the cost of
the suit, including a reasonable attorney’s
fee.
18 U.S.C. § 1964(c).
FN8. The civil RICO claimant need not,
however, plead and prove a distinct “racketeering
injury.” Sedima, 473 U.S. at 495, 105
S.Ct. at 3284.
The civil RICO count at issue here contains an
adequate allegation of injury to the plaintiffs’ business
or property: the loss of interest income on their
First Maryland savings accounts and certificates of
deposit during the period in which First Maryland has
been in conservatorship and receivership. See
Amended Complaint paragraphs 102-107. But the
MSSIC defendants argue that the plaintiffs have
failed adequately to plead the requisite causal connection
between this injury and the predicate acts of
racketeering activity that they are alleged to have
committed. We agree.
The only predicate acts of racketeering activity
of which the MSSIC defendants stand accused are
acts of mail and wire fraud and interstate transportation
of fraudulently obtained funds committed in
connection with their dissemination of certain*1188
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PHILLIPS, Circuit Judge:
Plaintiffs, depositors in the insolvent First Maryland
Savings and Loan Association (First Maryland),
appeal the dismissal of their action against certain
former officers, directors, and senior management
personnel of First Maryland (the First Maryland defendants),
as well as certain former officers and directors
of the Maryland Savings-Share Insurance
Corporation (MSSIC) and the individual savings and
loan institutions with which those individuals were
affiliated during their tenure at MSSIC (the MSSIC
defendants). Their amended complaint contained two
counts based on the civil provisions of the Racketeer
Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. §§ 1961-1968, as well as several pendent
state law claims. The district court dismissed the action
prior to trial. The court dismissed the civil RICO
count against the MSSIC defendants for failure to
state a claim and declined to exercise its discretionary
jurisdiction over the pendent state claims against
those defendants. It then dismissed the claims-both
federal and state-against the First Maryland defendants
on abstention grounds, in deference to the ongoing
state receivership proceedings. We affirm,
though on somewhat different grounds as to the
MSSIC defendants.
I
The Maryland Savings-Share Insurance Corporation
(MSSIC) was a quasi-public non-profit corporation
established by the Maryland legislature in 1962
to insure accounts in state-chartered savings and loan
associations. MSSIC was given substantial regulatory
control over its member institutions, which by 1985
numbered approximately 100.FN1 In May 1985, rumors
of financial instability at two savings and loans
insured by MSSIC-Old Court and Merritt-triggered a
general run on MSSIC-insured thrifts. The resulting
panic threw MSSIC itself into financial peril and
threatened to lead to the collapse of the state’s savings
and loan industry. In response, the Governor of
Maryland declared a state of public crisis, issued an
Executive Order limiting withdrawals from all
MSSIC-insured institutions to a maximum of $1,000
per account per month, and called the Maryland General
Assembly into emergency session. In special
sessions held in May and October-November of
1985, the General Assembly passed a package of
legislation designed to deal comprehensively with the
crisis in the state’s savings and loan industry. See
1985 Md.Laws, 1st Sp.Sess., ch. 1-11; 1985
Md.Laws, 2d Sp.Sess., ch. 3-6. Further refinements
were added in the legislature’s regular session in
1986. See 1986 Md.Laws, ch. 11-12.
FN1. MSSIC was governed by an elevenmember
Board of Directors. Three of the
eleven directors were appointed by the Governor;
the remainder were elected by
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MSSIC’s member institutions.
*1182 This legislative effort had two principal
components. First was the creation of a state-operated
deposit insurance fund, the Maryland Deposit Insurance
Fund (MDIF), to replace the ruined MSSIC.
MDIF was given all of MSSIC’s powers, duties, and
responsibilities and assumed all of its assets and liabilities,
including its insurance obligations to depositors
at member institutions. See generally
Md.Fin.Inst.Code Ann. §§ 10-101 to 10-121 (establishing
and defining structure and powers of MDIF).
Second, and of particular importance here, was the
establishment of a comprehensive framework for the
administration of conservatorship and receivership
proceedings for insolvent savings and loan associations.
See Md.Fin.Inst.Code Ann. §§ 9-701 to 9-712.
Section 9-709 gave MDIF the right to be appointed
conservator or receiver of any savings and loan association
insured by it. Section 9-710 gave the state
court administering the conservatorship or receivership
of such an institution “exclusive and plenary
jurisdiction over all claims, actions, and proceedings
that are brought by any person and that are related to
the assets, property, powers, rights, privileges, duties
and liabilities” of that institution or of MDIF in its
capacity as conservator or receiver.FN2 To implement
this comprehensive scheme, the Maryland Court of
Appeals appointed a single judge, Judge Joseph Kaplan
of the Circuit Court for the City of Baltimore, to
adjudicate all claims arising out of the conservatorship/
receivership proceedings for the failed savings
and loan associations.
FN2. Section 9-710 reads as follows:
§ 9-710. Jurisdiction of circuit court.
(a) In general.-(1) Notwithstanding any
other provision of law and to the maximum
extent permitted under the federal
and State constitutions, the circuit court
administering a conservatorship or receivership
under this title shall have exclusive
and plenary jurisdiction over all claims,
actions, and proceedings that are brought
by any person and that are related to the
assets, property, powers, rights, privileges,
duties, and liabilities of:
(i) The savings and loan association and
its subsidiaries, affiliates, or holding company;
(ii) The receivership or conservatorship
estate; and
(iii) The State of Maryland Deposit Insurance
Fund Corporation in its capacity as
receiver or conservator of the savings and
loan association.
(2) A court other than a court administering
a conservatorship or receivership under
this title may exercise jurisdiction
over claims and actions if:
(i) The court would have jurisdiction over
the claims or actions but for this section;
and
(ii) The court administering the conservatorship
or receivership approves:
1. The initiation and prosecution, or the
continued prosecution, of the claims or actions
in the other court by the conservator
or receiver; or
2. The continued prosecution of claims or
actions in the other court by any person
other than the conservator or receiver.
(b) Transfers.-Except as otherwise ordered
by the court administering the conservatorship
or receivership, any action or
proceeding described in subsection (a)(1)
of this section that is pending at the time
the conservatorship or receivership is established
under this title shall be transferred
to the circuit court administering
the conservatorship or receivership.
(1986, ch. 11, § 2.)
First Maryland was a state-chartered savings and
loan association formerly insured by MSSIC. In November
1985, Judge Kaplan found First Maryland to
be in an impaired condition and appointed MDIF as
its conservator. The conservatorship order froze the
interest rates on most First Maryland accounts at 5
1/2 % per annum. But First Maryland’s financial
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problems proved insurmountable, and on June 19,
1986, Judge Kaplan formally placed First Maryland
in receivership, appointing MDIF receiver and giving
it total control over First Maryland’s assets. The receivership
order terminated the continuing accrual of
interest of all First Maryland accounts as of that date.
No appeal was taken from that order.
In carrying out its statutory duty as receiver to
consolidate First Maryland’s assets for distribution to
its depositors and other creditors, MDIF has filed
actions in state court against various parties believed
to have participated in the misappropriation of the
institution’s assets. Chief among these is an action
against First Maryland’s former officers and directors
seeking $45 million in compensatory and punitive
damages for their wrongful depletion of the thrift’s
assets, based on theories of fraud, *1183 breach of
fiduciary duty, conspiracy, negligence, gross negligence,
waste, and conversion. MDIF v. Seidel, No.
13408 (Cir.Ct. of Mont.Co). MDIF has also instituted
a state court action against certain former directors of
MSSIC, seeking damages for their alleged complicity
in the fraud perpetrated by the former directors of
First Maryland and other insolvent thrifts. MDIF v.
Hogg, No. 113102 (Cir.Ct. Anne Arundel Co.).
To date, MDIF has distributed over $110 million
in First Maryland assets to the institution’s depositors.
In July 1986, MDIF returned up to $5,000 of principal
to each depositor, depending on the amount in his
or her account. In December 1986, MDIF distributed
another $41 million generated through the sale of
First Maryland’s assets to its depositors. As additional
assets are collected and liquidated, MDIF will distribute
the proceeds to the depositors. MDIF estimates,
however, that the depositors may not be repaid
the entire principal of their accounts until 1990 or
thereafter, and that they may never be compensated
for the interest lost on their accounts during First
Maryland’s insolvency.
Not satisfied with MDIF’s efforts, the plaintiffs
filed this action in federal court on behalf of themselves
and a class consisting of all persons who had
money deposited in First Maryland as of August 23,
1985.FN3 Named as defendants are First Maryland and
a number of its former officers, directors, and senior
management personnel (the First Maryland defendants),
as well as 12 former officers and directors of
MSSIC and the various savings and loan associations
with which those individuals were affiliated during
their tenure at MSSIC (collectively, the MSSIC defendants).
In this action, the plaintiffs seek damages
to compensate them for being deprived of the use of
their savings-and of the interest thereon-during the
period in which First Maryland has been in conservatorship
or receivership.
FN3. According to the amended complaint,
the class consists of more than 22,000 individuals.
The amended federal complaint, which is the
subject of this appeal, contains seven counts. Count I
asserts a civil RICO claim against both the First
Maryland defendants and the MSSIC defendants,
based on allegations that they used the mails and interstate
wires to make a series of fraudulent misrepresentations
about the security of deposits at First
Maryland and other MSSIC-insured savings and
loans, in order to induce the public to deposit money
in those institutions. Count II asserts a civil RICO
claim against the First Maryland defendants only,
based on allegations that they misappropriated the
thrift’s assets through numerous acts of self-dealing
extending over a number of years. The remaining
counts assert a number of pendent state claims.
Counts III and IV assert claims against the MSSIC
defendants for fraud, deceit, negligent and intentional
misrepresentation, and civil conspiracy, based on
their dissemination of allegedly false information
about the security of accounts at First Maryland and
other MSSIC-insured institutions. Count V asserts
claims against First Maryland for conversion and
breach of contract arising out of its failure “through
its conservator MDIF,” to release or pay interest on
the plaintiffs’ accounts.FN4 Counts VI and VII assert
claims against the MSSIC defendants for negligence,
gross negligence, and breach of fiduciary duty, based
on their alleged failure to exercise adequate regulatory
control over financial practices at First Maryland
and other MSSIC-insured institutions.
FN4. First Maryland has been voluntarily
dismissed from the action and is not a party
to this appeal.
The district court dismissed the plaintiffs’ claims
against all defendants prior to trial. The court held
first that the civil RICO count against the MSSIC
defendants should be dismissed under Fed.R.Civ.P.
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12(b)(6) for failure to allege a legally sufficient pattern
of racketeering activity and that the pendent state
claims against those defendants should be dismissed
under United Mine Workers v. Gibbs, 383 U.S. 715,
86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). The court then
concluded that the claims against the First Maryland
defendants-under both civil RICO and state lawshould
be dismissed on abstention grounds, *1184 in
deference to the ongoing state receivership proceedings.
This appeal followed.
II
We consider first the dismissal of the counts
against the MSSIC defendants. We agree with the
district court that the civil RICO count against those
defendants fails to state a claim, but we reach that
conclusion by a somewhat different route.
The district court dismissed on the basis that the
complaint failed adequately to allege a RICO “pattern.”
It did not address an alternative basis urged by
defendants: that even were a pattern sufficiently alleged,
an adequate causal connection between pattern
and cognizable injury to plaintiffs was not.
Because we have serious reservations about the
district court’s “no-pattern” conclusion, we rest affirmance
on the alternative “no-causal connection”
ground, a theory advanced by defendants both in the
district court and here. See Stern v. Merrill Lynch,
Pierce, Fenner and Smith, Inc., 603 F.2d 1073, 1093
(4th Cir.1979) (proper to affirm on alternative ground
advanced but not considered in trial court).
Though in the end we rest affirmance on the alternative
ground, we believe it nevertheless prudent
first to discuss in some detail the “no-pattern” basis
relied upon by the district court in order to indicate
why we decline to affirm on that basis. We do so out
of considerations of fairness to the litigants, concern
for the doctrinal integrity of our ongoing applications
of the difficult “pattern” concept, and, most importantly,
because of the special need in this case to emphasize
the conceptual independence, despite their
close relationship, of the pattern and causation elements
of the civil RICO claim.
A
To discuss the “pattern” issue, we begin at the
beginning. 18 U.S.C. § 1964(c) provides a private
action for treble damages and attorneys’ fees to
“[a]ny person injured in his business or property by
reason of a violation of section 1962 of this chapter.”
The civil RICO claim at issue here is based on alleged
violations of §§ 1962(a), (c), and (d). All of
these subsections require a showing that the defendants
engaged in a “pattern of racketeering activity.”
FN5 The RICO statute defines “racketeering activity”
to include, inter alia, any act indictable under certain
provisions of the federal criminal code, including 18
U.S.C. § 1341 (mail fraud), 18 U.S.C. § 1343 (wire
fraud), and 18 U.S.C. § 2314 (interstate transportation
of fraudulently obtained funds). See 18 U.S.C. §
1961(1). A “pattern of racketeering activity” is in
turn *1185 defined as at least two acts of racketeering
activity within ten years of each other. See 18 U.S.C.
§ 1961(5). In Sedima, SPRL v. Imrex Co., 473 U.S.
479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme
Court noted that while two such acts are necessary
to make out a RICO pattern, they may not be
sufficient. Id. at 496 n. 14, 105 S.Ct. at 3285 n. 14.
To constitute a pattern, the Court indicated, predicate
acts of racketeering activity must reflect both “continuity”
and “relationship.” Id.
FN5. 18 U.S.C. § 1962 provides:
§ 1962. Prohibited Activities
(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 in which such person
has participated as a principal within the
meaning of section 2, title 18, United
States Code, 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. A purchase
of securities on the open market for
purposes of investment, and without the
intention of controlling or participating in
the control of the issuer, or of assisting
another to do so, shall not be unlawful under
this subsection if the securities of the
issuer held by the purchaser, the members
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of his immediate family, and his or their
accomplices in any pattern or [sic] racketeering
activity or the collection of an unlawful
debt after such purchase do not
amount in the aggregate to one percent of
the outstanding securities of any one class,
and do not confer, either in law or in fact,
the power to elect one or more directors of
the issuer.
(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 subsections (a), (b), or (c) of this section.
Since Sedima, this court has wrestled with the
concept of a RICO pattern on a number of occasions,
see, e.g., Walk v. Baltimore & Ohio RR, 847 F.2d
1100 (4th Cir.1988); Eastern Publishing & Advertising,
Inc. v. Chesapeake Publishing & Advertising,
Inc., 831 F.2d 488 (4th Cir.1987); HMK Corp. v.
Walsey, 828 F.2d 1071 (4th Cir.1987); International
Data Bank v. Zepkin, 812 F.2d 149 (4th Cir.1987). In
these cases, we have deliberately declined to adopt
any mechanical rules to determine the existence of a
RICO pattern, holding instead that the issue is a
“matter of criminal dimension and degree” to be decided
on a case-by-case basis. See Zepkin, 812 F.2d
at 155. Factors relevant to this inquiry include the
number and variety of predicate acts and the length of
time over which they were committed, the number of
putative victims, the presence of separate schemes,
and the potential for multiple distinct injuries. See
Morgan v. Bank of Waukegan, 804 F.2d 970, 975
(7th Cir.1986). These factors are not exclusive, and
no one of them is necessarily determinative; instead,
a carefully considered judgment taking into account
all the facts and circumstances of the particular casewith
special attention to the context in which the
predicate acts occur-is required. See Walk, 847 F.2d
at 1103-04; HMK, 828 F.2d at 1074. The mere fact
that the predicate acts alleged can be characterized as
part of the same overall scheme does not automatically
prevent their constituting a RICO pattern. See
Walk, 847 F.2d at 1106; Zepkin, 812 F.2d at 155.
Similarly, the fact that a scheme to defraud requires
several acts of mail or wire fraud in order to accomplish
its objective does not automatically make it a
RICO pattern. See Walk, 847 F.2d at 1104; Zepkin,
812 F.2d at 154-55. With us, the pattern inquiry remains
a flexible one whose ultimate focus must always
be on whether the related predicate acts indicate
“ongoing criminal activity of sufficient scope and
persistence to pose a special threat to social wellbeing.”
Walk, 847 F.2d at 1106; See Zepkin, 812 F.2d
at 155.
In this case, the civil RICO count against the
MSSIC defendants is based on allegations that they
made a series of misleading statements in order to
induce the public to deposit money in First Maryland
and other MSSIC-insured institutions, including:
(1) running print and broadcast advertisements designed
to create the misimpression that MSSIC was
an agency of the state of Maryland;
(2) distributing various documents-including a brochure
entitled “We Have the Answers” and a letter
entitled “An Open Letter to a Potential MSSIC
Saver”-designed to create the misimpression that
MSSIC was an agency of the state of Maryland and
that it effectively regulated its member institutions
to insure the safety of deposits therein;
(3) giving false assurances of security, both in writing
and over the telephone, to depositor inquiries
about the safety of accounts in MSSIC-insured institutions;
(4) encouraging member institutions to use the
MSSIC seal, which is similar to the State of Maryland’s
seal, in print and broadcast ads, in order to
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create the misimpression that their accounts were
insured by the state of Maryland;
(5) deliberately concealing adverse information
about member institutions from the press; and
(6) distributing documents and running print and
broadcast advertisements misrepresenting the nature
and value of the insurance offered by MSSIC.
See Amended Complaint paragraphs 81-84. The
plaintiffs allege that the MSSIC defendants thereby
committed multiple acts of mail and wire fraud, as
well as interstate transportation of fraudulently obtained*
1186 funds, all of which are proper predicate
offenses under the RICO statute.

