Jupiter Aluminum Corporation v. Sabaitis et al
Filing
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OPINION AND ORDER GRANTING: 46 Motion to Dismiss by Dfts GMI Services LLC, Gary S Longoria, 32 First Motion to Dismiss by Dft Scrap Metal Services, LLC; 20 Motions to Dismiss by Dft Michael L Thompson, 48 Motion to Dismiss by Dft Philip J Sab aitis and 44 Motion to Dismiss by Dft Loren D Jahn. The court has dismissed all claims over which it has original jurisdiction, and declines to exercise supplemental jurisdiction over the state law claims, 28 U.S.C. § 1367(c)(3), so the case is DISMISSED. A dismissal under Rule 12(b)(6) ordinarily is with prejudice. The court affords Jupiter 21 days from the date of this order in which to file an amended complaint. If Jupiter does not do so, judgment of dismissal with prejudice will be entered. Signed by Judge Robert L Miller, Jr on 9/13/2016. (lhc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
JUPITER ALUMINUM CORPORATION,
)
)
Plaintiff,
)
)
vs.
)
)
PHILIP J. SABAITIS; LOREN D. JAHN; SCRAP )
METAL SERVICES, LLC; MICHAEL L.
)
THOMPSON; GMI SERVICES LLC D/B/A GMI )
RECYCLING SERVICES, INC.; and GARY S.
)
LONGORIA,
)
)
Defendants.
)
Cause No. 2:16-cv-30
OPINION AND ORDER
Something went very wrong at Jupiter Aluminum Corporation in fiscal
year 2014. Jupiter is an Indiana corporation in the business of converting
scrap aluminum into coils. It contracts with vendors to provide the scrap.
Jupiter claims that a FY2014 audit revealed that Jupiter processed less scrap
that year than it ordered, yet Jupiter still paid all of its vendors for the full
amount ordered. The result was Jupiter paying for about eight million dollars
in scrap that it never processed. Jupiter alleges that defendants conspired to
submit falsified paperwork to cover up schemes to divert scrap that Jupiter
ordered away from Jupiter and to make off with scrap that was already
delivered to Jupiter.
Jupiter sued Philip Sabaitis, Jupiter’s receiving/inventory supervisor
from 2009-2015; Loren Jahn, Jupiter’s CFO from 2007-2014; Scrap Metal
Services (SMS), a scrap vendor, and Michael Thompson, senior manager and
partial owner of Scrap Metal Services; and GMI Recycling Services, another
scrap vendor, and Gary Longoria, GMI’s owner. Jupiter alleges federal and
state RICO violations and violations of state law based on fraud, criminal
conversion, deception, civil conspiracy, breach of contract and unjust
enrichment. All defendants have moved to dismiss Jupiter’s complaint
pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.
This court has jurisdiction under 18 U.S.C. § 1964, 28 U.S.C. § 1331,
and 28 U.S.C. § 1367. For the reasons that follow, the court grants all of the
motions to dismiss. With no surviving claims over which it has original
jurisdiction, the court declines to exercise supplemental jurisdiction over the
state law claims, 28 U.S.C. § 1367(c)(3), and dismisses the whole case.
I.
JUPITER’S ALLEGATIONS
Jupiter describes the process it uses to acquire scrap from vendors.
Jupiter first determines the price it’s willing to pay for various types of scrap.
Jupiter then emails vendors with information about the type and quantity of
scrap it wants to buy and the price it’s willing to pay. Once a vendor responds
and the parties agree on the type, quantity, and price of the scrap to be
delivered, Jupiter prepares a quote sheet containing a purchase order number.
Jupiter emails the quote sheet to the vendor or provides its information over
the phone. Jupiter enters the quote sheet information into its computer
system, which prints a purchase order for each transaction detailing the
vendor’s name, type and quantity of scrap, price, date of delivery, and terms
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and conditions of the transaction. Jupiter sends the original purchase order to
the vendor while keeping a copy for its files. After a purchase order is issued,
the vendor schedules a time for delivery.
Delivery trucks entering Jupiter’s premises must first check in at a gate
manned by SDG Global, an entity independent from Jupiter. SDG personnel
record the names of the carrier and driver, and the times of the truck’s arrival
and departure. SDG’s records don’t include any information about the contents
of the delivery. Once checked in, trucks proceed to Jupiter’s receiving
department. They drive onto a scale that weighs and records the full gross
weight of the trailer, have the scrap unloaded by Jupiter employees, and then
return to the scale so the trailer’s empty weight can be recorded. Jupiter issues
a receiving ticket showing the weights of the full and the empty trailer, a
description, the net weight of the scrap delivered, the purchase order number,
and the vendor’s name. Drivers typically provide Jupiter with a bill of lading
from the vendor showing the type and quantity of the scrap that was on the
trailer when it left the carrier’s facility. At all times relevant to this action,
Philip Sabaitis signed bills of lading acknowledging Jupiter’s receipt of
shipments.
