Morelia Consultants, LLC, et al. vs. RCMP Enterprises, LLC, et al.
MEMORANDUM and ORDER SUSTAINING the objections to the report and recommendation of Magistrate Judge Prince and the R&R of Magistrate Judge Princi is NOT ADOPTED; the 19 21 22 Motions to Dismiss are DENIED; Case is REMANDED to MJ Blewitt for further proceedings. Signed by Honorable James M. Munley on 09/09/11 (sm, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
MORELIA CONSULTANTS, LLC;
THE CHRISTOPHER ENTERPRIZE,
CRH NAPLES DEVELOPMENT, LLC;
(Magistrate Judge Blewitt)
RCMP ENTERPRISES, LLC;
UNITED PENN INVESTMENT GROUP, :
CHRISTOPHER M. WARTELLA;
STANLEY MALINOWSKI, a/k/a Rick :
MICAHEL OLENGINSKI; and
JEFFREY N. WOYTOWICH,
Before the court are plaintiffs’ objections to the report and recommendation of
Magistrate Judge William T. Prince (Doc. 64), which proposes the court grant in part
and deny in part defendants’ motions to dismiss the complaint.
This case arises out of business disputes between the parties. Defendant
RCMP Enterprises, LLC (“RCMP”) is a limited liability company located in
Pennsylvania. (Amended Complaint (Doc. 16) (hereinafter “Amend. Complt.”) at ¶
5). The individual defendants are allegedly “members” of RCMP and hold
themselves out to members of Defendant United Penn Investment Group (“United
Penn”), a defunct corporation. (Id. at ¶ 14). Plaintiffs allege that RCMP was–and
remains–undercapitalized. (Id. at ¶ 17). Defendant Kretchik continually provided
RCMP with funding, money without which the company would not have been able to
operate. (Id. at ¶ 18). Plaintiffs contend that the purpose of this undercapitalization
was for the individual defendants to avoid liability for RCMP’s tortious actions, and
for Kretchik to assert control over the rest of the members. (Id. at ¶ ¶ 19-21).
Indeed, plaintiffs contend that RCMP’s corporate existence as a limited liability entity
should be ignored and the individual defendants made liable for the company’s
obligations. (Id. at ¶ 27). Likewise, plaintiffs allege that defendants knowingly used
United Penn, a dissolved corporate entity, to enter into contracts and incur
obligations. (Id. at ¶ 32). Plaintiffs allege that the individual defendants should be
liable for any of United Penn’s obligations. (Id. at ¶ 38).
Plaintiffs allege that in July 2007 Defendants Malinowski and Wartella, along
with Franklind Lea, a consultant, traveled to Cincinnati, Ohio to meet with Plaintiff
Christopher Hildebrandt. (Id. at ¶ 40). The purpose of this meeting was to solicit
Hildebrant’s services in the purchase and development of a marina and about thirty
acres of land located in Estero, Florida. (Id.). This property is referred to by the
litigants as the “Weeks Fish Camp.” (Id.). Malinowski, Wartella and Lind solicited
Hildebrant to act as a consultant for RCMP relative to the fishing camp. (Id. at ¶ 42).
Plaintiffs allege that shortly after this meeting defendants breached their agreement
with Franklind Lea and his company, Tactical Financial Consulting. (Id. at ¶ 41).
This breach led to litigation and eventually a confidential settlement agreement. (Id.
at ¶ 41).
Soon after the 2007 meeting, Malinowski learned that Hildebrant owned 2325square-foot home near the Weeks Fishing Camp. (Id. at ¶ 42). Malinowski
approached Hildebrant about renting this home while Malinowski was in Florida
working on the sale and development of the fishing camp. (Id. at ¶ 43). Hildebrant
and Malinowski entered into a written lease (the “Cypress Lease”) for this property
on September 10, 2007. (Id. at ¶ 44). Hildebrant was landlord and Malinowski
tenant on the lease. (Id.). The lease covered property located at 8844 Cypress
Preserve Place, Fort Meyers, Florida (the “Premises”). (Id.). Hildebrant leased the
property because he believed Malinowski, who represented himself as the
“managing member” of RCMP, to possess sound finances and good character.. (Id.
at ¶¶ 45-46). The lease lasted from November 1, 2007 to December 31, 2008 and
required Malinowski to pay rent in the amount of $2,000 per month if he paid before
the 10th of the month and $2,100 per month if he paid later. (Id. at ¶ 47). While this
contract was between Hildebrant and Malinowski, Malinowski expressly rented the
Premises because of its proximity to the fishing camp. (Id. at ¶ 48). He intended to
carry out his duties for RCMP related to the camp at the property. (Id.).
Soon after Malinowski took possession of the premises, Hildebrant became
aware of certain “nefarious” and allegedly unlawful conduct by Malinowski at those
premises. (Id. at ¶ 49). When Hildebrant confronted Malinowski and other RCMP
members about this conduct, they told Hildebrant that Malinowski had “‘personal
problems’” which led to the behavior. (Id. at ¶ 50). During the term of the lease,
however, RCMP and the individual defendants treated the rent payments as a
business expense and not Malinowski’s personal expense. (Id. at ¶ 51). They
caused the lease payments to be made because they found use of the Premises
beneficial in light of the proximity of the Premises to the Fishing Camp. (Id. at ¶ 52).