The district court found these allegations insufficient
to set forth a RICO pattern. The court reasoned
that while the predicate acts alleged were sufficient in
number, adequately related, and spread out over time,
they lacked the requisite “continuity” to make out a
RICO pattern. See Brandenburg v. First Maryland
Sav. & Loan, 660 F.Supp. 717, 727 (D.Md.1987).
This was so, said the district court, because they were
all in furtherance of a single “limited” scheme to encourage
the public to deposit money in First Maryland
and other MSSIC-insured savings and loans by
representing deposits in those institutions to be more
secure than they actually were. See id. at 727-28. In
the district court’s view, this scheme-which it characterized
as a “one-time plan to accomplish a single
goal”-did not “set forth the type of continuous criminal
endeavor that will establish a pattern of racketeering
as defined in Sedima and [Zepkin ].” Id. at 727.
Though the issue is a close one and the district
court’s analysis arguably faithful to our precedents,
we are sufficiently concerned with its accuracy that
we choose not to rest affirmance upon it. The predicate
acts alleged here spanned a period of more than
three years and were directed at more than 22,000
putative victims. Though they can be characterized as
part of a single scheme, it was not a scheme that is
easily treated as one limited in scope to the accomplishment
of a single discrete objective. This is not a
case, for example, like Zepkin, where the predicate
acts alleged were all designed to defraud a small
group of victims in connection with a single transaction.
Instead, the predicate acts of fraud, as alleged
here, were directed at an enormous group of personsthe
investing public-in connection with a virtually
limitless number of deposit transactions. Nor is this
case easily likened to Walk, where the predicate acts
alleged, though occurring in connection with several
related transactions spread out over a number of
years, were all steps in the path to the accomplishment
of a single limited goal-squeezing out the minority
in a particular corporate structure. Unlike the
scheme in Walk, the scheme as alleged here did not
involve the commission of multiple preparatory acts
aimed at the infliction of a single basic injury, but the
commission of a series of independent acts that were
distinct criminal ends in themselves.FN6 In contrast to
the scheme in Walk, this scheme as alleged had no
limiting goal whose accomplishment would bring the
criminal activity it spawned to an end. Indeed, the
criminal activity as pleaded here threatened to continue
unabated, driven by the possibility of repeated
economic gain, until the defendants were caught.
Such a scheme-though “single”-is arguably of the
type whose very scope and persistence poses a special
threat to social well-being, a possibility we have
recognized. See Zepkin, 812 F.2d at 155; see also
Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1304-05
(7th Cir.1987) (allegations that defendants mailed 19
separate false shipping invoices over a period of
seven months were sufficient to state a pattern, because
each false invoice threatened an independent
economic injury); Illinois Dept. of Revenue v. Phillips,
771 F.2d 312, 313 (7th Cir.1985) (allegations
that defendant mailed nine separate fraudulent sales
tax returns to the state were sufficient to state a pattern,
because each false return threatened an independent
economic injury).
FN6. The fact that the discrete objectives of
each of the predicate acts were all of the
same basic type would not, of course, prevent
the predicate acts from constituting a
pattern. As we said in Walk, the pattern requirement
cannot be avoided by “ ‘the semantical
game of generalizing th [e] illegal
objective’ ” of the related predicate acts. See
847 F.2d at 1106, quoting Montesano v. Seafirst
Comm. Corp., 818 F.2d 423, 426 (5th
Cir.1987).
As this analysis indicates, the district court’s
conclusion that a RICO pattern had not been sufficiently
alleged is open at least to serious question
under our precedents. Because the issue therefore is
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close, the pattern concept a difficult one whose outer
bounds are yet unclear, and the question as presented
here one of the sufficiency of bare-bones pleading
allegations, we decline to pass upon it. We may
*1187 do so because of our conclusion that affirmance
is compelled on the much firmer, alternative
causation ground.
Accordingly, we assume, without deciding, that
a RICO pattern was sufficiently alleged and turn, as
this assumption requires, to the causation question.
Before doing so, we emphasize that to find, or assume,
that a RICO pattern of racketeering activity
consisting of acts of mail and wire fraud has been
shown does not also establish that its intended victims
were injured, nor beyond that, that any injury
suffered by them was sufficiently caused by the acts
to create RICO liability. This follows because indictable
acts of mail or wire fraud may be proven without
any proof of detrimental reliance by, hence of injury
to, the intended victims. See Armco Indus. Credit
Corp. v. SLT Warehouse Co., 782 F.2d 475, 481-82
(5th Cir.1986).
B.
To make out a civil action for damages under the
RICO statute a private plaintiff must demonstrate not
only that the defendants have violated § 1962, but
also that he has been “injured in his business or property
by reason of [the alleged] violation of section
1962.” 18 U.S.C. § 1964(c).FN7 The quoted language
requires the plaintiff to make two closely related
showings: (1) that he has suffered injury to his business
or property; and (2) that this injury was caused
by the predicate acts of racketeering activity that
make up the violation of § 1962. See Nodine v. Textron,
Inc., 819 F.2d 347, 348 (1st Cir.1987).FN8 As the
Seventh Circuit has said, “[a] defendant who violates
section 1962 is not liable for treble damages to everyone
he might have injured by other conduct, nor is
[he] liable to those who have not been injured.” See
Haroco, Inc. v. American Nat’l Bank & Trust Co.,
747 F.2d 384, 398 (7th Cir.1984), aff’d, 473 U.S. 606,
105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). The Supreme
Court has explained these injury and causation requirements
as aspects of standing, rather than elements
of the civil RICO plaintiff’s prima facie case.
See Sedima, 473 U.S. at 496-97, 105 S.Ct. at 3285
(Under § 1962(c), a “plaintiff only has standing if,
and can only recover to the extent that, he has been
injured in his business or property by the conduct
constituting the violation.”). In any event, it is clear
that a civil RICO complaint is vulnerable to a motion
to dismiss if it fails to allege either an adequate injury
to business or property, see, e.g., Drake v. BF Goodrich
Co., 782 F.2d 638, 644 (6th Cir.1986), or an
adequate causal nexus between that injury and the
predicate acts of racketeering activity alleged, see,
e.g., Pujol v. Shearson/American Express, Inc., 829
F.2d 1201, 1204-06 (1st Cir.1987); Nodine, 819 F.2d
at 348-49; Morast v. Lance, 807 F.2d 926, 932-33
(11th Cir.1987); In re Gas Reclamation, Inc. Securities
Litigation, 663 F.Supp. 1123, 1124-26
(S.D.N.Y.1987).
FN7. Section 1964(c) reads in full as follows:
Any person injured in his business or
property by reason of a violation of
section 1962 of this chapter may sue
therefor in any appropriate United States
district court and shall recover threefold
the damages he sustains and the cost of
the suit, including a reasonable attorney’s
fee.
18 U.S.C. § 1964(c).
FN8. The civil RICO claimant need not,
however, plead and prove a distinct “racketeering
injury.” Sedima, 473 U.S. at 495, 105
S.Ct. at 3284.
The civil RICO count at issue here contains an
adequate allegation of injury to the plaintiffs’ business
or property: the loss of interest income on their
First Maryland savings accounts and certificates of
deposit during the period in which First Maryland has
been in conservatorship and receivership. See
Amended Complaint paragraphs 102-107. But the
MSSIC defendants argue that the plaintiffs have
failed adequately to plead the requisite causal connection
between this injury and the predicate acts of
racketeering activity that they are alleged to have
committed. We agree.
The only predicate acts of racketeering activity
of which the MSSIC defendants stand accused are
acts of mail and wire fraud and interstate transportation
of fraudulently obtained funds committed in
connection with their dissemination of certain*1188
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allegedly misleading information about the security
of deposits in MSSIC-insured thrifts. See Amended
Complaint paragraphs 93-97.FN9 The causal connection
between these acts and the plaintiffs’ loss of interest
is not at all clear from the pleadings themselves.
The Amended Complaint alleges simply that:
FN9. As the district court noted, the great
bulk of the allegations against the MSSIC
defendants concern their allegedly negligent
or grossly negligent failure to carry out their
statutory duty to regulate the financial practices
of MSSIC’s member institutions. See
Amended Complaint paragraphs 58-80.
As a result of defendants’ violations of law, a run
did take place on MSSIC institutions, including
First Maryland, and First Maryland was unable to
meet and did not meet its obligations to First Maryland
depositors, and MSSIC was unable to meet
and did not meet its insurance obligations to First
Maryland depositors, including the plaintiffs and
class members herein.
See id. paragraph 102. There is no explanation of
how the MSSIC defendants’ misrepresentations
caused the run-nor could there be, for the cause of
the run was obviously the public’s discovery that
certain MSSIC-insured institutions were teetering
on the brink of insolvency because of self-dealing
by their officers and directors. While the MSSIC
defendants’ negligent failure to prevent unsound financial
practices at MSSIC’s member institutions
may have contributed to the run, and thus to the
plaintiffs’ injury, acts of negligence are not predicate
acts under the RICO statute, and § 1964(c)
provides no cause of action to individuals injured
by conduct other than predicate acts of racketeering
activity. See Nodine, 819 F.2d at 349.
The plaintiffs argue that the Amended Complaint
alleged two causal nexus between the MSSIC defendants’
misrepresentations and their loss of interest,
either of which is sufficient to satisfy § 1964(c). First,
they claim to have alleged that the misrepresentations
caused a huge influx of deposits into MSSIC’s member
institutions, stretching MSSIC’s insurance commitments
far beyond their limits and resulting in
MSSIC’s inability to meet its insurance obligations to
the plaintiffs when the run occurred. See Reply Brief
for Appellants at 21-22, citing Amended Complaint,
paragraphs 102-106. But while MSSIC’s overextension
may well have contributed to the plaintiffs’ lossin
the sense that it removed the safety net of insurance
that should have protected them upon First
Maryland’s insolvency-that overextension was not
caused by the MSSIC defendants’ misrepresentations
but by their negligent failure to maintain adequate
reserves.
The plaintiffs also claim to have alleged that the
MSSIC defendants’ misrepresentations induced them
to deposit their money in First Maryland. See Brief
for Appellants at 22, citing Amended Complaint,
paragraphs 3-7. But the Amended Complaint contains
no specific allegation that the named or class plaintiffs
acted in reliance on any misrepresentations directly
made by the MSSIC defendants when they
decided to deposit their money in First Maryland.FN10
Instead, the plaintiffs allege that they deposited their
money in First Maryland in reliance on deceptive
newspaper ads placed by First Maryland itself. See
Amended Complaint paragraphs 3-7. The only connection
between these ads and the MSSIC defendants
is the fact that they contained the MSSIC seal, which
the plaintiffs contend created the misimpression that
MSSIC was an agency of the state of Maryland and
thus, by implication, that deposits in its member institutions
were insured by the state. Even assuming that
use of the seal by First Maryland can be considered a
representation by the MSSIC defendants, we do not
think that representation was sufficiently misleading
to serve as the basis for a predicate act of fraud.
Though not a state agency, MSSIC was *1189 created
by the Maryland legislature as part of a regulatory
response to the state’s first savings and loan crisis.
See Letter of Stephen Sachs, Attorney General of
the State of Maryland, to Wilbur D. Preston, Jr., Special
Counsel, JA 122-23. The MSSIC seal has been in
continuous use for over 23 years, with the knowledge
and blessing of both the legislative and executive
branches of the state government. Id. Under these
circumstances, we do not think any representations of
state involvement conveyed by the seal can serve as
the basis for predicate acts of mail and wire fraud.
Accordingly, any injury caused the plaintiffs by the
ads containing the seal was not caused by any predicate
acts of racketeering activity.
FN10. The defendants correctly point out
that while, as we have noted, it is not necessary
to establish detrimental reliance by the
victim in order to make out a violation of the
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federal mail fraud statute, see Armco Indus.,
782 F.2d at 481-82, such reliance is necessary
to establish injury to business or property
“by reason of” a predicate act of mail
fraud within the meaning of § 1964(c).
In sum, we conclude that the plaintiffs have alleged
at most a cause-in-fact connection between any
fraudulent misrepresentations made by the MSSIC
defendants and plaintiffs’ later loss of interest income
on their First Maryland deposits. It is obvious that, as
a factual matter, plaintiffs would not have lost any
interest on their deposits but for having made them in
the first place. Further, it may be inferred in this context,
though it is not so obvious, that their particular
losses would have been avoided in the end by insurance
coverage but for the fact that too many others
had also made deposits. To the extent therefore that
any misrepresentations by defendants may have
caused these particular plaintiffs to deposit in the first
place and other depositors then to have increased
overall deposits past the point of insurance coverage,
the plaintiffs have surely alleged a degree of causal
connection between defendants’ conduct and their
injury. But, as indicated, it is no more than a bare
cause-in-fact connection, and a most attenuated one
at that.
Such a cause-in-fact connection, standing alone,
does not suffice to establish liability. Civil RICO is
of course a statutory tort remedy-simply one with
particularly drastic remedies. Causation principles
generally applicable to tort liability must be considered
applicable. These require not only cause-in-fact,
but “legal” or “proximate” cause as well, the latter
involving a policy rather than a purely factual determination:
“whether the conduct has been so significant
and important a cause that the defendant should
be held responsible.” Prosser and Keeton Torts, § 42
p. 272 (general principle) (5th ed. 1984); see also id.,
§ 110 p. 767 (applicable in fraud cases); Restatement
(Second) of Torts, § 548A (legal cause required in
fraud cases). As such, the legal cause determination
is properly one of law for the court, taking into consideration
such factors as the foreseeability of the
particular injury, the intervention of other independent
causes, and the factual directness of the causal
connection. See generally Restatement (Second) of
Torts § 548A comments a, b.FN11
FN11. We are aware of the Sedima Court’s
admonitions that RICO’s civil remedy provisions
are to be “liberally construed” and that
Congress did not intend civil RICO claimants
to be unduly hampered by the interrelated
“strict requirements [of] ‘standing’ to
sue and ‘proximate cause’ ” appropriate in
the related antitrust context. Sedima, 473
U.S. at 498, 105 S.Ct. at 3286. But these
admonitions obviously were not intended to
read the traditional proximate cause concerns
of tort law completely out of civil
RICO, leaving only a cause-in-fact requirement.
They were made in the context of a rejection
of the view that RICO injury, like
antitrust injury, see Brunswick Corp. v.
Pueblo Bowl-O-Mat, Inc., 429 U.S. 477,
489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701
(1977), must be of a special type causally
connected to the anti-competitive effects of
the basically proscribed conduct rather than
the normally compensable type of injury
flowing from the basically proscribed conduct
(predicate acts) itself. This rejection
clearly relaxes the RICO proximate cause
test from that applied in antitrust, by focussing
inquiry on more direct cause and effect
relationships than the necessarily more attenuated
ones implied by the amorphous
concepts of “anti-competitive” injury and
violation. But it is plain that with the matter
of RICO injury and RICO violation thus settled,
the Sedima Court assumed that the
normal proximate cause inquiry into their relationship
would be appropriate. See id. 473
U.S. at 497, n. 15, 105 S.Ct. at 3285, n. 15.
Our inquiry proceeds within those bounds.
Here we conclude as a matter of law that on the
facts as alleged the misrepresentations charged to
defendants were not so significant and important a
cause of the plaintiffs’ loss of income on their deposits
and accounts that these defendants should be held
responsible for them. In more *1190 specific terms of
the statutory causation requirement, we conclude that
plaintiffs have not been “injured in [their] business or
property by reason of [the defendants’ alleged] violation
of § 1962.” 18 U.S.C. § 1964(c).
As we have pointed out, the causal connection
was in factual terms an extremely attenuated one. It
rests on an assumption of actual reliance by the
Page 10
859 F.2d 1179, 57 USLW 2251, RICO Bus.Disp.Guide 7046
(Cite as: 859 F.2d 1179)
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
named plaintiffs (and the entire class) upon the defendants’
advertising, through the medium of their
seal’s use, of their insured institutions’ financial stability
as the effective cause of plaintiffs’ independent
decisions to deposit their money in those institutions
rather than do something else with it. That connection
is certainly alleged, albeit in conclusory terms in the
complaint, but this does not mean we may not take
into account the slim thread of causal connection
upon which it rests. More important is the consideration
of all that had to transpire thereafter in order to
bring upon plaintiffs the RICO injury they specifically
alleged. Obviously the two most immediate
causes were the alleged depredations of the insured
institution’s management, and the MSSIC defendants’
negligent or reckless failure to prevent those depredations.
That of course is what directly caused the run
and ruin that followed, and neither of these of course
constitute RICO predicate acts chargeable to these
defendants. That these are in practical terms the intervening
direct causes of the tragic losses sustained
is of course reflected in the fact that they provide the
basis for these plaintiffs’ related pendent state claims
in this action. We therefore hold that on the facts alleged,
defendants’ alleged misrepresentations may not
properly be held the legal cause of the RICO injuries
alleged by these plaintiffs.FN12
FN12. In light of this conclusion, we find it
unnecessary to address the alternative argument,
strenuously advanced before us by the
six MSSIC member institutions that are
joined as defendants, that they cannot be
held liable in any event for the alleged misconduct
of MSSIC’s officers and directors.
In terms of our analysis, it is plain that the
causal connection between their conduct and
the plaintiffs’ injury is even more attenuated-
“legal” cause less evident-than that of the
MSSIC directors themselves.
Since there are no other federal claims against
the MSSIC defendants, we conclude that the district
court did not abuse its discretion in dismissing the
pendent state claims against those defendants as well.
United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86
S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966).
* * * *
IV
For the reasons set forth above, the district
court’s order of dismissal is affirmed.
AFFIRMED.
C.A.4 (Md.),1988.
Brandenburg v. Seidel
859 F.2d 1179, 57 USLW 2251,

Statute of limitations under RICO: Matthews v. Kidder Peabody


Statute of limitations under RICO can be tough to calculate. The Court first noted policy considerations for plaintiff. “Too much emphasis on the statute of limitations can precipitate premature and groundless suits, as plaintiffs rush to beat the deadline without being able to obtain good evidence of fraud”); Fujisawa Pharm. Co., Ltd. v. Kapoor, 115 F.3d 1332, 1335 (7th Cir.1997) (“Inquiry notice … must not be construed so broadly that the statute of limitations starts running too soon for the victim of the fraud to be able to bring suit.”).

