Fiala et al v. Brizuela et al
Filing
127
MEMORANDUM Opinion and Order Written by the Honorable Gary Feinerman on 3/16/2012.Mailed notice.(jlj)
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ED FIALA, individually and on behalf of other similarly )
situated persons who reside within the Wasco Sanitary
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District, and TIM KOBLER CUSTOM HOMES, INC.,
)
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Plaintiffs,
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vs.
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WASCO SANITARY DISTRICT, ROBERT
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SKIDMORE, RAUL BRIZUELA, GARY SINDELAR, )
CHARLES V. MUSCARELLO, PATRICK GRIFFIN,
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JERRY BOOSE, KENNETH BLOOD, FOX MILL
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LIMITED PARTNERSHIP, B&B ENTERPRISES, and )
HUDSON HARRISON,
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Defendants.
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10 C 2895
Judge Feinerman
MEMORANDUM OPINION AND ORDER
Plaintiffs Ed Fiala and Tim Kobler Custom Homes, Inc. brought this action in the Circuit
Court of the Sixteenth Judicial Circuit, Kane County, Illinois, against Defendants Wasco
Sanitary District, Robert Skidmore, Raul Brizuela, Gary Sindelar, Charles Muscarello, Patrick
Griffin, Jerry Boose, Kenneth Blood, Fox Mill Limited Partnership (“FMLP”), B&B Enterprises,
and Hudson Harrison, alleging violations of the Racketeer Influenced and Corrupt Organizations
Act (“RICO”), 18 U.S.C. § 1961 et seq., and Illinois law. After the case was removed to federal
court, Defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and
12(b)(6). Docs. 18, 21, 24, 28, 32. Because Plaintiffs’ alleged injuries do not satisfy the
requirements of RICO standing, the RICO claims are dismissed. And having disposed of the
only federal claims in the case, the court remands the state law claims to state court.
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Background
A complaint’s well-pleaded facts generally are assumed true on Rule 12(b)(1) and
12(b)(6) motions, and all reasonable inferences are drawn in the plaintiff’s favor. See Reger
Dev., LLC v. Nat’l City Bank, 592 F.3d 759, 763 (7th Cir. 2010); Patel v. City of Chi., 383 F.3d
569, 572 (7th Cir. 2004). Also pertinent at the Rule 12(b) stage are exhibits attached to the
complaint, see Fed. R. Civ. P. 10(c); Witzke v. Femal, 376 F.3d 744, 749 (7th Cir. 2004), and
exhibits attached to the parties’ briefs that are “referred to” in the complaint and “central to [the
plaintiff’s] claim,” Wright v. Associated Ins. Cos., 29 F.3d 1244, 1248 (7th Cir. 1994). See
Hecker v. Deere & Co., 556 F.3d 575, 582-83 (7th Cir. 2009) (collecting cases). In addition,
orders entered and filings made in this and other courts are subject to judicial notice, as are
“adjudicative facts capable of accurate and ready determination by resort to sources whose
accuracy cannot reasonably be questioned.” United States v. Stevens, 500 F.3d 625, 628 n.4 (7th
Cir. 2007) (internal quotation marks omitted); see Cancer Found., Inc. v. Cerberus Capital
Mgmt. LP, 559 F.3d 671, 676 n.2 (7th Cir. 2009). To the extent an exhibit or a judicially noticed
court document or fact contradicts the complaint’s allegations, the exhibit or court document
takes precedence. See Forrest v. Universal Sav. Bank, F.A., 507 F.3d 540, 542 (7th Cir. 2007).
The following facts are stated as favorably to Plaintiffs as permitted by the complaint and other
materials that may be considered on a Rule 12(b) motion.
Fiala owns a home in the Fox Mill subdivision, which is located within the borders of the
Wasco Sanitary District, a municipal entity that provides its constituents with water and sanitary
sewer services. Doc. 88 at ¶¶ 1, 3. Kobler is a developer that built homes in Fox Mill. Id. at ¶ 2.
According to the second amended complaint, which is the operative pleading, Defendants for
many years have engaged in an illegal scheme to misdirect funds from the District to B&B and
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FMLP, which own homes in Fox Mill and which allegedly are corporate alter egos. Id. at ¶¶ 18,
19(f), 46(a) & (ww). The scheme allegedly commenced in 1994, when the District and FMLP
entered into an annexation agreement (“Fox Mill Agreement”) under which the District would
annex the Fox Mill subdivision, id. at ¶ 20, which in turn would receive water and sewer services
from the District, Doc. 1-3 at 10-11. The Fox Mill Agreement further provided that the District
would enter into agreements for reimbursement to FMLP for a portion of the cost of wastewater
and water facilities constructed or paid for by FMLP. Doc. 1-4 at 2-3. Although the District and
FMLP never executed any such agreement, Doc. 88 at ¶ 28, the District has since 1994
reimbursed FMLP and B&B by allowing them to collect connection fees from existing and
prospective District customers, id. at ¶ 25.
