Jalili v. Far East National Bank et al

Filing 36

ORDER by Judge Saundra Brown Armstrong GRANTING IN PART 11 Motion to Dismiss; DENYING AS MOOT 12 Motion to Strike; GRANTING IN PART 20 Motion to Dismiss. Plaintiff shall have until 05/22/13 to file Amended Complaint. Signed by Judge Saundra Brown Armstrong, on 05/01/13 (jlm, COURT STAFF) (Filed on 5/1/2013)

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UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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OAKLAND DIVISION

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9 BERUZ JALILI,

Plaintiff,

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vs.

12 FAR EAST NATIONAL BANK, a Federally
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Case No: C 12-5962 SBA
ORDER GRANTING IN PART
MOTIONS TO DISMISS WITH
LIMITED LEAVE TO AMEND
Dkt. 11, 12, 20

Chartered Bank; SINOPAC HOLDINGS, a
Foreign Corporation; LIBERTY ASSET
MANAGEMENT CORPORATION, a
California Corporation; TLH-REO
MANAGEMENT, LLC, a California
Limited Liability Company;
GFC SERVICE CORPORATION,
a dissolved California Corporation; and
H & Q ASIA PACIFIC II, LLC, a
Delaware Limited Liability Company,
Defendants.

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The instant action arises from a dispute between Plaintiff Beruz Jalili (“Plaintiff”)

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and several financial institutions relating to construction and other loans on various

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properties owned by Plaintiff. As Defendants, Plaintiff has named the following parties:

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Far East National Bank (“the Bank”); Sinopac Holdings (“Sinopac”); Liberty Asset

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Management Corporation (“Liberty”); TLH-REO Management, LLC (“TLH”); GFC

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Service Corporation (“GFC”); and H & Q Asia Pacific II, LLC (“H&Q”). Plaintiff alleges

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federal claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”)

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and the Real Estate Settlement Procedures Act (“RESPA”), along with various

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supplemental state law causes of action.

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This matter is before the Court on three motions: (1) the Bank and Sinpac’s motion

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to dismiss; (2) the Bank and Sinpac’s motion to strike; and (3) Liberty, TLH, GFC and

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H&Q’s motion to dismiss. Having read and considered the papers filed in connection with

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this matter and being fully informed, the Court hereby GRANTS the motions to dismiss as

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to Plaintiff’s federal claims and declines to address Plaintiff’s state law claims at this

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juncture. In light of the ruling on the motion to dismiss, the Court DENIES the motion to

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strike as moot. The Court, in its discretion, finds this matter suitable for resolution without

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oral argument. See Fed. R. Civ. P. 78(b); N.D. Cal. Civ. L.R. 7-1(b).

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I.

BACKGROUND
FACTUAL SUMMARY1

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A.

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Plaintiff owns various properties in Berkeley, California, located at: (1) 1311-1315

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San Pablo Avenue (“the San Pablo Avenue Property”); 1043-1049 Virginia Street (“the

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Virginia Street Property”); and 1348A, 1348B, 1350A and 1350B Rose Street (“the Rose

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Street Property”). Compl. ¶ 13, 14, 18. Plaintiff co-owns the Rose Street Property with his

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sister, who is not a party to this action. Id. ¶ 18.

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Plaintiff’s financial relationship with the Bank began on or about December 5, 2005,

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when he obtained a $100,000 line of credit secured by the San Pablo Avenue Property. Id.

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¶ 13. Thereafter, Plaintiff secured additional loans from the Bank. On May 30, 2007, he

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obtained a $2.25 million construction loan to develop condominiums at the Virginia Street

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Property. Id. ¶¶ 15-16. Later, on July 13, 2007, Plaintiff obtained a $1.21 million

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construction loan for a development project at the Rose Street Property. Id. ¶¶ 19-20.

