Opinion
1:02-cv-01778-JDT-TAB.
May 18, 2004
ENTRY
This Entry is a matter of public record and is being made available to the public on the court's web site, but it is not intended for commercial publication either electronically or in paper form. Although the ruling or rulings in this Entry will govern the case presently before this court, this court does not consider the discussion in this Entry to be sufficiently novel or instructive to justify commercial publication or the subsequent citation of it in other proceedings.
This matter was removed to this court from the Hancock Circuit Court based upon 28 U.S.C. § 1441 and this court's original jurisdiction over Count III of Plaintiff's Amended Complaint. Count III alleges a violation of 18 U.S.C. § 1961-64, more commonly referred to as the Federal Civil RICO statute, as well as its state law counterpart, Ind. Code § 35-45-6-2. There are two other counts alleged in the Amended Complaint, but this courts jurisdiction rides solely upon the sufficiency of the federal statutory violation alleged in Count III.
The Plaintiff in this case is Boonville Convalescent Center, Inc. ("BCC"), which owns a convalescent center/nursing home ("Facility") located in Warrick County, Indiana. It has sued Sherwood Healthcare Corp. ("Sherwood"), an entity which subleased the Facility and, according to BCC, the alter ego or instrumentality of the four individuals also named as Defendants in this lawsuit. Those individuals are, William Robert Lee, Randy Prock, Tyrrell Garth and Bruce Whitehead. The four individual defendants have appeared and answered or otherwise responded to Plaintiff's Amended Complaint. Sherwood has not appeared and is currently subject to default.
There are numerous dispositive motions which have been filed by the parties. Those motions include: 1) Motion to Dismiss Amended Complaint — filed by Defendants Garth and Whitehead; 2) Defendant Prock's Motion for Summary Judgment; 3) Defendant Lee's Motion for Summary Judgment; and 4) BCC's Motion for Default Judgment Against Sherwood.
Earlier this court posed the question of whether or not the pending bankruptcy of Raintree Healthcare Corporation ("Raintree") had any effect on these proceedings and asked the parties to submit briefs on that issue. Based upon the representations made by the individual Defendants in the Removal Petition, the court assumed that Sherwood was a wholly owned subsidiary of Raintree as a result of its having been absorbed by a predecessor. As it turns out, a series of bankruptcies involving Sherwood and related debtors did little to clarify Sherwood's final status. Though it is uncontested that Sherwood was administratively dissolved as an Indiana corporation shortly after this lawsuit was filed and served, corporate dissolution is no protection against suit. Ind. Code § 23-1-46-2. Further, after reviewing the briefs submitted by the parties and the authority offered therein, the court finds that the automatic stay provisions of 11 U.S.C. § 362 should have no application to the matter at hand Therefore, the court will move forward to address the pending motions.
Because the jurisdiction of this court is tied to the federal RICO claim in Count III of the Amended Complaint, which is brought solely against Sherwood, and because Sherwood has not appeared or filed a response, it is most appropriate for the court to first deal with the Plaintiff's Motion For Default Judgment Against Sherwood. See, United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003). If a default judgment is appropriate or if the claim is insufficient as a matter law, either way, a resolution of the claim upon which jurisdiction is based would leave this court with the discretion to either remand or dismiss the supplemental state law claims. Robles v. City of Fort Wayne, 113 F.3d 732, 738 (7th Cir. 1997).
I. Factual and Procedural Background
BCC leased the Facility to Cloverleaf Healthcare Services, Inc. ("Cloverleaf") and individual shareholders as guarantors in 1986 for a period of twenty years. The Facility was an active enterprise at the time of this lease. The lease was then promptly assigned to a newly created, but related, entity known as Cloverleaf Healthcare of Boonville, Inc. ("Cloverleaf Boonville"). Approximately five years later in February of 1991, the controller of Cloverleaf, Defendant Lee, incorporated Sherwood, a new entity which he registered with the State of Indiana. Lee and his wife were the officers and Lee the sole shareholder of Sherwood. In August of 1991, Sherwood entered into a sublease of the Facility with Cloverleaf Boonville as sub-lessor. Cloverleaf Boonville subleased or leased six other nursing homes it owned or operated (or its affiliates owned or operated) to Sherwood as well. All of these locations were initially managed by Cloverleaf and later by BritWill Investments-Indiana, LP pursuant to written management contracts Sherwood had with each of the entities. On December 24, 1992, all shares of Sherwood were sold by Lee to Defendant Garth. Garth along with Defendant Whitehead are alleged to be agents and, Whitehead, the principal of various "BritWill" entities, including BritWill Indiana partnership, which had the management contract for the Facility with Sherwood. Additional assignments were entered into which transferred the leasehold interests to BritWill Investments-Indiana, LP and then to BritWill Healthcare Company, which later became Raintree.
