Rainbow Business Solutions et al v. Merchant Services, Inc et al

Filing 425

ORDER by Judge Claudia Wilken GRANTING IN PART AND DENYING IN PART PLAINTIFFS #383 MOTION FOR LEAVE TO FILE A THIRD AMENDED COMPLAINT, GRANTING IN PART, DENYING IN PART AND DEFERRING IN PART PLAINTIFFS #385 MOTION TO FILE UNDER SEAL AND SETTING FURTHER DATES. (ndr, COURT STAFF) (Filed on 12/6/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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JUST FILM, INC.; RAINBOW BUSINESS
SOLUTIONS, doing business as
PRECISION TUNE AUTO CARE;
BURLINGAME MOTORS, INC.; DIETZ
TOWING, INC.; THE ROSE DRESS,
INC.; VOLKER VON GLASENAPP; JERRY
SU; VERENA BAUMGARTNER; TERRY
JORDAN; LEWIS BAE; and ERIN
CAMPBELL, on behalf of
themselves, the general public
and those similarly situated,

United States District Court
For the Northern District of California

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Plaintiffs,
v.
MERCHANT SERVICES, INC.; NATIONAL
PAYMENT PROCESSING; UNIVERSAL
MERCHANT SERVICES, LLC; UNIVERSAL
CARD, INC.; JASON MOORE; NATHAN
JURCZYK; ROBERT PARISI; ERIC
MADURA; FIONA WALSHE; ALICYN ROY;
MBF LEASING, LLC; NORTHERN
FUNDING, LLC; NORTHERN LEASING
SYSTEMS, INC.; GOLDEN EAGLE
LEASING, LLC; LEASE SOURCE-LSI,
LLC; LEASE FINANCE GROUP, LLC;
JAY COHEN; LEONARD MEZEI; SARA
KRIEGER; BRIAN FITZGERALD; SAM
BUONO; MBF MERCHANT CAPITAL, LLC;
RBL CAPITAL GROUP, LLC; WILLIAM
HEALY; JOSEPH I. SUSSMAN; JOSEPH
I. SUSSMAN, P.C.; and SKS
ASSOCIATES, LLC,

No. C 10-1993 CW
ORDER GRANTING IN
PART AND DENYING
IN PART
PLAINTIFFS’ MOTION
FOR LEAVE TO FILE
A THIRD AMENDED
COMPLAINT (Docket
No. 383), GRANTING
IN PART, DENYING
IN PART AND
DEFERRING IN PART
PLAINTIFFS’ MOTION
TO FILE UNDER SEAL
(Docket No. 385)
AND SETTING
FURTHER DATES

Defendants.
________________________________/
Plaintiffs Volker von Glasenapp, who was the sole shareholder

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of Just Film, Inc. and acquired its assets when it dissolved in
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2011; Rainbow Business Solutions, doing business as Precision Tune
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Auto Care, and its owner Jerry Su; Verena Baumgartner, doing
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business as Burlingame Motors; Dietz Towing, Inc., and its CFO and
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Secretary, Terry Jordan; The Rose Dress, Inc., and its owner Lewis

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Bae; and Erin Campbell, doing business as Silicon Valley Pet

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Clinic, move for leave to file their proposed third amended

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complaint (3AC) in this putative class action.

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Merchant Services, Inc. (MSI), National Payment Processing, Inc.

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(NPP), Universal Card, Inc. (UCI), Universal Merchant Services,

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LLC (UMS), Jason Moore, Nathan Jurczyk, Robert Parisi, Eric

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Madura, Fiona Walshe, Alicyn Roy (collectively, the Merchant

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Services Defendants), Northern Leasing Systems, Inc., MBF Leasing

Defendants

United States District Court
For the Northern District of California

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LLC (MBF), SKS Associates LLC (SKS), Jay Cohen, Leonard Mezei,

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Sara Krieger, and Sam Buono (collectively, the Leasing Defendants)

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oppose the motion.

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papers.

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Court GRANTS the motion in part and DENIES it in part.

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also DENIES in part Plaintiffs’ motion to file under seal and

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DEFERS it in part, and SETS further case management dates.

The motion was taken under submission on the

Having considered the papers filed by the parties, the
The Court

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BACKGROUND

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Plaintiffs allege that Defendants defrauded them and the

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putative class members in a scheme involving credit and debit card

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processing services and equipment.

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individual Plaintiff’s last name is used to refer to both that

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Plaintiff and his or her business, where it is a separate entity.

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Plaintiffs divide the Defendants into two categories: Merchant

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Services Defendants and Leasing Defendants.

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Below, for brevity, each

Plaintiffs refer to MSI, NPP, UCI and UMS collectively as the

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Merchant Services Companies and allege that each of them is the

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alter ego of the others.

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that MSI and NPP were created to trick banks and regulators into

In the proposed 3AC, Plaintiffs allege

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believing the Merchant Services Companies were legitimate

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corporations, and that UMS and UCI were created to hide the

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illegal activities and proceeds thereof from banks and regulators.

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Plaintiffs allege the following about the individual Merchant

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Services Defendants: Moore is the President and in control of each

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of the Merchant Services Companies, the sole employee, officer,

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director and shareholder of MSI and NPP, and owns sixty percent of

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shares in UCI and one hundred percent of shares in UMS; Jurcyzk

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manages all operations of the Merchant Services Companies, is

United States District Court
For the Northern District of California

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UCI’s Vice President of Operations and holds himself out as the

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Vice President of MSI and NPP; Parisi owns forty percent of the

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shares of UCI, is UCI’s Senior Vice President and holds himself

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out as the Senior Vice President of MSI and NPP; Madura is UCI’s

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Manager of Corporate Operations and holds himself out as the

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Manager of Corporate Operations for MSI and NPP; Walshe was the

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Regional Sales Manager for the Merchant Services Companies and

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directed their San Jose, California regional office; and Roy is a

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Senior Account Executive for the Merchant Services Companies.

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Plaintiffs contend that the Merchant Services Companies are alter

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egos of Moore, Jurczyk and Parisi.

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Leasing Defendants are entities and individuals based outside

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of California.

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and controls SKS through a shell company, Pushpin Holdings, LLC.

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Plaintiffs refer collectively to Northern Leasing, MBF and SKS as

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the Northern Leasing Companies, each of which is allegedly the

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alter ego of the others.

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directed and controlled the Northern Leasing Companies: Cohen,

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Northern Leasing’s President and CEO; Mezei, Northern Leasing’s

Plaintiffs allege that Northern Leasing owns MBF

The following individuals allegedly

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Chairman of the Board; Krieger, Northern Leasing’s Vice President

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for Operations, who holds herself out as MBF’s Vice President; and

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Buono, Northern Leasing’s former Vice President of Collections and

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Customer Service, who also holds himself out as MBF’s Vice

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President.

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Buono, transfer monies obtained through the alleged fraud in shell

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companies, such as Northern Funding LLC.

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Plaintiffs allege that the Leasing Defendants, except

In the currently operative second amended complaint (2AC),
Plaintiffs generally explain the alleged fraud as follows.

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United States District Court
For the Northern District of California

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and debit card transactions are processed through financial

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networks, called interchanges, run by entities like Visa and

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Mastercard.

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card processing services directly to merchants, or indirectly

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through companies and individuals known as Independent Sales

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Organizations and Merchant Service Providers (ISOs/MSPs).

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¶¶ 67-68.

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both Visa and Mastercard, as well as with a bank or a

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bank-approved processing entity, called a processor.

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¶¶ 67-68.

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Credit

Banks, as members of these interchanges, can sell

2AC

These ISOs/MSPs must be licensed and registered with

Id. at

Merchants pay a fee for each credit and debit card

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transaction.

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that issued the credit or debit card to the customer, (2) the

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interchange, (3) the bank through whom the merchant is accepting

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the card, (4) the ISO/MSP that solicited the merchant and/or

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provides customer service to the merchant (if any) and (5) the

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third party-processor (if any).”

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required to pay for credit and debit card processing equipment,

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such as card terminals.

