ROBINSON, District Judge.
This action arises from the bankruptcy cases of Allied Systems Holdings, Inc., et al. ("Allied").
Allied was a provider of distribution and transportation services to the automotive industry. Allied emerged from its first bankruptcy in May 2007, and plaintiffs became Allied's majority shareholder under the plan of reorganization, with control over its board of directors. To finance its emergence from bankruptcy, Allied borrowed $265 million of first lien debt (the "First Lien Debt" or "First Lien Claims") from numerous lenders ("Lenders") pursuant to a Credit Agreement.
Under the Credit Agreement, the only parties eligible to act as Requisite Lenders were "Lenders," which consisted only of the original Lender signatories to the Credit Agreement, and "Eligible Assignees" that subsequently become Lenders pursuant to an Assignment Agreement.
In 2008, certain events of default occurred under the terms of the Credit Agreement, and Allied stopped making interest payments on the First Lien Debt. Plaintiffs orchestrated the passage of a Third Amendment to the Credit Agreement, which gave plaintiffs limited rights to become a Lender, capping the amount of debt they could purchase, stripping that debt of any voting power, and requiring certain contributions to equity. (D.I. 1, ex. 14, Third Amendment § 2.1(a)) Thus, plaintiffs could never become Requisite Lenders under the Third Amendment. The Third Amendment also contained a covenant not to sue, which limited plaintiffs' rights to sue any Lender. The covenant not to sue provided:
(Id., § 2.7(e) (emphasis added))
In February 2009, ComVest Investment Partners III, L.P. ("ComVest") became the Requisite Lender. Thereafter, plaintiffs directly negotiated with ComVest to acquire the First Lien Debt. On August 21, 2009, plaintiffs caused Allied to enter into a purported Fourth Amendment to the Credit Agreement which, if effective, would have eliminated the Third Amendment's restrictions on plaintiffs' acquisition of First Lien Debt and would have allowed plaintiffs to become Requisite Lenders. Indeed, that same day, plaintiffs purported to purchase ComVest's debt and declared themselves Requisite Lenders. However, the Fourth Amendment was not approved by unanimous consent of the Lenders as required by the Credit Agreement. CIT Group Business Credit, Inc. ("CIT") — a Lender and the Administrative Agent under the Credit Agreement — challenged plaintiffs' status as Requisite Lenders, which led to a lengthy litigation in Georgia state court among plaintiffs, Allied, and CIT ("Georgia Action"). CIT settled that litigation with plaintiffs and Allied, but the settlement did not resolve the issues between plaintiffs and the other Lenders. In January 2012, BD/S commenced an action in New York state court ("New York Action")
On May 17, 2012, while the New York Action was pending, Black Diamond filed involuntary petitions for bankruptcy against Allied in the bankruptcy court, and Allied entered bankruptcy for the second time, five years after its first bankruptcy. (See Bankr. D.I. 1)
The bankruptcy court issued an oral ruling on February 27, 2013, granting a motion to dismiss plaintiffs' cross-claims in the Allied Action, including their claim for declaratory relief that certain provisions of the Third Amendment should be deemed void. (See Committee Action D.I. 255 at 103-08) On June 19, 2013, the bankruptcy court entered an agreed scheduling order in the Allied Action and Committee Action in which the parties (including plaintiffs) acknowledged that the bankruptcy court may address the issue of "[w]ho, if anyone, is `Requisite Lender' under the Debtors' [Credit Agreement].'" (See Committee Action D.I. 268 ¶¶ 2(a), (b)) Thereafter, BD/S filed a motion for summary judgment in both the Allied Action and Committee Action seeking a declaration that BD/S are the Requisite Lenders under the Credit Agreement. (See Committee Action D.I. 254) After full briefing, the bankruptcy court, on July 30, 2013, ruled from the bench that BD/S are the Requisite Lenders.
