Swarey et al v. Desert Capital REIT, Inc. et al
Filing
64
MEMORANDUM OPINION. Signed by Chief Judge Deborah K. Chasanow on 9/20/12. (sat, Chambers)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
:
ISRAEL SWAREY, et al.
:
v.
:
Civil Action No. DKC 11-3615
:
DESERT CAPITAL REIT, INC.,
et al.
:
MEMORANDUM OPINION
Numerous motions are pending and ready for review in this
civil RICO case, including:
Stephenson’s
Swarey
and
Plaintiffs’
affirmative
Linda
Swarey
complaint
a motion to strike Defendant Kerry
defenses
(ECF
filed
by
filed
No.
by
35);
Defendants
Plaintiffs
motions
Todd
to
Israel
dismiss
Parriott
and
Phillip Parriott (ECF Nos. 38, 40); a motion to set aside the
clerk’s entries of default filed by Defendants Nick Andrews and
N. Andrews, LLC (ECF No. 43); and motions to withdraw as counsel
filed by the attorney for Defendants Todd and Phillip Parriott
(ECF Nos. 52, 53).
The issues have been fully briefed, and the
court now rules, no hearing being deemed necessary.
105.6.
Local Rule
For the reasons that follow, the motion to set aside the
defaults entered against Defendants Nick Andrews and N. Andrews,
LLC,
will
be
granted;
the
motion
to
strike
Defendant
Stephenson’s affirmative defenses will be denied as moot; the
motions for leave to withdraw as counsel will be granted; the
motions to dismiss will be granted in part and denied in part;
and the case will be remanded to state court.
I.
Background
A.
Factual Background
Plaintiffs purport to be the victims of several real estate
investment scams designed and executed by Defendants.
Viewing
the allegations in the complaint (ECF No. 2) in the light most
favorable to Plaintiffs, the schemes occurred as follows.
While attending a financial planning seminar on “how to
invest in real estate tax sales to support a fixed income” (id.
¶ 124), Mr. Swarey was solicited by a company called Strategic
Wealth Management to participate in certain investment projects.1
Strategic
Wealth
Management
and
its
affiliates
ultimately
introduced Mr. Swarey to two subsets of Defendants who together
conspired to defraud the Swareys of their life savings.
subset
of
Parriott,
Defendants
Kerry
consists
Stephenson,
and
of
Todd
Desert
Parriott,
Capital
One
Phillip
REIT,
Inc.
(collectively, “the Desert Capital Defendants”), who induced the
Swareys to invest substantial sums of money in sham investment
vehicles.
The
other
subset
of
Defendants
consists
of
individuals and entities associated with First Universal Lending
LLC:
Sean Zausner, David Zausner, David Feingold, Nick Andrews
1
Strategic Wealth Management is not a party to this action.
2
and N. Andrews, LLC (collectively, “the FUL Defendants”).2
The
FUL Defendants allegedly induced the Swareys’ procurement of a
$2 million loan that funded the Plaintiffs’ participation in the
investment
opportunities
presented
by
the
Desert
Defendants
Capital
executed
three
distinct
Defendants.
The
Desert
Capital
fraudulent schemes through which they received money from the
Swareys via undercapitalized shell companies.
In March 2008,
the Desert Capital Defendants collectively induced Mr. Swarey to
enter
into
(“Pebble
an
agreement
Creek”),
a
that
sham
created
entity
that
capitalized and had only one member:
company
owned
and
managed
by
Pebble
was
Creek
never
JV,
LLC
adequately
R&D Properties, LLC, a
Defendant
Stephenson.
The
operating agreement for Pebble Creek stated that the purpose of
the
venture
property
was
located
Project”).
to
develop,
in
Nevada
construct,
for
and
profit
sell
(“the
47
lots
Pebble
of
Creek
Defendant Stephenson requested that Mr. Swarey wire
$440,000 to fund his participation in the Pebble Creek Project.
Stephenson
represented
that
these
funds
would
be
used
to
purchase property in which Mr. Swarey would acquire an ownership
interest.
represented
2
The
to
Mr.
Desert
Swarey
Capital
that
homes
Defendants
would
be
collectively
built
on
the
First Universal Lending, Inc. is not a party to this
action.
3
purchased
lots
within
six
months
and
that
he
would
receive
payments as the homes were sold, amounting to a 20% rate of
return
on
his
original
investment.
On
March
31,
2008,
Mr.
Swarey wired the funds from his Bank of America checking account
in
Maryland
to
Pebble
Creek.
At
some
point
thereafter,
Stephenson and Todd Parriott represented to Mr. Swarey that the
47
lots
in
Las
Vegas
had
been
acquired
with
his
$440,000
investment and also arranged for Mr. Swarey to speak with a
builder about the “fake project.”
(Id. ¶ 83).
Todd Parriott
also personally assured Mr. Swarey that he had never lost any
money
for
his
investors
in
the
past.
Despite
these
representations, no lots were ever purchased with Mr. Swarey’s
investment of $440,000; no homes were built; Mr. Swarey never
received any interest payments from the Pebble Creek Project;
and Mr. Swarey did not recover his initial investment.
In the second alleged scheme, the Desert Capital Defendants
convinced Mr. Swarey to enter into another venture, Ann Road
Industrial 007, LLC.
agreement,
the
Per the terms of the entity’s operating
purpose
of
the
venture
was
to
(1) acquire
a
specific plot of land located on Ann Road and (2) enter into a
joint
venture
with
a
shell
company
of
the
Desert
Capital
Defendants to develop and sell the property for a profit (“the
Ann Road Project”).
The Desert Capital Defendants collectively
informed Mr. Swarey that he would receive a full return of his
4
investment within six months, as well as a 20% rate of return on
the principal amount.
On June 5 and June 12, 2008, Mr. Swarey
wired a combined sum of $1,150,000 from his Bank of America
account in Maryland to Ann Road Industrial 007, LLC.
As with
the Pebble Creek Project, no property was acquired with Mr.
Swarey’s
investment.
Instead,
from
2008
through
2009,
the
Desert Capital Defendants, and Todd Parriott in particular, gave
conflicting information in response to Mr. Swarey’s inquiries
about the status of the Ann Road Project and the use of his
funds.
In
the
third
alleged
scheme,
Mr.
Swarey
invested
approximately $2 million in “the Mid-Bar Property Project” in
June
of
(“Desert
2008.
Todd
Parriott
Capital”),
and
represented
Desert
to
Capital
REIT,
Inc.
Swarey
that
his
Mr.
investment would be used to purchase certain land that would be
developed into a high-rise condominium building.
and
Desert
Capital
also
promised
Mr.
Swarey
Todd Parriott
that
he
would
receive a return of no less than 20% on top of his principal
investment and a first deed of trust in the land as security for
his investment if the project failed.
Mr.
Swarey
project.”
was
“nowhere
(Id. ¶ 57).
close
to
Despite these assurances,
a
senior
creditor
to
the
Rather, the Mid-Bar Property “carried a
$31,500,000.00
first
mortgage
Defendants.”
(Id.
¶
arranged
58).
by
the
Specifically,
5
Desert
Capital
Desert
Capital
concealed its role as a lender for the project by listing one of
the
Desert
Capital
instrument.
Defendants’
alter
egos
on
the
security
By deliberately arranging for the Mid-Bar Property
Project to remain under-funded, the Desert Capital Defendants
ultimately were able to foreclose on the property, “acquiring
the land at a vastly discounted value and laundering away any
lost equity.”
(Id. ¶¶ 58-60).
The Desert Capital Defendants
then transferred ownership of the Mid-Bar Property to MidBlue,
LLC,
an
entity
that
had
a
single
officer:
Consolidated
Mortgage, LLC, which is the purported alter ego of Todd and
Phillip
Parriott.
information
Property
about
Project
Although
how
were
the
Mr.
funds
used
Swarey
he
repeatedly
invested
throughout
2008
in
the
and
sought
Mid-Bar
2009,
all
communications from Todd Parriott ended in the fall of 2009.
Mr. Swarey obtained some of the funds for his participation
in the three alleged schemes by procuring a $2 million loan on
May
22,
2008.
Defendant
Andrews,
on
behalf
of
the
FUL
Defendants, contacted Mr. Swarey, “[s]eemingly out of the blue,”
and offered to “undertake” the loan for the funds Plaintiffs
needed
to
investment
participate
projects.
in
the
Desert
(Id.