Jupiter says it issues payments to vendors based on transaction packets
prepared by Mr. Sabaitis. Each packet includes a copy of the purchase order,
the receiving ticket, and the signed bill of lading, and is submitted to Jupiter’s
scrap purchasing department, which approves payment to the vendor. Jupiter
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then issues a check, CFO Loren Jahn signs the check, and Jupiter mails the
check to the vendor within 30 days of the date of the delivery.
Jupiter reports that in FY2014, it discovered an inventory shortfall: the
company had paid over $8 million for inventory it didn’t receive or process.
Jupiter faults the defendants for that shortfall, alleging that Philip Sabaitis and
Loren Jahn “surreptitiously conspired over a substantial period of time” with
Scrap Metal Services and its senior manager, Michael Thompson; and GMI
Services and its owner, Gary Longoria; to submit falsified paperwork that
caused Jupiter to pay for scrap shipments the company never received and
scrap shipments that were received by the company but removed from
Jupiter’s facility before being processed. Jupiter claims the defendants
undertook two schemes to defraud the company.
First is the “ghost truck” scheme, in which the defendants caused
Jupiter to pay for scrap shipments the company never received. Jupiter says
that during its investigation of the inventory shortfall, it acquired SDG Global’s
guard gate logs and found “numerous instances where a vendor was paid for a
‘shipment’ but the guard gate log didn’t reflect a corresponding truck entering
Jupiter’s facility.” Jupiter says it then contacted its vendors seeking
information to help reconcile these “ghost truck” shipments. Jupiter reports
that some vendors responded with all the requested information, some with
some of the information, some refused to provide any information, and some
didn’t respond at all. Jupiter reports that while it could reconcile some of those
shipments, “95 trucks from 20 different vendors are unreconciled on SDG’s
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guard gate logs; that is, these 95 ‘ghost trucks’ never arrived at Jupiter’s
facility,” resulting in Jupiter paying about $2.48 million for scrap it never
received. Jupiter claims that bills of lading “for almost all of the ‘ghost trucks’”
were signed by Mr. Sabaitis, who Jupiter alleges to have conspired with the
other defendants “to divert the ‘ghost truck’ shipments and sell the scrap back
to Jupiter or to third parties for their own personal gain.”
Jupiter alleges a second, “scrap removal” scheme to account for the
remaining $5.5 million in missing inventory. This scam was part of a
conspiracy by the defendants to remove unprocessed scrap from Jupiter’s
premises and then to sell that scrap back to Jupiter or to third parties for the
defendants’ own personal gain. Jupiter offers possible scenarios the defendants
could have employed to facilitate the scheme.
Jupiter alleges that Messrs. Sabaitis and Jahn agreed to and knowingly
conducted and participated in those schemes to intentionally defraud Jupiter.
Jupiter claims they used wire services and the United States Postal Service to
execute their fraud against Jupiter, causing Jupiter to pay more than $8
million for scrap metal it never received and scrap metal that was taken from
Jupiter before being processed. Jupiter maintains that Messrs. Sabaitis and
Jahn’s use of wire and mail services to carry out the fraud constituted a
pattern of racketeering activity under 18 U.S.C. § 1961(5).
Jupiter alleges that all six defendants knowingly and intentionally agreed
and conspired to participate in the affairs of Jupiter through a pattern of
racketeering. Jupiter says the defendants knew the acts of wire and mail fraud
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were part of the pattern of racketeering activity, they agreed to the commission
of those acts to further the “ghost truck” and “scrap removal” schemes, and
they knowingly and intentionally acquired or maintained proceeds belonging to
Jupiter through the pattern of racketeering, causing Jupiter to pay more than
$8 million for scrap metal it never received and scrap that was diverted from
Jupiter before the company was able to process it into coils.