Id. at ¶ 69.

The fee is “shared among (1) the bank

Id.

Id. at ¶ 70.
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Merchants may also be

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Plaintiffs alleged that Merchant Services Defendants are

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ISO/MSPs, and Leasing Defendants provided card processing

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equipment.

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marketed equipment leases to merchants on behalf of MBF Leasing.

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2AC ¶ 133.

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Pursuant to a contract, Merchant Services Defendants

When marketing card processing services, the Merchant
Services Companies’ independent sales agents, such as Walshe,

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misled merchants about card transaction rates.

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these sales agents used a so-called Rate Sheet, which suggested

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United States District Court
For the Northern District of California

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that the merchants would be charged a fixed rate of 1.79 percent

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for each card transaction plus a flat monthly service fee.

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fact, however, the rates for each transaction varied based on the

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type of credit card a consumer used.

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charges associated with card processing services were reflected on

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the Rate Sheet, even though sales agents represented they were.

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The Rate Sheet had a signature line for a merchant to affirm that

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“all fees have been sufficiently explained to my satisfaction.”

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2AC ¶ 212.

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through Merchant Services Defendants, the merchant generally was

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asked to sign an Application for Merchant Agreement.

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were instructed to represent that the Application reflected “the

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entire arrangement with the Merchant Services Defendants.”

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¶ 257.

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the Merchant Card Processing Agreement (MCPA), which provided the

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terms for card processing services.

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the MCPA and instructed the merchant “to review the terms and

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conditions of a ‘Merchant Card Processing Agreement included with

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this application.’”

In particular,

In

Further, not all of the

If a merchant decided to seek card processing services

Sales agents

Id. at

However, sales agents did not provide the merchant with

Id. at ¶ 258.
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The Application referred to

According to Plaintiffs,

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although the MCPAs may have their signatures acknowledging the

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terms, this is because “Merchant Services Defendants create a

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signed version using scanners and computer programs to copy the

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signature . . . onto the document.”

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Id. at ¶ 264.

The sales agents also misrepresented the need for and value

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of leasing card processing equipment from MBF Leasing.

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Finance Leases (EFLs) governed merchants’ use of this equipment.

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Some Plaintiffs signed EFLs and some alleged that their signatures

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on those documents were forged.

United States District Court
For the Northern District of California

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Equipment

Plaintiffs also complain about various fees they were

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charged, including for a “first and last month” deposit, which was

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not credited to class members’ accounts, and a “cancellation fee,”

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which the Merchant Services Defendants deducted from class

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members’ accounts.

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Plaintiffs allege that certain Defendants, without a

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permissible purpose, inquired into and placed negative notations

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on certain Plaintiffs’ consumer credit reports.

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Von Glasenapp, Jordan and other merchants received “letters a

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couple times a year informing them of their obligation to pay a

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personal property tax on the equipment they” leased.

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Leasing Defendants determined the amount of this tax and debited

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it, along with a processing fee, from Von Glasenapp’s, Jordan’s

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and other merchants’ bank accounts.

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“are not actually due to, nor are they remitted to, any taxing

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authority.”

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shell companies owned by Leasing Defendants.

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Id. ¶ 278.

2AC ¶ 274.

However, the collected taxes

Instead, the funds were transferred to

On November 29, 2010, the Court resolved various motions to
dismiss Plaintiffs’ first amended complaint and allowed Plaintiffs
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to file a second amended complaint, to remedy various identified

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deficiencies.

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Docket No. 179.

On August 29, 2011, the Court resolved various motions to
dismiss the second amended complaint.

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order, the Court dismissed some of Plaintiffs’ claims against

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particular Defendants without leave to amend.

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that, “to the extent that the Court denies leave to amend, it does

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so because Plaintiffs have failed to state claims, notwithstanding

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the Court’s previous instructions, or because they do not suggest

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United States District Court
For the Northern District of California

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that the claims are not futile,” but that, “if Plaintiffs obtain

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evidence over the course of discovery supporting any claim

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dismissed by the Court, they may move for leave to amend their

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complaint.”

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Docket No. 292.

In that

The Court stated

Docket No. 292, 41.

On February 2, 2012, the Court granted Plaintiffs’ motion to

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dismiss the claims asserted by Plaintiff Burlingame Motors, Inc.

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and to file an amended pleading to clarify that Burlingame Motors

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is a fictitious business name of Plaintiff Baumgartner.

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No. 335.

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entitled “Amendment No. 1 to Second Amended Complaint.”

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No. 327.

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“promptly file a third amended complaint incorporating the changes

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to paragraphs 4 and 8 of the 2AC contained in their proposed

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amendment.”

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filing . . . an amended pleading must reproduce the entire . . .

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pleading and may not incorporate any part of a prior pleading by

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reference.”)).

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at that time, and instead have included the changes to paragraphs

Docket

Plaintiffs had sought to file a separate document
Docket

In the order, the Court required that Plaintiffs

Id. at 5 (citing Civil Local Rule 10-1 (“Any party

Plaintiffs did not file a third amended complaint

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7

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four and eight in the proposed third amended complaint at issue

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now.

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On August 23, 2012, Plaintiffs filed the instant motion for

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leave to file a third amended complaint and simultaneously filed

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their motion for class certification to prosecute the claims in

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the proposed third amended complaint.

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Docket Nos. 383, 387.

On August 24, 2012, Defendants filed various motions to

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extend time to oppose the motion for class certification until

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after the motion for leave to amend was resolved.

United States District Court
For the Northern District of California

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Docket Nos.

388, 389.
On August 31, 2012, the Court granted Defendants’ motions to

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extend time.

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schedule on the motion for class certification and stated that it

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would be reset in the order resolving the instant motion.

Docket No. 397.

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The Court vacated the briefing

LEGAL STANDARD
The case management order in this action provided that the

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deadline to add additional parties or claims was December 1, 2011.

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Docket No. 276.

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modified except upon a showing of good cause and by leave of the

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district judge.”

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been filed, a party’s ability to amend the pleadings is “governed

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by Rule 16(b), not Rule 15(a).”

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Inc., 975 F.2d 604, 608 (9th Cir. 1992).

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here, a party seeks to amend a pleading after the date specified

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in a scheduling order, it must first show “good cause” for the

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amendment under Rule 16(b).

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Under Rule 16(b), “[a] schedule shall not be

Fed. R. Civ. Pro. 16(b).

Where a schedule has

Johnson v. Mammoth Recreations,
Therefore, where, as

Id.

In order to determine whether good cause exists, courts
primarily consider the diligence of the party seeking the
8

1

modification.

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232 F.3d 1271, 1294 (9th Cir. 2000).

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participate from the outset in creating a workable Rule 16

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scheduling order but they must also diligently attempt to adhere

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to that schedule throughout the subsequent course of the

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litigation.”

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Cal. 1999).

8
9

Id. at 609; see also Coleman v. Quaker Oats Co.,
“[N]ot only must parties

Jackson v. Laureate, Inc., 186 F.R.D. 605, 607 (E.D.

If good cause is shown, the party must next demonstrate that
the amendment is proper under Rule 15.

Johnson, 975 F.2d at 608.

United States District Court
For the Northern District of California

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Under that rule, courts consider five factors when assessing the

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merits of a motion for leave to amend: undue delay, bad faith,

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futility of amendment, prejudice to the opposing party and whether

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the plaintiff has previously amended the complaint.

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Nev. Sys. of Higher Educ., 555 F.3d 1051, 1055 n.3 (9th Cir.

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2009).

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“futility of amendment alone can justify the denial of a motion.”

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Id. at 1055.

Ahlmeyer v.

Although these five factors are generally all considered,

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DISCUSSION

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Plaintiffs contend that they discovered new facts during

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discovery that support extending liability for certain claims to

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other Defendants, beyond those against whom they currently have

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stated claims.

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previously dismissed.

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revealed additional predicate acts for their RICO claims.