The complaint alleges that these reimbursements were prohibited by the Sanitary Act of
1936, 70 ILCS 2805/1 et seq., as it stood at the time the Fox Mill Agreement was executed.
Doc. 88 at ¶ 27. The Sanitary Act later was amended to permit such reimbursements, but
Plaintiffs contend that the amended statute still requires that the connection fees first be paid to
the District and only then turned over to FMLP. Doc. 42 at 23. Plaintiffs assert that the District,
notwithstanding the amendment, directed developers to pay connection fees directly to FMLP
and B&B prior to their receiving sanitation services. Doc. 88 at ¶ 26; Doc. 42 at 2. Kobler paid
connection fees to FMLP and B&B, as have numerous others. As a result, funds that should
have been used by the District for infrastructure and capacity instead were paid to FMLP or
B&B. This diversion of funds has required the District to charge higher fees, assessments, and
property taxes, which Fiala would not have paid absent the illegal arrangement.
Defendants allegedly perpetrated this scheme through a host of illegal and fraudulent
activities. The District’s three trustees during the relevant time period—Skidmore, Brizuela, and
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Sindelar—had undisclosed financial or familial relations to B&B and its principals, Boose and
Blood. Doc. 88 at ¶ 46(s), (t), (y), (z), (aa), (dd), (ee). The trustees filed statements of financial
interest that failed to reveal those interests. Id. at ¶ 46(u), (y), (z), (aa), (dd), (ee). The trustees,
FMLP, B&B, Boose, and Blood, with the assistance of Griffin (B&B’s attorney) and Muscarello
(the District’s attorney), filed or caused to be filed false applications and certifications with state
regulators concerning the District’s wastewater capacity. Id. at ¶ 46(e), (n), (r), (v), (bb), (gg),
(hh), (oo).
Harrison is another home developer in the District. In 2005, Harrison sought to annex
into the District an area called Norton Farms that he wanted to develop. Id. at ¶ 29. The District
denied Harrison’s request. Id. at ¶ 30. Harrison renewed the application in 2008, this time
retaining Griffin as his attorney. Id. at ¶ 31. Harrison then agreed to pay $2.65 million in
exchange for the annexation and the receipt of sufficient wastewater capacity for the homes in
Norton Farms (“Norton Farms Agreement”). Id. at ¶ 33. The 2008 application was approved.
Id. at ¶ 32. Plaintiffs maintain that Harrison bribed Brizuela (one of the trustees) by giving him a
recorded interest in real property. Id. at ¶¶ 46(ss) & (tt); Doc. 42 at 11. Plaintiffs also allege that
Harrison’s retention of Griffin as his attorney was another bribe intended to gain the District’s
approval. Doc. 88 at ¶ 46(rr).
The Norton Farms Agreement had negative consequences for Fiala. According to the
second amended complaint, Fiala received 3.5 “population equivalents” (“PEs”) with the
purchase of his home. Id. at ¶ 1; Doc. 42 at 27; Doc. 105 at 6. A PE represents the amount of
wastewater one individual is expected to generate in one day, which state law estimates to be
100 gallons. See 225 ILCS 225/3(6). Applicable regulations assume that a single-family home
uses 3.5 PEs. See 35 Ill. Admin. Code § 370 App. A. The second amended complaint alleges
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that Fiala, by virtue of purchasing a single-family home that was connected to the District’s
facilities, “owns” 3.5 PEs. Doc. 88 at ¶ 1. As a result of the Norton Farms Agreement, one PE
was “stolen” from Fiala and every other homeowner in the Fox Mill subdivision and then “sold”
to Harrison to give the Norton Farms development sufficient wastewater capacity. Id. at ¶ 46(j),
(o), (x), (ii), (pp), (vv). Each PE allegedly is worth $10,000. Ibid. The District’s “sale” of
Fiala’s and other homeowners’ PEs to Harrison increased the District’s wastewater usage beyond
its capacity, resulting in the spraying of wastewater effluent into public waterways. Id. at
¶ 46(ww).