¶¶
128-29).
Capital
When
Defendants’
Mr.
Swarey
expressed reluctance about pursuing the loan, the FUL Defendants
began threatening and harassing Plaintiffs.
The FUL Defendants
ultimately effected the loan by sending a notary to Plaintiffs’
6
hotel room the night before Mrs. Swarey was scheduled to undergo
surgery
at
a
Baltimore
hospital.
The
notary
procured
Mrs.
Swarey’s signature on a power of attorney form in favor of Mr.
Swarey,
even
carcinoma]
competent
¶ 142).
though,
and
to
her
“[d]ue
to
treatments,
execute
any
her
condition
Mrs.
legally
Swarey
binding
[renal
was
not
cell
legally
documents.”
(Id.
The notary then arranged for Mr. Swarey to sign the
closing documents.
Upon receiving copies of the loan documents in September
2008, Plaintiffs learned that the loan application was “vastly
different” from that which had been discussed over the telephone
with
Mr.
Andrews
Plaintiffs’
income
represented
to
conventional,
financial
and
and
Mr.
.
net
rate
.
.
incorrect
worth.
Swarey
fixed
data
included
that
loan
[but]
statements
(Id.
he
based
¶ 148).
was
“Andrews
applying
on
the
and
Andrews
regarding
the
for
Swareys’
FUL
a
true
Defendants
applied the Swareys for a subprime loan with an adjustable-rate
that the Swareys had no hope of repaying based on their fixed
income.”
B.
(Id. ¶ 155).
Procedural Background
On May 18, 2011, Plaintiffs filed a 21-count complaint in
the Circuit Court for St. Mary’s County, Maryland.
the
FUL
Defendants,
(1) mortgage
fraud;
Plaintiffs
(2)
assert
intentional
7
causes
of
infliction
As against
action
of
for:
emotional
distress; (3) violations of Md. Code Ann., Comm. Law § 12-127,
and (4) elder abuse.
Capital
Defendants,
(Id. ¶¶ 145-88).
Plaintiffs
As against the Desert
assert
causes
of
action
for:
(1) unjust enrichment, or, alternatively, breach of contract,
for
the
Pebble
enrichment
for
Creek
the
and
Ann
Projects;
(2)
unjust
Property
Mid-Bar
Road
Project;
(3)
fraud;
(4) conversion; (5) embezzlement; (6) violations of the Maryland
Consumer Protection Act; and (7) violations of the Racketeer
Influenced and Corrupt Organizations Act (“RICO”).
325).
(Id. ¶¶ 145-
As against all defendants, Plaintiffs allege counts for
conspiracy to commit fraud and common law indemnity.
Plaintiffs
seek actual and statutory damages in an amount not less than
$3.79 million; treble damages under RICO in an amount not less
than
$11.37
million;
indemnification
for
claims
against
the
Swareys seeking repayment of the allegedly fraudulent mortgage
loan;
punitive
damages;
damages
attorneys’ fees and court costs.
for
pain
and
suffering;
and
(Id. at 50-51).
On December 15, 2011, Defendants Todd and Phillip Parriott
removed
the
jurisdiction
case
based
to
on
this
the
court,
RICO
citing
federal
count
and
jurisdiction over the state law claims.
question
supplemental
(ECF No. 1 ¶¶ 13-16).
An automatic stay was entered as to Desert Capital because of
its pending bankruptcy case.
(ECF No. 4).
On January 18, 2012,
the clerk entered defaults against Defendants Nick Andrews and
8
N. Andrews, LLC (together, “the Andrews Defendants”) (ECF No.
30).
On February 9, 2012, the clerk entered default against
Defendant Sean Zausner (ECF No. 37).
The Andrews Defendants
filed a motion to vacate the defaults on February 22, 2012.
(ECF No. 43).
Andrews
Plaintiffs filed a response (ECF No. 49), and the
Defendants
replied
(ECF
No.
54).
Defendant
Kerry
Stephenson answered the complaint on February 1, 2012 (ECF No.
34),
and
Plaintiffs
moved
to
strike
Stephenson’s
defenses the very next day (ECF No. 35).
Defendant Stephenson
then filed an amended answer on February 23, 2012.
44).
Defendants
Parriott
Todd
Defendants”)
and
filed
Phillip
Parriott
separate
affirmative
motions
(ECF No.
(together,
to
dismiss
“the
on
February 16, 2012 (ECF Nos. 38, 40), and those motions were
fully briefed (ECF Nos. 48, 51, 56, 57).3
II.
The Andrews Defendants’ Rule 55(c) Motion
A.
Standard of Review
Pursuant to Fed.R.Civ.P. 55(c), a court may “set aside an
entry of default for good cause.”
3
Because the Fourth Circuit
John Carpenter, Esq., also filed motions seeking leave to
withdraw his appearance on behalf of Phillip Parriott and Todd
Parriott.
(ECF Nos. 52, 53).
Pursuant to Local Rule 101.2.a,
an attorney representing an individual may withdraw his
appearance with leave of the court if “appearance of other
counsel has been entered.” Here, Paul J. Doughtery, III, Esq.,
and Andrew M. Lagomarisino, Esq., have entered appearances on
behalf of both Phillip Parriott and Todd Parriott.
(ECF Nos.
58, 62). Because both of the Parriott Defendants have retained
new counsel, leave will be granted to Mr. Carpenter to withdraw
his appearance on behalf of Todd and Phillip Parriott.
9
has a “strong policy that cases be decided on their merits,”
United States v. Shaffer Equip. Co., 11 F.3d 450, 453 (4th Cir.
1993),
a
construed
motion
in
consequences
to
order
of
set
to
defaults
aside
a
provide
and
default
relief
default
must
from
be
“‘liberally
the
judgments,’”
onerous
Colleton
Preparatory Acad., Inc. v. Hoover Universal, Inc., 616 F.3d 413,
421 (4th Cir. 2010) (quoting Tolson v. Hodge, 411 F.2d 123, 130
(4th
Cir. 1969)).
As a result, “[a]ny doubts about whether
relief should be granted should be resolved in favor of setting
aside the default so that the case may be heard on the merits.”
Tolson, 411 F.2d at 130.
“Generally a default should be set aside where the moving
party acts with reasonable promptness and alleges a meritorious
defense.”
Consolidated Masonry & Fireproofing, Inc. v. Wagman
Constr. Corp., 383 F.2d 249, 251 (4th Cir. 1967).
To establish a
meritorious defense, the moving party should proffer evidence
that would permit a finding for the defaulting party.
Augusta
Fiberglass Coatings, Inc. v. Fodor Contracting Corp., 843 F.2d
808, 812 (4th Cir. 1988).
The following factors should also be
considered in considering a Rule 55(c) motion:
“the personal
responsibility of the defaulting party, the prejudice to the
party, whether there is a history of dilatory action, and the
availability of sanctions less drastic.”
Payne ex rel. Estate
of Calzada v. Brake, 439 F.3d 198, 204–05 (4th Cir. 2006).
10
B.
Analysis
The Andrews Defendants correctly contend that, pursuant to
the Payne factors, good cause exists to set aside the clerk’s
entries of default.4
First, the Andrews Defendants acted with
reasonable promptness in seeking to set aside the defaults.
defaults were entered on January 18, 2012.
The
(ECF No. 30).
On
February 22, 2012 – just over one month later – the Andrews
Defendants moved to vacate the defaults (ECF No. 43), a period
of
time
that
is
well
reasonable diligence.
Pan
Am.
(finding
Airways
that,
within
the
bounds
of
what
constitutes
See, e.g., Wainwright’s Vacations, LLC v.
Corp.,
based
130
on
F.Supp.2d
the
712,
718
circumstances
(D.Md.
of
the
2001)
case,
defendants “acted reasonably promptly” in moving to set aside
the default approximately one month after it was entered).
What
is more, the Andrews Defendants apparently contacted counsel for
Plaintiffs on or about February 7, 2012, to seek their consent
for filing a motion to set aside the defaults, and Plaintiffs
responded
a
week
later
on
February
consent to the proposed motion.
4
14,
2012
by
refusing
(ECF No. 43, at 2).
to
Based on
Because the Andrews Defendants demonstrate good cause for
setting aside the defaults and indicate their willingness to
“defend Plaintiffs’ claims on the merits” (ECF No. 54, at 2),
their arguments regarding improper service need not be reached.