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Defendants do not argue that Plaintiffs have acted without

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diligence or with undue delay, but instead respond that the

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proposed amendments would represent a fundamental change to

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Plaintiffs’ case, for which Defendants should be permitted to take

Included in these are claims that this Court had
Plaintiffs also state that discovery has

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1

further discovery before the class certification motion is

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briefed, and that the proposed amendments are deficient as a

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matter of law, making amendment futile.

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In addition to these changes, Plaintiffs also seek to change

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the definitions of proposed subclasses, and add new proposed

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subclasses, although they keep the same overall class definition.

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Further, Plaintiffs seek to eliminate references to former

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Plaintiff Just Film, Inc., which was dissolved in late 2011 with

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its remaining assets being acquired by its sole shareholder, Von

United States District Court
For the Northern District of California

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Glasenapp.

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oppose these changes.

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I.

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It does not appear that Defendants substantively

Reinstatement of dismissed claims and extension of existing
claims

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A. Reinstatement of dismissed claims against Northern Leasing
Systems, Inc.

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In the August 29, 2011 order, the Court dismissed Plaintiffs’

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claims against Northern Leasing for RICO violations, common law

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fraud, breach of contract, breach of implied covenant, negligent

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misrepresentation, and conversion.

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that Plaintiffs had not alleged sufficiently that Northern Leasing

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had participated directly in the alleged misconduct or could be

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held liable through an alter ego theory based on its relationship

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with MBF.

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ego liability as boilerplate and found that they had not alleged

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facts to support the theory.

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At that time, the Court found

The Court described Plaintiffs’ allegations of alter

In the proposed 3AC, Plaintiffs seek to add new allegations

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against Northern Leasing, supporting its direct involvement in the

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improper activity, and seek to reinstate each of these dismissed

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claims against it.

Specifically, Plaintiffs now allege that
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Northern Leasing was the entity that directed and conducted the

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wire transfers from class members’ bank accounts and received the

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funds, and that Northern Leasing had instructed its banks to put

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in the description field the name of a shell company that it had

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set up, such as MBF, so that the true identity of the company

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making the withdrawals was obscured.

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¶¶ 86, 92, 462.

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fact the entity that had performed all of the conduct that was

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purportedly done by MBF, including sending mailings and making

See, e.g., Proposed 3AC

They also allege that Northern Leasing was in

United States District Court
For the Northern District of California

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phone calls to collect debts.

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In their reply, Plaintiffs clarify that they are not alleging that

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Northern Leasing should be held liable under an alter ego theory,

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but rather are alleging that it should be held liable directly

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because it was in fact the wrongdoer.

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learned this only in the discovery process.

See, e.g., id. at ¶¶ 490, 492-99.

Plaintiffs assert that they

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Defendants do not argue that Plaintiffs have insufficiently

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plead the involvement of Northern Leasing in the claims for RICO

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violations, common law fraud, breach of contract, breach of

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implied covenant, negligent misrepresentation, and conversion.

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Instead, they argue that the new RICO predicate acts are

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insufficiently plead, as to Northern Leasing as well as other

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Defendants.

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Defendants have not shown that Plaintiffs’ claims are otherwise

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futile, and because Plaintiffs have now alleged Northern Leasing’s

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direct involvement in the conduct at issue in these claims,

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Plaintiffs may reinstate these claims against Northern Leasing.

This argument will be addressed below.

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Because

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B. Reinstatement of dismissed FCRA claims against Universal
Card, Inc.

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In the August 29, 2011 order, the Court held that “Von

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Glasenapp and Bae state FCRA claims against Universal Merchant

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Services, Northern Leasing and MBF Leasing.”

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However, the Court dismissed the FCRA claim against other

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Defendants, including Universal Card, Inc. (UCI), as based on

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“boilerplate alter ego allegations.”

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9

Docket No. 292, 32.

Id.

Plaintiffs seek to make the FCRA claim against Universal
Merchant Services LLC against UCI as well.

Plaintiffs allege that

United States District Court
For the Northern District of California

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Universal Merchant Services LLC was purportedly dissolved

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(although they allege that the dissolution process was not done

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properly and that it is still recognized as a corporate entity by

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the state of California) and its assets were transferred to UCI.

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Proposed 3AC ¶ 231.

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with Experian on behalf of UCI to conduct credit inquiries, he

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stated that the company name was “Universal Merchant Services,”

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even though that company had been purportedly dissolved, and “that

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the ‘Affiliated or Parent Company’ of Universal Merchant Services

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was ‘Universal Card, Inc.’”

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allege that UCI, using the registration obtained with Experian

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under the name of Universal Merchant Services LLC, conducted

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multiple inquiries on Von Glasenapp’s credit report, and that it

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used the Universal Merchant Services name, so that, if Von

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Glasenapp saw the inquiry on his credit report, he would be unable

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to hold UCI responsible.

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that they learned during UCI’s Rule 30(b)(6) deposition that it

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was UCI that had the relationship with Experian.

Plaintiffs also allege when Moore registered

Id. at ¶ 423.

Plaintiffs further

Id. at ¶ 485, 501.

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12

Plaintiffs represent

Mot. at 7.

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Defendants have not opposed the resurrection of the FCRA

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claim against UCI.

3

Merchant Services LLC became UCI and that “UCI assumed all debts

4

and obligations of UMS.”

5

Plaintiffs may amend to reinstate the FCRA claim against UCI.

6
7

In fact, Defendants acknowledge that Universal

Opp. at 13 n.12.

Accordingly,

C. Reinstatement of dismissed conversion claims against
certain Merchant Services Defendants
In the 2AC, Plaintiffs alleged that “Defendants have used ACH

8
withdrawal to extract sums of money from the bank accounts of
9
Plaintiffs and the Class to which they have no right,” and that
10
United States District Court
For the Northern District of California

the Merchant Services Defendants specifically had withdrawn “sums
11
equivalent to the first and last month’s payment on the equipment
12
finance leases, when in fact the funds were not credited to class
13
members accounts, but rather, counted towards Merchant Services
14
Defendants[’] own revenues.”

See 2AC ¶¶ 270-72, 350, 670-73.

15
In the August 29, 2011 order, the Court held that Plaintiffs
16
stated a claim for conversion against MSI, which they alleged had
17
made the actual withdrawal, but dismissed their claims against the
18
other Merchant Services Defendants for failure to allege facts to
19
support the alter ego theory of liability.

Docket No. 292, 34.

20
Plaintiffs now seek to re-allege conversion claims against
21
UCI, NPP, Jurczyk, Moore and Parisi, based on their direct
22
involvement in the purported conversion, and to add additional
23
allegations regarding how the conversion was carried out.
24
Plaintiffs also seek to add a new theory of conversion, alleging
25
that MSI, UCI, NPP, Jurczyk, Moore and Parisi used so-called “gray
26
ACH forms” that purported to authorize “Merchant Services” or
27
“Universal Merchants Services,” unregistered fictitious entities,
28
13

to make withdrawals and that the true identity of the company

2

receiving the funds obtained through these forms was never

3

disclosed to Plaintiffs and class members.

4

because the class members had no knowledge of who received the

5

funds, they could not have authorized the deductions.

6

Proposed 3AC ¶ 831.

7

forms to make withdrawals that were not authorized, Plaintiffs

8

seek to add allegations that these Defendants trained their sales

9

agents to leave the amount on the gray ACH form blank and to fill

10
United States District Court
For the Northern District of California

1

it in with an unauthorized “commission,” typically equal to one or

11

two months of lease payments plus taxes, after the class members

12

had signed the forms.

13

allegations that these Defendants wrongfully used these forms to

14

collect unauthorized cancellation fees from the class members.

15

Id. at ¶¶ 836-37.

16

Defendants used gray ACH forms from before July 2007 to collect

17

from merchants fees for chargebacks and insufficient funds that

18

were not authorized specifically on those forms.

19

¶¶ 368-72.

20

Plaintiffs aver that,

See, e.g.,

To their theory that Defendants used the ACH

Id. at ¶¶ 361-367.

