Miller et al v. First Federal Savings Bank of Elizabethtown, Inc. et al

Filing 56

MEMORANDUM OPINION AND ORDER denying 20 Motion to Strike Plaintiffs' Amended Complaint ; granting 21 Motion to Dismiss for Failure to State a Claim; granting 22 Motion to Dismiss for Failure to State a Claim; denying 28 Motion to Str ike Amended Complaint; granting 31 Motion for Judgment on the Pleadings; granting 52 Motion to Supplement Memorandum of Law in support of Renewed Motion to Dismiss; granting 16 Motion to Dismiss. Signed by Chief Judge Joseph H. McKinley, Jr on 11/19/13. cc:counsel (DJT)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:13CV-206-JHM
WILLIAM P. MILLER, et al.

PLAINTIFFS

VS.
FIRST FEDERAL SAVINGS BANK OF
ELIZABETHTOWN, INC., et al.

DEFENDANTS

MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendant Steven R. Bergs’s Motion to Dismiss [DN
16], Motion to Strike Plaintiffs’ Amended Complaint [DN 20], Renewed Motion to Dismiss [DN
21] and Motion to Supplement Renewed Motion to Dismiss [DN 52]. Also, the Court will
review Defendant Lawrence A. Shapin’s Motion to Dismiss [DN 22], Motion to Strike [DN 28],
and Defendant First Federal Savings Bank of Elizabethtown, Inc.’s Motion for Judgment on the
Pleadings [DN 31]. Fully briefed, these matters are ripe for decision.
I. BACKGROUND
This case arises out of the purchase of commercial property in Addison, Illinois
(“Addison Property”) by Addent, LLC and Forwin, LLC. The individual plaintiffs in this case,
including William Miller, Marilyn Kleier, Edin Sehic, Aida Sehic, Shane Shaps, Charles
O’Koon, and Mushtaque Juneja (“Individual Plaintiffs”), allege that they bought membership
interests in the LLCs after being misled about the value of Addison Property. Addent, LLC and
Forwin, LLC were added as plaintiffs in the Amended Complaint and allege identical claims.1

1

 Following an Order by the Court (Order, DN 53), the Plaintiffs provided corporate documentation demonstrating 
that Addent, LLC and Forwin, LLC had agreed to join the suit against Defendants. (Amended Reply, DN 55).    

According to the Individual Plaintiffs, Defendant Shapin learned of Addison Property, a
multi-office dental building owned by Dr. Husam Aldairi, in early 2007. Dr. Aldairi listed the
property for sale in a sale-leaseback deal for $3.9 million. In April of 2007, Defendant Shapin
started approaching potential investors and allegedly stated that investors could get a 16.1%
return on their investment in Addison Property.2 Additionally, Shapin told Individual Plaintiffs
that “the guarantor, Aldairi, was creditworthy and had a net worth of $17 to $21 million.”
(Compl., DN 1, at 5). Shapin along with Defendant Berg allegedly “promised due diligence to
be conducted on behalf of the investors.” Id. at 6.
Based on the alleged representations made by Defendants Berg and Shapin concerning
Addison Property, Individual Plaintiffs decided to purchase membership interests in the LLCs.
Plaintiffs Edin Sehic, Aida Sehic, William Miller, Marilyn Kleier, Shane Shaps, and Charles
O’Koon along with Defendant Shapin purchased membership interests in Addent, LLC, which
was formed just prior to the purchase of Addison Property. Plaintiff Mushtaque Juneja and
Shapin already owned membership interests in the decade-old Forwin, LLC. On September 27,
2007, the parties closed on the sale of Addison Property.
Prior to closing on Addison Property, Shapin acquired financing in the form of
$3,315,000 loan from Defendant First Federal Savings Bank of Elizabethtown (“First Federal”).
First Federal secured the loan with a mortgage on Addison Property, and also the bank required
each member of the two LLCs to personally guarantee the loan. In addition, First Federal
obtained an appraisal for Addison Property and determined the value of the property to be at
$3.95 million. However, Plaintiffs describe this appraisal as fraudulent because the 2006 tax
assessment of Addison Property valued it at less than $1 million.

