C & L Ward Bros., Co. v. Outsource Solutions, Inc. et al

Filing 17

ORDER Granting 9 defendants' Motion to Dismiss Complaint. Signed by District Judge George Caram Steeh (MBea)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

C & L WARD BROS., CO.,
Plaintiff,

Case No. 11-cv-14773
HON. GEORGE CARAM STEEH

vs.
OUTSOURCE SOLUTIONS, INC., et al.,
Defendants.
__________________________________/
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS COMPLAINT
I.

Introduction

Plaintiff, C & L Ward Bros. Co., filed the instant class action lawsuit against
defendants Outsource Solutions Inc. (Outsource), Yoursource Management Group, Inc.
(Yoursource), Todd Lancaster, Robert Handley, Steve Chargo, and John Doe Corporations.
Plaintiff alleges that defendants overcharged it under the terms of the parties’ agreement
and retained the overcharged revenue for corporate and personal use. Plaintiff alleges
state law claims of fraud in the inducement, conversion and negligence as well as claims
under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961
et seq.
Presently before the court is defendants’ motion to dismiss pursuant to Federal Rule
of Civil Procedure 12(b)(6). Defendants argue that the parties’ agreement bars plaintiff’s
tort and RICO claims. Because plaintiff expressly alleged that it entered into an agreement
and that the amount to be charged for defendants’ payroll tax services was governed by
that agreement, plaintiff’s RICO and tort claims fail as a matter of law. Defendants are
-1-

therefore entitled to the relief sought in the present motion and plaintiff’s complaint is
dismissed.
II.

Factual Background

Ward is a Michigan corporation in the business of selling and installing windows,
doors, and siding for residential dwellings. Outsource is a dissolved Michigan corporation
that is an employer organization business providing payroll services, tax services, benefits
administration, and human resource services to its clients. Defendant Todd Lancaster was
the Chief Executive Officer of Outsource before it dissolved in February of 2011 and is now
the Chief Executive Officer of YourSource. Both defendants Robert Handley and Steve
Chargo are former Chief Financial Officers for YourSource.
On or about May 23, 2003, plaintiff and Outsource entered into a co-employment
agreement whereby Outsource agreed to handle various human resource and tax-related
services for plaintiff. The agreement was effective July 1, 2003 for a term of one year with
automatic renewal for one year periods until terminated by either party upon thirty days
written notice. Outsource dissolved on February 1, 2011, however service to plaintiff
pursuant to the co-employment agreement continued uninterrupted through defendant
YourSource and/or defendant Todd Lancaster through September of 2011.
Part of defendants’ responsibility under the agreement was to pay state and federal
unemployment taxes on behalf of plaintiff as part of its payroll service. Defendants
maintain that plaintiff agreed to pay 10.5% of plaintiff’s gross payroll for the tax related
services plus an additional fee for other payroll/human resource administration services
equal to 1.65% of plaintiff’s gross payroll.

-2-

Conversely, plaintiff alleges that prior to entering into the co-employment agreement,
defendants provided Patrick L. Ward, plaintiff’s President, with a proposal showing what
plaintiff’s human resource costs would be if it entered into the co-employment agreement.
Plaintiff maintains that the proposal and verbal representations were that plaintiff would
save $12,709.00 by using defendants’ services instead of paying an employee to handle
the human resources matters.

Plaintiff maintains that plaintiff’s payroll taxes would

continue at a rate of 10.5% of gross payroll and that the only new expense would be
defendants’ administrative fee, equaling 1.65% of plaintiff’s gross payroll. During an April
or May 2003 meeting between defendant Lancaster, Patrick Ward and Ronald Ward,
Lancaster represented that the total fee for all Outsource services was 1.65% of total
payroll and not one penny more. Nowhere in the proposal does it state that the 10.5% was
a flat fee as defendants claim. Rather the proposal states that plaintiff’s “Payroll Taxes on
Gross Payroll” were to be exactly the same under Outsource’s administration as they were
under Ward’s administration, in other words, the flat fee was nothing more than actual
payroll taxes.
Plaintiff maintains that it first learned there might be a problem with defendants’
billing practices when it was contacted by a former client of Outsource and was advised
that it should investigate what it was being charged by defendants for payroll taxes. After
Patrick Ward conducted an investigation, he met with defendants Lancaster and Chargo
on February 4, 2011 and confronted them with plaintiff’s accountant’s summary report,
which explained that defendants had overcharged plaintiff in the amount of $458,183.16.
According to plaintiff, Lancaster and Chargo admitted that plaintiff was overcharged and
stated that the extra money was used for operating expenses, administrative fees, and/or
-3-

the Michigan business tax.

