Yucaipa American Alliance Fund I LP et al v. Ehrlich et al

Filing 35

MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 9/2/2016. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

YUCAIPA AMERICAN ALLIANCE FUND I,
L.P., and YUCAIPA AMERICAN ALLIANCE
(PARALLEL) FUND I, L.P.,

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Plaintiffs,

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v.

RICHARD A EHRLICH, STEPHEN H.
DECKOFF, LESLIE A MEIER, JEFFREY A
SCHAFFER, BDCM OPPORTUNITY FUND II,
L.P., BLACK DIAMOND CLO 2005-1 LTD., and
SPECTRUM INVESTMENT PARTNERS, L.P.,
Defendants.

Civ. No. 15-373 (SLR)

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John T. Dorsey, Esquire, Michael R. Nestor, Esquire, Sharon M. Zieg, Esquire, and Michael
S. Neiburg, Esquire, of Young Conaway Stargatt & Taylor LLP, Wilmington, Delaware;
Robert A. Klyman, Esquire, Maurice M. Suh, Esquire, and Kahn Scolnick, Esquire, of
Gibson, Dunn & Crutcher, LLP, Los Angeles, California. Counsel for Yucaipa American
Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P.
Adam G. Landis, Esquire and Kerri K. Mumford, Esquire, of Landis Rath & Cobb, L.L.P.,
Wilmington, Delaware; Robert J. Ward, Esquire, of Schulte Roth & Zabel L.L.P., New York,
New York. Counsel for Richard A Ehrlich, Stephen H. Deckoff, Leslie A Meier, Jeffrey A
Schaffer, BDCM Opportunity Fund II, L.P., Black Diamond CLO 2005-1 Ltd., and Spectrum
Investment Partners, L.P.

MEMORANDUM OPINION

Dated: September J..
Wilmington, Delaware

, 2016

R~,
I. INTRODUCTION
This action arises from the bankruptcy cases of Allied Systems Holdings, Inc., et al.
("Allied"). 1 Plaintiffs Yucaipa American Alliance Fund I, L.P., and Yucaipa American
Alliance (Parallel) Fund I, L.P. (together, "plaintiffs") filed a complaint against BDCM
Opportunity Fund II, L.P. and Black Diamond CLO 2005-1 Ltd. (together, "Black Diamond"),
Spectrum Investment Partners, L.P. ("Spectrum" and together with Black Diamond, "BD/S"),
and certain members of Allied's board of directors (Richard A. Ehrlich, Stephen H. Deckoff,
Leslie A. Meier, and Jeffrey A. Schaffer) (collectively, "defendants") asserting violation of the
Racketeer Influenced and Corrupt Organizations ("RICO") Act, 2 as well as state law claims
for fraud and tortious interference with business relations. (D. I. 1 ("complaint") ) 3
Defendants move to dismiss on the bases that: the complaint fails to state a claim under§§
1962(c) and (d) of the RICO Act; the complaint fails to state claims for tortious interference
or fraud; the complaint is barred by the Noerr-Pennington doctrine; 4 and plaintiffs' claims
are barred by a covenant not to sue. (D.I. 17) Alternatively, defendants move to stay the

1

Allied Systems Holdings, Inc. is now known as ASHING Corporation.
18 U.S.C. § 1961, et seq.
3 The court will cite Defendants' Opening Brief in Support of the Motion to Dismiss as (MTD
at_); Yucaipa's Opposition Brief as (MTD Opp. at_); and Defendants' Reply Brief as
(MTD Reply at_). Other "D.I." references will be to the docket for Civ. No. 13-373 (SLR).
4
The Noerr-Pennington doctrine protects a litigant's right to "petition the Government for
redress of grievances," a fundamental principle that cannot be abridged under the First
Amendment of the U.S. Constitution. See E.R.R. Presidents Conference v. Noerr Motor
Freight, Inc., 365 U.S. 127, 137 (1961). Under the Noerr-Pennington doctrine, every step of
litigation is immune from liability. See United Mine Workers of Am. v. Pennington, 381 U.S.
657, 670 (1965). Courts in the Third Circuit have applied the Noerr-Pennington doctrine to
dismiss RICO actions. See e.g., Giles v. Phelan, Hallinan & Schmieg, LLP, 2013 WL
2444036, at *11 (D.N.J. June 4, 2013) (dismissing RICO claims); Bath Petroleum Storage,
Inc. v. Mkt. Hub Partners, L.P., 2000 WL 1508873, *1 (2d Cir. Oct. 11, 2000) ("NoerrPennington immunity is applicable to RICO actions and to state-law claims such as fraud
and tortious interference").
2

action pending resolution of related actions pending in the bankruptcy cases. (Id.) Because
the complaint fails to state a claim under RICO, and the court declines to exercise
supplemental jurisdiction over the state law claims, the motion to dismiss will be granted.

II. BACKGROUND
A. The Bankruptcy Cases
Allied was a provider of distribution and transportation services to the automotive
industry. Allied emerged from its first bankruptcy in May 2007, and plaintiffs became
Allied's majority shareholder under the plan of reorganization, with control over its board of
directors. To finance its emergence from bankruptcy, Allied borrowed $265 million of first
lien debt (the "First Lien Debt" or "First Lien Claims") from numerous lenders ("Lenders")
pursuant to a Credit Agreement.5 As defined in the Credit Agreement, one or more Lenders
holding more than 50% of the total First Lien Debt can act as the "Requisite Lenders," and
the Requisite Lenders are vested with authority to exercise - or refrain from exercising certain rights and remedies on behalf of all Lenders, such as declaring events of default,
demanding immediate payment by Allied of any and all amounts due, or commencing
foreclosure. (Id., §§ 1.1, 8.1, 9.8)
Under the Credit Agreement, the only parties eligible to act as Requisite Lenders
were "Lenders," which consisted only of the original Lender signatories to the Credit
Agreement, and "Eligible Assignees" that subsequently become Lenders pursuant to an
Assignment Agreement. (Id., § 1.1) Plaintiffs were not original Lender signatories to the
Credit Agreement, and the definition of Eligible Assignee provided that "no ... Sponsor
shall be an Eligible Assignee." (Id.,) "Sponsor" is a defined term applicable only to

5

"Credit Agreement" refers to the Amended and Restated First Lien Secured Super-Priority
Debtor in Possession and Exit Credit and Guaranty Agreement, as amended and restated
as of May 15, 2007, between Allied Holdings Inc. and Allied Systems Ltd. (L.P.) as
Borrowers, and the Lenders from time to time party thereto (as amended). (D.l. 1, ex. 1)
2

plaintiffs. This prohibition recognized the manifest conflict of interest between plaintiffs (as
Allied's controlling shareholders) and the Lenders (as creditors of Allied).
In 2008, certain events of default occurred under the terms of the Credit Agreement,
and Allied stopped making interest payments on the First Lien Debt. Plaintiffs orchestrated
the passage of a Third Amendment to the Credit Agreement, which gave plaintiffs limited
rights to become a Lender, capping the amount of debt they could purchase, stripping that
debt of any voting power, and requiring certain contributions to equity. (D.I. 1, ex. 14, Third
Amendment§ 2.1 (a)) Thus, plaintiffs could never become Requisite Lenders under the
Third Amendment. The Third Amendment also contained a covenant not to sue, which
limited plaintiffs' rights to sue any Lender. The covenant not to sue provided:
To the fullest extent permitted by applicable law, no Restricted Sponsor Affiliate
[plaintiffs] shall assert, and each Restricted Sponsor Affiliate immediately and
automatically upon becoming a Lender, hereby irrevocably (i) waives, any claim or
cause of action against any Lender, any Agent and their respective Affiliates ..
. (whether or not the claim therefor is based on contract, tort or duty imposed by any
applicable legal requirement or otherwise) arising out of, in connection with, as a
result of, or in any way related to, this Agreement or any Credit Document or
any agreement or instrument contemplated hereby or thereby or referred to herein or
therein, the transactions contemplated hereby or thereby, any Loan or the use of
the proceeds thereof or any act or omission or event occurring in connection
therewith except to the extent caused by such Lender's or Agent's gross negligence
or willful misconduct ... as determined by a court of competent jurisdiction by final
and non-appealable judgment, (ii) waives, releases and agrees not to sue upon
any such claim or any such cause of action, whether or not accrued and whether
or not known or suspected to exist in its favor and (iii) waives any claim or cause of
action against any Agent or any Lender ... on any theory of liability for special,
indirect, consequential or punitive damages ....
(Id., § 2.7(e) (emphasis added))