Matthews v. Kidder Peabody 260 F.3d 239 (3d Cir. 2001)

NYGAARD, Circuit Judge.

The Appellants in this case are a number of self-professed conservative, first-time investors who purchased securities from Kidder Peabody & Co., Inc. and the Henry S. Miller Organization. They claim that Kidder and Miller fraudulently misrepresented the securities as low-risk vehicles similar to municipal bonds. Ultimately, the securities failed and the Appellants brought civil RICO claims. After extensive discovery, the District Court granted summary judgment to Kidder and Miller and held that the Appellants’ claims were barred by the applicable four-year statute of limitations. On appeal, the Appellants contend that the court erred in three major respects: It incorrectly concluded that the Appellants were injured at the time they purchased the securities; it erred in holding that the Appellants were on inquiry notice of their injuries no later than early 1990; and, finally, it erred in refusing to equitably toll the statute of limitations. We will affirm.

I. FACTS

This case involves a securities class action brought against Kidder, a retail brokerage house, and Miller, “a multi-faceted real-estate management, appraisal, and investment organization.” App. at 35. In the early 1980s, brokerage houses began working with real estate companies, such as Miller, to offer investment opportunities. They often sought to take advantage of the booming construction markets in the south and southwest regions of the United States known as the “Sunbelt.” The companies formed limited partnerships, purchased Sunbelt commercial real estate, and sold interests to the general public. They marketed the investments as tax shelters, long-term capital gain opportunities, and income-producing plans.

242*242 In 1981, Kidder and Miller created three separate investment funds. The two companies formed wholly owned subsidiaries to serve as general partners for the funds, and then sold limited partnerships to the public. The plan was to acquire commercial real estate properties in the Sunbelt, collect rental income (thus providing a steady, but modest, income stream for investors), and eventually sell the properties six to ten years later and collect substantial capital gains. The bulk of the return for investors was to come from appreciation in the properties.

Kidder prepared and distributed to its brokers a prospectus, sales information, a videotape, and other reference materials describing the first investment fund.[1] In May 1992, Kidder began selling limited partnership units in that fund. By May 1986, it had sold units in all three funds to more than six thousand investors and raised approximately eighty-four million dollars. The funds purchased properties in Texas, Florida, Georgia, New Mexico, Arizona, Arkansas, and Illinois.

The crux of the Appellants’ claims is that Kidder fraudulently suggested that the funds were low-risk, conservative investments suitable for low net-worth individuals. The Appellants believe that Kidder specifically targeted unsophisticated investors, intentionally misled them about the nature of the funds, and charged excessive fees and commissions. These acts allegedly constituted violations of the federal securities laws,[2] wire fraud, 18 U.S.C. § 1343, mail fraud, 18 U.S.C. § 1341, and RICO violations.

Furthermore, the Appellants claim that Kidder conducted inadequate due diligence in choosing commercial real estate investments. As a result, at least in part, fund properties lost many of their key tenants, and quarterly distributions (to limited partners) fell to only a few dollars per unit. Additional economic factors also weakened the Sunbelt real estate market as a whole,[3] and the value of the funds’ investments plunged. Nonetheless, the Appellants claim that Kidder intentionally “lulled [them] into a false sense of security that `things would probably work out and substantial losses would be avoided.'” App. at 39.

Economic conditions did not improve. By August 1991, Funds I and II had stopped paying quarterly distributions. In April 1992, Kidder informed investors that conditions were unlikely to rebound, and therefore it was initiating an “exit strategy.” App. at 40. By 1994, all three funds had announced their intention to liquidate, which they accomplished between February and November of 1997.

II. PROCEDURAL HISTORY

John W. Mathews invested $20,000 in Fund II in 1984. He allegedly relied primarily upon oral representations by a Kidder broker. As the fund’s value deteriorated, Mathews became understandably 243*243 frustrated and disappointed. On January 23, 1995, he filed a class action complaint contending that Kidder had intentionally misrepresented the inherent risks associated with the funds and therefore had fraudulently induced him and others to invest. He claimed that Kidder had engaged in a pattern of racketeering activity prohibited by the federal RICO statute, 18 U.S.C. §§ 1961 et seq. Specifically, he claimed that Kidder had committed the predicate acts of securities fraud, mail fraud, and wire fraud.[4]

In response, Kidder filed a motion to dismiss. It claimed that: (1) Mathews lacked standing to assert claims involving Funds I and III because he had only invested in Fund II, (2) Mathews had failed to allege the necessary RICO elements, and (3) his claims were barred by RICO’s four-year statute of limitations. The District Court denied the motion without prejudice. The court agreed that Mathews lacked standing concerning Funds I and III, but held that he could pursue his claims relating to Fund II. As to Kidder’s remaining objections, the court allowed the case to move forward to develop a more complete record.

Both parties quickly filed additional motions. Mathews sought to amend his complaint to include plaintiffs who had invested in Funds I and III. Ultimately, he moved for class certification, including investors in all three funds. Kidder opposed Mathews’ requests on procedural grounds, and in addition, argued that the Private Securities Litigation Reform Act of 1995 (“PSLRA”) barred Mathews’ RICO action. The PSLRA, which Congress enacted on December 22, 1995, amended the federal RICO statute and explicitly eliminated securities fraud as a predicate act. See Pub.L. No. 104-67, § 107, 109 Stat. 737, 758 (1995), amending 18 U.S.C. § 1964(c) (1994).

The District Court held that the PSLRA did not bar Mathews’ RICO claim. See Mathews v. Kidder Peabody & Co., Inc., 947 F.Supp. 180 (W.D.Pa.1996). In addition, the court allowed Mathews to amend his complaint to include investors in Funds I and III, and it certified his requested class. Kidder filed an interlocutory appeal to this Court arguing that the PSLRA should apply retroactively to suits pending when the Act was passed. We rejected that claim. See Mathews v. Kidder Peabody & Co., Inc., 161 F.3d 156, 170-71 (3d Cir.1998) (“[W]e are extremely reluctant to create causes of action that did not previously exist, or — as in this case — to destroy causes of action and remedies that clearly did exist before Congress acted.”).

Discovery continued until November 1999. Kidder then moved for summary judgment, or alternatively to decertify the plaintiff class. Mathews opposed these motions, and once again, sought to amend the complaint. In particular, he wanted to add a new allegation claiming that the Kidder prospectus itself was fraudulent, because it misrepresented the inherent risks of the investment. The District Court denied Mathews’ motion to amend. The court cited “undue prejudice to Defendants, undue delay on the part of the Movant, the Movant’s repeated failure to cure deficiencies by previous amendments and futility of amendment.” App. at 29. It held that amending the complaint would unduly prejudice the defendants because it “would necessitate the taking of significant additional discovery and the difficulties that would entail is persuasive.” App. at 244*244 29. Mathews filed a motion for reconsideration, which was denied.

On August 18, 2000, the District Court issued a thoughtful and thorough seventy-four page opinion and order granting Kidder’s motion for summary judgment. See App. at 33-106. The court held that Mathews’ claims were barred by the applicable four-year statute of limitations. Statute of limitations issues surrounding RICO claims historically have been tricky for two reasons. First, Congress failed to provide a statutory limitations period in the RICO statute itself, and second, the Supreme Court has consistently refused to determine when a RICO action accrues — i.e., when the applicable limitations period begins to run. It is now well settled that RICO actions enjoy a four-year limitations period; the question of accrual, however, remains a source of controversy.

In this case, the District Court applied what it termed an “injury discovery and pattern rule,” see App. at 57-61, under which the statute begins to run once “all of the elements of a civil RICO cause of action existed, whether or not discovered, and the plaintiffs knew [or should have known] of the existence and source of their injury.” App. at 60 (quoting Poling v. K. Hovnanian Enters., 99 F.Supp.2d 502, 511 (D.N.J.2000)). The court assumed, for the sake of summary judgment, that Mathews’ claims had merit and that Kidder had committed securities, wire, and mail fraud. Nonetheless, it had to address two questions: When did the elements of a RICO claim exist, and when did the Appellants know, or should they have known, of their injuries?

First, the court held that “all the elements of Plaintiffs’ RICO claim and their injury were in place no later than May 1986.”[5] App. at 77. Second, the court reviewed the mix of information available to the Appellants and concluded that they should have been aware of their injury “no later than February 1990.” App. at 90. Thus, because both prongs of the “injury discovery and pattern rule” were satisfied, the statute of limitations began to run in early 1990. Mathews did not file his claim until almost five years later. Therefore, he was barred by RICO’s four-year limitations period. The court also rejected Mathews’ argument that the limitations period should be equitably tolled by Kidder’s fraudulent acts and misrepresentations. Once again, the court assumed that Mathews’ allegations were true, but nonetheless concluded that the Appellants had not exercised “reasonable diligence” and therefore could not benefit from equitable tolling.[6] Mathews filed a timely appeal.

III. Accrual Rule

The statute of limitations for civil RICO claims has engendered a great deal of controversy. The statute itself does not contain a limitations period. See Rotella v. Wood, 528 U.S. 549, 552, 120 S.Ct. 1075, 1079-80, 145 L.Ed.2d 1047 (2000). As a result, in Agency Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 107 S.Ct. 245*245 2759, 97 L.Ed.2d 121 (1987), the Supreme Court relied upon the Clayton Act and adopted an analogous four-year period. However, the Court did not specify when the period began, and three different interpretations arose.

A number of Courts of Appeals adopted the “injury discovery accrual rule,” which began the four-year period once “a plaintiff knew or should have known of his injury.” Rotella, 528 U.S. at 553, 120 S.Ct. at 1080. This approach did not require any knowledge of the other RICO elements. All but one of the remaining Courts adopted the “injury and pattern discovery rule … under which a civil RICO claim accrues only when the claimant discovers, or should discover, both an injury and a pattern of RICO activity.” Id. We alone adopted a third variant, the “last predicate act” rule. See Keystone Ins. Co. v. Houghton, 863 F.2d 1125 (3d Cir.1988). From a plaintiff’s perspective, this was the most lenient approach: “Under this rule, the period began to run as soon as the plaintiff knew or should have known of the injury and the pattern of racketeering activity, but began to run anew upon each predicate act forming part of the same pattern.” Rotella, 528 U.S. at 554, 120 S.Ct. at 1080.

In 1997, the Supreme Court “cut the possibilities by one,” rejecting our last predicate act rule. Id. (discussing Klehr v. A.O. Smith Corp., 521 U.S. 179, 117 S.Ct. 1984, 138 L.Ed.2d 373 (1997)). The Court based its holding on two arguments: (1) the rule created a limitations period “longer than Congress could have contemplated,” which conflicted “with a basic objective — repose — that underlies limitations periods,” and (2) it conflicted with the “ordinary Clayton Act rule” applicable in private antitrust actions. Klehr, 521 U.S. at 187-88, 117 S.Ct. at 1989-90. In 2000, the Court again narrowed the possible approaches by rejecting the injury and pattern discovery rule. See Rotella, 528 U.S. at 555-559, 120 S.Ct. at 1080-83. The Court stressed the “basic policies of all limitations provisions: repose, elimination of stale claims, and certainty about a plaintiff’s opportunity for recovery and a defendant’s potential liability.” Id. at 555, 120 S.Ct. at 1081. In addition, the Court noted that the injury discovery rule would encourage plaintiffs to investigate their claims earlier and with greater vigor. See id. at 557, 120 S.Ct. at 1082. (noting that the object of civil RICO is “not merely to compensate victims but to turn them into prosecutors, `private attorneys general,’ dedicated to eliminating racketeering activity”).

In the wake of Rotella, at least two accrual rules remain possible: an injury discovery rule, where the limitations period begins to run once a plaintiff discovers her injury, or an injury occurrence rule, where discovery is irrelevant. See Rotella, 528 U.S. at 554 n. 2, 120 S.Ct. at 1080 n. 2 (refusing to “settle upon a final rule”). In Forbes v. Eagleson, we recently considered these two approaches and adopted the injury discovery rule. 228 F.3d 471, 484 (3d Cir.2000) (“[A] discovery rule applies whenever a federal statute of limitation is silent on the issue.”); see also Rotella, 528 U.S. at 555, 120 S.Ct. at 1081 (“Federal courts, to be sure, generally apply a discovery accrual rule when a statute is silent on the issue, as civil RICO is here.”).[7]

246*246 IV. Zenith Radio

The Appellants contend that an exception to the standard RICO accrual rule applies in this case. They claim that the damages resulting from Kidder’s misconduct were unclear at the time they invested, and “a cause of action does not accrue until the fact of financial loss becomes predictable, concrete and non-speculative and damages are provable.” Appellants’ Br. at 32. Thus, they argue that their claims did not accrue until Kidder indicated, in 1993 and 1994, that the investment funds were unlikely to be profitable. See Appellants’ Br. at 31.

The Appellants rely heavily upon Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 338-42, 91 S.Ct. 795, 806-08, 28 L.Ed.2d 77 (1971),[8] a case involving alleged antitrust violations. In Zenith Radio, the defendant raised a statute of limitations defense, and argued that many of the purported injuries arose from conduct that occurred more than four years before the plaintiff filed suit. The Supreme Court rejected the defendant’s argument. The Court held that at the time of the original misconduct, future damages were speculative and unclear and therefore unrecoverable. See id. at 339, 91 S.Ct. at 806. The Court noted that it would be “contrary to congressional purpose[s]” to foreclose recovery of those damages. It held that:

[R]efusal to award future profits as too speculative is equivalent to holding that no cause of action has yet accrued for any but those damages already suffered. In these instances, the cause of action for future damages, if they ever occur, will accrue only on the date they are suffered; thereafter the plaintiff may sue to recover them at any time within four years from the date they were inflicted.

401 U.S. at 339, 91 S.Ct. at 806. The Appellants argue that this case is factually similar to Zenith Radio, and that RICO damages were merely speculative at the time of their investment. For support, they cite a list of cases from the Second Circuit Court of Appeals and our recent decision in Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir.2000).[9]

247*247 The District Court rejected the proposition that the Appellants were injured when “their investments resulted in a `catastrophic loss,’ that is, loss of capital gains from appreciation of the properties when they were sold.” App. at 42. Instead, the court ruled that the underlying claim was for securities fraud, and in such cases, an injury occurs when an investor purchases overpriced securities. See App. at 66, 75 (“[I]t is well established that securities fraud in the sale of limited partnership interests occurs when the partnership interests are sold.”) (citing Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1412 (9th Cir.1987)). The court, however, did not explicitly address Zenith Radio.[10] Nonetheless, we agree with the District Court’s conclusion and find the Appellants’ reliance upon Zenith Radio misplaced.

The value of a security is related to its expected return and its inherent risk. All else being equal, the greater the expected return and the lower the risk, the more valuable the security. If we accept the Appellants’ allegations as true, Kidder overstated the expected return of the funds and downplayed their inherent risks. Thus, Kidder’s misrepresentations exaggerated the value of the funds and led the Appellants to purchase overpriced securities. We therefore conclude that the Appellants sustained an injury when they purchased units in Kidder’s investment funds — the only question is whether their damages, at the time of their investment, were sufficiently concrete.

We answer in the affirmative for three reasons. First, we agree with Kidder that the actual value of the securities was readily calculable at the time of the Appellants’ investment. See Appellant’s Br. at 27 (“While this determination may require some calculation or even expert testimony, the measure of damages is not speculative.”). The raison d’etre of many investment banks and financial institutions is to calculate the value of complicated securities, many of which are far more complex than the funds at issue here. Certainly, district courts are no strangers to expert testimony concerning financial valuation. See, e.g., Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 297 (3d Cir.1991) (“[D]amages are most commonly calculated as the difference between the price paid for a security and the security’s `true value.'”). In this case, as Kidder contends, “the Funds could have been valued at any time based, in part, on the yearly valuations of these properties.” Appellant’s Br. at 27. The Appellants’ damages, at the time they invested, were simply the difference between the approximate value of the Funds, calculated based upon market information free of Kidder’s misrepresentations, and the actual purchase price.

Second, we agree with the reasoning employed by the only other Circuit Court of Appeals to have addressed this issue. In a remarkably similar factual setting, the Second Circuit Court of Appeals held that investors were injured when they purchased overpriced limited partnership units based upon the defendant’s fraudulent misrepresentations. See In re Merrill Lynch Ltd. P’ships Litig., 154 F.3d 56, 59 (2d Cir.1998). Before the Merrill Lynch 248*248 decision, a number of Second Circuit cases had suggested that a RICO injury did not occur at the time of investment.[11] The District Court in Merrill Lynch summarized those cases as follows:

[They stand] for the proposition that when a creditor has been defrauded, but contractual or other legal remedies remain which hold out a “real possibility” that the debt, and therefore the injury, may be eliminated, RICO injury is speculative, and a RICO claim is not ripe until those remedies are exhausted.

