Thomas et al v. Daneshgari et al
Filing
54
OPINION AND ORDER DENYING 41 Plaintiffs' Motion for Leave to Amend Complaint, GRANTING 24 Defendants' Motion to Dismiss, DENYING 25 Defendants' Motion for Sanctions, and DENYING 29 Plaintiffs' Motion to Compel. Signed by District Judge Terrence G. Berg. (Chubb, A)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
EUGENE THOMAS AND
WALTER JAMIL,
Plaintiffs,
v.
Case No. 13-10378
PARVIZ DANESHGARI,
HAROLD BRESLIN, SAMIR
SHABENDER AND COMPUTER
BUSINESS WORLD, LLC,
HON. TERRENCE G. BERG
HON. PAUL J. KOMIVES
Defendants.
/
OPINION AND ORDER DENYING PLAINTIFFS’ MOTION FOR LEAVE TO
AMEND COMPLAINT (DKT. 41), GRANTING DEFENDANTS’ MOTION TO
DISMISS (DKT. 24), DENYING DEFENDANTS’ MOTION FOR SANCTIONS
(DKT. 25) AND DENYING PLAINTIFFS’ MOTION TO COMPEL (DKT. 29)
This case arises from a long-standing business dispute between Plaintiffs
Eugene Thomas and Walter Jamil (collectively “Plaintiffs”) and Defendants Parviz
Daneshgari, Harold Breslin, Samir Shabender and Computer Business World, LLC
(collectively “Defendants”). The procedural history of this dispute is recounted in
greater detail below. Briefly, Plaintiffs sold several business entities to Daneshgari
for $2,000,000 in cash, a $700,000 promissory note and the assumption of
$1,371,237.85 in debt. Several months after the sale, Daneshgari came to believe
that Plaintiffs had misrepresented certain allegedly fraudulent practices of the
businesses. Daneshgari sued Plaintiffs, and the parties arbitrated their claims in
front of arbitrator Edward Pappas. Daneshgari prevailed in the arbitration, and
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obtained a $2,800,000 award, which was later confirmed in the Oakland County
Circuit Court and reduced to a civil judgment against Plaintiffs. Daneshgari then
sought to collect this judgment and, in response, Plaintiffs filed for bankruptcy. The
Bankruptcy Judge, Honorable Steven Rhodes, ruled that the $2.8 million judgment
was non-dischargeable. See Computer Business World, LLC v. Jamil (In re Jamil),
409 B.R. 866 (Bankr. E.D. Mich. 2009). Plaintiffs appealed this ruling, but Judge
Rhodes’s decision was affirmed by Honorable Arthur J. Tarnow of this Court.
Plaintiffs also sought appellate relief through the state court system, but the civil
judgment was affirmed by the Michigan Court of Appeals. This lawsuit is based on
Plaintiffs’ contention that “newly discovered evidence” indicates that Defendants
perjured themselves in the arbitration proceedings.
Currently before the Court are: Plaintiffs’ motion for leave to file a second
amended complaint (Dkt. 41), and Defendants’ motions to dismiss (Dkt. 24) and for
sanctions (Dkt. 25). For the reasons stated below, Plaintiffs’ motion for leave to
amend is DENIED, Defendants’ motion to dismiss is GRANTED and Defendants’
motion for sanctions is DENIED. More specifically, the Court finds that Plaintiffs’
two federal claims – under the Racketeer Influenced and Corrupt Organizations Act
(“RICO”) and the Fair Debt Collection Practices Act (“FDCPA”) – fail to state a
claim upon which relief can be granted. Therefore, these claims are DISMISSED
WITH PREJUDICE. As to Plaintiffs’ remaining state law claims, the Court
declines to exercise supplemental jurisdiction over them, and thus they are
DISMISSED WITHOUT PREJUDICE. Finally, Plaintiffs also filed a motion to
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compel discovery from Defendants (Dkt. 29). Since the Court dismisses all pending
claims, Plaintiffs’ motion to compel is DENIED AS MOOT.
I. BACKGROUND
After a review of the pleadings, the relevant facts, taken in a light most
favorable to Plaintiffs, are as follows.
In 1999, Plaintiffs founded a company called Computer Builders Warehouse –
with several subsidiaries and related entities – the primary business of which was
retail computer sales (Dkt. 9, First Amd. Compl. ¶¶ 11-14). After achieving some
success with their business, in July 2006, Plaintiffs sold the company and most of
its attendant entities to Defendant Parviz Daneshgari (“Daneshgari”). Id. at ¶¶ 6871. To run this new business, Daneshgari founded Defendant Computer Business
World, LLC (“CBW”) and kept at least two of Plaintiffs’ former employees on staff,
specifically, Defendants Harold G. Breslin, (“Breslin”) and Samir Shabander
(“Shabander”). Id. at ¶¶ 68-74.
Plaintiffs were supposed to retain a minority interest in the business, and
were under contract to perform services for the business for 1 year after the sale.