Lancaster and Chargo deny admitting plaintiff was

overcharged.
Plaintiff argues that defendants fraudulently concealed their wrongful overcharging
by lumping legitimate tax payments of various kinds together with the fraudulent
overcharges and identifying them only as “payroll taxes” on invoices that defendants sent
to plaintiff to ensure that no line items on defendants’ invoices raised a red flag.
III.

Law & Analysis

A.

Standard of Review

Federal Rule of Civil Procedure12(b)(6) allows the court to make an assessment as
to whether the plaintiff has stated a claim upon which relief may be granted. See Fed. R.
Civ. P. 12(b)(6). “Federal Rule of Civil Procedure 8(a)(2) requires only ‘a short and plain
statement of the claim showing that the pleader is entitled to relief,’ in order to ‘give the
defendant fair notice of what the ... claim is and the grounds upon which it rests.’” Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing Conley v. Gibson, 355 U.S. 41,
47 (1957). Even though the complaint need not contain “detailed” factual allegations, its
“factual allegations must be enough to raise a right to relief above the speculative level on
the assumption that all of the allegations in the complaint are true.” Ass’n of Cleveland Fire
Fighters v. City of Cleveland, 502 F.3d 545, 548 (6th Cir. 2007) (quoting Bell Atlantic, 550
U.S. at 555).
The court must construe the complaint in favor of the plaintiff, accept the allegations
of the complaint as true, and determine whether plaintiff’s factual allegations present
plausible claims. To survive a Rule 12(b)(6) motion to dismiss, plaintiff’s pleading for relief
must provide “more than labels and conclusions, and a formulaic recitation of the elements
-4-

of a cause of action will not do.” Id. (citations and quotations omitted). “[T]he tenet that
a court must accept as true all of the allegations contained in a complaint is inapplicable
to legal conclusions.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).

“Nor does a

complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’”
Id. “[A] complaint must contain sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Id. The plausibility standard requires “more than a
sheer possibility that a defendant has acted unlawfully.” Id. “[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.’” Id. at
1950.
The district court generally reviews only the allegations set forth in the complaint in
determining on whether to grant a Rule 12(b)(6) motion to dismiss, however “matters of
public record, orders, items appearing in the record of the case, and exhibits attached to
the complaint, also may be taken into account. Amini v. Oberlin College, 259 F. 3d 493, 502
(6th Cir. 2001). Documents attached to a defendant’s “motion to dismiss are considered
part of the pleadings if they are referred to in the plaintiff’s complaint and are central to her
claim.” Id.
B.

Tort Claims

Defendants argue that plaintiff’s tort claims of fraud in the inducement, conversion
and negligence fail because any duty owed to plaintiff arose solely out of the parties’
contractual relationship, and Michigan law precludes tort actions where a contractual
agreement exists. See Sherman v. Sea Ray Boats, Inc., 251 Mich. App. 41, 52; 649
N.W.2d 783 (2002). “Michigan case law expressly provides that an action in tort may not
-5-

be maintained where a contractual agreement exists, unless a duty, separate and distinct
from the contractual obligation, is established.” Id.; see also, Fultz v. Union-Commerce
Assocs., 470 Mich. 460, 466; 683 N.W.2d 587 (2004).
Confronted with controlling precedent that the written agreement between the parties
bars plaintiff’s tort claims, plaintiff attempts to re-invent its allegations by denying that it ever
alleged that a valid, enforceable agreement exists.

