DeWitt Insurance, Inc. v. Horton et al
MEMORANDUM AND ORDER: IT IS HEREBY ORDERED that Defendants Gregory R. Horton and Sarah A. King's Motion to Dismiss Plaintiff's Complaint for Failure to State a Claim Upon Which Relief Can Be Granted And To Decline Supplemental Jurisdicti on of State Claims 7 is DENIED as moot. IT IS FURTHER ORDERED that Defendants Gregory R. Horton and Sarah A. King's Motion to Dismiss Plaintiff's Amended Complaint for Failure to State a Claim Upon Which Relief Can Be Granted And To Dec line Supplemental Jurisdiction of State Claims 13 is GRANTED, in part, and DENIED, in part. The Court DISMISSES Counts II and IV for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6). The Court DISMISSES Counts I, III, and V for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1).. Signed by District Judge John A. Ross on 5/28/14. (LGK)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
DEWITT INSURANCE, INC.,
GREGORY R. HORTON, et al.,
No. 4:13-CV-2585 JAR
MEMORANDUM AND ORDER
This matter is before the court on Defendants Gregory R. Horton and Sarah A. King’s
Motion to Dismiss Plaintiff’s Amended Complaint for Failure to State a Claim Upon Which
Relief Can Be Granted And To Decline Supplemental Jurisdiction of State Claims (ECF No.
On February 26, 2014, Plaintiff filed a five-count Verified Amended Complaint for
Damages (“Amended Complaint”). (ECF No. 12). Defendants argue that Plaintiff fails to state a
claim as to the federal causes of action under the Computer Fraud and Abuse Act (“CFAA”), 18
U.S.C. §§1030, et seq., and the Racketeer Influenced and Corrupt Organizations Act (“RICO”),
18 U.S.C. §§1961, et seq.
In addition, Defendants argue that the state law fraud claims
(fraudulent concealment against Horton, fraudulent concealment against King) must be
dismissed because the claims lack specificity required by Fed.R.Civ.P. 9(b) and fail to properly
Defendants previously filed a Motion to Dismiss Plaintiff’s Complaint (ECF No. 7), but
Plaintiff filed an Amended Complaint (ECF No. 12), which is now the operative complaint.
Accordingly, the Court denies Defendants Gregory R. Horton and Sarah A. King’s Motion to
Dismiss Plaintiff’s Complaint for Failure to State a Claim Upon Which Relief Can Be Granted
And To Decline Supplemental Jurisdiction of State Claims (ECF No. 7) as moot.
allege causation or damages. Finally, Defendants assert that the Court should decline to exercise
supplemental jurisdiction as to the state law claims.
Dewitt Insurance, Inc. (“Dewitt”) is an insurance management company.
Amended Complaint for Damages (“Amended Complaint”), ECF No. 12, ¶8). Horton worked
for Dewitt as an independent agent and as a “producer” from March 20, 1998 through June 30,
2011. (Id., ¶¶9, 10).3 During some periods, Horton worked for DeWitt as a sole proprietor and,
during other periods, he worked through Zigzak, Inc. (“Zigzak”) and Cindeb, Inc. (“Cindeb”).4
(Id., ¶10). Horton led Dewitt to believe that he owned both Zigzak and Cindeb. (Id.)
In 2000, Horton was working as a sole proprietor and he told DeWitt’s John DePond that
he was considering forming a company for his insurance business. (Id., ¶11). DePond told
Horton that he could incorporate his business subject to some conditions.
Specifically, DePond told Horton that he had to notify DeWitt prior to transferring any
ownership interest in his book of business to anyone else. (Id.)
Around the time of this conversation with DePond, on April 10, 2000, Horton formed
Zigzak. (Id., ¶13).5 Despite the admonition to the contrary, Horton made his daughter, Sarah
King, the sole shareholder of Zigzak. (Id., ¶15). King was only 17 years old when Zigzak was
When ruling on a Federal Rule of Civil Procedure 12(b)(6) motion to dismiss for failure to state
a claim, the Court must take as true the alleged facts and determine whether they are sufficient to
raise more than a speculative right to relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
Neither party defines what a “producer” is in this context.
None of the claims in the Amended Complaint relate to Cindeb.
DeWitt alleges that Horton chose to make his daughter the owner of Zigzak so that if Horton
and his wife, Debora Horton, divorced then his wife would not be eligible to receive the assets of
Zigzak. (Amended Complaint, ¶12).
formed. (Id., ¶16).