2

 At a later point, Defendant Shapin allegedly represented that the return could get as high as 17.7%. 

2 

For the first two years of the lease, Dr. Aldairi made timely rental payments. However,
problems with the investment arose in September of 2009 when Dr. Aldairi fell behind on his
lease payments for the first time. According to the Plaintiffs, Dr. Aldairi completely stopped
making payments on the lease in January of 2011. On June 28, 2011, Dr. Aldairi filed for
protection from his creditors under Chapter 7 of the Bankruptcy Code. The LLCs repossessed the
property in August and attempted to resell Addison Property, but the best offer they received on
the property was only for $1.2 million.
II. STANDARD OF REVIEW
Upon a motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6), a
court “must construe the complaint in the light most favorable to plaintiffs,” League of United
Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007) (citation omitted), accepting
all of the plaintiffs' allegations as true. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Under this
standard, the plaintiffs must provide the grounds for their entitlement to relief, which “requires
more than labels and conclusions, and a formulaic recitation of the elements of a cause of
action.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

Additionally, “[t]he

standard of review for a Rule 12(c) motion is the same as for a motion under Rule 12(b)(6) for
failure to state a claim upon which relief can be granted.” Fritz v. Charter Tp. of Comstock, 592
F.3d 718, 722 (6th Cir. 2010) (citing Ziegler v. IBP Hog Mkt., Inc., 249 F.3d 509, 511–12 (6th
Cir. 2001)).
The plaintiffs satisfy this standard only when they “plead[ ] factual content that allows
the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Iqbal, 556 U.S. at 678. A complaint falls short if it pleads facts that are merely
“consistent with a defendant's liability” or if the facts do not “permit the court to infer more than

3 

the mere possibility of misconduct.” Id. at 678–79. Instead, the allegations must “‘show[ ] that
the pleader is entitled to relief.’” Id. at 679 (quoting Fed.R.Civ.P. 8(a)(2)).
III. DISCUSSION
Plaintiffs, both the individuals and the LLCs, assert multiple claims against Defendants
based on representations made by Defendants Berg and Shapin prior to the investment in the
LLCs and subsequent dealings with Defendant First Federal in obtaining financing. The central
issue to Defendants’ motions to dismiss is Plaintiffs’ claims under the Racketeer Influenced and
Corrupt Organizations Act (RICO), 18 U.S.C. § 1964, because it provides the jurisdictional basis
in this action pursuant to 28 U.S.C. § 1331. As a result, the Court will examine Defendants’
arguments concerning the dismissal of Individual Plaintiffs’ and the LLCs’ claims under RICO
before deciding whether to permit supplemental jurisdiction over Plaintiffs’ state-law claims.
A. Individual Plaintiffs
Although Defendants each filed a separate motion to dismiss (with Defendant First
Federal filing a motion on the pleadings), Defendants all argue that Individuals Plaintiffs should
be dismissed because they lack a right to sue as individuals under RICO. As to this argument,
“[Individual] Plaintiffs do not dispute the general proposition that shareholders may not recover
where the only damage alleged is diminution in the value of stock or where damages are based
solely on damage to the corporate entity.” (Resp. of Pls. to Mot. to Dismiss Filed by Def., Berg,
DN 34, at 2). However, Individual Plaintiffs claim that they suffered a separate injury from that
of the LLCs based on representations about the investment made by Defendant Shapin and the
individual guarantees made to Defendant First Federal.
As to Individual Plaintiffs’ claim against Defendant Shapin, Plaintiffs contend that they
suffered a separate harm because “Defendant Shapin approached the individual Plaintiffs as
potential investors. He did not pitch his proposal to Addent or Forwin.” (Resp. of Pls. to Mot. to
4 

