Albert, et al v. Fair Associates, et al
Filing
48
ORDER granting in part and denying in part 13 Motion for Summary Judgment or to Dismiss; Dismissing First Amended Complaint Without Prejudice; denying without prejudice as moot motions 20 ; 24 ; 33 ; 35 ; 40 ; 41 ; 42 ; 44 ; 46 ; Cancelling Hearing and setting deadline for filing motion for leave to file amended complaint. Signed by District Judge Thomas L. Ludington. [Motion due 2/14/2013] (SGam)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
NORTHERN DIVISION
ELSE MARIE ALBERT et al.,
Plaintiffs,
Case No. 12-11812
Honorable Thomas L. Ludington
v.
FAIR ASSOCIATES et al.,
Defendants.
______________________________________ /
OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT OR
TO DISMISS FOR FAILURE TO STATE A CLAIM ON WHICH RELIEF MAY
BE GRANTED AND DISMISSING THE COMPLAINT WITHOUT PREJUDICE
Under the Federal Rules of Civil Procedure, a complaint must contain “a short and plain
statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).
And when alleging fraud, the complaint “must state with particularity the circumstances
constituting fraud.” Fed. R. Civ. P. 9(b).
The complaint in this case (more precisely, the first amended complaint) is not short. It
spans 32 pages (51 with exhibits) and 152 paragraphs. Notwithstanding its length, however, four
of its seven counts do not state claims on which relief may be granted. Its fraud allegations in
particular lack a sufficient factual basis to plausibly give rise to an entitlement to relief.
Briefly, the plaintiffs allege that in the 1970s three gentlemen — Samuel Fair, Tyrus
Hartley, and Richard Socia — persuaded the plaintiffs to purchase partnership interests in three
limited partnerships.
Organized to explore for oil and gas and extract it once found, the
partnerships have been operating since the 1970s.
Although the partnerships formed four
decades ago, Plaintiffs have not been paid. Two of the three gentlemen are now deceased.
In April 212, Plaintiffs filed a seven-count complaint in this Court. Count one alleges
that the defendants committed mail and wire fraud in violation of the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C. §§ 1961–1968. Count one does not, however, identify
fraudulent misrepresentations or omissions made by the defendants, much less identify them
with the particularity required under the federal rules.
Rather, as presently pleaded, the foundation of the complaint is that the plaintiffs
believed that in exchange for their investment they would receive a “reasonable return” of 100
times their initial investment. See First Am. Compl. ¶ 41 (“Representations were made to the
‘investors’ that the ‘Six Well Reinvestment of Production Development Plan’ would bring a
‘reasonable return’ of 100 times your initial investment.” (quotation marks omitted)). Yet
despite the decades passing, the plaintiffs haven’t received it (indeed, they haven’t received
anything).
Even if the “reasonable return” was enforceable against the defendants as a promise,
however, “[f]uture promises are contractual and do not constitute fraud.” Hi-Way Motor Co. v.
Int’l Harvester Co., 247 N.W.2d 813, 815–16 (Mich. 1976); see also Kaminski v. Teledyne
Indus., Inc., 121 F.3d 708 (6th Cir. 1997). As presently pleaded, the gravamen of the plaintiffs’
complaint is a contract claim — not a fraud claim.
Count four of the complaint, sensibly, asserts a breach of contract claim. But it does not
identify what the contract’s material terms are, nor allege any facts suggesting reciprocal
manifestations of intent to be bound by those terms. Kloian v. Domino’s Pizza L.L.C., 733
N.W.2d 766, 770 (Mich. Ct. App. 2006) (observing that a valid contract requires “mutual assent
or a meeting of the minds on all the essential terms”). To take just one example, while it is
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possible that the defendants not only made “representations” regarding a “reasonable return,” but
promises as well, the complaint does not allege that. The complaint does not, for example, allege
that investors were promised regular distributions of the limited partnerships’ earnings (or even
irregular distributions, for that matter). Nor does the complaint identify when investors could
expect a return of their capital contributions. As presently pleaded, the complaint does not state
a breach of contract claim on which relief may be granted.
Count five asserts a common law fraud in the inducement claim. Like count one,
however, it does not identify fraudulent misrepresentations or omissions made by the defendants,
much less identify them with the particularity required under the federal rules. This count does
not state a claim on which relief may be granted.
Finally, count seven asserts a common law conversion claim. Specifically, it alleges that
the defendants obtained the plaintiffs’ money. But it does not allege that the defendants obtained
the money without the plaintiffs’ consent. Citizens Ins. Co. of Am. v. Delcamp Truck Ctr., Inc.,
444 N.W.2d 210, 213 (Mich. Ct. App. 1989) (observing that to state a conversion claim the
defendant “must have obtained the money without the owner’s consent to the creation of a debtor
and creditor relationship”). Like counts one, four, and five, count seven does not state a claim on
which relief may be granted.
In sum, as presently pleaded, four of the seven counts of the complaint (including the
count that this Court’s jurisdiction arises under) do not state claims on which relief may be
granted. This is not to suggest that the plaintiffs cannot state such claims — simply that the first
amended complaint does not do so.
Accordingly, the defendants’ motion for summary judgment or to dismiss the complaint
for not stating a claim will be granted in part and denied in part. Specifically, the request for
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summary judgment will be denied, the request to dismiss the complaint for not stating a claim
will be granted, and the first amended complaint will be dismissed without prejudice. Plaintiffs
are cautioned, however, that unless a motion for leave to file an amended complaint is received
within 21 days of the entry of this order, count one will be dismissed with prejudice, jurisdiction
over the remaining counts will be declined, and the case will be dismissed.