Jupiter filed suit, alleging a federal RICO claim against defendants
Messrs. Sabaitis and Jahn, 18 U.S.C. § 1962(c) [Count 1]; a RICO conspiracy
claim against all defendants, 18 U.S.C. § 1962(d) [Count 2]; a RICO claim
under Indiana law, IND. CODE § 35-45-6-2 [Count 3], and a common law fraud
claim [Count 4] against defendants Sabaitis and Jahn; claims for criminal
conversion, Ind. Code § 35-43-4-3(a) [Count 5], deception, Ind. Code § 35-42-53(a)(2) [Count 6], civil conspiracy [Count 7], and unjust enrichment [Count 9]
against all defendants; and a breach of contract claim [Count 8] against
defendants Scrap Metal Services, LLC and GMI Recycling Services, Inc. Each of
the defendants filed a motion to dismiss Jupiter’s claims against them for
failure to state a claim under Fed. R. Civ. P. 12(b)(6).
II.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal of a
complaint that fails to state a claim upon which relief can be granted. To
survive a Rule 12(b)(6) motion, the complaint typically must meet the “notice
pleading” requirement of Federal Rule of Civil Procedure 8(a), that the
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complaint set forth “a short and plain statement of the claim showing that the
pleader is entitled to relief,” so the defendant has “fair notice of what the . . .
claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555 (2007).
A court considering a motion under Rule 12(b)(6) must accept as true the
factual allegations of the complaint and draw all reasonable inferences in favor
of the plaintiff without engaging in fact-finding. Reynolds v. CB Sports Bar,
Inc., 623 F.3d 1143, 1146 (7th Cir. 2010). Detailed factual allegations aren’t
necessary, but merely reciting the elements of a cause of action isn’t sufficient.
The factual allegations must be sufficient to raise the possibility of relief above
the “speculative level.” Bell Atlantic v. Twombly, 550 U.S. at 555. The plaintiff
must allege facts that, when “accepted as true, [ ] ‘state a claim to relief that is
plausible on its face.’ . . . A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009). A plaintiff’s claim need not be probable, only plausible,
but “a plaintiff must do better than putting a few words on paper that, in the
hands of an imaginative reader, might suggest that something has happened to
her that might be redressed by the law.” Swanson v. Citibank, N.A., 614 F.3d
400, 403 (7th Cir. 2010) (emphasis in original).
When claiming fraud, a plaintiff must state the circumstances “with
particularity.” Fed. R. Civ. P. 9(b). Allegations of fraud in a civil RICO complaint
are subject to the heightened pleading standard of Rule 9(b). “The particularity
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requirement ensures that plaintiffs do their homework before filing suit and
protects defendants from baseless suits that tarnish reputations.” Perelli
Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d
436, 439 (7th Cir. 2011); Borsellino v. Goldman Sachs Group, Inc., 477 F.3d
502, 507 (7th Cir. 2007) (“This heightened pleading requirement is a response
to the great harm to the reputation of a business firm or other enterprise a
fraud claim can do.”). “Because fair notice is perhaps the most basic
consideration underlying Rule 9(b), the plaintiff who pleads fraud must
reasonably notify the defendants of their purported role in the scheme.” Vicom,
Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994)
(internal citations and quotations omitted). Thus, Rule 9(b) requires a plaintiff
alleging fraud to plead the “who, what, when, where, and how of the fraud.”
Camasta v. Joseph A. Bank Clothiers, Inc., 761 F.3d 732, 737 (7th Cir. 2014).
The applicability of Rules 8(a) and 9(b) to the claims of Jupiter’s
complaint is at issue in each defendant’s motion to dismiss. The court of
appeals hasn’t decided whether the heightened standard of Rule 9(b) applies to
each element of a fraud-based RICO claim or only to the underlying fraud
allegations. Kostovetsky v. Ambit Energy Holdings, LLC, 15 C 2553, 2016 WL
105980, at *3 (N.D. Ill. Jan. 8, 2016). Jupiter argues that its allegations of mail
and wire fraud are only applicable to the § 1962(c) defendants and that the
heightened pleading standard only applies to the predicate acts themselves, not
the other elements of the § 1962(c) claim. The court will apply the requirement
of Rule 9(b) to Jupiter’s claims of mail and wire fraud and the requirements of
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Rule 8(a) to the remaining claims. The complaint doesn’t survive the motions to
dismiss even under this looser approach, and so it also wouldn’t survive if all
elements required the scrutiny of Rule 9(b).
III.