In February 2009, ComVest Investment Partners Ill, L.P. ("ComVest") became the
Requisite Lender. Thereafter, plaintiffs directly negotiated with ComVest to acquire the First
Lien Debt. On August 21, 2009, plaintiffs caused Allied to enter into a purported Fourth
Amendment to the Credit Agreement which, if effective, would have eliminated the Third
Amendment's restrictions on plaintiffs' acquisition of First Lien Debt and would have allowed

3

plaintiffs to become Requisite Lenders. Indeed, that same day, plaintiffs purported to
purchase ComVest's debt and declared themselves Requisite Lenders. However, the
Fourth Amendment was not approved by unanimous consent of the Lenders as required by
the Credit Agreement. CIT Group Business Credit, Inc. ("CIT") - a Lender and the
Administrative Agent under the Credit Agreement - challenged plaintiffs' status as Requisite
Lenders, which led to a lengthy litigation in Georgia state court among plaintiffs, Allied, and
CIT ("Georgia Action"). CIT settled that litigation with plaintiffs and Allied, but the settlement
did not resolve the issues between plaintiffs and the other Lenders. In January 2012, BOIS
commenced an action in New York state court ("New York Action") against plaintiffs, and
successfully obtained a judicial declaration that plaintiffs were not the Requisite Lenders
because the Fourth Amendment was not validly enacted and was void ab initio. 6
On May 17, 2012, while the New York Action was pending, Black Diamond filed
involuntary petitions for bankruptcy against Allied in the bankruptcy court, and Allied entered
bankruptcy for the second time, five years after its first bankruptcy. (See Bankr. 0.1. 1)7
Allied shortly thereafter consented to the entry of orders for relief under the Bankruptcy
Code. On October 18, 2012, Allied commenced an adversary proceeding seeking a
determination as to, among other things, the identity of the Requisite Lenders under the

6

See BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, No. 650150/2012,
2013 N.Y. Misc. LEXIS 1993, *13 (N.Y. Sup. Ct. Mar. 8, 2013). The First Department of the
New York Supreme Court's Appellate Division ("New York Appellate Division") affirmed the
finding that the Fourth Amendment is void ab initio and that plaintiffs are not the Requisite
Lenders. BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, 112 A.D.3d
509, 509 (N.Y. App. Div. 2013). The New York Appellate Division's opinion, however,
modified the lower court's opinion in that it held there was a triable issue of fact as to
whether Black Diamond waived the ability to challenge plaintiffs' status as Requisite
Lenders. 6 See id. at 511. The New York Court of Appeals denied further review on April 3,
2014, thereby exhausting plaintiffs' appeals. BOCM Opp. Fund II, LP v. Yucaipa Am.
Alliance Fund I, LP, 8 N.E.3d 849, 849 (N.Y. 2014).
7 The docket of Allied's chapter 11 cases, captioned In re ASH/NC Corporation, et al., Case
No. 12-11564 (CSS) (Bankr. D. Del.), is cited herein as (Bankr. 0.1. _).

4

Credit Agreement (Adv. No. 12-50947 (CSS)) (the "Allied Action"). On March 14, 2013, the
Official Committee of Unsecured Creditors appointed on behalf of Allied's bankruptcy
estates (the "Committee"), together with BOIS (as intervenors), filed an amended complaint
in the bankruptcy court seeking, among other things, to equitably subordinate plaintiffs'
purported First Lien Debt and to compel plaintiffs to comply with the Third Amendment's
requirement that plaintiffs contribute their debt to capital (Adv. No. 13-50530 (CSS)) (the
"Committee Action"). On November 19, 2014, BOIS filed an equitable subordination
complaint against plaintiffs (Adv. No. 14-50971 (CSS)) (the "BOIS Action"). The Committee
Action and the BOIS Action remain pending in the bankruptcy court, and discovery is
currently scheduled to be completed by July 17, 2017. (See Committee Action at 0.1. 392
(parties' July 12, 2016 status report))
The bankruptcy court issued an oral ruling on February 27, 2013, granting a motion
to dismiss plaintiffs' cross-claims in the Allied Action, including their claim for declaratory
relief that certain provisions of the Third Amendment should be deemed void. (See
Committee Action 0.1. 255 at 103-08) On June 19, 2013, the bankruptcy court entered an
agreed scheduling order in the Allied Action and Committee Action in which the parties
(including plaintiffs) acknowledged that the bankruptcy court may address the issue of
"[w]ho, if anyone, is 'Requisite Lender' under the Debtors' [Credit Agreement]."' (See
Committee Action 0.1. 268 ,-i,-i 2(a), (b)) Thereafter, BOIS filed a motion for summary
judgment in both the Allied Action and Committee Action seeking a declaration that BOIS
are the Requisite Lenders under the Credit Agreement. (See Committee Action 0.1. 254)
After full briefing, the bankruptcy court, on July 30, 2013, ruled from the bench that BOIS

5

are the Requisite Lenders. 8 Plaintiffs appealed that decision and, on March 31, 2016, the
court affirmed the bankruptcy court's decision. 9
Following the bankruptcy court's ruling that BD/S are the Requisite Lenders, in the
summer of 2013, the bankruptcy court supervised an auction of Allied's assets in which
BD/S, in their capacity as Requisite Lenders, submitted a credit bid to purchase Allied's
assets on behalf of the Lenders. Ultimately, Jack Cooper Holdings Corporation made the
highest and best bid and purchased substantially all of Allied's assets. That sale closed on
December 20, 2013 and was funded on December 27, 2013. BD/S, in their capacity as
Requisite Lenders, used their credit bid, which was approved by the bankruptcy court on
September 17, 2013, to purchase the remainder of Allied's assets (the "SBDRE Assets") on
behalf of all Lenders (including plaintiffs). (See Bankr. D.I. 1837, 1868 (sale orders))
On December 11, 2013, plaintiffs filed an action in the Delaware Court of Chancery
against BD/S and others to challenge the allocation of the SBDRE Assets. On October 31,
2014, the Delaware Court of Chancery dismissed most of plaintiffs' claims by applying the
bankruptcy court's decision through collateral estoppel that the Third Amendment is valid. 10
The claims that were not dismissed by the Court of Chancery were stayed pending
resolution of Allied's chapter 11 cases. 11 On December 9, 2015, a plan of reorganization
co-sponsored by BD/S in their capacity as the Requisite Lenders was approved by the
bankruptcy court. (See Bankr. D.I. 3383) The plan of reorganization, which was supported
by both Allied and the Committee, includes the prosecution of claims against plaintiffs and

8

See Committee Action D.I. 280, Allied Action D.I. 275 (bankruptcy court order granting
summary judgment); 7/30/13 Hr'g. Tr. at 120-30 (bankruptcy court bench ruling).
9 See Civ. No. 13-1580 (SLR), D.I. 39, 40; Civ. No. 13-1583 (SLR), D.I. 39, 40.
10 Yucaipa Am. Alliance Fund I, LP v. SBORE LLC, No. 9151-VCP, 2014 WL 5509787, at
*14 (Del. Ch. Oct. 31, 2014).
11
See id. at *16-*17.