See, e.g., Chaffin v. NiSource, Inc., No. 3:08-0870, 2008 WL
4811028, at *3 (S.D.W.Va. Nov. 3, 2008) (declining to reach a
defendant’s arguments regarding improper service because, even
if service were proper, good cause existed to lift the default).
11
these
circumstances,
the
Andrews
Defendants
acted
with
reasonable promptness by filing their motion on February 22,
2012.
Second, the Andrews Defendants present meritorious defenses
to Plaintiffs’ claims.
Initially, the Andrews Defendants note
that the mortgage transaction forming the basis for Plaintiffs’
claims occurred “more than three years ago” (ECF No. 43-1, at
1),
suggesting
barred
by
that
the
or
three-year
actions in Maryland.
101.
some
all
of
statute
the
of
Swareys’
claims
limitations
for
are
civil
See Md. Code Ann., Cts. & Jud. Proc. § 5-
The Andrews Defendants also observe that the “bizarre
patchwork
of
allegations”
asserted
by
Plaintiffs
complaint “will likely fail the Twombly/Iqbal tests.”
54, at 3 n. 1).
Defendants,
this
in
the
(ECF No.
Resolving all doubts in favor of the Andrews
statement
presents
a
meritorious
defense
because, if believed, it would entitle the Andrews Defendants to
an
order
dismissing
Plaintiffs’
complaint
pursuant
to
Fed.R.Civ.P. 12(b)(6).
In addition, other than vague references to the Andrews
Defendants’ “excessive and unjustified delay” (ECF No. 49, at
3), Plaintiffs fail to show with specificity how they would
suffer
prejudice
if
the
defaults
were
set
aside.
See
Wainwright’s Vacations, 130 F.Supp.2d at 720 (explaining that a
plaintiff must offer specific ways in which it would be harmed
12
by re-opening a case rather than generic arguments regarding
delay); Colleton Preparatory, 616 F.3d at 418 (“[D]elay in and
of
itself
does
party.”).
not
constitute
prejudice
to
the
opposing
As the Andrews Defendants point out, this action is
still in its nascent stages.
(ECF No. 43-1, at 12).
Indeed,
only one of the nine defendants has answered, no scheduling
order has been issued, and no discovery has been taken.
this
posture,
“suffered
by
Plaintiffs
any
party
would
which
defaults were set aside.
endure
loses
a
only
the
quick
Given
inconvenience
victory”
if
the
Augusta Fiberglass, 843 F.2d at 812.
The remaining Payne factors also weigh in favor of setting
aside the defaults.
Plaintiffs do not offer any evidence of
dilatory action by the Andrews Defendants, or that the Andrews
Defendants
culpable
(as
for
opposed
the
to
delayed
their
attorneys)
response.
See
are
personally
Lolatchy
v.
Arthur
Murray, Inc., 816 F.2d 951, 954 (4th Cir. 1987) (explaining that
this factor focuses on the personal responsibility of the party
rather than the responsibility of the party’s counsel).
respect
order
to
alternative
setting
aside
Defendants
to
post
sanctions,
the
a
defaults
Plaintiffs
should
“reasonable”
bond
argue
require
in
the
that
the
With
any
Andrews
amount
of
$2,205,247.20, representing the amount of their indemnity claim.
(ECF No. 49 at 2-3).
Plaintiffs contend that a bond in this
amount is necessary because the Andrews Defendants’ delay has
13
prevented Plaintiffs from resolving their dispute with U.S. Bank
– the owner of the Swareys’ $2 million mortgage — in the case
captioned Swarey et al. v. Bayview Loan Servicing, et al., No.
10-cv-03552-PJM (D.Md.).
That case, however, has since been
dismissed pursuant to a settlement agreement.
In light of the
“broad discretion” afforded by Rule 55(c) to condition vacatur
of a default on appropriate terms and conditions, O.T. Africa
Line v. Top Exp., Inc., No. 96-2533, 1997 WL 592856, at *1 (4th
Cir. 1997), Plaintiffs’ request will be denied.
In sum, good cause exists under Rule 55(c) to set aside the
defaults.
Given this circuit’s well-established preference for
deciding cases on the merits, the Andrews Defendants’ motion
will be granted.
III. Plaintiffs’ Motion to Strike Stephenson’s Affirmative
Defenses
Plaintiffs’
Rule
12(f)
motion
to
strike
the
affirmative
defenses asserted by Defendant Stephenson has been rendered moot
by Stephenson’s filing of an amended answer.
In
his
original
answer
filed
on
February
1,
2012,
Stephenson asserted seven affirmative defenses in a conclusory
manner without providing any factual support.
32).
(ECF No. 34, at
Plaintiffs filed a motion to strike under Rule 12(f),
contending that Rule 8 – as interpreted by the United States
Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544
14
(2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009) – required
Stephenson to go beyond mere labels and conclusions in pleading
his affirmative defenses.
opposing
Plaintiffs’
(ECF No. 36, at 1-2).
motion
to
strike,
Instead of
Stephenson
filed
an
amended answer on February 23, 2012, pursuant to Rule 15(a).
(ECF
No.
44).5
In
the
amended
answer,
Stephenson
provides
factual allegations to support six of the defenses previously
asserted.
(Id. at 32-34).6
Because Plaintiffs’ motion to
strike is premised on the argument that Stephenson’s affirmative
defenses are “wholly devoid of any factual content” (ECF 36, at
5), the amended answer renders Plaintiffs’ Rule 12(f) motion
moot, and it will be denied.
IV.
The Parriott Defendants’ Motions to Dismiss
Defendants
Todd
and
Phillip
Parriott
Plaintiffs’ complaint on three grounds:
seek
dismissal
of
(1) lack of personal
jurisdiction; (2) improper venue; and (3) failure to state a
claim upon which relief can be granted.
Each of these arguments
will be addressed, in turn.
5
Plaintiffs do not question the timing of Stephenson’s
filing of the amended answer, nor do they otherwise object to
its substance.
6
In his original answer, Stephenson asserted statute of
frauds as an affirmative defense, but he does not raise it in
his amended answer.
15
A.
Personal Jurisdiction
The first issue that must be decided is whether personal
jurisdiction
can
be
exercised
over
the
Parriott
Defendants
“because the dismissal of a case on an issue relating to the
dispute, such as a failure to state a claim, is improper without
resolving threshold issues of jurisdiction, including personal
jurisdiction.”
Sucampo Pharms., Inc. v. Astellas Pharma, Inc.,
471 F.3d 544, 548 (4th Cir. 2006) (citing Ruhrgas AG v. Marathon
Oil, 526 U.S. 574, 584 (1999) (“Personal jurisdiction . . . is
an essential element of the jurisdiction of a district . . .
court, without which the court is powerless to proceed to an
adjudication.”
(internal
quotation
marks
omitted));
see
also
Constantine v. Rectors & Visitors of George Mason Univ., 411
F.3d 474, 480 (4th Cir. 2005) (“The validity of an order of a
federal court depends upon that court’s having jurisdiction over
both the subject matter and the parties.”) (internal quotation
marks omitted).
When personal jurisdiction over a nonresident defendant is
challenged
by
a
Rule
12(b)(2)
motion,
“the
jurisdictional
question is to be resolved by the judge, with the burden on the
plaintiff
ultimately
preponderance
of
the
to
prove
grounds
evidence.”
for
Carefirst
jurisdiction
of
Md.,
by
Inc.
a
v.
Carefirst Pregnancy Ctrs., Inc., 334 F.3d 390, 396 (4th Cir.
2003) (citation omitted).
If jurisdiction turns on disputed
16
facts,
the
challenge
may
be
resolved
after
a
separate
evidentiary hearing, or the ruling may be deferred pending the
introduction of evidence at trial relevant to the jurisdictional
question.
Combs v. Bakker, 886 F.2d 673, 676 (4th Cir. 1989).
Where,
here,
as
evidentiary
a
hearing
ruling
is
and
issued
based
without
solely
on
conducting
the
an
complaint,
affidavits, and discovery materials, “the plaintiff need only
make
a
prima
facie
showing
Carefirst, 334 F.3d at 396.
of
personal
jurisdiction.”
In deciding whether the plaintiff
has proved a prima facie case, all reasonable inferences arising
from the proof must be drawn in favor of the plaintiff, and all
factual disputes must be resolved in his or her favor.