King has at all times had access to all of the information of Zigzak and
actively participated in Zigzak’s activities and business decisions. (Id., ¶¶17-18).
DeWitt alleges that Horton and King actively concealed from DeWitt the fact that King
was the owner of Zigzak and was actively involved in the management of Zigzak. (Id., ¶21).
DeWitt first learned that King was the owner of Zigzak in December 2013. (Id., ¶22).
DeWitt claims that it would not have agreed to do business with Zigzak if DeWitt had known
that King owned and controlled Zigzak. (Id., ¶25). Or, if DeWitt had known that King owned
Zigzak, DeWitt would have paid Zigzak at most 60% sales commissions, instead of the 80%
sales commissions that it paid. (Id.). DeWitt claims that Horton and King’s concealment of
King’s ownership interest and control of Zigzak caused DeWitt to defraud it into paying Zigzak
at least 33.33% more commissions than it should have received, based upon King’s ownership
and control. (Id., ¶29).
In its Amended Complaint, DeWitt alleged the following causes of action: Fraudulent
Concealment against Defendant Horton (Count I), Violation of the Computer Fraud and Abuse
Act, 18 U.S.C. §1030, et seq. against Defendant Horton (Count II), Fraudulent Concealment
against Defendant King (Count III), Violations of the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. §1961, et seq. against Defendants Horton and King (Count IV),
and Civil Conspiracy against Defendants Horton and King (Count V),
STANDARD FOR MOTION TO DISMISS
In ruling on a motion to dismiss, the Court must view the allegations in the Complaint
liberally in the light most favorable to Plaintiff. Eckert v. Titan Tire Corp., 514 F.3d 801, 806
(8th Cir. 2008) (citing Luney v. SGS Auto Servs., 432 F.3d 866, 867 (8th Cir. 2005)).
Additionally, the Court “must accept the allegations contained in the complaint as true and draw
all reasonable inferences in favor of the nonmoving party.” Coons v. Mineta, 410 F.3d 1036,
1039 (8th Cir. 2005) (citation omitted). To survive a motion to dismiss, a complaint must
contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007) (abrogating the “no set of facts” standard for Fed. R. Civ. P.
12(b)(6) found in Conley v. Gibson, 355 U.S. 41, 45–46 (1957)). While a complaint attacked by
a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s
obligation to provide the grounds of his entitlement to relief “requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Twombly, 550 U.S. at 555; Huang v. Gateway Hotel Holdings, 520 F. Supp. 2d 1137, 1140
(E.D. Mo. 2007).
CFAA in Count II
In Count II, Plaintiff attempts to allege a violation of the CFAA, 18 U.S.C. §1030(a)(4),6
Whoever knowingly and with intent to defraud, accesses a protected computer
without authorization, or exceeds authorized access, and by means of such
conduct furthers the intended fraud and obtains anything of value, unless the
object of the fraud and the thing obtained consists only of the use of the computer
and the value of such use is not more than $5,000 in any 1-year period shall be
punished as provided in subsection (c) of this section.
Defendants contend that Count II under the CFAA fails to state a claim. First Defendants
argue that Plaintiff does not allege any of the essential elements of a CFAA claim. Defendants
argue that Plaintiff, for example, does not allege: that its computer system was hacked, that
In its Amended Complaint, Plaintiff did not identify the specific the CFAA provision under
which it was seeking relief. (ECF No. 12, ¶¶44-50). However, Plaintiff identified 18 U.S.C.
§1030(a)(4) in its Response to Defendants’ Motion to Dismiss. (ECF No. 15).
Horton did not have authorization to access information, that information was deleted or
destroyed, that there was any service interruption, or that a computer was taken and not returned.
(ECF No. 14 at 6). In addition, Defendants maintain that Plaintiff fails to allege that its claimed
damages arose from any of the above-discussed the CFAA violations. (Id.) Defendants state
that Plaintiff has not identified how any damage was done to it through Horton’s alleged use of
Plaintiff’s computer systems. (Id.) Defendants note that Plaintiff alleges that Horton used
Plaintiff’s system to create loan applications, insurance applications, and tax returns containing
false and deceptive information, but Defendants maintain that Plaintiff has not identified what
information was false or deceptive or how the alleged acts are the cause of Plaintiff’s damages.