Dismiss Filed by Def., Berg, DN 34, at 2). In contrast, Defendants describe Individual Plaintiffs’
loss being simply the diminution in the value of their membership interests. To support their
argument, Defendants rely on Warren v. Mfrs. Nat’l. Bank of Detroit, 759 F.2d 542, 544 (6th
Cir. 1985), which adopted the rule as to individual shareholder suits in antitrust cases and applied
it to civil suits under RICO. The rule is as follows:
An action to redress injuries to a corporation cannot be maintained by a
shareholder in his own name but must be brought in the name of the corporation.
The shareholder's rights are merely derivative and can be asserted only through
the corporation. Although this rule does not apply in a case where the shareholder
shows a violation of duty owed directly to him, diminution in value of the
corporate assets is insufficient direct harm to give the shareholder standing to sue
in his own right.
Id. (citations omitted).
Based on Warren, Individual Plaintiffs lack the right to individually recover from
Defendants Berg and First Federal. The Sixth Circuit reaffirmed its position in Warren two years
after deciding the case. Gaff v. Federal Deposit Ins. Corp., 814 F.2d 311, 315 (6th Cir. 1987) on
reh'g in part, 828 F.2d 1145 (6th Cir. 1987) (“We find that in Warren this Circuit conclusively
adopted the general rule that a shareholder does not have standing to bring a direct cause of
action under federal law when the only damage alleged is the diminution in the value of
corporate shares.”).

A recovery by Individual Plaintiffs in this case would simply be the

recovery of the value of their membership interests. By preventing Individual Plaintiffs to sue
Defendants under RICO, the Court avoids the possibility of double recovery for an injury to the
LLCs.3 This is especially true in this action where Addent, LLC and Forwin, LLC have agreed
to join the action. The Individual Plaintiffs seek to overcome the general rule by pointing to the

3

 “The reasoning behind this rule is that a diminution in the value of corporate stock resulting from some depletion 
of or injury to corporate assets is a direct injury only to the corporation; it is merely an indirect or incidental injury 
to an individual shareholder.” Gaff, 814 F.2d at 315. 

5 

fact that Defendant Berg made fraudulent representations prior to the purchase of membership
interests in Addent, LLC. However, this argument still misses the mark because it fails to
address the issue of a distinct injury from that of the LLCs.
The Individual Plaintiffs also assert a theory of specific injury resulting from their
signing of personal guarantees with First Federal. They allege both Defendants Shapin and First
Federal induced them into signing such agreements. Defendants respond by explaining that
Individual Plaintiffs, as guarantors of the loans, simply become creditors of the LLCs, and as
such, they have no right to sue for alleged injuries inflicted on the LLCs. Defendants maintain
this position based on Mid-State Fertilizer Co. v. Exchange Nat’l Bank of Chicago, 877 F.2d
1333, 1336 (7th Cir. 1989), which determined that the injury inflicted on a guarantor to be even
more remote than one suffered by a shareholder. The Seventh Circuit explained the logic as
follows:
The participants most directly affected by injury inflicted on the firm are the
stockholders-for their investment is first to be wiped out. Creditors come next.
Guarantors are contingent creditors. If the firm stiffs a creditor, that creditor can
collect from the guarantor; the guarantor succeeds to the original creditor's claim
against the firm. We know that creditors cannot recover directly for injury
inflicted on a firm, so guarantors as potential creditors likewise cannot recover.
Id. Moreover, the fact that Individual Plaintiffs signed personal guarantee with Defendant First
Federal does not create a unique injury because “direct dealing is not the same as direct injury.”
Id. The alleged injuries by Defendant First Federal arise out of misrepresentations made to the
LLCs, not Individual Plaintiffs. This is the only logical result because Individual Plaintiffs
signed these personal guarantees to secure the loans made to Addent, LLC and Forwin, LLC.
The Individual Plaintiffs contend that Defendants fail to address the conclusions of
Swerdorff v. Miami Nat’l Bank, 584 F.2d 54 (5th Cir. 1978). However, Swerdorff deals only
with addressing the definition of “customer” under the Bank Holding Company Act. Id. at 58.
6 

