Polar Express School Bus, Inc. et al v. Navistar, Inc. et al

Filing 22

MEMORANDUM Opinion and Order Signed by the Honorable Harry D. Leinenweber on 12/16/2016:Mailed notice(wp, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

POLAR EXPRESS SCHOOL BUS,
INC., and LAKEVIEW BUS
LINES, INC.,
Plaintiffs,

Case No. 16 C 5769

v.

Judge Harry D. Leinenweber

NAVISTAR, INC., NAVISTAR
INTERNATIONAL CORP., and IC
BUS, LLC,
Defendants.

MEMORANDUM OPINION AND ORDER
Before

the

Court

is

the

Defendants’

Plaintiffs’ Complaint [ECF No. 13].
the

Court

grants

without prejudice.

the

Motion

and

Motion

to

Dismiss

the

For the reasons stated herein,
dismisses

the

Plaintiffs’

claims

If the Plaintiffs do not amend their Complaint

within twenty-one (21) days from the date of this Memorandum Opinion
and Order, the dismissal will convert automatically into a dismissal
with prejudice.
I.

BACKGROUND

The Plaintiffs are an Illinois school bus company, Polar Express
School Bus (“Polar”), and a second company that leased buses from
Polar, Lakeview Bus Lines (“Lakeview”).
Defendants,

Navistar,

Inc.

and

its

The Plaintiffs claim that the
affiliates

(collectively,

“Navistar”) manufactured and sold buses to Polar knowing that the
buses contained defective parts.

Polar alleges that from 2007 to 2009, it purchased from Navistar
approximately

40

buses

containing

engines

with

control technology and defective brake systems.

defective

emissions

The Plaintiffs’ only

claims under federal law are for civil violations of the Racketeer
Influenced

and

Corrupt

Organizations

Act

(“RICO”),

see,

18

U.S.C.

§§ 1962(c) and 1962(b), perpetrated through acts of mail and wire
fraud.

According

to

the

Complaint,

Navistar

committed

the

fraud

through an enterprise that included Navistar’s authorized dealers, who
sold

the

defective

vehicles,

and

Navistar’s

facilities, who serviced the vehicles.

authorized

repair

The Plaintiffs also bring

claims for fraud under Illinois state law.
According to the allegations, the defects in the engines arise
from an “exhaust gas recirculation” system that failed to meet U.S.
Environmental

Protection

Agency

(“EPA”)

guidelines.

Navistar’s

efforts to redesign the engines to meet the applicable EPA standards
actually led to worse performance, Plaintiffs claim, which in turn led
to “control failures and other malfunctions.”
Ostensibly for support, the Plaintiffs highlight a civil action
initiated

by

the

U.S.

Securities

and

Exchange

Commission

(“SEC”)

against Navistar, in which the SEC claims that Navistar made several
misleading public statements to investors from the years 2010 to 2012,
violating the federal securities laws.
the

SEC

alleges

statements,

it

Navistar
means,

misled

“by

its

Plaintiffs believe that when
investors

implication,”

deliberately deceived its customers.
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that

See, Compl. ¶ 11.

through
Navistar

public
also

II. DISCUSSION
A.

COUNT II – RICO CLAIM UNDER 18 U.S.C. § 1962(c)

The Court first addresses Count II, the Plaintiffs’ RICO claim
under Section 1962(c).
employed

by

or

That section “makes it unlawful for any person

associated

with

any

enterprise

engaged

in,

or

the

activities of which affect, interstate or foreign commerce, to conduct
or

participate,

enterprise’s

directly

affairs

or

indirectly,

through

a

in

the

pattern

conduct
of

of

such

racketeering

activity. . . .”

Rao v. BP Products North America, 589 F.3d 389, 399

(7th

(internal

Cir.

2009)

quotation

and

citation

omitted).

The

Plaintiffs therefore must allege facts showing “(1) conduct (2) of an
enterprise (3) through a pattern (4) of racketeering activity.”

Id.

In addition, because the Plaintiffs’ claims of racketeering are
premised on mail and wire fraud (“predicate acts” under RICO), the
heightened pleading standard of Federal Rule of Civil Procedure 9(b)
applies.

The

circumstances,

Plaintiffs

including

underlying the fraud.
Cir. 1990).

the

must
“who,

state
what,

with

particularity

when,

where,

and

the
how,”

DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th

The Defendants argue, and the Court agrees, that the

Plaintiffs’ Complaint fails to meet the Rule 9(b) threshold.
“‘An act of wire fraud requires a showing that (1) Defendants
participated
defraud;

and

in

a

(3)

fraudulent scheme.’”

scheme

to

Defendants

defraud;
used

(2)

wires

Defendants
in

intended

furtherance

of

to
the

Triumph Packaging Group v. Ward, 877 F.Supp.2d

629, 643 (N.D. Ill. 2012) (quoting Kaye v. D’Amato, 357 Fed. Appx.
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706, 710 (7th Cir. 2009)).