The individual defendants used the Premises for those purposes. (Id. at ¶ 53).
Indeed, RCMP became involved in issues related to the lease, sometimes making
payments on that lease. (Id. at ¶ 54). One check written by RCMP on the lease was
returned for insufficient funds. (Id. at ¶¶ 55-56). The defendants should have known
this check would bounce. (Id. at ¶ 57). In the end, Malinowski breached the lease
by failing to pay rent and other obligations from March 1, 2008 onward. (Id. at ¶¶ 5960). Malinowski owes more than $21,000 in back rent and interest, as well as for
substantial damage caused to the premises during his stay.1 (Id. at ¶¶ 62-63)).
Plaintiffs contend that Malinowski’s damage to the property was intentional. (Id. at ¶
The damage allegedly caused by Malinowski included: “the carpets in each and
every room of the Premises had cigarette burn marks where Malinowski, at this point the
managing member of RCMP, extinguished his cigarettes with wanton disregard for
Hildebrant’s property. In addition, Malinowski extinguished his cigarettes on the furniture
and within the kitchen cabinets and drawers and left the cigarette butts there upon vacating
the Premises.” (Amend. Complt. at ¶ 67). Plaintiffs contend that Malinowski owes
$42,469.21 for this damage. (Id. at ¶ 69).
On March 24, 2008, the individual defendants caused Defendant United Penn
to enter into a consulting agreement with Plaintiff Christopher Enterprize. (Id. at ¶
74). Christopher Enterprize was to provide “‘assistance and guidance for obtaining a
loan in the name of United Penn.’” (Id.). United Penn was defunct at the time this
agreement was made. (Id.). The defendants represented, however, that United
Penn was a validly existing company, a representation that Christopher Enterprize
relied upon. (Id. at ¶ 75). Defendants promised to pay Christopher Enterprize
$100,000 for this assistance, in addition to a minimum payment of $5,000 for any
consultations. (Id. at ¶ 76). Christopher Enterprize performed its obligation under
the consulting contract, but defendants did not pay. (Id. at ¶ 77). Plaintiffs allege
that the individual defendants convinced Christopher Enterprize to provide this
assistance by using “false pretenses, misrepresentations and promises.” (Id. at ¶
82). Defendants used mail, e-mail and wires to advance this fraudulent scheme.
(Id. at ¶ 83).
On October 17, 2007, Plaintiffs CRH Naples and Christopher Enterprize
entered into a term sheet that provided the parameters of a consulting relationship to
RCMP relative to the Fishing Camp. (Id. at ¶ 94). The $12,000 check defendants
used to pay their obligations under this term sheet was returned for insufficient
funds. (Id. at ¶¶ 95-96). On January 31, 2008 CRH Naples and Christopher
Enterprize entered into a consulting agreement with RCMP that replaced the term
sheet. (Id. at ¶¶ 97-98). The agreement provided that Christopher Enterprize would
be paid $6,000 monthly for consulting services. (Id. at ¶¶ 98-99). The agreement
was scheduled to last seven months, from January 31, 2008 to August 31, 2008.
(Id. at ¶ 99). The parties signed an addendum to that agreement on August 14,
2008 that provided for an increase in compensation to $10,000 monthly. (Id. at ¶¶
100, 102). The agreement was scheduled to last from September 1, 2008 to
September 30, 2010. (Id. at ¶ 102). Additionally, Christopher Enterprize was to
receive a ten-percent commission “for monetary value brought by the Christopher
Enterprize to the benefit of RCMP or the project.” (Id. at ¶ 103). RCMP paid
Christopher Enterprize $10,000 on September 1, 2008 pursuant to the consulting
agreement. (Id. at ¶ 108). This was the only payment RCMP ever made under the
contract. (Id. at ¶ 109). RCMP currently owes Christopher Enterprize more than
$240,000 under this contract, in addition to unspecified bonus payments. (Id. at ¶¶
Malinowski’s alleged misconduct led to other changes in the consulting
agreement. (Id. at ¶ 104). Malinowski was removed as managing member of RCMP
and replaced by Defendant Kretchik. (Id. at ¶ 104). In addition, RCMP acceded to
Christopher Enterprize’s demand that a paragraph be added to the consulting
agreement that held Christopher Enterprize harmless for “any claims that may arise
from the actions previously taken by or reliance upon information/documentation
provided by, [sic] RCMP’s representative Stanley ‘Rick’ Malinowski.” (Id. at ¶ 105).
Malinowski’s poor performance also caused defendants to seek an expanded
role for other consultants in the Fishing Camp project. (Id. at ¶ 114). Plaintiff
Hildebrant concluded that he and the other plaintiffs would have to provide more
services under their consulting contract than originally anticipated. (Id. at ¶ 115).