Following the bankruptcy court's ruling that BD/S are the Requisite Lenders, in the summer of 2013, the bankruptcy court supervised an auction of Allied's assets in which BD/S, in their capacity as Requisite Lenders, submitted a credit bid to purchase Allied's assets on behalf of the Lenders. Ultimately, Jack Cooper Holdings Corporation made the highest and best bid and purchased substantially all of Allied's assets. That sale closed on December 20, 2013 and was funded on December 27, 2013. BD/S, in their capacity as Requisite Lenders, used their credit bid, which was approved by the bankruptcy court on September 17, 2013, to purchase the remainder of Allied's assets (the "SBDRE Assets") on behalf of all Lenders (including plaintiffs). (See Bankr. D.I. 1837, 1868 (sale orders))
On December 11, 2013, plaintiffs filed an action in the Delaware Court of Chancery against BD/S and others to challenge the allocation of the SBDRE Assets. On October 31, 2014, the Delaware Court of Chancery dismissed most of plaintiffs' claims by applying the bankruptcy court's decision through collateral estoppel that the Third Amendment is valid.
On May 8, 2015, plaintiffs filed the instant action asserting violation of § 1962(c) of the RICO Act (count I); conspiracy to violate § 1962(c) pursuant to § 1962(d) (count II); fraud under state law (count III); and tortious interference with business relations under state law (count IV). On June 4, 2015, defendants moved to dismiss or stay the action. (D.I. 16) The motion to dismiss is fully briefed and properly before the court.
Plaintiffs assert a racketeering scheme by defendants, the goal of which was to force Allied into involuntary bankruptcy and equitably subordinate plaintiffs' claims in order to "recover a substantial multiple on their original investment." To implement this scheme, which was allegedly motivated by "simple greed" (D.I. 1, ¶ 123), Black Diamond and Spectrum encouraged plaintiffs' acquisition of ComVest's debt so that plaintiffs would obtain a 56% share of all of the First Lien Claims. "Were that to happen, [d]efendants could jointly push Allied into an involuntary bankruptcy, at which point, Black Diamond and Spectrum could attempt to equitably subordinate [plaintiffs'] First Lien Claims by falsely accusing [plaintiffs'] designees on the Allied board of directors of breaching their fiduciary duties to Allied and operating Allied to [plaintiffs'] advantage." (D.I. 1, ¶ 79) After "encourag[ing] [plaintiffs] to acquire as much Allied debt as possible by providing false assurances of cooperation and support" (id., ¶ 8), Black Diamond and Spectrum subsequently conspired and acted
With respect to specific factual allegations, plaintiffs allege that Black Diamond and Spectrum first encouraged plaintiffs (insiders of Allied) to buy as much First Lien Debt as possible. (Id., ¶¶ 8-10, 83-89) In support of this allegation, plaintiffs rely on an email dated February 2, 2011 from Black Diamond to plaintiffs stating that, "[o]n Allied, the strategy you outlined seemed right and you have our support." (See id., ex. 21) Despite this encouragement, defendants were planning to assert an equitable subordination claim against plaintiffs as early as 2009, as evidenced by an email from a third party to Spectrum, dated August 13, 2009, in which the third-party states: "I thought you were going to check out the `equitable subordination' angle." (Id., ex. 15) Plaintiffs also point to an email from Spectrum to Black Diamond, dated September 17, 2009 — one month after plaintiffs' purchase of ComVest's debt — in which Spectrum states "looks like [plaintiffs] pushed the equity button here... you ready to roll." (See id., ex. 17) Plaintiffs assert that this is evidence of a scheme to file the involuntary petitions, level false accusations, and file an equitable subordination action against plaintiffs as insiders. (Id., ¶ 90)
Notwithstanding the ruling in the New York Action that plaintiffs were not the Requisite Lenders under the Credit Agreement, and the bankruptcy court's conclusion that BD/S are the Requisite Lenders, plaintiffs further assert that, as part of the scheme, defendants wrongfully prevented plaintiffs from serving as Requisite Lenders. (Id., ¶¶ 13-17, 92-94) Specifically, Black Diamond and Spectrum "secretly (and successfully) urged CIT ... to refuse to recognize [plaintiffs] as Requisite Lender[s]" and pursue expensive litigation against plaintiffs in the Georgia Action. (Id., ¶ 93)
Plaintiffs further allege that, as part of their scheme, defendants interfered with the JCT Deal by pretending to negotiate with JCT for over a year and then filing involuntary petitions in order to "kill the deal." (Id., ¶¶ 18-20, 95-100, 109, 215) Specifically, the sale "would have resulted in the pre-bankruptcy transfer of [plaintiffs'] First Lien Debt to JCT." (Id., ¶ 95) Pursuant to the proposed transaction, "JCT would have purchased substantially all of the assets and assumed the liabilities of Allied, including debt owned by [plaintiffs]." (Id., ¶ 214) However, because such a sale was inconsistent with defendants' scheme, after JCT initially approached all Lenders, Black Diamond negotiated directly with JCT from March 2011 through May 2012. (Id., ¶ 96) Plaintiffs claim that the result of these direct negotiations was JCT's determination that any acquisition could be consummated only through a sale of Allied in a voluntary bankruptcy case under 11 U.S.C. § 363.