Id. Shortly after the sale, however, Daneshgari made a series of business decisions
that Plaintiffs claim were intended to cheat them out of the benefits of their
minority interest in the company. Id. at ¶¶ 74-93. In particular, Plaintiffs allege
that Daneshgari, Breslin, and Shabander “conspired to bleed the business and drain
the assets of CBW.” Id. at ¶ 185. This bleeding of the business, according to
Plaintiffs, consisted of Daneshgari increasing the company’s line of credit,
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liquidating inventory, moving assets between retail locations, adjusting the working
capital downward by almost $700,0001 and intentionally paying above market rents
and exorbitant consulting fees to himself and his other entities. Id. ¶¶ 74-93.
In the fall of 2007, Daneshgari began an arbitration proceeding against
Plaintiffs, claiming that Plaintiffs fraudulently induced him to purchase the
company by hiding certain questionable business practices from him prior to the
completion of the sale of the company. Id. at ¶ 94-99. In the present lawsuit,
Plaintiffs allege that the arbitration testimony of Daneshgari, Breslin, and
Shabander was false with regard to Daneshgari’s lack of knowledge of the
questionable business practices prior to the sale of the company, his opportunities
to learn of such questionable business practices during the due diligence phase of
the transaction, and the effects those business practices had on the company’s
relationship with its suppliers after the sale. Id.
At the conclusion of the arbitration proceeding Daneshgari won a $2.8 million
award and the arbitrator’s opinion specifically stated that Plaintiffs acted
fraudulently with regard to the sale of their business. Id. Daneshgari subsequently
had the award confirmed as a judgment in state court. Id. at ¶ 100. Plaintiffs claim
that Daneshgari, Breslin, and Shabander all submitted perjured testimony during
the arbitration proceeding, and that as such, the arbitration proceeding was secured
“fraudulently.” Id. at ¶¶ 96-99. Plaintiffs further allege that the perjured
1This
downward adjustment was effected pursuant to the presumably independent opinion of
business consulting and accounting firm Plante & Moran (Dkt. 25, Defs’ Mot. for Sanc. at 2 (quoting
Computer Business World, LLC v. Jamil (In re Jamil), 409 B.R. 866, 869 (Bankr. E.D. Mich. 2009)).
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arbitration testimony was submitted with the intent to secure a judgment against
them that could be declared non-dischargeable in federal bankruptcy proceedings.
Id. ¶ 139. The judgment was, in fact, declared non-dischargeable in federal
bankruptcy proceedings. See Computer Business World, LLC v. Jamil (In re Jamil),
409 B.R. 866 (Bankr. E.D. Mich. 2009).
Daneshgari has aggressively exercised his rights under Michigan’s judgment
enforcement rules, including attaching and levying much of the personal property of
Plaintiffs and their families (First Amd. Compl. ¶¶ 120-134; Pls.’ Resp. to Defs.’
Mot. for Sanc. 2-3). Both Plaintiffs and Defendants are now, or in the recent past
have been, party to numerous lawsuits relating to the events described herein,
including legal malpractice claims, bankruptcy proceedings, and state court
appellate proceedings.
On January 30, 2013, Plaintiffs initiated this lawsuit alleging violations of
the RICO Act, 18 U.S.C. § 1961 et seq., and the FDCPA, 15 U.S.C. 1692 et seq.,
along with seven counts of state law claims, ranging from breach of contract to
conversion. On February 22, 2013, Honorable Nancy G. Edmunds required
Plaintiffs to file a “RICO case statement,” within which Plaintiffs had to “describe in
detail” the basis for their RICO claim (Dkt. 8).1 On February 25, 2013, Plaintiffs
filed an Amended Complaint (Dkt. 9). Then, on March 13, 2013, Plaintiffs filed a
57-page (and in many places single-spaced) RICO case statement (Dkt. 10). When
describing which “predicate acts” form the basis of Plaintiffs’ RICO claim, Plaintiffs
Judge Edmunds later recused herself from this matter, and it was reassigned to the undersigned
(Dkts. 46, 47).
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stated that they were relying on “acts of perjury, offenses under 18 U.S.C. § 1621,
and acts of subordination of perjury, offenses pursuant to 18 U.S.C. § 1622” (Dkt. 10
at 38).
On June 14, 2013, “claiming newly discovered evidence,” Plaintiffs moved for
leave to file a Second Amended Complaint (Dkt. 41). Plaintiffs’ proposed Second
Amended Complaint adds new factual allegations, specifically the fact that
Daneshgari did not have standing to bring the arbitration proceeding in the first
place because he had relinquished his rights to any assets of CBW after defaulting
on a bank loan. The proposed Second Amended Complaint is 62 pages long and
contains 355 paragraphs of allegations; however, it contains only new factual
allegations, no new counts, or claims (Dkt. 41, Ex. H).
On September 18, 2013, the Court heard oral argument on Defendants’
Motion to Dismiss and Plaintiff’s Motion to Amend the Complaint.