On September 1, 2008, Plaintiff Morelia Consulting and RCMP and Thomas Kretchik
entered into a consulting agreement. (Id. at ¶ 116). In exchange for a $10,000
monthly fee during the two-year period of the agreement, Plaintiff Morelia agreed to
assist RCMP in financing and developing the fish camp project. (Id. at ¶ 118).
Defendants also agreed to pay Morelia a ten percent commission on “‘any monetary
value that is a benefit to [RCMP].” (Id.). Defendant Christopher Wartella also
replaced Malinowski under this agreement. (Id. at ¶ 119). The parties agreed that
Morelia should be held harmless from any claims arising from Malinowski’s conduct.
(Id. at ¶ 120). RCMP and/or Kretchik made some payments under the consulting
agreement with Morelia, but many of those payments were late. (Id. at ¶¶ 121-125).
In addition, RCMP and Morelia continue to owe Morelia more than $90,000 under
the consulting contract, in addition to consulting fees. (Id. at ¶¶ 129-31).
On November 24, 2009, an attorney for RCMP sent plaintiffs a letter. (Id. at ¶
135). This letter describes an alleged agreement between RCMP and Morelia dated
September 1, 2008. (Id. at ¶ 136). Plaintiffs insist that no such agreement existed.
(Id. at ¶ 137). The letter claimed that plaintiffs were bound by a non-disclosure and
non-competition agreement contained in the agreement, and threatened the plaintiffs
with enforcement of such agreements. (Id. at ¶¶ 139-41). Plaintiffs allege that
defendants threatened such enforcement even though they knew that no such
agreements existed. (Id. at ¶¶ 141-42). The letter also referenced an escrow
agreement between the parties that was no longer in effect. (Id. at ¶¶ 143-48)
The same attorney sent plaintiffs’ counsel another letter on January 13, 2010.
(Id. at ¶ 151). The letter quoted language from the agreement plaintiffs claim never
existed that allegedly pledged plaintiffs to non-compete, non-disclosure, and survival
agreements. (Id. at ¶ 152). Defendants threatened to use the Federal Bureau of
Investigation to enforce this phony agreement, file civil and criminal actions, and
seek injunctive relief. (Id. at ¶ 155).
Plaintiffs contend that defendants actions violated a variety of federal laws,
and were pursued as apart of a conspiracy creating liability under the Racketeering
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961, et seq.
Plaintiffs initiated this action by filing suit in the Court of Common Pleas of
Luzerne County, Pennsylvania. On February 26, 2010, defendants removed the
case to this court. (See Doc. 1). Defendants then filed motions to dismiss the
complaint. Plaintiffs responded by filing an amended complaint, which is the subject
of the instant motions to dismiss. The amended complaint contains nineteen counts
related to defendants’ alleged fraud, breaches of contract, RICO conspiracy, and
unjust enrichment. The magistrate judge issued a report and recommendation
proposing that the motions be granted in part and denied in part, and the plaintiffs
filed objections, bringing the case to its present posture.
Plaintiffs bring this suit pursuant to the RICO Act, 18 U.S.C. §§ 1961 et seq.
The court therefore has jurisdiction pursuant to 28 U.S.C. § 1331 (“The district courts
shall have original jurisdiction of all civil actions arising under the Constitution, laws,
or treaties of the United States.”). The court has supplemental jurisdiction over
plaintiffs’ state-law claims pursuant to 28 U.S.C. § 1367.
In disposing of objections to a magistrate judge’s report and recommendation,
the district court must make a de novo determination of those portions of the report
to which objections are made. 28 U.S.C. § 636 (b)(1)(C); see also Henderson v.
Carlson, 812 F.2d 874, 877 (3d Cir. 1987). This court may accept, reject, or modify,
in whole or in part, the findings or recommendations made by the magistrate judge.
The district court judge may also receive further evidence or recommit the matter to
the magistrate judge with instructions. Id.
Defendants have filed motions to dismiss plaintiff’s complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6). When a defendant files a motion pursuant
to Rule 12(b)(6), all well-pleaded allegations of the complaint must be viewed as true
and in the light most favorable to the non-movant to determine whether “under any
reasonable reading of the pleadings, the plaintiff may be entitled to relief.” Colburn
v. Upper Darby Township, 838 F.2d 663, 665-66 (3d Cir. 1988) (citing Estate of
Bailey by Oare v. County of York, 768 F.3d 503, 506 (3d Cir. 1985), (quoting
Helstoski v. Goldstein, 552 F.2d 564, 565 (3d Cir. 1977) (per curiam)). The court
may also consider “matters of public record, orders, exhibits attached to the
complaint and items appearing in the record of the case.” Oshiver v. Levin,
Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.2 (3d Cir. 1994) (citations
omitted). The court does not have to accept legal conclusions or unwarranted
factual inferences. See Curay-Cramer v. Ursuline Acad. of Wilmington, Del., Inc.,
450 F.3d 130, 133 (3d Cir. 2006) (citing Morse v. Lower Merion Sch. Dist., 132 F.3d
902, 906 (3d Cir. 1997)).