DISCUSSION
Section 1962(c) makes it “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 debts.” 18 U.S.C. § 1962(c). Jupiter must
allege facts that satisfy four elements: “(1) conduct (2) of an enterprise (3)
through a pattern (4) of racketeering activity” for its § 1962(c) claim against
Messrs. Sabaitis and Jahn to survive. Jennings v. Auto Meter Prods., Inc., 495
F.3d 466, 472 (7th Cir. 2007). Jupiter doesn’t allege facts against Mr. Sabaitis
that plausibly meet the “conduct” element of the claim nor does it allege facts
against Messrs. Sabaitis and Jahn that plausibly support the “racketeering
activity” element and so the § 1962(c) claims are dismissed. Section 1962(d)
makes it “unlawful for any person to conspire to violate any of the provisions of
subsection . . . (c).” 18 U.S.C. § 1962(d). Jupiter also doesn’t allege a plausible
conspiracy under § 1962(d) and so its § 1962(d) claims are dismissed.
A.
“Enterprise”
The first issue is whether Jupiter, simply by alleging that Jupiter is a
privately-held Indiana corporation, has sufficiently alleged an “enterprise” as
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used in § 1962(c) and defined in § 1961(4). Underlying this issue is whether,
under § 1962(c), the “enterprise” can be the victim of a pattern of racketeering
activities or can only be the vehicle through which the pattern is carried out.
The enterprise can be both vehicle and victim, and so Jupiter has sufficiently
pleaded facts to establish an “enterprise.”
An “enterprise” “includes any . . . corporation, association, or other legal
entity, and any union or group of individuals associated in fact although not a
legal entity.” 18 U.S.C. § 1961(4). Jupiter is a “corporation” and so is included
under the plain text of the definition.
The defendants argue that an “enterprise” under subsection (c) can’t be
the victim of a pattern of racketeering but can only be the vehicle through
which that pattern is carried out. The court of appeals has held that an
enterprise may be the victim of a pattern of racketeering. United States v.
Kovic, 684 F.2d 512, 516-517 (7th Cir. 1982) (“The not-very-surprising
corollary to the premise that an enterprise need not be benefitted by a pattern
of racketeering activity to come under RICO is that the enterprise may in fact
be harmed by the illegal activity.”). Later precedent from the Supreme Court
and the Seventh Circuit doesn’t disturb this holding and assumes that an
“enterprise” may be either vehicle or victim. “Enterprise,” as used in § 1962(c)
“connotes generally the vehicle through which the unlawful pattern of
racketeering activity is committed, rather than the victim of that activity.”
National Organization for Women, Inc. v. Scheidler, 510 U.S. 249, 250 (1994).
The court of appeals also describes the typical enterprise as the vehicle for
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corruption. See Jennings v. Emry, 910 F.2d 1434, 1440 (1990) (“[A]lthough a
pattern of racketeering activity may be the means through which the enterprise
interacts with society, it is not itself the enterprise . . . .”). Neither court,
though, held that the enterprise must be the victim, and other § 1962(c) cases
assumes that the enterprise can serve either function. See Cedric Kushner
Promotions, Ltd. v. King, 533 U.S. 158, 164 (2001) (“The Court has held that
RICO both protects a legitimate ‘enterprise’ from those who would use unlawful
acts to victimize it, United States v. Turkette, 452 U.S. 576, 591 . . . (1981), and
also protects the public from those who would unlawfully use an ‘enterprise’
(whether legitimate or illegitimate) as a ‘vehicle’ through which ‘unlawful
activity is committed,’ [NOW, 510 U.S. at 259].”); United States v. Warner, 498
F.3d 666, 696 (7th Cir. 2007) (allowing a state to act as both enterprise and
victim in a RICO prosecution). None of this precedent disturbs the holding of
Kovic that a § 1962(c) enterprise may be the victim of a pattern of racketeering.
See LaSalle Bank Lake View v. Seguban, 937 F. Supp. 1309, 1322-1323 (N.D.
Ill. 1996) (determining that Kovic’s holding remains intact after the NOW
decision). Jupiter, as an Indiana corporation, thus falls within the definition of
an “enterprise” as used under § 1962(c).1
The defendants conflate distinctness between “person” and “enterprise” under § 1962 with
the role that each party plays in the RICO formula (i.e., whether the enterprise is the vehicle for
the pattern of racketeering or the victim of it). Distinctness only requires that the “person” and
the “enterprise” are separate entities. See McCullough v. Suter, 757 F.2d 142, 144 (7th Cir.