I
Plaintiffs, 21 in all (at present1), are David Rogers, Else-Marie Albert, John Anderson,
Per Axelsen, William Ballard, William Ball, Gary Bauer, Dorothy Braley, Jane Ann Anderson
Chandler, Alberta Gamble, Julian R. Gershon, Dennis Goddeyne, Paul Golsch, Jeffrey W.
Hartley, Carol Vaglica Hunt, Pete Kondrup, Anne Ledbetter, Teri Salomon, Nina Spiess,
Achilles Tarachas, and Susan Laine Valentin.
Defendants, eight in all, are (1) Fair Energies, Inc., a Michigan corporation; (2) Fair
Development (a sole proprietorship or family partnership, paragraph 10 of the first amended
complaint alleges); (3) Fair Associates (again, either a sole proprietorship or family partnership);
(4) the Estate of Samuel S. Fair, deceased; (5) Natalie P. Fair, Mr. Fair’s widow; (6) Terri Fair
Reynolds, Mr. Fair’s daughter; (7) Tyrus W. Hartley; and (8) the Estate of Richard Socia,
deceased.2
Defendants move to dismiss the first amended complaint pursuant to Federal Rule of
Civil Procedure 12(b)(6). Accordingly, for purposes of deciding the motion the following facts
from the complaint are assumed to be true.
1
In November 2012, Plaintiffs filed a motion for class certification asserting that “there are approximately
100 members of the [putative] class.” ECF No. 24. On January 7, 2013, Plaintiffs filed a motion to add additional
plaintiffs. ECF No. 42. Specifically, Plaintiff seeks to add six identified individuals “and well over 100 additional
parties who ‘invested’ in Defendant(s) oil drilling ventures.”
2
Although count 3 of the first amended complaint seeks an accounting of the limited partnerships and
count six seeks an inspection of books and records, the complaint does not name the limited partnerships as
defendants.
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A
About 40 years ago, Samuel Fair, Tyrus Hartley, and Richard Socia began exploring for
oil and gas in Michigan. First Am. Compl. ¶ 31. And they found it. See id. ¶¶ 31–34. After
obtaining the mineral rights in several tracts of land, the gentlemen began extraction operations.
See id. Specifically, they began operations on five properties that they termed “Fairwells 301,
305, 307,” “Olympic Wells 101,” and “the Kawkawlin Oil Field.” Id. ¶¶ 33–34.
B
The gentlemen also began soliciting investors for “a share in six (6) wells.”3 First Am.
Compl. ¶ 36. Marketing the investments as limited partnership interests, the gentlemen led
investors to believe “that as investors, they were acquiring interests as ‘limited partners’ in (1)
Fair-Hartley Kawkawlin Development Limited Partnership (2) Fair Well 104 Limited
Partnership and (3) Fair Well Limited Partnership 105.” Id. ¶ 43.
For each $13,000, an investor would receive a 1 percent “equity interest” in the
partnerships. First Am. Compl. ¶ 42. It is not clear from the complaint what else, if anything,
prospective investors were promised. As noted, the first amended complaint does not allege that
investors were promised regular distributions of the limited partnerships’ earnings. Nor does the
complaint identify when investors could expect a return of their capital contributions.
In marketing the investment, as noted, Messrs. Fair and Hartley told investors that it was
possible that they could earn “a reasonable return of 100 times your initial investment.” First
Am. Compl. ¶ 41 (quotation marks omitted); see id. Ex. B (attaching letter to investors from
Messrs. Fair and Hartley). More precisely, Messrs. Fair and Hartley informed prospective
investors that “[b]ased on 50,000 barrel wells priced at $33 per barrel the ‘Conservative Return’
3
No, the numbers in the complaint don’t add up. The complaint alleges that the gentlemen began
operations on five wells. They marketed six. This discrepancy is not discussed in the complaint.
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would be 30 times your investment. Based on 100,000 barrel wells the ‘Realistic Return’ would
be 60 times. . . . Secondary recovery (water flooding) could double this ‘Realistic Return’ to
over 100 times your initial investment.” Id. Ex. B.
The gentlemen did not, however, “prepare a prospectus or any printed materials
describing the risks and benefits.” First Am. Compl. ¶ 38. Likewise, “Plaintiffs do not believe
that general and limited partnership documentation was provided to them.” Id. ¶ 45. Indeed, the
first amended complaint asserts: “The interest of Plaintiffs individually and in the aggregate have
not been reduced to writing.” Id. ¶ 81. Likewise, the complaint alleges, “The interests of
Hartley and Socia ha[ve] never been reduced to writing.” Id. ¶ 83.
Nevertheless, from 1972 through 1979 the gentlemen persuaded at least 66 people to
invest — and raised more than $1.5 million. First Am. Compl. ¶¶ 35, 37, 42.
C
At some point (the complaint does not specify when), Messrs. Fair and Hartley entered
into royalty agreements with “various companies.” First Am. Compl. ¶ 48. (The first amended
complaint does not identify these companies.4) Paragraph 48 of the complaint alleges, “Plaintiffs
believe[] that in exchange for ‘royalties’, some or all of the wells were assigned to various
companies.”
Id. ¶ 48. Instead of distributing the royalties to investors, the first amended
complaint continues, “Fair and Hartley assigned the royalties to themselves individually and in
an amount unknown.” Id. at 49.