They also ask to add

Finally, Plaintiffs seek to allege that these

Id. at

Targeting only the allegations that these Defendants did not

21

disclose to Plaintiffs who the ACH form actually authorized to

22

make deductions, Merchant Services Defendants argue that

23

Plaintiffs’ new conversion theories inadequately plead damages.

24

They argue that Plaintiffs do not dispute that they signed ACH

25

forms authorizing someone to debit their accounts and that

26

Plaintiffs have not alleged that their accounts were debited by

27

more than the amount reflected on the ACH forms or that someone

28

else tried to collect this amount again.
14

Defendants also contend

1

that UCI has registered “Merchants Services of Irvine” as a

2

fictitious business name in Orange County.

3

These arguments are unavailing for a number of reasons.

That

someone may have been authorized to debit Plaintiffs’ accounts

5

does not mean that Plaintiffs cannot be harmed if a different,

6

unauthorized person or entity has done so instead.

7

remain obliged to make a payment to the authorized entity.

8

Further, Plaintiffs have disputed the legitimacy of the ACH forms,

9

including the amount written on these forms: they have alleged

10
United States District Court
For the Northern District of California

4

that the amount was blank when they signed it, so no amount was

11

authorized to be deducted, and that Merchant Services Defendants’

12

agents filled in these amounts after the forms were signed.

13

also allege that the forms were used to collect amounts to which

14

these Defendants were not entitled, such as invalid cancellation

15

fees.

16

twice is not determinative.

17

some amounts were collected again: they have alleged that Merchant

18

Services Defendants did not credit the “commission” in the form of

19

multiple months of lease payments to Plaintiffs’ accounts, so they

20

were responsible for making lease payments for those additional

21

months again.

22

have alleged that the ACH forms authorized “Merchant Services” or

23

“Universal Merchant Services,” not “Merchant Services of Irvine,”

Plaintiffs may

They

That they have not alleged that the amounts were collected
Further, Plaintiffs do plead that

See, e.g., Proposed 3AC ¶ 366.

24
25
26
27
28
15

Finally, Plaintiffs

1

UCI’s registered fictitious business name.1

2

noted, none of the Defendants has registered the fictitious

3

business names used on the forms, although others have registered

4

“Merchant Services.”

5

identical, fictitious business name does not, as a matter of law,

6

prevent Plaintiffs from being able to establish that its use of

7

this name was misleading.

8

have alleged that Merchant Services Defendants used the name

9

“Universal Merchant Services” to imply that it was affiliated with

As Plaintiffs have

UCI’s registration of a similar, but not

In the 2AC and proposed 3AC, Plaintiffs

United States District Court
For the Northern District of California

10

“the legitimate Universal Savings Bank” and the name “Merchant

11

Services” to suggest that they were the merchant services division

12

of numerous reputable banks, such as JP Morgan Chase and Wells

13

Fargo.

2AC ¶¶ 166-67; Proposed 3AC ¶¶ 229-30.

14

Defendants also contend that Plaintiffs have continued to

15

engage in “categorical pleading,” failing to identify the specific

16

role each entity or individual played in the alleged conversion.

17

Plaintiffs reply that they have alleged that “in their capacity as

18

officers of UCI, Defendants Moore, Parisi, and Jurcyzk created the

19

‘gray ACH form,’ the tool central to Defendants’ ability to

20

convert the funds; transferred the money to either UCI, NPP, MSI,

21

or a shell company controlled by one of those defendants; and

22

worked together to hide the responsible party.”

Reply at 3

23

(citing Proposed 3AC ¶¶ 360-61, 461, 517, 580).

In the cited

24
25
26
27
28

1

Defendants have asked the Court to take judicial notice of
UCI’s registration of “Merchant Services of Irvine,” and
Plaintiffs have requested that the Court take judicial notice of
the results of a search of the Orange County database for
fictitious business names for “Merchant Services” and “Universal
Merchant Services.” Neither party objects to the other’s request.
The Court grants both parties’ unopposed requests.
16

1

paragraphs, however, Plaintiffs do not allege that Moore, Parisi,

2

and Jurcyzk, or the entities, created these forms or took these

3

other actions, and instead continue to group them together, with

4

limited exceptions.

5

was the one which performed the withdrawals and that Parisi was

6

the one who ordered each withdrawal and directed that changes be

7

made to the gray ACH form.

8

specific actions taken by UCI and Parisi in furtherance of the

9

alleged conversion, Plaintiffs may pursue this claim against these

United States District Court
For the Northern District of California

10
11

Plaintiffs do specifically allege that UCI

Thus, because they have identified

two Defendants.
Plaintiffs also argue that liability can be alleged against

12

all of these Defendants because, although they have not alleged

13

who received the money and instead have plead vaguely that the

14

money was transferred to “UCI or the bank account of Parisi,

15

Moore, Jurcyzk, MSI, NPP, UMS, or a shell company,” see, e.g.,

16

Proposed 3AC ¶ 517, this is nonetheless permissible “because, as

17

Plaintiffs allege, Defendants do not know” who received the money

18

“either.”

19

this allegation, Plaintiffs appear to be referring to paragraph

20

360 of the proposed 3AC in which they allege:

21
22
23
24
25
26

Reply at 3.

Although they do not cite where they made

Parisi testified that the entity receiving the funds was
“Merchant Services,” but refused to provide any more
specifics. Jurcyzk (personally and on behalf of UCI)
testified that UCI would use the form to collect amounts
owed to it, but would not state whether UCI was the only
company that received the funds, refusing to make
generalizations about the uses of the Gray ACH forms.
While Moore testified that MSI and NPP do not conduct
the ACH withdrawals, Jurcyzk testified that UCI often
makes ACH withdrawals for monies owed to MSI and NPP.

27

Proposed 3AC ¶ 360.

28

have also alleged that MSI and NPP have orally subcontracted out

Elsewhere in the proposed 3AC, Plaintiffs

17

1

to UCI their non-existent “right” to collect certain sums.

2

¶ 421.

3

extending liability to Jurcyzk or Moore.

4

irrelevant that Defendants have not given Plaintiffs proof of who

5

received the funds; Plaintiffs are required to plead their claims

6

sufficiently, and ultimately have the burden of proving their

7

claims as to each Defendant.

8

alleged that UCI made at least some of the ACH withdrawals on

9

behalf of NPP, which authorized it to do so, Plaintiffs may pursue

United States District Court
For the Northern District of California

10

Id. at

There is nothing in these allegations that supports
Further, it is

However, because Plaintiffs have

this claim against NPP as well.2

11

Accordingly, the Court grants Plaintiffs leave to amend to

12

add the new allegations supporting their conversion claims and to

13

re-allege these claims against Parisi, UCI and NPP, but not

14

against Jurczyk and Moore.

15

II.

16

New RICO predicate acts
The Court has already found that Plaintiffs’ RICO claims were

17

properly plead against the Merchant Services Defendants and the

18

Leasing Defendants, except Northern Leasing.

19

Plaintiffs seek leave to add additional predicate acts and

20

allegations to their already existing and properly plead RICO

21

claims, which were originally based on wire and mail fraud.

22

Defendants only challenge Plaintiffs’ amendments that fall into

23

two categories: (1) misrepresentations made by the Merchant

24

Services Defendants to third parties, other than class members,

25

including alleged breaches of these third parties’ regulations or

In this motion,

26
27
2

28

As noted above, the conversion claim was previously upheld
as sufficiently plead against MSI.
18

1

contracts with them, as further acts of wire and mail fraud; and

2

(2) allegations that Northern Leasing, Cohen and Mezei engaged in

3

bribery and witness tampering, new predicate acts.

4

Defendants characterize the first of these as new claims for fraud

5

or misrepresentation, they are alleged only as RICO predicate

6

acts, not as a new basis for the fraud and misrepresentation

7

claims.

Although

8

A. Fraud involving third parties

9

In the proposed 3AC, Plaintiffs seek to add the following

United States District Court
For the Northern District of California

10

allegations regarding third parties.