In November of 1992, Cloverleaf Boonville assigned its rights and interests in the Facility to BritWill Healthcare Co., which then assigned those rights to its subsidiary, BritWill Investments-I, Inc. Subsequently, in 1994, BCC consented to the previously accomplished assignments after obtaining reaffirmation of the personal guaranties of the individual shareholders of Cloverleaf, the entity which had originally entered into the twenty-year lease with BCC.
Sherwood filed for bankruptcy protection under Chapter 11 in May of 1998. In February 2000 Raintree filed for bankruptcy protection. The Trustee in Bankruptcy rejected the lease/sublease of the Facility held by Raintree. When BCC learned of this, it contacted Cloverleaf and demanded that Cloverleaf operate the Facility and pay the remaining lease payments. Cloverleaf refused to do so. Sherwood's bankruptcy was dismissed in August of 2002.
With no lessee in place to run the Facility, the president of BCC and his wife formed Southwind Healthcare, Inc. ("Southwind"), for purposes of temporarily operating the Facility until it could be re-let to an interested third party. BCC claims that when Southwind became the lessee and took control of the Facility, the premises were in a state of disrepair. According to BCC, the actions and inactions of the various lessees, subleases and assigns caused physical damage to the Facility as well as damages to the goodwill of BCC and its ability to attract patients as an ongoing convalescent center/nursing home.
BCC first pursed litigation in state court by pursuing the various lessees, subleases, assigns and guarantors for damages and rent payments under the master lease in Hendricks Superior Court. BCC received a default judgment against Sherwood in connection with that litigation on June 21, 2001, for the amount of $1,005,713.30. Later, the remaining Defendants filed for summary judgment in the Hendricks County litigation. Then, on December 12, 2002, summary judgment was granted in favor of the Defendants by the Hendricks Superior Court. Shortly thereafter, the Hendricks Superior Court vacated the default judgment it had previously entered against Sherwood, stating that the summary judgment in favor of the Defendants had superseded the interlocutory default judgment. It specifically found that Sherwood had no liability to BCC.
Finally, with respect to the Hendricks Superior Court litigation, the Indiana Court of Appeals reversed the summary judgment which had been obtained by the Defendants and remanded the case to the trial court with instructions that it enter judgment for BCC on the issue of liability under the lease and to hold a hearing for a determination of damages. No further activity with respect to the Hendricks County litigation has been brought to this court's attention.
On October 17, 2002, BCC began the litigation at hand by filing its complaint in the Hancock Circuit Court. After the filing of an amended complaint on October 29, 2002, the action was removed to this court. BCC's Amended Complaint seeks to enforce the judgment it obtained against Sherwood through a piercing of the corporate veil to reach the individual-named Defendants. It also seeks to enforce the personal guaranty of Defendant Lee with respect to the lease. The Amended Complaint concludes with a federal and state civil racketeering claim against Defendant Sherwood. As previously indicated, it is the federal RICO claim against Sherwood which provided the jurisdictional basis for the Defendants' removal petition. Therefore the court will first address Plaintiff's request for a default judgment against Sherwood.
II. ANALYSIS
Pursuant to Fed.R.Civ.P. 55, when a defendant fails to plead or otherwise defend itself against the allegations of a plaintiff's claim for relief, the clerk shall enter a default. If a defendant fails to appear, a default judgment may only be entered by the clerk if the claim against that defendant is for a sum certain. Fed.R.Civ.P. 55(b)(1). Otherwise, a plaintiff must apply to the court for entry of a judgment. Fed.R.Civ.P. 55(b)(2). In this case, BCC has asked both the court and clerk for a default judgment. However, despite the affidavit of damages submitted to the clerk by BCC, this case clearly does not involve a sum certain. Consequently, though an entry of default by the clerk is provident, the propriety of a judgment may only be determined by the court.