Plaintiff maintains that the co-

employment agreement states in relevant part that plaintiff would pay defendants “a service
fee equal to the calculation as shown on Exhibit D, which is attached and made part of this
Agreement . . . .” Compl., Ex. A. Plaintiff now asserts that exhibit D was never attached
to the co-employment agreement. However, plaintiff expressly alleged that it entered into
an agreement and the amount defendants would charge was governed by the parties’
agreement and that “the agreement limited defendants’ compensation to 1.65% of the
gross payroll.” Plaintiff further alleged in the complaint that “[t]he Agreement was effective
July 1, 2003 . . . [and] continued in full force and effect until September 2011, when Ward
terminated the Agreement.” Compl. at ¶ ¶ 11-12.
Under Michigan’s separate and distinct duty doctrine, a plaintiff may not assert a
fraudulent inducement claim based on alleged pre-contractual misrepresentations that are
“interwoven with” the parties’ contract, only fraud in the inducement claims based on
“extraneous” misrepresentations survive under the rule. See Huron Tool and Eng’g v.
Precision Consult. Serv. Co., 209 Mich. App. 365, 372-73; 532 N.W.2d 541 (1995). “[A]
claim of fraud in the inducement, by definition, redresses misrepresentations that induce
the buyer to enter into a contract but that do not in themselves constitute a contract or
warranty terms subsequently breached by the seller.” Id. at 375.
-6-

While plaintiff responds that the co-employment agreement is unenforceable, plaintiff
alleged in the complaint that “[o]n May 23, 2003, Ward and Outsource entered into a coemployment agreement. . . [and] the agreement continued in full force and effect until
September 2011.” The alleged misrepresentation concerns the rate at which Outsource
would bill plaintiff for its services. Specifically, plaintiff contends that no additional charges
beyond the 1.65% of gross payroll charges “were authorized by the agreement.” Plaintiff’s
fraud in the inducement claim involves an alleged misrepresentation that is “interwoven
with” the parties’ agreement, therefore it is barred by the parties’ agreement.
Similarly, in order for plaintiff’s conversion claim to survive, plaintiff must allege a
duty separate and distinct from the contract’s duties. Plaintiff alleges that defendants
“wrongfully exerted dominion over Ward’s funds . . . by overcharging Ward for ‘payroll
taxes’ as set forth in the Complaint.” Thus, the only duty that plaintiff identifies is the duty
to not overcharge for defendants’ services, a duty that arises under the parties’ agreement,
which set forth the agreed upon rate that would be charged by defendants. See Hamilton
v. Nochimson, No. 09-13366, 2010 U.S. Dist. LEXIS 17942, at *6-8 (E.D. Mich. March 1,
2010) (dismissing tort claims of breach of fiduciary duty and conversion because the claims
failed to allege a duty separate and distinct from the parties’ contractual duties); see also
Wrench LLC v. Taco Bell Corp., No. 1:98-cv-45, 2003 WL 21653410, at *2 (W.D. Mich. May
1, 2003).
Likewise, plaintiff’s negligence claim fails because plaintiff does not identify a duty
separate and distinct from the parties’ agreement. Plaintiff alleges that defendants were
“negligent in that they overcharged Ward in excess of Five Hundred Thousand
($500,000.00) Dollars for ‘payroll taxes’ . . . .” Compl. at ¶ 129. Defendants’ alleged
-7-

overcharging plaintiff for tax related services was a breach of the parties’ contract, and thus
was not a violation of any duty that was “separate and distinct” from the parties’ contractual
obligations. Thus, plaintiff’s negligence claim fails as a matter of law. See Fultz, 470 Mich.
at 467.
Because plaintiff fails to allege any duties separate and distinct from the parties’
agreement, all of plaintiff’s tort claims are subject to dismissal.
C.