II. ANALYSIS
A. Standards for Motion for Leave to Amend and to Dismiss
Rule 15(a)(2) provides that “a party may amend its pleading only with the
opposing party’s written consent or the court’s leave. The court should freely give
leave when justice so requires.” Fed. R. Civ. P. 15(a)(2). However, amendments
should not be permitted in instances of “undue delay in filing, lack of notice to the
opposing party, bad faith by the moving party, repeated failure to cure deficiencies
by previous amendments, undue prejudice to the opposing party, and futility of
amendment.” Foman v. Davis, 371 U.S. 178, 182 (1962). “The test for futility ...
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does not depend on whether the proposed amendment could potentially be
dismissed on a motion for summary judgment; instead, a proposed amendment is
futile only if it could not withstand a Rule 12(b)(6) Motion to Dismiss.” Rose v.
Hartford Underwriters Ins. Co., 203 F.3d 417, 421 (6th Cir. 2000).
“Rule 12(b)(6)…allow(s) a defendant to test whether, as a matter of law, the
plaintiff is entitled to legal relief if all the facts and allegations in the complaint are
taken as true.” Rippy ex rel. Rippy v. Hattaway, 270 F.3d 416, 419 (6th Cir. 2001)
(citing Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993)). Under Rule 12(b)(6), the
complaint is viewed in the light most favorable to the plaintiff, the allegations in the
complaint are accepted as true, and all reasonable inferences are drawn in favor of
the plaintiff. See Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426, 430 (6th
Cir. 2008). “[A] judge may not grant a Rule 12(b)(6) motion based on a disbelief of a
complaint’s factual allegations.” Saglioccolo v. Eagle Ins. Co., 112 F.3d 226, 228–29
(6th Cir. 1997) (quoting Columbia Nat’l Res., Inc. v. Tatum, 58 F.3d 1101, 1109 (6th
Cir. 1995)). “However, while liberal, this standard of review does require more than
the bare assertion of legal conclusions.” Tatum, 58 F.3d at 1109; Tackett v. M & G
Polymers, USA, L.L.C., 561 F.3d 478, 488 (6th Cir. 2009).
“To survive a motion to dismiss, [a plaintiff] must plead ‘enough factual
matter’ that, when taken as true, ‘state[s] a claim to relief that is plausible on its
face.’ Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 570, (2007). Plausibility
requires showing more than the “sheer possibility” of relief but less than a
‘probab[le]’ entitlement to relief. Ashcroft v. Iqbal, [556 U.S. 662, 678] (2009).”
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Fabian v. Fulmer Helmets, Inc., 628 F.3d 278, 280 (6th Cir. 2010). “Where a
complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it
‘stops short of the line between possibility and plausibility of entitlement to relief.’”
Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557).
Consideration of a motion to dismiss under Rule 12(b)(6) is confined to the
pleadings. See Jones v. City of Cincinnati, 521 F.3d 555, 562 (6th Cir. 2008).
Assessment of the facial sufficiency of the complaint ordinarily must be undertaken
without resort to matters outside the pleadings. See Wysocki v. Int’l Bus. Mach.
Corp., 607 F.3d 1102, 1104 (6th Cir. 2010). However, “documents attached to the
pleadings become part of the pleadings and may be considered on a motion to
dismiss.” Commercial Money Ctr., Inc. v. Illinois Union Ins. Co., 508 F.3d 327, 335
(6th Cir. 2007) (citing Fed. R. Civ. P. 10(c)); see also Koubriti v. Convertino, 593 F.3d
459, 463 n. 1 (6th Cir. 2010). Even if a document is not attached to a complaint or
answer, “when a document is referred to in the pleadings and is integral to the
claims, it may be considered without converting a motion to dismiss into one for
summary judgment.” Commercial Money Ctr., 508 F.3d at 335–36. If the plaintiff
does not directly refer to a document in the pleadings, but that document governs
the plaintiff’s rights and is necessarily incorporated by reference, then the motion
need not be converted to one for summary judgment. See Weiner v. Klais & Co.,
Inc., 108 F.3d 86, 89 (6th Cir. 1997). In addition, “a court may consider matters of
public record in deciding a motion to dismiss without converting the motion to one
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for summary judgment.” Northville Downs v. Granholm, 622 F.3d 579 (6th Cir.
2010) (citing Commercial Money Ctr., Inc., 508 F.3d at 335–36).
B. Plaintiffs’ Proposed Amendment is Futile
Defendants argue the additional factual allegations found in the proposed
amendment “do not state a claim for fraud, much less a violation of RICO or the
Fair Debt Collection Practices Act” (Dkt. 43, Defs.’ Resp. to Pls.’ Mot. for Leave to
Amd. at 8). The Court agrees.
As explained below, the allegations found in the First Amended Complaint do
not state a viable claim under either RICO or the FDCPA. The proposed Second
Amended Complaint’s newly alleged factual matter – that Daneshgari did not have
standing to initiate the arbitration proceeding – does nothing to enhance the
viability of Plaintiffs’ RICO or FDCPA claims. Viewed through the applicable Rule
12(b)(6) standard, the proposed amendment fails to state a claim to relief that is
plausible on its face, and fails to state a valid RICO or FDCPA claim. Leave to
amend is therefore denied as futile.