Plaintiffs allege that "central to [the] Allied Strategy" was a Cooperation Agreement executed in January 2012, pursuant to which Black Diamond and Spectrum agreed to offer a right of first refusal and participation rights to one another before transferring any Allied debt to a third party. (Id., ¶¶ 101-102) The Cooperation Agreement states that it was entered into "in contemplation of ... certain strategies to enforce the rights of the Parties as Lenders under the [Credit Agreement]" and provided that the parties would share costs and expenses. (Id., ex. 13) Plaintiffs assert that the Cooperation Agreement was entered into in contemplation of an improper involuntary bankruptcy proceeding and functioned to spur improper claims trading. (Id., ¶¶ 102, 104)
In this regard, to induce Spectrum to join Black Diamond as a petitioning creditor
Plaintiffs allege that the involuntary petitions filed by Black Diamond and Spectrum two months later were supported by false statements and material omissions regarding the transfer. (Id., ¶¶ 110-113) Specifically, although defendants checked the box on the involuntary petitions indicating whether "there has been a transfer of claim against the debtor by or to any petitioner," defendants failed to attach evidence of such transfers as required by Bankruptcy Rule 1003(a).
Plaintiffs assert that defendants have abused their status of Requisite Lenders to further harm plaintiffs. (Id., ¶¶ 1, 82) The Credit Agreement provides for reimbursement of legal expenses incurred by any Lender under certain circumstances, including expenses in a bankruptcy proceeding. (Id., ¶ 129) Plaintiffs claim that they are entitled to be reimbursed for fees and expenses relating to the litigation with CIT, the litigation with Black Diamond and Spectrum, and fees incurred in the Allied bankruptcy proceedings. (Id., ¶ 129) According to plaintiffs, defendants have colluded to block payment of plaintiffs' fees and expenses while reimbursing their own. (Id., ¶¶ 129-31) Finally, defendants obstructed justice by failing to disclose the Cooperation Agreement, which was responsive to discovery requests propounded by plaintiffs in the bankruptcy proceedings. (Id., ¶ 122)
The RICO Act imposes criminal and civil liability upon those who engage in certain "prohibited activities." Each prohibited activity is defined in 18 U.S.C. § 1962 to include, as one necessary element, proof either of "a pattern of racketeering activity" or of "collection of an unlawful debt." "Racketeering activity" is defined in RICO to mean "any act or threat involving" specified state-law crimes, any "act" indictable under various specified federal statutes, and certain federal offenses. 18 U.S.C. § 1961(1). Under the statute, a "pattern" requires at least two acts of racketeering activity within a 10-year period. 18 U.S.C. § 1961(5).
The "predicate acts" alleged in the complaint are: (1) false oath in relation to a bankruptcy proceeding in violation of 18 U.S.C. § 152(2), regarding the Black Diamond and Spectrum Affidavits, including the redaction of certain information in the trading records attached to the Spectrum Affidavit (D.I. 1, ¶¶ 174-79); (2) false declarations in relation to a bankruptcy proceeding
The court has original jurisdiction over this matter pursuant to 28 U.S.C. § 1331 and 18 U.S.C. § 1964(c). To survive a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint must "contain sufficient factual matter, accepted as true, to `state a claim for relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). The plausibility standard requires more than a "sheer possibility that a defendant has acted unlawfully." Id. To determine the sufficiency of a complaint under Twombly and Iqbal, the court must take the following three steps: (1) the court must "tak[e] note of the elements a plaintiff must plead to state a claim;" (2) the court should identify the allegations that, "because they are no more than conclusions, are not entitled to the assumption of truth;" and (3) "where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief." Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir.2011) (citing Iqbal, 556 U.S. at 664, 129 S.Ct. 1937).