4
It is possible, but no more than possible, that one of the “companies” referred to in paragraph 48 of the
first amended complaint is Shell Oil. Although paragraph 48 does not expressly identify which company the
gentlemen contracted with, paragraphs 114 and 115 allege “In 1992 Shell Oil drilled five deep wells on the leased
land . . . in the Kawkawlin Field. Sam Fair and Tyrus Hartley shared equally in the gas and oil wells drilled by
Shell.”
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D
In 1992, the first amended complaint alleges, Shell Oil drilled five wells on “the
Kawkawlin Field.” First Am. Compl. ¶ 114. Messrs. Fair and Hartley “shared equally in the gas
and oil wells drilled by Shell.” Id. ¶ 115. (How much they shared is not specified in the
complaint.)
E
In 1996, Mr. Hartley filed suit in state court against Messrs. Fair and Socia, Ms.
Reynolds, Fair–Hartley Energies, Inc., Fair–Hartley Kawkawlin Development LP, Fair Well 104
LP, and Fair Well 105 LP. First Am. Compl. ¶¶ 50–51; id. Ex. C (attaching copy of first
amended complaint). Mr. Hartley’s complaint alleged that the defendants were freezing Mr.
Hartley out of the business, mismanaging it, and diverting assets. See id. Ex. C.
Plaintiffs were not notified of the pendency of the suit, “consulted,” or “advised.” First
Am. Compl. ¶ 56.
About a year later, a settlement was reached. First Am. Compl. ¶ 58. In October 1997, a
judgment was entered. See id. Ex. D (attaching copy of judgment).
In pertinent part, the judgment provides that Mr. Hartley is entitled to $48,599.90 “in
liquidation of any past amounts which for any reason were or may have been due him.” Id. Ex.
D. But, the judgment cautions: “These past amounts include but are not necessarily limited to
any royalties or commissions associated with the entities which are parties to this action.” Id.
Moving forward, the judgment continues, Mr. Hartley will be entitled to a share of the
revenue of each limited partnership. See First Am. Compl. Ex. D. First, the judgment provides:
“Notwithstanding the fact that Tyrus W. Hartley is no longer a general partner in Fair Hartley
Kawkawlin Development Limited Partnership, the amounts payable to him as a general partner
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by the terms of the Limited Partnership Agreement dated February 24, 1983 . . . shall continue to
be paid to him.” Id. (While a copy of the judgment is attached to the first amended complaint, a
copy of the limited partnership agreement is not.)
The judgment continues: “Notwithstanding the fact that Tyrus W. Hartley is not and has
not been a general partner in Fairwells 104 Limited Partnership or in Fairwells 105 Limited
Partnership, the amounts payable to Samuel S. Fair as a general partner by the terms of the
Limited Partnership Agreements dated August 23, 1983 . . . shall henceforth be paid 1/2 to
Samuel S. Fair and 1/2 to Tyrus Hartley.” Id. (Again, copies of these limited partnership are not
attached to the first amended complaint.)
No provision was made for Plaintiffs in the judgment.
F
More than a decade passed. It is not clear from the complaint if Plaintiffs were paid
during this time. See First Am. Compl. ¶ 73. More precisely, it is not clear from the allegations
in the complaint whether Plaintiffs have been paid anything at any time. The sole assertion
regarding payment to Plaintiffs is found in paragraph 73, which alleges: “Plaintiffs have not been
reimbursed for their initial investments or any proceeds over and above their initial investments.”
This could mean Plaintiffs have not received a return of capital, but have received distributions
of partnership revenues. Or it could mean that Plaintiffs have received nothing.
G
Mr. Fair died in 2009. First Am. Compl. ¶ 11. No estate has been opened, no personal
representative appointed. Id. ¶ 13.
Mr. Socia died in 2011. See First Am. Compl. ¶ 17. His estate has been opened, and
Barbara Socia has been appointed personal representative. Id.
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H
On April 24, 2012, Plaintiffs filed suit in this Court based on federal question and
supplemental jurisdiction. ECF No. 1. Specifically, the complaint invoked this Court’s federal
question jurisdiction based on Defendants’ alleged violation of the Racketeer Influenced and
Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961–1968.
On May 8, 2012, Plaintiffs filed their first amended complaint. ECF No. 3. As noted, it
raises seven claims: (1) violations of RICO; (2) declaratory judgment; (3) accounting; (4) breach
of contract; (5) fraud in the inducement; (6) inspection of books and records; and (7) conversion.
Defendants now move to dismiss or for summary judgment.
II
Federal Rule of Civil Procedure 8(a)(2) provides that a complaint must contain “a short
and plain statement of the claim showing that the pleader is entitled to relief.” When alleging
fraud, as noted, the complaint “must state with particularity the circumstances constituting
fraud.” Fed. R. Civ. P. 9(b).
Elaborating on the requirements of Rule 9, the Sixth Circuit “require[es] a plaintiff, at a
minimum, to allege the time, place, and content of the alleged misrepresentation on which he or
she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting
from the fraud.” Coffey v. Foamex L.P., 2 F.3d 157, 161–62 (6th Cir. 1993) (quoting Ballan v.
Upjohn Co., 814 F.Supp. 1375, 1385 (W.D. Mich.1992)). Moreover, “allegations of fraudulent
misrepresentation must be made with sufficient particularity and with a sufficient factual basis to
support an inference that they were knowingly made.” Id.
To survive a Rule 12(b)(6) motion to dismiss, the pleading “must contain sufficient
factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v.