11

sales company must agree to adhere to rigid rules set by Visa,

12

MasterCard and the authorizing processors.

13

These rules and their agreements with these entities, among other

14

things, govern the types of fees that ISOs are allowed to charge

15

and collect from merchants, forbid subcontracting of sales and

16

marketing services and require ISOs to assume all liability for

17

their employees’ and agents’ acts.

18

NPP are registered with Visa, MasterCard and the processors, while

19

UCI is not, but is subcontracted to perform all marketing, sales

20

and support in connection with the Merchant Services Defendants’

21

credit card processing, in violation of the agreements with the

22

processors, Visa and MasterCard.

23

To become an ISO/MSP, a

Proposed 3AC ¶ 67.

Id. at ¶¶ 67, 240.

MSI and

Id. at ¶¶ 70, 239-40, 275.

Moore, in concert with Parisi and Jurcyzk, allegedly has made

24

numerous false representations to Visa, MasterCard and the

25

processors to induce them to grant NPP and MSI the authority to

26

market and sell credit card services, and to trick them into

27

believing that NPP and MSI continue to be in compliance.

28

¶ 240.

Id. at

NPP and MSI told these entities that they were based at an
19

1

address in Irvine, California, which is actually UCI’s address,

2

instead of at the address in Corona del Mar, California that they

3

have stated was theirs during this litigation.

4

698.

5

the processors ever conducted an audit, they would immediately

6

know that the Corona del Mar location did not meet basic security

7

standards which would reveal that these are not legitimate

8

companies.

9

and holds himself out as the Vice President but does not tell them

Id. at ¶¶ 241,

They did this because they knew that, if Visa, Mastercard or

Id.

Jurcyzk regularly corresponds with the processors

United States District Court
For the Northern District of California

10

that he is the Vice President of UCI, not of NPP or MSI.

11

¶ 242.

12

MSI do business as “Merchant Services,” although they have not

13

registered this name and denied at deposition that they do

14

business as “Merchant Services.”

15

does do business under this name.

16

the processors that the sales agents and staff of UCI are

17

independent contractors, which cannot be used pursuant to their

18

contracts.

19

legitimate-sounding titles, like “Account Executive,” to obscure

20

this fact.

21

cards with the logo of “Merchant Services” and a statement that

22

“Merchant Services” is a “Registered ISO/MSP” of the processor.

23

Id.

24

processing contracts with class members on behalf of the

25

processors and mailed, faxed and emailed these to the processors,

26

“making the implicit representation that the contracts were

27

secured in compliance with NPP’s and MSI’s contracts with the

Id. at

Moore, Jurcyzk and UCI tell the processors that NPP and

Id. at ¶ 245.

Id.

Id. at ¶ 243.
Id.

UCI, however,

NPP and MSI do not tell

Instead, UCI gives these agents

UCI also requires the agents to use business

Merchant Services Defendants entered into credit card payment

28
20

1

Processors, as well as governing Visa and Mastercard rules.”

2

at ¶¶ 702, 722.3

3

Id.

The Merchant Services Defendants also allegedly charged

4

merchant customers fees in violation of Visa and Mastercard’s

5

regulations and NPP’s and MSI’s agreements with the processors.

6

Merchants who enroll in credit card processing services typically

7

enter into a contract with a processor.

8

Visa’s and Mastercard’s regulations, ISOs are prohibited from

9

directly assessing or collecting fees associated with this

Id. at ¶ 347.

Under

United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

3

Merchant Services Defendants make several evidence-based
arguments that these allegations are false and that Plaintiffs
should not be allowed to amend their pleading to add them. The
Court rejects these arguments for a number of reasons.
First, they argue that Plaintiffs will be unable to prove
that Merchant Services Defendants concealed that NPP and MSI are
located in Corona del Mar, California, because this address is a
matter of public record. Opp. at 5. In support, they request
that the Court take judicial notice of print-outs they have
submitted from the California Secretary of State’s website that
shows business entity detail for NPP and MSI and lists their
addresses in Corona Del Mar. Defs.’ Request for Judicial Notice,
Exs. A, B. However, as Plaintiffs point out, these printouts show
information that was “current as of Friday, August 31, 2012” and
do not show the information that was on file with the California
Secretary of State throughout the class period.
Second, they state that, at recent depositions, Merchant
Services Defendants themselves testified that “Visa and MasterCard
do conduct regular audits of MSI and NPP, are aware of MSI and
NPP’s respective subcontracts with UCI, and have approved of these
relationships,” including in August 2011, and that neither “Visa
nor MasterCard has ever indicated that MSI’s or NPP’s subcontract
with UCI violates any terms of their agreement.” Opp. at 5.
Notably, Merchant Services Defendants have made only general
statements about the content of their deposition testimony and
have not offered it into evidence.
Finally, although such evidence may be appropriate in a
motion for summary judgment to support an argument that there was
no causal connection between Merchant Services Defendants’ alleged
misrepresentations to MasterCard, Visa and the processors and harm
to class members, evidence-based arguments such as these are not
appropriate at the pleading stage.
21

1

contract from the merchant.

2

fees from the merchant and pays the ISO a share.

3

NPP’s contract with a processor, Transfirst LLC, prohibited NPP

4

from directly assessing merchants’ bank accounts for fees

5

associated with the merchants’ contracts with Transfirst; instead,

6

the merchants provided Transfirst with ACH authorization to debit

7

and credit their accounts for fees associated with credit card

8

processing, and Transfirst gave NPP a share.

9

Plaintiffs allege that, when Merchant Services Defendants enrolled

Id.

Instead, the processor collects
Id.

Further,

Id. at ¶ 348.

United States District Court
For the Northern District of California

10

merchants in processing services with Transfirst, they altered

11

Transfirst’s terms of service to contain an early termination fee,

12

although they did not usually show these terms to customers at

13

all.

14

customers cancelled their contracts with processors, Merchant

15

Services Defendants either used this early termination fee to

16

scare the customers into continuing with their contracts (if the

17

customers were valuable ones) or directly collected the fee from

18

the customers’ bank accounts, using the banking information that

19

the customer provided when enrolling in the processing services.

20

Id. at ¶¶ 353-56.

21

Id. at ¶¶ 350-52.

Plaintiffs also allege that, when

Plaintiffs also allege that the Merchant Services Defendants

22

improperly tried to collect monies that merchants did not pay to

23

the processor.

24

for being paid a higher share of revenue, MSI and NPP agreed to

25

accept the financial risks related to the merchants that they

26

enrolled; under this arrangement, if a merchant defaulted on debts

27

owed to the processor, the processor could deduct those fees from

28

the amount paid to MSI and NPP.

In their agreements with processors, in exchange

Id. at ¶ 420.
22

Although, under

1

the Visa and Mastercard regulations, they were prohibited from

2

collecting directly from merchants debts owed under the agreements

3

between the merchants and processors, MSI and NPP have orally

4

purported to subcontract to UCI the non-existent “right” to

5

collect losses.

6

hundreds or thousands of collections letters to merchants,

7

conducted credit inquiries, reported debts to credit bureaus and

8

turned over debts to third party collection agencies.

9

¶ 422.

Id. at ¶ 421.

As a result, UCI has mailed

Id. at

United States District Court
For the Northern District of California

10

Finally, Plaintiffs allege that the Merchant Services

11

Defendants used “fraudulent ACH forms” to represent falsely to

12

banks that they were authorized to deduct money from class

13

members’ accounts.

14

fraudulent because they listed a non-existent entity as the

15

recipient and merchants were never told what entity would be

16

receiving the funds.

17

according to Plaintiffs, when “UCI, on behalf of itself, other

18

Defendants, or its alter-egos, make the ACH withdrawal, they are

19

making a false representation to the bank that that entity has

20

explicit authorization of the merchant to conduct the withdrawal

21

to induce the bank to permit them to deduct the funds from the

22

class member’s account,” which “UCI knows . . . to be false, as

23

the class cannot give authorization to a fictitious non-entity.”

24

Id. at ¶ 358; see also id. at ¶ 372.