Mylan
Labs., Inc. v. Akzo, N.V., 2 F.3d 56, 60 (4th Cir. 1993).
Under Rules 4(k)(1)(A) and (C) of the Federal Rules of
Civil Procedure, a federal court may exercise jurisdiction over
a defendant’s person in the manner provided by state law or when
otherwise
authorized
by
federal
statute.
In
this
case,
Plaintiffs assert that personal jurisdiction is proper based on
both the federal RICO statute and the Maryland long-arm statute.
(See ECF No. 48, at 1-8; ECF No. 51, at 1-19).
The Parriott
Defendants, in turn, contend that the Maryland long-arm statute
does not authorize the exercise of personal jurisdiction over
them and that Plaintiffs have not asserted a “colorable” RICO
claim, precluding reliance on that statute’s nationwide service
17
of
process
(ECF
No.
provision
39,
at
to
5-15;
establish
ECF
No.
in
41,
personam
at
jurisdiction.
5-13).
As
will
be
discussed, because RICO provides a basis for exercising personal
jurisdiction over the Parriott Defendants as to that count of
the complaint, making it permissible to assert pendent personal
jurisdiction as to Plaintiffs’ state law claims at the threshold
of this litigation, the parties’ arguments with respect to the
Maryland long-arm statute need not be reached at this time.
See, e.g., Sadighi v. Daghighfekr, 36 F.Supp.2d 267, 271 (D.S.C.
1999) (declining to reach the “traditional personal jurisdiction
analysis” where jurisdiction was proper under RICO).
As explained by the Fourth Circuit in ESAB Group, Inc. v.
Centricut, Inc., 126 F.3d 617, 626 (4th Cir. 1997), Congress
enacted RICO as Title IX of the Organized Crime Control Act of
1970, Pub. L. No. 91-452, 84 Stat. 922 (1970).
RICO prohibits
various activities generally associated with organized crime.
See 18 U.S.C. §§ 1963, 1964. In addition to criminal penalties,
Congress also “granted a private civil right of action to ‘[a]ny
person
injured
in
his
business
or
violation of’ the RICO provisions.”
property
by
reason
of
a
ESAB Grp., 126 F.3d at 626
(citing 18 U.S.C. § 1964(c)).
Section 1965(d) of RICO provides that “[a]ll other process
in any action or proceeding under this chapter may be served on
any
person
in
any
judicial
district
18
in
which
such
person
resides, is found, has an agent, or transacts his affairs.”
The
Fourth Circuit has construed section 1965(d) as “authoriz[ing]
nationwide
personal
service
of
jurisdiction
process
in
any
and,
thus,
district
the
court.”
exercise
of
D’Addario
v.
Geller, 264 F.Supp.2d 367, 386 (E.D.Va. 2003) (citing ESAB Grp.,
126
F.3d
at
626).7
Therefore,
in
this
circuit,
service
of
7
Although the federal courts of appeals agree that RICO
provides for nationwide service of process, they are divided as
to which subsection of the statute provides for such service.
See Noble Sec., Inc. v. MIZ Eng’g, Ltd., 611 F.Supp.2d 513, 548
(E.D.Va. 2009) (summarizing the circuit split).
For example,
the Second Circuit has relied on section 1965(b) as authorizing
nationwide service of process. PT United Can Co. Ltd. v. Crown
Cork & Seal Co., Inc., 138 F.3d 65, 71-72 (2d Cir. 1998). That
section provides:
In any action under section 1964 of this
chapter in any district court of the United
States in which it is shown that the ends of
justice require that other parties residing
in any other district be brought before the
court, the court may cause such parties to
be summoned, and process for that purpose
may be served in any judicial district of
the United States by the marshal thereof.
18 U.S.C. § 1965(b). Thus, according to the Second Circuit, “a
civil RICO action can only be brought in a district court where
personal jurisdiction based on minimum contacts is established
as to at least one defendant,” and then personal jurisdiction
may be exercised over additional nonresident defendants if the
“ends of justice so require.” PT United, 138 F.3d at 71-72. By
contrast, in relying on section 1965(d) rather than section
1965(b) as the basis for nationwide service of process, the
Fourth Circuit “has permitted RICO plaintiffs to sue all
Defendants in one forum without any need for a showing that the
‘ends of justice’ required such an assertion of personal
jurisdiction
over
nonresident
defendants.”
Sadighi,
36
F.Supp.2d at 274; see also D’Addario, 264 F.Supp.2d at 387 n. 22
(“[T]he Fourth Circuit seems to have eradicated the ‘ends of
19
process on a RICO defendant in a judicial district where that
defendant
resides
establishes
personal
jurisdiction,
provided
that the assertion of jurisdiction comports with due process.
ESAB Grp., 126 F.3d at 626 (“[W]here, as here, Congress has
authorized nationwide service of process . . . so long as the
assertion of jurisdiction over the defendant is compatible with
due process, the service of process is sufficient to establish
the jurisdiction of the federal court over the person of the
defendant.”)
process
(internal
permits
the
quotation
exercise
marks
of
omitted).
personal
Where
due
jurisdiction,
a
defendant can preclude a plaintiff’s reliance on the nationwide
service of process provision only by showing that the RICO claim
is “‘wholly immaterial or insubstantial.’”
Noble Sec., Inc. v.
MIZ Eng’g, Ltd., 611 F.Supp.2d 513, 549 (E.D.Va. 2009) (quoting
ESAB Grp., 126 F.3d at 629).
Here,
Parriott
it
were
is
undisputed
personally
that
served
Todd
with
Parriott
process
in
and
Philip
Nevada,
a
“judicial district [where they] reside” as per section 1965(d).
(See ECF Nos. 29-56, 29-57).
Hence, the Parriott Defendants can
defeat personal jurisdiction only by showing that due process
would
be
violated
or
that
Plaintiffs’
RICO
claim
is
not
justice’ inquiry by using section 1964(d) to acquire personal
jurisdiction.”). Hence, there is no need to perform an “ends of
justice” inquiry here.
20
colorable.
See D’Addario, 264 F.Supp.2d at 387; Myers v. Lee,
No. 10-cv-131, 2010 WL 2757115, at *8 (E.D.Va. July 12, 2010).
Because a federal statute confers personal jurisdiction in
this
case,
rather
the
than
protect
Due
that
“the
Process
of
liberty
the
Clause
of
Fourteenth
interests
of
the
Amendment
[the
Amendment
–
applies
–
Parriott
against unfair burden and inconvenience.”
at 626.
Fifth
to
Defendants]
ESAB Grp., 126 F.3d
Where a defendant is located within the United States,
“‘it is only in highly unusual cases that inconvenience will
rise
to
a
level
of
constitutional
concern.’”
Id.
at
627
(quoting Republic of Panama v. BCCI Holdings (Luxembourg), S.A.,
119 F.3d 935, 947 (11th Cir. 1997)); see also D’Addario, 264
F.Supp.2d at 387 (“The burden is on the defendant to demonstrate
that
the
assertion
litigation
unfairly
so
is
of
gravely
at
a
jurisdiction
difficult
severe
in
and
disadvantage
the
forum
will
inconvenient
in
comparison
make
that
he
to
his
over
the
opponent.”) (internal quotation marks omitted).
In
this
case,
exercising
personal
jurisdiction
Parriott Defendants pursuant to section 1965(d) comports with
due process.
Although the Parriott Defendants, in arguing for a
transfer of the case, contend that they will experience some
inconvenience by litigating in Maryland rather than Nevada (ECF
No. 39, at 19-22; ECF No. 41, at 17-21), they do not show that a
Maryland forum “would be so extremely inconvenient or so unfair
21
as
to
outweigh
the
Congressional
policy
of
permitting
the
exercise of personal jurisdiction pursuant to RICO’s nationwide
service of process provisions.”
Sadighi, 36 F.Supp.2d at 274
(citing ESAB Grp., 126 F.3d at 626).
Thus, asserting personal
jurisdiction over the Parriott Defendants as to Plaintiffs’ RICO
claim will not violate the Fifth Amendment.
The
Parriott
Defendants
also
fail
to
demonstrate
Plaintiffs’ RICO claim is wholly without color.
that
A RICO claim is
without color where it is “insubstantial, implausible, . . . or
otherwise
devoid
of
merit.”
Sadighi,
36
F.Supp.2d
(internal quotation marks and citations omitted).
at
271
By contrast,
a RICO claim is colorable “if it is arguable and nonfrivolous,
whether or not it would succeed on the merits.”