C.
Plaintiffs’ Federal Claims Fail to State a Claim and the Court
Declines to Exercise Supplemental Jurisdiction Over Plaintiffs’
Remaining State Law Claims
1. RICO
Plaintiffs’ RICO claims contain several defects causing them to fail to state a
claim upon which relief can be granted. For example, Paragraph 179 of the First
Amended Complaint states: “Defendants conspired among themselves to commit
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various criminal acts through a pattern of activity that is unlawful under 18 U.S.C.
§ 1961(1)(A).” Section 1961(1)(A) defines “racketeering activity” to mean:
any act or threat involving murder, kidnapping, gambling, arson, robbery,
bribery, extortion, dealing in obscene matter, or dealing in a controlled
substance or listed chemical (as defined in section 102 of the Controlled
Substances Act), which is chargeable under State law and punishable by
imprisonment for more than one year.
Plaintiffs’ First Amended Complaint alleges various bad acts by Defendants, but all
of them relate to Defendants’ alleged perjury at an arbitration proceeding and
Defendants’ post-sale allocation of company resources. None of these allegations are
the type of criminal acts contemplated by § 1961(1)(A) such as arson, murder,
kidnapping, gambling, robbery, bribery, extortion, dealing in obscene matter or
drug dealing. As a result Plaintiffs’ RICO claim does not contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.2
Furthermore, while Plaintiffs have pleaded in conclusory fashion that
Defendants “conspired” among one another, they have failed to plead the elements
of a conspiracy necessary to sustain a claim under 18 U.S.C. § 1962(d). The Sixth
Circuit has held that:
[t]o plausibly state a claim for a violation of 18 U.S.C. § 1962(d), plaintiffs
must successfully allege all the elements of a RICO violation, as well as
alleging the existence of an illicit agreement to violate the substantive RICO
provision. An agreement can be shown if the defendant objectively
Section 1961(1)’s definition of “racketeering activity” contains two subsections. Subsection (A),
alleged by Plaintiffs, is limited to those crimes (“act or threat involving murder, kidnapping,
gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled
substance . . . ”) listed above. Subsection (B), not referenced by Plaintiffs, includes scores of other
serious federal crimes, such as mail fraud, wire fraud, bribery, gambling, and obstruction of justice.
See 18 U.S.C. § 1961(1)(A) and (B). As explained in greater detail below, Plaintiffs do not adequately
allege any of these other crimes as predicate offenses, in particular, obstruction of justice, mail fraud
or wire fraud.
2
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manifested an agreement to participate directly or indirectly in the affairs of
an enterprise through the commission of two or more predicate crimes.
Heinrich v. Waiting Angels Adoption Services, Inc., 668 F.3d 393, 411 (6th Cir.
2012). In Heinrich the Sixth Circuit reversed the district court’s dismissal of
several RICO claims. However, the complaint in Heinrich alleged sufficient
predicate acts, specifically mail and wire fraud and extortion, to support the
requisite inferences for a RICO conspiracy claim under 18 U.S.C. § 1962(d).
Heinrich, 668 F.3d 411. In contrast, here, Plaintiffs have not alleged any actions by
Defendants that qualify as predicate acts under any section of the RICO statute, let
alone the section Plaintiffs relied on, § 1961(1)(A), which, as noted above, contains a
relatively circumscribed list of serious, mostly violent felonies. Plaintiffs’
allegations, specifically that Defendants bled the business by moving assets
between companies; entered into contracts with companies also owned by
Daneshgari; and offered perjured arbitration testimony, if true, may form the basis
of a civil action for breach of contract, fraud, breach of fiduciary duty, conflict of
interest, perjury in a state proceeding, or some other business tort.3 These claims
do not properly form the basis of a RICO claim, for conspiracy or otherwise.
As to perjury, it is not included among the list of predicate acts in 18 U.S.C.
§ 1961(1). See Pyramid Sec., Ltd. v. IB Resolution, Inc., 924 F.2d 1114, 1117
(D.C.Cir. 1991), cert. denied, 502 U.S. 822 (1991); Rand v. Anaconda–Ericsson, Inc.,
Furthermore, Plaintiffs could theoretically return to state court and move to amend the state court
judgment, or request relief from the judgment. The Michigan Court Rules authorize the state court
to grant a new trial based upon “irregularity in the proceedings” or “misconduct…of the prevailing
party.” MCR 2.611(A)(1)(a), (b). The Michigan Court Rules authorize “relief from judgment” based
on “[n]ewly discovered evidence” or “[f]raud (intrinsic or extrinsic), misrepresentation, or other
misconduct of an adverse party.” MCR 2.612(C)(1)(a), (c). Plaintiff’s counsel conceded at the hearing
that this kind of relief was available.