The federal rules require only that plaintiff provide “‘a short and plain
statement of the claim showing that the pleader is entitled to relief,’” a standard
which “does not require ‘detailed factual allegations,’” but a plaintiff must make “‘a
showing, rather than a blanket assertion, of entitlement to relief’ that rises ‘above the
speculative level.’” McTernan v. City of York, 564 F.3d 636, 646 (3d Cir. 2009)
(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007)). The
“complaint must contain sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)
(quoting Twombly, 550 U.S. at 570). Such “facial plausibility” exists “when the
plaintiff pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the conduct alleged.” Id.
The magistrate judge recommended dismissal of several of the plaintiffs’
claims. The plaintiffs raise a number of objections. The court will address each in
1. Unjust Enrichment Claims (Counts IX, XIII, XV and XVII)
The magistrate judge recommended that Counts IX, XIII, XV and XVII should
be dismissed. These counts allege unjust enrichment. The magistrate judge
concluded that plaintiff’s unjust enrichment claims were based on contracts made
between the parties. Since unjust enrichment is based on a court implying a
contract and plaintiffs have alleged contracts actually existed between the parties,
plaintiffs have not made out a claim for unjust enrichment. Plaintiffs argue that they
are allowed to plead in the alternative and have done so here. As such, they should
be allowed to seek discovery on their unjust enrichment claims.
Plaintiffs allege that “Malinowski entered into the Cypress Lease, in large part,
because of its proximity to the Weeks Fishing Camp and so that the Premises might
be utilized during negotiations towards a deal relating to the Weeks Fishing Camp.”
(Amed. Complt. at ¶ 284). Moreover, “RCMP and the Individual Defendants used
the leased Premises for both business and personal purposes.” (Id. at ¶ 285).
Despite their use and enjoyment of this property, plaintiffs allege, “[t]he individual
Defendants and RCMP have been unjustly enriched by and through the efforts of
and their use of” the property. (Id. at ¶ 292).
Pennsylvania courts have held that “‘[u]njust enrichment’ is essentially an
equitable doctrine.” Styer v. Hugo, 619 A.2d 347, 350 (Pa. Super. Ct. 1993) (quoting
Wolf v. Wolf, 514 A.2d 901, 905 (Pa. Super. Ct. 1986)). The doctrine “permits
recovery where the claimant can show that a benefit was wrongly secured or
passively received, and that it would be unconscionable for the party receiving the
benefit to retain it without payment.” State Farm Mut. Auto. Ins. Co. v. Jim Bowe &
Sons, 539 A.2d 391, 393 (Pa. Super. Ct. 1991). Under these circumstances, “the
law implies a contract between the parties pursuant to which the plaintiff must be
compensated for the benefits unjustly received by the defendant.” Styer, 619 A.2d at
350. The existence of such a “contract . . . requires that the defendant pay the
plaintiff the value of the benefits conferred.” Id.
The court declines to adopt the report and recommendation on this point.
While the court agrees that the existence of a contract between the parties would
make a breach-of-contract claim, not an unjust enrichment claim, the appropriate
means of recovery for plaintiffs, the complaint does not allege that the individual
defendants or RPMC had a contract with the defendant. As such, the mechanism of
a contract-implied-in-law may be the only means by which plaintiffs may recover for
the defendants’ alleged misuse of their property. Moreover, even though plaintiff has
pled that a contract existed and sought recovery for breach of contract claims
against Defendant Kretchnik, discovery may reveal that the contract which allegedly
existed was invalid, making an unjust enrichment claim necessary for recovery. The
court will therefore decline to dismiss these claims at such an early stage in the
litigation. Discovery will certainly reveal whether breach of contract or unjust
enrichment is plaintiffs’ more appropriate claim on this matter. The plaintiffs’
objections on this matter will therefore be sustained, and the court will decline to
adopt the report and recommendation on this matter. The court will deny the
motions to dismiss plaintiffs’ unjust enrichment claims.
2. Breach of Contract Claim Against Defendant Kretchik
Magistrate Judge Prince concluded that plaintiffs had not stated a claim for
breach of the Morelia agreement against Defendant Kretchik. Though the
magistrate judge found that Defendant Kretchik had signed the contract, he
concluded that the Defendant signed only as the representative RCMP. Kretchik’s
actions did not create any individual liability. The plaintiffs object to this conclusion,
arguing that they have alleged that Kretchik signed the agreement in his individual
capacity, as well as a representative of RCMP. Moreover, Kretchik benefitted from
the agreement personally, and can therefore be liable.
The parties agree that Ohio law applies to the court’s assessment of whether
a contract claim exists against Kretchik. The issue identified by the magistrate judge
is whether Kretchnik individually was a party to the Morelia agreement. In Ohio, “the
construction of a written contract is a matter of law.” Alternatives Unlimited-Special,
Inc. v. Ohio Dep’t of Educ., 861 N.E. 2d 163, 170 (Ohio Ct. App. 2006). “In
construing a contract, the court’s primary objective is to ascertain and give effect to
the intent of the parties.” Id. The court looks to the language of the contract to
determine this intent, and “[w]here the terms of the contract are clear and
unambiguous, a court may not in effect create a new contract by finding an intent not
expressed by the parties in the clear language used within the contract.” Id. If a
“disparity” exists in the contract as to the identity of the signatories, a court is “to
peruse the contract as a whole to ascertain whether the entirety of the contract
resolves the apparent ambiguity.” Id. at 602.