In re Merrill Lynch Ltd. P’ships Litig., 7 F.Supp.2d 256, 263 (S.D.N.Y.1997). Nonetheless, the court drew a critical distinction between cases involving contractual debt instruments and those involving “equity investments with no basis for recovery other than the limited partnerships’ performance.” Id. Traditionally, the line between debt and equity has been well defined.[12] Debt contracts promise set future payments of interest and principal. Upon default, an investor can recover damages through a contract action. In contrast, an equity investment is traditionally considered an ownership stake in an underlying asset. There is no promised return; therefore, an investor has no contractual remedy if the underlying property, asset, or venture fails.

The District Court in Merrill Lynch recognized that in the debt context, a RICO injury occurs only when a debtor defaults on his contractual obligation. 7 F.Supp.2d at 263. Only at that point can an investor be sure that he will not receive the benefit of his bargain. We implicitly recognized the same principle in Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir.2000). In that case, the plaintiffs claimed that Aetna’s fraudulent misrepresentations had led them to buy overpriced health insurance. We held, however, that a RICO injury did not occur until Aetna failed to perform its contractual obligations — i.e., until it failed to provide health benefits or treatment that it had promised. 221 F.3d at 488-90. In essence, we characterized the plaintiffs’ property interest as a contractual right to receive certain benefits, and distinguished it from an ownership interest in tangible property. See id. at 489-90 (“[T]he property rights at issue are different from interests in real or personal property.”).

In contrast, the Appellants’ interest in this case was an ownership stake in real property, fundamentally no different than “a plot of land or a diamond necklace.” Maio, 221 F.3d at 488. Although Kidder 249*249 may have been overly optimistic in describing its investment funds, it never promised a set return. Therefore, the Appellants have no contractual remedy for the losses they incurred. Instead, Kidder offered an equity investment, contingent upon the appreciation, or lack thereof, of the underlying Sunbelt properties. The crux of the Appellants’ claim is that they overpaid for that interest. We believe that the most accurate way to measure that loss, like for any other tangible property interest, would be to calculate the difference between what the Appellants paid and the true market value of what they received. Therefore, we agree with the Second Circuit Court of Appeals that this case is distinguishable from those involving contractual agreements, such as debt contracts. When a defendant fraudulently misleads individuals into purchasing equity interests in real property, an injury occurs at the time of investment.

Finally, caselaw concerning U.S. securities regulations also supports our conclusion. The Appellants argue that their losses did not become sufficiently concrete until Kidder decided to liquidate the funds in 1993. They presumably believe that the only non-speculative way to determine damages would be to calculate the difference between what they originally paid for the fund units and what they received upon liquidation. In other words, they believe rescission is the only proper approach. See Pinter v. Dahl, 486 U.S. 622, 641 n. 18, 108 S.Ct. 2063, 2076 n. 18, 100 L.Ed.2d 658 (1988) (“[R]escission [provides] for restoration of the status quo by requiring the buyer to return what he received from the seller;” in terms of damages, rescission provides “the consideration paid for such security with interest thereon, less the amount of any income received thereon.”). Of course, we need not determine the best method for calculating damages in the present case. Our task is merely to decide whether the Appellants’ damages could have been calculated at the time of their injury. If an “out of pocket measure” of damages (the difference between the purchase price of a security and its true value) is viable in this case, we must conclude that the Appellants’ injury, at the time of their investment, was sufficiently concrete.

The Appellants have alleged securities fraud under § 12(2) of the Securities Exchange Act of 1933. See 15 U.S.C. § 77I, App. at 38. Section 12(2) specifically provides for rescissionary damages. See Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 693 (3d Cir.1991). However, the Appellants also cite § 10(b) of the Securities Exchange Act of 1934. See 15 U.S.C. § 78j(b), App. at 38. Damages in § 10(b) securities fraud cases “are most commonly calculated as the difference between the price paid for a security and the security’s `true value.'” Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 297 (3d Cir.1991). Although we have declined to establish a firm rule for calculating § 10(b) damages, see Scattergood v. Perelman, 945 F.2d 618, 624 n. 2 (3d Cir.1991), the Fifth Circuit Court of Appeals has commented at length about the conceptual shortcomings of rescission:

[T]he rescissional measure permits the defrauded securities buyer to place upon the defendant the burden of any decline in the value of the securities between the date of purchase and the date of sale even though only a portion of that decline may have been proximately caused by the defendant’s wrong…. Under these circumstances, the rescissional measure is unjust insofar as it compensates an investor for the nonspecific risks which he assumes by entering the market. Losses thus accruing have no relation to either the benefits derived by 250*250 the defendants from the fraud or to the blameworthiness of their conduct.

Huddleston v. Herman & MacLean, 640 F.2d 534, 555 (5th Cir.1981), modified on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). We have expressed similar sentiments. See Hoxworth v. Blinder, Robinson & Co., Inc., 903 F.2d 186, 203 n. 25 (3d Cir.1990) (“Although the Supreme Court has reserved the question whether a rescissionary measure of damages is ever appropriate for defrauded buyers under Rule 10b-5, this court has expressed clear disapproval of a damage theory that would insure defrauded buyers against downside market risk unrelated to the fraud.”).

Thus, in most § 10(b) cases, we are extremely hesitant to award rescissionary damages and instead apply an “out of pocket measure.” In this case, there is nothing in the record to suggest that the Appellants’ injuries were any more speculative or difficult to calculate than those in a typical § 10(b) claim. Therefore, we reject the Appellants’ argument that their claims require a rescissionary measure of damages. Instead, we conclude that the Appellants’ damages, at the time they purchased units in Kidder’s investment funds, could have been calculated by an “out of pocket measure” and thus were sufficiently concrete and non-speculative.

V. Injury Discovery

The Appellants’ second primary objection is that the District Court erred by holding that they should have discovered their injury “no later than February 1990.” App. at 90. Because the court granted summary judgment, the burden of proof is initially on Kidder to demonstrate the absence of a genuine issue of material fact surrounding the Appellants’ discovery of their injury. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). We recognize that this puts Kidder in the unenviable position of arguing that its fraud was so obvious that the Appellants should have discovered their injuries. In addition, the issue is extremely fact-specific. See Davis v. Grusemeyer, 996 F.2d 617, 623 n. 10 (3d Cir.1993) (“[T]he applicability of the statute of limitations usually implicates factual questions as to when plaintiff discovered or should have discovered the elements of the cause of action; accordingly, `defendants bear a heavy burden in seeking to establish as a matter of law that the challenged claims are barred.'”) (quoting Van Buskirk v. Carey Canadian Mines, Ltd., 760 F.2d 481, 498 (3d Cir.1985)). Therefore, Kidder’s task is not an easy one.[13]

In Forbes, we adopted an “injury discovery rule” whereby a RICO claim accrues when “plaintiffs knew or should have known of their injury.” 228 F.3d at 484. By our own plain language, the rule is both subjective and objective. The subjective component needs little explanation — a claim accrues no later than when the plaintiffs themselves discover their injuries. However, we offered little insight into the 251*251 objective prong of the Forbes test. We take this opportunity to do so.

In order to determine whether the Appellants were on “inquiry notice” of their injuries, the District Court relied heavily upon caselaw in other Circuits concerning securities fraud. Without a doubt, the Appellants’ claim is greatly dependent upon their allegations of securities fraud. However, it is important to note that “[t]he focus of accrual in a RICO action is different from that for a fraud claim where the focus is on the acts of the defendants.” Landy v. Mitchell Petroleum Tech. Corp., 734 F.Supp. 608, 625 (S.D.N.Y.1990). More specifically, a RICO claim accrues when the plaintiffs should have discovered their injuries. In contrast, a securities fraud claim accrues when the plaintiffs should have discovered the misrepresentations and wrong-doing of the defendants. The difference is subtle, but in some circumstances, it can be dispositive.[14] In this case, however, it is insignificant because the fraud and injury occurred at approximately the same time — when the Appellants purchased Kidder’s securities. Furthermore, in most securities fraud actions, the plaintiffs’ injuries are inextricably intertwined with the defendant’s misrepresentations. Discovery of one leads almost immediately to discovery of the other. Therefore, we believe that the District Court did not err by relying upon securities fraud precedent to determine whether the Appellants were on “inquiry notice” of their injuries.

It would be an understatement to characterize the body of caselaw concerning what constitutes “inquiry notice” in a federal securities fraud action as extensive. See, e.g., Lawrence Kaplan, Annotation, What Constitutes “Inquiry Notice” Sufficient to Commence Running of Statute of Limitations in Securities Fraud Action — Post-Lampf Cases, 148 A.L.R. Fed. 629, 1998 WL 695966 (1998). The general articulation of the inquiry notice standard, however, is fairly consistent.[15] In the context of a RICO action predicated upon a securities fraud claim, we hold that a plaintiff is on inquiry notice whenever circumstances exist that would lead a reasonable investor of ordinary intelligence, through the exercise of reasonable due diligence, to discover his or her injury.

Some courts have further refined the inquiry notice test into a multi-step analysis. See, e.g., Havenick v. Network Express, 981 F.Supp. 480 (E.D.Mich.1997); Addeo v. Braver, 956 F.Supp. 443 (S.D.N.Y.1997). The District Court in this case applied a two-part test: “(1) whether the plaintiffs knew or should have known 252*252 of the possibility of fraud (`storm warnings’) and, once that possibility arose, (2) whether plaintiffs exercised due diligence to determine the origin and extent of the fraud. The first part of the test is objective, the second subjective.” App. at 80 (citations omitted). In other words, the court asked whether there were sufficient storm warnings on the horizon, and if so, whether the Appellants exercised due diligence to recognize them.

We hold that inquiry notice should be analyzed in two steps. First, the burden is on the defendant to show the existence of “storm warnings.” As the District Court noted, storm warnings may take numerous forms, and we will not attempt to provide an exhaustive list. They may include, however, “substantial conflicts between oral representations of the brokers and the text of the prospectus, … the accumulation of information over a period of time that conflicts with representations that were made when the securities were originally purchased,” or “any financial, legal or other data that would alert a reasonable person to the probability that misleading statements or significant omissions had been made.” App. at 80-81.

The existence of storm warnings is a totally objective inquiry. Plaintiffs need not be aware of the suspicious circumstances or understand their import. It is enough that a reasonable investor of ordinary intelligence would have discovered the information and recognized it as a storm warning. Thus, investors are presumed to have read prospectuses, quarterly reports, and other information relating to their investments. This comports with the general purpose of civil RICO to encourage plaintiffs to actively investigate potential criminal activity, to become “prosecutors, `private attorneys general,’ dedicated to eliminating racketeering activity.” Rotella, 528 U.S. at 557, 120 S.Ct. at 1082.

Second, if the defendants establish the existence of storm warnings, the burden shifts to the plaintiffs to show that they exercised reasonable due diligence and yet were unable to discover their injuries. This inquiry is both subjective and objective. The plaintiffs must first show that they investigated the suspicious circumstances.[16] Then, we must determine whether their efforts were adequate — i.e., whether they exercised the due diligence expected of reasonable investors of ordinary intelligence. Because the stated goal of civil RICO is to encourage active investigation of potential racketeering activity, see Rotella, 528 U.S. at 557, 120 S.Ct. at 1082, we reject the proposition that unsophisticated investors should be held to a lower standard of due diligence.

In this case, the District Court found that Kidder had established the existence of storm warnings. In particular, our review of the record, in addition to the District Court’s findings, indicates four areas of potential concern — the initial prospectus, the “paltry” annual distributions of rental income, the falling net asset value of each partnership unit, and Kidder’s periodic assessment of the funds’ economic health. While it is true that the “mix of information” may constitute a storm warning in the aggregate, we will address the prospectus and the subsequent financial updates separately.

We begin with the prospectus. The District Court focused much of its attention upon the descriptions of risks provided in the prospectus. See App. at 49-53; 2443-2525. We do not dispute that the language cited by the court is present, or that “the specific risks discussed in the [prospectus] are most of the events on which Plaintiffs base their allegations of fraud.” App. at 82. Nonetheless, we agree with the spirit of the Appellants’ position, that there is nothing in the document to suggest the magnitude of the many enumerated risks. In fact, in reading through the numerous cautionary provisions, we are reminded of the laundry lists of possible side-effects that accompany most prescription medications. Just because there are risks, even if they are numerous, does not mean that a drug is unsafe. Similarly, there is nothing in the prospectus to suggest that the funds are especially risky or inappropriate for conservative investors.[17]

Like the Seventh Circuit Court of Appeals, we are mindful of the dangers in adopting too broad an interpretation of inquiry notice. See Law v. Medco Research, Inc., 113 F.3d 781, 786 (7th Cir. 1997) (“[T]oo much emphasis on the statute of limitations can precipitate premature and groundless suits, as plaintiffs rush to beat the deadline without being able to obtain good evidence of fraud”); Fujisawa Pharm. Co., Ltd. v. Kapoor, 115 F.3d 1332, 1335 (7th Cir.1997) (“Inquiry notice … must not be construed so broadly that the statute of limitations starts running too soon for the victim of the fraud to be able to bring suit.”). If a relatively generic enumeration of possible risks, without any meaningful discussion of their magnitude, can be enough to establish inquiry notice at the summary judgment stage, we would encourage a flood of untimely litigation. Therefore, we hold that the prospectus, by itself, does not constitute a storm warning.

Kidder’s numerous financial updates, however, are a different matter.[18] Based upon the correspondence concerning Funds I and II, we conclude that the District Court, if anything, was overly generous to the Appellants in holding that they should have discovered their injuries by early 1990. Sufficient storm warnings existed for investors in Funds I and II no later than April of 1989. On August 18, 1988, Kidder informed investors in Fund I that their quarterly distribution had fallen to $3.00 per unit.[19] This represented over a 66% decrease in the initial fund distributions, which ranged from $9.07 (Q3, 1983) to $9.40 (Q1, 1985). On that same date, Kidder informed investors in Fund II that their quarterly distributions had fallen to $1.50 per unit. This represented over a 75% decrease in the initial fund distributions, which ranged from $6.00 (Q2, 1985) 254*254 to $7.00 (Q4, 1986). Even if the distributions had returned to their original levels at some later time, this sort of volatility is simply inconsistent with a conservative investment vehicle similar to municipal bonds.

Furthermore, Kidder also sent the Appellants annual updates on the total net asset value of the individual units.[20] As of December 31, 1985, Fund I units had a total net asset value of $532. On April 8, 1989, Kidder sent a letter to Fund I investors indicating that total net asset value had fallen to $337. See App. at 1204. This represented a 36% decrease from 1985. As of December 31, 1985, Fund II units had a total net asset value of $509. On April 8, 1989, Kidder sent a letter to Fund II investors indicating that total net asset value had fallen to $351. See App. at 1872. This represented a 31% decrease from 1985.

The Appellants’ only response is that “there was ample evidence from which a jury could conclude that it was entirely reasonable for [them] to wait and see how things developed.” Appellants’ Br. at 40. The Appellants fundamentally misunderstand their own argument. They contend that Kidder fraudulently misrepresented the inherent risk of the investment funds. According to modern finance, risk is best understood as a security’s volatility. Therefore, regardless of whether the funds recovered, the large swings in their distributions and net asset values are inconsistent with low-risk, conservative investments.[21] After the funds’ net asset values fell over 30% and their distributions fell by over 60%, the Appellants should have recognized that they were not the safe, conservative vehicles promised by Kidder. Based upon the financial information received by the Appellants, we have no problem concluding that ominous storm warnings, concerning Funds I and II, were present no later than April 1989.

As the Appellants point out, however, Fund III is a closer question. By April of 1990, the Fund’s net asset value had fallen only 14%, see App. at 2629, and its distributions were still consistent. See App. at 2947-48. In fact, a noticeable decrease in the Fund’s distributions did not occur until the first quarter of 1992, and the Appellants were not informed until May 15, 1992. See App. at 981. Even when viewed in combination with Kidder’s prospectus and the cautionary language in its quarterly updates, we would be hard-pressed to find no genuine issue of material fact as to whether Fund III investors were on inquiry notice of their injuries prior to 1992. However, the Appellants did not allege a separate cause of action based solely upon Fund III. Instead, they sought and were granted certification of a class that included investors in all three funds, and they alleged a common, overarching pattern of racketeering activity. See Mathews v. Kidder Peabody & Co., No 95-85, 1996 WL 665729, at *4 (W.D.Pa. Sept. 26, 1996) (“Plaintiffs have alleged a 255*255 large, unitary scheme, a common course of conduct.”). As we previously concluded, the storm warnings pertaining to Funds I and II were overwhelming. Thus, we conclude that sufficient storm warnings existed for the entire class certified by the Appellants.

Because storm warnings were present, we must next determine whether the Appellants exercised due diligence expected of reasonable investors of ordinary intelligence. We conclude that they did not. Based upon the record, the parties’ briefs, and the District Court’s opinion, the only action that might be termed due diligence is a single letter from Attorney Robert Wolf inquiring into the status of Fund I.[22] See App. at 68-69. According to the District Court, Kidder responded with a four and one-half page letter, reiterating financial information provided in quarterly reports. The only positive sentiment in the letter was Kidder’s statement that the General Partners “remain confident in the underlying value of the Partnership’s real estate assets and believe this value will be realized once these markets turnaround.” App. at 101 n. 61. There is no evidence that Wolf followed-up in any fashion. We agree with the District Court that if anything, this evidences a lack of due diligence.

Furthermore, to determine what constitutes “reasonable” due diligence, we must consider the magnitude of the existing storm warnings. The more ominous the warnings, the more extensive the expected inquiry. In this case, the warnings, at least for investors in Fund I and II, were massive and extremely threatening. For “conservative first-time investors,” they must have appeared like funnel clouds. That none of them pressed Kidder for an explanation defies comprehension.