3
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623 F.Supp. 176, 182 (E.D.N.Y. 1985), aff’d on other grounds, 794 F.2d 843, 849 (2d
Cir. 1986), cert. denied, 479 U.S. 987 (1986); Sellers v. General Motors Corp., 590
F.Supp. 502, 507 (E.D.Pa. 1984).
When perjury is alleged to have been committed in a federal proceeding,
some courts have found that it may qualify as a RICO predicate act because
obstruction of justice in violation of 18 U.S.C. § 1503 is a listed offense under 18
U.S.C. § 1961(1)(B). See C & W Constr. Co. v. Brotherhood of Carpenters & Joiners
of Am., 687 F.Supp. 1453, 1467 (D. Haw. 1988), United States v. Mayer, 775 F.2d
1387, 1391 (9th Cir.1985) (stating that a false statement to the magistrate is
properly charged under § 1503 as this was “consistent with a scheme in which
frauds perpetrated upon a court in its adjudicative capacity must be prosecuted as
perjury, obstruction of justice, or contempt”).
In this case, the acts of perjury which the Defendants are alleged to have
committed do not constitute RICO predicate acts. Section 1503 applies only to
perjury offered in federal court proceedings. See O'Malley v. New York City Transit.
Auth., 896 F.2d 704, 708 (2d Cir. 1990) (finding that plaintiff failed to state a
violation of § 1503 where the alleged acts took place in “state judicial or
administrative courts, not in a federal court as required by § 1503”). Here, the
alleged perjury took place in arbitration proceedings and in state court (giving rise
to the $2.8 million judgment against Plaintiffs, and in the state court legal
malpractice action filed by Plaintiffs against their former attorneys), not federal
court (see, e.g., Dkt. 41, Ex. H ¶¶ 96, 97, 99, 136, 193, 195). Although Plaintiffs also
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allege various bad acts by Defendants in Bankruptcy Court, the allegations of
perjury stem from Defendants’ alleged conduct in the arbitration and state court
proceedings. Thus, Plaintiffs’ perjury allegations do not properly allege a predicate
act, sufficient to give rise to a RICO claim.
There are other listed predicate acts under RICO that involve false statement
and misrepresentation, however. For example, if Plaintiffs were to allege facts
showing that Defendants’ alleged lies were tied to conduct that constituted mail or
wire fraud in violation of 18 U.S.C. §§ 1341 and 1343, then those acts could
theoretically may serve as predicate acts, under 18 U.S.C. § 1961(1)(B).
Following the September 18, 2013 hearing on the motions before the Court,
Plaintiffs – apparently recognizing that the perjury allegations alone would not
constitute RICO predicate acts – filed a supplemental brief (Dkt. 50), in which they
attempted to expand their alleged predicate acts to include “Bank/Fraud,”
“Obstruction of Justice, Bankruptcy Fraud and Mail/Wire Fraud,” “Falsely
Proceeding as a Creditor In Bankruptcy Cases,” “Filing Adversary Proceedings in
Bankruptcy to Thwart Award (sic) Dischargeability–(All the Filings were False),”
“Filing Other False Adversary Proceedings in Bankruptcy Against [Plaintiffs’]
Wives,” “Filing Other False Adversary Proceedings in Bankruptcy Court,” and
“Ongoing Acts–Mail Fraud.”
None of these “predicate acts” appear in any of the three lengthy Complaints
(Dkts. 1, 9, 41, Ex. H). Nor did Plaintiffs allege wire or mail fraud as a predicate act
in the 57-page RICO case statement (Dkt. 10) that Judge Edmunds required
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Plaintiffs to file. Thus, such claims have not properly been pled by Plaintiffs.
Furthermore, even assuming that Plaintiffs had actually alleged these predicate
acts in the Complaint, Courts have repeatedly held that in RICO cases alleging mail
fraud and wire fraud as the “predicate acts”, the underlying fraudulent activities
must be pled with particularity. See, e.g., Saporito v. Combustion Engineering, Inc.,
843 F.2d 666, 673 (3rd Cir. 1988); Van Dorn Co. v. Howington, 623 F.Supp. 1548
(N.D.Ohio 1985); NL Industries, Inc. v. Gulf & Western Industries, Inc., 650 F.Supp.
1115, 1126 (D.Kan. 1986). Courts have routinely dismissed RICO actions where the
plaintiffs, after having been given an opportunity to correct defective complaints,
still failed to state with particularity the time, place, subject matter and the precise
individuals who, through use of the mails or telephone, made the purportedly
fraudulent statements. For example, Bender v. Southland Corp., 749 F.2d 1205,
1216 (6th Cir. 1984), the Sixth Circuit affirmed the district court’s dismissal of the
plaintiff’s RICO claims because they failed to allege the time, place, and contents of
the specific misrepresentations upon which he relied. Similarly, in Saporito, supra,
the Third Circuit affirmed the dismissal of a RICO complaint where the plaintiffs
failed to plead with specificity the particular persons who made the fraudulent
statements upon which the plaintiffs based their action. In Bhatla v. Resort
Development Corp., 720 F.Supp. 501 (W.D.Pa. 1989), after the plaintiffs had twice
been granted leave to amend their complaint, they still failed to allege with
specificity who made the representations upon which their RICO claims. The court,
therefore, dismissed those claims.