The dispute here revolves around a contract the parties have denoted as the
“Morelia Consulting Agreement.” The plaintiffs allege that on September 1, 2008
“Morelia on one hand and RCMP and Thomas Kretchik on the other did enter into a
consulting agreement.” (Amend. Complt. at ¶ 116). The agreement obligated
Morelia to “‘assist RCMP in the financing and development of Weeks Fish Camp into
a viable commercial project.’” (Id. at ¶ 118). In exchange, the parties agreed that
“RCMP and Kretchik shall pay to Morelia a fee of Ten Thousand Dollars ($10,000)
per month for twenty four (24) months. (Id.). According to plaintiffs, “Kretchik did
personally cause certain payments to be made to Morelia under the Morelia
Consulting Agreements.” (Id. at ¶ 123). Many of these payments were late, and
“Kretchik” therefore allegedly breached the contract. (Id. at ¶¶ 124, 126, 128). As
such, plaintiffs allege, “Kretchik, individually, owes Morelia a sum exceeding Ninety
Thousand Dollars ($90,000) for the breach of the Morelia Consulting Agreement.”
(Id. at ¶ 130).
The parties executed the contract in question on September 1, 2008. (See
Exh. H. to Amend. Complt. (Doc. 16)). The contract states that “[t]his Consulting
Agreement . . . is dated as of September 1, 2008 by and among RCMP Enterprises,
LLC (“RCMP”), a Pennsylvania limited liability company, Thomas Kretchik
(“Kretchik”), and Morelia Consultants, LLC (Morelia).” (Id.). One provision of the
agreement requires that “RCMP and Kretchik shall pay Moreilia Consultants, LLC a
fee of $10,000 per month for a period of 24 months.” (Id. at ¶ 3). Another provision
requires RCMP and Kretchik to pay Morelia a portion of any cash received in the
sale of the fish camp. (Id. at ¶ 4). Kretchik also “warrant[ed] and “represent[ed]” that
he was “duly and properly authorized and empowered to act on behalf of RCMP.”
(Id. at ¶ 8). The agreement also contains a signature line. (Id., n.p.). That signature
line contains the signature of Thomas Kretchik, as “Managing Member” of RCMP
Enterprises, LLC. (Id.). The agreement does not contain the signature of Kretchnik
on his own behalf.
The magistrate judge concluded that the fact that Kretchik did not sign in his
individual capacity “is strong evidence that his signature bound only RCMP to the
contract.” (Report and Recommendation (Doc. 54) at 20). Moreover, the magistrate
judge found, Kretchik did not benefit individually from the contract, and the benefits
of the contract inured solely to RCMP. As such, Kretchik served solely as an agent
in the contract and should not be liable for any breach.
The court will sustain the plaintiffs’ objections to this portion of the report and
recommendation. Here, there is a disparity between the persons named as the
parties to the contract and the parties who actually signed the contract. While
Kretchik is named as a party to the contract, his signature appears only as a
representative of RCMP. Under those circumstances, the court is to look at the body
of the contract in an attempt to resolve this apparent ambiguity. The contract, as the
magistrate judge noted, supplies a role for Kretchnik that in many ways could be
described as an agency one. Kretchnik is to “cause to be paid” a sum to Morelia
after the sale of the fish camp. (Contract at ¶ 4). At the same time, however, the
contract provides that Kretchnik “shall pay” a monthly consulting fee to Morelia. (Id.
at ¶ 3). This appears to be a requirement that Kretchnik himself pay the fee.
Without more evidence the court cannot determine the intent of the parties. The
court therefore finds that discovery is necessary to resolve this apparent ambiguity
and dismissing the claim would at this point be premature. The court declines to
adopt the report and recommendation on this point and will deny the motions to
dismiss on this issue.
3. Piercing the Corporate Veil
Magistrate Judge Prince concluded that plaintiffs’ allegations were insufficient
for the court to ignore the corporate form and make the individual defendants liable
for the actions of RCMP.2 The court concluded that plaintiffs had not pled facts
The magistrate judge found that the corporate veil should be pierced in relation to
United Penn. The defendants do not object to this finding. Therefore, in order to decide
whether to adopt the report and recommendation, the court must determine whether a
review of the record evidences plain error or manifest injustice. See, e.g., Sullivan v.
Cuyler, 723 F.2d 1077, 1085 (3d Cir. 1983); FED. R. CIV. P. 72(b) 1983 Advisory Committee
Notes (“When no timely objection is filed, the court need only satisfy itself that there is no
clear error on the face of the record to accept the recommendation”); 28 U.S.C. § 636(b)(1).
The court finds neither plain error or manifest injustice, and will adopt the report and
sufficient to allege that RCMP was undercapitalized or was used to perpetuate a
fraud. The court found, however, that plaintiffs had properly alleged that RCMP
improperly commingled personal and corporate accounts. The plaintiffs object to the
court’s finding that they have not adequately alleged that the corporate veil should
be pierced on undercapitalization and fraud theories.