The second amended complaint purports to state claims under RICO and Illinois law. Id.
at ¶ 15. For the RICO claim, which is set forth in Count I of the second amended complaint,
Plaintiffs seek actual damages, treble damages, attorney fees, and costs. Id. at p. 46. For the
state law claims, which are set forth in Counts II-V, Plaintiffs seek compensatory and punitive
damages, and ask the court to nullify the Norton Farms Agreement; to declare that the Fox Mill
Agreement does not permit FMLP or B&B to seek the reimbursements; to require that all monies
received by B&B, FMLP, or “the B&B Family” be returned to the individuals and entities from
whom the monies were wrongfully obtained; to declare that the amendment to the Sanitary
District Act of 1936 does not apply retroactively to any project constructed prior to its
enactment; and to declare that any excess PEs are the District’s property. Id. at ¶ 67(a), (b), (c),
(e) (f), and p. 50. Plaintiffs ask the court under the Illinois Public Officer Prohibited Activities
Act, 50 ILCS 105/3, to declare that the trustee defendants violated that statute and to nullify any
District contract executed while one of the trustees held office, and, pursuant to 50 ILCS 105/4,
to remove the trustees from public office and to appoint a receiver until a proper election for
successor trustees can be held. Id. at ¶¶ 70(a) & (b), 73, 74.
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Discussion
Five sets of defendants have filed five separate motions to dismiss. One argument made
or adopted by all Defendants is that Plaintiffs lack RICO standing. That argument, which is
correct and which disposes of the RICO claims, is addressed first, followed by consideration of
the state law claims.
I.
RICO Claims
RICO provides that “[a]ny person injured in his business or property by reason of a
violation of section 1962 of this chapter may sue … in any appropriate United States district
court and shall recover threefold the damages he sustains and the cost of the suit, including a
reasonable attorney’s fee.” 18 U.S.C. § 1964(c). “The phrase ‘injured in [his] business or
property’ has been interpreted as a standing requirement—rather than an element of the cause of
action—which must be satisfied in order to prevail on a RICO claim.” Evans v. City of Chi., 434
F.3d 916, 924 (7th Cir. 2006) (citing Gagan v. Am. Cablevision, Inc., 77 F.3d 951, 958-59 (7th
Cir. 1996)). Therefore, “to establish standing to sue for a violation of § 1962, a plaintiff must
allege that the defendant’s overt act in furtherance of the RICO conspiracy injured the plaintiff’s
business or property.” Gagan, 77 F.3d at 959.
The portions of Plaintiffs’ second amended complaint and briefs that conceivably bear
upon RICO standing generously can be read to maintain that Plaintiffs suffered the following
injuries: (1) Defendants misappropriated one of Fiala’s PEs and reassigned it to Harrison’s
homes in Norton Farms; (2) Defendants’ actions “endangered the health and welfare of Fiala and
others similarly situated”; (3) because Kobler and other developers paid B&B or FMLP the
connection fees that should have been paid to the District, insufficient investments were made in
infrastructure and capacity, leading the District to charge Fiala and other homeowners higher
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fees, assessments, and property taxes to make up the shortfall; (4) as a result of Defendants’
actions, Kobler was forced to pay “illegal fees” to B&B that it would not have paid “but for
Defendants’ wrongful acts.” Doc. 42 at 26-27; Doc. 88 at ¶¶ 18, 19(m) 38, 46(ww) & (zz), 51,
59, 62; Doc. 105 at 4-6. Plaintiff forfeited any argument regarding the third and fourth alleged
injuries by failing to argue in their briefs that those injuries establish RICO standing. And
putting aside forfeiture, none of the alleged injuries satisfy the RICO standing requirement.
A.
Misappropriation and Reassignment of PEs
The first alleged injury—the taking and reassignment of Fiala’s PE—rests on the premise
that PEs are property that Fiala owned and that one PE supposedly was taken from Fiala and
reassigned to Norton Farms. After all, if the PEs are not property, then Fiala could not own
“his” PEs and a PE could not have been wrongfully taken from him. And if the PE was not
wrongfully taken from Fiala, then he cannot be said to have suffered an “injury in business or
property” under 18 U.S.C. § 1694(c). See Rylewicz v. Beaton Servs., Ltd., 698 F. Supp. 1391,
1396 (N.D. Ill. 1988) (“The term ‘property’ [in § 1964(c)] contemplates something owned or
possessed that an individual has a legitimate claim of entitlement to.”).
The second amended complaint alleges that Fiala “owns 3.5 PEs” by virtue of purchasing
a home in the Fox Mills subdivision. Doc. 88 at ¶ 1. That allegation is “a legal conclusion
couched as a factual allegation,” and thus need not be accepted as true on a Rule 12(b) motion.
