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

Filing 425


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1 IN THE UNITED STATES DISTRICT COURT 2 FOR THE NORTHERN DISTRICT OF CALIFORNIA 3 4 5 6 7 8 9 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 10 11 12 13 14 15 16 17 18 19 20 21 22 23 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 24 of Just Film, Inc. and acquired its assets when it dissolved in 25 2011; Rainbow Business Solutions, doing business as Precision Tune 26 Auto Care, and its owner Jerry Su; Verena Baumgartner, doing 27 business as Burlingame Motors; Dietz Towing, Inc., and its CFO and 28 1 Secretary, Terry Jordan; The Rose Dress, Inc., and its owner Lewis 2 Bae; and Erin Campbell, doing business as Silicon Valley Pet 3 Clinic, move for leave to file their proposed third amended 4 complaint (3AC) in this putative class action. 5 Merchant Services, Inc. (MSI), National Payment Processing, Inc. 6 (NPP), Universal Card, Inc. (UCI), Universal Merchant Services, 7 LLC (UMS), Jason Moore, Nathan Jurczyk, Robert Parisi, Eric 8 Madura, Fiona Walshe, Alicyn Roy (collectively, the Merchant 9 Services Defendants), Northern Leasing Systems, Inc., MBF Leasing Defendants United States District Court For the Northern District of California 10 LLC (MBF), SKS Associates LLC (SKS), Jay Cohen, Leonard Mezei, 11 Sara Krieger, and Sam Buono (collectively, the Leasing Defendants) 12 oppose the motion. 13 papers. 14 Court GRANTS the motion in part and DENIES it in part. 15 also DENIES in part Plaintiffs’ motion to file under seal and 16 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 17 BACKGROUND 18 Plaintiffs allege that Defendants defrauded them and the 19 putative class members in a scheme involving credit and debit card 20 processing services and equipment. 21 individual Plaintiff’s last name is used to refer to both that 22 Plaintiff and his or her business, where it is a separate entity. 23 Plaintiffs divide the Defendants into two categories: Merchant 24 Services Defendants and Leasing Defendants. 25 Below, for brevity, each Plaintiffs refer to MSI, NPP, UCI and UMS collectively as the 26 Merchant Services Companies and allege that each of them is the 27 alter ego of the others. 28 that MSI and NPP were created to trick banks and regulators into In the proposed 3AC, Plaintiffs allege 2 1 believing the Merchant Services Companies were legitimate 2 corporations, and that UMS and UCI were created to hide the 3 illegal activities and proceeds thereof from banks and regulators. 4 Plaintiffs allege the following about the individual Merchant 5 Services Defendants: Moore is the President and in control of each 6 of the Merchant Services Companies, the sole employee, officer, 7 director and shareholder of MSI and NPP, and owns sixty percent of 8 shares in UCI and one hundred percent of shares in UMS; Jurcyzk 9 manages all operations of the Merchant Services Companies, is United States District Court For the Northern District of California 10 UCI’s Vice President of Operations and holds himself out as the 11 Vice President of MSI and NPP; Parisi owns forty percent of the 12 shares of UCI, is UCI’s Senior Vice President and holds himself 13 out as the Senior Vice President of MSI and NPP; Madura is UCI’s 14 Manager of Corporate Operations and holds himself out as the 15 Manager of Corporate Operations for MSI and NPP; Walshe was the 16 Regional Sales Manager for the Merchant Services Companies and 17 directed their San Jose, California regional office; and Roy is a 18 Senior Account Executive for the Merchant Services Companies. 19 Plaintiffs contend that the Merchant Services Companies are alter 20 egos of Moore, Jurczyk and Parisi. 21 Leasing Defendants are entities and individuals based outside 22 of California. 23 and controls SKS through a shell company, Pushpin Holdings, LLC. 24 Plaintiffs refer collectively to Northern Leasing, MBF and SKS as 25 the Northern Leasing Companies, each of which is allegedly the 26 alter ego of the others. 27 directed and controlled the Northern Leasing Companies: Cohen, 28 Northern Leasing’s President and CEO; Mezei, Northern Leasing’s Plaintiffs allege that Northern Leasing owns MBF The following individuals allegedly 3 1 Chairman of the Board; Krieger, Northern Leasing’s Vice President 2 for Operations, who holds herself out as MBF’s Vice President; and 3 Buono, Northern Leasing’s former Vice President of Collections and 4 Customer Service, who also holds himself out as MBF’s Vice 5 President. 6 Buono, transfer monies obtained through the alleged fraud in shell 7 companies, such as Northern Funding LLC. 8 Plaintiffs allege that the Leasing Defendants, except In the currently operative second amended complaint (2AC), Plaintiffs generally explain the alleged fraud as follows. 