6

certain of its principals for equitable subordination, breach of contract, breach of fiduciary
duty, and other claims.
On May 8, 2015, plaintiffs filed the instant action asserting violation of§ 1962(c) of
the RICO Act (count I); conspiracy to violate§ 1962(c) pursuant to§ 1962(d) (count II);
fraud under state law (count Ill); and tortious interference with business relations under
state law (count IV). On June 4, 2015, defendants moved to dismiss or stay the action.
(D. I. 16) The motion to dismiss is fully briefed and properly before the court.

B.

The Alleged RICO Scheme

Plaintiffs assert a racketeering scheme by defendants, the goal of which was to force
Allied into involuntary bankruptcy and equitably subordinate plaintiffs' claims in order to
"recover a substantial multiple on their original investment." To implement this scheme,
which was allegedly motivated by "simple greed" (D.I. 1, 11123), Black Diamond and
Spectrum encouraged plaintiffs' acquisition of ComVest's debt so that plaintiffs would obtain
a 56% share of all of the First Lien Claims. "Were that to happen, [d]efendants could jointly
push Allied into an involuntary bankruptcy, at which point, Black Diamond and Spectrum
could attempt to equitably subordinate [plaintiffs') First Lien Claims by falsely accusing
[plaintiffs') designees on the Allied board of directors of breaching their fiduciary duties to
Allied and operating Allied to [plaintiffs'] advantage." (D.I. 1, 1179) After "encourag[ing]
[plaintiffs] to acquire as much Allied debt as possible by providing false assurances of
cooperation and support" (id., 11 8), Black Diamond and Spectrum subsequently conspired
and acted to prevent plaintiffs from serving as Requisite Lenders under the Credit
Agreement; "scuttle" a deal with Jack Cooper Transport Company Inc., a competitor and
prospective purchaser of Allied's assets (the "JCT Deal"); file involuntary bankruptcy
petitions against Allied supported by false statements and material omissions; attempt to
wipe out plaintiffs' First Lien Claims with a "bogus" complaint for equitable subordination;

7

and abuse their Requisite Lender status with the goal of further harming plaintiffs. (Id., ~
82)
With respect to specific factual allegations, plaintiffs allege that Black Diamond and
Spectrum first encouraged plaintiffs (insiders of Allied) to buy as much First Lien Debt as
possible.

(Id.,~~

8-10, 83-89) In support of this allegation, plaintiffs rely on an email dated

February 2, 2011 from Black Diamond to plaintiffs stating that, "[o]n Allied, the strategy you
outlined seemed right and you have our support." (See id., ex. 21) Despite this
encouragement, defendants were planning to assert an equitable subordination claim
against plaintiffs as early as 2009, as evidenced by an email from a third party to Spectrum,
dated August 13, 2009, in which the third-party states: "I thought you were going to check
out the 'equitable subordination' angle." (Id., ex. 15) Plaintiffs also point to an email from
Spectrum to Black Diamond, dated September 17, 2009 - one month after plaintiffs'
purchase of ComVest's debt - in which Spectrum states "looks like [plaintiffs] pushed the
equity button here ... you ready to roll." (See id., ex. 17) Plaintiffs assert that this is
evidence of a scheme to file the involuntary petitions, level false accusations, and file an
equitable subordination action against plaintiffs as insiders.

(Id.,~

90)

Notwithstanding the ruling in the New York Action that plaintiffs were not the
Requisite Lenders under the Credit Agreement, and the bankruptcy court's conclusion that
BD/S are the Requisite Lenders, plaintiffs further assert that, as part of the scheme,
defendants wrongfully prevented plaintiffs from serving as Requisite Lenders.

(Id.,~~

13-

17, 92-94) Specifically, Black Diamond and Spectrum "secretly (and successfully) urged
CIT ... to refuse to recognize [plaintiffs] as Requisite Lender[s]" and pursue expensive
litigation against plaintiffs in the Georgia Action.

(Id.,~

93)

Plaintiffs further allege that, as part of their scheme, defendants interfered with the
JCT Deal by pretending to negotiate with JCT for over a year and then filing involuntary

8

petitions in order to "kill the deal." (Id.,

ilil 18-20, 95-100,

109, 215) Specifically, the sale

"would have resulted in the pre-bankruptcy transfer of [plaintiffs'] First Lien Debt to JCT."
(Id.,~

95) Pursuant to the proposed transaction, "JCT would have purchased substantially

all of the assets and assumed the liabilities of Allied, including debt owned by [plaintiffs]."

(Id.,

iT 214)

However, because such a sale was inconsistent with defendants' scheme, after

JCT initially approached all Lenders, Black Diamond negotiated directly with JCT from
March 2011 through May 2012. (Id.,

iT 96)

Plaintiffs claim that the result of these direct

negotiations was JCT's determination that any acquisition could be consummated only
through a sale of Allied in a voluntary bankruptcy case under 11 U.S.C. § 363. 12 (Id., iT~ 97,
215) In support of this allegation, plaintiffs rely on an email, dated May 10, 2011, from JCT
to Black Diamond and plaintiffs, containing a proposal incorporating a voluntary bankruptcy
filing and§ 363 sale. (Id.,~ 99) Plaintiffs claim that, in December 2011, JCT reported that
it had reached an agreement with Black Diamond on certain terms, including a bridge loan
from Black Diamond to JCT to the purpose of financing JCT's purchase of the First Lien
Debt held by plaintiffs. (Id.,

iT 98; ex.

19) By March of 2012, "[t]he parties had agreed upon

substantially all of the terms of that transaction, ... and expected to complete the necessary
contracts and paperwork to effectuate the transaction." (Id.,

iT 214;

ex. 4) "The

consummation of the sale was thus reasonably likely and probable." (Id.,

iT 214)

Although

the term sheets provided that defendants would have received par plus accrued interest for
their First Lien Debt, plaintiffs assert that an equitable subordination claim, if successful,
offered defendants the possibility of a greater recovery, so defendants "scuttled" the deal

12

Section 363 of the Bankruptcy Code provides that the trustee, after notice and a hearing,
may sell property of the estate "other than in the ordinary course of business." 11 U.S.C. §
363(b). This section empowers the trustee to sell assets "free and clear of any interest in
such property of an entity other than the estate" including claims that could otherwise be
assertable against the buyer of the assets under the common law doctrine of successor
liability. See In re Grumman Olson Indus., Inc., 467 B.R. 694, 703 (S.D.N.Y. 2012).
9

with JCT by filing the involuntary bankruptcy. (Id., 11100) According to plaintiffs, the
negotiations with JCT were "simply a sham, conducted to lull Allied, JCT, and [plaintiffs] into
falsely believing that no involuntary bankruptcy was on the horizon." (Id., 11109) In support
of this assertion, plaintiffs rely on an email, dated January 8, 2012, between Black Diamond
principals referring to the "Allied Strategy." (Id., 11100, ex. 20)
Plaintiffs allege that "central to [the] Allied Strategy" was a Cooperation Agreement
executed in January 2012, pursuant to which Black Diamond and Spectrum agreed to offer
a right of first refusal and participation rights to one another before transferring any Allied
debt to a third party. (Id., 1111101-102) The Cooperation Agreement states that it was
entered into "in contemplation of ... certain strategies to enforce the rights of the Parties as
Lenders under the [Credit Agreement]" and provided that the parties would share costs and
expenses. (Id., ex. 13) Plaintiffs assert that the Cooperation Agreement was entered into in
contemplation of an improper involuntary bankruptcy proceeding and functioned to spur
improper claims trading. (Id., 1111102, 104)
In this regard, to induce Spectrum to join Black Diamond as a petitioning creditor 13 in
the involuntary bankruptcy, Black Diamond gave Spectrum a "bribe." The alleged bribe was
Black Diamond's agreement to transfer $4 million of its own First Lien Claims to Spectrum
"on favorable pricing terms." (Id., 11107) Black Diamond and Spectrum appear to have
conceded that the transfer to Spectrum was made for the same price that Black Diamond
originally paid for the debt (id., 11107), but assert that the transfer was not made for the
purposes of filing involuntary petitions. In support of their allegations that the transfer was a
bribe, plaintiffs rely on an email dated March 21, 2012 between Spectrum and Black

