Kearney v. Foley and Lardner, et al

Filing 139

ORDER granting 126 Motion to Dismiss Third Amended Complaint without prejudice. Plaintiff may file a Fourth Amended Complaint on or before August 15, 2011. Signed by Judge Anthony J. Battaglia on 07/22/11. (cge)

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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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JOAN BROWN KEARNEY,

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Plaintiff,
v.

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FOLEY AND LARDNER, et al.,
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Defendants.
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Case No.: 05-CV-2112-AJB-MDD
ORDER GRANTING MOTION
TO DISMISS THIRD AMENDED
COMPLAINT
[Doc. No. 126]

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Defendants Foley & Lardner, Gregory v. Moser, and Larry L. Marshall (collectively “Attorney

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Defendants”) move to dismiss plaintiff’s Third Amended Complaint. The Plaintiff filed an opposition,

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[Doc. No. 132], and the Defendants filed a reply, [Doc. No. 134]. Based upon the parties moving

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papers, arguments of counsel made at the hearing on June 20, 2011, and for the reasons set forth herein,

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the Defendants’ motion to dismiss is hereby GRANTED.

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Factual Background

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Unless otherwise specified, the following facts are drawn from Plaintiff’s Third Amended

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Complaint (“TAC”).
Plaintiff is the former owner of a 52.06-acre parcel located in Ramona, California. In June of

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2000, the Ramona Unified School District (“RUSD”) initiated a condemnation process to acquire that

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property through eminent domain pursuant to Government Code § 66499.34. Defendants include the law

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firm of Foley and Lardner, LLC (“F&L”), and two individuals, Moser and Marshall, who were F&L
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partners during the relevant time and who represented the RUSD in the eminent domain action.

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Defendant McCarthy was the Business Manager of RUSD. In preparation for the eminent domain

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proceeding, RUSD hired Construction Testing & Engineering (“CTE”) to conduct a septic system,

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including percolation testing, of Plaintiff’s land, and to prepare a report with the results. Those results

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would show how many residential plots the land could support, thus determining the land’s value.

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CTE entered Plaintiff’s property in December of 2002 to conduct the perc test without her

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approval. On December 26, 2002 the RUSD and Plaintiff reached an agreement in which she would

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consent for the RUSD to conduct perc testing in exchange for copies of any reports prepared from the

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testing. In late January and early February 2001, CTE completed the percolation testing on the Property,

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however, it did not prepare a formal report of the results. Plaintiff, through her counsel, sent broad

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document requests to RUSD, but did not receive any test results though other documents produced

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suggested testing had been done.

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The trial to determine the value of Plaintiff’s property lasted from April 29 to May 9, 2002.

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Plaintiff’s expert testified that the parcel could support up to sixteen residential lots based upon the

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percolation test performed in 1996. This gave the property a value of $1.4 million. RUSD’s expert

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appraised the property at $850,000 based upon the understanding that the parcel could support six to

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eight lots. Defendant Marshall, one of RUSD’s attorneys, said in trial that no new percolation testing

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had been performed. The jury awarded Plaintiff $935,000 in compensation.

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After trial, Plaintiff learned from a school expense itemization report that percolation testing had

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in fact been performed. She submitted a California Public Records Act (“CPRA”) request in May 2002,

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but nothing was produced. RUSD said it did not possess anything that had not been provided during

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discovery. It also said that, to the extent any documents existed in the offices of the professionals it

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employed, the documents were exempt from CPRA. Plaintiff moved for a new trial based on the

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itemization rerpot. The state trial court denied her motion. Plaintiff appealed.

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While the appeal was pending, Plaintiff made another CPRA request and exchanged letters with

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Marshall. Marshall said RUSD would waive its CPRA exemption. On November 12, 2002, it produced a

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copy of the testing results, stating that the document was not in RUSD’s possession and was obtained

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only after the trial. Plaintiff had RUSD’s experts review the report, and they determined that the results
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were significant to valuation and would support a higher value for the property. Plaintiff filed more

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motions for a new trial which were denied on jurisdictional grounds. She appealed those as well. On

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March 3, 2004, the California Court of Appeal issued its ruling denying her relief. The California

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Supreme Court denied review.