1985) (holding that § 1962 requires distinctness because “you cannot associate with yourself”);
GREGORY P. JOSEPH, CIVIL RICO: A DEFINITIVE GUIDE 68 (3rd ed. 2010) (“The ‘person’ who
allegedly violates section 1962(c) must be distinct from the ‘enterprise’ whose affairs that
person is allegedly ‘conduct[ing] or participat[ing]’ in conducting.’”). A legally formal difference
between the entities is all that is needed. Cedric Kushner Promotions, Ltd. v. King, 533 U.S.
1
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B.
“Conduct or participate”
To prevail on the § 1962(c) claims, Jupiter must allege that Messrs.
Sabaitis and Jahn “conduct[ed] or participate[d], directly or indirectly, in the
conduct of” Jupiter’s affairs. 18 U.S.C. § 1962(c). “[I]n order to satisfy the
‘conduct’ element of § 1962(c), a plaintiff must allege that the defendant
participated in the operation or management of the enterprise itself, and that
the defendant played some part in directing the enterprise’s affairs.” Goren v.
New Vision Int’l, Inc., 156 F.3d 721, 727 (7th Cir. 1998) (internal quotations
and citations omitted). The word “conduct” “indicates some degree of direction.”
Reves v. Ernst & Young, 507 U.S. 170, 178 (1993). To participate in the
conduct of Jupiter’s affairs, the defendants “must have some part in directing”
Jupiter’s affairs. Id. at 179. Goren and Reves don’t require that a § 1962(c)
violator be part of the enterprise’s upper management. The rule includes
“lower-rung participants in the enterprise who are under the direction of upper
management or others associated with the enterprise who exert control over it,
as for example, by bribery.” MCM Partners, Inc. v. Andrews-Bartlett & Assocs.,
Inc., 62 F.3d 967, 977 (7th Cir. 1995) (internal quotations omitted).
Jupiter doesn’t allege facts demonstrating that Mr. Sabaitis is upper
management or that he is “under the direction of upper management or others
associated with the enterprise who exert control over it.” Id. Jupiter alleges that
Mr. Sabaitis acted as the Receiving/Inventory Supervisor, and that he had
158, 163 (holding that a sole proprietor was distinct enough from his company that the former
could be the “person” and the latter the “enterprise”). Distinctness is not at issue here.
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“supervisory authority over receiving and documenting incoming shipments.”
These allegations are insufficient to state a plausible claim that Mr. Sabaitis
participated in the operation or management of the enterprise. Nothing in the
pleadings about Mr. Sabaitis’s title or activities at Jupiter indicates that he
directly participated in the operation or management of Jupiter. Jupiter alleges
no facts that create a chain of command such that the alleged racketeering was
done at the direction of someone at the level of Jupiter’s operation or
management. The facts alleged don’t create a plausible inference that the man
who oversees shipments that come in and out participates in the operation or
management of Jupiter as a whole. With only the facts in the complaint, there
is no allegation of conduct, so Mr. Sabaitis’s motion to dismiss must be granted
on Count I.
The same can’t be said for Mr. Jahn. That Mr. Jahn is Jupiter’s chief
financial officer automatically places him in a position of responsibility over the
financial risks of the corporation. This complaint at least raises a plausible
inference that Mr. Jahn is part of the operation or management of Jupiter.
C.
“Pattern”
The “ghost truck” and “scrap removal” schemes, if true, would constitute
a “pattern of racketeering activity.” The statute explains that a “pattern of
racketeering activity” requires at least two acts of racketeering within ten years.
18 U.S.C. § 1961(5). In addition, a plaintiff must allege facts that demonstrate
“continuity plus relationship” between the acts of racketeering. Gagan v. Am.
Cablevision, Inc., 77 F.3d 951, 962 (7th Cir. 1996). Four factors demonstrate a
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pattern of racketeering activity: “(1) the number and variety of the predicate
acts and the length of time over which they were committed; (2) the number of
victims; (3) the presence of separate schemes; and (4) the occurrence of distinct
injuries.” Id. at 962-963.
This isn’t an alleged instance of offenders absconding once with a pile of
scrap after arranging by phone or email to have Jupiter pay for more than it
ultimately receives. If Jupiter’s allegations are true, this is a situation of
offenders coordinating to regularly represent to Jupiter the amount of scrap
that it was buying and receiving over a period of at least ten months. The ten
month period is enough for a closed-ended pattern. Id. at 963 (analyzing Liquid
Air Corp. v. Rogers, 834 F.2d 1297, 1300 (7th Cir. 1987), where a single
scheme which lasted seven months and defrauded one victim established a
pattern of racketeering because “each instance of false billing inflicted an
injury separate and independent of the previous and succeeding instances of
false billing.”). Jupiter alleges numerous instances of intentional false billing
for scrap that was either never delivered or was stolen after delivery over an
extended period. This is enough for a closed-ended pattern.