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Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility,” the Supreme Court
instructs, “when the [party] pleads factual content that allows the court to draw the reasonable
inference that the [opposing party] is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678
(citing Twombly, 550 U.S. at 555–56).
A court must accept all factual content in the pleading as true, however, a court is “not
bound to accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 U.S.
at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). “In keeping with these principles
a court considering a motion to dismiss can choose to begin by identifying pleadings that,
because they are no more than conclusions, are not entitled to the assumption of truth. . . . When
there are well-pleaded factual allegations, a court should assume their veracity and then
determine whether they plausibly give rise to an entitlement to relief.” Iqbal, 556 U.S. at 679.
III
A
Count one of the first amended complaint asserts a civil RICO claim. As presently
pleaded, however, it does not state a claim on which relief may be granted.
RICO, the Supreme Court observes, “imposes criminal and civil liability upon those who
engage in certain prohibited activities.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 232 (1989)
(quotation marks and citations omitted); see generally Richard L. Bourgeois, Jr., Racketeer
Influenced and Corrupt Organizations, 37 Am. Crim. L. Rev. 879 passim (2000) (providing
overview of RICO).
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The civil cause of action is created by 18 U.S.C. § 1964(c), which provides: “Any person
injured in his business or property by reason of a violation of section 1962 of this chapter may
sue in any appropriate United States district court.”
Section 1962, in turn, lists “prohibited activities,” including owning, operating, or
participating in an “enterprise” engaged in “a pattern of racketeering activity” or the “collection
of unlawful debt.”
§ 1962(a)–(c); see H.J. Inc., 492 U.S. at 232 (“Each prohibited activity is
defined in 18 U.S.C. § 1962 to include, as one necessary element, proof either of ‘a pattern of
racketeering activity’ or of ‘collection of an unlawful debt.’ ” (quoting § 1962)).
Here, the first amended complaint claims that Defendants engaged in a pattern of
racketeering activity. See First Am. Compl. ¶¶ 65–78. It does not, however, support its assertion
with sufficient factual allegations to state a facially plausible claim.
1
To maintain a civil RICO action based on a “pattern of racketeering activity,” the Sixth
Circuit instructs that a plaintiff must establish four elements: “(1) conduct (2) of an enterprise (3)
through a pattern (4) of racketeering activity.” Cent. Distribs. of Beer, Inc. v. Conn, 5 F.3d 181,
183 (6th Cir. 1993) (citing Sedima, S.P.R.L. V. Imrex Co., 473 U.S. 479, 496 (1985)).
“Enterprise,” “pattern,” and “racketeering activity” are each defined terms under the statute.
a
An “enterprise” means “any individual, partnership, corporation, association, or other
legal entity, and any union or group of individuals associated in fact although not a legal entity.”
§ 1961(4).
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Although legitimate “enterprises” were not within Congress’s original contemplation, the
Court has interpreted “enterprise” to encompass both legitimate and illegitimate enterprises.
United States v. Turkette, 452 U.S. 576, 588–93 (1981) (discussing legislative history).
b
A “pattern,” according to the statute, means “at least two acts of racketeering activity”
within a 10–year period. § 1961(5).
As interpreted by the Supreme Court, however, a “pattern” requires more than simply
two predicate acts — it requires a plaintiff or prosecutor to “show that the racketeering
predicates are related, and that they amount to or pose a threat of continued criminal activity.”
H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989) (emphasis omitted). Known as the
“continuity plus relationship” test, to prove a “pattern” a party must demonstrate both a
“relationship” between the predicate acts and “the threat of continuing activity.” Id. (quoting
116 Cong. Rec. 18940 (1970) (statement of Sen. McClellan)).
Consequently, “while two acts are necessary, they may not be sufficient.” Id. at 237
(quoting Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n.14 (1985) (Powell, J., dissenting));
see Anderson v. Found. for Advancement, Educ. & Emp’t of Am. Indians, 155 F.3d 500, 506 (4th
Cir. 1998) (“We are especially cautious when the predicate acts involved are mail and wire
fraud: it will be the unusual fraud that does not enlist the mails and wires in its service at least
twice.” (quotation marks and brackets omitted) (quoting Int’l Data Bank, Ltd. v. Zepkin, 812
F.2d 149, 154–55 (4th Cir. 1987)).
c
Finally, “racketeering activity” is defined by the statute “as including any act ‘indictable’
under certain enumerated federal criminal statutes, including 18 U.S.C. § 1341, which makes
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mail fraud a criminal offense, and 18 U.S.C. § 1343, which makes wire fraud a crime.” Cent.
Distribs. of Beer, 5 F.3d at 183 (quoting § 1961(1)(b); Schreiber Distrib. Co. v. Serv-Well
Furniture Co., 806 F.2d 1393, 1399 (9th Cir. 1986)).
“A civil RICO action does not require that there be a prior criminal conviction for the
conduct forming the predicate act; however, the conduct used to support a civil RICO action
must be indictable. Thus, the plaintiff must prove each prong of the predicate offense, or
‘racketeering activity,’ to maintain a civil action under the RICO statute.” Conn, 5 F.3d at 183–
84 (emphasis and citation omitted) (citing Sedima, 473 U.S. at 481–82, 488–92); see generally
Kenneth Mann, Punitive Civil Sanctions: The Middleground Between Criminal and Civil Law,
101 Yale L.J. 1795, 1848 (1992) (“Congress converted entire sections of the federal criminal
code into civil wrongs as a way to enforce existing substantive law. Under RICO, civil and
criminal offenses are identical in every way except procedurally.”).