Congress' intent in enacting the RICO statute was to combat "long-term criminal conduct" and the "danger posed by organized crime-type offenses." Hughes v. Consol-Penn. Coal Co., 945 F.2d 594, 611 (3d Cir.1991) (internal quotations and citations omitted). Careful scrutiny of such claims is appropriate because of the "relative ease with which a plaintiff may mold a RICO pattern from allegations that, upon closer scrutiny, do not support it." Kolar v. Preferred Real Estate Investments, Inc., 361 Fed.Appx. 354, 363 (3d Cir.2010) (internal citations omitted)). RICO claims should be viewed with scrutiny to ensure that "only those purported RICO claims which truly fit within the intent of the statute will proceed." O'Malley v. BancAmerica Commercial Corp., 1992 WL 81394, *4 (E.D.Pa. Apr. 17, 1992). Moreover, "courts should strive to flush out frivolous RICO allegations at an early stage of the litigation." Rotherberg v. Marger, 2013 U.S. Dist. LEXIS 44473, * 31 (D. N.J. Mar. 28, 2013).
Section 1962(c) of the RICO statute provides:
18 U.S.C. § 1962(c). Similarly, 18 U.S.C. § 1962(d) makes it unlawful to "conspire" to violate § 1962(c). To make out a claim under § 1962(d), plaintiffs must first establish their § 1962(c) claim. See Annulli v. Panikkar, 200 F.3d 189, 198 (3d Cir. 1999) (overruled on other grounds, Rotella v. Wood, 528 U.S. 549, 120 S.Ct. 1075, 145 L.Ed.2d 1047 (2000)).
Standing to bring a private action under the RICO statute is extended to "[a]ny person injured in his business or property by reason of a violation of § 1962..." 18 U.S.C. § 1964(c). The "by reason of' language in § 1964(c) has been interpreted as creating two distinct requirements for standing in RICO claims brought pursuant to § 1962: "(1) that the plaintiff suffered an injury to business or property; and (2) that the plaintiffs injury was proximately caused by the defendant's violation of 18 U.S.C. § 1962." Maio v. Aetna, Inc., 221 F.3d 472, 482-83 (3d Cir. 2000). Such injury must be specific or quantifiable and must have resulted in "tangible financial loss to plaintiff' (id. at 483 (internal citations omitted)). As such, a complaint does not adequately plead a RICO violation unless it shows damage to business or property with some certainty; if the claimed injury is speculative, it is not ripe for adjudication. See id. at 495 (injury predicated on speculation insufficient to support cause of action under RICO). To meet the proximate cause requirement, a plaintiff must plead sufficient facts to plausibly assert that "the alleged violation led directly to the plaintiffs injuries." Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006). Plaintiffs argue that the RICO claims are ripe based on several injury theories, each of which fails to meet the above criteria.