25

Merchant Services Defendants falsely represented to the banks that

26

they were authorized to make the ACH withdrawals for certain sums

27

of money to which they were not actually entitled, including for

28

the improper cancellation fees and other debts under the

Plaintiffs allege that these forms were

See, e.g., id. at ¶¶ 358-361, 461.

23

Thus,

Plaintiffs also state that

1

processing contract between the merchant and the processor that

2

are described above.

3

517, 545, 580, 718.

4

See, e.g., id. at ¶¶ 353, 461, 481, 501,

Merchant Services Defendants argue that Plaintiffs have not

5

plead adequately that they themselves relied on these purported

6

misrepresentations to third parties.

7

Plaintiffs do not have standing to bring claims based on

8

misrepresentations to third parties, because they have not alleged

9

sufficiently that they suffered an injury in fact that was caused

United States District Court
For the Northern District of California

10
11

They also contend that

by the misconduct.
RICO creates a private cause of action for “[a]ny person

12

injured in his business or property by reason of a violation of

13

section 1962 of this chapter.”

14

1962(c), in turn, makes it “unlawful for any person employed by or

15

associated with any enterprise engaged in, or the activities of

16

which affect, interstate . . . commerce, to conduct or

17

participate, directly or indirectly, in the conduct of such

18

enterprise’s affairs through a pattern of racketeering activity,”

19

and § 1962(d) makes it “unlawful for any person to conspire to

20

violate” subsection (c).

21

encompass a variety of predicate acts that are set forth in 18

22

U.S.C. § 1961(1), including mail fraud, wire fraud, witness

23

tampering, and bribery.

24

requires at least two acts of racketeering activity.”

25

§ 1961(5).

26

18 U.S.C. § 1964(c).

Section

“Racketeering activity” is defined to

A “‘pattern of racketeering activity’
18 U.S.C.

“To have standing under civil RICO, [a plaintiff] is required

27

to show that the racketeering activity was both a but-for cause

28

and a proximate cause of his injury.”
24

Rezner v. Bayerische

1

Hypo-Und Vereinsbank AG, 630 F.3d 866, 873 (9th Cir. 2010).

2

also Hemi Group, LLC v. City of New York, 130 S. Ct. 983, 989

3

(2010) (citing Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258,

4

268 (1992)).

5

causation, the central question it must ask is whether the alleged

6

violation led directly to the plaintiff’s injuries.”

7

Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006) (emphasis

8

added).

9

predicate wrong and the harm.”

See

“When a court evaluates a RICO claim for proximate

Anza v.

There must be “‘a direct causal connection’ between the
Hemi Group, 130 S. Ct. at 994

United States District Court
For the Northern District of California

10

(quoting Anza, 547 U.S. at 460).

11

purely contingent, or indirect is insufficient.”

12

(internal quotation marks and formatting omitted).

13

cases, reliance may be ‘a milepost on the road to causation.’”

14

Poulos v. Caesars World, Inc., 379 F.3d 654, 664 (9th Cir. 2004)

15

(quoting Blackie v. Barrack, 524 F.2d 891, 906 n.22 (9th Cir.

16

1975)).

17

“A link that is too remote,
Id. at 989
“In some

However, Merchant Services Defendants are incorrect when they

18

argue that Plaintiffs must allege that they themselves were aware

19

of, and personally relied upon, the purported misrepresentations.

20

In Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2008),

21

the Supreme Court held that first-party reliance is not an element

22

of a RICO claim based on mail fraud or required to establish

23

proximate causation, and that “a person can be injured ‘by reason

24

of’ a pattern of mail fraud even if he has not relied on any

25

misrepresentations.”

26

noted that plaintiffs still may be required to show that someone

27

had relied on the misrepresentations in order to prove proximate

28

causation ultimately.

Id. at 649-54.

In so holding, the Court

Id. at 658-59 (“none of this is to say that
25

1

a RICO plaintiff who alleges injury ‘by reason of’ a pattern of

2

mail fraud can prevail without showing that someone relied on the

3

defendant’s misrepresentations”) (emphasis in original).

4

Bridge, the Court emphasized that proximate causation is “a

5

flexible concept that does not lend itself to a black-letter rule

6

that will dictate the result in every case.”

7

quotation marks and citations omitted).

8

causation is the label given to “the judicial tools used to limit

9

a person’s responsibility for the consequences of that person’s

In

Id. at 654 (internal

Instead, proximate

United States District Court
For the Northern District of California

10

own acts, with a particular emphasis on the demand for some direct

11

relation between the injury asserted and the injurious conduct

12

alleged.”

13

Id. (internal quotation marks and citations omitted).

Further, as Plaintiffs argue, to establish standing, they are

14

not required to show that each individual predicate act caused

15

them an injury, but rather that the pattern of racketeering

16

activity did.

17

(1985), the Supreme Court stated that the plaintiff is required to

18

plead “compensable injury [consisting of] harm caused by predicate

19

acts sufficiently related to constitute a pattern.”

20

The Seventh Circuit has explained that, after establishing that

21

predicate acts are sufficiently related to constitute a pattern of

22

racketeering activity, “a plaintiff need not demonstrate injury to

23

himself from each and every predicate act making up the RICO

24

claim.”

25

Cir. 2004) (discussing Marshall & Ilsley Trust Co. v. Pate, 819

26

F.2d 806, 809-10 (7th Cir. 1987)).

27

prove only “an injury directly resulting from some or all of the

28

activities comprising the violation.”

In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479

Id. at 497.

Corley v. Rosewood Care Ctr., 388 F.3d 990, 1004 (7th

26

Instead, the plaintiff must

Marshall, 819 F.2d at 809.

See also Deppe v. Trippe, 863 F.2d 1356, 1366 (7th Cir. 1988)(“no

2

requirement exists that the plaintiff must suffer an injury from

3

two or more predicate acts, or from all of the predicate acts. . .

4

Thus, a RICO verdict can be sustained when a pattern of

5

racketeering acts existed, but when only one act caused injury.”);

6

Kearny v. Hudson Meadows Urban Renewal Corp., 829 F.2d 1263, 1268

7

(3d Cir. 1987) (finding that the statute required only injury from

8

“any predicate act,” not all, and stating that a contrary holding

9

would mean that, “[f]or example, if an organized crime group were

10
United States District Court
For the Northern District of California

1

to operate a protection racket, extorting money from each merchant

11

in a community, then each merchant’s injury would be separate, and

12

therefore, . . . none could recover”); Edgenet, Inc. v. GS1,

13

AISBL, 742 F. Supp. 2d 997, 1015 n.6 (E.D. Wis. 2010) (noting that

14

the Supreme Court did not hold otherwise in Hemi Group); Gregory

15

P. Joseph, Civil RICO: A Definitive Guide 58-59 (3d ed. 2010) (“As

16

long as the pattern of racketeering activity has caused harm to

17

the plaintiff’s business or property, the plaintiff has RICO

18

standing.

19

has been injured by multiple predicate acts, as long []as it has

20

been injured by at least one predicate act.”).

21

cases stating that plaintiffs must plead or prove that they were

22

harmed by each predicate act alleged.

23

The plaintiff is not obliged to plead or prove that it

Defendants cite no

Here, the Court has already found that Plaintiffs have

24

properly plead RICO claims, which they had standing to pursue.

25

See Docket No. 179, 29-30.

26

have been directly injured by at least one of the new predicate

27

acts; Plaintiffs have alleged that Merchant Services Defendants

28

represented to banks and ACH providers that they were authorized

In addition, they allege that they

27

1

to debit money from class members’ accounts, even though they were

2

not entitled to collect these amounts, and that money was

3

unlawfully taken from their bank accounts as a result.

4

Services Defendants do not contest that the new alleged predicate

5

acts are related enough to the predicate acts previously plead or

6

to each other to constitute part of the same pattern of

7

racketeering.

8

barred as a matter of law for failure to plead standing or

9

reliance.

