Opinion
Case Number: 00-CV-10113-BC
January 4, 2002
OPINION AND ORDER ADOPTING IN PART AND REJECTING IN PART MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION AND GRANTING DEFENDANT'S MOTION TO DISMISS
The plaintiff, Roland J. Jersevic, filed a pro se complaint in this Court alleging that the defendant, Scott Kuhl, is a convicted extortionist who, in a failed attempt to coerce money from the plaintiff, damaged the plaintiff's reputation by disclosing embarrassing private facts. Jersevic contends that the revelations were timed to undermine his campaign for re-election to the Michigan Legislature, and to damage his law practice. The complaint states a single count alleging a violation of three sections of the Racketeer Influenced and Corrupt Organizations (RICO) Act, 18 U.S.C. § 1961 et seq.
The defendant moved for dismissal pursuant to Fed.R.Civ.P. 12(b)(6), and the motion was referred by this Court's predecessor to Magistrate Judge Charles B. Binder. Pursuant to the order of reference and 28 U.S.C. § 636(b)(1)(B), Magistrate Judge Binder recommended that the motion be granted for the following reasons: (1) the plaintiff lacks standing under RICO; (2) the plaintiff fails to plead control of an enterprise to racketeering activities; and (3) the plaintiff fails to plead injury to business or property "by reason of" a violation of § 1962(b). The plaintiff filed timely objections to the Report and Recommendation and this Court has conducted its de novo review of the matter. The Court concludes that the plaintiff has standing to bring his action, but that the complaint fails to state a claim under 18 U.S.C. § 1962(a), (b) or (c). Accordingly, the Court will adopt the Report and Recommendation in part and grant the motion to dismiss.
I.
The facts of the case are ably set forth by Magistrate Judge Binder in his Report and Recommendation as follows:
Plaintiff, who is an attorney and appears pro se, initiated this action by the filing of a document entitled, "Complaint Under the Racketeer Influenced and Corrupt Organizations Act" (hereinafter "RICO"). (Dkt. 1.) Plaintiff's First Amended Complaint is similarly captioned. Plaintiff alleges that Defendant participated in a pattern of racketeering activities under 18 U.S.C. § 1962(c), and also alleges that Defendant violated 18 U.S.C. § 1962(a)-(b). ( See First Amended Comp., Dkt. 9 at ¶ 1.) Plaintiff alleges that Defendant conducted an enterprise consisting of association with various individuals, including Christina Hakes and various businesses in which the Defendant was either a proprietor or a full partner, many of which are now bankrupt. These businesses involved the producing and selling of glass-related products. ( See id. at ¶¶ 2-4).
Plaintiff recounts that in October 1994, the Defendant, who was allegedly in "desperate need of cash to continue his . . . business," approached Plaintiff for a $50,000 loan. While Plaintiff was considering this request, "Plaintiff discovered that Kuhl was having an affair with [Plaintiff's'] girlfriend." ( Id. at ¶ 6.) Plaintiff ultimately refused the request for a loan and alleges that Kuhl's businesses then began to dissolve with Kuhl blaming Plaintiff for his financial misfortune. ( See id. at ¶ 7.) Kuhl is alleged to have vowed that Plaintiff "is going down." ( Id.)
During this period, Plaintiff was a member of the Michigan Legislature. Plaintiff avers that he was running for re-election in 1996. ( See id. at ¶ 9.) Plaintiff contends that Kuhl developed a scheme to extort funds from Plaintiff with the assistance of Hakes. According to Plaintiff, Defendant's plan was to "demand $100,000 from the plaintiff or disclose embarrassing private matters about plaintiff which would result in permanently mining his reputation, cost plaintiff his elected position as state representative, and destroy his political career." ( Id. at ¶ 12.)
Plaintiff alleges that he refused to pay and that thereafter Kuhl executed his plan. This plan allegedly included Ms. Hakes' entry into Plaintiff's home and her breaking into a locked portion of his house, stealing various items, including embarrassing video tapes which were intended to be used in the extortion scheme. Plaintiff alleges that Kuhl and Hakes were ultimately arrested by the Michigan State Police and were found guilty after a jury trial of extortion and conspiracy to commit extortion. ( See id. at ¶¶ 10, 11, 18.) Plaintiff alleges that these actions were deliberately timed "to coincide with a major political fund raising event for plaintiff's re-election effort." ( Id. at ¶ 18.) According to Plaintiff, "[a]s a direct result of these actions, plaintiff lost his elected office of state representative, and was damaged in his name, his reputation, and his character, and had his privacy violated and lost the income and benefits of his job." ( Id. at ¶ 26.) Plaintiff seeks at least $1,000,000 actual damages, treble damages under 18 U.S.C. § 1964, as well as attorney fees. ( See id. at ¶ 27.)
Report and Recommendation at 2-4.
II.