Plaintiffs seek damages "in an amount to be proven at trial." (Id., ¶ 200) Here, the injury asserted — equitable subordination of plaintiffs' claims in the Allied bankruptcy — has not yet occurred and is wholly contingent upon the outcome of the bankruptcy court proceedings. Inasmuch as the RICO injury is predicated exclusively on the possibility that future events might occur, rather than on the actual occurrence of those events, the loss requires a significant degree of factual speculation and is insufficient to support a cause of action under RICO. See Maio, 221 F.3d at 495. As set forth in the complaint, any injury to plaintiffs' business or property which would result from equitable subordination of their claims remains speculative. (See id., ¶¶ 29, 31 ("
Notwithstanding that the equitable subordination of plaintiffs' claims — the ultimate goal of defendants' alleged scheme — is contingent upon the outcome of the bankruptcy proceedings, plaintiffs argue
Plaintiffs' alleged injury in the form of the "loss of profit on the original JCT transaction scuttled by [d]efendants' wrongful involuntary bankruptcy filing" cannot be said to be a "concrete financial loss." See Maio, 221 F.3d at 483. Even as pled in the complaint, the JCT Deal was "uncertain" and "subject to multiple closing conditions including funding contingencies." (D.I. 1, ¶ 124) Plaintiffs' losses arising from a failure to close the JCT Deal, if any, are not "clear and definite." See Motorola Credit Corp. v. Uzan, 322 F.3d 130, 135 (2d Cir.2003) ("a cause of action does not accrue under RICO until the amount of damages becomes clear and definite"). Moreover, plaintiffs cannot satisfy proximate cause in light of the numerous conditions and contingencies attendant to the JCT Deal; that is, there is no plausible basis for asserting that any of the predicate acts set forth in the complaint, including the alleged wrongful filing of the involuntary petitions, "led directly" to the deal's failure and plaintiffs' alleged injuries. See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-97, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) ("plaintiff ... can only recover to the extent that ... he has been injured in his business or property
Regarding plaintiffs' argument that the complaint pleads "concrete financial loss" in the form of "millions in attorneys' fees and costs," this alleged injury does not confer RICO standing either. (See MTD Opp. at 16-17) The Third Circuit has not formally addressed the question of whether prior legal fees can ever suffice as injuries under RICO, and there is an obvious split among authorities.
Finally, plaintiffs allege that defendants' scheme "stripped [plaintiffs] of [their] property by arbitrarily reducing [their] ownership interest in certain real estate assets" and that this is also a "concrete financial loss" under RICO. (See MTD Opp. at 17; D.I. 1 at ¶¶ 132-39) However, these alleged losses are still being litigated in the Court of Chancery.
Where a plaintiff fails to allege injury to its business or property in the form of a concrete financial loss proximately caused by an alleged predicate act, or where a plaintiff's injury is speculative or contingent on future events, that plaintiff lacks standing to bring suit under RICO. See Maio, 221 F.3d at 483. Here, plaintiffs have failed to allege a concrete financial loss, and count I of the complaint will be dismissed for lack of standing.
Even assuming the injury alleged by plaintiffs were sufficient to make out a
Regarding whether the predicate acts are related, the Supreme Court has held that that this prong is satisfied when the predicate acts have "the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." Id. at 240, 109 S.Ct. 2893. In the Third Circuit, courts liberally construe this standard. See, e.g., Banks v. Wolk, 918 F.2d 418, 425 (3d Cir.1990) (finding predicate acts were related even where four of five predicate acts did not involve precisely the same parties). Here, plaintiffs allege that the predicate acts set forth in the complaint are all related to each other and to defendants' "purpose of subordinating [plaintiffs'] claims by forcing Allied into involuntary bankruptcy." (D.I. 1, ¶ 163) Plaintiffs' allegations, if accepted as true, satisfy the requirement that the predicate acts are related.
Regarding whether the predicate acts "amount to or pose a threat of continued criminal activity," the Supreme Court has noted that continuity is a "temporal concept." See H.J. Inc., 492 U.S. at 241-42, 109 S.Ct. 2893. Duration is the sine qua non of continuity. See Hindes v. Castle, 937 F.2d 868, 873 (3d Cir.1991). A plaintiff can meet this requirement by showing either "close-ended continuity" or "open-ended continuity." See H.J. Inc., 492 U.S. at 241-42, 109 S.Ct. 2893. Close-ended continuity refers "to a closed period of repeated conduct." Id. at 241, 109 S.Ct. 2893. Open-ended continuity refers to "past conduct that by its nature projects into the future with a threat of repetition." Id. The Third Circuit has also noted other factors that are relevant to the "pattern" inquiry, including "the number of unlawful acts, the length of time over which the acts were committed, the similarity of the acts, the number of victims, the number of perpetrators, and the character of the unlawful activity." See Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1412-13 (3d Cir. 1991) (quoting Barticheck v. Fidelity Union Bank/First Nat'l State, 832 F.2d 36, 39 (3d Cir.1987)). Following H.J. Inc., Third Circuit courts "focus on these factors as they bear upon the separate questions of continuity and relatedness." Marshall-Silver Constr. Co. v. Mendel, 894 F.2d 593, 596 (3d Cir.1990). Although the Supreme Court has provided this basic structure for analyzing continuity, the analysis is ultimately fact specific. See H.J. Inc., 492 U.S. at 241, 109 S.Ct. 2893 (noting "development of these concepts must await future cases").
