Opinion
Civil No. 03-1220 (JBS).
April 22, 2004
Robert J. Reilly, III, Esq., James G. O'Neill, Esq., FITZPATRICK, REILLY, SUPPLE GAUL, New Providence, NJ, Attorney for Plaintiffs.
Paul W. Verner, Esq., VERNER SIMON, P.C., Maplewood, NJ, Attorney for Defendants UJEX, Inc.; UJEX Enterprises, Inc.; Justin M. Sciarra; AJAX, Inc.; AJAX Enterprises, Inc.; AJEX, Inc.; Paul Brown Agency; Paul Brown; and Homestead Assurance Brokerage.
Robert M. Smolen, Esq., SWARTZ, CAMPBELL DETWEILER, ESQS., Mt. Laurel, NJ, Attorney for Defendants Staff America, Inc.; Paul Hopkins; and America's PEO Marine Managers.
M. Karen Thompson, Esq., NORRIS, McLAUGHLIN MARCUS, Somerville, NJ, Attorney for Defendant World Wide Labor Support, Inc.
OPINION
This matter comes before the Court upon the motion of Defendants UJEX, Inc., UJEX Enterprises, Inc., Justin M. Sciarra, AJAX, Inc., AJAX Enterprises, Inc., AJEX, Inc., Paul Brown Agency, Paul Brown and Homestead Assurance Brokerage to dismiss and to stay discovery pending resolution of this motion. In addition, Defendant World Wide Labor Support, Inc. has made a cross-motion to dismiss as have Defendants Paul Hopkins and Staff America, Inc./America's PEO Marine Managers. For the reasons discussed herein, this Court holds that Plaintiffs should be permitted leave to file an Amended Complaint within thirty (30) days to clarify the specifics of their allegations. Therefore, the Court will deny Defendants' motions to dismiss.
BACKGROUND
The PartiesPlaintiffs initiated this case by Complaint dated March 12, 2003, which alleges that the moving Defendants conspired to defraud Granite State in connection with the procurement of workers compensation insurance policies at significantly discounted premiums. Plaintiff Granite State Insurance Company is a servicing carrier of the New Jersey and Pennsylvania Compensation Rating and Inspection Bureaus ("CRIBs"). As such, it is under contract with the CRIBs. This action involves two workers compensation policies of insurance, issued in the Residual Market for workers compensation in the state of New Jersey and Pennsylvania pursuant to the New Jersey and Pennsylvania statutes governing the CRIBs and the Workers' Compensation Plan Manuals issued by the CRIBs in those states pursuant to those statutes.
The New Jersey Compensation Rating and Inspection Bureau (NJCRIB), for example, is created and established pursuant to the provisions of N.J.S.A. 34:15-89. It is under the supervision of the Commissioner of Insurance. NJCRIB is charged by statute to: (1) establish and maintain rules, regulations and premium rates for workers compensation and employers liability insurance; (2) adopt means for assuring uniform and accurate audit of payrolls as they relate to workers compensation insurance; (3) encourage employers to reduce the number and severity of accidents by adjusting premiums through the use of credits and debits under a uniform system of experience rating.
Specifically, the NJCRIB is directed by N.J.S.A. 34:15-89 to "adopt means for assuring uniform and accurate audit of payrolls as they relate to policies of workmen's compensation and employer's liability insurance by auditors, appointed by the bureau, with the approval of the said commissioner or by such other means as the bureau may, with the approval of the Commissioner of Banking and Insurance, establish." N.J.S.A. 34:15-89.