This case stands in stark contrast to Forbes, 228 F.3d at 479, where the plaintiffs hired an investigator, who made numerous inquiries and requested financial documents not only from the defendant, but also from other related parties. He continued to pursue his investigation in spite of continued opposition. Reasonable due diligence does not require a plaintiff to exhaust all possible avenues of inquiry. Nor does it require the plaintiff to actually discover his injury. At the very least, however, due diligence does require plaintiffs to do something more than send a single letter to the defendant. If we were to hold that the Appellants exercised reasonable due diligence in this case, it would strip the requirement of any meaningful significance. Therefore, because by early 1990, there were numerous storm warnings that the Appellants failed to adequately investigate, their claims accrued, and the limitations period began to run, on that date.[23]

VI. Fraudulent Concealment/Equitable Tolling

Finally, the Appellants argue that even if their claims accrued in 1990, the 256*256 statute of limitations should be tolled due to Kidder’s fraudulent concealment of its racketeering activity. “Fraudulent concealment is an `equitable doctrine [that] is read into every federal statute of limitations.'” Davis v. Grusemeyer, 996 F.2d 617, 624 (3d Cir.1993).

In Rotella, the Supreme Court indicated that RICO’s limitation period could be tolled “where a pattern remains obscure in the face of a plaintiff’s diligence in seeking to identify it.” 120 S.Ct. at 1084, 528 U.S. at 561. We adopted this holding in Forbes, 228 F.3d at 486-88, and held that the plaintiff has the burden of proving the three necessary elements of a fraudulent concealment claim — (1) “active misleading” by the defendant, (2) which prevents the plaintiff from recognizing the validity of her claim within the limitations period, (3) where the plaintiff’s ignorance is not attributable to her lack of “reasonable due diligence in attempting to uncover the relevant facts.” See also Klehr v. A.O. Smith Corp., 521 U.S. 179, 195-96, 117 S.Ct. 1984, 1993, 138 L.Ed.2d 373 (1997) (“[W]e conclude that `fraudulent concealment’ in the context of civil RICO embodies a `due diligence’ requirement.”). However, when a plaintiff merely seeks to survive summary judgment, there need only be a genuine issue of material fact that the doctrine applies. Thus, a court must determine:

(1) whether there is sufficient evidence to support a finding that defendants engaged in affirmative acts of concealment designed to mislead the plaintiffs regarding facts supporting their Count I claim, (2) whether there is sufficient evidence to support a finding that plaintiffs exercised reasonable diligence, and (3) whether there is sufficient evidence to support a finding that plaintiffs were not aware, nor should they have been aware, of the facts supporting their claim until a time within the limitations period measured backwards from when the plaintiffs filed their complaint. Absent evidence to support these findings there is no genuine dispute of material fact on the issue and the defendants are entitled to summary judgment.

Forbes, 228 F.3d at 487 (citing Northview Motors, Inc. v. Chrysler Motors Corp., 227 F.3d 78, 87-88 (3d Cir.2000)). Here, we will assume that Kidder actively misled the Appellants.[24] Therefore, we must determine whether they exercised “reasonable diligence” in attempting to uncover the facts necessary to support a claim.[25]

Although a fraudulent concealment defense can offer a tremendous advantage to plaintiffs,[26] it is of little 257*257 practical utility here. In order to avoid summary judgment, there must be a genuine issue of material fact as to whether the Appellants exercised reasonable due diligence in investigating their claim. We have already answered that question in the negative. Therefore, we reject the Appellants’ fraudulent concealment claim.

VII. Conclusion

For the foregoing reasons, we will affirm the District Court’s grant of summary judgment in favor Kidder Peabody & Co., Inc. and the Henry S. Miller Organization.

[*] Honorable Thomas M. Reavley, Circuit Judge for the United States Court of Appeals for the Fifth Circuit, sitting by designation.

[1] There are numerous corporate defendants in this case. See App. at 33. In order to avoid confusion, we will refer to all the Defendants/Appellees collectively as “Kidder.”

[2] Specifically, the Appellants claim that Kidder violated § 17(a) of the Securities Exchange Act of 1933, 15 U.S.C. § 77q, § 12(2) of the Securities Exchange Act of 1933, 15 U.S.C. § 77I, and § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b).

[3] Corporate divisions merged and moved their offices; a gas and oil decline hit Texas in the mid 80s; Congress passed the 1986 Tax Reform Act, which discouraged real estate investment; and aggressive construction eventually caused supply to meet and outstrip demand. See App. at 39.

[4] He also asserted a number of claims under state law, including breach of fiduciary duty and negligent misrepresentation.

[5] Assuming that Kidder committed the alleged offenses, the court concluded that the elements of securities fraud “were probably finalized by May 1986 … but certainly no later than December 1986,” App. at 68; mail fraud “occurred no later than May 1986,” App. at 72, and interstate wire fraud “occurred in the early 1980s and certainly no later than March 1985.” App. at 73.

[6] After dismissing Mathews’ federal claims, the District Court declined to exercise supplemental jurisdiction over the remaining state law claims. See App. 104 (“In a case such as this, where all the federal claims brought under the RICO statute have been dismissed, there is little to gain in the way of convenience or judicial economy in having this court hear a case now consisting entirely of state claims.”).

[7] The District Court’s decision, which preceded our ruling in Forbes by approximately two months, applied an “injury discovery and pattern rule.” App. at 60. Under this formulation, a RICO claim does not accrue until a plaintiff discovers he has been injured and all of the elements of his RICO claim, including a pattern of racketeering activity, exist. The District Court’s test, therefore, poses an important question-whether a civil RICO claim must be complete before it accrues. The Supreme Court expressly declined to provide an answer in Rotella, 528 U.S. at 558 n. 4, 120 S.Ct. at 1082 n. 4, and we too have been silent on the issue. See Forbes, 228 F.3d at 484 (addressing only the question of injury discovery because a pattern of racketeering activity was well established). We have little doubt that the question eventually will have to be addressed. However, its resolution is not necessary to the outcome of this case, because the Appellants have not contested, on appeal, the existence of a pattern of racketeering activity. Therefore, we leave the issue for another day.

[8] As Kidder recognizes in its brief, Zenith Radio concerned an antitrust violation. Under the Clayton Act, “a cause of action accrues and the statute begins to run when a defendant commits an act that injures a plaintiff’s business.” Zenith Radio, 401 U.S. at 338, 91 S.Ct. at 806. Thus, antitrust claims are subject to the less plaintiff-friendly “injury occurrence” accrual rule. Because we hold that RICO claims are governed by a more lenient “injury discovery” rule, it is unclear whether we need to adopt the Zenith Radio exception (delaying the accrual of claims when damages are merely speculative) in the RICO context. For the sake of discussion, however, we will assume without deciding that the Zenith Radio exception could apply to RICO claims.

[9] In Maio, we held that a plaintiff lacks standing to bring a RICO claim unless he has suffered a concrete financial loss. See Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir.2000). Plaintiffs sued their HMO claiming that they had received an “inferior health care” product. They alleged neither a denial of medical benefits nor inferior treatment. Instead, their claim rested solely upon Aetna’s misrepresentation, which allegedly caused them to pay too much in premiums. We rejected the plaintiffs’ theory. Although we recognized that the diminution in value of tangible property, “like a plot of land or diamond necklace,” can constitute a RICO injury, the plaintiffs’ interest was merely a contractual right. 221 F.3d at 488-89. In that context, a RICO injury requires “proof that Aetna failed to perform under the parties’ contractual arrangement.” Id. at 490.

[10] The court cited Zenith Radio only once, noting that courts apply a pure injury occurrence accrual rule for Clayton Act antitrust violations. See App. at 49 n. 12.

[11] See First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 767-68 (2d Cir.1994) (holding that a RICO injury does not occur until a debt becomes uncollectible and the note holder exhausts his contractual remedies); Cruden v. Bank of New York, 957 F.2d 961, 977-78 (2d Cir.1992) (holding that a RICO injury does not occur until a debtor defaults on promised principal and equity payments); Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1103 (2d Cir.1988) (holding that a RICO injury does not occur until it becomes clear that a loan will not be repaid).

[12] We recognize that modern financial markets, and the widespread use of complicated derivative instruments, have blurred the once-sharp distinction between debt and equity. See Anthony P. Polito, Useful Fictions: Debt and Equity Classification in Corporate Tax Law, 30 Ariz. St. L.J. 761, 790 (1998) (“[F]inance theory cannot identify the true boundary between debt and equity.”). Today, debt contracts are openly traded, are valued from moment to moment, and often behave like equity, especially when a company experiences financial difficulty. Thus, any legal test dependent upon a bright-line distinction between contractual debt and equity ownership is at best precarious. However, both the Second Circuit, and possibly the Supreme Court, have apparently adopted this distinction. Luckily, because this case concerns a clear equity interest in real property, we need not explore this potential minefield any further.

[13] It is not, however, impossible. We quickly reject any suggestion by the Appellants that summary judgment can never be granted when the issue of injury discovery is contested by the parties. Instead, we agree that “[i]f the facts needed in order to determine when `a reasonable investor of ordinary intelligence’ discovered or should have discovered the fraud can be gleaned from the pleadings, a court may resolve the issue of the existence of fraud at the summary judgment stage.” App. at 78. Thus, at least in the RICO context, we disagree with the Eleventh Circuit Court of Appeals, which has held that “as a general rule, the issue of when a plaintiff in the exercise of due diligence should have known of the basis for his claims is not an appropriate question for summary judgment.” Morton’s Market, Inc. v. Gustafson’s Dairy, Inc., 198 F.3d 823, 832 (11th Cir.1999).

[14] In Landy, 734 F.Supp. at 625, the District Court held that the defendant’s fraud occurred approximately three years before the plaintiffs were injured. Thus, the plaintiffs’ securities fraud claim accrued three years before their RICO action accrued.

[15] See Great Rivers Coop. of Southeastern Iowa v. Farmland Indus., Inc., 120 F.3d 893, 896 (8th Cir.1997) (“[I]nquiry notice exists when there are `storm warnings’ that would alert a reasonable person of the possibility of misleading information, relayed either by an act or by omission.”); Gray v. First Winthrop Corp., 82 F.3d 877, 881 (9th Cir.1996) (“[I]f a prudent person would have become suspicious from the knowledge obtained through the initial prudent inquiry and would have investigated further, a plaintiff will be deemed to have knowledge of facts which would have been disclosed in a more extensive investigation.”); Dodds v. Cigna Sec., Inc., 12 F.3d 346, 350 (2d Cir.1993) (Plaintiff is on inquiry notice “when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud.”); Caviness v. DeRand Res. Corp., 983 F.2d 1295, 1303 (4th Cir.1993) (Inquiry notice exists when plaintiff “has such knowledge as would put a reasonably prudent purchaser on notice to inquire, so long as that inquiry would reveal the facts on which a claim is ultimately based.”).

[16] We are reluctant to excuse Appellants’ lack of inquiry because, in retrospect, reasonable diligence would not have uncovered their injury. Such a holding would, in effect, discourage investigation of potential racketeering activity. See Rotella, 528 U.S. at 557, 120 S.Ct. at 1082. Therefore, if storm warnings existed, and the Appellants chose not to investigate, we will deem them on inquiry notice of their claims.

[17] We agree with the District Court, however, that a reasonable investor of ordinary intelligence would have read the prospectus. Therefore, we reject any argument based upon the Appellants’ ignorance of its contents.

[18] Because reasonable investors of ordinary intelligence read correspondence describing the economic health of their investments, we presume that the Appellants read the documents that Kidder sent them.

[19] There are implications in both the parties’ briefs and the District Court’s opinion that the total amount of distributions was “paltry” or excessively low. We find this argument puzzling. A $9.00 quarterly distribution, if consistent, would result in an approximate annual yield of 7.2% ($36.00 per $500 unit). This rate of return is generally consistent with a conservative, low risk investment vehicle. Contrary to the suggestions of the parties, a higher return would arouse suspicion that the securities were actually high-risk, speculative investments.

[20] We agree with the District Court that these values were, at the very least, “a good indicator … of [the fund units’] market value.” App. at 86.

[21] Even if the Appellants’ argument was on-point, courts have consistently discouraged a “wait and see” strategy. For example, in Tregenza v. Great Am. Communications Co., 12 F.3d 717, 722 (7th Cir.1993), “plaintiffs waited patiently to sue. If the stock rebounded from the cellar they would have investment profits, and if it stayed in the cellar they would have legal damages. Heads I win, tails you lose.” The court held that the plaintiffs were on inquiry notice. See also Sterlin v. Biomune Sys., 154 F.3d 1191, 1202 (10th Cir. 1998) (“The purpose behind commencing the … limitations period upon inquiry notice is to discourage investors from adopting a wait-and-see approach.”).

[22] According to the District Court’s opinion, a small number of plaintiffs testified as to having asked their brokers about the status of their investment, but they quickly “dropped the matter” after being assured that everything was all right. See App. at 69-70 & n. 62. A few cursory inquiries cannot amount to reasonable due diligence.

[23] Because we agree that the Appellants should have discovered their injuries no later than early 1990, we need not consider whether the District Court erred in denying leave to amend their complaint. Even if the Appellants were allowed to include allegations that the prospectus itself was fraudulent, it would not change the outcome of the case. See App. at 44 n. 7. Because the Appellants should have discovered Kidder’s misrepresentations, whether within or outside the prospectus, more than four years before they filed suit, their claims are barred.

[24] The Appellants rely primarily upon “optimistic statements” that Kidder included in its quarterly newsletters. See Appellants’ Br. at 46. We have carefully reviewed these statements and are skeptical that they amount to active misleading. Nonetheless, because we must draw all reasonable factual inferences in favor of the plaintiffs at the summary judgment stage, see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986), we will assume that they have satisfied the first prong of the fraudulent concealment test.

[25] The Appellants claim that they “need not demonstrate due diligence to survive summary judgment.” Appellants’ Br. at 47. This position is squarely foreclosed by Forbes, 228 F.3d at 487.

[26] Upon first inspection, the utility of a fraudulent concealment defense may not be readily apparent. In a civil RICO case where all the requisite elements are present, a claim accrues immediately upon the plaintiff’s discovery of her injury. See Forbes, 228 F.3d at 484. Absent equitable tolling doctrines, ignorance of the remaining elements of her claim, including the pattern required by RICO, is immaterial. A plaintiff has four years from the time she discovers her injury to investigate, gather evidence, and bring suit. At the end of the four years, her claim expires. However, if the defendant misleads the plaintiff to believe that she does not have a claim, fraudulent concealment doctrine tolls the limitations period. Thus, if the defendant conceals any element of the offense, including, but not limited to, the injury itself, the four-year period will be tolled. For this reason, an injury discovery rule that includes equitable tolling approaches an injury and pattern discovery rule. The primary difference is that under an equitable tolling regime, the decision whether to toll the limitations period for lack of pattern discovery is left to the court’s discretion. Nonetheless, fraudulent concealment doctrine provides an extremely generous “out” from the potentially harsh injury discovery rule of Forbes.

Enterprise and continuity requirement in a real estate RICO claim

`The Court dismissed the complaint alleging mortgage fraud. Basically, the court found plausible proof of a fraud affecting the plaintiff, but not others.

“Hopkins’ allegations, however, do not pled facts showing the associates of the enterprise— here, AHMSI and Citibank—function as a continuing unit. “[T]he continuity requirement focuses on whether the associates’ behavior was `ongoing’ rather than isolated activity.” Odom, 486 F.3d at 553; Bryant v. Mattel, Inc., 573 F. Supp. 2d 1254, 1263 (C.D. Cal. 2007) (“The `continuing unit’ requirement . . . is related to the notion that RICO was not meant to address discrete instances of fraud or criminal conduct.”). Courts often look to the length of time that the associates have interacted to determine whether they functioned as a continuing unit. See Bryant, 573 F. Supp. 2d at 1263 (“[T]his requirement is related to the duration of the racketeering activities.”); see also Odom, 486 F.3d at 553 (“An almost two-year time span is far more than adequate to establish that Best Buy and Microsoft functioned as a continuing unit.”).

Similar to his failure to establish a pattern of racketeering activity, discussed further below, Hopkins’ allegations do not indicate that the defendants’ alleged behavior is ongoing, rather than isolated. See Turkette, 452 U.S. at 583 (noting “the proof used to establish these separate elements may in particular cases coalesce”). Even if the four cancelled checks were the proximate cause of Hopkins’ non-judicial foreclosure, this alone is not sufficient to indicate that Citibank and AHMSI function as a continuing unit. Cf. Izenberg, 589 F. Supp. 2d at 1203 (finding no continuing unit when plaintiffs’ complaint was focused on a single foreclosure sale); Gamboa v. Tr. Corps, 09-0007 SC, 2009 WL 656285, at *5 (N.D. Cal. Mar. 12, 2009) (same). Accordingly, the complaint fails adequately to identify a RICO enterprise.”

Opinion Hopkins v. American Home Mortgage Servicing

No. 13-4447 United States District Court, N.D. California, San Francisco Division.

February 13, 2014.

RICHARD SEEBORG, District Judge.