Id. (internal
quotation marks and citations omitted).
The Parriott Defendants argue that Plaintiffs’ RICO count
is “entirely without color” because it fails to state a claim
under Rule 12(b)(6).
(ECF No. 39, at 14-15; ECF No. 41, at 13).
This contention ignores that a claim can be colorable while
still
failing
to
satisfy
the
Federal Rules of Civil Procedure.
pleading
requirements
of
the
See D’Addario, 264 F.Supp.2d
at 389 n. 26 (E.D.Va. 2003) (explaining that although a RICO
claim
was
colorable
for
purposes
of
section
1965(a),
the
operative pleading likely required amendment to include “greater
specificity” in order to survive a dispositive motion);
22
cf.
Noble Sec., 611 F.Supp.2d at 550 n. 22 (distinguishing between
the
“colorable
personal
federal
jurisdiction
claim”
standard
analysis
under
that
Rule
applies
the
and
12(b)(2)
to
the
“federal claim upon which relief can be granted” standard that
applies to a Rule 12(b)(6) motion to dismiss).8
In assessing whether a claim is “colorable,” courts look to
whether
a
plaintiff
pleads
a
RICO
violation
by
alleging
“(1) conduct (2) of an enterprise (3) through a pattern (4) of
racketeering activity,” as well as (5) injury in the plaintiff’s
business
or
D’Addario,
property
265
(6)
by
reason
F.Supp.2d
at
288
of
the
(internal
RICO
violation.
quotation
marks
omitted); see also Noble Sec., 611 F.Supp.2d at 550 (analyzing
whether the plaintiff had pled the elements of a RICO violation
to determine whether its claim was “colorable”).
of
the
complaint,
Plaintiffs
allege
that
the
In Count XIX
Desert
Capital
Defendants participated in an enterprise consisting of a “web of
shell companies” that collectively engaged in a “lengthy pattern
of racketeering activity” to “carry out a criminal Ponzi scheme”
through multiple instances of wire, mail, and bank fraud.
8
(ECF
But see Dtex, LLC v. BBVA Bancomer, S.A., 405 F.Supp.2d
639, 652 (D.S.C. 2005) (concluding that RICO’s nationwide
service of process provision did not provide a basis for
personal jurisdiction where the RICO claim “must be dismissed
under Rule 12(b)(6)”).
The Dtex court did not address the
distinction between the standard for assessing whether a claim
is without color and the standard for a Rule 12(b)(6) motion.
23
No. 2 ¶¶ 287-303).
Plaintiffs further allege this pattern of
conduct has lasted “several years” and has affected “hundreds of
other investors.”
(Id. ¶ 293).
Finally, Plaintiffs also aver
that this “pattern of fraudulent and criminal misconduct has
divested the Swareys of millions of dollars.”
(Id.
¶ 306).
With respect to the threshold showing required to use RICO’s
nationwide service of process provision (i.e., that the claim is
colorable), Plaintiffs’ RICO count is “close enough to what is
required that it cannot be said to be wholly insubstantial and
immaterial.”
D’Addario,
quotation marks omitted).9
265
F.Supp.2d
at
288
(internal
Thus, personal jurisdiction properly
can be asserted over the Parriott Defendants as to Plaintiffs’
RICO count.
At
this
stage,
it
is
also
proper
to
exercise
pendent
personal jurisdiction in connection with Plaintiffs’ state law
claims.
When a federal statute authorizes nationwide service of
process and the remaining state law claims arise from the same
nucleus of operative facts, pendent personal jurisdiction may be
exercised to adjudicate state claims that are properly within
the court’s subject matter jurisdiction.
ESAB Grp., 126 F.3d at
627–28.
asserted
Here,
the
state
law
9
claims
against
the
As set forth below, however, Plaintiffs do not allege
sufficient facts to support a key element of their RICO count,
which will be dismissed for failure to state a claim pursuant to
Rule 12(b)(6).
24
Parriott Defendants arise out of a common nucleus of operative
facts – namely, the three alleged real estate schemes involving
the Pebble Creek Project, the Ann Road Project, and the Mid-Bar
Property Project.
Thus, pendent personal jurisdiction is proper
as to Plaintiffs’ state law claims, and a separate personal
jurisdiction analysis as to those claims need not be conducted.
See
Sadighi,
F.Supp.2d
federal
at
36
F.Supp.2d
387-88
claim(s)
at
(E.D.Va.
providing
274-75;
2003)
the
cf.
D’Addario,
(explaining
basis
for
that
pendent
if
264
the
personal
jurisdiction “should be dismissed” at a later time, “the state
claims against that defendant would also have to be dismissed,
unless
another
exists”).
basis
for
asserting
personal
jurisdiction
The Parriott Defendants’ motions to dismiss will be
denied to the extent they seek dismissal under Rule 12(b)(2).
B.
Venue
The
Parriott
Defendants
also
seek
dismissal
under
Rule
12(b)(3) for improper venue and argue in the alternative than a
transfer to the District of Nevada is warranted.
In this circuit, when venue is challenged by a motion to
dismiss,
the
plaintiff
must
establish
that
venue
is
proper.
Gov’t of Egypt Procurement Office v. M/V ROBERT E. LEE, 216
F.Supp.2d 468, 471 (D.Md. 2002).
“[I]n deciding a motion to
dismiss [for improper venue], all inferences must be drawn in
favor of the plaintiff, and ‘the facts must be viewed as the
25
plaintiff most strongly can plead them.’”
Three M Enters., Inc.
v. Tex. D.A.R. Enters., Inc., 368 F.Supp.2d 450, 454 (D.Md.
2005) (quoting Sun Dun, Inc. of Wash. v. Coca-Cola Co., 740
F.Supp. 381, 385 (D.Md. 1990)).
Because subject matter jurisdiction in this case is not
founded “solely on diversity of citizenship,” venue is governed
by 28 U.S.C. § 1391(b):
A civil action . . . may, except as
otherwise provided by law, be brought only
in:
(1) a
judicial
district
in
which
any
defendant resides, if all defendants are
residents of the State in which the
district is located;
(2) a
judicial
district
in
which
a
substantial
part
of
the
events
or
omissions giving rise to the claim
occurred, or a substantial part of
property that is the subject of the
action is situated; or
(3) if there is no district in which an
action may otherwise be brought as
provided in this section, any judicial
district in which any defendant is
subject
to
the
court’s
personal
jurisdiction with respect to such action.
This
alleges
case
that
satisfies
many
of
the
section
events
1391(b)(2).
giving
rise
The
to
complaint
Plaintiffs’
claims occurred in Maryland, including:
(1) the Desert Capital
Defendants’
“fraudulent
advertisement
of
their
financial
products” (ECF No. 2 ¶ 25); (2) the negotiation of the terms of
26
the
investment
agreements
between
Mr.
Swarey
and
the
Desert
Capital Defendants’ alter egos (id. ¶¶ 25, 50); (3) the phone
calls
made
by
Todd
Parriott
and
the
other
Desert
Capital
Defendants to Mr. Swarey while he was located in Maryland, in
which they misrepresented the “true nature” of the transaction
involving the Mid-Bar Property (id. ¶¶ 221, 224); (4) the FUL
Defendants’ solicitation of the Swareys through numerous phone
calls
to
Maryland
allegedly
(id.
fraudulent
¶ 127);
loan
and
(5)
application
the
by
signing
Mr.
of
Swarey
the
in
a
Baltimore hotel room (id. ¶ 127).
Moreover, it would be inappropriate to transfer this case
to the District of Nevada.
The relevant statute provides that
“[f]or the convenience of parties and witnesses, in the interest
of justice, a district court may transfer any civil action to
any
other
brought.”
district
or
division
28 U.S.C. § 1404(a).
where
it
might
have
been
In order “[t]o prevail on a
motion to change venue pursuant to § 1404, the defendant must
show
by
a
preponderance
of
the
evidence
that
the
proposed
transfer will better and more conveniently serve the interests
of the parties and witnesses and better promote the interests of
justice.”
Helsel v. Tishman Realty & Constr. Co., Inc., 198
F.Supp.2d 710, 711 (D.Md. 2002) (internal quotation marks and
citation omitted); see also Lynch v. Vanderhoef Builders, 237
F.Supp.2d
615,
617
(D.Md.