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Due to the impact of the economic recession on the San Francisco Bay Area real

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estate market in late 2008, Plaintiff and the Bank realized that development project at the

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Virginia Street Property was “under water,” i.e., the amount of the loan exceeded the value

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The following summary is taken from allegations of the Complaint, which, for
purposes of these motions, are accepted as true.
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of the finished condominiums. Id. ¶¶ 25-26. As such, the Bank extended the term of the

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construction loans, as well as the $100,000 line of credit, so that he could proceed with the

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development. Id. ¶¶ 28-32. Plaintiff claims that he agreed to complete his real estate

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projects based on the Bank’s representation that it would provide long-term financing. Id.

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¶ 34.

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In December 2009, Plaintiff and the Bank agreed to roll Plaintiff’s existing loans

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into two new ones: Promissory Note A in the amount of $2.755 million; and Promissory

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Note B in the amount of $869,543. Id. ¶ 38. The Bank represented to Plaintiff that

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“Promissory Note B was to be written off[.]” Id. ¶ 45. According to Plaintiff, the Bank

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used the two new loans and related representations as a means to induce him to continue

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with the projects and to provide more real property as security so that the Bank could later

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transfer or sell the loans on the open market after the projects were completed. Id. ¶ 43.

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In February 2012, the Bank transferred Promissory Note A and Promissory Note B

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to its Stressed Asset Division. Id. ¶ 45. Following the transfer, the Bank informed Plaintiff

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“for the first time—and contrary to prior representations—that [the Bank] was not going to

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further extend or modify the loans represented by Promissory Note A or Promissory Note

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B.” Id. Plaintiff was also told that he could “buy out” the obligations under both notes for

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$1.7 million. Id.

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On a date not specified in the pleadings, the Bank sold Promissory Note A and

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Promissory Note B to Liberty at less than fair market value for $1.5 million. Id. ¶ 47.

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Plaintiff claims that the Bank sold the property to Liberty so that both of them could share

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in the profit realized from the eventual sale of Plaintiff’s properties. Id. ¶ 47. A few weeks

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later, Liberty sold the notes to TLH for $1.7 million. Id.

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B.

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On November 21, 2012, Plaintiff filed the instant action against the Bank, Sinopac,

PROCEDURAL HISTORY

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Liberty, TLH, GFC and H&Q.2 The Complaint alleges eight claims for relief for:

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(1) Fraud; (2) Misrepresentation; (3) violation of RICO; (4) Promissory Estoppel;

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(5) Breach of Contract; (6) Reformation; (7) Breach of Statutory Notice (RESPA)

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Obligations; and (8) an Accounting.

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The Bank and Sinopac have jointly filed two motions, a motion to dismiss under

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Federal Rule of Civil Procedure 12(b)(6) and a motion to strike under Rule 12(e).

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Separately, Liberty, TLH, GFC and H&Q have filed a Rule 12(b)(6) motion to dismiss.3

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Plaintiff and Defendants timely filed their opposition and reply briefs, respectively. The

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matter is now ripe for adjudication.

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II.

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LEGAL STANDARD
Pleadings in federal court actions are governed by Federal Rule of Civil Procedure

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8(a)(2), which requires only “a short and plain statement of the claim showing that the

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pleader is entitled to relief[.]” Rule 12(b)(6) “tests the legal sufficiency of a claim.”

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Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A complaint may be dismissed under

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Rule 12(b)(6) for failure to state a cognizable legal theory or insufficient facts to support a

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cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.

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1990). “[C]ourts must consider the complaint in its entirety, as well as other sources courts

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ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular,

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documents incorporated into the complaint by reference, and matters of which a court may

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take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322

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(2007). The court is to “accept all factual allegations in the complaint as true and construe

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Sinopac is the parent company of the Bank. Id. ¶ 3. In addition, Sinopac and H&Q
are allegedly alter egos of the Bank. Id. ¶ 10. GFC is alleged to be the servicing agent for
TLH on Promissory Note A and Promissory Note B. Id. ¶ 46.