Bonte v. U.S. Bank, N.A., 624 F.3d 461, 465 (7th Cir. 2010). In their briefs opposing dismissal,
which is where Plaintiffs need to support their legal conclusions, Plaintiffs cite no legal authority
for the proposition that a PE is property belonging to a homeowner. Docs. 42, 105. And the
legal authority that is available establishes that Fiala did not own any PEs.
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The nature of a PE is established by Illinois law. Different types of residences are
designated different numbers of PEs. See 35 Ill. Admin. Code § 370 App. A (designating one
PE for an efficiency or studio apartment, 1.5 PEs for a one-bedroom apartment, three PEs for a
two- or three-bedroom apartment, 3.5 PEs for a single-family dwelling, and 2.25 PEs for a
mobile home). A PE is “an average waste loading equivalent to that produced by one person
which is defined as 100 gallons per day.” 225 ILCS 225/3(6). This unit of measurement is used
to estimate the wastewater usage and environmental impact of various structures. As the
regulations explain:
“Population Equivalent” is a term used to evaluate the impact of industrial
or other waste on a treatment works or stream. One population equivalent
is 100 gallons (380 liters) of sewage per day, containing 0.17 pounds (77
grams) of BOD (5) (five day biochemical oxygen demand) and 0.20 pounds
(91 grams) of suspended solids. The impact on a treatment works is
evaluated as the equivalent of the highest of the three parameters. Impact
on a stream is the higher of the BOD (5) and suspended solids parameters.
35 Ill. Admin. Code § 301.345. The manner in which Illinois law uses this unit of measurement
is illustrated by a regulation prohibiting effluent from a “source whose untreated waste load is
10,000 population equivalents or more” from being discharged into the Chicago River System or
Calumet River System. Id. § 304.120(b).
Illinois law makes clear, then, that the 3.5 PEs assigned to Fiala’s single-family home do
nothing more, and nothing less, than designate the amount of wastewater the home is presumed
to generate. This designation, in turn, is used to estimate the Fiala home’s impact on the
District’s treatment capacity and surrounding environment. Illinois courts refer to PEs in
precisely this way and no other. See, e.g., N. Moraine Wastewater Reclamation Dist. v. Ill.
Commerce Comm’n, 912 N.E.2d 204, 217 (Ill. App. 2009); Vill. of Fox River Grove v. Pollution
Control Bd., 702 N.E.2d 656, 663 (Ill. App. 1998); Metro Util. v. Ill. Commerce Comm’n, 549
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N.E.2d 1327, 1328 (Ill. App. 1990); Greater Peoria Sanitary & Sewage Disposal Dist. v.
Pollution Control Bd., 540 N.E.2d 934, 935 (Ill. App. 1989); Unity Ventures v. Pollution Control
Bd., 476 N.E.2d 1368, 1369-1370 (Ill. App. 1985).
The nature of PEs under Illinois law conclusively defeats Plaintiffs’ submission that the
3.5 PEs are property that Fiala acquired by virtue of purchasing a home in Fox Mills. Plaintiffs
do not and could not allege that Fiala’s wastewater services were in any way limited by the
supposed “theft” of one of his PEs. If Fiala’s home produced more than 2.5 PEs (250 gallons) of
wastewater on any given day after the “theft” of one PE, he would not have faced any penalty or
paid any charges for continuing to flush his toilet or run his shower, dishwasher, or washing
machine. Fiala could not sell his PEs to a neighbor, thereby diminishing the amount of water he
was entitled to use and increasing the amount of water his neighbor could use. And there is no
support in law or logic for Plaintiffs’ conclusory allegation that the value of Fiala’s home was
diminished by the “loss” of one PE, Doc. 42 at 27, for there is no basis to believe that his actual
wastewater services were affected in any way by the “loss.”
In short, Fiala’s PEs are not property and cannot have been taken or stolen from him.
The supposed theft therefore does not provide a basis for RICO standing.
B.
Harm to Fiala’s “Health and Welfare” Due To The Spraying and
Discharge of Effluent
The second amended complaint alleges that Defendants “spray[ed] excess effluent in
violation of Illinois law and [Environmental Protection Agency (“EPA”)] regulations for the
purpose of falsifying the capacity of the [District’s] system,” “spray[ed] effluent when the
ground is over saturated in violation of [Illinois Environmental Protection Agency] regulations,”
and “discharge[d] effluent directly into Mill Creek in violation of both State and Federal EPA
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regulations.” Doc. 88 at ¶ 38. The complaint alleges that these actions “endanger[ed] the health
and welfare of the Plaintiffs and the citizens within the [District] and Illinois.” Id. at ¶ 39.