To survive a motion to dismiss, the plaintiff must allege facts that if proved would result in the requested relief Helfrich v. PNC Bank, Kentucky, Inc., 267 F.3d 477, 480 (6th Cir. 2001). The complaint "must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory." Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988). When considering a motion under Rule 12(b)(6), however, the district court must construe the plaintiff's well-pleaded allegations in the light most favorable to the plaintiff and accept the allegations as true. Ruffin-Steinback v. dePasse, 267 F.3d 457, 461 (6th Cir. 2001). Although RICO pleadings are to be liberally construed, Begala v. PNC Bank, 214 F.3d 776, 781 (6th Cir. 2000), the applicable standard does not require the district court to accept legal conclusions unsupported by the facts pleaded. Lillard v. Shelby County Bd. of Educ., 76 F.3d 716, 726 (6th Cir. 1996). More is ordinarily required to satisfy the federal notice pleading requirements. Scheid, 859 F.2d at 436 (citing 5A C. Wright A. Miller, Federal Practice Procedure § 1357, at 596 (1969)); Begala, 214 F.2d at 779.
The Magistrate Judge concluded that the plaintiff failed to plead facts establishing that he had standing to bring his claim. The jurisdictional requirement of standing is met when the plaintiff demonstrates a cognizable injury, a causal relationship between the defendant's conduct and that injury, and seeks relief that would redress the injury. Yeager v. General Motors Corp., 265 F.3d 389, 395 (6th Cir. 2001). To be judicially cognizable, the plaintiff's claimed injury must be "concrete, particularized, and actual or imminent." Markva v. Haveman, 168 F. Supp.2d 695, 704 (E.D. Mich. 2001).
Although RICO is essentially a criminal statute, it provides a civil remedy to certain persons 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 costs of the suit, including a reasonable attorney's fee.18 U.S.C. § 1964(c).
Under RICO's statutory framework,
(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.
(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.18 U.S.C. § 1962.
In this case, the Magistrate Judge essentially found that no politician could ever show a proximal link between extortion and his ability to win re-election. The Magistrate Judge also observed that the plaintiff's "job" as a member of the Michigan House of Representatives, the loss of which deprived the plaintiff of "income and benefits," was more of a privilege than a right. Further, proof that the publication of private facts, especially true facts, caused the plaintiff's defeat at the polls may nearly be impossible to muster. Although the plaintiff claims to have polling data and anecdotal evidence from some of his constituents as to the reason he lost the vote, all of which most likely constitutes inadmissible hearsay, the plaintiff generally cannot compel direct testimony from voters as to their choice of candidates in the privacy of the voting booth. See Belcher v. Mayor of City of Ann Arbor, 402 Mich. 132, 134, 262 N.W.2d 1, 2 (1978). Without such direct evidence, the reason for the voter's choice will likely be relegated to speculation.
The Court agrees with these observations of the Magistrate Judge. Nonetheless, the nature of notice pleading obliges the Court to assume that the factual allegations made can be proven by the plaintiff. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). Further, the plaintiff alleged that he was also damaged by loss of business in his law practice. Consequently, the Court concludes that the plaintiff has pleaded allegations sufficient to establish standing, and the Court rejects the Magistrate Judge's contrary conclusion.
III.
In order to state a claim under RICO, the plaintiff must allege that his business or property was injured by a violation of 18 U.S.C. § 1962. In response to the defendant's motion to dismiss, the plaintiff argues that his amended complaint states claims under three distinct subsections of RICO, 18 U.S.C. § 1962(a), (b) and (c). The Magistrate Judge correctly concluded that no claim for relief is stated under § 1962(a) or (b). Other than finding lack of standing, the Report and Recommendation does not address the sufficiency of the complaint under subsection (c).
Subsection (a) prohibits a person from investing funds obtained from a pattern of racketeering activity into any enterprise in interstate or foreign commerce. Although the plaintiff alleges in his amended complaint that the defendant engaged in fraudulent misrepresentation, sometimes through the mail, in the operation of his business, and that he attempted to extort money from the plaintiff, there is no allegation that the defendant was ever successful in his criminal undertakings. Even when every legitimate inference is indulged, it cannot be said that the amended complaint suggests, let alone alleges, that the defendant actually obtained any money from a pattern of racketeering activity. Obtaining proceeds from racketeering activity, of course, is a necessary prerequisite to investing it in an enterprise. The plaintiff therefore has not alleged a violation of section 1962(a).
Subsection (b) is violated when a person acquires or maintains an interest in or control of an enterprise through a pattern of racketeering activity. In order to state a claim under this or other RICO subsections, the plaintiff cannot merely allege that he was injured by the predicate act of racketeering; rather, he must demonstrate that the defendant acquired or maintained control of an enterprise through a pattern of racketeering activity. See Whaley v. Auto Club Ins. Assoc., 891 F. Supp. 1237, 1242 (E.D. Mich. 1995). In Whaley, the plaintiff was an insurance salesperson who sued the auto club, her employer, for violating RICO through its decision not to pay commissions on insurance applicants who were given insurance through the Michigan Automobile Insurance Placement Facility. The Court held that even if the plaintiff could make out the requisite predicate act of racketeering, she could not demonstrate how her injury had resulted from racketeering that led to the control or maintenance of an enterprise.