2
Here, the first amended complaint contends that Defendants committed both mail and
wire fraud, alleging:
Sometime prior to 1979, the exact date being unknown to the Plaintiffs, the
promoters/Defendants devised a scheme and artifice to deprive Plaintiffs of their
property/money by convincing Plaintiffs to contribute significant funds towards
the venture. Rather than provide dividends or proceeds to the investors/Plaintiffs,
Defendant/promoters used said funds to pay dividends to themselves and/or
reinvest or convert said funds to their own interest.
Defendants for the purpose of executing this scheme and artifice to defraud
Plaintiffs of their money, used and caused to be used the United States mail and
other instrumentalities of interstate commerce.
Having induced Plaintiff[s] to make the investment, having misappropriated said
funds, and failing to pay out gross proceeds to the Plaintiffs, the promoters
willfully and fraudulently deceived, cheated, and defrauded Plaintiffs, and in total
and complete disregard for the financial investment needs and objectives of
Plaintiffs . . . .
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Defendants for the purposes of executing the scheme to defraud Plaintiffs of their
money, transmitted and caused to be transmitted communications by means of
wire in interstate commerce. Such interstate communications by wire included,
without limitation, telephone calls.
First Am. Compl. ¶¶ 66–68, 77. These allegations, however, are insufficient to state a claim on
which relief may be granted.
“The elements of the offense of mail fraud,” the Supreme Court instructs, are: “(1) a
scheme to defraud, and (2) the mailing of a letter, etc., for the purpose of executing the scheme.”
Pereira v. United States, 347 U.S. 1, 8 (1954) (citing18 U.S.C. § 1341).
The elements of wire fraud are similarly straightforward. “To convict a defendant of
wire fraud,” the Sixth Circuit explains, “the government must prove (1) a scheme or artifice to
defraud; (2) use of interstate wire communications in furtherance of the scheme; and (3) intent to
deprive a victim of money or property.” United States v. Daniel, 329 F.3d 480, 485 (6th Cir.
2003) (quotation marks omitted) (quoting United States v. Prince, 214 F.3d 740, 747-48 (6th Cir.
2000)).
The Sixth Circuit cautions, however, that a plaintiff cannot maintain a civil RICO claim
based on mail or wire fraud “absent evidence that the defendants made misrepresentations or
omissions of material fact to [the plaintiff] and evidence that [the plaintiff] relied on those
misrepresentations or omissions to its detriment.”
Conn, 5 F.3d at 184 (citing Bender v.
Southland Corp., 749 F.2d 1205, 1216 (6th Cir. 1984)).
The Sixth Circuit further cautions that “to establish a scheme to defraud, which is an
essential element of mail [and wire] fraud, there must be proof of misrepresentations or
omissions which were reasonably calculated to deceive persons of ordinary prudence and
comprehension.” Blount Fin. Services, Inc. v. Walter E. Heller & Co., 819 F.2d 151, 153 (6th
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Cir. 1987) (quotation marks omitted) (quoting United States v. Van Dyke, 605 F.2d 220, 225 (6th
Cir. 1979)).
That is, both mail and wire fraud require “specific intent, which means not only that a
defendant must knowingly make a material misrepresentation or knowingly omit a material fact,
but also that the misrepresentation or omission must have the purpose of inducing the victim of
the fraud to part with property or undertake some action that he would not otherwise do absent
the misrepresentation or omission.” United States v. Daniel, 329 F.3d 480, 487 (6th Cir. 2003)
(quotation marks omitted) (quoting United States v. DeSantis, 134 F.3d 760, 764 (6th Cir.
1998)).
Here, as noted, count one of the first amended complaint asserts that “Defendants devised
a scheme and artifice to deprive Plaintiffs of their property/money by convincing Plaintiffs to
contribute significant funds towards the venture.” First Am. Compl. ¶ 66.
Count one does not, however, identify any facts plausibly suggesting such a scheme. It
does not identify what the fraudulent misrepresentations or omissions of material fact were. It
does not identify where or when they were made. It does not identify how Plaintiffs relied on
those misrepresentations. It does not allege any facts suggesting that Defendants not only made
misrepresentations, but knowingly made them with the specific intent to defraud the Plaintiffs.
Rather, count one simply asserts that “Defendants devised a scheme and artifice to
deprive Plaintiffs of their property/money.” Id. This conclusory allegation is not sufficient to
state a claim on which relief may be granted.5
5
Moreover, Plaintiffs’ conclusory allegation is in some tension with allegations elsewhere in the complaint.
Plaintiffs acknowledge, for example, that before investing they did not review “any printed materials describing the
risks and benefits.” Id. ¶ 38. They acknowledge that they “do not believe that general and limited partnership
documentation was provided to them.” Id. ¶ 45. Moreover, they assert: “The interest[s] of Plaintiffs individually
and in the aggregate have not been reduced to writing” Id. ¶ 81. Thus, any misrepresentations must have been oral.
Yet no particular oral misrepresentations are identified in the complaint — much less oral misrepresentations made
with the specific intent to defraud.
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To reiterate, to state a civil RICO claim a complaint must allege that a defendant made
repeated misrepresentations or omissions of material fact. It must identify those fraudulent
misrepresentations or omissions with particularity, specifying their contents and the time and
place that they were made.