Merchant

Accordingly, the Court finds that these are not

United States District Court
For the Northern District of California

10

Finally, Merchant Services Defendants contend that the

11

allegations of new predicate acts based on misrepresentations to

12

Visa, MasterCard and the processors do not comply with the

13

requirements of Rule 9(b).

14

F.3d 1058, 1066 (9th Cir. 2004) (the heightened pleading

15

requirements of Rule 9(b) apply to RICO predicate acts based on

16

fraud).

17

722 as conclusory.

18

of the proposed 3AC give sufficient details of the fraud that they

19

claim Merchant Services Defendants perpetrated on Visa, MasterCard

20

and the processors.

21

not explain how Merchant Services Defendants purportedly made “the

22

implicit representation that the contracts were secured in

23

compliance with NPP’s and MSI’s contracts with the Processors, as

24

well as governing Visa and Mastercard rules.”

25

in the proposed pleading, Plaintiffs have explained with

26

specificity what compliance with these rules and contracts

27

entailed and how Merchant Services Defendants allegedly had

28

violated these requirements and concealed this from Visa,

See Edwards v. Marin Park, Inc., 356

Defendants specifically identify paragraphs 240, 720 and
However, as Plaintiffs point out, other parts

For example, in paragraph 722, Plaintiffs do

28

However, elsewhere

1

Mastercard and the processors.

2

not sufficiently plead the misrepresentation to third parties,

3

Rule 9(b)’s pleading requirement may be relaxed “where evidence of

4

fraud is exclusively in the defendant’s possession,” such as where

5

the plaintiffs themselves were not directly involved in the

6

purportedly fraudulent conduct.

7

F.3d 550, 558 (9th Cir. 2010) (citing United States ex rel. Lee v.

8

Smith-Kline Beecham, Inc., 245 F.3d 1048, 1052 (9th Cir. 2001)).

9

Finally, even if some of the predicate acts are plead less

Further, even if Plaintiffs had

Sanford v. MemberWorks, Inc., 625

United States District Court
For the Northern District of California

10

specifically than others, there are sufficient specifically plead

11

predicate acts to support the RICO claim.

12

Accordingly, the Court grants Plaintiffs’ request to amend to

13

allege new predicate acts based on Merchant Services Defendants’

14

purported misrepresentations to third parties.

15

B. Anti-bribery and witness tampering claims

16

Plaintiffs also request leave to add allegations related to

17

two new predicate acts against the Leasing Defendants.

18

Specifically, Plaintiffs seek to add allegations that Northern

19

Leasing, Cohen and Mezei committed witness tampering and bribery,

20

which they explain as follows.

21

this action, they believed that SKS Associates was the entity

22

conducting the improper ACH transactions.

23

preliminary injunction to prohibit SKS Associates from continuing

24

its tax collection efforts.

When Plaintiffs filed the 2AC in

Thus, they sought a

25

According to Plaintiffs, at that time, Northern Leasing took

26

a number of improper steps to trick the Court into believing that

27

Northern Leasing was not involved in the transactions.

28

3AC ¶ 215.

Proposed

Cohen and Mezei, on behalf of themselves and Northern
29

1

Leasing, created a fake “Purchase Agreement” that purported to

2

transfer the right to collect taxes from certain individuals from

3

Northern Leasing to SKS Associates.

4

created a shell company to serve as SKS Associates’ manager and

5

hired Mezei’s nephew, Jonathan Mirsky, to act as the shell

6

company’s Vice President.

7

took steps to have Mirsky sign a declaration, which they knew

8

contained false and misleading information, including that the

9

Purchase Agreement was valid, and led Mirsky to believe that the

Id. at ¶ 216.

Id. at ¶¶ 218-19.

They also

Mezei and Cohen each

United States District Court
For the Northern District of California

10

contents of the declaration were accurate.

11

Associates then submitted the declaration to this Court in

12

connection with its opposition to Plaintiffs’ motion for a

13

preliminary injunction and in support of its motion to compel

14

arbitration.

15

for his role.

16

corporation, Leasing Defendants took steps to dissolve it.

17

¶ 222.

18

Id. at ¶ 221.
Id.

Id. at ¶¶ 217-20.

SKS

Mezei allegedly paid Mirsky $20,000

After Plaintiffs subpoenaed the shell
Id. at

In addition, in August 2011, the New York Attorney General

19

subpoenaed Northern Leasing and SKS Associates to provide two

20

witnesses to testify regarding SKS’s tax collection scheme.

21

at ¶ 223.

22

Derussy, an employee without relevant knowledge, to testify.

23

at ¶¶ 223-25.

24

information in advance of his testimony in order to prevent or

25

delay the testimony of those with actual knowledge of the

26

fraudulent scheme and to ensure that Plaintiffs in this litigation

27

did not learn the information.

Id.

Plaintiffs claim that Northern Leasing persuaded Cortes
Id.

It knowingly provided Derussy with false

Id. at ¶¶ 223-26, 743.

28
30

1

Plaintiffs contend that these activities constitute witness

2

tampering in violation of 18 U.S.C. § 1512(b) and (c) and bribery

3

in violation of 18 U.S.C. § 201(b)(3), in furtherance of the

4

enterprise.

5

Leasing Defendants oppose Plaintiffs’ request to add these

6

allegations.

7

allege these predicate acts because they cannot plead that their

8

business or property has been injured by the conduct, and that

9

they have not alleged proximate causation between these new

United States District Court
For the Northern District of California

10

They argue that Plaintiffs do not have standing to

predicate acts and the harm they have suffered.

11

As discussed above, Plaintiffs need not plead or prove that

12

they have suffered harm as a result of each individual predicate

13

act, but rather that the predicate acts are all part of a pattern

14

of racketeering activity and that they have suffered harm as a

15

direct result of at least one predicate act.

16

challenged that these predicate acts are alleged to be part of the

17

same pattern of racketeering activity, and it appears that

18

Plaintiffs have plead this adequately.

19

F.3d 1219, 1229 (9th Cir. 2004) (quoting H.J. Inc. v. Nw. Bell

20

Tel. Co., 492 U.S. 229, 239 (1989) (“A ‘pattern’ of racketeering

21

activity . . . requires proof that the racketeering predicates are

22

related and ‘that they amount to or pose a threat of continued

23

criminal activity.’”).

24

witness tampering and bribery were undertaken in order to conceal

25

the role of Northern Leasing in the debt collection scheme and to

26

allow it to continue, and that the predicate acts have taken place

27

over the course of several years.

Defendants have not

See Turner v. Cook, 362

Plaintiffs have plead that the alleged

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31

1

Thus, Plaintiffs have alleged sufficiently that the predicate

2

acts are part of the same pattern of racketeering and that they

3

have been directly harmed by at least one of the predicate acts.

4

Because they have alleged injury and standing sufficiently, the

5

Court grants Plaintiffs leave to amend to add these predicate

6

acts.

7

III. Discovery

8

Defendants argue that, if leave to amend is granted, they

9

should be permitted to “reopen class discovery with respect to any

United States District Court
For the Northern District of California

10

permitted new claim and/or class(es), including re-opening the

11

depositions of the named plaintiffs and conducting additional

12

written discovery to investigate the new theories and new

13

classes.”

14

briefing be “adjourned until such additional discovery is

15

completed.”

16

discovery they want to take is to investigate Plaintiffs’

17

“personal knowledge of the purported misrepresentations” to third

18

parties, “their supposed reliance thereon, and any resulting

19

damage.”

20

Opp. at 19.

Id.

They also request that class certification

Defendants state that one example of the further

Id.

The Court notes that it has not set a separate “class

21

discovery” deadline and that the fact discovery deadline is April

22

19, 2013.

23

need to “reopen class discovery” as Defendants have requested.

24

See Docket Nos. 276, 367.

Accordingly, there is no

If Defendants seek to take further depositions of individuals

25

whom they have already deposed, they shall meet and confer with

26

Plaintiffs on this topic and, if they are unable to reach an

27

agreement, they shall seek permission from the discovery

28

Magistrate Judge in compliance with her Order regarding Discovery
32

1

Procedures.