Plaintiffs’ briefs do not elaborate on the complaint’s allegations, other than to say that
“Defendants have also endangered the health and welfare of Fiala and others similarly situated.”
Doc. 42 at 27.
Plaintiffs nowhere assert that the spraying and discharge of effluent diminished the value
of their homes or property. The alleged environmental harms therefore cannot establish RICO
standing. The Seventh Circuit has held “not only that personal injuries do not provide standing
in civil RICO actions, but also that pecuniary losses flowing from those personal injuries are
insufficient to confer standing under § 1964(c).” Evans, 434 F.3d at 926 (citation omitted); see
also id. at 931 (“personal injuries and the pecuniary losses stemming therefrom do not establish
standing under the civil RICO statute”). As the Seventh Circuit explained:
In the civil RICO context, personal injuries which may result in pecuniary
losses, but are nonetheless insufficient to provide standing under § 1964(c)
have been found to include injury to mental health or emotional distress;
sickness, poisoning and emotional distress; emotional distress due to loss of
security and peace; injury stemming from the harassment and intimidation
of federal witnesses; loss of income due to wrongful death of a family
member/source of support; and inability to pursue or obtain meaningful
employment.
Id. at 926 (citations omitted). Likewise, RICO plaintiffs may not recover for “physical and
emotional injuries due to harmful exposure to toxic waste.” Genty v. Resolution Trust Corp.,
937 F.2d 899, 918-19 (3d Cir. 1991). It follows that Plaintiffs cannot seek redress under RICO
for the alleged harm to their “health and welfare.”
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C.
Payment of Higher Fees, Property Taxes, and Assessments
As noted above, Plaintiffs allege that because Kobler and other developers paid B&B or
FMLP the connection fees that should have been paid to the District, insufficient investments
were made in the District’s infrastructure and capacity, requiring the District to charge Fiala and
other home owners higher fees, assessments, and property taxes to make up the shortfall.
Although Plaintiffs specifically disclaim any reliance on Fiala’s taxpayer status, Doc. 88 at ¶ 61
(“Plaintiff FIALA is not seeking any recovery under [RICO] in his capacity as a taxpayer.”), the
second amended complaint references Fiala’s payment of higher fees, taxes, and assessments, id.
at ¶¶ 1, 18, 46(ww). In their briefs opposing dismissal, however, Plaintiffs do not argue that the
overpayments constitute an injury for purposes of RICO standing. Any RICO standing argument
based on the alleged overpayments accordingly has been forfeited. See Alioto v. Town of Lisbon,
651 F.3d 715, 721 (7th Cir. 2011) (“Longstanding under our case law is the rule that a person
waives an argument by failing to make it before the district court. We apply that rule where a
party fails to develop arguments related to a discrete issue, and we also apply that rule where a
litigant effectively abandons the litigation by not responding to alleged deficiencies in a motion
to dismiss.”) (citations omitted); Bonte, 624 F.3d at 466 (“Failure to respond to an argument—as
the [plaintiffs] have done here—results in waiver.”); Wojtas v. Capital Guardian Trust Co., 477
F.3d 924, 926 (7th Cir. 2007); Cincinnati Ins. Co. v. E. Atl. Ins. Co., 260 F.3d 742, 747 (7th Cir.
2001) (a party’s failure to oppose an argument permits an inference of acquiescence, and
“acquiescence operates as a waiver”); Walsh v. Arrow Fin. Servs., LLC, 2012 WL 255802, at *3
(N.D. Ill. Jan. 27, 2012) (citing cases); Shaffer v. Nat’l Passenger R.R. Corp., 2011 WL
4916493, at *2 (N.D. Ill. Oct. 17, 2011) (citing cases).
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Any such argument would have failed in any event due to the “indirect purchaser” rule.
The rule holds that a plaintiff cannot seek damages under RICO where it is an indirect purchaser,
meaning where it alleges that it paid the costs of a RICO scheme that were passed on by the
scheme’s direct victim. See BCS Servs, Inc. v. Heartwood 88, LLC, 637 F.3d 750, 753-57 (7th
Cir. 2011). The rule is regularly invoked to defeat the kind of RICO claim at issue in this case.
In Carter v. Berger, 777 F.2d 1173 (7th Cir. 1985), for example, the defendant bribed employees
of the Cook County Board of Appeals to obtain lower property assessments for his clients. The
bribes indisputably violated RICO, and the plaintiff taxpayers sued the defendant on the theory
that Cook County had increased their taxes to make up the shortfall caused by the lower
assessments given the defendant’s clients. See id. at 1174-75. The Seventh Circuit held that the
indirect purchaser rule defeated the claim, explaining that RICO does not provide redress for
taxpayers who were overcharged due to costs being “passed on” by the scheme’s direct victim,
which in Carter was the County. Id. at 1175-76.