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Courts rigorously enforce Fed. R. Civ. P. 9(b)’s pleading requirements in
RICO cases in which the “predicate acts” are mail fraud and wire fraud, and have
further required specific allegations as to which defendant caused what to be mailed
(or made which telephone calls), and when and how each mailing (or telephone call)
furthered the fraudulent scheme. See, Berent v. Kemper Corp., supra; Bennett v.
Berg, 685 F.2d 1053 (8th Cir. 1982), cert. denied, 464 U.S. 1008 (1983); Barker v.
Underwriters at Lloyd’s, London, 564 F.Supp. 352, 356 (E.D.Mich. 1983); Otto v.
Variable Annuity Life Ins. Co., 611 F.Supp. 83 (N.D.Ill. 1985), aff'd in part, rev'd in
part, 814 F.2d 1127 (7th Cir. 1986), cert. denied, 486 U.S. 1026 (1988) (the district
court found that the plaintiff failed to plead each defendant’s involvement in the
alleged fraud as required by Rule 9(b) and, therefore, dismissed the plaintiff’s RICO
count).
The allegations of Plaintiffs’ Second Amended Complaint have not cured the
deficiencies in the First Amended Complaint, upon which Defendants’ motion to
dismiss was grounded. Likewise, the additional “predicate acts” set forth in
Plaintiffs’ supplemental brief do not meet the pleading requirements of Rule 9(b).
The Second Amended Complaint, and supplemental brief, fail to specifically identify
which Defendant made which misrepresentations, or when. While Plaintiffs have
generally enumerated some of the particular alleged representations upon which
they relied, Plaintiffs fail to set out which Defendant mailed, or caused to be mailed,
a particular written item or made a certain interstate telephone call, and when
these acts occurred. Indeed, the specific allegations upon which Plaintiffs purport
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to base their wire fraud and mail fraud claims involve renewed allegations of
“perjury,” not actions involving telephone conversations, wire communications, or
letters or documents received in the mail. Plaintiffs’ supplemental brief simply
repackages their perjury claims as mail or wire fraud claims, but this does not state
a claim for a RICO violation. In sum, the Court finds that Plaintiffs’ conclusory
allegations of mail fraud and wire fraud in Plaintiffs’ supplemental brief fail to
satisfy the requirements of Rule 9(b). Having made this determination, the Court
finds Plaintiffs have failed to establish any predicate act upon which to base a RICO
claim. See, e.g., Gotham Print, Inc. v. Am. Speedy Printing Centers, Inc., 863 F.
Supp. 447, 457-58 (E.D. Mich. 1994)
Therefore, Plaintiffs’ RICO claims fail to state a claim upon which relief can
be granted and are dismissed with prejudice.
2. FDCPA
Plaintiffs’ FDCPA claim is also fatally flawed. By its own terms, the FDCPA
does not apply to commercial debts. That is, the FDCPA defines “debt” to mean
“any obligation or alleged obligation of a consumer to pay money arising out of a
transaction in which the money, property, insurance, or services which are the
subject of the transaction are primarily for personal, family, or household purposes,
whether or not such obligation has been reduced to judgment.” 15 U.S.C. §
1692a(5)(emphasis added).
Here, Plaintiffs allege that Defendants Daneshgari and CBW have
improperly pursued the collection of a debt. According to Plaintiffs, however, the
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underlying debt involved here is the result of an arbitration award stemming from a
business dispute between the parties. In light of that, Plaintiffs’ claims are beyond
the scope of the FDCPA, and cannot plausibly be construed as relating to a debt of a
“consumer” that is “primarily for personal, family, or household purposes.” See Van
Eck v. BAL Global Fin., LLC, Case No. 08–13436, 2009 WL 3210992, at *1
(E.D.Mich. Sept. 30, 2009) (recognizing that debt from the purchase of materials for
manufacturing industrial equipment is not consumer debt); Schram v. Federated
Fin. Corp., Case No. 06–12700, 2007 WL 1238863, at *1 (E.D. Mich. Apr. 27, 2007)
(holding that the FDCPA did not apply because it was “undisputed” that the
business credit card debt was a business debt); First Gibraltar Bank v. Smith, 62
F.3d 133 (5th Cir. 1995) (holding that debt entered into by a partnership to acquire
and develop property is not debt under the FDCPA); Kattula v. Jade, Case No. 07–
12569, 2008 WL 495298, at *1 (E.D.Mich. Feb. 20, 2008) (holding that debt entered
into by a partnership to acquire and develop property is not debt under the
FDCPA). Thus, since the underlying debt is not related to “personal, family, or
household purposes,” Plaintiffs’ FDCPA claim fails as a matter of law.