The magistrate judge found that the court should look to Pennsylvania law to
determine whether to pierce the corporate veil in relation to RCMP. In Pennsylvania,
“a corporation . . . is normally regarded as a legal entity separate and distinct from its
shareholders.” Ashley v. Ahsley, 393 A.2d 637, 641 (Pa. 1978); see also, College
Watercolor Group, Inc. v. William H. Newbauer, Inc., 360 A.2d 200, 208 (Pa. 1976)
(finding that a corporation can be an independent entity even if there is only a single
shareholder). As such, “there is a strong presumption in Pennsylvania against
piercing the corporate veil.” Lumax Indus. v. Aultman, 669 A.2d 893, 895 (Pa.
1995). At the same time, “whenever one in control of a corporation uses that
control, or uses the corporate assets, to further his or her own personal interests, the
fiction of the separate corporate identity may properly be disregarded.” Ashley, 393
A.2d at 641. Still, “[t]he corporate entity or personality will be disregarded only when
the entity [is] used to defeat public convenience, justify wrong, protect fraud or
defend crime.” Sams v. Redevelopment Authority of New Kensington, 244 A.2d 779,
781 (Pa. 1968). Therefore, “[t]he alter ego doctrine is not applied by a test, but by
recommendation on this point.
consideration of relevant ‘factors . . . to determine whether the debtor corporation is
little more than a legal fiction.’” Trustees of Nat. Elevator Indus. Pension, Health
Benefit & Educ. Funds v. Lutyk, 332 F.3d 188, 198 (3d Cir. 2003) (quoting Pearson
v. Component Tech. Corp., 247 F.3d 471, 484-85 (3d Cir. 2001)). Courts in
Pennsylvania have found allegations of “failure to adhere to corporate formalities,
substantial intertwining of personal and corporate affairs, undercapitalization, and
the furthering of personal interests” sufficient to pierce the corporate veil.
Commonwealth, Dep’t of Environmental Resources v. Peggs Run, 423 A.2d 765,
768-69 (Pa. Commw. Ct. 1980)
Plaintiffs allege that “[a]t all times relevant hereto, RCMP was and, upon
information and belief, remains undercapitalized.” (Amend. Complt. at ¶ 17). They
contend that RCMP’s undercapitalization was “evidenced by the fact that Kretchik
would personally pay certain obligations of RCMP, or cause RCMP to be funded
only to the limited extent that it was able to pay certain limited obligations as they
because [sic] due.”3 (Id. at ¶ 18). Moreover, plaintiffs contend, “Kretchik would
personally pay certain obligations of RCMP when due, or cause RCMP to be funded
only to the limited extent that was able to pay certain limited obligations as they
because [sic] due.” (Id. at ¶ 225). RCMP was not sufficiently “capitalized or funded”
to allow the corporation “to operate as a separate and distinct going concern without
The court assumes that the words “because” in the previous sentence and the
following sentence were intended to read “became.”
Kretchik’s” intervention and “domination.” (Id. at ¶ 226). This undercapitalization
was, plaintiffs allege, intentional, created by the defendants to facilitate their
“fraudulent, tortious and unlawful conduct under the company name and ostensibly
shielded by the corporate fiction.” (Id. at ¶ 227).
Plaintiffs contend that the magistrate judge erred in finding that they had not
stated a claim that would allow the corporate veil to be pierced because RCMP was
undercapitalized. The court agrees. The magistrate judge concluded that plaintiff
had not pled adequate facts to move the possibility of relief beyond a speculative
level. Plaintiffs had not pled, “for example, that RCMP was capitalized to some
particular extent (say, $2 million in equity) with some amount of revenue (say, $1
million annually) but had liabilities and operating costs that consistently exceeded
the wherewithal of the corporation.” (Report and Recommendation (Doc. 54) at 31).
In Pennsylvania, however, “[t]he law . . . lacks substantial guidance as to what
exactly constitutes undercapitalization.” Fletcher-Harlee Corp. v. Szymanski, 936
A.2d 87, 100 n.17 (Pa. Super. Ct. 2007). Courts have offered only a general
definition: a firm that does “not have enough capital to carry on its business.” Id. at
100. At this preliminary stage, the allegations summarized above are sufficient to
state a claim that RCMP lacked sufficient capital to carry out its business. Plaintiffs
have therefore stated a claim that is more than speculative and is plausible on its
face and are entitled to engage in discovery to determine whether RCMP’s
capitalization was sufficient. The court will sustain the plaintiffs’ objection and
decline to adopt the report and recommendation on this count. The motion to
dismiss will be denied.4
4. Participation Theory
The plaintiffs also object to the magistrate judge’s finding that Count VIII of the
complaint should be dismissed because plaintiffs failed to state a claim under the
participation theory. The magistrate judge concluded that plaintiffs had not alleged
that the individual defendants had participated in any tortious activity engaged in by
a limited liability company. First, the magistrate judge concluded that plaintiffs had
not properly alleged any tortious behavior by the defendants, and thus could not
allege any tort liability under the participation theory. Moreover, plaintiffs’ allegations
were far too conclusory to establish that the individual plaintiffs could be subject to
liability on a participation theory.