Other decisions are in accord. In Wooten v. Loshbough, 951 F.2d 768 (7th Cir. 1991), the
plaintiff was a judgment creditor of a company driven into bankruptcy by the defendant’s RICO
violations. While acknowledging that “the defendants’ activities made it less likely that [the
plaintiff] would collect her judgment[,]” the court held that her claim was barred by the indirect
purchaser rule. Id. at 769. And in Illinois ex rel. Ryan v. Brown, 227 F.3d 1042 (7th Cir. 2000),
the plaintiff taxpayers brought suit on behalf of the State of Illinois to recoup interest lost due to
the state treasurer’s placement of state monies in a non-interest bearing account, a decision that
allegedly resulted from a bribery scheme that violated RICO. In holding that the plaintiffs were
not the scheme’s direct victims and thus could not sue under RICO, the Seventh Circuit cited
Carter, describing it as a case where
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the directly injured party was the county, whose tax collections had been
less than they should have been because of the acts of bribery and mail
fraud at issue; those plaintiffs claimed that they too were injured because
their tax assessments were too high, as a result of the depressed levels other
people’s taxes.
Id. at 1045. The Seventh Circuit ruled that because “the State of Illinois itself was directly
injured by the mis-direction of its funds into non-interest bearing accounts and the pockets of
miscreants[,] … the State is the proper party to be suing, not the plaintiffs.” Id. at 1045-46.
As in Carter, Wooten, and Ryan, the indirect purchaser rule bars Plaintiffs from invoking
RICO to recover the amounts by which the District allegedly was compelled to overcharge them
due to the siphoning away of money by FMLP and B&B. The direct victim of Defendants’
scheme, and thus the only appropriate RICO plaintiff, is the District itself.
Although this result may seem odd at first glance because the second amended complaint
names the District as a defendant, the complaint makes clear that the District is not a RICO
defendant. In its third paragraph, the complaint states: “No money is being sought from the
[District] in this action, but instead they are named herein as an interested party under Count II
with the right to notice that this action may adjudicate their rights to certain property.” Doc. 88
at ¶ 3 (emphasis added). Count I is the RICO claim, while Count II seeks equitable and
declaratory relief under a variety of state law theories. Moreover, the third paragraph’s reference
to “their rights to certain property” suggests that Plaintiffs (correctly) view the District as the
victim, not the perpetrator, of a RICO scheme allegedly concocted by the other defendants. The
point is confirmed by the complaint’s first paragraph, which alleges that Fiala brought this suit
“in his individual capacity as a homewoner in Fox Mill and as a taxpayer for the
misappropriation of general public funds for which the municipality [the District] has a right to
collect, pursuant to Golden v. City of Flora[,] … 96 N.E.2d 506, 508 (Ill. 1951).” Id. at ¶ 1
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(emphasis added). Again, the allegation that the District “has a right to collect” funds that the
RICO scheme diverted elsewhere suggests that the District is the scheme’s victim and not among
its perpetrators. The District’s status as a nominal defendant therefore does not undermine the
conclusion that it is the direct victim of the alleged RICO scheme and thus the only appropriate
RICO plaintiff.
Carter recognizes an exception to the “indirect purchaser” rule in RICO cases “‘where
the direct purchaser is owned or controlled by’ the wrongdoer.” 777 F.2d at 1178 (quoting
Illinois Brick Co. v. Illinois, 431 U.S. 720, 736 n.16 (1977)). The rationale for this exception,
which arose from antitrust law, is that where the wrongdoers control the direct purchaser, “the
direct purchaser would have little or no incentive to sue on [its] own behalf, thus leaving the
indirect purchaser without recourse for any antitrust injuries.” Doe v. Ariz. Hosp. & Healthcare
Ass’n, 2009 WL 1423378, at *6 (D. Ariz. Mar. 19, 2009). Those circumstances were present at
the inception of this lawsuit in April 2010, when the three trustee defendants controlled the
District’s three-member board. But two of the trustees (Brizuela and Sindelar) were replaced in
November 2010, giving majority control of the District’s board to non-conflicted trustees. See
Wasco Sanitary District Trustees, http://wascosd.org/AboutWSD/Trustees/tabid/110/
Default.aspx (last visited Mar. 15, 2012) (identifying Ryan Strauss as President, Thomas Bihun
as Vice President, and Skidmore as Trustee); Bihun, Strauss win in Wasco Sanitary District,
Kane County Chronicle, Nov. 3, 2010 (reporting that Strauss and Bihun defeated Brizuela and
William Scanlon in the November 2010 election), available at http://fwix.com/news/11230082
(last visited Mar. 15, 2012); Kane County Elections, 2010 General Election Contest Results,
http://www.kanecountyelections.org/ElectionResults/2010-11-02/Contests.asp (last visited Mar.