I. INTRODUCTION

This action was removed to federal court following years of litigation before the Alameda County Superior Court. Several motions are now pending: defendant Citibank’s motions to dismiss and to strike portions of plaintiff’s fourth amended complaint (FAC) and defendant American Home Mortgage Servicing, Inc.’s motion to dismiss the FAC. For the following reasons, defendants’ motions to dismiss are granted in part with respect to plaintiff’s federal claims. In particular, the eighteenth claim for relief (under RICO) is dismissed with leave to amend and the eighth claim (under RESPA) is dismissed with prejudice and without leave to amend. In addition, plaintiff is ordered to show cause why his remaining federal claim against defendant ABC should not be dismissed. If plaintiff wishes to remain in federal court, he must file an amended complaint and respond to this order within thirty (30) days.[1]

II. BACKGROUND

Plaintiff Donald Ray Hopkins contends that defendants Citibank, Homeward Residential Inc. (Homeward) f/k/a American Home Mortgages Servicing Inc. (AHMSI),[2] and American Home Mortgage Corp. d/b/a American Brokers Conduit (ABC) conspired to foreclose upon his home in Oakland, California. According to Hopkins, AHMSI and ABC secretly instructed his bank, Citibank, to cancel several timely electronic mortgage payments. Hopkins avers that defendants blamed him for the resulting nonpayment, thereby creating a pretext for the subsequent non-judicial foreclosure of his home, which they allegedly sold at a significant profit.

Hopkins filed this action in the Alameda County Superior Court in June 2011. Some two years and four amended complaints later, Hopkins for the first time alleged several federal claims for relief in August 2013. Defendants removed, contending this court has original jurisdiction over Hopkins’ federal claims and supplemental jurisdiction over his state law claims. Shortly thereafter, Citigroup filed motions to strike and to dismiss the FAC, with AHMSI bringing its own motion to dismiss. More than two weeks after the opposition deadlines passed for all three aforementioned motions, Hopkins moved to stay these proceedings, because defendant ABC, the purported originator and holder of the mortgage at issue, had filed for bankruptcy protection. (ECF No. 29; ECF No. 35).

A previous order denied Hopkins’ motion to stay and ordered him to file responses to defendants’ motions by December 17, 2013. (ECF No. 38). Hopkins filed separate oppositions to Citibank’s and AHMSI’s motions to dismiss, but did not oppose Citibank’s motion to strike.[3] (ECF No. 39; ECF No. 40). Hopkins argues that all of his claims are properly pleaded or, in the alternative, that leave to amend is warranted. Citibank and AHMSI filed replies requesting Hopkins’ claims be dismissed with prejudice. The motions were submitted without oral argument pursuant to Civil Local Rule 7-1(b).

III. LEGAL STANDARD

A complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). While “detailed factual allegations are not required,” a complaint must have sufficient factual allegations to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 566 U.S. 652, 678 (2009) (citing Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible “when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. This standard asks for “more than a sheer possibility that a defendant acted unlawfully.” Id. The determination is a context-specific task requiring the court “to draw in its judicial experience and common sense.” Id. at 1950.

A motion to dismiss a complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the claims alleged in the complaint. See Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Dismissal under Rule 12(b)(6) may be based on either the “lack of a cognizable legal theory” or on “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). When evaluating such a motion, the court must accept all material allegations in the complaint as true, even if doubtful, and construe them in the light most favorable to the non-moving party. Twombly, 550 U.S. at 570. “[C]onclusory allegations of law and unwarranted inferences,” however, “are insufficient to defeat a motion to dismiss for failure to state a claim.” Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996); see also Twombly, 550 U.S. at 555 (“threadbare recitals of the elements of the claim for relief, supported by mere conclusory statements,” are not taken as true).

IV. DISCUSSION

A. Eighth Claim for Relief for Violating the Real Estate Settlement Procedures Act (RESPA)

Under RESPA, “[e]ach transferee servicer to whom the servicing of any federally related mortgage loan is assigned, sold, or transferred shall notify the borrower of any such assignment, sale, or transfer.” 12 U.S.C § 2605(c)(1) (2012). RESPA also requires loan servicers to respond to Qualified Written Requests (QWR) submitted by borrowers. § 2605(e). Hopkins alleges AHMSI violated RESPA, because AHMSI failed to provide (1) notice when it began servicing the loan, (2) notice when AHMSI filed for bankruptcy, (3) copies of the operative loan documents, and (4) a response to Hopkins’ March 30, 2012 QWR. (FAC, Exb. A at ¶¶ 22, 69-70). As an initial matter, it is not clear that RESPA requires loan servicers to provide borrowers with notice of bankruptcy proceedings or copies of loan documents. Hopkins does not invoke a single piece of legal authority to support his contrary contention.

More importantly, Hopkins fails to allege any pecuniary loss attributable to the RESPA violations. This defect is fatal to his RESPA claims. RESPA provides that anyone who fails to comply with its provisions shall be liable to the borrower for “any actual damages to the borrower as a result of the failure[.]” 12 U.S.C. § 2605(f). “Although this section does not explicitly set this out as a pleading standard, a number of courts have read the statute as requiring a showing of pecuniary damage in order to state a claim.” Allen v. United Financial Mortg. Corp., 660 F. Supp. 2d 1089, 1097 (N.D. Cal 2009). To advance a RESPA claim, a “[p]laintiff must, at a minimum, also allege that the breach resulted in actual damages.” Id. (citing Hutchinson v. Delaware Sav. Bank FSB, 410 F. Supp. 2d 374, 383 (D.N.J. 2006)). “This pleading requirement has the effect of limiting the cause of action to circumstances in which plaintiffs can show that a failure of notice has caused them actual harm.” Id. at 1097. Courts, however, “have interpreted this requirement [to plead pecuniary damage] liberally.” Yulaeva v. Greenpoint Mortgage Funding, Inc., CIVS-09-1504 LKK/KJM, 2009 WL 2880393, at *15 (E.D. Cal. Sept. 3, 2009). For example, in Hutchinson, plaintiffs pled sufficient pecuniary loss by claiming they suffered negative credit ratings when the servicer submitted delinquency notices to credit bureaus after receiving a QWR. 410 F. Supp. 2d at 383.

Here, Hopkins offers only conclusory allegations that he is entitled to damages and attorney fees under RESPA. (See FAC at ¶ 72). Hopkins fails to explain how the alleged RESPA violations caused him any pecuniary loss. See Shepherd v. Am. Home Mortgage Servs., Inc., CIV 209-1916 WBS GGH, 2009 WL 4505925 (E.D. Cal. Nov. 20, 2009) (concluding plaintiff’s allegation he “suffered and continue[d] to suffer damages and costs of suit” was insufficient even under “a liberal pleading standard for harm”). The specific harms plaintiff complains of—the converted loan payments, improper late fees, and non-judicial foreclosure—allegedly resulted from defendants conspiring to cancel Hopkins’ electronic checks and Hopkins ceasing his loan payments. These injuries do not flow from AHMSI’s alleged RESPA violations. Indeed, the complaint suggests that Hopkins was aware during the relevant time period that AHMSI serviced his loan, as he made loan payments to AHMSI since at least July 2008. (See Customer Account Activity Statement, FAC, Exb. 3). Moreover, Hopkins’ QWR was not submitted until March 2012, a year after Hopkins admittedly stopped paying his loans. See Allen, 660 F. Supp. 2d at 1097 (stating plaintiff’s “loss of property appears to have been caused by his default”). Because it does not appear that Hopkins can cure this deficiency with additional good faith pleading, Hopkins’ eighth claim for relief is dismissed with prejudice.

B. Eighteenth Claim for Relief for Violating the Racketeer Influenced and Corrupt Organizations Act (RICO)

To state a RICO claim, a plaintiff must allege that defendant (a) received income derived from a pattern of racketeering activity, and used the income to acquire or invest in an enterprise; (b) acquired an interest in, or control of, an enterprise through a pattern of racketeering activity; (c) conducted or participated in the conduct of an enterprise through a pattern of racketeering activity; or (d) conspired to engage in any of these activities. See 18 U.S.C. § 1962(a)-(d). Although Hopkins’ complaint does not specify which RICO subsection(s) defendants allegedly violated, his allegations most closely fit § 1962(c) and are analyzed accordingly.[4] See Reynolds v. E. Dyer Dev. Co., 882 F.2d 1249, 1251 (7th Cir. 1989) (stating “[I]t is essential to plead precisely . . . the RICO section allegedly violated[,]” but affirming district court decision to analyze under § 1962(c)). Under § 1962(c), a plaintiff must allege: “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (known as `predicate acts’) (5) causing injury to plaintiff’s business or property.” Grimmett v. Brown, 75 F.3d 506, 510 (9th Cir.1996) (citing Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985)).

“[R]acketeering activity” is any act indictable under several provisions of Title 18 of the United States Code, and includes the predicate acts of mail fraud and wire fraud, each of which is alleged in this case.[5] Turner v. Cook, 362 F.3d 1219, 1229 (9th Cir. 2004) (citing 18 U.S.C. § 1961(1)). Claims for mail and wire fraud are subject to Rule 9(b)’s heightened pleading requirements. Sanford v. MemberWorks, Inc., 625 F.3d 550, 557-58 (9th Cir. 2010); Lancaster Cmty. Hosp. v. Antelope Valley Hosp. Dist., 940 F.2d 397, 405 (9th Cir. 1991) (“[Rule 9(b)] requires a pleader of fraud to detail with particularity the time, place, and manner of each act of fraud, plus the role of each defendant in each scheme.”).

Hopkins alleges that defendants used mail and wires to disseminate false and misleading information with intent to cause him to miss payments, incur late fees, and default on his home loan.[6] (FAC at ¶¶ 130-145). Specifically, Hopkins avers he directed Citibank to make timely electronic loan payments to AHMSI from July 2010 to October 2010, but AHMSI instructed Citibank to cancel these payments.[7] (Id. at ¶ 1). Hopkins further avers that Citibank and AHMSI either applied these payments to his loan late or converted the funds into secret accounts.[8] (Id. at ¶¶ 1-3). Hopkins’ RICO claim suffers from several deficiencies, which are addressed in turn.

1. RICO Enterprise

Hopkins’ complaint fails to identify a RICO enterprise. “[T]o establish liability under § 1962(c) one must allege and prove the existence of two distinct entities: (1) a `person’; and (2) an `enterprise’ that is not simply the same `person’ referred to by a different name.” Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161, (2001); Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353, 361 (9th Cir. 2005). A “person” is defined as “any individual or entity capable of holding a legal or beneficial interest in property.” 18 U.S.C. § 1961(3). As AHMSI and Citibank are recognized legal entities, they are “persons” within the meaning of RICO. An “enterprise” is defined to include “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” § 1961(4). Hopkins has not alleged the existence of a separate legal entity apart from the defendants; rather his complaint relies on an association-in-fact between the individual defendants. See Bias v. Wells Fargo & Co., 942 F. Supp. 2d 915, 940 (N.D. Cal. 2013) (“An enterprise that is not a legal entity is commonly known as an `association-in-fact’ enterprise.”).

The Supreme Court in United States v. Turkette stated that an association-in-fact enterprise is “a group of persons associated together for a common purpose of engaging in a course of conduct.” 452 U.S. 576, 583 (1981). Ninth Circuit precedent requires proof of three elements: (i) a common purpose of engaging in a course of conduct; (ii) evidence of an “ongoing organization, formal or informal”; and (iii) evidence that the various associates function as a continuing unit. Odom v. Microsoft Corp., 486 F.3d 541, 551-52 (9th Cir.2007) (en banc) (quoting Turkette, 452 U.S. at 583).[9] However, an “associated-in-fact enterprise under RICO does not require any particular organizational structure, separate or otherwise.” Id. at 551.[10]

Hopkins alleges that the defendants “associated themselves together for a common purpose” of distributing false information to misdirect or steal his monthly loan payments. (FAC at ¶¶ 130, 133). Hopkins specifically alleges that AHSMI and Citibank secretly canceled his checks, deposited the funds into secret accounts, and continued to issue statements indicating his loans had been properly paid. (FAC at ¶¶ 1-3). These allegations, if true, are sufficient to show defendants’ common purpose of misdirecting or stealing Hopkins’ loan payments. See Izenberg v. ETS Servs., LLC, 589 F. Supp. 2d 1193, 1203 (C.D. Cal. 2008) (finding plaintiffs’ allegations that defendants illegally foreclosed on properties “sufficiently plead that defendants had a common purpose— i.e., to collect and foreclose on mortgages illegally”).

Similarly, Hopkins’ allegations are sufficient to show an ongoing organization. A plaintiff properly pleads an ongoing organization when he alleges the vehicle or mechanism used to commit the predicate acts. Odom, 486 F.3d at 552 (“An ongoing organization is a vehicle for the commission of two or more predicate crimes.”) (quotation omitted). Here, Hopkins’ allegations of the canceled checks, secret accounts, and incorrect statements sufficiently show the vehicle for defendants’ alleged fraudulent acts. See id. (finding allegations that defendants established “mechanisms for transferring plaintiffs’ personal and financial information” and a “cross-marketing contract” sufficiently evinced an ongoing organization); Friedman v. 24 Hour Fitness USA, Inc., 580 F. Supp. 2d 985, 993 (C.D. Cal. 2008) (“Plaintiffs’ description of the mechanisms that Defendant set up with each payment processor satisfies the requirement of a `vehicle for the commission of at least two predicate acts of fraud[.]'”).

Hopkins’ allegations, however, do not pled facts showing the associates of the enterprise— here, AHMSI and Citibank—function as a continuing unit. “[T]he continuity requirement focuses on whether the associates’ behavior was `ongoing’ rather than isolated activity.” Odom, 486 F.3d at 553; Bryant v. Mattel, Inc., 573 F. Supp. 2d 1254, 1263 (C.D. Cal. 2007) (“The `continuing unit’ requirement . . . is related to the notion that RICO was not meant to address discrete instances of fraud or criminal conduct.”). Courts often look to the length of time that the associates have interacted to determine whether they functioned as a continuing unit. See Bryant, 573 F. Supp. 2d at 1263 (“[T]his requirement is related to the duration of the racketeering activities.”); see also Odom, 486 F.3d at 553 (“An almost two-year time span is far more than adequate to establish that Best Buy and Microsoft functioned as a continuing unit.”).

Similar to his failure to establish a pattern of racketeering activity, discussed further below, Hopkins’ allegations do not indicate that the defendants’ alleged behavior is ongoing, rather than isolated. See Turkette, 452 U.S. at 583 (noting “the proof used to establish these separate elements may in particular cases coalesce”). Even if the four cancelled checks were the proximate cause of Hopkins’ non-judicial foreclosure, this alone is not sufficient to indicate that Citibank and AHMSI function as a continuing unit. Cf. Izenberg, 589 F. Supp. 2d at 1203 (finding no continuing unit when plaintiffs’ complaint was focused on a single foreclosure sale); Gamboa v. Tr. Corps, 09-0007 SC, 2009 WL 656285, at *5 (N.D. Cal. Mar. 12, 2009) (same). Accordingly, the complaint fails adequately to identify a RICO enterprise.

2. Pattern of Racketeering Activity

Hopkins also fails to aver facts supporting the existence of a RICO pattern. A RICO claim requires a showing of “a pattern of racketeering activity” which is defined as “at least two acts of racketeering activity” in a ten year period. 18 U.S.C. § 1961(5). “Two acts are necessary, but not sufficient, for finding a violation.” Howard v. Am. Online Inc., 208 F.3d 741, 746 (9th Cir. 2000) (citing H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 238 (1989)). “[T]he term `pattern’ itself requires the showing of a relationship between the predicates and of the threat of continuing activity.” Id.

Hopkins fails to allege a RICO pattern, because he has not pled facts supporting either closed-ended or open-ended continuity. “[T]o satisfy the continuity requirement, [a complainant] must prove either a series of related predicates extending over a substantial period of time, i.e., closed-ended continuity, or past conduct that by its nature projects into the future with a threat of repetition, i.e. open-ended continuity.” Steam Press Holdings, Inc. v. Hawaii Teamsters, Allied Workers Union, Local 996, 302 F.3d 998, 1011 (9th Cir. 2002) (quoting Howard, 208 F.3d at 750) (alteration original). Defendants’ alleged predicate acts occurred over a four-month period and are insufficient to show closed-ended continuity. See Howard, 208 F.3d at 750 (“Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy [the closed-ended continuity] requirement. . . . Activity that lasts only a few months is not sufficiently continuous.”) (alteration original); Liu v. Li, EDCV 10-00952 ODW, 2010 WL 4286265, at *5 (C.D. Cal. Oct. 21, 2010) (finding plaintiffs did not sufficiently allege a “pattern” when the predicate acts of wire and mail fraud spanned from January 10, 2007 to March 12, 2007).

Open-ended continuity is shown by “[p]redicate acts that specifically threaten repetition or that become a `regular way of doing business.'” Id. (quoting Allwaste, Inc. v. Hecht, 65 F.3d 1523, 1528 (9th Cir. 1995)). Hopkins fails to allege facts that plausibly support his theory defendants improperly cancel customer loan payments as part of their regular way of doing business. Hopkins’ conclusory allegation, unsupported by any facts in the record, that “what happened to plaintiff here is standard operating procedure for defendant[s]” is insufficient to meet Rule 9(b)’s heightened pleading requirements.[11] (ECF. No. 39 at 8).

Although it is not apparent how Hopkins can cure the deficiencies in his RICO claim, the policy of granting leave to amend “is to be applied with extreme liberality.” Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001). “In determining whether leave to amend is appropriate, the district court considers `the presence of any of four factors: bad faith, undue delay, prejudice to the opposing party, and/or futility.'” Id. (quoting Griggs v. Pace Am. Group, Inc., 170 F.3d 877, 880 (9th Cir. 1999)). Although Hopkins’ failure to abide by local rules and comply with a prior court order caused delay in these proceedings, see Order Denying Motion to Stay and Directing Plaintiff to File Responses to Defendants’ Motions to Dismiss and Strike, Dec. 11, 2013 (ECF No. 18), and although it is uncertain if Hopkins can successfully amend his claim, that prospect, at this juncture, cannot be deemed “futile.” See Allen v. City of Beverly Hills, 911 F.2d 367, 374 (9th Cir. 1990). Accordingly, the RICO claim is dismissed with leave to amend.