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Procedural Background
Plaintiff commenced the present action on November 14, 2005 in federal court against the law

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firm that represented RUSD in the state proceedings, two of the firm’s attorneys, and RUSD’s business

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manager. Her complaint alleged federal causes of action under 18 U.S.C. §§ 1961-1968, the Racketeer

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Influenced and Corrupt Organizations Act (“RICO”), conspiracy to violate RICO, and 42 U.S.C. § 1983.

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She also had many state causes of actions. Defendants filed motions to dismiss and the District Court

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granted them. Her federal claims were dismissed under the Noerr-Pennington doctrine because the

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conduct on which Plaintiff relied to establish liability was incidental to First Amendment protected

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petitioning activity and the complaint did not fit into the “sham” exception. The district court also

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dismissed her state causes of actions under California’s anti-SLAPP statute.

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Plaintiff appealed and the Ninth Circuit accepted review. The Ninth Circuit found that the “sham

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exception” applied to her claims which prevent the Defendants from claiming immunity. Kearney v.

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Foley & Lardner, 590 F.3d 638 (9th Cir. 2009). The Ninth circuit affirmed the dismissal of Plaintiff’s

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state law claims and remanded the case back to the District Court to entertain Plaintiff’s federal RICO

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claims. After remand, Plaintiff filed a second amended complaint (“SAC”). Defendants moved to have

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the SAC dismissed. [Doc. No. 106.] That motion was granted with leave for Plaintiff to amend her

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RICO claim. [Doc. No. 122.] Plaintiff filed her Third Amended complaint (“TAC”) on April 4, 2011, in

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which she sought relief based on two causes of actions against Defendants Foley and Lardner, LLP.

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(F&L), Gregory Moser and Larry Marshall (Attorney Defendants), as well as Michael McCarty. The

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first cause of action is for violation of 18 U.S.C. § 1963(c), the Racketeer Influence and Corrupt

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Organization Act (RICO), against all named defendants. The second cause of action is for conspiracy to

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violate RICO against Defendant F&L. The Honorable Judge Lorenz, who previously presided over this

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case, issued a recusal on April 26, 2011. Defendant F&L and Attorney Defendants move to dismiss the

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TAC. For the following reasons, this Court GRANTS the motion to dismiss.
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Legal Standard

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A motion to dismiss under Rule 12(b)(6), tests the legal sufficiency of the pleadings, and allows

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a court to dismiss a complaint upon a finding that the plaintiff has failed to state a claim upon which

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relief may be granted. See Novarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The court may dismiss a

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complaint as a matter of law for: (1) “lack of cognizable legal theory,” or (2) “insufficient facts under a

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cognizable legal claim.” SmileCare Dental Grp. v. Delta Dental Plan of Cal., 88 F.3d 780, 783 (9th Cir.

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1996) (citation omitted). However, a complaint survives a motion to dismiss if it contains “enough facts

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to state a claim to relief that is plausible on its face.” Bell Atl.Corp. v. Twombly, 550 U.S. 544, 470

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(2007).

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Notwithstanding this deference, the reviewing court need not accept “legal conclusions” as true.

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Ashcroft v. Iqbal, --U.S--, 129 S. Ct. 1937, 1945-50, 173 L.Ed. 2d 868 (2009). It is also improper for the

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court to assume “the [plaintiff] can prove facts that [he or she] has not alleged.” Associated Gen.

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Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). On the other

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hand “[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then

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determine whether they plausibly give rise to an entitlement to relief.” Iqbal, 129 S. Ct. at 1929. The

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court only reviews the contents of the complaint, accepting all factual allegations as true, and drawing

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all reasonable inferences in favor of the nonmoving party. al-Kidd v. Ashcroft, 580 F.3d 949, 956 (9th

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Cir. 2009) (citations omitted).

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Discussion
I. Racketeer Influenced and Corrupt Organizations Act (“RICO”)
RICO “protects the public from those who would unlawfully use an ‘enterprise’ (whether

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legitimate or illegitimate) as a ‘vehicle’ through which ‘unlawful . . . activity is committed.’” Cedric

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Kushner Promotions, Ltd. v. King, 533 U.S. 158, 164-65 (2001).