Plaintiff AIG Claims Services, Inc. is the premium auditing and claims adjustment servicing company employed of contract with Granite State Insurance Company. Plaintiffs' Complaint alleges that Justin M. Sciarra, UJEX, Inc., UJEX Enterprises, Inc., AJAX, Inc., AJAX Enterprises, AJEX, Inc., and Staff America, Inc. ("Sciara Defendants") conspired with other Defendants, by contracting with the "Employer Defendants" (see below) to devise an artifice and scheme to defraud Plaintiffs by "allegedly establishing an employee lease arrangement." Compl. ¶¶ 19-34, 88. The Complaint also alleges that several individuals and corporations procured workers compensation insurance policies from Granite State at significantly discounted rates. Compl. ¶ 99. These Defendants include Paul Brown Agency, Paul Brown, Homestead Assurance Brokerage, Paul Hopkins, and America's PEO Marine Managers ("Producer Defendants"). The Complaint alleges in two paragraphs that these Defendants conspired with the other Defendants (collectively, "RICO Defendants") to devise an artifice and scheme to defraud Plaintiffs through the creation of several employment leasing companies which were falsely posed as the employers. Compl. ¶¶ 88, 99.
Defendants contend in their brief that UJEX Enterprises, Inc. and UJEX, Inc. are one in the same, namely UJEX Enterprises, Inc., a Delaware Corporation. Defendants further contend that AJAX, Inc. does not and has never existed. AJEX, Inc. likewise, it is offered, does not and has never existed although there is alleged to be a company known as AJEX Enterprises, Inc. Defendants also claim no knowledge of the Paul Brown Agency, although there is an entity known as Paul J. Brown t/a Homestead Assurance Brokerage. See Sciarra Defendants Brief, p. 1, n. 1.
The Complaint also alleges that a number of Defendants ("Employer Defendants") entered into an artifice and scheme to defraud Plaintiffs by "allegedly establishing an employee lease agreement" with UJEX. Compl. ¶¶ 19-34, 88. The Complaint asserts that all the Employer Defendants, Producer Defendants, and Sciarra Defendants conspired among and with each other (thereby collectively, the "RICO Defendants"), to devise an artifice and scheme to defraud Plaintiff through the creation of several "sham" employment leasing companies which were falsely posed as the employers. Compl. ¶¶ 19-34, 88.
The Complaint further alleges that a number of individuals, who were employees of the Employer Defendants, submitted workers compensation claims to Plaintiff under the Workers' Compensation Policies ("Employee Defendants"). Compl. ¶ 38-62.
The Alleged Conspiracy
The Complaint alleges that Justin Sciarra, doing business as UJEX, misrepresented to Granite State Insurance Company certain material facts concerning the nature of the insured and the amount of the payroll which allowed him to obtain one workers compensation insurance policy in 2000 and 2001, which policy was allegedly procured through the "Paul Brown Agency and/or Homestead Assurance Brokerage." Compl. ¶¶ 63-87.
Specifically, the Complaint alleges that, for this workers compensation policy (#8541147, subsequently renewed as #8549943), Sciarra misrepresented to Granite State that UJEX was a "window washing company" and that "estimated premiums were set forth as $10,000." Compl. ¶¶ 65-66. Upon renewal, according to the Complaint, Sciarra added Pile Drivers and Clericals with an estimated premium of $40,800. Compl. ¶ 68.
A second policy, a Longshoreman and Harbor Workers cover, was applied for by Producer America's PEO Marine Managers, and premiums were estimated on application at $200,000. Compl. ¶ 73. No further information is pled regarding the audit of this policy.
On audit of the first policy, conducted on October 26, 2001 for the initial policy period August 17, 2000 through August 17, 2001, payrolls were established at $1,144,028 and premium $173,564.00. Compl. ¶ 76. Moreover, Plaintiffs allege that the audit disclosed that UJEX was discovered to be a "temp" agency rather than a "window cleaning business." Id.
Plaintiffs further assert that three additional premium audits, covering both the renewal policy and the Longshoremans' policy, revealed that additional premiums were due from UJEX. Compl. ¶ 78. No specific facts in the Complaint demonstrate any material misrepresentation of fact made by the insured nor any damages accruing to Plaintiffs.