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The motions to dismiss present largely identical arguments, and therefore, will be
discussed together.
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the pleadings in the light most favorable to the nonmoving party.” Outdoor Media Group,

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Inc. v. City of Beaumont, 506 F.3d 895, 899-900 (9th Cir. 2007).

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To survive a motion to dismiss, “a complaint must contain sufficient factual matter,

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accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal,

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556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

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The complaint must afford the defendants with “fair notice” of the claims against them, and

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the grounds upon which the claims are based. Swierkiewicz v. Sorema N.A., 534 U.S. 506,

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512 (2002). “Threadbare recitals of the elements of a cause of action, supported by mere

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conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678. Where a complaint or claim

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is dismissed, “[l]eave to amend should be granted unless the district court determines that

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the pleading could not possibly be cured by the allegation of other facts.” Knappenberger

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v. City of Phoenix, 566 F.3d 936, 942 (9th Cir. 2009).

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III.

DISCUSSION

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A.

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RICO provides for civil liability for “‘[a]ny person injured in his business or

RICO

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property by reason of a violation of section 1962.’” Beck v. Prupis, 529 U.S. 494, 495

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(2000) (quoting 18 U.S.C. § 1964(c)). RICO contains three substantive subsections, which

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are set forth in 18 U.S.C. § 1962(a), (b) and (c). The Complaint purports to state a claim

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under each of these subsections. See Compl. ¶¶ 61-67. The Court discusses each claim, in

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turn.

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1.

18 U.S.C. § 1962(a) & (b)

Section 1962(a) prohibits acquiring, establishing or operating “an enterprise” with

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income derived “from a pattern of racketeering activity or through collection of an unlawful

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debt.” 18 U.S.C. § 1962(a). To state a claim under § 1962(a), Plaintiff must allege facts

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establishing the following: (1) a person receives income derived directly or indirectly from

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a pattern of racketeering activity or unlawful debt; (2) that person uses or invests, directly

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or indirectly, any part or proceeds of such income in the acquisition of any interest in, or

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the establishment or operation of any enterprise; and (3) that enterprise is engaged in or its
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activities affect interstate or foreign commerce. United States v. Robertson, 15 F.3d 862,

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868 (9th Cir. 1994), rev’d on other grounds by 514 U.S. 669 (1995). In addition, a plaintiff

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“must allege that the investment of racketeering income was the proximate cause of its

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injury.” Sybersound Records Inc. v. UAV Corp., 517 F.3d 1137, 1149 (9th Cir. 2008).

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Section 1962(b) provides: “It shall be unlawful for any person through a pattern of

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racketeering activity or through collection of an unlawful debt to acquire or maintain,

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directly or indirectly, any interest in or control of any enterprise which is engaged in, or the

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activities of which affect, interstate or foreign commerce.” 18 U.S.C. § 1962(b) (emphasis

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added). To bring a claim under this provision, “plaintiff must allege that 1) the defendant’s

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activity led to its control or acquisition over a RICO enterprise, and 2) an injury to plaintiff

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resulting from defendant’s control or acquisition of a RICO enterprise.” Wagh v. Metris

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Direct, Inc., 363 F.3d 821, 830 (9th Cir. 2003), overruled on other grounds Odom v.

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Microsoft Corp., 486 F.3d 541, 551 (9th Cir. 2007) (en banc). Plaintiff must also plead

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“facts sufficient to assert standing” by alleging facts showing that “the alleged racketeering

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activity . . . [was] used to injure him,” and “allege a specific nexus between the control of

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the enterprise and the racketeering activity.” Id.

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Plaintiff’s allegations in support of his claim under § 1962(a) and (b) are set forth in

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Paragraph 63 and 64 of the Complaint, respectively. These paragraphs, however, are

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devoid of any facts and simply restate the language of the statute in an entirely conclusory

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manner. This is precisely the type of conclusory, fact-barren pleading which the Supreme

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Court and Ninth Circuit have held is insufficient to avoid a motion to dismiss. Iqbal, 556

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U.S. at 678 (“Threadbare recitals of the elements of a cause of action, supported by mere

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conclusory statements, do not suffice.”); Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir.