With respect to continuity, plaintiffs allege that "[d]efendants' pattern of racketeering activity is continuous" as the predicate acts "extend over a substantial period of time, from September of 2011 to the present, and the involuntary bankruptcy proceeding that [d]efendants fraudulently initiated is currently pending." (D.I. 1, ¶ 164) Plaintiffs further allege that "[d]efendants' scheme will continue in the future until they achieve their objective of
Plaintiffs' allegations, even if accepted as true, do not satisfy close-ended continuity, that is, "a series of related predicates extending over a substantial period of time." H.J. Inc., 492 U.S. at 242, 109 S.Ct. 2893. The Third Circuit has consistently held that a pattern lasting less than one year does not, as a matter of law, constitute a "substantial period of time" as required by H.J. Inc. See e.g., Hughes, 945 F.2d at 611 ("We hold that twelve months is not a substantial period of time"); Tabas v. Tabas, 47 F.3d 1280, 1293 (3d Cir.1995) ("Since HJ Inc., this court has faced the question of continued racketeering activity in several cases, each time finding that conduct lasting no more than twelve months did not meet the standard for close-ended continuity"); Helman v. Murry's Steaks, Inc., 742 F.Supp. 860, 882 (D.Del.1990) (predicate acts spanning twelve months did not satisfy close-ended continuity requirement).
Plaintiffs allege an elaborate scheme dating "potentially as far back as 2009." (D.I. 1, ¶ 159) To determine the duration of the pattern, the court must look to the earliest predicate act. H.J. Inc., 492 U.S. at 242, 109 S.Ct. 2893 ("party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates"). Although plaintiffs assert that defendants' scheme has run "from at least in 2009 and continues today," the duration of the pattern begins on the date of the earliest alleged predicate act, not on the date that defendants allegedly began contemplating the scheme. Here, the earliest predicate act asserted in the complaint involves the September 2011 emails, which are alleged to constitute acts of wire fraud in violation of 18 U.S.C. §§ 1343, and which "facilitated the solicitation of Allied debtholders to join the involuntary petition[s] and [d]efendants' illegal claims trading." (D.I. 1, ¶¶ 190-94) Defendants argue that these allegations of wire fraud should be rejected because "[plaintiffs] cannot tack on conclusory allegations of mail and wire fraud to add more time to its alleged pattern of racketeering conduct." (See MTD at 25-26 (citing Kehr, 926 F.2d at 1418)) Even accepting plaintiffs' allegations as true, and including the alleged acts of wire fraud occurring in September 2011, the pattern as alleged still falls short of one year under Third Circuit law. The involuntary petitions, allegedly containing false statements and material omissions in violation of 18 U.S.C. § 1343, and/or resulting from claims trading in violation of 18 U.S.C. § 152(6) in March 2012, were filed in May 2012. Thus, the pattern of racketeering activity alleged in the complaint is at most nine months in duration.
Plaintiffs argue that the predicate acts asserted in the complaint do not end with the May 2012 bankruptcy filings because the complaint references defendants' continued pursuit of the equitable subordination claims against plaintiffs. (MTD Opp. at 18; D.I. 1, ¶ 159) This argument misses the mark for the same reason — the period of continuity is established by the predicate acts in furtherance of the alleged scheme. See H.J. Inc., 492 U.S. at 242, 109 S.Ct. 2893 ("
Plaintiffs further argue that the predicate acts asserted in the complaint do not
18 U.S.C. § 1503(a). The Third Circuit has held that "only acts
Plaintiffs claim that the predicate acts asserted in the complaint do not end with the May 2012 bankruptcy filings because defendants withheld relevant documents in the bankruptcy litigation until at least August 2014. (D.I. 1, ¶ 188) Alleged obstruction of justice in a pending proceeding cannot support a RICO claim brought in a different court. See e.g., Rafferty v. Halprin, 1991 WL 148798, at *7 (S.D.N.Y.1991) (holding that "[o]bstruction [of justice] claims ... must be presented in the court in which the civil action giving rise to the alleged obstruction is pending" and noting that to allow otherwise would be "an improper use of the civil RICO statute"); Eli Lilly and Co. v. Roussel Corp., 23 F.Supp.2d 460, 483 n. 35 (D.N.J.1998) (quoting Rafferty: "to permit conduct in a pending action to serve as a basis of a RICO claim would improperly apply the RICO statute, invite forum shopping of a most pernicious sort and would embroil this Court in the supervision and review of proceedings" in other courts). Even accepting as true plaintiffs' allegation that defendants withheld relevant documents in the bankruptcy proceedings, the court agrees that such an act does not satisfy the predicate act of obstruction of justice for purposes of establishing a pattern of racketeering activity.