RICO Claims 1

Defendants argue that plaintiff fails to allege (1) the predicate acts of mail and wire
fraud, or (2) a RICO enterprise.
Section 1962(c) of Title 18 of the United States Code provides that:
It shall be unlawful for any person employed by or associated with any
enterprise engaged in, or the activities of which affect, interstate or foreign
commerce, to conduct or participate, directly or indirectly, in the conduct of
such enterprise’s affairs through a pattern of racketeering activity or
collection of unlawful debt.
18 U.S.C. 1962(c). To prevail on a RICO cause of action, plaintiff must establish “(1)
conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Moon v.
Harrison Piping Supply, 465 F. 3d 719, 723 (6th Cir. 2006) (quoting Sedima, S.P.R.L. v.
Imrex Co., Inc., 473 U.S. 479, 496 (1985)). “Racketeering activity” is any act that is

1

Plaintiff has abandoned its RICO claims under 18 U.S.C. § § 1962(a) and (b)
as it offers no response to defendants’ argument that plaintiff has failed to state a claim
under RICO sections 1962(a) and 1962(b). See Defs.’ Mot. to Dis. at 14-18. Plaintiff’s
response argues only that it “sufficiently pleaded its RICO claims pursuant to 18 U.S.C.
§ 1962(c) and 18 U.S.C. § 1962(d).” Plf.’s Resp. at 19. Thus, plaintiff has abandoned
its RICO claims under 18 U.S.C. § § 1962(a) and (b). See Mekani v. Homecomings
Fin., LLC, 752 F. Supp.2d 785, 790 n. 2 (E.D. Mich. 2010) (when a plaintiff fails to
respond to a motion to dismiss a claim, “the Court assumes he concedes this point and
abandons the claim.”).
-8-

indictable under certain enumerated federal criminal statutes. 18 U.S.C. § 1961(1)(B);
Advocacy Org. for Patients & Providers v. Auto Club Ins. Ass’n, 176 F. 3d 315, 322 (6th Cir.
1999). RICO requires at least two acts of racketeering activity within a period of ten years.
See 18 U.S.C. § 1961(5).
“To allege a violation of the mail fraud statute, 18 U.S.C. § 1341, plaintiff must allege
that the (1) defendants formed a scheme or artifice to defraud; (2) the defendants used the
United States mails or caused a use of the United States mails in furtherance of the
scheme; and (3) the defendants did so with specific intent to deceive or defraud. See
Jackson v. Sedgwick Claims Management, 2010 WL 931864, *27 (E.D. Mich. March 11,
2010) (quoting Central Distributors of Beer, Inc. v. Conn., 5 F. 3d 181, 183-84 (6th Cir.
1993)). “A scheme to defraud includes any plan or course of action by which someone uses
false, deceptive, or fraudulent pretenses, representations, or promises to deprive someone
else of money.” Heinrich v. Waiting Angels Adoption Servs., Inc., No. 09-2470, 2012 U.S.
App. LEXIS 2390, *15 (6th Cir. Feb. 7, 2012) (citing United States v. Jamieson, 427 F. 3d
394, 402 (6th Cir. 2005)).
The elements of wire fraud are very similar, but require that the defendant use
interstate wire, radio or television communications in furtherance of the scheme to defraud.”
Hall v. Witteman, 569 F. Supp. 2d 1208 (D. Kan. 2008). Specifically, 18 U.S.C. § 1343
provides that “Whoever, having devised or intending to devise any scheme or artifice to
defraud, or for obtaining money or property by means of false or fraudulent pretenses,
representations, or promises, transmits or causes to be transmitted by means of wire,
radio, or television communication in interstate or foreign commerce, any writings, signs,

-9-

signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be
fined under this title or imprisoned not more than 20 years, or both.” 18 U.S.C. § 1343.
“When pleading predicate acts of mail or wire fraud, in order to satisfy the
heightened pleading requirements of Rule 9(b), a plaintiff must ‘(1) specify the statements
that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and
when the statements were made, and (4) explain why the statements were fraudulent.’”
Heinrich, 2012 U.S. App. LEXIS 2390, at *15 (citing Frank v. Dana Corp., 547 F. 3d 564,
570 (6th Cir. 2008)).
Here, plaintiff’s RICO claims do not allege fraudulent activity, rather plaintiff claims
that defendants billed plaintiff for tax related services at a rate that was not agreed to by
the parties. However, sending billing invoices which erroneously apply a charge for tax
related services under the terms of a contract does not amount to fraud. See Blount
Financial Services, Inc. v. Walter E. Heller, 819 F.2d 151, 152-53 (6th Cir. 1987) (“Sending
a financial statement which misconstrues the prime rate provided by the terms of the
contract may breach the contract but it does not amount to a RICO mail fraud cause of
action.”); see also Kevelighan v. Trott & Trott, P.C., 771 F. Supp. 2d 763, 773 (E.D. Mich.
2010) (“It is insufficient . . . to transmute claims sounding in contract into RICO claims by
simply appending the terms ‘false’ and ‘fraudulent.’) Plaintiff’s argument that mail and wire
fraud can constitute predicate acts of racketeering activity for RICO purposes does not
save plaintiff’s claim from dismissal. While plaintiff is correct that mail and wire fraud are
predicate acts under RICO, plaintiff is still required to plead a viable fraud claim specifying
the fraudulent statements, the identity of the speaker, where and when the statements were
made, and explain why the statements were fraudulent.’” Heinrich, 2012 U.S. App. LEXIS
-10-