Upon the receipt of an application for default judgment, the court must exercise sound discretion in determining whether the judgment should be entered. Whitfield v. Illinois Bd. of Law Examiners, 504 F.2d 474, 479 (7th Cir. 1974). While a defendant's failure to appear and respond to the complaint amounts to a concession of all well-pleaded facts other than those related to the amount of unliquidated damages, conclusions of law, such as the sufficiency of the facts to constitute a cause of action, remain for the court to consider. Black v. Lane, 22 F.3d 1395, 1407 (7th Cir. 1994). In essence the court is required to "run the traps" of a Fed R. Civ. P. 12(b)(6) analysis before moving on to an examination of damages.
As might be expected, Sherwood has not suddenly appeared to respond to the request for a default judgment. However, equally predictable, the individual defendants have raised arguments in opposition to the entry of a default judgment, as they fear the same would become the subject of further attempts to collect against them as a part of the equitable veil piercing claims that BCC has pursued in this litigation. Though much of the discussion in their briefs goes to the sufficiency of the Amended Complaint to state a cause of action against Sherwood, the very type of analysis this court must engage in before deciding if a default judgment should be entered, they also raise an issue with a procedural bent.
Citing to Home Insurance Co. of Illinois v. Adco Oil Co., 154 F.3d 739 (7th Cir. 1998), Plaintiff Prock argues that it is inappropriate for a trial court to enter a default judgment against a single defendant in a multiple defendant case. In Home the dispute involved an insurer, an insured and an injured third party. After an alleged act of malpractice on the part of the insured, he filed a bankruptcy petition but never alerted his insurer to the potential malpractice claim. Id. at 740. The insurer brought an adversary proceeding in the bankruptcy case naming the insured debtor and the third party allegedly injured by the malpractice as parties and seeking a declaratory judgment that it was not required to indemnify or defend the insured because of untimely notice. Id. at 740-41. The insured ignored the adversary proceeding and the bankruptcy judge entered a default judgment against him finding that the insurer was not required to defend or indemnify. Id.
After entering the default declaratory judgment, the bankruptcy judge indicated that he questioned whether he had jurisdiction to hear and decide the dispute as between the insurer and the third party. Id. at 741. He encouraged the insurer to dismiss the adversary proceeding and re-file in district court. Id. The insurer did so and the third party obtained summary judgment in his favor from the district court. Id. at 740-41. On appeal, Judge Easterbrook authored the opinion and, referencing Frow v. De La Vega, 82 U.S. 552 (1872), commented that the cause of the inconsistent rulings was the bankruptcy court's inappropriate entry of a default judgment in a multiple party case combined with its failure to resolve the issue as between the plaintiff and the remaining defendant. Id. at 741.
The significant distinction between this case and the facts of Home, is that with regard to Count III of BCC's Amended complaint, the federal RICO claim upon which jurisdiction of this court is founded, there is but a single defendant. Resolution of the RICO claim has no immediate impact on the other defendants. While a default judgment might provide additional fodder for the entirely separate equitable claim for veil piercing, there is no possibility of a conflicting ruling with regard to federal RICO liability. Indeed, courts in this circuit as well as federal procedural scholars have noted that the many changes which have occurred in federal procedural rules since 1872 have left the Frow rule less than all encompassing when there is little or no worry of inconsistent adjudication. In re Uranium Antitrust Litig., 473 F. Supp. 382 (N.D. Ill. 1979), aff'd, 617 F.2d 1248 (7th Cir. 1980); 10A Charles Alan Wright Arthur R. Miller, Federal Practice and Procedure § 2690 (3rd ed. 1998). Therefore, if warranted, the court could enter a default judgment against only Sherwood.
That leaves the court to its remaining responsibility of determining whether or not the factual allegations of the Amended Complaint are sufficient as a matter of law to assert a federal RICO claim against Sherwood. On its face, there are at least two reasons why BCC's RICO count fails. The allegations of fraud fail to meet the requirements of Fed.R.Civ.P. 9(b) and the damages alleged are not causally related to the alleged predicate criminal acts.