It must allege facts demonstrating both continuity in the
misrepresentations and a relationship between them. And complaint must allege facts plausibly
suggesting that the statements or omissions were made not through simple error or unrealistic
optimism, but with the specific intent of fraudulently depriving the plaintiff of his or her
property. Finally, the complaint must allege facts showing that the plaintiff relied on those
misrepresentations or omissions to his or her detriment.
Here, the first amended complaint does not do this. Consequently, it does not state a civil
RICO claim on which relief may be granted.
B
Count two of the first amended complaint seeks a declaratory judgment under Michigan
state law. As presently pleaded, this count contains sufficient factual matter to entitle Plaintiffs
to seek this form of relief.
Under Michigan law, declaratory judgments are not separate causes of action, but
“procedural remedies.” Assoc. Builders & Contractors v. Dir. of Consumer & Indus. Servs. Dir.,
693 N.W.2d 374, 378 (Mich.2005), overruled on other grounds by Lansing Sch. Educ. Ass’n v.
Lansing Bd. of Educ., 487 Mich. 349, 792 N.W.2d 686 (2010). “The purpose,” the Michigan
Supreme Court explains, “is to enable the parties to obtain an adjudication of their rights before
actual injuries or losses have occurred.” Detroit Base Coal. for Human Rights of Handicapped v.
Dep’t of Soc. Servs., 428 N.W.2d 335, 344 (Mich.1988) (citing Shavers v. Attorney General, 267
N.W.2d 72 (Mich. 1978)). “The essential requirement,” that court further instructs, “is that
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plaintiffs plead and prove facts which indicate an adverse interest necessitating the sharpening of
the issues raised.” Assoc. Builders, 693 N.W.2d at 379–80 (2005) (quotation marks omitted)
(quoting Shavers, 267 N.W.2d 72).
Here, Plaintiffs plead facts suggesting an adversity of interests between themselves and
Messrs. Hartley and Socia. Plaintiffs note that their limited partnership interests, as well as those
of Messrs. Hartley and Socia, “have not been reduced to writing.” First Am. Compl. ¶¶ 81, 83.
Plaintiffs seek a judicial declaration maximizing their interests.
Thus, although declaratory judgment is not a separate cause of action, Plaintiffs have
alleged sufficient facts to entitle them to seek this form of relief.
C
Count three seeks an accounting. As presently pleaded, it states a claim on which relief
may be granted.
Under Michigan law, a partner may demand an accounting of the partnership affairs
under four circumstances: “(a) If he is wrongfully excluded from the partnership business or
possession of its property by his copartners, (b) If the right exists under the terms of any
agreement, (c) As provided by section 21, (d) Whenever other circumstances render it just and
reasonable.” Mich. Comp. Laws § 449.22 (formatting omitted).
Section 21 of the Michigan Compiled Laws, in turn, provides: “Every partner must
account to the partnership for any benefit, and hold as trustee for it any profits derived by him
without the consent of the other partners from any transaction connected with the formation,
conduct, or liquidation of the partnership or from any use by him of its property.” § 449.21.
Here, the first amended complaint alleges that Plaintiffs are limited partners in three
limited partnerships. First Am. Compl. ¶ 43. It further alleges: “The Fairs and/or Hartley have
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comingled funds between the partnerships and the corporation; between the partnerships,
corporation and other business ventures; and between the partnerships, corporation and their own
personal uses and for the personal uses of members of the Fair and Hartley families.” Id. ¶ 74.
And it alleges that “Fair and Hartley assigned the royalties to themselves individually in equal
amounts in a manner unknown and undisclosed to the limited partners.” Id. ¶ 49.
Accepting these allegations as true, Mr. Hartley must formally account for the use of the
partnerships’ property and the benefits conferred. (Mr. Fair, deceased, is not subject to the
requirements of these sections. See Mich. Comp. Laws § 449.21(2).)
The first amended complaint alleges sufficient facts to entitle Plaintiffs to seek an
accounting.
D
Count four asserts a breach of contract claim. As presently pleaded, it does not state a
claim on which relief may be granted.
Under Michigan law, a breach of contract claim has three elements: (1) a valid contract;
(2) a breach of that contract; and (3) damages. In re Brown, 342 F.3d 620, 628 (6th Cir. 2003)
(citing Platsis v. E.F. Hutton & Co., Inc., 642 F.Supp. 1277, 1309 (W.D. Mich. 1986)).
A valid contract, crucially, requires “mutual assent or a meeting of the minds on all the
essential terms.” Kloian v. Domino’s Pizza L.L.C., 733 N.W.2d 766, 770 (Mich. Ct. App. 2006)
(citing Burkhardt v. Bailey, 680 N.W.2d 453 (Mich. Ct. App. 2004)). Moreover, it requires
consideration, “a bargained-for exchange.”
Gen. Motors Corp. v. Dep’t of Treasury, 644
N.W.2d 734, 738 (Mich. 2002) (citing Higgins v. Monroe Evening News, 272 N.W.2d 537
(Mich. 1978)).
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Here, the first amended complaint does not identify the essential terms of the purported
contract. Instead, it alleges: “Plaintiffs and others similarly situated as ‘investors’ had reason to
believe that they would receive at a minimum a reasonable return on their investment.” First
Am. Compl. ¶ 94. This assertion appears premised on the letter that Messrs. Fair and Hartley
sent to prospective investors, which told them that it was possible that they could earn “a
reasonable return of 100 times your initial investment.” Id. ¶ 41 (quotation marks omitted).