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2009) (“conclusory allegations of law and unwarranted inferences are insufficient to avoid

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a Rule 12(b)(6) dismissal.”). Accordingly, the Court DISMISSES Plaintiff’s claims under

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§ 1962(a) and (b), with leave to amend.

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2.

18 U.S.C. § 1962(c)

Section 1962(c) makes it “unlawful for any person employed by or associated with

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any enterprise engaged in, or the activities of which affect, interstate or foreign commerce,

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to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs

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through a pattern of racketeering activity or collection of unlawful debt.” To state a civil

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RICO claim, a plaintiff must allege five elements: (1) conduct, (2) of an enterprise,

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(3) through a pattern, (4) of racketeering activity, establishing that (5) the defendant caused

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injury to the plaintiff’s business or property. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473

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U.S. 479, 496 (1985).

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a)

Pattern Requirement

“To state a RICO claim, one must allege a ‘pattern’ of racketeering activity, which

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requires at least two predicate acts.” Clark v. Time Warner Cable, 523 F.3d 1110, 1116

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(9th Cir. 2008) (citations omitted); 18 U.S.C. §§ 1961(5), 1962(c). The term “racketeering

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activity,” also referred to as “predicate acts,” includes “any act indictable under several

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provisions of Title 18 of the United States Code, and includes the predicate acts of mail

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fraud, wire fraud and obstruction of justice.” Sanford v. MemberWorks, Inc., 625 F.3d

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550, 557 (9th Cir. 2010).

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“[W]hile two predicate acts are required under the Act, they are not necessarily

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sufficient.” Turner v. Cook, 362 F.3d 1219, 1229 (9th Cir. 2004). Rather, “[a] ‘pattern’ of

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racketeering activity also requires proof that the racketeering predicates are related and

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‘that they amount to or pose a threat of continued criminal activity.’” Id. (quoting in part

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H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989)). In H.J., the Supreme

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Court explained the “continuity” requirement as follows:

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Continuity is both a closed and open ended concept, referring
either to a closed period of repeated conduct, or to past conduct
that by its nature projects into the future with a threat of
repetition . . . . A party alleging a RICO violation may
demonstrate continuity over a closed period by proving a series
of related predicates extending over a substantial period of time.
Predicate acts extending over a few weeks or months and
threatening no future criminal conduct do not satisfy this
requirement: Congress was concerned in RICO with long term
criminal conduct.
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H.J., 492 U.S. at 241-42. “Thus, in order to allege open-ended continuity, a RICO plaintiff

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must charge a form of predicate misconduct that by its nature projects into the future with a

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threat of repetition.” Turner, 362 F.3d at 1229. “Conversely, an alleged series of related

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predicates not extending over a substantial period of time and not threatening future

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criminal conduct fails to charge closed-ended continuity.” Id.

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Here, the Complaint does not specifically identify any predicate acts. Rather, the

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pleadings merely allege that “Defendants used the interstate mails and wires to further its

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pattern of racketeering activity, in violation of federal law, including by communicating

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with Plaintiff and each other.” Compl. ¶ 64. These conclusory allegations fail to comport

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with the heightened pleading standards of Rule 9(b), which apply, where, as here, the RICO

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predicate acts are based on fraudulent conduct. Edwards v. Marin Park, Inc., 356 F.3d

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1058, 1065-66 (9th Cir. 2004). To comport with Rule 9(b), plaintiffs must plead with

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particularity the time, place, and manner of each act of fraud, as well as the role of each

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defendant in each scheme. Id. Since the Complaint fails to allege such facts, Plaintiff’s

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RICO claim must be dismissed. Id. (affirming dismissal of RICO claim which identified

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the parties involved but did not specify the content of the communications); Alan Neuman

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Prods., Inc. v. Albright, 862 F.2d 1388, 1392-393 (9th Cir. 1988) (“The allegations of

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predicate acts in the complaint concerning those elements of RICO are entirely general; no

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specifics of time, place, or nature of the alleged communications are pleaded. This is a

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fatal defect under Fed. R. Civ. P. 9(b)”).