Pennsylvania courts have articulated a theory of liability against corporate
officers that stands separate from the veil-piercing theory discussed above. Under
The magistrate judge found that plaintiffs had adequately alleged a commingling of
corporate and personal funds sufficient to allow for piercing the corporate veil. Plaintiffs
argue that the magistrate judge should also have found that they have alleged the
corporate veil could be pierced because defendants failed to observe corporate formalities.
Courts have found that “[n]ot every disregard of corporate formalities or failure to maintain
corporate records justifies piercing the corporate veil. That remedy is available only if it is
shown that a corporation’s affairs and personnel were manipulated to such an extent that it
became nothing more than a sham used to disguise the alter ego’s use of its assets for his
own benefit in fraud of its creditors.” Kaplan v. First Options, 19 F.3d 1503, 1521 (3d Cir.
1994). Plaintiffs allege that RCMP failed to observe corporate formalities by allowing
Kertchik to make decisions unilaterally, without regard for the formal corporate governance
procedures that applied to the company. (Brief in Support of Objections (Doc. 62) at 11).
The court agrees that a failure to observe corporate formalities, if proved, could be grounds
to pierce the corporate veil. Plaintiffs may proceed on this theory as well.
the “participation theory” of liability, “the court imposes liability on the individual as an
actor rather than as an owner. Such liability is not predicated on a finding that the
corporation is a sham and a mere alter ego of the individual corporate officer.
Instead, liability attaches where the record establishes the individual’s participation in
the tortious activity.” Wicks v. Milzoco Builders, Inc., 470 A.2d 86, 90 (Pa. 1983). As
such, the participation theory provides that “a corporate officer can be held liable for
‘misfeasance,’ i.e., the improper performance of an act, but not for ‘mere
nonfeasance,’ i.e., the omission of an act which a person ought to do.” Brindley v.
Woodland Village Restaurant, 652 A.2d 865, 868 (Pa. Super. Ct. 1995).
The court will sustain plaintiffs’ objections on these grounds as well. As
explained above, the plaintiffs have stated claims for tort liability against the
individual defendants. This liability came in the course of acts performed for the
company, and thus plaintiffs have stated a claim for liability on a participation theory.
The court will decline to adopt the report and recommendation on these grounds and
deny the motions to dismiss this claim.
5. Negligent and Fraudulent Misrepresentation
Plaintiffs also object to the magistrate judge’s finding that their claims for
negligent and fraudulent representation should be dismissed. Plaintiffs argue that
they have pled sufficient facts to establish both negligent and fraudulent
In Pennsylvania, a plaintiff asserting negligent misrepresentation must allege:
“(1) a misrepresentation of a material fact; (2) the representor must either know of
the misrepresentation, must make the misrepresentation without knowledge as to its
truth or falsity, or must make the representation under circumstances in which he
ought to have known of its falsity; (3) the representor must intend the representation
to induce another to act on it; and (4) injury must result to the party acting in
justifiable reliance on the misrepresentation.” Weisblatt v. Minnesota Mutual Life Ins.
Co., 4 F. Supp. 2d 371, 377 (E.D. Pa. 1998); see also Gibbs v. Ernst, 647 A. 2d 882,
890 (Pa. 1994) (finding that “negligent misrepresentation differs from intentional
misrepresentation in that to commit the former, the speaker need not know his or her
words are untrue, but must have failed to make reasonable investigation of the truth
of those words.”). The magistrate judge concluded that plaintiffs had not stated a
claim in this instance because plaintiffs did not allege that defendants supplied false
information upon which plaintiffs relied in their business transactions.
The court will sustain plaintiffs’ objections on this count. Plaintiffs allege that
the individual defendants represented to them that “United Penn was a validly
existing company.” (Amend. Complt. at ¶ 75). Further, they contend that this
statement about United Penn was a “misrepresentation,” and that they “rel[ied] on
this misrepresentation and believe[d] United Penn to be a validly existing company.”
(Id.). Moreover, based on this misrepresentation, plaintiff Chirstopher Enterprize
determined “to expend considerable efforts and . . . provide[d] assistance and
guidance to United Penn in an effort to acquire commitments for financing in the
name of United Penn.” (Id. at ¶ 79). The court finds this is an allegation of negligent
misrepresentation. Plaintiffs contend that material fact alleged here–the existence
of United Penn as a valid entity–was untrue, that defendants knew or should have
known that the representation was untrue, that they intended to have plaintiffs act on
that misrepresentation, and plaintiffs acted to their harm in reliance on that
misrepresentation. The court will decline to adopt the report and recommendation
on this point and deny the motions to dismiss.