Plaintiff asserts that it has alleged all of the elements of a CFAA action under
§1030(a)(4). Plaintiff states that it alleged that Horton “intentionally” and “knowingly,” and
“with intention of defrauding DeWitt Insurance,” “exceeded his authorization to access DeWitt
Insurance’s protected computers,” and as a result “thereby obtain[ed] inflated commissions from
DeWitt Insurance in an amount at least 33.33% more than Zigzak, Inc. was entitled to.” (ECF
No. 15 at 3 (citing Amended Complaint, ¶¶8-35, 46, 48, 49)). In support of its damages
allegation, Plaintiff notes that it alleged “Horton’s unauthorized access proximately caused
DeWitt Insurance loss in excess of $5,000 during a one-year period. Specifically, DeWitt
Insurance suffered loss in the amount of 20% of all the commissions DeWitt Insurance paid to
Zigzak, Inc.” (ECF No. 15 at 3 (citing Amended Complaint, ¶50)). Plaintiff expansively claims
that this allegation qualified as a “loss” under the CFAA because a loss is defined only as “any
reasonable cost to any victim.” Plaintiff claims that the descriptions of “loss” in §1030(e)(11)
after the word “including” are only “examples.” (ECF No. 15 at 4); see 18 U.S.C. §1030(e)(11).
“The CFAA criminalizes various fraudulent or damaging activities related to the use of
computers.” Fiber Sys. Int’l v. Roehrs, 470 F.3d 1150, 1156 (5th Cir. 2006). A claim “alleging
a violation of Section 1030(a)(4) requires a showing that the defendant: (1) accessed a protected
computer, (2) without authorization or exceeding such authorization that was granted, (3)
knowingly and with intent to defraud, and thereby (4) furthered the intended fraud and obtained
anything or value, causing (5) a loss to one or more persons during any one-year period
aggregating at least $5,000 in value.” Absolute Energy Solutions, LLC v. Trosclair, CIV.A. H13-3358, 2014 WL 360503, at *2 (S.D. Tex. Feb. 3, 2014)(internal quotations and citations
omitted). The CFAA recognizes “private causes of action for individuals damaged by computer
fraud: ‘Any person who suffers damage or loss by reason of a violation of this section may
maintain a civil action against the violator to obtain compensatory damages and injunctive relief
or other equitable relief.’” In re AOL, Inc. Version 5.0 Software Litig., 168 F. Supp. 2d 1359,
1368 (S.D. Fla. 2001) (quoting 18 U.S.C. ' 1030(g)). The CFAA defines “loss” as “any
reasonable cost to any victim, including the cost of responding to an offense, conducting a
damage assessment, and restoring the data, program, system, or information to its condition prior
to the offense, and any revenue lost, cost incurred, or other consequential damages incurred
because of interruption of service.” 18 U.S.C. §1030(e)(11).
The Court finds that Plaintiff’s Amended Complaint fails to allege a “loss” as defined
under the CFAA. “The weight of relevant authority restricts the CFAA ‘loss’ requirement to
actual computer impairment.” Harley Auto. Grp., Inc. v. AP Supply, Inc., CIV. 12-1110
DWF/LIB, 2013 WL 6801221, at *6 (D. Minn. Dec. 23, 2013)(citing ReMedPar, Inc. v. AllParts
Med., LLC, 683 F.Supp.2d 605, 614–15 (M.D. Tenn. 2010) (“investigation” of alleged wrongful
acts and costs incurred not “loss” under the CFAA; injuries associated with the misappropriation
of confidential information not “loss” under the CFAA); Von Holdt v. A–1Tool Corp., 714
F.Supp.2d 863, 875–76 (N.D.Ill.2010) (noting that the purpose of the CFAA is to punish those
who destroy data, not to cover a former employee who “walks off with confidential
information”); Am. Fam. Mut. Ins. Co. v. Rickman, 554 F.Supp.2d 766, 772 (N.D. Ohio 2008)
(“The CFAA does not contemplate consequential damages ... that are unrelated to harm to the
computer itself.”); Civic Ctr. Motors, Ltd. v. Mason St. Import Cars, Ltd., 387 F.Supp.2d 378,
382 (S.D. N.Y. 2005) (“[C]osts not related to computer impairment or computer damages are not
compensable under the CFAA.”)).
Here, Plaintiff has not alleged “loss” due to any impairment to its computer systems or
any interruption in service.