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In his opposition, Plaintiff contends that the requisite predicate acts are alleged in

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Paragraph 65 of the Complaint, which avers that “[t]he predicate acts that establish the

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requisite racketeering activity . . . include[] the acts and omissions that led to the Consent

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Order.” Compl. ¶ 65. The Consent Order was entered into by the United States

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Comptroller of the Currency (“Comptroller”) and the Bank on or about March 9, 2010,

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following the Comptroller’s stated intention to initiate cease and desist proceedings against

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the Bank under 12 U.S.C. § 1818(b) “for unsafe and unsound banking practices relating to

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supervision of the Bank[.]” Compl. Ex. J (Stip. and Consent to the Issuance of a Consent
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Order ¶ 1), Dkt. 1 at 136. Setting aside that there is no reference in the Consent Order to

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any mail or wire fraud or any other predicate acts, Plaintiff has made no showing that such

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order relates to any of the specific conduct that forms the basis of this action. Moreover,

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even if the Consent Order were sufficient to establish the existence of two or more

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predicate acts—which it clearly is not—Plaintiff has alleged no facts to satisfy the

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continuity requirement. These deficiencies compel the dismissal of Plaintiff’s RICO claim.

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See Lacey v. Maricopa Cnty., 693 F.3d 896, 939 (9th Cir. 2012) (“We agree with the

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district court that [plaintiff] offers only vague allegations with no factual support that the

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defendants engaged in any of the requisite predicate crimes. This ‘unadorned, the-

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defendant-unlawfully-harmed-me accusation’ is insufficient to survive a motion to

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dismiss.”).

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b)

Enterprise

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An “enterprise” for purposes of RICO is “any individual, partnership, corporation,

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association, or other legal entity, and any union or group of individuals associated in fact

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although not a legal entity.” 18 U.S.C. § 1961(4). Under this definition, an enterprise can

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be a single individual, partnership, corporation, association, or other legal entity. Odom,

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486 F.3d at 548. The Supreme Court has defined an associated-in-fact enterprise as “a

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group of persons associated together for a common purpose of engaging in a course of

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conduct.” United States v. Turkette, 452 U.S. 576, 583 (1981). “To establish the existence

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of such an enterprise, a plaintiff must provide both ‘evidence of an ongoing organization,

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formal or informal,’ and ‘evidence that the various associates function as a continuing

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unit.’” Odom, 486 F.3d at 552 (quoting Turkette, 452 U.S. at 583); Walter v. Drayson, 538

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F.3d 1244, 1249 (9th Cir. 2008) (“there must be an element of direction.”).

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It is unclear from the Complaint whether Plaintiff is alleging that the enterprise is an

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individual, partnership, corporation, association, or other legal entity. See Compl. ¶ 63. To

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the extent that Plaintiff is attempting to allege an associated-in-fact enterprise, his

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allegations are entirely conclusory. For example, the Complaint avers that Defendants

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“participated in, or have been associated with, an enterprise,” but neglects to present any
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facts demonstrating each Defendant’s role in the enterprise. See Reves v. Ernst & Young,

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507 U.S. 170, 183 (1993) (stating that a party is not liable under § 1962 “unless one has

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participated in the operation or management of the enterprise itself”). There also are no

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factual allegations demonstrating the existence of “an ongoing organization” in which

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“various associates function as a continuing unit.” Odom, 486 F.3d at 552 (internal

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quotations and citation omitted). Given these conclusory allegations, Plaintiff’s RICO

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claim must be dismissed. See Elliott v. Foufas, 867 F.2d 877, 881 (5th Cir. 1989) (“In

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order to avoid dismissal for failure to state a claim, a [RICO] plaintiff must plead specific

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facts, not mere conclusory allegations, which establish the existence of an enterprise”).