Second, liability under the FDCPA can only attach to those who meet the
statutory definition of a “debt collector.” Montgomery v. Huntington Bank, 346 F.3d
693, 698 (6th Cir. 2003). The FDCPA defines a “debt collector” as “any person who
uses any instrumentality of interstate commerce or the mails in any business the
principal purpose of which is the collection of any debts, or who regularly collects or
attempts to collect, directly or indirectly, debts owed or due or asserted to be owed
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or due another.” 15 U.S.C. § 1692a(6). “[A] creditor is not a debt collector for the
purposes of the FDCPA and creditors are not subject to the FDCPA when collecting
their accounts.” Montgomery v. Huntington Bank, 346 F.3d 693, 699 (6th Cir. 2003)
(internal quotation and citations omitted). Plaintiffs’ FDCPA claim is brought
against Defendants Daneshgari and CBW. However, these Defendants are not
“debt collectors” for purposes of the FDCPA, as they are not attempting to a debt
“owed or due another.” Daneshgari and CBW are judgment creditors, and their
attempts to collect are not governed by the FDCPA.
As such, Plaintiffs’ FDCPA claim fails to state a claim upon which relief can
be granted, and is dismissed with prejudice.
3. The Court Declines to Exercise Supplemental Jurisdiction
Over Plaintiffs’ Remaining State Law Claims
Having dismissed Plaintiffs’ only federal claims, the Court is left with seven
state-law claims – breach of contract, oppression of member interest in LLC,
conversion, aiding and abetting conversion, accounting, breach of fiduciary duties
and abuse of process. There is no diversity jurisdiction in this matter, as Plaintiffs
and Defendants are all Michigan residents (Dkt. 41, Ex. H ¶¶ 1-6). Thus, these
state law claims are only in this Court by virtue of supplemental jurisdiction, as
adjuncts to Plaintiffs’ RICO and FDCPA claims. A district court’s supplemental
jurisdiction is governed by statute, specifically, 28 U.S.C. § 1367. The relevant
portion of § 1367 states:
The district courts may decline to exercise supplemental jurisdiction over a
claim under subsection (a) if—
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(1) the claim raises a novel or complex issue of State law,
(2) the claim substantially predominates over the claim or claims over which
the district court has original jurisdiction,
(3) the district court has dismissed all claims over which it has original
jurisdiction, or
(4) in exceptional circumstances, there are other compelling reasons for
declining jurisdiction
28 U.S.C. § 1367(c)
The Supreme Court, in Carlsbad Technology, Inc. v. HIF Bio, Inc., 556 U.S. 635,
639-40 (2009), further expounded on § 1367(c), stating that “[w]ith respect to
supplemental jurisdiction in particular, a federal court has subject-matter
jurisdiction over specified state-law claims, which it may (or may not) choose to
exercise. A district court’s decision whether to exercise that jurisdiction after
dismissing every claim over which it had original jurisdiction is purely
discretionary” (internal citations omitted). The Supreme Court has also noted that
a district court, when considering whether or not to exercise its supplemental
jurisdiction over state-law claims, after the dismissal of original jurisdiction claims,
should “consider and weigh in each case, and at every stage of the litigation, the
values of judicial economy, convenience, fairness, and comity.” City of Chicago v.
International College of Surgeons, 522 U.S. 156, 173, (1997).
Here, Plaintiffs’ state-law claims rest on allegations that involve a lengthy
and convoluted procedural history in various state courts. Moreover, these
remaining claims face many procedural hurdles – including res judicata, collateral
estoppel, and statutes of limitation – all of which arise under state law. In light of
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the all of the above, and in the interest of judicial economy and fairness to all of the
parties, the Court declines to exercise supplemental jurisdiction over Plaintiffs’
state-law claims. Therefore, Plaintiffs’ state-law claims are dismissed without
prejudice.
D. Defendants’ Motion for Sanctions is Denied
Defendants have moved for sanctions against Plaintiffs for bringing this
Complaint. Under Federal Rule of Civil Procedure 11, sanctions may be imposed if
“a reasonable inquiry discloses the pleading, motion, or paper is (1) not well
grounded in fact, (2) not warranted by existing law or a good faith argument for the
extension, modification or reversal of existing law, or (3) interposed for any
improper purpose such as harassment or delay.” Herron v. Jupiter Transp. Co., 858
F.2d 332, 335 (6th Cir. 1988). The purpose of sanctions is to deter the abuse of the
legal process. Id. Rule 11 was amended in 1983 to facilitate the imposition of
sanctions against attorneys who disregard their professional responsibilities to the
court. Id. As amended, the rule “stresses the need for some pre-filing inquiry into
both the facts and the law to satisfy the affirmative duty imposed.” Id. (citing Fed.
R. Civ. P. 11 advisory committee’s note to the 1983 amendment); see also Century
Prods., Inc. v. Sutter, 837 F.2d 247, 250 (6th Cir. 1988).
The conduct of counsel subject to a sanctions request is measured by an
objective standard of reasonableness under the circumstances. See INVST Fin.