The court clearly explained the holding to be that the stockholders of the “corporation who have
been required individually to guarantee the corporation's loan must be considered just as much
‘customers’ of the bank as the corporation through which they do business for the purposes of
these provisions of the Bank Holding Company Act.” Id. at 59. Moreover, there is no reason to
believe that the court in Swerdorff attempted to expand remedies to plaintiffs that only have a
derivative type of action based on an injury to the LLCs.5
Finally, Individual Plaintiffs also attempt to paraphrase K-B Trucking Co. v. Riss Int’l
Corp., 763 F.2d 1148 (10th Cir. 1985) to suggest that they may maintain a separate injury for
misrepresentations made prior to the formation of the LLC. This case deals with fraudulent
misrepresentation under Kansas law, not RICO. As such, it has no real application in this case.
The Individual Plaintiffs have failed to establish an injury unique from that of the LLCs.
In other words, their injury simply derives from that of the diminution in the value of their
membership interests.

Therefore, Defendants’ motions to dismiss are GRANTED as to

Individual Plaintiffs’ RICO claims.
B. RICO Claims by Addent, LLC and Forwin, LLC
Addent, LLC, and Forwin, LLC assert RICO claims against all the Defendants in the
case. Defendants do not contest that the LLCs are the proper parties to bring a cause of action
under RICO, but they argue that the LLCs have failed to alleged sufficient facts in the Complaint
to meet the necessary pleading standards.
Section 1962(c) of the Racketeer Influenced and Corrupt Organizations Act makes it
“unlawful for any person employed by or associated with any enterprise engaged in” activities

5

 The Seventh Circuit in Mid‐State declined to extend the holding in Swerdorff and explained, “Guarantors must be 
treated  as  creditors.  When  they  suffer  direct  injury‐injury  independent  of  the  firm's  fate‐they  may  pursue  their 
own remedies. Those whose injury is derivative must take their place in line as creditors in the bankruptcy action 
(or outside of it), dependent now as before on the success of the firm in which they invested.” Mid‐State, 877 F.2d 
at 1336‐37. 

7 

affecting “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 . . . .” 18 U.S.C.
§ 1962(c). In order to prove a violation of this section of the RICO Act, a plaintiff must plead
“(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima,
S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S. Ct. 3275, 3285, 87 L. Ed. 2d 346 (1985)
(footnote omitted); see also Moon v. Harrison Piping Supply, 465 F.3d 719, 723 (6th Cir. 2006).
“To plead a pattern of racketeering activity, the plaintiff must allege at least two predicate acts,
although that may not be sufficient.” Estate of Wyatt v. WAMU/JP Morgan Chase Bank, 2012
WL 933289 (E.D. Mich. March 20, 2012) (citing Brown v. Cassens Transp. Co., 546 F.3d 347,
354 (6th Cir. 2008)). “Only those acts itemized in 18 U.S.C. § 1961(1) can constitute predicate
offenses for RICO violations.” Frank v. D'Ambrosi, 4 F.3d 1378, 1385 (6th Cir. 1993).
Defendants contend that Plaintiff LLCs have failed to even allege the facts necessary to
describe one predicate act necessary to plead a pattern of racketeering. Plaintiffs’ Complaint
states that “[t]he pattern of racketeering engaged in by Defendants involved fraudulent acts in
support of the above scheme constituting mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. §
1343), and financial institution fraud (18 U.S.C. § 1346) . . . .” (Compl., DN 1, at 10). Even after
having an opportunity to file an amended complaint, Plaintiffs have declined to describe with
more particularity the predicate acts necessary for a RICO claim.6 Additionally, at least one
alleged predicate act, financial institution fraud, is impossible because it only occurs “when
someone defrauds the bank, not vice versa.” St. Clair v. Citizens Financial Group, 340