13

Section 303 of the Bankruptcy Code provides that an involuntary case is commenced by
the filing with the bankruptcy court of a petition under chapter 7 or 11 by three or more
creditors. See 11 U.S.C. § 303(b).
10

Diamond, in which Spectrum stated: "Please get this [claim transfer] closed this week. We
cannot file an involuntary without it done." (Id., 11108; ex. 6) Plaintiffs acknowledge in the
complaint that "Spectrum already held sufficient claims to qualify as a petitioner of the
involuntary bankruptcy under Bankruptcy Rule 1003," but asserts that the transfer of an
additional $4 million in First Lien Claims was "clearly an inducement in violation of 18 U.S.C.

§ 152(6)." (Id.,

~

170)

Plaintiffs allege that the involuntary petitions filed by Black Diamond and Spectrum
two months later were supported by false statements and material omissions regarding the
transfer. (Id.,

,m 110-113) Specifically, although defendants checked the box on the

involuntary petitions indicating whether "there has been a transfer of claim against the
debtor by or to any petitioner," defendants failed to attach evidence of such transfers as
required by Bankruptcy Rule 1003(a). 14 (Id., 11111) The affidavit filed on behalf of Black
Diamond ("Black Diamond Affidavit"), which stated that no claims had been transferred to
Black Diamond, contained a material omission in failing to disclose that Black Diamond had
transferred claims to Spectrum and a false statement that the transfers were not made "for
the purpose of commencing the Bankruptcy Cases." (Id., ~ 113) Similarly, plaintiffs assert
that the affidavit on behalf of Spectrum ("Spectrum Affidavit") contained a false statement
that the claims it received from Black Diamond "were not assigned to Spectrum for the
purpose of the commencing the Bankruptcy Cases." (Id., 11112)

14

Federal Rule of Bankruptcy Procedure 1003(a) provides: "A transferor or transferee of a
claim shall annex to the original and each copy of the petition a copy of all documents
evidencing the transfer, whether transferred unconditionally, for security, or otherwise, and
a signed statement that the claim was not transferred for the purpose of commencing the
case and setting forth the consideration for and terms of the transfer. An entity that has
transferred or acquired a claim for the purpose of commencing a case for liquidation under
chapter 7 or for reorganization under chapter 11 shall not be a qualified petitioner."
11

Plaintiffs assert that defendants have abused their status of Requisite Lenders to
further harm plaintiffs. (Id.,

,.m 1, 82)

The Credit Agreement provides for reimbursement of

legal expenses incurred by any Lender under certain circumstances, including expenses in
a bankruptcy proceeding. (Id., ,-i 129) Plaintiffs claim that they are entitled to be reimbursed
for fees and expenses relating to the litigation with CIT, the litigation with Black Diamond
and Spectrum, and fees incurred in the Allied bankruptcy proceedings. (Id., ,-i 129)
According to plaintiffs, defendants have colluded to block payment of plaintiffs' fees and
expenses while reimbursing their own. (Id., ,-i,-i 129-31) Finally, defendants obstructed
justice by failing to disclose the Cooperation Agreement, which was responsive to discovery
requests propounded by plaintiffs in the bankruptcy proceedings. (Id., ,-i 122)

C.

Alleged Predicate Acts Under RICO

The RICO Act imposes criminal and civil liability upon those who engage in certain
"prohibited activities." Each prohibited activity is defined in 18 U.S.C. § 1962 to include, as
one necessary element, proof either of "a pattern of racketeering activity" or of "collection of
an unlawful debt." "Racketeering activity" is defined in RICO to mean "any act or threat
involving" specified state-law crimes, any "act" indictable under various specified federal
statutes, and certain federal offenses. 18U.S.C.§1961(1). Under the statute, a "pattern"
requires at least two acts of racketeering activity within a 10-year period. 18 U.S.C. §
1961 (5).
The "predicate acts" alleged in the complaint are: (1) false oath in relation to a
bankruptcy proceeding in violation of 18 U.S.C. § 152(2), regarding the Black Diamond and
Spectrum Affidavits, including the redaction of certain information in the trading records
attached to the Spectrum Affidavit (D.I. 1, ,-i,-i 174-79); (2) false declarations in relation to a
bankruptcy proceeding in violation of 28 U.S.C. § 152(3) regarding the Black Diamond and
Spectrum Affidavits (id., ,-i,-i 181-82); (3) instances of claims trading in relation to a
12

bankruptcy proceeding in violation of 18 U.S.C. § 152(6) regarding the transfer of First Lien
Claims between Black Diamond and Spectrum (id.,

,.m 166-72); (4) wire fraud in violation of

18 U.S.C. § 1343 regarding emails between the defendants, specifically emails "that
facilitated the solicitation of Allied debtholders to join the involuntary petition[s] and
[d]efendants' illegal claims trading" (id.,

,.m 190-94); (5) mail fraud in violation of 18 U.S.C. §

1341 regarding the "deliver[y of] documents reflecting the illegal claims transfer from Black
Diamond to Spectrum to induce Spectrum to support the involuntary bankruptcy petitions
against Allied" (id.,

ilil 196-99); and

(6) obstruction of justice in violation of 18 U.S.C. § 1503

regarding the Black Diamond and Spectrum Affidavits and defendants' alleged failure to
timely disclose the Cooperation Agreement (id.,

ilil 184-89).

Ill. JURISDICTION AND STANDARD OF REVIEW
The court has original jurisdiction over this matter pursuant to 28 U.S.C. § 1331 and
18 U.S.C. § 1964(c). To survive a motion to dismiss pursuant to Federal Rule of Civil
Procedure 12(b)(6), a complaint must "contain sufficient factual matter, accepted as true, to
'state a claim for relief that is plausible on its face."' Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The plausibility
standard requires more than a "sheer possibility that a defendant has acted unlawfully." Id.
To determine the sufficiency of a complaint under Twombly and Iqbal, the court must take
the following three steps: (1) the court must "tak[e] note of the elements a plaintiff must
plead to state a claim;" (2) the court should identify the allegations that, "because they are
no more than conclusions, are not entitled to the assumption of truth;" and (3) "where there
are well-pleaded factual allegations, a court should assume their veracity and then
determine whether they plausibly give rise to an entitlement for relief." Burtch v. Mi/berg
Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011) (citing Iqbal, 556 U.S. at 664).

13

IV. ANALYSIS
Congress' intent in enacting the RICO statute was to combat "long-term criminal
conduct" and the "danger posed by organized crime-type offenses." Hughes v. Consol-

Penn. Coal Co., 945 F.2d 594, 611 (3d Cir. 1991) (internal quotations and citations omitted).
Careful scrutiny of such claims is appropriate because of the "relative ease with which a
plaintiff may mold a RICO pattern from allegations that, upon closer scrutiny, do not support
it." Kolar v. Preferred Real Estate Investments, Inc., 361 F. App'x 354, 363 (3d Cir. 2010)
(internal citations omitted)). RICO claims should be viewed with scrutiny to ensure that
"only those purported RICO claims which truly fit within the intent of the statute will
proceed." O'Malley v. BancAmerica Commercial Corp., 1992 WL 81394, *4 (E.D. Pa. Apr.
17, 1992). Moreover, "courts should strive to flush out frivolous RICO allegations at an
early stage of the litigation." Rotherberg v. Marger, 2013 U.S. Dist. LEXIS 44473, * 31 (D.
N.J. Mar. 28, 2013).
A.