Group, Inc. v. Chem–Nuclear Sys., Inc., 815 F.2d 391, 401 (6th Cir. 1987). The
Court is “expected to avoid using the wisdom of hindsight and should test the
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signer’s conduct by inquiring what was reasonable to believe at the time the
pleading, motion, or other paper was submitted.” Id. (citation and quotation marks
omitted). “[T]he reasonable inquiry under Rule 11 is not a one-time obligation.”
Runfola & Assocs., Inc. v. Spectrum Reporting II, Inc., 88 F.3d 368, 374 (6th Cir.
1996) (quoting Herron, 858 F.2d at 335). “[T]he plaintiff is impressed with a
continuing responsibility to review and reevaluate his pleadings and where
appropriate modify them to conform to Rule 11.” Id. (quoting Herron, 858 F.2d at
335–36); Merritt v. Int’l Ass’n of Machinists & Aerospace Workers, 613 F.3d 609, 626
(6th Cir. 2010).
Defendants’ primary contention in their motion for sanctions is that Plaintiffs
filed this lawsuit for the sole purpose of pressuring or coercing Daneshgari to forego
further collection efforts, and instead accept a “global resolution” settlement for a
reduced amount of the $2.8 million judgment, concurrent with the settlement of a
legal malpractice claim Plaintiffs filed against their former attorneys in the
Oakland County Circuit Court (Case No. 10-112215-NM, Nichols, J.; currently in
the Michigan Court of Appeals, Case No. 314374). The Court must consider
whether Plaintiffs’ primary purpose in filing this lawsuit was to create leverage in
settlement negotiations.
Looking first to the procedural posture of Defendants’ motion for sanctions,
Defendants’ counsel wrote a letter dated February 5, 2013 demanding that
Plaintiffs dismiss this lawsuit and threatening to seek Rule 11 sanctions if
Plaintiffs did not do so (Dkt. 25, Ex. T). However, the February 5, 2013 letter does
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not indicate that a copy of Defendants’ Rule 11 motion was served upon Plaintiffs as
an enclosure to this letter. See id. The Court recognizes that Defendants’ motion
for sanctions alleges that “a copy of this [m]otion and supporting brief were served
upon Plaintiffs’ counsel at least 21 days before” Defendants filed their motion with
the Court (Dkt. 25 at 2, CM/ECF pagination). However, at this point Defendants
have not provided the Court with a proof of service or affidavit attesting to this
assertion. Thus, Defendants’ have provided no proof that they properly complied
with the procedural requirements for filing a Rule 11 motion for sanctions. Rule
11(c)(2), commonly referred to as the safe harbor provision, states:
A motion for sanctions must be made separately from any other motion and
must describe the specific conduct that allegedly violates Rule 11(b). The
motion must be served under Rule 5, but it must not be filed or be presented
to the court if the challenged paper, claim, defense, contention, or denial is
withdrawn or appropriately corrected within 21 days after service or within
another time the court sets....
In accord with the plain language of that provision, the Sixth Circuit has made
clear that “a party seeking sanctions must follow a two-step process: first, serve the
Rule 11 motion on the opposing party for a designated period (at least twenty-one
days); and then file the motion with the court.” Ridder v. City of Springfield, 109
F.3d 288, 294 (6th Cir. 1997). Here, the record does not establish that Defendants
complied with the requirement that they serve the motion for sanctions at least 21
days prior to filing or presenting it to the Court. Thus, Defendants’ motion for
sanctions should be denied based on this procedural defect.
Second, the Court has reviewed the complex procedural background of this
case, its underlying facts, and is cognizant of the parties’ history of mistrust and
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extreme litigiousness. Viewing all the circumstances, there is insufficient evidence
in the record at this stage to support a conclusion that Plaintiffs’ attorneys’ conduct
was objectively unreasonable. Having said that, the Court can understand
Defendants’ frustration with what appears to be Plaintiffs’ continuing attempts to
collaterally attack the arbitration award and subsequent confirmation judgment.
Any future attempts to do so should be very closely scrutinized.
III.
CONCLUSION
For the reasons set forth above, the Court DENIES Plaintiffs’ motion for
leave to amend (Dkt. 41). As to Plaintiffs’ RICO claim (Count I) and FDCPA claim
(Count IX) the Court GRANTS Defendants’ motion to dismiss (Dkt. 24), and those
claims are DISMISSED WITH PREJUDICE. The Court declines to exercise
supplemental jurisdiction over Plaintiffs’ remaining state-law claims, and hereby
DISMISSES WITHOUT PREJUDICE Counts II through VIII. The Court
DENIES Defendants’ motion for sanctions (Dkt. 25). Finally, Plaintiffs’ motion to
compel discovery (Dkt. 29) is DENIED AS MOOT.
SO ORDERED.
s/Terrence G. Berg
TERRENCE G. BERG
UNITED STATES DISTRICT JUDGE
Dated: February 14, 2014
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Certificate of Service
I hereby certify that this Order was electronically submitted on February 14,
2014, using the CM/ECF system, which will send notification to each party.
s/A. Chubb
Case Manager
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