The first amended complaint does not, however, allege that the parties agreed that
Plaintiffs would invest in exchange for Defendants promising “a reasonable return on their
investment.” In paragraph 38, for example, Plaintiffs acknowledge that before investing they did
not review “any printed materials describing the risks and benefits.” In paragraph 48, they
acknowledge that they “do not believe that general and limited partnership documentation was
provided to them.” And in paragraph 81 assert: “The interest[s] of Plaintiffs individually and in
the aggregate have not been reduced to writing.” Thus, any agreement must have been oral.
But the terms of this oral agreement are not identified in the first amended complaint.
The complaint does not, for example, allege that investors were promised distributions of the
limited partnerships’ earnings. It also does not identify when investors could expect a return of
their capital contributions. Put simply, it does not identify the terms of the contract.
Consequently, the allegations of the first amended complaint are insufficient to state a
breach of contract claim.
To reiterate, to state a breach of contract claim a complaint must allege facts plausibly
suggesting the existence of a valid contract, including the essential terms of that contract. It must
allege facts suggesting mutual assent and a bargained-for exchange. It must allege a breach of
those terms. And it must allege damages.
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Here, the first amended complaint does not do this. Consequently, it does not state a
breach of contract claim on which relief may be granted.
E
Count five asserts a claim for fraudulent inducement. As presently pleaded, however, it
does not state a claim on which relief may be granted.
Under Michigan law, fraud generally has six elements. Hi-Way Motor Co. v. Int’l
Harvester Co., 247 N.W.2d 813, 815–16 (Mich. 1976). A plaintiff must establish: “(1) That
defendant made a material representation; (2) that it was false; (3) that when he made it he knew
that it was false, or made it recklessly, without any knowledge of its truth, and as a positive
assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that
plaintiff acted in reliance upon it; and (6) that he thereby suffered injury.” Id. at 816 (quoting
Candler v. Heigho, 175 N.W. 141, 143 (Mich. 1919)).
“The distinction between fraud in the inducement and other kinds of fraud,” the Michigan
Court of Appeals explains, “is the same as the distinction . . . between fraud extraneous to the
contract and fraud interwoven with the breach of contract. With respect to the latter kind of
fraud, the misrepresentations relate to the breaching party’s performance of the contract and do
not give rise to an independent cause of action in tort. Such fraud is not extraneous to the
contractual dispute among the parties, but is instead but another thread in the fabric of the
plaintiffs’ contract claim.” Huron Tool & Eng’g Co. v. Precision Consulting Servs., Inc., 532
N.W.2d 541, 545 (Mich. Ct. App. 1995) (quoting Public Serv. Enter. Grp., Inc. v. Phila. Elec.
Co., 722 F. Supp. 184, 201 (D.N.J. 1989)).
Crucially, as noted, regardless of the type of fraud alleged, the “fraudulent
misrepresentation must be predicated upon a statement relating to a past or an existing fact.
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Future promises are contractual and do not constitute fraud.” Hi-Way Motor, 247 N.W.2d at
816; see also Kaminski v. Teledyne Indus., Inc., 121 F.3d 708 (6th Cir. 1997) (“To infer
fraudulent intent from mere nonperformance . . . would eviscerate the distinction between a
breach of contract and fraud.”).
Here, count five asserts that Defendants made two fraudulent misstatements. First, it
alleges:
The promoters, individual Defendants herein, caused to be published to Plaintiffs
and other members of the public who were solicited to make cash payments to
Defendants certain misrepresentations of fact which these Defendants knew or
should have known were untrue or without reasonable factual foundation. The
material misrepresentations as set out in Exhibit A concerning the acreage leased
by the promoters/Defendants appear, alternatively, to have already been drilled by
promoters/Defendants for their individual profit.
First Am. Comp. ¶ 111. And second, it alleges: “Exhibit B with the attached map of the leased
land states: We have the acreage to drill 40 to 50 wells. . . . Payout will commence between the
10th and 15th well during the second year using ‘Conservative’ figures. The 10th well was not
drilled and there has been no Payout.” Id. ¶¶ 111.
Neither assertion is sufficient to state a claim for fraud — much less fraudulent
inducement. First, Exhibit A does not concern “acreage leased by Defendants,” but the letter of
authority appointing Barbara K. Socia as personal representative for the estate of Richard Socia.
See First Am. Compl. Ex. A. And nothing in this letter appears fraudulent.
Likewise, even if the reference to Exhibit “A” was a scrivener’s error — and Plaintiffs
meant Exhibit “B” — the count nevertheless does not state a claim on which relief may be
granted. As noted, fraud must be pleaded with particularity. Rule 9 requires a “plaintiff, at a
minimum, to allege the time, place, and content of the alleged misrepresentation on which he or
she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting
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from the fraud.” Coffey v. Foamex L.P., 2 F.3d 157, 161–62 (6th Cir. 1993) (quoting Ballan v.
Upjohn Co., 814 F. Supp. 1375, 1385 (W.D. Mich.1992)). Simply alleging that Defendants
made “certain misrepresentations of fact which these Defendants knew or should have known
were untrue or without reasonable factual foundation” is insufficient.
Likewise, the material representations of Exhibit B are not predicated on existing facts,
but future events. It informs prospective investors, for example, that “[b]ased on 50,000 barrel
wells priced at $33 per barrel the ‘Conservative Return’ would be 30 times your investment.
Based on 100,000 barrel wells the ‘Realistic Return’ would be 60 times. . . . Secondary recovery
(water flooding) could double this ‘Realistic Return’ to over 100 times your initial investment.”