Count 1- Violation of 18 U.S.C. § 1962(c)

Section 1962(c) of the RICO statute provides:
It shall be unlawful for any person employed by or associated with any
enterprise engaged in, or the activities of which affect, interstate or
foreign commerce, to conduct or participate, directly or indirectly, in
the conduct of such enterprise's affairs through a pattern of
racketeering activity or collection of unlawful debt.
18 U.S.C. § 1962(c). Similarly, 18 U.S.C. § 1962(d) makes it unlawful to "conspire" to
violate§ 1962(c). To make out a claim under§ 1962(d), plaintiffs must first establish their§
1962(c) claim. See Annu/li v. Panikkar, 200 F.3d 189, 198 (3d Cir. 1999) (overruled on

other grounds, Rotella v. Wood, 528 U.S. 549 (2000)).
1. Standing
Standing to bring a private action under the RICO statute is extended to "[a]ny
person injured in his business or property by reason of a violation of§ 1962 ... " 18 U.S.C.
14

§ 1964(c). The "by reason of' language in§ 1964(c) has been interpreted as creating two
distinct requirements for standing in RICO claims brought pursuant to§ 1962: "(1) that the
plaintiff suffered an injury to business or property; and (2) that the plaintiffs injury was
proximately caused by the defendant's violation of 18 U.S.C. § 1962." Maio v. Aetna, Inc.,
221 F.3d 472, 482-83 (3d Cir. 2000). Such injury must be specific or quantifiable and must
have resulted in "tangible financial loss to plaintiff' (id. at 483 (internal citations omitted)).
As such, a complaint does not adequately plead a RICO violation unless it shows damage
to business or property with some certainty; if the claimed injury is speculative, it is not ripe
for adjudication. See id. at 495 (injury predicated on speculation insufficient to support
cause of action under RICO). To meet the proximate cause requirement, a plaintiff must
plead sufficient facts to plausibly assert that "the alleged violation led directly to the
plaintiffs injuries." Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006). Plaintiffs
argue that the RICO claims are ripe based on several injury theories, each of which fails to
meet the above criteria.
Plaintiffs seek damages "in an amount to be proven at trial." (Id.,

1f 200)

Here, the

injury asserted - equitable subordination of plaintiffs' claims in the Allied bankruptcy - has
not yet occurred and is wholly contingent upon the outcome of the bankruptcy court
proceedings. Inasmuch as the RICO injury is predicated exclusively on the possibility that
future events might occur, rather than on the actual occurrence of those events, the loss
requires a significant degree of factual speculation and is insufficient to support a cause of
action under RICO. See Maio, 221 F.2d at 495. As set forth in the complaint, any injury to
plaintiffs' business or property which would result from equitable subordination of their
claims remains speculative. (See id.,

1l1l 29, 31

("If [the equitable subordination] claims are

ultimately successful ... , [plaintiffs'] claims will likely be wiped out and [d]efendants will
reap a substantial windfall ... ")(emphasis added)) In fact, the alleged scheme "is ongoing
15

to this day." (Id., at iI 29) The Third Circuit has made it clear that an injury that is
speculative or contingent on future events does not confer RICO standing. See Maio, 221
F.3d at 495; see a/so Walter v. Palisades Collections, LLC, 480 F. Supp. 2d 797, 804 (E.D.
Pa. 2007) ("RICO liability cannot attach to future contingent events"). Plaintiffs have failed
to plead a "concrete financial loss" which is specific or quantifiable. See Maio, 221 F.3d at
483; Barbieri v. Wells Fargo & Co., 2014 WL 7330461, at *5 (E.D. Pa. Dec. 22, 2014) (to
qualify as a concrete financial loss, plaintiff's injury cannot be speculative).
Notwithstanding that the equitable subordination of plaintiffs' claims - the ultimate
goal of defendants' alleged scheme - is contingent upon the outcome of the bankruptcy
proceedings, plaintiffs argue that injury to their business or property in the form of an "actual
monetary loss" has been asserted; that is, defendants' scheme "has already injured
(plaintiffs] and cost [them] more than $175 million in damages," including "loss of profit on
the original JCT transaction scuttled by [d]efendants' wrongful involuntary bankruptcy filing,"
and "millions in attorneys' fees and costs." (Id.,

iI 33;

MTD Opp. 16) Plaintiffs also point to

allegations in the complaint that defendants "stripped (plaintiffs] of [their] property by
arbitrarily reducing [their] ownership interest in certain real estate assets and denied
[plaintiffs the] right to reimbursement of expenses while paying their own." (D.I. 1,

iiiI 132-

39; MTD Opp. 17) However, upon careful consideration, none of the injuries alleged in the
complaint confer RICO jurisdiction.
Plaintiffs' alleged injury in the form of the "loss of profit on the original JCT
transaction scuttled by [d]efendants' wrongful involuntary bankruptcy filing" cannot be said
to be a "concrete financial loss." See Maio, 221 F.2d at 483. Even as pied in the complaint,
the JCT Deal was "uncertain" and "subject to multiple closing conditions including funding
contingencies." (D.I. 1, iI 124) Plaintiffs' losses arising from a failure to close the JCT Deal,
if any, are not "clear and definite." See Motorola Credit Corp. v. Uzan, 322 F.3d 130, 135
16

(2d Cir. 2003) ("a cause of action does not accrue under RICO until the amount of damages
becomes clear and definite"). Moreover, plaintiffs cannot satisfy proximate cause in light of
the numerous conditions and contingencies attendant to the JCT Deal; that is, there is no
plausible basis for asserting that any of the predicate acts set forth in the complaint,
including the alleged wrongful filing of the involuntary petitions, "led directly" to the deal's
failure and plaintiffs' alleged injuries. See Sedima, S.P.R.L. v. lmrex Co., 473 U.S. 479,
496-97 (1985) ("plaintiff ... can only recover to the extent that ... he has been injured in his
business or property by the conduct constituting the violation") (emphasis added));

Anza, 547 U.S. 461 (alleged RICO violation must have led directly to plaintiffs injuries);
Lynch v. Capital One Bank, 2013 WL 2915734, at *3 (E.D. Pa. June 14, 2013) (plaintiff must
plead sufficient facts to plausibly assert that the alleged violation act led directly to plaintiff's
injuries).
Regarding plaintiffs' argument that the complaint pleads "concrete financial loss" in
the form of "millions in attorneys' fees and costs," this alleged injury does not confer RICO
standing either. (See MTD Opp. at 16-17) The Third Circuit has not formally addressed the
question of whether prior legal fees can ever suffice as injuries under RICO, and there is an
obvious split among authorities. 15 For instance, in Weiss v. First Unum Life Ins. Co., 482
F.3d 254, 256 (3d Cir. 2007), cited by plaintiffs, a participant in an employee benefits plan