Plaintiffs also object to the magistrate judge’s finding that plaintiff’s claim for
fraudulent misrepresentation should be dismissed. A tort action for intentional
misrepresentation or fraud requires: “(1) a representation; (2) which is material to the
transaction at hand; (3) made falsely, with knowledge of its falsity or recklessness as
to whether it is true or false; (4) with the intent of misleading another into relying on
it; (5) justifiable reliance on the misrepresentation; and (6) the resulting injury was
proximately caused by the reliance.” Office of Disciplinary Counsel v. Anonymous
Attorney A, 714 A.2d 402, 407 n.8 (Pa. 1998); see also RESTAT. 2d of TORTS § 525
(stating that “[o]ne who fraudulently makes a misrepresentation of fact, opinion,
intention or law for the purpose of inducing another to act or to refrain from action in
reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused
to him by his justifiable reliance upon the misrepresentation.”).
The court will likewise sustain the objections to the magistrate judge’s findings
here. As explained above, the plaintiff has alleged that defendants knowingly
misrepresented the state of United Penn in an effort to induce plaintiffs to provide
services to them. If plaintiffs could prove these facts they could prevail on their
fraudulent misrepresentation claim. The court will therefore decline to adopt the
report and recommendation on this point and deny the motions to dismiss.
6. Conspiracy Claims
Finally, the plaintiffs object to the magistrate judge’s finding that the
conspiracy claims against the defendants should be dismissed. The magistrate
judge concluded that plaintiffs could not make out a civil conspiracy claim because
the defendants were all agents of a single principal. The intra-corporate conspiracy
doctrine bars conspiracy claims among agents of a single entity, and thus plaintiffs
cannot bring those claims that arose for their work for RCMP or for United Penn
while the company still existed. Moreover, none of the defendants’ alleged
conspiratorial actions were taken in their individual capacities.
In Pennsylvania, “[t]o prove a civil conspiracy, it must be shown that two or
more persons combined or agreed with intent to do an unlawful act or to do an
otherwise lawful act by unlawful means.” Thompson Coal Co. v. Pike Coal Co., 412
A.2d 466, 472 (Pa. 1979). Further, a plaintiff must have “[p]roof of malice, i.e., an
intent to injure,” and the “unlawful intent must be absent justification.” Id.; see also
Skipworth v. Lead Industries Assoc., Inc., 690 A.2d 169, 174 (Pa. 1997) (holding that
to prevail on a civil conspiracy claim a plaintiff must show that defendants “acted in
concert to commit an unlawful act or do a lawful act by unlawful means, and that
they acted with malice.”).
The court has concluded that plaintiffs have raised allegations sufficient to
pierce the corporate veil. As such, the intra-corporate conspiracy doctrine does not
apply to the case. See, e.g., Gen. Refractories Co. v. Fireman’s Fund Ins. Co., 337
F.3d 297, 313 (3d Cir. 2003) (under the “intracorporate conspiracy doctrine” “an
entity cannot conspire with one who acts as its agent.”). Since the court has
determined that plaintiffs have properly alleged that the corporate veil should be
pierced, the individual defendants may be liable for corporate actions and any
distinction created by the intra-corporate doctrine does not exist. Moreover, plaintiffs
have alleged that the defendants engaged in fraudulent and negligent
misrepresentation, as well as a number of violations of the RICO act, and that the
individual defendants acted in combination and as part of a scheme to commit these
violations. Plaintiffs have therefore stated a claim for civil conspiracy. The court will
therefore sustain the plaintiffs’ objections on this matter. The court will decline to
adopt the report and recommendation and deny the motions to dismiss on these
For the reasons stated above, the court will sustain the plaintiff’s objections to
the report and recommendation. The court will not adopt the report and
recommendation, which proposed that the court grant in part and deny in part
defendants’ motion to dismiss. The court will instead deny the motions to dismiss
and remand the case to the magistrate judge for further proceedings.5 An
appropriate order follows.
The case will be remanded to Magistrate Judge Thomas M. Blewitt, who is now
assigned to the case.
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
MORELIA CONSULTANTS, LLC;
THE CHRISTOPHER ENTERPRIZE,
CRH NAPLES DEVELOPMENT, LLC;
(Magistrate Judge Blewitt)
RCMP ENTERPRISES, LLC;
UNITED PENN INVESTMENT GROUP, :
CHRISTOPHER M. WARTELLA;
STANLEY MALINOWSKI, a/k/a Rick :
MICAHEL OLENGINSKI; and
JEFFREY N. WOYTOWICH,
AND NOW, to wit, this 9th day of September 2011, the plaintiffs’ objections
(Doc. 61) to the report and recommendation of Magistrate Judge William T. Prince
(doc. 54) are hereby SUSTAINED. The report and recommendation is NOT
ADOPTED. The motions to dismiss by Defendants RCMP Enterprises and United
Penn Investment Group (Doc. 19), Defendant Thomas Kretchik (Doc. 21) and
Michael Olenginski and Jeffrey Wytomowich (Doc. 22) are hereby DENIED. The
case is hereby REMANDED to Magistrate Judge Thomas M. Blewitt for further
BY THE COURT:
s/ James M. Munley
JUDGE JAMES M. MUNLEY
UNITED STATES DISTRICT COURT