D.
Whether Messrs. Sabaitis and Jahn acted
“through” a pattern of racketeering activities.
Even if Jupiter effectively pleaded the “conduct” element of the claim
against Mr. Sabaitis, Jupiter doesn’t allege facts that state a plausible claim for
relief against either Mr. Sabaitis or Mr. Jahn. Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Jupiter
is incorrect that the kind of claim and the scale of discovery involved has no
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bearing on whether the claim is plausible. Twombly “teaches that a defendant
should not be forced to undergo costly discovery unless the complaint contains
enough detail, factual or argumentative, to indicate that the plaintiff has a
substantial case.” Limestone Dev. Corp. v. Vill. of Lemont, 520 F.3d 797, 802803 (7th Cir. 2008). “RICO cases, like antitrust cases, are ‘big’ cases and the
defendant should not be put to the expense of big-case discovery on the basis
of a threadbare claim.” Id. at 803. Even when evaluated under the basic notice
pleading standard of Rule 8(a), “the pleading must contain something more . . .
than . . . a statement of facts that merely creates a suspicion that the pleader
might have a legally cognizable right of action.” 5 CHARLES ALAN WRIGHT, ARTHUR
R. MILLER, MARY KAY KANE, RICHARD L. MARCUS, A. BENJAMIN SPENCER & ADAM N.
STEINMAN, FEDERAL PRACTICE AND PROCEDURE § 1216 (3d ed. 2016).
Rule 9(b) further requires that because Jupiter alleges wire and mail
fraud, 18 U.S.C. §§ 1341, 1343, Jupiter plead the “who, what, when, where,
and how of the fraud.” Camasta v. Joseph A. Bank Clothiers, Inc., 761 F.3d
732, 737 (7th Cir. 2014). “[T]he plaintiff must, within reason, describe the time,
place, and content of the mail and wire communications, and it must identify
the parties to these communications.” Jepson, Inc. v. Makita Corp., 34 F.3d
1321, 1328 (7th Cir. 1994).
Despite Jepson’s statement of what is needed in mail/wire fraud
pleadings, such particularity in the contents of the emails is not needed for
Jupiter’s claim to survive here. Jupiter appropriately alleged the contents to
contain information about the price and quantity of the scrap being purchased.
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Ultimately this case is about what happened to $8 million in scrap metal, with
Jupiter alleging that Messrs. Jahn and Sabaitis engaged in acts of wire and
mail fraud to hide the fact that they arranged for this scrap to be redirected
from Jupiter or taken from Jupiter after delivery. Even if Jupiter alleged the
precise contents of the emails associated with “ghost truck” and “scrap
removal” purchases, this would tell the court nothing about the fraud. It wasn’t
the emails that were doctored to misrepresent what was purchased, it was the
product itself that was allegedly diverted beneath those emails.
Still, the complaint doesn’t allege enough facts to make the fraudulent
scheme plausible or to plausibly connect Messrs. Sabaitis and Jahn to it. A
plausible claim for relief ought to allege facts that indicate why the particular
defendants in the case used fraudulent means of communication to bill Jupiter
for that scrap. Certain alleged facts still leave open the glaring possibility that
others were responsible for the alleged theft or that much (if not all) of it can be
attributed to recordkeeping problems. Few facts tie any of the defendants to the
loss.
The primary example of the paucity of alleged facts is the spreadsheet
that Jupiter uses to support its “ghost truck” scheme. The spreadsheet lists
twenty different vendors linked to alleged ghost trucks. For either Mr. Sabaitis
or Mr. Jahn to be responsible for the ghost trucks, one or both of them would
have had to convince each of the twenty vendors to accept payment for goods
that weren’t going to be delivered. Yet the complaint contains no indication of
any such communications with any of them, not even the named defendants
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GMI and SMS. For the scheme to work, all twenty vendors would have had to
be involved or, if the vendor doesn’t provide the trucking services, the trucking
company would need to be involved.
Jupiter doesn’t discuss any of the vendors on the spreadsheet except for
defendants GMI and SMS. Yet the vendor with the largest amount of “ghost
truck” scrap is Metal Exchange Corp. Was this company in on the racket too? If
not, then how does Jupiter explain this vendor’s roughly $700,000 in ghost
truck scrap? No facts are alleged to suggest that Messrs. Sabaitis or Jahn
coordinated with the company associated with the largest amount of “ghost
truck” losses. The value of scrap lost through GMI’s ghost trucks was a mere
$55,148 out of the $2.48 million allegedly lost through ghost trucks overall.