6

  The  Court  notes  that  Plaintiffs  attached  an  affidavit  by  William  Miller  and  a  document  listing  closing  dates  on 
properties  by  other  LLCs  to  their  response  to  Defendant  Berg’s  motion  to  dismiss.    The  affidavit  described 
instances  in  which  Defendants  Shapin  and  Berg  contacted  Miller  about  investment  opportunities,  including  the 
investment in Addent, LLC.  Plaintiffs stated in their response that they intended to incorporate those facts into 
their Amended Complaint.  The Plaintiffs failed to do so. Considering that the Plaintiffs were given the opportunity 
to  plead  these  facts  and  chose  not  to  do  so,  the  Court  will  not  consider  any  of  those  facts  in  examining  the 
pleadings on a motion to dismiss.    

8 

Fed.Appx. 62, 66 (3d Cir. 2009) (citing United States v. Khorozian, 333 F.3d 498, 503 (3d Cir.
2003)). Regardless of this fact, as stated previously, a plaintiff must provide the ground for his
entitlement to relief, which “requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007).
In addition to RICO claims, Plaintiff LLCs state that “Defendants and other unnamed coconspirators knowingly and willfully conspired to violated [sic] 18 U.S.C. §§ 1962(a), (b), and
(c) . . . .” (Compl. DN 1, at 10). This statement as to a RICO conspiracy claim not only fails to
meet the Iqbal pleading standards but also “omit[s] essential allegations detailing an agreement
to jointly undertake specific actions illegalized by RICO.” Pik-Coal Co. v. Big Rivers Elec.
Corp., 200 F.3d 884, 890 n. 10 (6th Cir. 2000) (citing Craighead v. E.F. Hutton & Co., Inc., 899
F.2d 485, 495 (6th Cir. 1990)). As such, Plaintiffs’ RICO conspiracy claims fail as a matter of
law.
Therefore, the Court finds that, as a matter of law, Defendants’ motions to dismiss as to
Addent, LLC and Forwin, LLC’s RICO claims and RICO conspiracy claims are GRANTED.
C. State Law Claims
In addition to Individual Plaintiffs’ and Plaintiff LLCs’ RICO claims, they allege that
Defendants violated KRS § 292.320, were negligent, were negligent per se, committed civil
conspiracy, breached a fiduciary duty, sold unregistered securities in violation of KRS 292.327,
and concealed key material facts. The Plaintiffs’ Amended Complaint also asks the Court to
rescind or void the First Federal business loan agreements. Because Plaintiffs’ federal claims are
subject to dismissal, the Court declines to exercise supplemental jurisdiction over the state-law
claims. See 18 U.S.C. § 1367(c)(3) (providing that a district court may decline to exercise

9 

supplemental jurisdiction when it has dismissed all claims over which it has original
jurisdiction); see also United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966). Therefore,
Plaintiffs’ state law claims are DISMISSED WITHOUT PREJUDICE. 28 U.S.C. §
1367(c)(3).
IV. CONCLUSION
Defendant Berg’s Motion to Strike Plaintiffs’ Amended Complaint [DN 20] and
Defendant Shapin’s Motion to Strike [DN 28] are DENIED for the reasons set forth in the
Court’s Order [DN 53]. Defendant Steven R. Bergs’s Motion to Supplement Renewed Motion to
Dismiss [DN 52] is GRANTED. Also, Defendant Steven R. Bergs’s Motion to Dismiss [DN 16]
and Renewed Motion to Dismiss [DN 21], Defendant Lawrence A. Shapin’s Motion to Dismiss
[DN 22], and Defendant First Federal Savings Bank of Elizabethtown, Inc.’s Motion for
Judgment on the Pleadings [DN 31] are GRANTED.

cc: counsel of record

November 19, 2013

10