Paragraphs 87-99 of the Complaint attempt to allege specific facts pertaining to the Plaintiffs' conclusory statements that the Defendants were engaged in an "artifice to defraud" under RICO. Plaintiffs assert that previous direct employment by the Employer Defendants of the Employee Defendants was terminated and that the Sciarra Defendants took on the employees on paper only. Plaintiffs assert that this was a "sham" designed to "conceal the true employer" (Compl. ¶ 90), which misrepresented the actual risks involved (Compl. ¶ 92) and avoided payment of renewal premiums by the Employer Defendants (Comp. ¶ 97).
Plaintiffs allege that the insured would obtain an experience modification rating of 1.0 neutral thereby generating lower premiums and that policies were in place before payrolls were actually able of being estimated as the contracts between UJEX and the Employer Defendants were entered into after the policy was in full force and effect. Compl. ¶¶ 95-96.
The Complaint contains twelve counts — Count I: declaratory judgment voiding the policies ab initio; Counts II-V: Federal Civil RICO and its New Jersey State Law equivalent as promulgated by 2C:41-1 et seq. (against RICO Defendants), Counts VI-VII: Common Law Fraud (against RICO Defendants) and Conspiracy to Commit Common Law Fraud (against all Defendants); Count VIII: Negligent Misrepresentation (against all Defendants); Count IX: Conversion (against all Defendants); Count X: Breach of Fiduciary Duty (against Producer Defendants); Count XI: Breach of Contract (against Sciarra Defendants); and Count XII: John Doe Counts.
On November 3, 2003, the Sciarra Defendants filed the present motion to dismiss and to stay discovery pending the disposition of this motion. By way of cross-motions filed by Defendant World Wide Labor Support, Inc. as well as by Defendants Paul Hopkins and Staff America, Inc./America's PEO Marine Manager, on November 3, 2003 and November 20, 2003 respectively, those Defendants join in the Sciarra Defendants' motion to dismiss.
DISCUSSION
Standard of Review for Motion to Dismiss
A Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted must be denied "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). A district court must accept any and all reasonable inferences derived from those facts. Unger v. Nat'l Residents Corp. v. Exxon Co., U.S.A., 761 F. Supp. 1100, 1107 (D.N.J. 1991); Gutman v. Howard Sav. Bank, 748 F. Supp. 254, 260 (D.N.J. 1990). Further, the court must view all allegations in the Complaint in the light most favorable to the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Jordan v. Fox, Rothschild, O'Brien Frankel, 20 F.3d 1250, 1261 (3d Cir. 1994).
It is not necessary for the plaintiff to plead evidence, and it is not necessary to plead the facts that serve as the basis for the claim. Bogosian v. Gulf Oil Corp., 561 F.2d 434, 446 (3d Cir. 1977); In re Midlantic Corp. Shareholder Litigation, 758 F. Supp. 226, 230 (D.N.J. 1990). The question before the court is not whether plaintiffs will ultimately prevail; rather, it is whether they can prove any set of facts in support of their claims that would entitle them to relief. Hishon v. King Spalding, 467 U.S. 69, 73 (1984). Therefore, in deciding a motion to dismiss, a court should look to the face of the complaint and decide whether, taking all of the allegations of fact as true and construing them in a light most favorable to the nonmovant, plaintiff's allegations state a legal claim.Markowitz, 906 F.2d at 103. Only the allegations in the complaint, matters of public record, orders, and exhibits attached to the complaint matter, are taken into consideration.Chester County Intermediate Unit v. Pennsylvania Blue Shield, 896 F.2d 808, 812 (3d Cir. 1990).
The Federal RICO Claims
Counts II through V of the Complaint allege that the RICO Defendants violated the civil RICO statute, 18 U.S.C. §§ 1962(c) and (d), by "conducting or participating directly in the conduct of a racketeering enterprise through a pattern of racketeering activities, which included, but was not limited to mail and wire fraud." Compl. ¶ 107. Defendants contend that these claims should be dismissed with prejudice as not one specific predicate act of mail or wire fraud has been alleged in the Complaint.