BCC's RICO claim is predicated on allegations that Sherwood was created for the illegal and fraudulent purpose of obtaining an increase in the amount of Medicaid reimbursement that could be obtained from the state for the operation of the Boonville facility. BCC claims that Sherwood contracted with "insiders" and related parties, adding an "unnecessary layer" of charges for medical, consulting and management services to the detriment of the state and the patients. In addition, BCC says it was damaged because the proceeds from this activity were diverted to the insiders and related parties as opposed to being used to maintain the facility or improve the healthcare of its patients. In order to establish the "pattern" of criminal activity required in order to allege a federal RICO claim, BCC has alleged "predicate acts" of mail fraud in violation of 18 U.S.C. § 1341. BCC claims the mail fraud involved was the exchange of documents related to the sub-lease of various nursing homes (including BCC) by Cloverleaf to Sherwood and the eventual purchase and/or receipt by assignment of Sherwood's interests by a BrittWill entity. The documents are attached to the Amended Complaint and include an opinion letter from an Indianapolis law firm regarding why the lease arrangement should allow BrittWill to obtain a "step up" in Medicaid rates. The documents at issue are alleged to have been exchanged via the mail between September 1991 and November 1992.
Though the court will not spend time analyzing whether or not the four year statute of limitations applicable to federal RICO claims applies to bar Plaintiffs claim, it should be noted that both the length of time between the last predicate act alleged in November of 1992 along with BCC's ratification of the sub-leases in 1994 make it difficult for the court to believe that the injury alleged by BCC accrued less than four years prior to the filing of its complaint.
BCC makes no effort to explain what is fraudulent about the documents it attaches to its Amended Complaint and by no means do any of the documents appear fraudulent on their face. To the contrary, they appear to be exchanges between individuals and corporations who believe they are constructing a legitimate business deal. It may be that there is some nefarious purpose or goal here, but the documents do not suggest what that might be. And, although BCC alleges that the deal was part of an overall conspiracy to use its facility in an operation to bilk the state and perhaps patients, the Amended Complaint falls far short of the standard required for alleging fraud.
Fed.R.Civ.P. 9(b) requires allegations of fraud or the circumstances constituting fraud must be "stated with particularity." This heightened pleading standard requires a RICO plaintiff to plead all averments of fraud with a degree of specificity not required in general notice pleading. Slaney v. The Int'l Amateur Athletic Fed'n, 244 F.3d 580, 597 (7th Cir. 2001). BCC has failed to specify what representations were made and how they were fraudulent. Further, none of the documents were addressed to BCC and there is nothing to inform the court how, when or where the misrepresentations were made to BCC, let alone an allegation explaining how BCC relied to its detriment on the misrepresentation-whatever it was. Clearly, the Amended Complaint is insufficient in its allegations to sustain a RICO claim premised on mail fraud.
Equally deficient are BCC's allegations of damage. According to BCC its physical facility was left in a state of disrepair with no one to pay the rent after Raintree went into bankruptcy and rejected the lease. How this relates to the conduct of a criminal enterprise, as opposed to being a simple default on lease payments or the breach of a building maintenance lease provision is left for the court to imagine. Indeed, the allegations of the Amended Complaint suggest that BCC would have been satisfied if Sherwood's allegedly ill-gotten gains would have been applied to maintenance of the BCC facility. The only conclusion to be drawn from the allegations is that it wasn't the fraud that actually damaged Plaintiff, it was the decision not to use the money gained from the fraud to pay on Sherwood's lease or maintenance obligations.
If a plaintiff fails to demonstrate a causal nexus between his injury and one or more of the criminal predicate acts, he has no standing to bring an action under 18 U.S.C. § 1964(c). See, Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-97 (1985). For though the RICO statute is to be liberally construed to effectuate its remedial purposes, a defendant is not liable for the act's treble damages to everyone it might have injured by other conduct. Id. at 496-98. In this instance Sherwood's failure to maintain the premises or pay the rent does not arise out of the alleged criminal acts. Accordingly, the RICO claim is deficient.
III. CONCLUSION
BCC is not entitled to a default judgment on its RICO claim against Defendant Sherwood. Its allegations of mail fraud fail to meet the pleading requirements of Fed.R.Civ.P. 9(b). In addition, it has failed to allege damages which stem from the alleged criminal acts. Ergo, the count should be dismissed.
Without the federal RICO claim, BCC is left with an action to enforce a personal guaranty and an equitable claim to pierce the corporate veil of Sherwood in order to collect on an earlier state court judgment. The defendants who have appeared have filed motions attacking those state law claims. However, neither of the remaining claims supports the notion of this court continuing to exercise supplemental jurisdiction. Therefore, in order to avoid potential prejudice to the Plaintiff in attempting to re-file the state law claims, the court will remand this matter rather than address the remaining motions or dismiss the remaining counts. Robles v. City of Fort Wayne, 113 F.3d 732, 738 (7th Cir. 1997).
ALL OF WHICH IS ENTERED.