Having alleged a pattern of racketeering activity lasting only nine months, the complaint does not satisfy close-ended continuity as a matter of law. See Hughes, 945 F.2d at 611 (pattern lasting less than one year does not, as a matter of law, constitute a "substantial period of time").
The allegations in the complaint, accepted as true, do not satisfy open-ended continuity either. If a plaintiff alleges a RICO violation before continuity is established, plaintiff must allege "a threat of continued racketeering activity." H.J. Inc., 492 U.S. at 242, 109 S.Ct. 2893. This requirement is met where the "racketeering acts themselves include a specific threat of repetition extending indefinitely into the future." Id. at 242-43, 109 S.Ct. 2893. A threat of continuity also exists when the predicate acts are part of an ongoing entity's "regular way of doing business." Id. Additionally, a plaintiff may plead a threat of continued racketeering activity where the predicate acts can be attributed to "a defendant operating as part of a long-term
Plaintiffs do not allege that defendants used fraud as a regular way of doing business or formed an ongoing criminal association. Instead, plaintiffs allege that "[d]efendants' scheme will continue in the future until they achieve their objective of equitably subordinating [plaintiffs'] debt holdings in Allied." (D.I. 1, ¶ 164) Defendants "continue to assert causes of action for equitable subordination against [plaintiffs] in adversary case number 13-50530 filed in the Allied bankruptcy case" and "continue to obstruct justice" (Id., ¶¶ 157, 159). In response, defendants argue that the complaint does not satisfy open-ended continuity because it "amounts to nothing more than a business dispute between creditors that does not constitute criminal activity, let alone pose a threat of continued criminal activity." (See MTD at 25)
The Third Circuit has often held that a single scheme involving a single injury to a single victim within a short period of time falls outside of RICO due to lack of continuity, even where all aspects are entirely related. See e.g., Hughes, 945 F.2d at 611 (predicate acts against single victim lasting one year did not satisfy continuity); Kehr, 926 F.2d at 1413 ("[A]lthough a single fraudulent scheme can give rise to RICO liability, when that scheme is short-lived and directed at a limited number of people, this court has required some further indication that the defendant's fraudulent activities are likely to continue"); Baldwin v. Township of Union, 2005 WL 3588473, *6 (D.N.J. Dec. 29, 2005) (no threat of continued racketeering activity where "predicate acts focus on a clearly defined, discrete, and finite goal"); Kolar, 361 Fed.Appx. at 365 (holding that a "single finite transaction cannot by itself underpin a pattern of racketeering activity").
Defendants argue that the complaint's allegations fall outside of RICO because the alleged pattern of racketeering activity has only one objective — equitable subordination of plaintiffs' claims — and targets only plaintiffs. (See MTD at 5) The Supreme Court has rejected the theory that a RICO pattern requires proof of "multiple schemes." H.J. Inc., 492 U.S. at 240, 109 S.Ct. 2893; see also United States v. Starnes, 644 F.2d 673, 678 (7th Cir.1981) (no requirement for separate unrelated schemes); LSC Assocs. v. Lomas & Nettleton Fin. Corp., 629 F.Supp. 979, 981-82 (E.D.Pa.1986) (schemes involving only one transaction intended or one objective sufficient when "defendants allegedly committed several racketeering acts to entice plaintiffs to enter that transaction."). Nevertheless, when a single fraudulent scheme "is short-lived and directed at a limited number of people, [the Third Circuit] has required some further indication that the defendant's fraudulent activities are likely to continue." Kehr, 926 F.2d at 1413.