Mail fraud requires the same, except as to

the third element, which requires the defendant to have used the mails
in furtherance of the fraud.

See, id. (citing United States v. Boone,

628 F.3d 927, 933 (7th Cir. 2010)).
requires

“a

false

statement

or

A “scheme to defraud,” in turn,

material

concealment of a material fact.”

misrepresentation,

or

the

Williams v. Aztar Indiana Gaming

Corp., 351 F.3d 294, 299 (7th Cir. 2003).
The

Defendants

point

out

that

many

of

their

supposed

misrepresentations were made well after Polar purchased any buses from
Navistar
because

dealers.
there

is

That’s
no

way

an

obvious

they

could

problem
have

for

relied

the
on

a

Plaintiffs,
fraudulent

statement from, say, 2012, when they purchased or leased a bus in
2009.

Indeed, the SEC action that the Plaintiffs highlight deals with

alleged misrepresentations and omissions all occurring from 2010 to
2012.

The SEC portrays Navistar as having difficulty developing an

engine that would meet impending EPA emissions standards; as a result,
the SEC says, Navistar covered up its problems through misleading
statements to its investors in violation of various provisions of the
federal securities laws.
ECF No 1.

See, Civil Docket Case No. 1:16-cv-03885,

Absent from the SEC complaint are any allegations regarding

misrepresentations to Navistar’s investors prior to 2010, as well as
any

allegations

of

misrepresentation

to

Navistar’s

customers.

In

other words, it is hard to see how the SEC’s 2016 suit is relevant to
the present matter.

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Regardless, the Plaintiffs are not free to piggy-back on an SEC
action.

They must state allegations in their own Complaint that would

form a plausible claim.

In an effort to do so, the Plaintiffs attach

several exhibits that they believe contain fraudulent statements.

For

example, they provide several Form 8-Ks (forms Navistar was required
to

file

with

the

SEC

to

disclose

various

developments) from the relevant time period:
See, Compl. Exs. A, C, D and E.

business-related

2006, 2007 and 2008.

These disclosures from Navistar

contain optimistic predictions about its engine development efforts –
that

is

all.

They

do

not

by

themselves

amount

to

deliberate

misrepresentations.
The Plaintiffs counter that their RICO claim is not based on a
misrepresentation about Navistar’s engines, but instead based on a
failure to disclose the known defects in the engines.

A failure to

disclose does not automatically constitute fraud, but it may amount to
fraud

if

the

failure

is

accompanied

affirmative misrepresentations.”
503, 507 (7th Cir. 2005).

by

“acts

of

concealment

or

United States v. Stephens, 421 F.3d

But the Plaintiffs’ Complaint is also short

on any allegations of concealment that aren’t conclusory.
In the section of their Complaint describing the Defendants’ wire
and

mail

fraud,

the

Plaintiffs

include

a

litany

of

supposed

misrepresentations by Navistar, but they do not explain how Navistar
actively concealed defects.
Plaintiffs’

Complaint

and

Again and again, the implication from the
briefing

is

that

because

Navistar

made

several public statements about their engines’ quality that turned out
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to be wrong, they must have known it all along.

If that were enough

to meet Rule 9(b)’s requirement of pleading fraud with particularity,
it is hard to imagine a claim that wouldn’t meet the threshold.
It’s true that the Plaintiffs allege (in conclusory fashion) that
Navistar

knew

sufficient

to

allegations

of

the

state

defects,
any

certainly

requirement.

but

claim

fail

(Examples

conclusory

after

to

of

Twombly

meet

such

Rule

allegations
and

Iqbal,

9(b)’s

conclusory

are
and

not
such

particularity

statements

appear

throughout the Complaint, but in particular, see, Compl. ¶¶ 96-98.)
The

Plaintiffs

have

provided

a

critical

lack

of

detail

about

the

fraudulent concealment – substantially less detail than, for example,
a similar RICO complaint dismissed in In re Testosterone Replacement
Therapy, 159 F.Supp.3d 898 (N.D. Ill. 2016).
The problem of lack of detail is magnified when considering the
entire RICO enterprise and not just Navistar’s statements.
successful

RICO

claim,

there

must

be

allegations

For a

suggesting

that

Navistar worked in concert with its dealers and service facilities to
conceal defects, and to run up the costs for customers seeking repairs
and replacement parts.

More precisely, the Plaintiffs must allege

facts that would establish three things:

“a purpose, relationships

among those associated with the enterprise, and longevity sufficient
to permit these associates to pursue the enterprise’s purpose.”
589 F.3d at 399.

Rao,

There must also be allegations suggesting that the

enterprise then engaged in a pattern of racketeering activity:

in

other

be

words,

the

predicate

acts
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of

the

enterprise

must

“sufficiently related to constitute a pattern.” Id.