Ten of the twenty ghost truck vendors had ghost truck scrap more valuable
than GMI’s. Where was the coordination with them? How could someone
relying only the complaint know the “ghost trucks” aren’t just a matter of poor
reporting on the part of the gate attendants?
Lack of contradiction between allegations places the claim into the realm
of possibility, but it doesn’t make the claim plausible: “a plaintiff must do
better than putting a few words on paper that, in the hands of an imaginative
reader, might suggest that something has happened to her that might be
redressed by the law.” Swanson v. Citibank, N.A., 614 F.3d 400, 403 (7th Cir.
2010). Jupiter alleges facts that are consistent with a wide-scale coordination
by Messrs. Sabaitis and Jahn with all of the ghost truck vendors, but leaves
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out glaring details that would elevate these allegations beyond hunch or
suspicion.
Even more tenuous is the “scrap removal” scheme, which supposedly
accounts for the vast majority of the lost money. There is no explanation for
how we know the value of scrap lost through this possible scheme, though,
except that Jupiter subtracted out the amount it attributed to ghost trucks
from the overall amount missing and simply assumed the rest was stolen.
There is no indication from the facts that Mr. Sabaitis implemented one of the
possible strategies described to unload trailers-full of scrap. There are other
good explanations for why Mr. Sabaitis would allow SMS to leave their trailers
at the facility, such as that it was more convenient for SMS, a large scrap
vendor for Jupiter. A nefarious relationship between Mr. Sabaitis and SMS
wouldn’t explain all of the parties who would have had to be involved in order
for this scam to work. The complaint alleges no facts with respect to Mr. Jahn’s
coordination in this operation besides signing the checks.
Jupiter alleges some suspicious behavior: SMS drivers sometimes would
turn around before entering the facility when Mr. Sabaitis wasn’t present when
the truck arrived; Mr. Sabaitis sometimes would leave out the weight and
descriptions of scrap on bills of lading for SMS’ shipments; Mr. Sabatis
sometimes wouldn’t submit receiving tickets describing how much scrap, if
any, was delivered. There is a plausible claim that something odd was going on
with Mr. Sabaitis, and even a plausible claim that something odd was going on
with SMS. It doesn’t follow from oddity that trucks from twenty different
18
companies were delivering scrap on paper but not doing so in reality. Oddity
alone won’t support a RICO claim.2
To proceed on this ‘big’ litigation, Limestone Dev. Corp. v. Vill. of Lemont,
520 F.3d 797, 803 (7th Cir. 2008), Jupiter must provide dots that outline the
shape of what occurred before asking the court to connect them.
E.
The conspiracy claims.
Under 18 U.S.C. § 1962(d), “[i]t shall be unlawful for any person to
conspire to violate any of the provisions of subsection (a), (b), or (c) of this
section.” To allege a RICO conspiracy claim, Jupiter must (1) identify a proper
enterprise; (2) identify the defendant’s association with that enterprise; and (3)
allege that the defendant knowingly joined a conspiracy, the objective of which
was to operate that enterprise through a pattern of racketeering activity. United
States v. Tello, 687 F.3d 785, 794 (7th Cir. 2012). “A conspiracy to violate RICO
may be shown by proof that the defendant, by his words or actions, objectively
manifested an agreement to participate, directly or indirectly, in the affairs of
an enterprise, through the commission of two or more predicate crimes.”
DeGuelle v. Camilli, 664 F.3d 192, 204 (7th Cir. 2011). A defendant need not
personally commit a predicate act, but the plaintiff must allege that the
defendant agreed that someone would commit two or more predicate acts. Id.
The “touchstone of liability” “is an agreement to participate in an endeavor
which, if completed, would constitute a violation of the substantive statute.” Id.
Jupiter also alleges some completely innocuous behavior. For example, that GMI only began
selling scrap to Jupiter in FY 2011 and that, by FY 2014, it was Jupiter’s second-largest scrap
vendor by volume, hints at no wrongdoing of any kind.