2002).
27
Mere
assertions
of
inconvenience
sustain
a
or
hardship,
motion
under
without
section
more,
1404(a).
are
insufficient
Dow
v.
Jones,
to
232
F.Supp.2d 491, 499 (D.Md. 2002); Helsel, 198 F.Supp.2d at 712.
Instead,
a
defendant
should
submit,
for
example,
“affidavits
from witnesses and parties explaining the hardships they would
suffer if the case were heard in the plaintiff’s chosen forum.”
Dow, 232 F.Supp.2d at 499 (citing Helsel, 198 F.Supp.2d at 712).
The Parriott Defendants argue that transfer is warranted
because, among other things:
(1) a substantial part of the
events giving rise to Plaintiffs’ claims took place in Nevada;
(2) the real estate projects in question are located in Nevada;
and (3) the convenience of the parties and the witnesses weigh
in favor of litigating in Nevada.
41
¶¶ 31-41).
“[l]itigating
this
Todd
Parriott
dispute
in
(ECF No. 39 ¶¶ 36-43; ECF No.
specifically
Maryland,
which
avers
is
that
over
2,000
miles from Nevada, would place a significant financial burden on
me because I live in Nevada” and that “[t]raveling across the
country to Maryland will significantly disrupt my work duties in
Nevada.”
The
(ECF No. 39-1, T. Parriott Aff. ¶ 84).
Parriotts
also
acknowledge,
however,
that
“a
plaintiff’s choice of forum is ordinarily accorded considerable
weight.”
Vanderhoef Builders, 237 F.Supp.2d at 617.
It is true
that this “weight is lessened . . . when either (1) the chosen
forum is not the plaintiff’s home, or (2) the chosen forum has
28
little
or
no
litigation.”
connection
to
the
events
giving
rise
to
the
Tse v. Apple Computer, Civ. No. 05-2149, 2006 WL
2583608, at *2 (D.Md. Aug. 31, 2006).
Here, however, the chosen
forum is Plaintiffs’ home, and Maryland does have a connection
to
the
events
allegations
set
giving
forth
rise
in
to
the
the
litigation
complaint.
based
Thus,
on
transfer
the
to
Nevada would be inappropriate in this case, and the Parriott
Defendants’ motion in this regard will be denied.
C.
Failure to State a Claim
The
Parriott
Defendants
also
move
for
dismissal
of
Plaintiffs’ complaint for failure to state a claim under Rule
12(b)(6).
1.
(ECF No. 39, at 23-48; ECF No. 41, at 22-46).
Standard of Review
A motion to dismiss pursuant to Rule 12(b)(6) tests the
sufficiency
of
Charlottesville,
the
464
complaint.
F.3d
480,
Presley
483
(4th
v.
Cir.
City
2006).
of
A
plaintiff’s complaint need only satisfy the standard of Rule
8(a), which requires a “short and plain statement of the claim
showing that the pleader is entitled to relief.”
8(a)(2).
“Rule 8(a)(2) still requires a ‘showing,’ rather than
a blanket assertion, of entitlement to relief.”
U.S.
at
Fed.R.Civ.P.
n.
3.
That
showing
must
consist
of
Twombly, 550
more
than
“a
formulaic recitation of the elements of a cause of action” or
29
“naked
assertion[s]
devoid
of
further
factual
enhancement.”
Iqbal, 556 U.S. at 678 (internal quotation marks omitted).
At this stage, the court must consider all well-pleaded
allegations in a complaint as true, Albright v. Oliver, 510 U.S.
266, 268 (1994), and must construe all factual allegations in
the
light
most
favorable
to
the
plaintiff,
see
Harrison
v.
Westinghouse Savannah River Co., 176 F.3d 776, 783 (4th Cir.
1999) (citing Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134
(4th Cir. 1993)).
In
evaluating
the
complaint,
unsupported legal allegations.
the
court
need
not
accept
Revene v. Charles Cnty. Comm’rs,
882 F.2d 870, 873 (4th Cir. 1989).
Nor must it agree with legal
conclusions couched as factual allegations, Iqbal, 556 U.S. at
678, or conclusory factual allegations devoid of any reference
to actual events, United Black Firefighters v. Hirst, 604 F.2d
844 (4th Cir. 1979); see also Francis v. Giacomelli, 588 F.3d
186, 193 (4th Cir. 2009).
“[W]here the well-pleaded facts do not
permit the court to infer more than the mere possibility of
misconduct, the complaint has alleged, but it has not ‘show[n]
. . . that the pleader is entitled to relief.’”
at
679
(quoting
Fed.R.Civ.P.
8(a)(2)).
Thus,
Iqbal, 556 U.S.
“[d]etermining
whether a complaint states a plausible claim for relief will
. . . be a context-specific task that requires the reviewing
court to draw on its judicial experience and common sense.”
30
Id.
2.
RICO Count As To The Parriott Defendants
Plaintiffs assert claims against the Defendants under RICO
subsections (a), (b), (c), and (d).10
substantive
violation
of
RICO,
the
To state a claim for a
complaint
facts that, if proven, would establish:
must
set
forth
“(1) conduct (2) of an
enterprise (3) through a pattern (4) of racketeering activity.”
10
Subsection (a) “is aimed at the use of racketeering
proceeds to infiltrate an enterprise.”
Benard v. Hoff, 727
F.Supp. 211, 214 (D.Md. 1989). The elements of a subsection (a)
claim are:
(1) a receipt of income from a pattern of
racketeering activity, and (2) use or investment of this income
in an enterprise.
18 U.S.C. § 1962(a); Busby v. Crown Supply,
Inc., 896 F.2d 833, 837 (4th Cir. 1990).
Subsection (b) “is aimed at the use of racketeering
activity itself (as distinguished from use of illegal proceeds)
to acquire or maintain an enterprise.”
Benard, 727 F.Supp. at
214. The elements of a subsection (b) claim are: (1) acquiring
or maintaining (2) through a pattern of racketeering activity or
through a collection of an unlawful debt (3) an interest in or
control of (4) any enterprise (5) engaged in interstate or
foreign commerce. 18 U.S.C. § 1962(b). Additionally, “under §
1962(b), a plaintiff must allege a specific nexus between
control of a named enterprise and the alleged racketeering
activity.”
Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d
1406, 1411 (3d Cir. 1991); see also Field v. GMAC LLC, 660
F.Supp.2d, 679, 687 (E.D.Va. 2008).
Subsection (c) “is aimed at the use of an enterprise to
carry out racketeering activities.” Benard, 727 F.Supp. at 214.
The elements of a subsection (c) claim are: (1) conduct of or
participation in (2) any enterprise (3) through a pattern (4) of
racketeering activity. 18 U.S.C. § 1962(c); Sedima S.P.R.L. v.
Imrex Co., Inc., 473 U.S. 479, 496 (1985).
Subsection (d) is aimed at conspiracies to violate
subsections (a) through (c) of RICO. 18 U.S.C. § 1962(d). To
allege a subsection (d) claim, a plaintiff must allege that
“each defendant agreed that another coconspirator would commit
two or more acts of racketeering.” United States v. Pryba, 900
F.2d 748, 760 (4th Cir.), cert. denied, 498 U.S. 924 (1990).
31
Morley v. Cohen, 888 F.2d 1006, 1009 (4th Cir. 1989) (quoting
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985)).
statute defines several of the operative terms.
The
“Enterprise,”
as set forth in 18 U.S.C. § 1961(4), “includes any individual,
partnership, corporation, association, or other legal entity,
and
any
although
union
not
or
a
group
legal
of
individuals
entity.”
The
associated
same
statute
in
fact
defines
“racketeering activity” as “any act which is indictable” under a
number of enumerated criminal provisions.
Id. § 1961(1).
A
“pattern of racketeering activity,” moreover, “requires at least
two acts of racketeering activity, one of which occurred after
the effective date of [RICO] and the last of which occurred
within ten years (excluding any period of imprisonment) after
the commission of a prior act of racketeering activity.”
Id.
§ 1961(5).
The
Parriott
Defendants
identify
deficiencies in Plaintiffs’ RICO count:
three
purported
(1) failure to plead a
sufficient factual basis for the underlying offenses of mail,
wire, and bank fraud; (2) failure to allege sufficient facts in
support of a “pattern of racketeering activity”; and (3) failure
to allege properly the existence of an enterprise.