15

See Walter, 480 F. Supp. 2d at 804, n.11 (collecting cases). Compare Handeen v.
Lemaire, 112 F .3d 1339, 1354 (8th Cir. 1997) (attorney fees spent objecting to defendant's
allegedly fraudulent claims in another litigation sufficient to confer standing within the
meaning of RICO); Stochastic Decisions, Inc., v. DiDomenico, 995 F .2d 1158, 1167 (2d Cir.
1993) ("legal fees may constitute RICO damages when they are proximately caused by a
RICO violation."); with Kashelkar v. Rubin & Rothman, 97 F. Supp. 2d 383, 391 (S.D.N.Y.
2000) (granting defendants' motion to dismiss RICO count where plaintiff's alleged injury in
the form of defense costs in state lawsuits was insufficient to establish commercial injury for
RICO claim); Local 355, Hotel, Motel, Restaurant, & Hi-Rise Employees and Bartenders v.
Pier 66 Co., 599 F. Supp. 761, 765 (S.D. Fla. 1984) ("[Attorneys' fees] are incidental dames
and do not rise to the type of proprietary damage for which RICO provides compensation").
17

alleged that his insurer violated RICO by discounting payment of his benefits as part of a
racketeering scheme involving an illegal policy of rejecting expensive payouts to disabled
insureds. While the court held that the IRS penalties and fees plaintiff incurred may be
actionable damages under RICO, the court did not address whether legal fees were
actionable damages. See id. at 258 n.2. Plaintiffs also cite cases from the Eastern District
of Pennsylvania in which the court noted that attorney fees can establish an injury in a
RICO action under certain circumstances. In Lynch, for example, the court noted that
attorney fees may be actionable under RICO, but only where incurrence of those fees was
proximately caused by defendants' misrepresentation or RICO violation. See Lynch, 2013
WL 2915734, at *3. In the Walter case, the court noted that the "Third Circuit's focus on
out-of-pocket expenses ... leads to the conclusion that the payment of legal fees can be
actionable under RICO." See Walter, 480 F. Supp. 2d at 804. The court also found,
however, that while past attorney fees may be actionable under RICO, future attorney fees
are prospective damages that did not confer RICO standing, and fees incurred in initiating
or litigating the RICO action could not form the basis for RICO liability. See id. ("RICO's
injury requirement would be a nullity if paying an attorney to initiate the RICO action itself
sufficed as a damage."). While the court does not necessarily disagree that past attorney
fees may, in some circumstances, confer RICO standing, this case is distinguishable. Here,
plaintiffs' legal fees are the subject of their claims for reimbursement under the Credit
Agreement, and those claims remain pending in the bankruptcy proceedings. As plaintiffs'
recovery on its reimbursement claims in the bankruptcy proceedings remains unclear,
plaintiffs' legal fees do not confer RICO jurisdiction. See Motorola, 322 F. 3d at 137 (where
recovery in the bankruptcy proceedings is unknown, RICO claims are not ripe, even where
recovery is a "forlorn hope'); Harbinger Capital Partners Master Fund I, Ltd. v. Wachovia
Capital Markets, LLC, 347 F. App'x 711, 712-13 (2d Cir. 2009) (RICO claims are not ripe

18

where recovery in the bankruptcy proceedings is unknown); Barnett v. Stern, 909 F .2d 973,
977 n.4 (7 1h Cir. 1990) (creditors lacked RICO standing until recovery in bankruptcy
proceedings became clear).
Finally, plaintiffs allege that defendants' scheme "stripped [plaintiffs] of [their]
property by arbitrarily reducing [their] ownership interest in certain real estate assets" and
that this is also a "concrete financial loss" under RICO. (See MTD Opp. at 17; D.I. 1 at 1111
132-39) However, these alleged losses are still being litigated in the Court of Chancery. 16
Thus, any losses remain speculative and do not confer RICO standing. See Motorola, 322
F .2d at 135 (a cause of action does not accrue until the amount of damages becomes clear
and definite).
Where a plaintiff fails to allege injury to its business or property in the form of a
concrete financial loss proximately caused by an alleged predicate act, or where a plaintiff's
injury is speculative or contingent on future events, that plaintiff lacks standing to bring suit
under RICO. See Maio, 221 F.3d at 483. Here, plaintiffs have failed to allege a concrete
financial loss, and count I of the complaint will be dismissed for lack of standing.

2. Pattern of racketeering activity
Even assuming the injury alleged by plaintiffs were sufficient to make out a claim
under RICO, plaintiffs have failed to plead a pattern of racketeering activity. To prove that
defendants violated 18 U.S.C. § 1962(c), plaintiffs must show "a pattern of racketeering
activity" which requires commission of "at least two acts of racketeering activity." 18 U.S.C.

§ 1961 (5). Section 1961 's two-act requirement does not so much define a pattern of
racketeering activity as set a minimum necessary condition for such a pattern to exist. H.J.
Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 237 (1989). Although the statute does not

16

Yucaipa Am. Alliance Fund I, LP v. SBDRE LLC, No. 9151-VCP (Del. Ch.).
19

define such a pattern, the Supreme Court has held that a pattern of racketeering activity
requires that the predicate acts (1) are related, and (2) amount to or pose a threat of
continued criminal activity. See id. at 239.
Regarding whether the predicate acts are related, the Supreme Court has held that
that this prong is satisfied when the predicate acts have "the same or similar purposes,
results, participants, victims, or methods of commission, or otherwise are interrelated by
distinguishing characteristics and are not isolated events." Id. at 240. In the Third Circuit,
courts liberally construe this standard. See, e.g., Banks v. Wolk, 918 F .2d 418, 425 (3d Cir.
1990) (finding predicate acts were related even where four of five predicate acts did not
involve precisely the same parties). Here, plaintiffs allege that the predicate acts set forth in
the complaint are all related to each other and to defendants' "purpose of subordinating
[plaintiffs'] claims by forcing Allied into involuntary bankruptcy." (D.I. 1, ~ 163) Plaintiffs'
allegations, if accepted as true, satisfy the requirement that the predicate acts are related.
Regarding whether the predicate acts "amount to or pose a threat of continued
criminal activity," the Supreme Court has noted that continuity is a "temporal concept." See
HJ Inc., 492 U.S. at 241-42. Duration is the sine qua non of continuity. See Hindes v.
Castle, 937 F.2d 868, 873 (3d Cir. 1991). A plaintiff can meet this requirement by showing

either "close-ended continuity" or "open-ended continuity." See H.J. Inc., 492 U.S. at 24142. Close-ended continuity refers "to a closed period of repeated conduct." Id. at 241.
Open-ended continuity refers to "past conduct that by its nature projects into the future with
a threat of repetition." Id. The Third Circuit has also noted other factors that are relevant to
the "pattern" inquiry, including "the number of unlawful acts, the length of time over which
the acts were committed, the similarity of the acts, the number of victims, the number of
perpetrators, and the character of the unlawful activity." See Kehr Packages, Inc. v.
Fidelcor, Inc., 926 F.2d 1406,1412-13 (3d Cir. 1991) (quoting Barticheck v. Fidelity Union

20

Bank/First Nat'/ State, 832 F.2d 36, 39 (3d Cir. 1987)). Following HJ Inc., Third Circuit
courts "focus on these factors as they bear upon the separate questions of continuity and
relatedness." Marshall-Silver Constr. Co. v. Mendel, 894 F.2d 593, 596 (3d Cir. 1990).
Although the Supreme Court has provided this basic structure for analyzing continuity, the
analysis is ultimately fact specific. See HJ Inc., 492 U.S. at 241 (noting "development of
these concepts must await future cases").
With respect to continuity, plaintiffs allege that "[d]efendants' pattern of racketeering
activity is continuous" as the predicate acts "extend over a substantial period of time, from
September of 2011 to the present, and the involuntary bankruptcy proceeding that
[d]efendants fraudulently initiated is currently pending." (0.1. 1,

1f 164)

Plaintiffs further

allege that "[d]efendants' scheme will continue in the future until they achieve their objective
of equitably subordinating [plaintiffs'] debt holdings in Allied, and [d]efendants will continue
to make false statement to courts and to engage in other acts of obstruction and fraud in
order to bring this scheme to fruition." (Id.)

a.