10 United States District Court For the Northern District of California 9 and debit card transactions are processed through financial 11 networks, called interchanges, run by entities like Visa and 12 Mastercard. 13 card processing services directly to merchants, or indirectly 14 through companies and individuals known as Independent Sales 15 Organizations and Merchant Service Providers (ISOs/MSPs). 16 ¶¶ 67-68. 17 both Visa and Mastercard, as well as with a bank or a 18 bank-approved processing entity, called a processor. 19 ¶¶ 67-68. 20 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 21 transaction. 22 that issued the credit or debit card to the customer, (2) the 23 interchange, (3) the bank through whom the merchant is accepting 24 the card, (4) the ISO/MSP that solicited the merchant and/or 25 provides customer service to the merchant (if any) and (5) the 26 third party-processor (if any).” 27 required to pay for credit and debit card processing equipment, 28 such as card terminals. Id. at ¶ 69. The fee is “shared among (1) the bank Id. Id. at ¶ 70. 4 Merchants may also be 1 Plaintiffs alleged that Merchant Services Defendants are 2 ISO/MSPs, and Leasing Defendants provided card processing 3 equipment. 4 marketed equipment leases to merchants on behalf of MBF Leasing. 5 2AC ¶ 133. 6 Pursuant to a contract, Merchant Services Defendants When marketing card processing services, the Merchant Services Companies’ independent sales agents, such as Walshe, 8 misled merchants about card transaction rates. 9 these sales agents used a so-called Rate Sheet, which suggested 10 United States District Court For the Northern District of California 7 that the merchants would be charged a fixed rate of 1.79 percent 11 for each card transaction plus a flat monthly service fee. 12 fact, however, the rates for each transaction varied based on the 13 type of credit card a consumer used. 14 charges associated with card processing services were reflected on 15 the Rate Sheet, even though sales agents represented they were. 16 The Rate Sheet had a signature line for a merchant to affirm that 17 “all fees have been sufficiently explained to my satisfaction.” 18 2AC ¶ 212. 19 through Merchant Services Defendants, the merchant generally was 20 asked to sign an Application for Merchant Agreement. 21 were instructed to represent that the Application reflected “the 22 entire arrangement with the Merchant Services Defendants.” 23 ¶ 257. 24 the Merchant Card Processing Agreement (MCPA), which provided the 25 terms for card processing services. 26 the MCPA and instructed the merchant “to review the terms and 27 conditions of a ‘Merchant Card Processing Agreement included with 28 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. 5 The Application referred to According to Plaintiffs, 1 although the MCPAs may have their signatures acknowledging the 2 terms, this is because “Merchant Services Defendants create a 3 signed version using scanners and computer programs to copy the 4 signature . . . onto the document.” 5 Id. at ¶ 264. The sales agents also misrepresented the need for and value 6 of leasing card processing equipment from MBF Leasing. 7 Finance Leases (EFLs) governed merchants’ use of this equipment. 8 Some Plaintiffs signed EFLs and some alleged that their signatures 9 on those documents were forged. United States District Court For the Northern District of California 10 Equipment Plaintiffs also complain about various fees they were 11 charged, including for a “first and last month” deposit, which was 12 not credited to class members’ accounts, and a “cancellation fee,” 13 which the Merchant Services Defendants deducted from class 14 members’ accounts. 15 Plaintiffs allege that certain Defendants, without a 16 permissible purpose, inquired into and placed negative notations 17 on certain Plaintiffs’ consumer credit reports. 18 Von Glasenapp, Jordan and other merchants received “letters a 19 couple times a year informing them of their obligation to pay a 20 personal property tax on the equipment they” leased. 21 Leasing Defendants determined the amount of this tax and debited 22 it, along with a processing fee, from Von Glasenapp’s, Jordan’s 23 and other merchants’ bank accounts. 24 “are not actually due to, nor are they remitted to, any taxing 25 authority.” 26 shell companies owned by Leasing Defendants. 27 28 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 6 1 to file a second amended complaint, to remedy various identified 2 deficiencies. 3 Docket No. 179. On August 29, 2011, the Court resolved various motions to dismiss the second amended complaint. 5 order, the Court dismissed some of Plaintiffs’ claims against 6 particular Defendants without leave to amend. 