Aside from more

conclusory statements, the Complaint contains nothing suggesting any
coordination between the Defendants.
The relationship between the different Defendants in the supposed
enterprise
service

is

clear

enough:

centers.

suggesting

that

overarching

However,
their

scheme

to

manufacturer,
there

activities
defraud.

are
are

The

dealers,

no

and

allegations

related

in

Complaint

any

licensed
plausibly

way

alleges

to

that

an

when

Lakeview sent its buses to be serviced, the service centers knew the
engines were defective but never revealed this fact, and so profited
from

the

continued

(and

ultimately

fruitless)

repairs.

But

that

statement does not suggest that all Defendants shared in the profits
of the same scheme; the service centers may have just been the happy
beneficiaries

of

customers

who

had

bought

a

shoddy

product.

Cf.

Guaranteed Rate, Inc. v. Barr, 912 F.Supp.2d 671, 687 (N.D. Ill. 2012)
(affirming

dismissal

of

a

RICO

claim

because

complaint

failed

to

assert that “RICO Defendants had any interest in the outcome of the
alleged scheme beyond their own individual interests”).
claims

of

meetings

or

conversations

between

the

There are no

Defendants,

for

example, suggesting they were conspiring to rip off their customers;
thus

even

assuming

that

Navistar

knew

about

the

defects

in

the

engines, it is wholly unclear how the dealers and service centers
would have knowledge of the defects as well.

Cf. In Re Testosterone

Therapy, 159 F.Supp.3d at 921 (fraudulent concealment claim failed to

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meet Rule 9(b)’s threshold in part because of a lack of “details about
meetings or communications” related to the concealment).
The Defendants make one other material argument for dismissal:
that

the

RICO

limitations.

claims

are

barred

by

the

applicable

statute

of

The applicable period for RICO claims is four years, and

the period begins to run when the plaintiff knows or should know that
that he has been injured by the defendant.

See, Cancer Foundation v.

Cerberus Capital Mgmt., 559 F.3d 671, 674 (7th Cir. 2009).

Here, the

Defendants point out that the Plaintiffs arguably should have known
about the injury (the purchase of the defective engines and subsequent
costs) by as early as 2007, when they began to notice problems.

The

Defendants may have a strong argument, but the Plaintiffs have not
pled themselves out of court on this issue.

More facts are required

to determine conclusively when the Plaintiffs knew of their injury and
when they knew the Defendants were the parties responsible.

As the

Plaintiffs rightly point out, they are not required to plead facts
that

anticipate

and

negate

the

Defendants’

affirmative

defenses.

Independent Trust Corp. v. Stewart Information Services, 665 F.3d 930,
935 (7th Cir. 2012).

The statute of limitations is not a basis for

dismissal at this juncture, although if the Plaintiffs attempt to
amend the Complaint, they should be mindful of the issue.
B.

COUNT I – RICO CLAIM UNDER 18 U.S.C. 1962(b)

Section

1962(b)

racketeering

activity

prohibits
.

.

.

“any

to

person

acquire

or

through

a

maintain,

pattern

of

directly

or

indirectly, any interest in or control of any enterprise which is
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engaged in, or the activities of which affect, interstate or foreign
commerce.”

The primary difference between § 1962(b) and § 1962(c) is

that § 1962(c) focuses on prohibition of racketeering activity, while
§ 1962(b) focuses on the prohibition of any interest in or control
over the racketeering enterprise.

But that difference is immaterial

for purposes of the motion to dismiss.
The Plaintiffs’ claim under Section 1962(b) contains the same
deficiencies as their claim under § 1962(c).

Section 1962(b), like

§ 1962(c), still requires allegations that would support “a pattern of
racketeering activity,” or in other words, at least two predicate
acts.

See, Starfish Inv. Corp. v. Hansen, 370 F.Supp.2d 759, 780

(N.D. Ill. 2005).

As the Court has explained, the allegations to

support with particularity a plausible claim for underlying mail and
wire fraud are insufficient.

Section 1962(b), like § 1962(c), also

requires facts that would demonstrate an “enterprise,” and as the
Court has already pointed out, the Complaint is short on such facts.
The claim under Section 1962(b) fails.
III.

CONCLUSION

For the reasons stated herein, the Court grants the Defendants’
Motion to Dismiss [ECF No. 13], dismissing Counts I and II of the
Plaintiffs’ Complaint without prejudice.

Because the Plaintiff has

failed to state a federal claim, the Court relinquishes supplemental
jurisdiction over Count III, the Illinois fraud claim.

28 U.S.C.

§ 1367(c)(3); RWJ Mgt. Co., Inc. v. BP Prods. N. Am. Inc., 672 F.3d
476,

478

(7th

Cir.

2012).

If

the

- 9 -

Plaintiffs

do

not

amend

the

Complaint within twenty-one (21) days from the date of this Memorandum
Opinion and Order, this dismissal will convert automatically into a
dismissal with prejudice.

IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court
Dated: December 16, 2016

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