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The elements of a civil RICO claim are: “(1) conduct (2) of an enterprise (3) through a pattern

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(4) of racketeering activity (known as ‘predicate acts’) (5) causing injury to plaintiff’s ‘business or

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property.” Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 535, 561 (9th Cir. 2005)

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(citation and quotation marks omitted). “To state a RICO claim, one must allege a ‘pattern’ of

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racketeering activity, which requires at least two predicate acts.” Clark v. Time Warner Cable, 523 F.3d

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1110, 1116 (9th Cir. 2008) (citations omitted).

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Furthermore, “[to] establish liability under § 1962(c) one must allege and prove the existence of

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two distinct entities: (1) a ‘person’ and (2) an ‘enterprise’ that is not simply the same ‘person’ referred

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to by a different name.” Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). The term

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“enterprise” is defined in 18 U.S.C. § 1961(4) as “any individual, partnership, corporation, association,

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or other legal entity, and any union or group of individuals associated in fact although not a legal

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entity.” Thus, an enterprise may be a legal entity, such as a corporation, or may be “a group of persons

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associated together for a common purpose of engaging in a course of engaging in a course of conduct.”

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United States v. Turkette, 452 U.S. 576, 582 (1981). This type of “continuing unit that functions with a

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common purpose” constitutes an associated-in-fact enterprise. Boyle v. United States, 129 S.Ct. 2237,

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2240 (2009). An associated-in-fact enterprise is “proved by evidence of an ongoing organization, formal

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or informal, and by evidence that the various associates function as a continuing unit.” Turkette, 452

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U.S. 583; Odom v. Microsoft Corp., 486 F.3d 541, 552 (9th Cir. 2007).

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In the present case, Plaintiff alleges that the “non-party RUSD” constituted a RICO enterprise

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within the meaning of 18 U.S.C. § 1961(4),” and is “an enterprise engaged in, or its activities affect,

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interstate and/or foreign commerce.” (TAC ¶¶ 52-53). Plaintiff alleges that Defendant McCarty and the

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Attorney Defendants are the “persons” under 18 U.S.C. § 1961(3). (TAC ¶ 54). She further alleges that

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they were associated with the RICO enterprise RUSD and either “(1) conducted the affairs of the

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enterprise or (2) participated, directly or indirectly, in the conduct of the affairs of the enterprise . . . “

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Id. Plaintiff goes on to cite a number of events that she alleges were Defendant’s predicate acts

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establishing a pattern of racketeering activity with a “common purpose to defraud Plaintiff and prevent

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her from receiving the fair value of her property.” (TAC ¶¶ 56-58). Plaintiff states that the Attorney

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Defendants “played a part in directing the affairs of RUSD” and were given “significant control” over

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decisions regarding what evidence to present or conceal in the eminent domain proceedings. (TAC ¶¶

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59-60).

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A. Participation in the Operation or Management of the Enterprise

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

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

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participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of

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racketeering activity or collection of an unlawful debt.” 18 U.S.C. § 1962(c). In Reves v. Earnst &

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Young. 507 U.S. 170 (1993), the Court looked at the phrase “conduct or participate, directly or

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indirectly, in the conduct of such enterprise’s affairs” and concluded that for RICO liability to attach

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“one must participate in the operation or management of the enterprise itself.” Id. at 179. The Court

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noted, however, that “RICO liability is not limited to those with a formal position in the enterprise, but

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some part in directing the enterprise’s affairs is required.” Id. (emphasis in original).

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The Ninth Circuit has held that the “management and operations” test also extends to associated-

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in-fact enterprises. Walter v. Drayson, 583 F.3d 1244 (9th Cir. 2008). The Walter Court concluded that

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the structure of a client, her attorney, and her trustee could be an associated-in-fact enterprise. However

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to find the attorney liable for RICO violation, the Plaintiff must show that the attorney and her law firm

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had some part in directing the affairs of the associated-in-fact enterprise. The Walter Court further held

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that “[s]imply performing services for the enterprise does not rise to the level of direction, whether one

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is “inside” or “outside.” Id. at 1249.