7 that, “to the extent that the Court denies leave to amend, it does 8 so because Plaintiffs have failed to state claims, notwithstanding 9 the Court’s previous instructions, or because they do not suggest 10 United States District Court For the Northern District of California 4 that the claims are not futile,” but that, “if Plaintiffs obtain 11 evidence over the course of discovery supporting any claim 12 dismissed by the Court, they may move for leave to amend their 13 complaint.” 14 Docket No. 292. In that The Court stated Docket No. 292, 41. On February 2, 2012, the Court granted Plaintiffs’ motion to 15 dismiss the claims asserted by Plaintiff Burlingame Motors, Inc. 16 and to file an amended pleading to clarify that Burlingame Motors 17 is a fictitious business name of Plaintiff Baumgartner. 18 No. 335. 19 entitled “Amendment No. 1 to Second Amended Complaint.” 20 No. 327. 21 “promptly file a third amended complaint incorporating the changes 22 to paragraphs 4 and 8 of the 2AC contained in their proposed 23 amendment.” 24 filing . . . an amended pleading must reproduce the entire . . . 25 pleading and may not incorporate any part of a prior pleading by 26 reference.”)). 27 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 28 7 1 four and eight in the proposed third amended complaint at issue 2 now. 3 On August 23, 2012, Plaintiffs filed the instant motion for 4 leave to file a third amended complaint and simultaneously filed 5 their motion for class certification to prosecute the claims in 6 the proposed third amended complaint. 7 Docket Nos. 383, 387. On August 24, 2012, Defendants filed various motions to 8 extend time to oppose the motion for class certification until 9 after the motion for leave to amend was resolved. United States District Court For the Northern District of California 10 11 Docket Nos. 388, 389. On August 31, 2012, the Court granted Defendants’ motions to 12 extend time. 13 schedule on the motion for class certification and stated that it 14 would be reset in the order resolving the instant motion. Docket No. 397. 15 16 The Court vacated the briefing LEGAL STANDARD The case management order in this action provided that the 17 deadline to add additional parties or claims was December 1, 2011. 18 Docket No. 276. 19 modified except upon a showing of good cause and by leave of the 20 district judge.” 21 been filed, a party’s ability to amend the pleadings is “governed 22 by Rule 16(b), not Rule 15(a).” 23 Inc., 975 F.2d 604, 608 (9th Cir. 1992). 24 here, a party seeks to amend a pleading after the date specified 25 in a scheduling order, it must first show “good cause” for the 26 amendment under Rule 16(b). 27 28 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. 2 232 F.3d 1271, 1294 (9th Cir. 2000). 3 participate from the outset in creating a workable Rule 16 4 scheduling order but they must also diligently attempt to adhere 5 to that schedule throughout the subsequent course of the 6 litigation.” 7 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 10 Under that rule, courts consider five factors when assessing the 11 merits of a motion for leave to amend: undue delay, bad faith, 12 futility of amendment, prejudice to the opposing party and whether 13 the plaintiff has previously amended the complaint. 14 Nev. Sys. of Higher Educ., 555 F.3d 1051, 1055 n.3 (9th Cir. 15 2009). 16 “futility of amendment alone can justify the denial of a motion.” 17 Id. at 1055. Ahlmeyer v. Although these five factors are generally all considered, 18 DISCUSSION 19 Plaintiffs contend that they discovered new facts during 20 discovery that support extending liability for certain claims to 21 other Defendants, beyond those against whom they currently have 22 stated claims. 23 previously dismissed. 24 revealed additional predicate acts for their RICO claims. 25 Defendants do not argue that Plaintiffs have acted without 26 diligence or with undue delay, but instead respond that the 27 proposed amendments would represent a fundamental change to 28 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 9 1 further discovery before the class certification motion is 2 briefed, and that the proposed amendments are deficient as a 3 matter of law, making amendment futile. 4 In addition to these changes, Plaintiffs also seek to change 5 the definitions of proposed subclasses, and add new proposed 6 subclasses, although they keep the same overall class definition. 7 Further, Plaintiffs seek to eliminate references to former 8 Plaintiff Just Film, Inc., which was dissolved in late 2011 with 9 its remaining assets being acquired by its sole shareholder, Von United States District Court For the Northern District of California 10 Glasenapp. 