(ECF No. 39,
at
“pattern
36-45;
ECF
racketeering
No.
41,
activity”
is
at
35-42).
“an
Because
essential
32
a
element
in
any
of
RICO
action,” Menasco, Inc. v. Wasserman, 886 F.2d 681, 683 (4th Cir.
1989), the Parriott Defendants’ second argument is dispositive.
To allege a pattern of racketeering activity, a plaintiff
must present facts making it plausible, rather than possible,
that:
(1) at least two predicate acts occurred within ten years
of each other; (2) the predicate acts were related; and (3) the
acts
“amount
activity.”
(1989).
to
pose
a
threat
of
continued
criminal
H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239
Acts are related if they “have the same or similar
purposes,
results,
commission,
or
characteristics
(citing
or
Sedima,
participants,
otherwise
and
473
are
U.S.
are
not
at
victims,
interrelated
or
by
isolated
14).
n.
of
distinguishing
events.”
496,
methods
With
Id.
at
respect
240
to
continuity, the Fourth Circuit has explained:
Continuity . . . refers either to a closed
period of repeated conduct, or to past
conduct that by its nature projects into the
future with a threat of repetition.
To
satisfy the continuity element, a plaintiff
must show that the predicates themselves
amount to, or . . . otherwise constitute a
threat of, continuing racketeering activity.
Significantly, [p]redicate acts extending
over a few weeks or months and threatening
no future criminal conduct do not satisfy
this requirement: Congress was concerned in
RICO with long-term criminal conduct. Thus,
predicate acts must be part of a prolonged
criminal endeavor.
Menasco,
886
F.2d
at
683-84
(internal
quotation
marks,
citations, and parentheticals omitted) (alteration and emphasis
33
in original).
In other words, because “Congress contemplated
that only a party engaging in widespread fraud would be subject
to” the serious consequences available under the statute (e.g.,
treble damages), the continuity requirement ensures that RICO
liability
is
reserved
for
“ongoing
unlawful
activities
whose
scope and persistence pose a special threat to social wellbeing.”
Id.
distinction
“This
between
caution
ordinary
or
is
designed
to
garden-variety
preserve
fraud
a
claims
better prosecuted under state law and cases involving a more
serious scope of activity.”
Al-Abood ex rel. Al-Abood v. El-I,
217 F.3d 225, 238 (4th Cir. 2000).
Assessing whether a plaintiff has satisfied the “continuity
plus relationship” test requires a fact-specific, common-sense
approach at the motion to dismiss stage.
683-84.
Menasco, 886 F.2d at
Relevant factors to consider include “the number and
variety of predicate acts, the length of time over which they
were committed, the number of putative victims, the presence of
separate
injuries.”
schemes,
and
the
potential
of
multiple
distinct
Pobel v. Hans Christian Yachts, Inc., 933 F.Supp.
494, 496 (D.Md. 1996).
Illustrative is Menasco, 886 F.2d at 684, where the Fourth
Circuit held that the continuity prong was not satisfied because
the defendants’ purported actions were narrowly directed toward
a single fraudulent goal (defrauding two entities of their oil
34
interests),
involved
one
perpetrator,
victims, and took place over one year.
targeted
one
set
of
Although the plaintiffs
alleged that the scheme represented the defendants’ “regular way
of conducting” business and that the defendants had committed
fraudulent
acts
against
“various
individuals,”
the
court
concluded that the allegations “lack[ed] the specificity needed
to show a distinct threat of continuing racketeering activity”
because the complaint did not supply any details regarding the
ongoing fraud operation or the identity or activity of the other
purported
victims.
Id.;
see
also,
e.g.,
GE
Inv.
Private
Placement Partners II v. Parker, 247 F.3d 543, 549 (4th Cir.
2001) (where complaint alleged that the defendants had engaged
in a Ponzi scheme to inflate the value of their company before
selling it, the plaintiffs failed to plead continuity in an
adequate manner because the purported conduct lasted only two
years and “was all designed for the single goal of allowing [the
defendants] to profit from their interests [in the company]”).
Here,
Plaintiffs’
allegations
fail
to
satisfy
continuity prong of RICO’s pattern requirement.
the
complaint,
directed
towards
Defendants’
a
single
purported
fraudulent
Swareys out of their life savings.
actions
goal:
the
According to
were
to
narrowly
swindle
the
The alleged scheme involved
a single set of victims (the Swareys), caused a single discrete
injury (the Swareys’ monetary loss), and lasted under two years
35
(from January 2008 to sometime in the fall of 2009).
Plaintiffs’
conclusory
allegations
that
Other than
Defendants
defrauded
“hundreds of other investors” (ECF No. 2 ¶ 293), the complaint
offers no facts to support that the alleged scheme stretched
beyond
the
victimization
of
the
Swareys
or
that
the
Capital Defendants pose a broader societal threat.
Desert
Although
Plaintiffs characterize Defendants’ conduct as a “multi-million
dollar Ponzi-scheme” (id. ¶ 2), the complaint does not offer any
specific factual allegations regarding how the scheme utilized
other people’s money to pay the Swareys, and Plaintiffs do not
identify
the
other
purported
victims.
There
also
is
no
allegation to support a threat of continuing future conduct; to
the contrary, Plaintiffs aver that the Desert Capital Defendants
ceased all communications with Mr. Swarey in the fall of 2009.
(Id. ¶ 65).
In
their
opposition,
Plaintiffs
point
to
the
following
statement by Todd Parriott in a 2008 filing with the United
States Securities and Exchange Commission as evidence of the
continuous
nature
of
the
RICO
violation:
“[t]he
growth
of
[Desert Capital] depends on our access to external sources of
capital.
Our profitability depends on our ability to obtain
that capital at a cost we can absorb while still generating an
attractive risk-adjusted return on the loans we acquire using
the
proceeds
of
our
financing.”
36
(ECF
No.
51,
at
35).
Plaintiffs’ reliance on this statement is misplaced, as it has
no apparent relation to the alleged scheme perpetrated against
the
Swareys
and
certainly
does
not
demonstrate
the
type
of
“distinct threat of continuing racketeering activity” required
to satisfy the continuity requirement.
Hence, at bottom, the
complaint – even when construed in the light most favorable to
Plaintiffs – alleges only a narrow real estate investment scheme
that
was
directed
perpetrated
through
towards
conduct
a
that
single
falls
set
of
short
of
victims
and
constituting
“ongoing unlawful activities whose scope and persistence pose a
special threat to social well-being.”
Accordingly,
because
the
complaint
Menasco, 886 F.2d at 684.
does
not
allege
specific
factual events in support of the continuity element, Plaintiffs’
RICO count against the Parriott Defendants must be dismissed.
3.
Leave to Amend
In a single sentence in their oppositions to the Parriott
Defendants’
motions
to
dismiss,
Plaintiffs
contend
that
they
should be given leave to amend the complaint if the motions are
granted.
(ECF No. 48, at 19-20; ECF No. 51, at 29-30).
Fed.R.Civ.P.
15(a)(2)
provides
that
“[t]he
court
freely give leave [to amend] when justice so requires.”
Supreme Court has held that:
In the absence of any apparent or declared
reason — such as undue delay, bad faith or
dilatory motive on the part of the movant,
37
should
The
repeated failure to cure deficiencies by
amendments
previously
allowed,
undue
prejudice to the opposing party by virtue of
allowance of the amendment, futility of
amendment, etc. — the leave sought should,
as the rules require, be ‘freely given.’
Foman v. Davis, 371 U.S. 178, 182 (1962).
this
statement
is
that
the
district
“However, implicit in
court
must
be
able
to
determine whether ‘justice so requires,’ and in order to do
this,
the
court
must
proposed amendment.”
have
before
it
the
substance
of
the
Roskam Baking Co. v. Lanham Mach. Co.,
Inc., 288 F.3d 895, 906 (6th Cir. 2002) (affirming the district
court’s denial of a plaintiff’s requests for leave to amend that
were
asserted
in
briefs
opposing
the
defendant’s
motion
to
dismiss; were not accompanied by a proposed amended complaint;
and did not contain any indication of what new allegations an
amended complaint would contain); see also Long v. Satz, 181
F.3d 1275, 1279 (11th Cir. 1999) (same); cf. Gallop v. Cheney,
642 F.3d 364, 369 (2d Cir. 2011) (district court did not err in
denying leave to amend and dismissing a claim with prejudice
pursuant to Rule 12(b)(6) where there was no indication that the
represented plaintiff “could — or would – provide additional
allegations that might lead to a different result”).