As discussed supra, accepting plaintiffs' allegations as true, the last predicate act alleged in the complaint occurred in May 2012. The final goal of defendants' alleged scheme is clearly defined: equitable subordination of plaintiffs' claims. The scheme, therefore, is of finite duration, and there is no threat of long-term continuous criminal activity "where predicate acts focus on a clearly defined, discrete, and finite goal." Baldwin, 2005 WL 3588473 at *6. This single fraudulent scheme, which is short-lived and directed at a limited number of victims, does not give rise to RICO liability without some "further indication that the defendant's fraudulent activities are likely to continue." See Kehr, 926 F.2d at 1413. The complaint makes no allegation that the alleged predicate acts themselves include "a specific threat of repetition extending indefinitely into the future." H.J. Inc., 492 U.S. at 242-43, 109 S.Ct. 2893. "[S]chemes which have a clear and terminable goal have a natural ending point. Such
Construing the complaint in a light most favorable to plaintiffs, and assuming all facts in the complaint to be true, for the reasons stated above, plaintiffs have failed to allege continuity under either the open-ended or close-ended standards. Related predicate acts lasting "a few weeks or months and threatening no future criminal conduct do not satisfy [the continuity] requirement." H.J. Inc., 492 U.S. at 242, 109 S.Ct. 2893. Having failed to allege a pattern of racketeering activity, the complaint fails to state a claim under RICO. Accordingly, count I of the complaint must be dismissed.
Section 1962(d) of the RICO Act makes it unlawful to "conspire" to violate § 1962(c). To make out a claim under § 1962(d), a plaintiff must first establish its claim under § 1962(a), (b), or (c). See Annulli, 200 F.3d at 198. Because plaintiffs have failed to state a claim under § 1962(c), the conspiracy claim must fail as well. See Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1191 (3d Cir.1993) ("Any claim under section 1962(d) based on a conspiracy to violate the other subsections of section 1962 must necessarily fail if the substantive claims are themselves deficient"). Accordingly, count II of the complaint must be dismissed.
The court's original jurisdiction over this matter is based solely upon plaintiffs' federal RICO claims. Having dismissed those claims, the court no longer has original jurisdiction over the action and must determine whether to exercise supplemental jurisdiction over the state law claims. Pursuant to 28 U.S.C. § 1367, federal courts with original jurisdiction over a federal claim have supplemental jurisdiction over state-law claims that "form part of the same case or controversy." 28 U.S.C. § 1367(a). A district court may, however, decline to exercise supplemental jurisdiction over state law claims if "the district court has dismissed all claims over which it has original jurisdiction." 28 U.S.C. § 1367(c)(3); New Rock Asset Partners, LP. v. Preferred Entity Advancements, Inc., 101 F.3d 1492, 1508 (3d Cir.1996) (dismissal of the jurisdiction-granting claim "triggers a discretionary decision on whether jurisdiction over a state law claim should be declined pursuant to § 1367(c)(3)").
The Third Circuit has instructed that "where the claim over which the district court has original jurisdiction is dismissed before trial, the district court must decline to decide the pendent state claims unless considerations of judicial economy, convenience, and fairness to the parties provide an affirmative justification for doing so." Dougherty v. A.O. Smith Corp., 2014 WL 3542243, *16 (D.Del. July 16, 2014) (quoting Borough of West Mifflin v. Lancaster, 45 F.3d 780, 788 (3d Cir.1995)); see also Carnegie-Mellon University v. Cohill, 484 U.S. 343, 351, 108 S.Ct. 614, 98 L.Ed.2d 720 (1988) (when the federal claims are eliminated early in a case, "the District Court ha[s] a powerful reason to choose not to continue to exercise jurisdiction").
Defendants argue that there are no fairness considerations preventing dismissal of
For the foregoing reasons, the complaint fails to state a claim under RICO, and the court declines to exercise supplemental jurisdiction over the state law claims. Accordingly, the motion to dismiss is granted. The parties will bear their own costs. An appropriate order shall issue.
At Wilmington this
IT IS ORDERED that defendants' motion to dismiss (D.I. 16) is granted and the case closed.