2390, at *15. Plaintiff has failed to plausibly allege the predicate acts of mail and wire
fraud, therefore its claim under § 1962(c) fails.
Plaintiff’s RICO claim under § 1962(c) also fails because it failed to plead the
existence of an enterprise.

An “enterprise” includes “any individual, partnership,

corporation, association, or legal entity, and union or group of individuals associated in fact
although not a legal entity.” 18 U.S.C. § 1961(4). Therefore, an enterprise under RICO
“encompasses both legal entities and illegitimate associations-in-fact.” Russello v. United
States, 464 U.S. 16, 24 (1983). In Boyle v. United States, 129 S. Ct. 2237 (2009), the
Supreme Court held that an association-in-fact enterprise must have three structural
features: “a purpose, relationships among those associated with the enterprise, and
longevity sufficient to permit these associates to pursue the enterprise’s purpose.” Id. at
1276. However, the group need not “have a hierarchical structure or a ‘chain of command’;
. . . a name, regular meetings, [or] dues.” Id. at 2245.

The group “must function as a

continuing unit and remain in existence long enough to pursue a course of conduct . . . .”
Id.
Here, defendants did not associate for the common purpose of engaging in mail and
wire fraud. An enterprise exists within the meaning of RICO only where “a group of
persons [has] associated together for the common purpose of engaging in a course of
conduct.” Boyle, 129 S.Ct. at 2243 (quoting United States v. Turkette, 452 U.S. 576, 583
(1981)).

Defendants were associated as a business and plaintiff merely asserts that

“defendants were an enterprise affecting interstate commerce.” Compl. at ¶ 54. In fact,
plaintiff acknowledges that it “does not allege that the corporate [or individual] Defendants
existed only to engage in this illegal common purpose,” and they “had legitimate business
-11-

pursuits,” and “already knew each other and already worked together.” Resp. Br. at 19-20.
Plaintiff’s complaint fails to allege that the defendants associated for a common purpose
to engage in racketeering activity. For this reason also, plaintiff fails to allege a viable claim
under § 1962(c).
As to plaintiff’s RICO conspiracy claim, defendants correctly argue that because
plaintiff has failed to state a violation under RICO, plaintiff’s conspiracy claim under RICO
fails as a matter of law. See Craigshead v. EF Hutton & Co., 899 F. 2d 485, 495 (6th Cir.
1989) (“Plaintiffs’ conspiracy claim cannot stand in light of the dismissal of their other RICO
counts.”); AK Steel Corp. v. USW, 2002 U.S. Dist. LEXIS 19676, *24 (S.D. Ohio 2002) (“A
conspiracy claim under 18 U.S.C. § 1962(d) cannot survive a motion to dismiss if the
pleadings do not also state a substantive RICO claim for which relief may be granted.”).
IV.

Conclusion

Accordingly,
Defendants’ motion to dismiss [#9] is GRANTED.
This cause of action is dismissed.
SO ORDERED.
Dated: August 3, 2012
s/George Caram Steeh
GEORGE CARAM STEEH
UNITED STATES DISTRICT JUDGE
CERTIFICATE OF SERVICE
Copies of this Order were served upon attorneys of record on
August 3, 2012, by electronic and/or ordinary mail.
s/Marcia Beauchemin
Deputy Clerk

-12-