11 oppose these changes. 12 I. 13 It does not appear that Defendants substantively Reinstatement of dismissed claims and extension of existing claims 14 A. Reinstatement of dismissed claims against Northern Leasing Systems, Inc. 15 In the August 29, 2011 order, the Court dismissed Plaintiffs’ 16 claims against Northern Leasing for RICO violations, common law 17 fraud, breach of contract, breach of implied covenant, negligent 18 misrepresentation, and conversion. 19 that Plaintiffs had not alleged sufficiently that Northern Leasing 20 had participated directly in the alleged misconduct or could be 21 held liable through an alter ego theory based on its relationship 22 with MBF. 23 ego liability as boilerplate and found that they had not alleged 24 facts to support the theory. 25 At that time, the Court found The Court described Plaintiffs’ allegations of alter In the proposed 3AC, Plaintiffs seek to add new allegations 26 against Northern Leasing, supporting its direct involvement in the 27 improper activity, and seek to reinstate each of these dismissed 28 claims against it. Specifically, Plaintiffs now allege that 10 1 Northern Leasing was the entity that directed and conducted the 2 wire transfers from class members’ bank accounts and received the 3 funds, and that Northern Leasing had instructed its banks to put 4 in the description field the name of a shell company that it had 5 set up, such as MBF, so that the true identity of the company 6 making the withdrawals was obscured. 7 ¶¶ 86, 92, 462. 8 fact the entity that had performed all of the conduct that was 9 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 10 phone calls to collect debts. 11 In their reply, Plaintiffs clarify that they are not alleging that 12 Northern Leasing should be held liable under an alter ego theory, 13 but rather are alleging that it should be held liable directly 14 because it was in fact the wrongdoer. 15 learned this only in the discovery process. See, e.g., id. at ¶¶ 490, 492-99. Plaintiffs assert that they 16 Defendants do not argue that Plaintiffs have insufficiently 17 plead the involvement of Northern Leasing in the claims for RICO 18 violations, common law fraud, breach of contract, breach of 19 implied covenant, negligent misrepresentation, and conversion. 20 Instead, they argue that the new RICO predicate acts are 21 insufficiently plead, as to Northern Leasing as well as other 22 Defendants. 23 Defendants have not shown that Plaintiffs’ claims are otherwise 24 futile, and because Plaintiffs have now alleged Northern Leasing’s 25 direct involvement in the conduct at issue in these claims, 26 Plaintiffs may reinstate these claims against Northern Leasing. This argument will be addressed below. 27 28 11 Because 1 B. Reinstatement of dismissed FCRA claims against Universal Card, Inc. 2 In the August 29, 2011 order, the Court held that “Von 3 Glasenapp and Bae state FCRA claims against Universal Merchant 4 Services, Northern Leasing and MBF Leasing.” 5 However, the Court dismissed the FCRA claim against other 6 Defendants, including Universal Card, Inc. (UCI), as based on 7 “boilerplate alter ego allegations.” 8 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 10 Universal Merchant Services LLC was purportedly dissolved 11 (although they allege that the dissolution process was not done 12 properly and that it is still recognized as a corporate entity by 13 the state of California) and its assets were transferred to UCI. 14 Proposed 3AC ¶ 231. 15 with Experian on behalf of UCI to conduct credit inquiries, he 16 stated that the company name was “Universal Merchant Services,” 17 even though that company had been purportedly dissolved, and “that 18 the ‘Affiliated or Parent Company’ of Universal Merchant Services 19 was ‘Universal Card, Inc.’” 20 allege that UCI, using the registration obtained with Experian 21 under the name of Universal Merchant Services LLC, conducted 22 multiple inquiries on Von Glasenapp’s credit report, and that it 23 used the Universal Merchant Services name, so that, if Von 24 Glasenapp saw the inquiry on his credit report, he would be unable 25 to hold UCI responsible. 26 that they learned during UCI’s Rule 30(b)(6) deposition that it 27 was UCI that had the relationship with Experian. Plaintiffs also allege when Moore registered Id. at ¶ 423. Plaintiffs further Id. at ¶ 485, 501. 28 12 Plaintiffs represent Mot. at 7. 1 Defendants have not opposed the resurrection of the FCRA 2 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 28 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 10 11 12 13 14 15 19 20 21 IT IS SO ORDERED. 22 23 Dated: 12/6/2012 CLAUDIA WILKEN United States District Judge 24 25 26 27 28 37

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