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Attorney Defendants move to dismiss the TAC asserting that Plaintiff does not and cannot allege

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that Attorney Defendants participated in the operation or management of the alleged RICO enterprise as

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required for liability by Reves v. Young, 507 U.S. 170 (1993). Attorney Defendants contend that because

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the alleged RICO enterprise is the school district, they cannot satisfy the “operations and management”

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test for RICO liability. They argue that the RUSD is under the control of a board of trustees or board of

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education and there is no authority for a school district of its Board to contract with outside attorneys to

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participate in carrying out the Board’s duties in the operation or management of the district. [Doc. No.

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126].

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Plaintiff, in her Opposition to the Motion to Dismiss, argues that the RUSD and Attorney

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Defendants is an associated-in-fact enterprise. [Doc. No. 132]. She relies upon Living Designs, Inc. v.

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E.I Dupont de Nemours & Co., 431 F. 3d 353 (9th Cir. 2005) to establish that attorneys can be found

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liable for RICO violations. The Ninth Circuit in Living Designs acknowledged that Dupont and the law
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firms it hired could be an associated-in-fact enterprise, and that the enterprise formed by DuPont, the

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law firms, and expert witnesses retained by the law firms, were separate and distinct from DuPont, the

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RICO “person” alleged in the complaint. Id. at 362. The court also noted that “even in the context of the

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attorney-client relationship, attorneys retain control over important functions; for example, in litigation,

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the attorney retains control over tactical and strategic decisions.” Id. at 362.

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This Court does not doubt that a legitimate entity, such as RUSD, and its attorneys could form an

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associated-in-fact enterprise under the definition set forth by 18 U.S.C. § 1961(4) and its interpretation

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by the Supreme Court in Turkett. 452 U.S., at 583. The issue for the court is if Plaintiff properly pleaded

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an associated-in-fact enterprise. The confusion stems from the fact that Plaintiff first alleges that “at all

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relevant times, non-party RUSD constituted a RICO enterprise.” (TAC ¶ 52). If the RICO enterprise was

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the RUSD, then it is unlikely that Attorney Defendants, as outside counsel, could have had any

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involvement in the operation and control of the entirety of the enterprise. However, if the RICO

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enterprise alleged was the associated-in-fact enterprise, comprised of the RUSD and the Attorney

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Defendants, with the common purpose of settling the eminent domain proceedings; then it is more

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plausible that the Attorney Defendants could have had some direction over this eminent domain

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litigation enterprise.

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Currently the Court finds that Plaintiff’s allegations are ambiguous and fail to put Attorney

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Defendants on proper notice of their supposed misconduct within any enterprise. Accordingly, the Court

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GRANTS the motion to dismiss. Plaintiff will be given leave to amend to more clearly state which is

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the RICO enterprise she alleges to exist.

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B. Factual Allegations

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The Court is not persuaded by Defendant Attorney’s arguments that Plaintiff’s factual

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allegations are insufficient under any characterizations. However, because the TAC is dismissed for the

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above reasons, it is unnecessary to go into the merits of Plaintiff’s factual allegations. The merits of

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plaintiff’s factual claims are best left to a motion for summary judgment or trial.

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II. RICO Conspiracy Claim

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Defendants argue Plaintiff cannot state a claim for RICO conspiracy because she has not

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adequately pleaded RICO violations. Because the Court will dismiss Plaintiff’s RICO claim without

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prejudice, her RICO conspiracy claim will also be dismissed without prejudice.

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Conclusion
Based on the foregoing, Defendants’ motion to dismiss the TAC is hereby GRANTED without

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prejudice as set forth above. Plaintiff may file a Fourth Amended Complaint to set forth RICO and

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RICO conspiracy claims that sufficiently allege the Foley defendants’ participation in the operation or

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management of a RICO enterprise consistent with the analysis herein. A further failure in this regard

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will result in a dismissal with prejudice. The Plaintiff’s Fourth Amended Complaint must be filed on or

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before August 15, 2011.

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IT IS SO ORDERED

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DATED: July 22, 2011

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Hon. Anthony J. Battaglia
U.S. District Judge

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