Furthermore, the predicate acts that are alleged are purportedly related to the "obtaining of workers compensation policies at discounted prices." The Complaint, however, admits that these applications were sent only twice: once on August 17, 2000 and once on August 17, 2001.
Plaintiffs do not allege specific instances of use of the U.S. Mail or wire.
Section 1962(c) provides in pertinent part that:
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 of collection of unlawful debt.18 U.S.C. § 1962(c).
In order to assert a RICO claim under 18 U.S.C. § 1962(c) and (d), a plaintiff must allege (1) the conducting of (or conspiracy to conduct), (2) an enterprise, (3) that affects interstate or foreign commerce, (4) through a pattern, (5) of racketeering activity. See, Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479 (1985). Defendants argue that nothing in the Complaint can be read to sufficiently allege a pattern of racketeering activity which is "continuous." See Hindes v. Castle, 937 F.2d 868, 872 (3d Cir. 1991) (to be considered a pattern, predicate criminal acts must (1) be related, and (2) establish, or pose a threat of, continuing activity) (citation omitted). Defendants point to the fact that only two policies of insurance are involved (renewal of a policy is a continuation of the same policy) and each of these policies has long since expired (on August 17, 2002).
Continuity may be determined by showing either an open or closed-ended period of predicate acts or offenses. See, H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 241 (1989). Continuity refers to "a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." Id.
Although there is no definitive length of time for establishing a closed-ended period, the Third Circuit has noted that "conduct lasting no more than twelve months did not meet the standard for closed-ended continuity." See, Tabas v. Tabas, 47 F.3d 1280, 1293 (3d Cir. 1995).
Defendants argue that the Complaint fails to allege "closed-ended" continuity because it describes only two isolated occurrences of misrepresentation/fraud, namely, the submission of two allegedly fraudulent insurance applications, separated by a twelve-month period, which is too short in duration to establish "close-ended" continuity. Defendants also correctly point out that the Complaint does not set forth whether these two applications for insurance were mailed or wired. Plaintiffs respond that the alleged scheme is not a single scheme directed at a single victim. Instead, the alleged scheme has ramifications for the workers compensation systems of New Jersey, Pennsylvania, and the federal government, and on any number of employer and employee defendants.
Defendants also argue that Plaintiffs have failed to allege "open-ended" continuity. An open-ended scheme requires that the alleged activity pose a "threat of additional repeated criminal conduct over a significant period." H.J. Inc., 492 U.S. 229 (1989). Thus, where the alleged scheme has a single objective that has already been attained, an open-ended scheme cannot be established. See, e.g., Hughes v. Consol-Pennsylvania Coal, Co., 945 F.2d 594, 610-11 (3d Cir. 1991) (holding that plaintiffs failed to establish open-ended continuity where defendants had obtained the property that they had sought and posed no future threat to plaintiffs), cert. denied, 504 U.S. 955 (1992).
Defendants assert that the Complaint does not allege that the purported conspiracy will extend beyond the period in which the predicate acts were committed. The Complaint does not refer to any conspiracy-related events taking place subsequent to August 2001, and thus explicitly concedes that the scheme involving Granite State has been concluded — the obtaining of premiums at discounted prices. Plaintiffs counter, however, that the scheme began with the UJEX application in August of 2000 and the threat of continued criminal conduct is supported by the fact that claims for workers compensation benefits under Defendants' fraudulent scheme can be made up through the time period ending in August of 2004.