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In sum, the Court finds that Plaintiff has failed to allege facts sufficient to state a

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claim under § 1962(c). Accordingly, the Court DISMISSES said claim with leave to

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amend.

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B.

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Plaintiff’s seventh claim alleges that Defendants violated RESPA’s notice

RESPA

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requirements, which apply specifically to “federally related mortgage loans.” See 12

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U.S.C. § 2605(b).4 The definition of “federally regulated mortgage loans” specifically

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excludes “temporary financing such as a construction loan[.]” See 12 U.S.C. § 2602(1).

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Commercial loans also are excluded from the purview of RESPA. See Johnson v. Wells

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Fargo Home Mortg., Inc., 635 F.3d 401, 421 (9th Cir. 2011). Here, Plaintiff concedes that

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the loans at issue are construction and commercial loans. Pl.’s Opp’n at 14. Because

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RESPA creates no duties with respect to such loans, the Court GRANTS Defendants’

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motion to dismiss Plaintiff’s seventh claim under RESPA. Such dismissal is with

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prejudice, as further amendment would be futile.

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This section provides that: “Each servicer of any federally related mortgage loan
shall notify the borrower in writing of any assignment, sale, or transfer of the servicing of
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C.

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Federal court jurisdiction is limited to claims raising federal questions or involving

REMAINING STATE LAW CLAIMS

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parties with diverse citizenship. Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S.

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546, 552 (2005). In this case, Plaintiff predicates this Court’s subject matter jurisdiction on

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his federal RICO and RESPA claims. See 28 U.S.C. § 1331. The Court’s jurisdiction over

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the remaining state law claims is based on supplemental jurisdiction. Id. § 1367(a).

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At this juncture, the Court has dismissed Plaintiff’s federal claims, and is permitting

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leave to amend only as to the RICO claim. Because it presently is unclear whether Plaintiff

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can state a cognizable federal claim by amending his Complaint to allege facts

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demonstrating a plausible RICO claim, the Court will not engage at this time in an analysis

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of whether Plaintiff has plead cognizable state law claims. See Gusenkov v. Washington

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Mut. Bank, FA, No. C 09-04747 SI, 2010 WL 2612349, *6 (N.D. Cal. June 24, 2010)

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(granting motion to dismiss federal claims and declining to consider viability of state law

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claims pending plaintiff’s amendment of the federal claims).

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The Court advises Plaintiff that if he does not timely amend his Complaint within

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the time period specified below or is unable to amend his Complaint to state a cognizable

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federal claim under RICO, the Court will dismiss his RICO claim with prejudice and

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decline to exercise supplemental jurisdiction over the remaining state law claims. See 28

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U.S.C. § 1367(c)(3); Ove v. Gwinn, 264 F.3d 817, 826 (9th Cir. 2001) (“A court may

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decline to exercise supplemental jurisdiction over related state-law claims once it has

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dismissed all claims over which it has original jurisdiction.”).

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IV.

CONCLUSION

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For the reasons stated above,

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IT IS HEREBY ORDERED THAT:

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1.

Defendants’ motions to dismiss are GRANTED IN PART as to Plaintiff’s

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third claim under RICO and seventh claim under RESPA. Plaintiff is granted leave to

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amend his RICO claim to rectify the deficiencies discussed above. The RESPA claim is

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dismissed with prejudice.
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2.

The Bank and Sinopac’s motion to strike is DENIED as moot.

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3.

Plaintiff shall have until May 22, 2013 to file a First Amended Complaint,

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consistent with the Court’s rulings. Plaintiff is advised that any additional factual

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allegations set forth in his amended complaint must be made in good faith and consistent

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with Rule 11. The Court defers consideration of Plaintiff’s supplemental state law claims

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until it is determined that Plaintiff has stated a plausible federal claim.

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4.

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IT IS SO ORDERED.

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This Order terminates Docket 11, 12 and 20.

Dated: May 1, 2013

______________________________
SAUNDRA BROWN ARMSTRONG
United States District Judge

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