C. Plaintiff’s Remaining Claims

Hopkins’ only remaining federal claim is the thirteenth claim for relief against ABC for violation of the Truth in Lending Act (TILA). While not raised by the parties, it appears that Hopkins’ TILA claim also suffers from significant deficiencies. In particular, Hopkins’ prayer for relief is premised upon an alleged “continuing right to rescind all loans . . . pursuant to 15 U.S.C. § 1635(a) and Regulation Z 12 C.F.R. § 226.23(a)(3).” (FAC, at ¶ 108). Hopkins’ home loan, however, evidently is a “residential mortgage transaction,” which is specifically exempted from the operation of the aforementioned sections.[12] 15 U.S.C. § 1635(e); 12 C.F.R. § 226.23(f). Moreover, barring exceptions not applicable here, any right of rescission Hopkins held expired under the statute in October 2009. 15 U.S.C. § 1635(f) (“An obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this part have not been delivered to the obligor[.]”). Therefore, Hopkins is ordered to show cause why his TILA claim should not also be dismissed. Considering the extent of the state court’s prior involvement in this litigation, if Hopkins is unable to state a federal claim, this action will be remanded to the Alameda County Superior Court.

V. CONCLUSION

For the aforementioned reasons, defendants’ motions to dismiss are GRANTED in part. Hopkins’ RESPA claims are dismissed with prejudice and his RICO claims are dismissed with leave to amend. If plaintiff wishes to amend his complaint, he must refile within thirty (30) days of this order. Hopkins is further ordered to show cause within thirty (30) days why his TILA claim against ABC should not be dismissed. Hopkins’ further filings, if any, must comply with the Federal Rules of Civil Procedure and the Civil Local Rules of the Northern District of California.

IT IS SO ORDERED.

[1] This order does not reach Citibank’s motion to strike. If plaintiff substantiates a basis for federal jurisdiction, Citibank’s motion to strike will be resolved at a later date.

[2] AHMSI is now known as Homeward Residential, Inc. Because most filings refer to Homeward as AHMSI, that acronym will be used here.

[3] Although Hopkins titled his opposition to Citibank’s motions “Plaintiff Donald Ray Hopkins’ Memorandum of Points and Authorities in Opposition to Defendant Citibank’s Motions to Dismiss/Strike Fourth Amended Complaint[,]” he did not offer any substantive opposition to Citibank’s motion to strike. (See ECF No. 40).

[4] Hopkins’ allegations may also fit within § 1962(d). Because Hopkins’ claim under § 1962(d) depends on his § 1962(c) claim, the analysis is restricted to § 1962(c). See Odom v. Microsoft Corp., 486 F.3d 541, 547 (9th Cir. 2007).

[5] Hopkins also alleges “unlawful dealings in violation of 18 U.S.C. Sections 1961, 1962 and their sub parts.” (FAC at ¶ 137). The term “unlawful dealings” does not appear in the RICO statute, nor does it identify a cognizable legal theory on which plaintiff could base his claim.

[6] Hopkins suggests in his opposition that defendants’ alleged RESPA violations are relevant to his RICO claim. (ECF No. 39 at 9). RESPA violations, however, are not predicate acts included in the statutory definition and Hopkins offers no authority or explanation why the alleged violations should be considered “racketeering activity.” See 18 U.S.C. § 1961(1). Hopkins also alleges that defendants engaged in predatory loan practices. (FAC at ¶¶ 130-145). Hopkins concedes that neither AHMSI nor Citibank originated his home loan. Further, Hopkins has not alleged facts showing AHMSI’s or Citibank’s involvement, if any, in issuing his loan. Consequently, even if these practices are predicate acts, they do not support Hopkins’ RICO claims against AHMSI and Citibank.

[7] Hopkins complaint is inconsistent as to how many payments AHMSI instructed Citibank to cancel.

[8] AHMSI’s Customer Account Activity Statement, attached to the FAC, indicates that Hopkins’ July 2010 through August 2010 payments were eventually applied to his loan, but that the July 2010 payment incurred a late fee. Hopkins’ October 2010 payment was never applied to the mortgage. (FAC, Exb. 3).

[9] The Ninth Circuit in Odom noted that the definition of an enterprise is “not very demanding.” 486 F.3d at 548; Boyle v. United States, 556 U.S. 938, 944 (2009) (“the very concept of an association in fact is expansive”).

[10] Odom specifically overruled prior holdings requiring the associate-in-fact enterprise to have a sufficiently “ascertainable structure, separate and apart from the structure inherent in the conduct of the pattern of racketeering activity.” See Chang v. Chen, 80 F.3d 1293, 1295 (9th Cir. 1996).

[11] Hopkins argues it is clear that defendant’s alleged conduct is typical, because various state Attorneys General Offices have brought actions against AHMSI and because AHMSI was the subject of CBS 60 Minutes “robo-signing” expose. (ECF No. 39 at 8). This evidence is not in the record before the court and is not considered here.

[12] “The term `residential mortgage transaction’ means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer’s dwelling to finance the acquisition or initial construction of such dwelling.” 15 U.S.C. § 1602(x).

Links to other practice areas.

Beyond RICO our office handles other areas of practice.

Additionally we note areas of practice handled by other attorneys. (note any listing of other attorneys should not be regarded as an endorsement or evaluation).

http://www.murillolawfirm.com
http://www.chicago-defense.com
http://www.nicklowelaw.com
http://www.injuryaccidentlawyer-nyc.com
http://www.northgadivorcelaw.com
http://www.laattorney.com

Routine Wage and Hour violations do not constitute RICO predicate acts

A hospital is allegedly to have failed to pay required minimum wage. Here, even if that occurred in multiple incidents it would not constitute a RICO violation.

Opinion Lundy v. Catholic Health System, 711 F. 3d 106 (2d Cir. 2013)

DENNIS JACOBS, Chief Judge.

Plaintiffs, a respiratory therapist and two nurses, allege that the Catholic Health System of Long Island Inc., a collection of hospitals, healthcare providers, and related entities (collectively, “CHS”), failed to compensate them adequately for time worked during meal breaks, before and after scheduled shifts, and during required training sessions. They sued on behalf of a purported class of similarly situated employees (collectively, “the Plaintiffs”) and take this appeal from orders of the United States District Court for the Eastern District of New York (Seybert, J.), dismissing the claims asserted under the Fair Labor Standards Act (“FLSA”), the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and the New York Labor Law (“NYLL”).

We affirm the dismissal of the FLSA and RICO claims for failure to state a claim. We also affirm the dismissal of Plaintiffs’ NYLL overtime claims, which have the same deficiencies as the FLSA overtime claims. However, because the district court did not explain why Plaintiffs’ NYLL gap-time claims were dismissed with prejudice, we vacate that aspect of the judgment and remand for further consideration of the NYLL gap-time claims.

BACKGROUND

The original complaint, alleging violations of FLSA and RICO, was filed in March 2010 by Daisy Ricks, a healthcare employee, on behalf of similarly situated employees, against the Long Island Health Network, Inc., Catholic Health Services of Long Island, and various related entities.[1] The First Amended Complaint, filed in June 2010, substituted Dennis Lundy, Patricia Wolman, and Kelly Iwasiuk as lead plaintiffs, dropped some defendants, and added claims under NYLL and state common law. The twelve causes of action pleaded were FLSA, RICO, NYLL, implied contract, express contract, implied covenants, quantum meruit, unjust enrichment, fraud, negligent misrepresentation, conversion, and estoppel. This case is one of many similar class actions brought by the same law firm, Thomas & Solomon LLP, against numerous healthcare entities in the region. A dozen of them are currently on appeal before this Court.[2]

The FLSA claims focused on alleged unpaid overtime. In relevant part, FLSA’s overtime provision states that “no employer shall employ any of his employees . . . for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.” 29 U.S.C. § 207(a)(1).[3]

It is alleged that CHS used an automatic timekeeping system that deducted time from paychecks for meals and other breaks even though employees frequently were required to work through their breaks, and that CHS failed to pay for time spent working before and after scheduled shifts, and for time spent attending training programs.[4]

The procedural history of this case was prolonged by four attempts to amend the complaint, and various orders dismissing the claims, as recounted below.

A Second Amended Complaint, filed in August 2010, replaced some of the defendants that had been sued in error. On motion, the district court dismissed most of the claims, without prejudice. The FLSA overtime claims were dismissed for failure to approximate the number of uncompensated overtime hours. The FLSA claim for “gap-time” pay (i.e., for unpaid hours below the 40-hour overtime threshold) was dismissed—with prejudice—on the ground that FLSA does not permit gap-time claims when the employment contract explicitly provides compensation for gap time worked. The RICO claims were dismissed—with prejudice—for insufficient allegations of any pattern of racketeering activity. Once the federal claims were dismissed, the state law claims were dismissed without prejudice.

The district court granted leave to replead the FLSA overtime claims that were dismissed without prejudice, but cautioned that any future complaint “should contain significantly more factual detail concerning who the named Plaintiffs are, where they worked, in what capacity they worked, the types of schedules they typically or periodically worked, and any collective bargaining agreements they may have been subject to.” Special App. 18. The district court said that it would “not be impressed if the Third Amended Complaint prattle[d] on for another 217 paragraphs, solely for the sake of repeating various conclusory allegations many times over.” Id. at 19.

The Third Amended Complaint, filed in January 2011, was largely identical to the Second (with the addition of approximately ten paragraphs). When CHS moved to dismiss, the court issued an order sua sponte urging supplemental briefing and a more definite statement. Observing that Plaintiffs had again failed to achieve sufficient specificity, the court added:

[T]he Court does not believe that it would serve anyone’s interest to enter another dismissal without prejudice, which would be followed almost assuredly by another amended complaint and then a full round of Rule 12(b)(6) briefing. Instead, the Court considers it more appropriate to sua sponte direct Plaintiffs to file a more definite statement, which it will then use to judge the sufficiency of the [Third Amended Complaint].

Special App. 26. The court expressed concern with the vagueness of the pleading, directed Plaintiffs to stop “hiding the ball,” id. at 27, and listed specific information needed for a more definite statement.

Plaintiffs failed to issue a more definite statement and instead filed a Fourth Amended Complaint (hereinafter, “the Complaint”) in May 2011. The RICO and estoppel claims were dropped, and the remaining causes of action were pleaded as before, supplemented with some more facts.

CHS’s renewed motion to dismiss was largely granted in February 2012, on the following grounds:

1. Plaintiffs insufficiently pled the requisite employer-employee relationship as to each named defendant, because Lundy, Wolman, and Iwasiuk worked only at Good Samaritan Hospital, and because the “economic realities” of the relationships among defendants did not constitute a single employment organization. The FLSA claims against all defendants other than Good Samaritan were dismissed with prejudice.[5]

2. The FLSA claims against Defendant James Harden (the CEO, President, and Director of CHS) were dismissed with prejudice because the economic reality of his relationship with Lundy, Wolman, and Iwasiuk did not amount to an employer-employee relationship.

3. As to the claim that the automatic timekeeping deductions allegedly violated FLSA as applied to Plaintiffs (even though they were not per se illegal), the Plaintiffs failed to show that they were personally denied overtime by this system.

4. As to their FLSA overtime allegations against Good Samaritan, Plaintiffs were required to plead that they worked (1) compensable hours (2) in excess of 40 hours per week, and (3) that CHS knew that Plaintiffs were working overtime. Only some of the categories of purportedly unpaid work—meal breaks, time before and after scheduled shifts, and training—constituted “compensable” hours.

Work during meal breaks is compensable under FLSA if “predominantly” for the employer’s benefit. Special App. 62. Although Plaintiffs alleged that their meal breaks were “typically” missed or interrupted, the Complaint “is void of any facts regarding the nature and frequency of these interruptions during the relevant time period or how often meal breaks were missed altogether as opposed to just interrupted.” Id. at 63. Absent such specificity, there is no claim for compensable time.

Time spent working before and after scheduled shifts is compensable if it is “integral and indispensable” to performance of the job and not de minimis. Id. at 64. Vague assertions that Wolman and Iwasiuk spent fifteen to thirty minutes before their shifts “preparing” their assignments did not state a claim for compensable time. Id. at 64-65. On the other hand, Lundy’s allegation—that he had to arrive early to receive his assignment from the nurse working the prior shift and leave late to hand off assignments to the nurse taking over—could be compensable.

Time spent at training is not compensable if it is outside regular hours, if attendance is voluntary, if the training is not directly related to the job, and if the employee does not perform productive work during the training. See id. at 66. Wolman and Lundy’s allegations regarding monthly, mandatory staff meetings stated claims for compensable time. (Iwasiuk made no allegation of uncompensated trainings.)

5. The potentially valid allegations of compensable time nevertheless did not allege that the compensable time exceeded 40 hours, as required for a FLSA overtime claim. Wolman and Iwasiuk’s sparse allegations could not support a claim for time in excess of 40 hours. And Plaintiffs conceded that Lundy never actually worked more than 40 hours in one week. The FLSA claims against Good Samaritan were therefore dismissed without prejudice.

6. Once the federal claims were dismissed, discretion was exercised against taking jurisdiction over the state law claims, thereby also dismissing them without prejudice.

Having done all this, the district court granted Plaintiffs limited leave to file a further complaint alleging only those claims that had been dismissed without prejudice, and again gave specific guidance as to the “contours” of such a complaint. Special App. 70-72.

In response to Plaintiffs’ inquiry, the district court issued another order a month later, clarifying the scope of the February 2012 order dismissing the Complaint. The court explained that it dismissed all claims against all defendants, except Good Samaritan, and that the FLSA and NYLL claims were dismissed with prejudice, while the remaining state law claims were not. See id. at 76.

Plaintiffs mercifully elected to forgo another amended complaint, and instead filed their Notice of Appeal on April 11, 2012, indicating their intent to appeal the district court’s December 2010 Order dismissing the Second Amended Complaint, the May 2011 sua sponte Order requesting supplemental briefing, the February 2012 Order dismissing the Fourth Amended Complaint, and the March 2012 Order clarifying the scope of the dismissal.

DISCUSSION

On appeal, Plaintiffs challenge the dismissal of the overtime claims under FLSA; the gap-time claims under FLSA (and NYLL); [3] the NYLL claims with prejudice; and [4] the RICO claims.

I

We review de novo dismissal of a complaint for failure to state a claim upon which relief can be granted, “accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff’s favor.” Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009) (internal quotation marks omitted). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted).

Nevertheless, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Id. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. Pleadings that “are no more than conclusions . . . are not entitled to the assumption of truth.” Id. at 679.

II

As to the overtime claims under FLSA, Plaintiffs argue that they sufficiently alleged [i] compensable work that was unpaid, [ii] uncompensated work in excess of 40 hours in a given week, and [iii] status as “employees” of all the Defendants. Although the district court held Plaintiffs’ complaint lacking on all three grounds, we affirm on the second ground—the failure to allege uncompensated work in excess of 40 hours in a given week—because it entirely disposes of the FLSA overtime claims.

Section 207(a)(1) of FLSA requires that, “for a workweek longer than forty hours,” an employee who works “in excess of” forty hours shall be compensated for that excess work “at a rate not less than one and one-half times the regular rate at which he is employed” (i.e., time and a half). 29 U.S.C. § 207(a)(1).[6] So, to survive a motion to dismiss, Plaintiffs must allege sufficient factual matter to state a plausible claim that they worked compensable overtime in a workweek longer than 40 hours. Under Federal Rule of Civil Procedure 8(a)(2), a “plausible” claim contains “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678; see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (“Factual allegations must be enough to raise a right to relief above the speculative level . . . on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” (internal citation omitted)).

We have not previously considered the degree of specificity needed to state an overtime claim under FLSA. Federal courts have diverged somewhat on the question. See Butler v. DirectSat USA, LLC, 800 F. Supp. 2d 662, 667 (D. Md. 2011) (recognizing that “courts across the country have expressed differing views as to the level of factual detail necessary to plead a claim for overtime compensation under FLSA”). Within this Circuit, some courts have required an approximation of the total uncompensated hours worked during a given workweek in excess of 40 hours. See, e.g., Nichols v. Mahoney, 608 F. Supp. 2d 526, 547 (S.D.N.Y. 2009); Zhong v. August August Corp., 498 F. Supp. 2d 625, 628 (S.D.N.Y. 2007). Courts elsewhere have done without an estimate of overtime, and deemed sufficient an allegation that plaintiff worked some amount in excess of 40 hours without compensation. See, e.g., Butler, 800 F. Supp. 2d at 668 (collecting cases).

We conclude that in order to state a plausible FLSA overtime claim, a plaintiff must sufficiently allege 40 hours of work in a given workweek as well as some uncompensated time in excess of the 40 hours. See 29 U.S.C. § 207(a)(1) (requiring that, “for a workweek longer than forty hours,” an employee who works “in excess of” forty hours shall be compensated time and a half for the excess hours).

Determining whether a plausible claim has been pled is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”[7] Iqbal, 556 U.S. at 679. Reviewing Plaintiffs’ allegations, as the district court thoroughly did, we find no plausible claim that FLSA was violated, because Plaintiffs have not alleged a single workweek in which they worked at least 40 hours and also worked uncompensated time in excess of 40 hours.