In addition, Defendants argue that Plaintiffs' RICO claims should be dismissed for failure to plead with particularity. Plaintiff relies upon general allegations of mail and wire fraud in asserting its RICO claims. A plaintiff relying upon such allegations must plead fraud with particularity under Rule 9(b) of the Fed.R.Civ.P. "Where plaintiffs allege mail and wire fraud as the basis of a RICO violation, the allegations of fraud must comport with the Fed.R.Civ.P. 9(b) heightened pleading standard." Saporito v. Combustion Engineering, Inc., 843 F.2d 666, 673 (3d Cir. 1988), vacated on other grounds, 489 U.S. 1049 (1989). To plead mail or wire fraud with sufficient particularity, Plaintiffs must "plead with particularity the `circumstances' of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior." Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984), cert. denied, 469 U.S. 1211 (1985). To satisfy the pleading requirement, plaintiffs may plead the specific conduct alleged to be fraudulent along with the "date, place and time" that the alleged fraud occurred or use some "alternative means of injecting precision and some measure of substantiation into their allegations of fraud." Id. Vague or conclusory allegations of fraud will not survive a motion to dismiss. In re Burlington Coat Factor Sec. Litig., 114 F.3d 1410, 1418 (3d Cir. 1997). Defendants argue that the Complaint should be dismissed because it makes improper conclusory allegations without stating the particulars of the alleged fraud.
Finally, Defendants argue that the RICO conspiracy claim brought under 18 U.S.C. § 1962(d) should be dismissed because Plaintiffs have failed to allege a legally cognizable claim under § 1962(c). It is well-settled that where a substantive RICO claim fails, a claim alleging a conspiracy to violate RICO must also fail. Lighting Lube Inc. v. Witco Corp., 4 F.3d 1152, 1191 (3d Cir. 1993) (dismissing conspiracy claim because substantive claims of violation of RICO sections 1962(a), (b), and (c) were dismissed). Moreover, Defendants contend, Plaintiffs have not alleged sufficient facts to demonstrate that there was a conspiracy and that each Defendant participated in such a conspiracy.
Plaintiffs argue that they have stated claims for relief, making allegations with the appropriate amount of specificity where required, but seek leave to amend their Complaint if the Court finds it necessary, so that they can specifically plead RICO injury, damages, or any other element necessary to sustain their claims for relief.
This Court finds that leave for such amendment is appropriate here regarding the RICO claims. When a defendant has filed a responsive pleading, as Defendants have done here, the plaintiff may amend his complaint, provided he obtains "leave of court" or "written consent of the adverse party." Fed.R.Civ.P. 15(a). Leave of court is to be "freely given when justice so requires." Id. Leave to amend is thus in the discretion of the district court, Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321 (1971), and will only be overturned for abuse of that discretion. Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 654 (3d Cir. 1998). Leave should be freely given "in the absence of any apparent or declared reason such as undue delay, bad faith . . ., repeated failure to cure deficiencies . . ., undue prejudice to the opposing party . . ., [or] futility of amendment." Foman v. Davis, 371 U.S. 178 (1962). See also Arab African International Bank v. Epstein, 10 F.3d 168 (3d Cir. 1993). The Third Circuit has established this liberal standard for amendment so that particular claims will be decided on their merits rather than dismissed because of technicalities.Dole v. Arco Chem. Co., 921 F.2d 484, 486-87 (3d Cir. 1990).
Here, the Court finds that it is appropriate to provide Plaintiffs leave to amend their Complaint. The allegations in Plaintiffs' Complaint are indeed, at times, bordering on cryptic and require a great deal more by way of specificity; conclusory generalities simply will not suffice. The Court will therefore provide Plaintiffs one final opportunity to clarify their Complaint to clearly state their RICO claims. The Court will also require that Plaintiffs complete a RICO case statement, in accordance with Local Rule 16.1(b) and Appendix O to ensure that Plaintiffs set forth in detail all the required elements of their RICO claims. Plaintiffs' counsel is advised to review the relevant facts and law before reasserting any RICO claim, and to abandon such claims as cannot be sustained under Rule 11, Fed.R.Civ.P., which requires counsel's belief "formed after an inquiry reasonable under the circumstances," that the "claims . . . therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law . . ." and that the "allegations and other factual contentions have evidentiary support of, if specifically so identifies, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery. . . ." Rule 11(b)(2) (3), Fed.R.Civ.P.