15, 2012) (same); Josh Stockinger, Wasco candidates disagree on legal fees, Chicago Daily
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Herald, Oct. 25, 2010, at 4 (reporting that Strauss and Bihun ran as a slate against Brizuela and
Scanlon in the November 2010 election).
The non-conflicted trustees have had the authority since November 2010 to seek redress
for the alleged siphoning of funds away from it and to FMLP and B&B. See 70 ILCS 2805/3(d)
(“[a] majority of the board of trustees shall constitute a quorum”). Because there remains no
impediment to suit by the direct purchaser, and because there has been no such impediment since
November 2010, the “own or control” exception to the indirect purchaser rule does not apply. It
follows—even putting aside Plaintiffs’ forfeiture of the argument that the alleged overpayment
of fees, property taxes, and assessments provide a basis for RICO standing—that Plaintiffs are
not the proper parties to seek redress under RICO for that alleged injury.
D.
Payment of “Illegal Fees” by Kobler to B & B
Finally, the second amended complaint alleges that Kobler was injured when forced to
pay “illegal fees” to B&B as a result of the reimbursement agreement between the District and
B&B. There are two conceivable alleged injuries here. The first is that Kobler “would not have
had to pay [the illegal fees] but for the Defendants’ wrongful acts.” Doc. 88 at ¶ 62. Any
argument that this injury provides a basis for RICO standing has been forfeited because
Plaintiffs’ briefs do not press this point in opposing dismissal; in fact, the briefs do not mention
this point at all. See Alioto, 651 F.3d at 721; Bonte, 624 F.3d at 466; Wojtas, 477 F.3d at 926;
Cincinnati Ins. Co., 260 F.3d at 747; Walsh, 2012 WL 255802, at *3; Shaffer, 2011 WL
4916493, at *2.
The second conceivable injury, which is not forfeited, arises from the allegation that
“Kobler … w[as] induced to pay monies directly to defendants after being falsely advised by
defendants that B&B and/or FMLP owned the rights to sell P.E.’s as some type of commodity.”
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Doc. 42 at 27. The argument appears to be that the reimbursement arrangement caused harm
because the fees first should be paid to the District and then given to B&B, not paid directly to
B&B. This alleged injury does not establish RICO standing. Plaintiffs do not contend that the
homes Kobler built did not receive wastewater services in exchange for the payments; indeed,
the homes did. Nor do Plaintiffs submit that the fees were any higher than they would have been
had the fees been paid directly to the District. Accordingly, the fact that money is paid directly
to B&B rather than passed through the District does not deprive Kobler of any money (beyond
what it would have paid anyway) or services. It follows that the direct payments did not injure
Kobler’s “business or property” under § 1964(c) and thus that it cannot predicate RICO standing.
II.
State Law Claims
Having dismissed the RICO claims, which are the only federal claims, the court must
decide the proper disposition of the state law claims. If the dismissal of the RICO claims is for
lack of subject matter jurisdiction under Rule 12(b)(1), the court must remand the state law
claims without considering whether to retain supplemental jurisdiction under 28 U.S.C. § 1367.
See Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006); Miller v. Herman, 600 F.3d 726, 730 (7th
Cir. 2010). In Evans v. City of Chicago, supra, the Seventh Circuit definitively held that RICO
standing implicates subject matter jurisdiction, not the merits of the RICO claim:
The phrase “injured in business or property” has been interpreted as a
standing requirement—rather than an element of the cause of
action—which must be satisfied in order to prevail on a RICO claim. The
causation component of § 1964(c)—whether an alleged RICO injury was
caused “by reason of” a violation of the statute—has also been considered a
component of standing. As such, the issue represents a jurisdictional
requirement which remains open to review at all stages of the litigation.
434 F.3d at 924 (citations and some internal quotation marks omitted); accord, e.g., RWB Servs.,
LLC v. Hartford Computer Grp., Inc., 539 F.3d 681, 686 (7th Cir. 2008); Gagan, 77 F.3d at 958.
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On that understanding, the dismissal of the RICO claims is for lack of jurisdiction under Rule
12(b)(1), mandating remand of the state law claims.
It is possible that the Seventh Circuit might revisit the issue and conclude that RICO
standing goes to the merits of a RICO claim, thus making Rule 12(b)(6) and not Rule 12(b)(1)
the appropriate vehicle for a dismissal grounded on lack of RICO standing. The Seventh Circuit
has long considered antitrust standing, a close cousin of RICO standing, to be non-jurisdictional.
See Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774, 778 (7th Cir. 1994) (“despite the
suggestive terminology, ‘antitrust standing’ is not a jurisdictional requirement and is therefore
waivable”). And the Second, Third, and Ninth Circuits have held that RICO standing goes to
merits and not the court’s jurisdiction. See, e.g., Canyon Cnty. v. Syngenta Seeds, Inc., 519 F.3d
969, 974 n.7 (9th Cir. 2008) (“we review the question of whether the [plaintiff] satisfies civil
RICO’s standing requirements under the standard for Rule 12(b)(6)”); Lerner v. Fleet Bank,
N.A., 318 F.3d 113, 129-30 (2d Cir. 2003) (Sotomayor, J.) (RICO standing “is not jurisdictional
in nature under Fed. R. Civ. P. 12(b)(1), but is rather an element of the merits addressed under a
Fed. R. Civ. P. 12(b)(6) motion for failure to state a claim”); Maio v. Aetna, Inc., 221 F.3d 472,
481 n.7 (3d Cir. 2000) (“While we have designated section 1964(c) as the ‘standing’ provision of
RICO, we point out that our method of analysis in prior cases has been to consider issues of
RICO and antitrust standing in the context of reviewing motions to dismiss pursuant to Rule
12(b)(6), despite the fact that the ‘injury to business or property’ and proximate causation
requirements are considered aspects of the plaintiff’s ‘standing’ to sue under section 1964(c) of
RICO and section 4 of the Clayton Act.”) (citation omitted).
If the Seventh Circuit were to agree with the Second, Third, and Ninth Circuits, then the
dismissal of the RICO claims here would be on the merits under Rule 12(b)(6), thus requiring
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the court to decide whether to retain or relinquish supplemental jurisdiction over the state law
claims under 28 U.S.C. § 1367. (The parties are not diverse, so there is no original jurisdiction
under the diversity statute, 28 U.S.C. § 1332.) Under those circumstances, the court would
exercise its discretion under § 1367(c) to relinquish jurisdiction over the state law claims and
remand them to state court.
Section 1367(c)(3) provides that a district court “may decline to exercise supplemental
jurisdiction over a claim” if “the district court has dismissed all claims over which it has original
jurisdiction.” 28 U.S.C. § 1367(c)(3). “As a general matter, when all federal claims have been
dismissed prior to trial, the federal court should relinquish jurisdiction over the remaining
pendant state claims.” Williams v. Rodriguez, 509 F.3d 392, 404 (7th Cir. 2007). This rule has
three exceptions: “when the [refiling] of the state claims is barred by the statute of limitations;
where substantial judicial resources have already been expended on the state claims; and when it
is clearly apparent how the state claim is to be decided.” Ibid. None of those exceptions apply
here, making remand appropriate. See Courtney v. Halleran, 485 F.3d 942, 950-51 (7th Cir.
2007) (affirming the district court’s dismissal of the state law claims under § 1367(c)(3) after it
dismissed the RICO claims, which were the only federal claims in the case); Cenco Inc. v.
Seidman & Seidman, 686 F.2d 449, 458-59 (7th Cir. 1982) (suggesting that relinquishing
jurisdiction over the state law claims would be appropriate because the RICO claims, which
were the only federal claims in the case, had been dismissed).
Remand is independently appropriate under § 1367(c)(1), which applies where a state
law claim “raises a novel or complex issue of State law.” 28 U.S.C. § 1367(c)(1). As noted
above, Plaintiffs’ state law claims ask the court under the Illinois Public Officer Prohibited
Activities Act, 50 ILCS 105/3, to declare that the District’s trustees violated that statute, to
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nullify any District contract executed while one of the trustees held office, and, under 50 ILCS
105/4, to appoint a receiver until a proper election for successor trustees can be held. Such
claims, which strike at the heart of an Illinois municipality’s ability to govern itself, are better
resolved by the Illinois judiciary. See Marshall v. Cnty. of Cook, 2011 WL 5980454, at *4 (N.D.
Ill. Nov. 29, 2011) (citing cases).
Conclusion
For the foregoing reasons, Plaintiffs’ RICO claims are dismissed. Jurisdiction is
relinquished over the state law claims, which are remanded to the Circuit Court of the Sixteenth
Judicial Circuit, Kane County, Illinois. The dismissal of the RICO claims is without prejudice to
Plaintiffs pursuing their state law claims in state court.
March 16, 2012
United States District Judge
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