First Am. Compl. Ex. B. As noted, however, “[f]uture promises are contractual and do not
constitute fraud.” Hi-Way Motor Co., 247 N.W.2d at 815–16.
The second alleged misrepresentation identified in count five — that “[t]he 10th well was
not drilled and there has been no Payout” — is likewise not predicated on an existing fact, but a
future event. That is, Plaintiffs allege that in promoting the venture in the 1970s, Defendants
represented that they would drill at least 10 wells and that payments would then follow.
Plaintiffs further allege that Defendants did not keep their word. Accepting these allegations as
true, count five does not allege a claim for fraud.
To reiterate, to state a fraud claim a complaint must allege with particularity facts
plausibly suggesting that a defendant made a material representation regarding a past or an
existing fact. It must allege that the statement was false. It must allege that when the defendant
made it he knew that it was false, or made it recklessly. It must allege that the defendant made it
with the specific intent that the plaintiff rely on it. And it must allege that the plaintiff did in fact
rely on it, and suffered damages as a result.
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Here, the first amended complaint does not do this. Consequently, it does not state a
fraud claim on which relief may be granted.
F
Count six seeks an inspection of the partnerships’ books and records. As presently
pleaded, it states a claim on which relief may be granted.
Under Michigan law, partners are entitled to access the partnerships’ books and records.
Mich. Comp. Laws § 449.19. “The partnership books shall be kept,” the Michigan Compiled
Laws provide, “and every partner shall at all times have access to and may inspect and copy any
of them.” Id.; see also § 449.20 (“Partners shall render on demand true and full information of
all things affecting the partnership to any partner.”).
Here, as noted, the first amended complaint alleges that Plaintiffs are partners in the three
limited partnerships. They therefore have a statutory right to inspect the books and records of
the partnerships.
The first amended complaint alleges sufficient facts to entitle Plaintiffs to seek an
inspection of the books and records.
G
Finally, count seven asserts a claim for conversion. As presently pleaded, however, it
does not state a claim on which relief may be granted.
“There can be no conversion of money,” the Michigan Supreme Court instructs, “unless
there was an obligation on the part of defendant to deliver specific money to plaintiff.” Garras
v. Bekiares, 23 N.W.2d 239, 242 (Mich. 1946) (ellipses omitted); see generally 1 Linda Miller
Atkinson et al., Torts: Michigan Law & Practice § 3.103 (2d ed. 2000). The Michigan Court of
Appeals likewise cautions: “To support an action for conversion of money, the defendant must
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have an obligation to return the specific money entrusted to his care.” Head v. Phillips Camper
Sales & Rental, Inc., 593 N.W.2d 595, 603 (Mich. Ct. App. 1999) (citing Check Reporting
Servs., Inc. v. Mich. Nat’l Bank–Lansing, 478 N.W.2d 893 (Mich. Ct. App. 1991)). “The
defendant must have obtained the money without the owner’s consent to the creation of a debtor
and creditor relationship.” Citizens Ins. Co. of Am. v. Delcamp Truck Ctr., Inc., 444 N.W.2d
210, 213 (Mich. Ct. App. 1989) (citing Hogue v. Wells, 146 N.W. 369 (Mich. 1914)).
Here, the first amended complaint alleges that Plaintiffs gave Defendants money, perhaps
as much as $1.5 million. See First Am. Compl. ¶ 37. It does not, however, allege any facts
suggesting that Defendants have an obligation to return the specific money entrusted to their
care. And it does not allege that Defendants obtained the money without Plaintiffs’ consent —
on the contrary, it alleges Plaintiffs “paid” Defendants. Id. ¶ 22.
Consequently, the first amended complaint does not state a conversion claim on which
relief may be granted.
IV
Accordingly, it is ORDERED that Defendants’ motion for summary judgment or to
dismiss (ECF No. 13) is GRANTED IN PART AND DENIED IN PART.
It further ORDERED that the first amended complaint (ECF No. 3) is DISMISSED
WITHOUT PREJUDICE.
It further ORDERED that if a motion for leave to file an amended complaint is not filed
on or before February 14, 2013, count one will be dismissed with prejudice, jurisdiction over the
remaining counts will be declined, and the case will be dismissed.
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It further ORDERED that the hearings scheduled on Plaintiffs’ motion for appointment
of a special receiver (ECF No. 33) and motion for attorney fees (ECF No.35) scheduled for
February 28, 2013 are CANCELLED.
It is further ORDERED that Defendants’ motion to limit discovery (ECF No. 20),
Plaintiffs’ motion for class certification (ECF No. 24), Plaintiffs’ motion for appointment of a
special master (ECF No. 33), Plaintiffs’ motion for attorney fees (ECF No. 35), Defendants’
motion to strike expert witnesses (ECF No. 40), Plaintiffs’ motion to substitute parties (ECF No.
41), Plaintiffs’ motion for leave to amend the complaint to add additional parties (ECF No. 42),
Plaintiffs’ motion to compel (ECF No. 44), and Plaintiffs’ motion for a protective order (ECF
No. 46) are DENIED WITHOUT PREJUDICE AS MOOT.
s/Thomas L. Ludington
THOMAS L. LUDINGTON
United States District Judge
Dated: January 24, 2013
PROOF OF SERVICE
The undersigned certifies that a copy of the foregoing order was served
upon each attorney or party of record herein by electronic means or first
class U.S. mail on January 24, 2013.
s/Tracy A. Jacobs
TRACY A. JACOBS
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