Here, Plaintiffs have not filed a motion for leave to amend
in
accordance
proposed
with
amended
Local
complaint;
Rule
and
38
103.6;
have
have
not
not
submitted
otherwise
a
indicated
what
new
contain.
allegations
their
proposed
amended
complaint
would
Instead, in arguing that they sufficiently alleged the
predicate acts of mail, bank, and wire fraud in accordance with
the heightened pleading standard set forth in Fed.R.Civ.P. 9(b),
the Swareys state – in a conclusory fashion – that “if this
Court
does
not
find
the
pleadings
were
pled
particular[ity],” leave to amend should be granted.
48, at 19-20; ECF No. 51, at 29-30).
with
(ECF No.
When liberally construed,
the implication of this statement is that Plaintiffs’ proposed
amended complaint would allege the predicate acts of fraud with
greater specificity.
Significantly, however, Plaintiffs do not
propose or even allude to any amendments or additional evidence
that would supplement their allegations regarding continuity.
Thus,
the
Swareys
fail
to
provide
a
sufficient
basis
for
determining whether an amended complaint would be futile, as it
is not clear that Plaintiffs would, or could, offer any new
allegations to alter the conclusion that the purported scheme
“does not . . . warrant
RICO
treatment.”
GE
Inv.
Private
Placement Partners II, 247 F.3d at 551 (affirming the district
court’s dismissal of a plaintiff’s RICO count for failure to
allege continuity, as well as the court’s denial of leave to
amend).11
Hence, Plaintiffs’ unsupported, cursory request for
leave to amend will be denied.
11
In
Menasco,
the
Fourth
39
Circuit
granted
leave
to
the
4.
RICO Count As To Defendants Stephenson & Desert
Capital
Because Plaintiffs’ allegations in support of their RICO
count are identical with respect to all of the Desert Capital
Defendants, the RICO count as to Desert Capital and Stephenson
also is subject to dismissal for failure to allege adequately
the continuity requirement.
Even though neither Desert Capital
nor Stephenson has affirmatively sought dismissal at this time,
they have not waived their right to do so.12
Accordingly, the
court will sua sponte dismiss the RICO count as to all of the
Desert Capital Defendants.
See Hawkins v. Chick, No. DKC 09-
0661, 2009 WL 4017953, at *6-7 (D.Md. Nov. 19, 2009) (dismissing
plaintiffs to amend their RICO count with respect to their
continuity allegations.
886 F.2d at 685-86.
Menasco is
distinguishable from the facts presented here.
There, the
decision to grant leave to amend was based primarily on timing:
the plaintiffs filed their complaint before the Supreme Court
issued its decision in H.J. Inc.
Because that decision set
forth detailed guidance with respect to continuity, the court
concluded that the plaintiffs “should be allowed to amend their
complaint to try to come within its parameters.” Id. Here, by
contrast, the Swareys had the benefit of the guidance from H.J.
Inc. – a decision that was issued in 1989 and that has been
widely interpreted by lower courts – at the time they filed
their complaint.
12
As noted above, Stephenson filed an answer and amended
answer to the complaint without moving for dismissal under Rule
12(b)(6).
Although Stephenson did not specifically assert
failure to state a claim upon which relief can be granted as an
affirmative defense, he has not waived his right to do so. See
Fed.R.Civ.P. 12(h)(2) (explaining that the defense of failure to
state a claim upon which relief can be granted may be raised as
late as trial).
Desert Capital has not yet responded to the
complaint due to the automatic bankruptcy stay. (ECF No. 4).
40
RICO claims sua sponte as to all defendants, including those who
had not affirmatively sought such relief, where the plaintiff
failed to allege a necessary element of a RICO violation).
5.
Remaining State Law Claims
Because subject matter jurisdiction in this case is based
on Plaintiffs’ RICO count, which will be dismissed, questions
arise as to (1) whether supplemental subject matter jurisdiction
can be exercised over the remaining state law claims, and (2) if
so, whether it should be exercised.
Pursuant
matter
to
28
jurisdiction
U.S.C.
may
be
§
1367(a),
exercised
supplemental
over
“all
subject
[nonfederal]
claims that are so related to [federal] claims in the action
. . . that they form part of the same case or controversy[.]”
Here, the remaining state law claims against the Desert Capital
Defendants and the FUL Defendants are sufficiently related to
the
RICO
claim
jurisdiction.
to
allow
for
the
exercise
of
supplemental
See White v. Cnty. of Newberry, S.C., 985 F.2d
168, 172 (4th Cir. 1993) (supplemental claims “need only revolve
around a central fact pattern” shared with the federal claim).
Pursuant to 28 U.S.C. § 1367(c)(3), however, the court has
discretion
to
retain,
dismiss,
or
remand
nonfederal
claims
where, as here, the federal basis of the action is no longer
present.
See Hinson v. Norwest Fin. S.C., Inc., 239 F.3d 611,
617 (4th Cir. 2001) (“[W]e conclude that under the authority of
41
28 U.S.C. § 1367(c), authorizing a federal court to decline to
exercise
supplemental
jurisdiction,
a
district
court
has
inherent power to dismiss the case or, in cases removed from
State court, to remand, provided the conditions set forth in
§ 1367(c) for declining to exercise supplemental jurisdiction
have
been
met.”).13
Indeed,
district
courts
in
the
Fourth
Circuit “enjoy wide latitude in determining whether or not to
retain jurisdiction over state claims when all federal claims
have been extinguished.”
(4th
Cir.
1995).
Shanaghan v. Cahill, 58 F.3d 106, 110
Factors
to
be
considered
include
the
“convenience and fairness to the parties, the existence of any
underlying issues of federal policy, comity, and considerations
of
judicial
economy.”
Id.
(citing
Carnegie–Melon
Univ.
v.
Cohill, 484 U.S. 343, 350 n. 7 (1998)).
Considering that this case is still in its early stages, it
is appropriate to decline to exercise supplemental jurisdiction
13
That the case has been automatically stayed as to Desert
Capital REIT, Inc. – the only Defendant who is a Maryland
resident and thus the only Defendant who destroys complete
diversity under 28 U.S.C. § 1332 – pending its bankruptcy
proceedings does not serve to create diversity jurisdiction in
this case.
An automatic stay is not tantamount to a dismissal
and thus has no bearing on the diversity calculus.
See, e.g.,
Reichley v. Abercrombie & Fitch Stores, Inc., No. 1:09-CV-838,
2009 WL 5196140, at *2 (W.D.Mich. Dec. 22, 2009) (“Deference for
state court jurisdiction requires that a case against a nondiverse party be fully and finally dismissed, and not merely
temporarily closed pursuant to the automatic stay imposed by the
filing of a bankruptcy petition, before federal diversity
jurisdiction may be exercised.”).
42
over Plaintiffs’ remaining state law claims.
Instead, those
claims will be remanded to the Circuit Court for St. Mary’s
County for further consideration.14
V.
Conclusion
For the foregoing reasons, the motion to set aside the
default entered against the Andrews Defendants will be granted;
the motion to strike Defendant Kerry Stephenson’s affirmative
defenses will be denied as moot; the motions to withdraw as
counsel filed by the attorney for Defendants Todd and Phillip
Parriott will be granted; and the motions to dismiss Plaintiffs’
complaint filed by the Parriott Defendants will be granted in
part
and
denied
in
part.
Plaintiffs’
RICO
count
will
be
dismissed as to all defendants, and the case will be remanded to
state court.
A separate order will follow.
/s/
DEBORAH K. CHASANOW
United States District Judge
14
Because the RICO count will be dismissed, there also will
no
longer
be
a
basis
for
exercising
pendent
personal
jurisdiction over the Parriott Defendants as to the state law
claims, necessitating an analysis of personal jurisdiction under
Maryland’s long-arm statute.
See D’Addario, 264 F.Supp.2d at
387-88 (E.D.Va. 2003) (explaining that if the federal claim(s)
providing the basis for pendent personal jurisdiction “should be
dismissed” at a later time, “the state claims against that
defendant would also have to be dismissed, unless another basis
for asserting personal jurisdiction exists”).
In light of the
decision
not
to
exercise
supplemental
subject
matter
jurisdiction over the state law claims and to remand the case,
that issue is not reached.
43
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