Contrary to plaintiff's assertion, one does not violate § 1962(b) by committing mail fraud or extortion. Instead, one must use racketeering activity to gain control or interest in an enterprise. In other words, plaintiff cannot simply allege that she was injured by the underlying acts of mail fraud and extortion. Rather, she must allege that she was injured by a violation of § 1962(b).Id. at 1242.
In this case, Jersevic's complaint suffers from the same infirmity. He alleges multiple injuries from the defendant's racketeering activity, but none from any enterprise that was bolstered by the alleged racketeering. In fact, Jersevic admits that although the goal of the racketeering was the extortion of cash to prop up the defendant's businesses, Jersevic never actually paid the defendant any money. As the Magistrate Judge correctly found, without any causal relationship between one of Kuhl's alleged "enterprises" and Jersevic's injuries, there can be no recovery for a violation of § 1962(b).
The conduct prohibited by subsection (e) is different than the investment in, or acquisition or control of an interstate enterprise as stated in subsections (a) and (b). Under subsection (c), it is unlawful for a person employed by or associated with an enterprise to conduct its affairs through a pattern of racketeering activity. To state a claim for civil damages under this subsection, the plaintiff must allege (1) that there was a pattern of racketeering activity, that is, at least two or more predicate offenses under 18 U.S.C. § 1961(i) were committed; (2) that an "enterprise" existed; (3) that there was a nexus between the conduct of the enterprise and the racketeering activity; and (4) that an injury to business or property occurred from the unlawful conduct of the enterprise. VanDenBroeck v. Common Point Mortgage Co., 210 F.3d 696, 699 (6th Cir. 2000).
An "enterprise" has been defined by the Supreme Court as a "group of persons associated together for a common purpose of engaging in a course of conduct." United States v. Turkette, 452 U.S. 576, 583 (1981).
In this case, the amended complaint alleges that the defendant operated a series of companies, either as corporations or partnerships in which he had an interest, which manufactured glass products. The plaintiff also alleges that the companies affected interstate commerce. According to the plaintiff, the defendant attempted to obtain funds to operate these companies through acts of fraud. Specifically, the plaintiff alleges that the defendant misrepresented his educational background and his business activity, falsely stated that he sold businesses and hid assets to avoid creditors, and diverted money from employee pension plans. Am. Compl. ¶ 5. The plaintiff also alleges that the defendant was involved in a "fraudulent insurance scam," although apparently this scheme was unrelated to his glass business but rather concerned a homeowner's theft claim. Am. Compl. ¶ 23.
The plaintiff does not allege that his business or property was injured by the operation of this "enterprise," that is, the glass company which the defendant controlled, or by the alleged acts of fraud or misrepresentation. Rather, the plaintiff further alleges that the defendant devised a scheme to abandon the corporation of which the defendant was the president and chief executive officer, presumably because it was failing. The plaintiff claims that the defendant intended to "filter business" through another company, Koehler Glas, Inc., (Koehler) and to obtain "seed money" for Koehler by extorting it from the plaintiff. Am. Compl. ¶¶ 7, 12. The amended complaint does not allege that the defendant was related to Koehler financially or in any managerial capacity. As the plaintiff describes it, he refused to meet the defendant's demand for payment, the defendant's plot failed, and the defendant set about his mission to destroy the plaintiff's personal reputation. The plaintiff believes that the damaging information made public by the defendant is the reason the plaintiff failed to gain re-election to the Michigan House of Representatives, and caused damage to plaintiff's law practice. The amended complaint thus does not state that the injury resulted from the conduct of the affairs of an enterprise through a pattern of racketeering activity. Rather, the plaintiff alleges at most that he was injured by an attempt to extort money from him.
To the extent that the plaintiff contends that the defendant's several and serial failed businesses constituted an enterprise in fact, the pleading likewise fails.
An association-in-fact enterprise can be proven by showing 1) that the associated persons formed an ongoing organization, formal or informal; 2) that they functioned as a continuing unit; and 3) that the organization was separate from the pattern of racketeering activity in which it was engaged.VanDenBroek, 210 F.3d at 699 (citing Frank v. D'Ambrosi, 4 F.3d 1378, 1386 (6th Cir. 1993)). Viewing the complaint in the light most favorable to the plaintiff, the most that can be said is that the defendant is alleged to have attempted and failed in several insulated glass product businesses, none of which ever functioned together as a continuing unit or which together possessed any organizational structure, according to the pleadings. The defendant's extortion scheme was directed at an effort to start a new business, which never took root, according to the amended complaint. See Am. Compl. ¶ 7.
The amended complaint certainly alleges that the plaintiff suffered a loss as a result of an extortion, and even that the plaintiff was a victim of an extortion conspiracy. Those state law civil claims, however, do not constitute a federal cause of action under RICO.
IV.
The Court agrees with the Magistrate Judge that the defendant's motion to dismiss should be granted, but for different reasons than are set forth in the Report and Recommendation.
Accordingly, it is ORDERED that the Magistrate Judge's Report and Recommendation is REJECTED IN PART and ADOPTED IN PART.
It is further ORDERED that the defendant's motion to dismiss [dkt. #4] is GRANTED, and that the complaint is DISMISSED with prejudice.