2
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The complaint contains insufficient facts from which an inference could
be drawn that GMI or Gary Longoria entered into an agreement to defraud
Jupiter. The allegations relating to GMI and Mr. Longoria are that (i) Jupiter
believes Mr. Longoria was a childhood friend of Mr. Sabaitis; (ii) “on
information and belief,” GMI isn’t in the business of purchasing or selling scrap
metal, but from 2011–2014, GMI sold scrap to Jupiter and by 2014 was
Jupiter’s second largest scrap vendor by volume; (iii) in October 2014, GMI
“abruptly” stopped delivering scrap to Jupiter at about the same time that
Jupiter questioned Mr. Sabaitis about Jupiter’s inventory shortfall; (iv) Jupiter
has an open purchase order for scrap that GMI never completed, and Gary
Longoria “falsely claimed” that GMI sold that scrap metal to another company;
(v) GMI provided Jupiter with information about the carriers and drivers of its
shipments, but GMI “was paid for two ‘ghost shipments’ . . . that do not appear
on SDG’s guard gate logs”; and (vi)“on information and belief,” GMI and Mr.
Longoria conspired with the other defendants to effectuate the “ghost truck”
scam and the “scrap removal” scam for their own personal gain. None of those
allegations supports an inference that GMI or Mr. Longoria agreed to enter into
a conspiracy with the other defendants or agreed to the commission of
predicate acts by Messrs. Sabaitis and Jahn in furtherance of that conspiracy.
Jupiter alleges that SMS, too, conspired in support of the pattern of
racketeering activity. Jupiter alleges that, (i) instead of delivering scrap, SMS
drivers would sometimes “turn around before entering Jupiter’s facility” if they
did not see Mr. Sabaitis there”; (ii) Mr. Sabaitis filled out bills of lading for SMS
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shipments that often lacked the weight and a description of the scrap delivered;
(iii) “SMS was paid for the weights indicated on Jupiter’s receiving ticket, which
is peculiar because a vendor typically would not choose to rely solely on the
buyer’s weight records without having its own record on its bill of lading”; (iv)
some of SMS’ shipments “did not have corresponding receiving tickets at all,”
and Mr. Sabaitis just submitted internal paperwork based on the purchase
order and the bill of lading, resulting in SMS being paid based on how much
scrap was ordered without record of how much was delivered; (v) Mr. Sabaitis
allowed SMS to drop off trailers at Jupiter’s premises for later unweighing and
unloading, creating an opportunity to use those trailers to steal scrap from
Jupiter; and (vi) during investigation of the missing scrap, SMS refused to
make its drivers available for questioning or to allow Jupiter to copy certain
records.
There is no plausible inference here that SMS joined a conspiracy to
pilfer scrap belonging to Jupiter. “The Rules of Civil Procedure set up a system
of notice pleading. Each defendant is entitled to know what he or she did that
is asserted to be wrongful. . . . Although every conspirator is responsible for
others’ acts within the scope of the agreement, it remains essential to show
that a particular defendant joined the conspiracy and knew of its scope.” Bank
of America, N.A. v. Knight, 725 F.3d 815, 818 (7th Cir. 2013). Some of the
behavior alleged might be odd or even suspicious, but more is needed than
allegations showing opportunity and curious behavior to create a plausible
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inference that SMS coordinated with Messrs. Sabaitis and Jahn, not to
mention its competitor GMI, to conduct the alleged schemes.
The conspiracy claims against Messrs. Longorias and Thompson are
premised on the plausibility of the conspiracies of GMI and SMS respectively,
and so these too are insufficiently pleaded.
CONCLUSION
Based on the foregoing, the court:
(1) GRANTS the motion to dismiss of Gary Longoria and GMI
Services, LLC [Doc. No. 46];
(2) GRANTS the motion to dismiss of Scrap Metal Services, LLC
[Doc. No. 32];
(3) GRANTS the motion to dismiss of Michael Thompson [Doc. No.
20];
(4) GRANTS the motion to dismiss of Philip Sabaitis [Doc. No. 48];
and
(5) GRANTS the motion to dismiss of Loren Jahn [Doc. No. 44].
The court has dismissed all claims over which it has original jurisdiction, and
so it declines to exercise supplemental jurisdiction over the state law claims, 28
U.S.C. § 1367(c)(3), and so the case is DISMISSED.
A dismissal under Rule 12(b)(6) ordinarily is with prejudice. The court
affords Jupiter 21 days from the date of this order in which to file an amended
complaint. If Jupiter doesn’t do so, judgment of dismissal with prejudice will be
entered.
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SO ORDERED.
ENTERED: September 13, 2016
/s/ Robert L. Miller, Jr.
Judge
United States District Court
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