The Court will also refrain from determining the viability of Plaintiffs' state law claims at this time, as Plaintiffs may also amend their Complaint, if they choose, regarding those state law claims. The Court notes that the Defendants presently argue for the dismissal of those claims on the ground that the only jurisdictional predicates for asserting jurisdiction over those claims are the alleged legally insufficient RICO claims in the current Complaint.
Breach of Fiduciary Duty and Conversion Claims
Defendants argue that Plaintiffs' breach of fiduciary duty (Count X) and conversion (Count IX) claims cannot presently stand, as they are deficient as a matter of law. Plaintiffs agree that there is insufficient evidence to sustain and the record does not presently support the bringing of these claims. Therefore, Plaintiffs consent and this Court will voluntarily dismiss both claims without prejudice.
Defendants' Request to Stay Discovery
Defendants request that discovery be stayed as the present Complaint is so flawed and unclear that it would be grossly unfair to force Defendants to participate in the discovery process at this time. Under Fed.R.Civ.P. 26(c), this Court has discretion to stay discovery "for good cause shown." Here, good cause exists for staying discovery until that time as Plaintiffs file an Amended Complaint that cures the defects from which the present pleading suffers. This Court will therefore grant Defendants' motion for a stay of discovery, but that stay will expire on the date Plaintiffs file their Amended Complaint and RICO cast statement.
CONCLUSION
For the reasons explained herein, the Court will deny Defendants' motions to dismiss and will grant Plaintiffs leave to amend their Complaint by filing and serving an Amended Complaint consistent with this Opinion within thirty (30) days which alleges their claims with greater specificity. The Court will also require Plaintiffs to file and serve a RICO case statement, in accordance with Local Civil Rule 16.1(b) and Appendix O, within thirty (30) days.
The accompanying Order is entered.
ORDER
This matter having come before the Court upon the motion to dismiss filed by Defendants UJEX, Inc., UJEX Enterprises, Inc., Justin M. Sciarra, AJAX, Inc., AJAX Enterprises, Inc., AJEX, Inc., Paul Brown Agency, Paul Brown and Homestead Assurance Brokerage [Docket Item No. 35-1], World Wide Labor Support, Inc. [Docket Item No. 40-1], and Paul Hopkins and Staff America, Inc./America's PEO Marine Managers [Docket Item No. 44-1], pursuant to Fed.R.Civ.P. 12(b); and the Court having considered the parties' written submissions; for good cause shown; and for the reasons expressed in the Opinion of today's date;IT IS this 22nd day of April, 2004 hereby
ORDERED that Plaintiffs' breach of fiduciary duty and conversion claims brought in Counts IX and X of the Complaint be, and hereby are, VOLUNTARILY DISMISSED WITHOUT PREJUDICE ; and
IT IS FURTHER ORDERED that the motions to dismiss filed by Defendants UJEX, Inc., UJEX Enterprises, Inc., Justin M. Sciarra, AJAX, Inc., AJAX Enterprises, Inc., AJEX, Inc., Paul Brown Agency, Paul Brown and Homestead Assurance Brokerage [Docket Item No. 35-1], World Wide Labor Support, Inc. [Docket Item No. 40-1], and Paul Hopkins and Staff America, Inc./America's PEO Marine Managers [Docket Item No. 44-1] be, and hereby are, DENIED ; and
IT IS FURTHER ORDERED that Plaintiffs' request for leave to amend their Complaint to clarify their claims be, and hereby is GRANTED, and Plaintiffs must file and serve their Amended Complaint within thirty (30) days from the date of this Order; and
IT IS FURTHER ORDERED that Plaintiffs file and serve a RICO Case Statement, in accordance with Local Civil Rule 16.1(b) and Appendix O, within thirty (30) days from the date of this Order; and
IT IS FURTHER ORDERED that discovery be stayed pending Plaintiff's filing of an Amended Complaint within thirty (30) days from the date of this Order.