2

Defendants may file on this issue, they shall clearly explain what

3

they need to ask these individuals.

4

example that Defendants have provided here would not justify

5

allowing further depositions of the named Plaintiffs because, as

6

explained above, Plaintiffs’ theory regarding the

7

misrepresentations to third parties is not that Plaintiffs

8

themselves relied or knew about the misrepresentations but that

9

the third parties did, to Plaintiffs’ detriment.

United States District Court
For the Northern District of California

10

See Docket No. 313.

In any discovery motion that

The Court notes that the

The Court resets the briefing schedule on Plaintiffs’ motion

11

for class certification, as set forth below.

12

IV.

Plaintiffs’ Motion to Seal

13

Concurrently with their motion for leave to file a 3AC,

14

Plaintiffs filed a motion for leave to file under seal a number of

15

documents, including portions of their motion for class

16

certification and its supporting evidence, portions of the motion

17

for leave to file a 3AC, and portions of Exhibit A thereto, which

18

contained their proposed 3AC.

19

declarations filed pursuant to orders issued by this Court,

20

Plaintiffs have represented that they requested that portions of

21

the motion for leave to file a 3AC and of the proposed 3AC be

22

sealed because they contain allegations, facts or arguments based

23

on documents and testimony that were designated as confidential by

24

either Leasing Defendants or Merchant Services Defendants.

25

Simplicio Decl., Ex. A, Docket No. 411; Simplicio 1st Suppl.

26

Decl., Ex. D, Docket No. 420.

Docket No. 385.

In subsequent

See

27

Local Rule 79-5(d) provides that, when a party files an

28

administrative motion seeking to submit material under seal that
33

1

another party to the action has designated as confidential, the

2

designating party must file a declaration establishing that the

3

information is sealable.

4

party does not file its responsive declaration . . . , the

5

document or proposed filing will be made part of the public

6

record.”

7

Civil L.R. 79-5(d).

“If the designating

Id.

Leasing Defendants have filed several declarations in support

8

of the motion to seal.

9

Suppl. Decl., Docket No. 423; Krieger Decl., Docket No. 423.

See Nigro Decl., Docket No. 419; Nigro
In

United States District Court
For the Northern District of California

10

these declarations, Leasing Defendants offer support for sealing

11

certain evidence that Plaintiffs have submitted in support of

12

their motion for class certification, but have not provided

13

reasons to seal any portion of Plaintiffs’ motion for leave to

14

file a 3AC or of their proposed 3AC.

15

Merchant Services Defendants have also filed a declaration in

16

support of the motion to seal.

17

However, Merchant Services Defendants likewise do not offer

18

support for sealing any portion of Plaintiffs’ motion for leave to

19

file a 3AC and provide reasons for sealing only a portion of

20

paragraph 541, line sixteen4 of the proposed 3AC.

21

See Jurczyk Decl., Docket No. 424.

Merchant Services Defendants seek to seal a portion of a

22

record that is closely related to the merits of Plaintiffs’

23

claims.

24

has designated it as confidential “must overcome a strong

25

presumption of access by showing that ‘compelling reasons

To establish that the document is sealable, the party who

26
27
28

4

Although, in his declaration, Jurcyzk identifies line
fifteen of paragraph 541, see Jurcyzk Decl. 13, row 2, he appears
to refer to the monetary amount contained in line sixteen instead.
34

1

supported by specific factual findings . . . outweigh the general

2

history of access and the public policies favoring disclosure.’”

3

Pintos v. Pac. Creditors Ass’n, 605 F.3d 665, 679 (9th Cir. 2010)

4

(citation omitted).

5

stringent “good cause” standard is applied to sealed discovery

6

documents attached to non-dispositive motions).

Cf. id. at 678 (explaining that a less

Jurcyzk explains that the relevant portion of paragraph 541,

8

line sixteen of the proposed 3AC describes “information regarding

9

compensation paid to Merchant [Services] Defendants by their

10
United States District Court
For the Northern District of California

7

service providers,” which gives insight into the contractual

11

pricing arrangements between these entities.

12

¶ 6.b.i.

13

to those generally available in the marketplace as well as those

14

secured by competitors,” and that, if the pricing arrangements

15

became public, Merchant Services Defendants would lose their

16

competitive advantage because their competitors “would take steps

17

to secure similar or better pricing from their service providers.”

18

Id. at ¶ 6.a.i.

19

would provide competitors with “insight into the types of products

20

and services that Merchant [Services] Defendants have found to be

21

most successful,” which could allow competitors to “adjust their

22

own strategies and models to compensate for or adopt those of

23

Merchant [Services] Defendants.”

Jurcyzk Decl.

He states that the pricing terms “are favorable compared

Jurcyzk further states that this information

Id. at ¶ 6.b.i.

24

“‘[S]ources of business information that might harm a

25

litigant’s competitive standing’ often warrant protection under

26

seal.”

27

Litig., 2012 U.S. Dist. LEXIS 140779, at *15 (N.D. Cal.) (quoting

28

Nixon v. Warner Commc’ns, Inc., 435 U.S. 589, 598 (1978).

In re NCAA Student-Athlete Name & Likeness Licensing

35

1

Merchant Services Defendants have provided sufficient evidence

2

that public disclosure of the compensation term in paragraph 541,

3

line sixteen of the proposed 3AC would competitively harm them in

4

the future.

5

resolution of the motion for leave to file the proposed 3AC.

6

Thus, the information can be redacted in the proposed 3AC and

7

filed under seal in the final 3AC.

8
9

This information, however, is not relevant to the

Accordingly, the Court GRANTS in part, DENIES in part and
DEFERS in part Plaintiffs’ motion to file under seal.

The request

United States District Court
For the Northern District of California

10

to seal portions of the motion for leave to file a 3AC is denied.

11

The Court finds compelling reasons to prevent public disclosure of

12

the compensation term in paragraph 541, line sixteen of the

13

proposed 3AC, but denies the motion to seal as to the remainder of

14

the document.

15

proposed 3AC and they are granted leave to file the corresponding

16

term in the final 3AC under seal.

17

request to seal portions of the motion for class certification and

18

its supporting evidence.

Plaintiffs shall redact this information in the

The Court defers ruling on the

19

CONCLUSION

20

For the reasons set forth above, the Court GRANTS in part

21

Plaintiffs’ motion for leave to file a 3AC and DENIES it in part

22

(Docket No. 383).

23

except that they may not re-allege their conversion claims against

24

Jurczyk and Moore.

25

Plaintiffs may file the 3AC as requested,

The Court GRANTS in part Plaintiffs’ motion to file under

26

seal, DENIES it in part and DEFERS it in part (Docket No. 385).

27

Within three days of the date of this Order, Plaintiffs shall file

28

in the public docket their motion for leave to file a 3AC and a
36

1

redacted version of Exhibit A.

2

also file a redacted version of their final 3AC in the public

3

record and an unredacted version under seal.

4
5

By that date, Plaintiffs shall

The Court resets the case schedule as follows:
Event

Date

Deadline for Plaintiffs to file
their Third Amended Complaint

Forthwith, but no later than
three days after the date of
this Order

Deadline for Plaintiffs to
file, if necessary, an amended
motion for class certification

Thursday, December 13, 2012

Deadline for Defendants to file
their opposition to Plaintiffs’
motion for class certification,
in one or two joint briefs,
totaling no more than fifty
pages.

Thursday, January 24, 2013

Thursday, February 14, 2013

16

Deadline for Plaintiffs to file
reply in support of motion for
class certification, in a
single brief of no more than
twenty pages.

17

Case Management Statement due

Thursday, February 28, 2013

18

Further Case Management
conference and hearing on
Plaintiffs’ motion for class
certification

Thursday, March 7, 2013, at
2:00 p.m.

6
7
8
9

United States District Court
For the Northern District of California

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11
12
13
14
15

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20
21

IT IS SO ORDERED.

22
23

Dated: 12/6/2012

CLAUDIA WILKEN
United States District Judge

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