Close-ended continuity

Plaintiffs' allegations, even if accepted as true, do not satisfy close-ended continuity,
that is, "a series of related predicates extending over a substantial period of time." HJ Inc.,
492 U.S. at 242. The Third Circuit has consistently held that a pattern lasting less than one
year does not, as a matter of law, constitute a "substantial period of time" as required by HJ

Inc. See e.g., Hughes, 945 F.2d at 611 ("We hold that twelve months is not a substantial
period of time"); Tabas v. Tabas, 47 F.3d 1280, 1293 (3d Cir. 1995) ("Since HJ Inc., this
court has faced the question of continued racketeering activity in several cases, each time
finding that conduct lasting no more than twelve months did not meet the standard for closeended continuity"); Helman v. Murry's Steaks, Inc., 742 F. Supp. 860, 882 (D. Del. 1990)
(predicate acts spanning twelve months did not satisfy close-ended continuity requirement).
21

Plaintiffs allege an elaborate scheme dating "potentially as far back as 2009." (0.1.
1,

iT 159)

To determine the duration of the pattern, the court must look to the earliest

predicate act. HJ Inc., 492 U.S. at 242 ("party alleging a RICO violation may demonstrate
continuity over a closed period by proving a series of related predicates"). Although
plaintiffs assert that defendants' scheme has run "from at least in 2009 and continues
today," the duration of the pattern begins on the date of the earliest alleged predicate act,
not on the date that defendants allegedly began contemplating the scheme. Here, the
earliest predicate act asserted in the complaint involves the September 2011 emails, which
are alleged to constitute acts of wire fraud in violation of 18 U.S.C. §§ 1343, and which
"facilitated the solicitation of Allied debtholders to join the involuntary petition[s] and
[d]efendants' illegal claims trading." (0.1. 1,

i'fil 190-94)

Defendants argue that these

allegations of wire fraud should be rejected because "[plaintiffs] cannot tack on conclusory
allegations of mail and wire fraud to add more time to its alleged pattern of racketeering
conduct." (See MTD at 25-26 (citing Kehr, 926 F.2d at 1418)) Even accepting plaintiffs'
allegations as true, and including the alleged acts of wire fraud occurring in September
2011, the pattern as alleged still falls short of one year under Third Circuit law. The
involuntary petitions, allegedly containing false statements and material omissions in
violation of 18 U.S.C. § 1343, and/or resulting from claims trading in violation of 18 U.S.C. §
152(6) in March 2012, were filed in May 2012. Thus, the pattern of racketeering activity
alleged in the complaint is at most nine months in duration.
Plaintiffs argue that the predicate acts asserted in the complaint do not end with the
May 2012 bankruptcy filings because the complaint references defendants' continued
pursuit of the equitable subordination claims against plaintiffs. (MTD Opp. at 18; 0.1. 1, 1J
159) This argument misses the mark for the same reason - the period of continuity is
established by the predicate acts in furtherance of the alleged scheme. See HJ Inc., 492
22

U.S. at 242 ("what must be continuous [is] RICO's predicate acts or offenses") (emphasis in
original). Were an allegation of the continued existence of a scheme sufficient to extend a
pattern of racketeering activity, in lieu of predicate acts themselves, the duration
consideration would be rendered meaningless.
Plaintiffs further argue that the predicate acts asserted in the complaint do not end
with the May 2012 bankruptcy filings because the complaint alleges defendants continue to
obstruct justice. (MTD Opp. at 18; D.I. 1,

~

157) Obstruction of justice as a predicate act

under RICO requires that a defendant
... corruptly, or by threats or force, or by any threatening letter or
communication, endeavor to influence, intimidate, or impede any ...
juror, or officer in or of any court of the United States ... in the discharge
of his duty.
18 U .S.C. § 1503(a). The Third Circuit has held that "only acts directly affecting parties,
witnesses or jurors - and not other acts that may merely influence the proceedings - are
cognizable" as predicate acts under RICO. See CollegeSource, Inc. v. AcademyOne, Inc.,
597 App'x 116, 126 (3d Cir. 2015) (emphasis in original). "Consequently, we have never
recognized obstruction of justice as a viable RICO predicate except in cases involving
witness intimidation." Id. (citing Malley-Duff & Assocs., Inc. v. Crown Life Ins. Co., 792 F.2d
341, 355 (3d Cir. 1986)). Here, accepting as true plaintiffs' allegations that defendants filed
false affidavits in support of the involuntary bankruptcy petitions, such an act is not
cognizable as a predicate act under RICO. See College Source, 597 Fed App'x at 126
(finding that allegations of submission of false affidavits and destruction of electronic
evidence were facially insufficient to establish obstruction of justice RICO violation).
Plaintiffs claim that the predicate acts asserted in the complaint do not end with the
May 2012 bankruptcy filings because defendants withheld relevant documents in the
bankruptcy litigation until at least August 2014. (D.I. 1, ~ 188) Alleged obstruction of justice
23

in a pending proceeding cannot support a RICO claim brought in a different court. See e.g.,
Rafferty v. Halprin, 1991 WL 148798, at *7 (S.D.N.Y. 1991) (holding that "[o]bstruction [of

justice] claims ... must be presented in the court in which the civil action giving rise to the
alleged obstruction is pending" and noting that to allow otherwise would be "an improper
use of the civil RICO statute"); Eli Lilly and Co. v. Roussel Corp., 23 F. Supp. 2d 460, 483
n.35 (D. N.J. 1998) (quoting Rafferty: "to permit conduct in a pending action to serve as a
basis of a RICO claim would improperly apply the RICO statute, invite forum shopping of a
most pernicious sort and would embroil this Court in the supervision and review of
proceedings" in other courts). Even accepting as true plaintiffs' allegation that defendants
withheld relevant documents in the bankruptcy proceedings, the court agrees that such an
act does not satisfy the predicate act of obstruction of justice for purposes of establishing a
pattern of racketeering activity.
Having alleged a pattern of racketeering activity lasting only nine months, the
complaint does not satisfy close-ended continuity as a matter of law. See Hughes, 945
F.2d at 611 (pattern lasting less than one year does not, as a matter of law, constitute a
"substantial period of time").

b.

Open-ended continuity

The allegations in the complaint, accepted as true, do not satisfy open-ended
continuity either. If a plaintiff alleges a RICO violation before continuity is established,
plaintiff must allege "a threat of continued racketeering activity." HJ Inc., 492 U.S. at 242.
This requirement is met where the "racketeering acts themselves include a specific threat of
repetition extending indefinitely into the future." Id. at 242-43. A threat of continuity also
exists when the predicate acts are part of an ongoing entity's "regular way of doing
business." Id. Additionally, a plaintiff may plead a threat of continued racketeering activity

24

where the predicate acts can be attributed to "a defendant operating as part of a long-term
association that exists for criminal purposes." Id.
Plaintiffs do not allege that defendants used fraud as a regular way of doing
business or formed an ongoing criminal association. Instead, plaintiffs allege that
"[d]efendants' scheme will continue in the future until they achieve their objective of
equitably subordinating [plaintiffs'] debt holdings in Allied." (D. I. 1,

~

164) Defendants

"continue to assert causes of action for equitable subordination against [plaintiffs] in
adversary case number 13-50530 filed in the Allied bankruptcy case" and "continue to
obstruct justice"