1. Wolman was “typically” scheduled to work three shifts per week, totaling 37.5 hours. J.A. 1797. She “occasionally” worked an additional 12.5-hour shift or worked a slightly longer shift, id., but how occasionally or how long, she does not say; nor does she say that she was denied overtime pay in any such particular week. She alleges three types of uncompensated work: (1) 30-minute meal breaks which were “typically” missed or interrupted; (2) uncompensated time before and after her scheduled shifts, “typically” resulting in an additional 15 minutes per shift; and (3) trainings “such as” a monthly staff meeting, “typically” lasting 30 minutes, and respiratory therapy training consisting of, “on average,” 10 hours per year. Id.

She has not alleged that she ever completely missed all three meal breaks in a week, or that she also worked a full 15 minutes of uncompensated time around every shift; but even if she did, she would have alleged a total 39 hours and 45 minutes worked. A monthly 30-minute staff meeting, an installment of the ten yearly hours of training, or an additional or longer shift could theoretically put her over the 40-hour mark in one or another unspecified week (or weeks); but her allegations supply nothing but low-octane fuel for speculation, not the plausible claim that is required.

2. Iwasiuk “typically” worked four shifts per week, totaling 30 hours. J.A. 1799. She claims that “approximately twice a month,” she worked “five to six shifts” instead of four shifts, totaling between 37.5 and 45 hours. Id. Like Wolman, Iwasiuk does not allege that she was denied overtime pay in a week where she worked these additional shifts. By way of uncompensated work, she alleges that her 30-minute meal breaks were “typically” missed or interrupted and that she worked uncompensated time before her scheduled shifts, “typically” 30 minutes, and after her scheduled shifts, “often” an additional two hours. Id. Maybe she missed all of her meal breaks, and always worked an additional 30 minutes before and two hours after her shifts, and maybe some of these labors were performed in a week when she worked more than her four shifts. But this invited speculation does not amount to a plausible claim under FLSA.

3. Lundy worked between 22.5 and 30 hours per week, J.A. 1800, and Plaintiffs conceded below—and do not dispute on appeal—that he never worked over 40 hours in any given week.

We therefore affirm the dismissal of Plaintiffs’ FLSA overtime claims. We need not consider alternative grounds that were conscientiously explored by the district court, such as the lack of an employer-employee relationship between the named Plaintiffs and many of the Defendants, and the insufficient allegations that additional minutes, such as meal breaks, were “compensable” as a matter of law.

III

A gap-time claim is one in which an employee has not worked 40 hours in a given week but seeks recovery of unpaid time worked, or in which an employee has worked over 40 hours in a given week but seeks recovery for unpaid work under 40 hours. An employee who has not worked overtime has no claim under FLSA for hours worked below the 40-hour overtime threshold, unless the average hourly wage falls below the federal minimum wage. See United States v. Klinghoffer Bros. Realty Corp., 285 F.2d 487, 494 (2d Cir. 1960) (denying petitions for rehearing); Monahan v. Cnty. of Chesterfield, 95 F.3d 1263, 1280 (4th Cir. 1996) (“Logically, in pay periods without overtime, there can be no violation of section 207 which regulates overtime payment.”).

Notwithstanding that Plaintiffs have failed to sufficiently allege any week in which they worked uncompensated time in excess of 40 hours, Plaintiffs invoke FLSA to seek gap-time wages for weeks in which they claim to have worked over 40 hours. The viability of such a claim has not yet been settled in this Circuit, but we now hold that FLSA does not provide for a gap-time claim even when an employee has worked overtime.

As the district court explained, the text of FLSA requires only payment of minimum wages and overtime wages. See 29 U.S.C. §§ 201-19. It simply does not consider or afford a recovery for gap-time hours. Our reasoning in Klinghoffer confirms this view: “[T]he agreement to work certain additional hours for nothing was in essence an agreement to accept a reduction in pay. So long as the reduced rate still exceeds [the minimum wage], an agreement to accept reduced pay is valid. . . .” 285 F.2d at 494. Plaintiffs here have not alleged that they were paid below minimum wage.

So long as an employee is being paid the minimum wage or more, FLSA does not provide recourse for unpaid hours below the 40-hour threshold, even if the employee also works overtime hours the same week. See id. In this way federal law supplements the hourly employment arrangement with features that may not be guaranteed by state laws, without creating a federal remedy for all wage disputes—of which the garden variety would be for payment of hours worked in a 40-hour work week. For such claims there seems to be no lack of a state remedy, including a basic contract action. See, e.g., Point IV (discussing the New York Labor Law).

As the district court observed, some courts may allow such claims to a limited extent. Special App. 13 (citing Monahan, 95 F.3d at 1279, and other cases). Among them is the Fourth Circuit in Monahan, which relied on interpretive guidance provided by the Department of Labor. See 29 C.F.R. §§ 778.315, .317, .322. “Unlike regulations,” however, “interpretations are not binding and do not have the force of law.” Freeman v. Nat’l Broad. Co., 80 F.3d 78, 83 (2d Cir. 1996) (analyzing deference owed to Department of Labor interpretation of FLSA). “Thus, although they are entitled to some deference, the weight accorded a particular interpretation under the FLSA depends upon `the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.'” Id. (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)).

The interpretive guidance on which Monahan relied, insofar as it might be read to recognize gap-time claims under FLSA, is owed deference only to the extent it is persuasive: it is not.[8]

Section 778.315 of the guidance, which considers the FLSA requirement for time-and-a-half pay, offers the following clarification: “This extra compensation for the excess hours of overtime work under the Act cannot be said to have been paid to an employee unless all the straight time compensation due him for the nonovertime hours under his contract (express or implied) . . . has been paid.” 29 C.F.R. § 778.315. This interpretation suggests that an employer could violate FLSA by failing to compensate an employee for gap time worked when the employee also works overtime; but the Department of Labor provides no statutory support or reasoned explanation for this interpretation.[9]

The Department of Labor adds, also without explanation, that “[a]n agreement not to compensate employees for certain nonovertime hours stands on no better footing since it would have the same effect of diminishing the employee’s total overtime compensation.” 29 C.F.R. § 778.317. This guidance seems to rely on nothing more than other (unreasoned) guidance, and directly conflicts with Klinghoffer, which ruled that such an agreement would not violate the limited protections of the FLSA. 285 F.2d at 494.

Accordingly, we therefore affirm the dismissal of Plaintiffs’ FLSA gap-time claims.[10]

IV

The claims under the NYLL were dismissed with prejudice. Plaintiffs argue that the district court lacked jurisdiction to dismiss Plaintiffs’ NYLL claims because it declined to exercise supplemental jurisdiction once it dismissed the federal claims.

In the welter of amended complaints, motions to dismiss, and orders that rule and clarify, the record is somewhat confusing on this point. The state law claims were considered generally in the February 2012 order, in which the district court “decline[d] to exercise supplemental jurisdiction over Plaintiff’s state law claims,” thereby dismissing them without prejudice. Special App. 69. But at the same time, the district court stated that Plaintiffs’ FLSA and NYLL claims are examined under the same legal standards, and that the analysis dismissing Plaintiffs’ FLSA claims “applies with equal force to Plaintiffs’ NYLL claims.” Id. at 47 n.4; see also id. at 61 n.8. In response to Plaintiffs’ motion for partial reconsideration and clarification, the March 2012 order explained that the “NYLL claims against these Defendants were dismissed WITH PREJUDICE.” Id. at 76.

The exercise of supplemental jurisdiction is within the sound discretion of the district court. See Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 349-50 (1988). Courts “consider and weigh in each case, and at every stage of the litigation, the values of judicial economy, convenience, fairness, and comity in order to decide whether to exercise” supplemental jurisdiction. Id. at 350. Once all federal claims have been dismissed, the balance of factors will “usual[ly]” point toward a declination. Id. at 350 n.7.

“We review the district court’s decision for abuse of discretion, and depending on the precise circumstances of a case, have variously approved and disapproved the exercise of supplemental jurisdiction where all federal-law claims have been dismissed.” Kolari v. N.Y.-Presbyterian Hosp., 455 F.3d 118, 122 (2d Cir. 2006) (internal citations omitted). The dismissal of state law claims has been upheld after dismissal of the federal claims, particularly where the state law claim implicated federal interests such as preemption, or where the dismissal of the federal claims was late in the litigation, or where the state law claims involved only settled principles rather than novel issues. Valencia ex rel. Franco v. Lee, 316 F.3d 299, 305-06 (2d Cir. 2003). And we have upheld the exercise of supplemental jurisdiction in situations when as here the “state law claims are analytically identical” to federal claims. Benn v. City of New York, 482 F. App’x 637, 639 (2d Cir. 2012); see also Petrosino v. Bell Atl., 385 F.3d 210, 220 n.11 (2d Cir. 2004).

In dismissing the NYLL claims with prejudice, the district court relied on the fact that the same standard applied to the FLSA and NYLL claims. That exercise of supplemental jurisdiction was entirely consistent with this Court’s precedent.[11] Reviewing the district court’s determination for an abuse of discretion, we largely affirm the district court’s dismissal of the NYLL claims with prejudice.

However, Plaintiffs point out that the district court order was arguably inconsistent in dismissing Plaintiffs’ NYLL claims with prejudice notwithstanding its observation that Plaintiffs may have a valid gap-time claim under NYLL.

According to the district court: “the NYLL does recognize Gap Time Claims and provides for full recovery of all unpaid straight-time wages owed.” Special App. 61 n.9 (internal quotations and citations omitted). “Thus, to the extent that the . . . Plaintiffs have adequately pled that they worked compensable time for which they were not properly paid, Plaintiffs have a statutory right under the NYLL to recover straight-time wages for those hours.” Id. This observation appears consistent with NYLL, which provides that “[i]f any employee is paid by his or her employer less than the wage to which he or she is entitled . . . he or she shall recover in a civil action the amount of any such underpayments . . . .” NYLL § 663(1) (emphasis added).

We express no view as to the merits of NYLL gap-time claims, or as to the adequacy of Plaintiffs’ pleading. But because New York law may recognize Plaintiffs’ NYLL gap-time claims, the district court erred in dismissing them with prejudice based solely on its dismissal of Plaintiffs’ FLSA claims. We therefore affirm the dismissal of Plaintiffs’ NYLL overtime claims, but vacate the dismissal of Plaintiffs’ NYLL gap-time claims and remand for further consideration in that narrow respect.

V

Finally, Plaintiffs challenge the dismissal of their RICO claims, which alleged that CHS used the mails to defraud Plaintiffs by sending them their payroll checks. The district court dismissed the RICO claims, holding that Plaintiffs had not alleged any pattern of racketeering activity.

To establish a civil RICO claim, a plaintiff must allege “(1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity,” as well as “injury to business or property as a result of the RICO violation.” Anatian v. Coutts Bank (Switz.) Ltd., 193 F.3d 85, 88 (2d Cir. 1999) (internal quotation marks omitted). The pattern of racketeering activity must consist of two or more predicate acts of racketeering. 18 U.S.C. § 1961(5).

The Third Amended Complaint cites the mailing of “misleading payroll checks” to show mail fraud as a RICO predicate act, J.A. 1779, on the theory that the mailings “deliberately concealed from its employees that they did not receive compensation for all compensable work that they performed and misled them into believing that they were being paid properly.” Id. at 1764-65; see also id. at 1765-67 (describing the mailing of checks).[12]

“To prove a violation of the mail fraud statute, plaintiffs must establish the existence of a fraudulent scheme and a mailing in furtherance of the scheme.” McLaughlin v. Anderson, 962 F.2d 187, 190-91 (2d Cir. 1992). On a motion to dismiss a RICO claim, Plaintiffs’ allegations must also satisfy the requirement that, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b); see McLaughlin, 962 F.2d at 191. So Plaintiffs must plead the alleged mail fraud with particularity, and establish that the mailings were in furtherance of a fraudulent scheme. Id. Plaintiffs’ allegations fail on both accounts.

As to particularity, the “complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements.” Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Plaintiffs here have not alleged what any particular Defendant did to advance the RICO scheme. Nor have they otherwise pled particular details regarding the alleged fraudulent mailings. Bare-bones allegations do not satisfy Rule 9(b).

Almost more fundamentally, Plaintiffs have not established that the mailings were “in furtherance” of any fraudulent scheme. As the district court observed, the mailing of pay stubs cannot further the fraudulent scheme because the pay stubs would have revealed (not concealed) that Plaintiffs were not being paid for all of their alleged compensable overtime. See Special App. 16-17. Mailings that thus “increase[] the probability that [the mailer] would be detected and apprehended” do not constitute mail fraud. United States v. Maze, 414 U.S. 395, 403 (1974); see also Cavallaro v. UMass Mem’l Health Care Inc., No. 09-40152, 2010 WL 3609535, at *3 (D. Mass. July 2, 2010) (examining very similar claim of mail fraud based on paychecks and ruling that the mailings “made the scheme’s discovery more likely”). We therefore affirm the dismissal of Plaintiffs’ RICO claims.

CONCLUSION

For the foregoing reasons, we affirm the dismissal of Plaintiffs’ claims under FLSA, their NYLL overtime claims, and their RICO claims, but we vacate the dismissal with prejudice of Plaintiffs’ gap-time claims under the NYLL, and remand for further consideration in that limited respect.

[*] The Honorable Sandra Day O’Connor, Associate Justice (retired) of the United States Supreme Court, sitting by designation.

[1] The complicated facts and procedural history of this case are recounted in detail in five orders issued by the district court. See Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. Dec. 30, 2010) (Special App. 1-19); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. May 5, 2011) (Special App. 20-32); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. May 24, 2011) (Special App. 33-37); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. Feb. 16, 2012) (Special App. 38-74); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. Mar. 12, 2012) (Special App. 75-77). We recount only those that bear on the resolution of this appeal.

[2] See Yarus v. N.Y.C. Health & Hosps. Corp., No. 11-710; Megginson v. Westchester Cnty. Health Care Corp., No. 11-713; Megginson v. Westchester Med. Ctr., No. 12-4084; Alamu v. Bronx-Lebanon Hosp. Ctr., No. 11-728; Alamu v. Bronx-Lebanon Hosp. Ctr., No. 12-4085; Nakahata v. N.Y.-Presbyterian HealthCare Sys., No. 11-734; Nakahata v. N.Y. Presbyterian HealthCare Sys., No. 12-4128; Hinterberger v. Catholic Health Sys., No. 12-630; Hinterberger v. Catholic Health Sys., No. 12-918; Gordon v. Kaleida Health, No. 12-654; Gordon v. Kaleida Health, No. 12-670; Lundy v. Catholic Health Sys. of Long Island Inc., No. 12-1453.

[3] In addition to FLSA’s overtime provisions, Section 206 of FLSA requires that employers pay a minimum wage. Plaintiffs have not brought minimum wage claims in this case.

[4] Since Plaintiffs were not subject to a collective bargaining agreement while they were employed by CHS, the Labor Management Relations Act is not at issue in this case.

[5] The court also rejected arguments that all of the named defendants operated as a single enterprise, or that they were all liable under theories of agency and alter-ego. Even though the district court dismissed the FLSA claims against CHS, we use the term “CHS” in this opinion to refer to Defendants generally.

[6] In its entirety, Section 207(a)(1) provides:

Except as otherwise provided in this section, no employer shall employ any of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.

Id.

[7] Under a case-specific approach, some courts may find that an approximation of overtime hours worked may help draw a plaintiff’s claim closer to plausibility.

[8] The district court identified deficiencies in the Fourth Circuit’s view and expressed “serious concerns” about allowing gap-time claims under FLSA. Special App. 15. One judge within the Fourth Circuit has acknowledged the force of the competing view:

While I follow the direction of Monahan and the Department of Labor regulations in this opinion, I note that one could, in the alternative, take the approach that compensation for FLSA overtime hours is the sole recovery available under the FLSA maximum hour provision. This approach would leave the contractual interpretation and determination of straight time compensation to state courts, which are better positioned to address these issues.

Koelker v. Mayor & City Council of Cumberland, 599 F. Supp. 2d 624, 635 n.11 (D. Md. 2009) (Motz, J.) (emphasis in original).

[9] Section 778.322 appears to merely build from this flawed interpretation: “[O]vertime compensation cannot be said to have been paid until all straight time compensation due the employee under the statute or his employment contract has been paid.” 29 C.F.R. § 778.322. Again, the Department of Labor’s interpretation is not grounded in the statute and provides no reasoned explanation for this conclusion.

[10] Even if we were to assume that an employee who has worked overtime may also seek gap-time pay under FLSA, such a claim would not be viable if the employment agreement provided that the employee would be compensated for all non-overtime hours worked. See Monahan, 95 F.3d at 1272. Here, Plaintiffs allege “binding, express oral contracts” that include an “explicit promise to compensate Plaintiffs and Class Members for `all hours worked.'” J.A. 1819. Of course in that event a contractual remedy may be available; but the district court dismissed the breach of contract claims and Plaintiffs have not appealed on that ground.

[11] In any event, the district court’s dismissal of Plaintiffs’ NYLL claims was proper under the Cohill factors: judicial economy, convenience, fairness, and comity. See 484 U.S. at 350. Judicial economy and convenience are served by dismissing Plaintiffs’ NYLL claims with prejudice. And considering that Plaintiffs amended their complaint at least four times with express guidance from the district court, they cannot argue now that it is unfair to dismiss their inadequately pleaded NYLL claims.

[12] Federal courts are properly wary of transforming any civil FLSA violation into a RICO case. See, e.g., Vandermark v. City of New York, 615 F. Supp. 2d 196, 209-10 (S.D.N.Y. 2009) (Scheindlin, J.) (“Racketeering is far more than simple illegality. Alleged civil violations of the FLSA do not amount to racketeering.”).