(Id.,~~

157, 159). In response, defendants argue that the complaint does

not satisfy open-ended continuity because it "amounts to nothing more than a business
dispute between creditors that does not constitute criminal activity, let alone pose a threat of
continued criminal activity." (See MTD at 25)
The Third Circuit has often held that a single scheme involving a single injury to a
single victim within a short period of time falls outside of RICO due to lack of continuity,
even where all aspects are entirely related. See e.g., Hughes, 945 F.2d at 611 (predicate
acts against single victim lasting one year did not satisfy continuity); Kehr, 926 F.2d at 1413
("[A]lthough a single fraudulent scheme can give rise to RICO liability, when that scheme is
short-lived and directed at a limited number of people, this court has required some further
indication that the defendant's fraudulent activities are likely to continue"); Baldwin v.
Township of Union, 2005 WL 3588473, *6 (D.N.J. Dec. 29, 2005) (no threat of continued

racketeering activity where "predicate acts focus on a clearly defined, discrete, and finite
goal"); Kolar, 361 App'x at 365 (holding that a "single finite transaction cannot by itself
underpin a pattern of racketeering activity").
Defendants argue that the complaint's allegations fall outside of RICO because the
alleged pattern of racketeering activity has only one objective - equitable subordination of
25

plaintiffs' claims - and targets only plaintiffs. (See MTD at 5) The Supreme Court has
rejected the theory that a RICO pattern requires proof of "multiple schemes." HJ Inc., 492
U.S. at 240; see also United States v. Starnes, 644 F.2d 673, 678 (7 1h Cir. 1981) (no
requirement for separate unrelated schemes); LSC Assocs. v. Lomas & Nettleton Fin.
Corp., 629 F. Supp. 979, 981-82 (E.D. Pa. 1986) (schemes involving only one transaction
intended or one objective sufficient when "defendants allegedly committed several
racketeering acts to entice plaintiffs to enter that transaction."). Nevertheless, when a single
fraudulent scheme "is short-lived and directed at a limited number of people, [the Third
Circuit] has required some further indication that the defendant's fraudulent activities are
likely to continue." Kehr, 926 F.2d at 1413.
As discussed supra, accepting plaintiffs' allegations as true, the last predicate act
alleged in the complaint occurred in May 2012. The final goal of defendants' alleged
scheme is clearly defined: equitable subordination of plaintiffs' claims. The scheme,
therefore, is of finite duration, and there is no threat of long-term continuous criminal activity
"where predicate acts focus on a clearly defined, discrete, and finite goal." Baldwin, 2005
WL 3588473 at *6. This single fraudulent scheme, which is short-lived and directed at a
limited number of victims, does not give rise to RICO liability without some "further
indication that the defendant's fraudulent activities are likely to continue." See Kehr, 926
F.2d at 1413. The complaint makes no allegation that the alleged predicate acts
themselves include "a specific threat of repetition extending indefinitely into the future." HJ
Inc., 492 U.S. at 242-43. "[S]chemes which have a clear and terminable goal have a natural
ending point. Such schemes therefore cannot support a finding of any specific threat of
continuity that would constitute open-ended continuity." Vicom, Inc. v. Harbridge Merchant
Servs., 20 F.3d 771, 782 (7 1h Cir. 1994).

26

Construing the complaint in a light most favorable to plaintiffs, and assuming all facts
in the complaint to be true, for the reasons stated above, plaintiffs have failed to allege
continuity under either the open-ended or close-ended standards. Related predicate acts
lasting "a few weeks or months and threatening no future criminal conduct do not satisfy
[the continuity] requirement." HJ Inc., 492 U.S. at 242. Having failed to allege a pattern of
racketeering activity, the complaint fails to state a claim under RICO. Accordingly, count I of
the complaint must be dismissed. 17

B.

Count II - § 1962(d) Claim

Section 1962(d) of the RICO Act makes it unlawful to "conspire" to violate § 1962(c).
To make out a claim under§ 1962(d), a plaintiff must first establish its claim under§
1962(a), (b), or (c). See Annulli, 200 F.3d at 198. Because plaintiffs have failed to state a
claim under§ 1962(c), the conspiracy claim must fail as well. See Lightning Lube, Inc. v.
Witco Corp., 4 F.3d 1153, 1191 (3d Cir. 1993) ("Any claim under section 1962(d) based on

a conspiracy to violate the other subsections of section 1962 must necessarily fail if the
substantive claims are themselves deficient"). Accordingly, count II of the complaint must
be dismissed.

C.

Counts Ill and IV - Fraud and Tortious Interference with Business
Relations Under State Law

The court's original jurisdiction over this matter is based solely upon plaintiffs' federal
RICO claims. Having dismissed those claims, the court no longer has original jurisdiction
over the action and must determine whether to exercise supplemental jurisdiction over the
state law claims. Pursuant to 28 U.S.C. § 1367, federal courts with original jurisdiction over
a federal claim have supplemental jurisdiction over state-law claims that "form part of the

17

Because the court concludes that the complaint fails to state a claim under RICO, the
court does not reach defendants' arguments that the RICO claims are barred by the NoerrPennington doctrine and/or the covenant not to sue in the Credit Agreement.
27

same case or controversy." 28 U.S.C. § 1367(a). A district court may, however, decline to
exercise supplemental jurisdiction over state law claims if "the district court has dismissed
all claims over which it has original jurisdiction." 28 U.S.C. § 1367(c)(3); New Rock Asset
Partners, L.P. v. Preferred Entity Advancements, Inc., 101 F.3d 1492, 1508 (3d Cir. 1996)

(dismissal of the jurisdiction-granting claim "triggers a discretionary decision on whether
jurisdiction over a state law claim should be declined pursuant to § 1367(c)(3)").
The Third Circuit has instructed that "where the claim over which the district court
has original jurisdiction is dismissed before trial, the district court must decline to decide the
pendent state claims unless considerations of judicial economy, convenience, and fairness
to the parties provide an affirmative justification for doing so." Dougherty v. A. 0. Smith
Corp., 2014 WL 3542243, *16 (D. Del. July 16, 2014) (quoting Borough of West Mifflin v.
Lancaster, 45 F.3d 780, 788 (3d Cir. 1995)); see a/so Carnegie-Mellon University v. Cohill,

484 U.S. 343, 351 (1988) (when the federal claims are eliminated early in a case, "the
District Court ha[s] a powerful reason to choose not to continue to exercise jurisdiction").
Defendants argue that there are no fairness considerations preventing dismissal of
plaintiffs' state law claims because "neither party has invested significant resources in
litigating them [in this court]." (MTD Reply at 18-19) Plaintiffs previously moved to withdraw
the reference of the BD/S Action to the bankruptcy court and argue that, should the court
grant their request, it would be more efficient for the same court to adjudicate these state
law claims together with the state law claims in the BD/S Action. (MTD Opp. at 27)
However, to avoid the risk of inconsistent rulings between the BD/S Action and Committee
Action, the court has since denied plaintiffs' motion to withdraw the reference of the BD/S
Action, as "[t]hese proceedings involve at least some overlapping claims and will certainly
involve overlapping facts." (See Civ. No. 15-256 (SLR), D.I. 19) Both actions will now
proceed in the bankruptcy court, and plaintiffs offer no other considerations in support of
28

their argument that the court should exercise supplemental jurisdiction. The court finds no
affirmative justification for exercising supplemental jurisdiction over the state law claims and
accordingly, counts Ill and IV are dismissed without prejudice. 18

V. CONCLUSION
For the foregoing reasons, the complaint fails to state a claim under RICO, and the
court declines to exercise supplemental jurisdiction over the state law claims. Accordingly,
the motion to dismiss is granted. The parties will bear their own costs. An appropriate
order shall issue.

18

Because the court declines to exercise supplemental jurisdiction over the state law
claims, the court does not reach defendants' arguments that those claims are barred by the
covenant not to sue in the Credit Agreement.

29