Instead, Plaintiff alleges that “Horton’s unauthorized access
proximately caused … DeWitt Insurance [to] suffer loss in the amount of 20% of all
commissions DeWitt Insurance paid to Zigzak, Inc.” (Amended Complaint, ¶50). Plaintiff has
alleged only economic harm due to its overpayment of commissions because of Defendants’
fraud. The Court finds that Plaintiff’s alleged “loss” for overpayment of commissions was not
proximately caused by Defendants’ use of Plaintiff’s computer systems. Further, Plaintiff’s
alleged financial injury is not the type of “loss” contemplated by the CFAA because it does not
relate to either responding to the offense or consequential damages due to interruption of service.
See NCMIC Fin. Corp. v. Artino, 638 F. Supp. 2d 1042, 1063-64 (S.D. Iowa 2009)(“Courts have
interpreted ‘loss’ to include the cost of responding to a security breach, such as the cost of
performing a computer system damage assessment, even if the losses are not derived from any
change to the computers themselves or the information contained on the computer.”)(citing
cases); Nexans Wires S.A. v. Sark-USA, Inc., 166 F. App'x 559, 562 (2d Cir. 2006)(“the plain
language of the statute treats lost revenue as a different concept from incurred costs, and permits
recovery of the former only where connected to an ‘interruption in service.’”). The Court finds
that Plaintiff’s alleged loss of a percentage of commissions that DeWitt paid to Zigzak
(Amended Complaint, ¶50) is too attenuated from Defendants’ use of Plaintiff’s computer
systems. Therefore, the Court holds that Plaintiff does not state a cognizable “loss” under the
CFAA and dismisses Plaintiff’s claim under the CFAA.
RICO in Count IV
In Count IV, Plaintiff purports to allege a RICO claim against Defendants. Section 1962
of the RICO Act makes it “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.” Nitro Distrib., Inc. v. Alticor,
Inc., 565 F.3d 417, 428 (8th Cir. 2009) (quoting 18 U.S.C. § 1962(c)). The federal RICO statute
“provides a private right of action for any person injured in his business or property by reason of
[a RICO violation].” Crest Const. II, Inc. v. Doe, 660 F.3d 346, 353 (8th Cir. 2011) (internal
quotation marks and citation omitted); 18 U.S.C. § 1964(c). To demonstrate a RICO violation,
the plaintiff must show “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering
activity.” Crest Constr. II, Inc., 660 F.3d at 353 (internal quotation marks and citation omitted).
In order to prove the last two elements, a plaintiff must demonstrate that the defendant
committed at least two predicate acts of racketeering which are delineated in the statute. 18
U.S.C. §§ 1961(1), (5).
For predicate acts of racketeering, Plaintiff alleges Defendants committed mail fraud and
wire fraud, in violation of 18 U.S.C. §1341 (wire fraud) and 18 U.S.C. §1341 (mail fraud), on
numerous occasions from 2000 through 2011. (ECF No. 15 at 10-11). Plaintiff alleges several
instances where Defendants used the internet, interstate emails, telephone calls to promote their
fraud. (Amended Complaint, ¶31).
Defendants contend that Plaintiff’s RICO claim fails because it did not allege the RICO
claim with the particularity required under Rule 9(b) and because it has not stated the essential
elements of a RICO claim. Because the Court finds that Plaintiff did not allege a “pattern of
racketeering” the Court will dismiss Plaintiff’s RICO claim.
A. Particularity under Rule 9(b)
With respect to allegations of mail or wire fraud such as those contained in the
Complaint, Rule 9(b) requires a party alleging fraud to state with heightened “particularity” the
circumstances constituting fraud or mistake. Crest Constr. II, Inc., 660 F.3d at 353. In other
words, Rule 9(b) requires plaintiffs to plead ‘the who, what, when, where, and how: the first
paragraph of any newspaper story.’” Summerhill v. Terminix, Inc., 637 F.3d 877, 880 (8th Cir.
2011)(citing Great Plains Trust Co. v. Union Pac. R.R. Co., 492 F.3d 986, 995 (8th Cir. 2007)).
“Federal courts have long held civil RICO complaints to a somewhat higher standard of pleading
and required a plaintiff to ‘specifically identify, and factually plead, each element of a viable
RICO claim.’” Crest Const. II, Inc. v. On Time Auto, 07-0728-CV-W-DGK, 2010 WL 3456690,
at *1 (W.D. Mo. Aug. 27, 2010) aff'd sub nom. Crest Const. II, Inc. v. Doe, 660 F.3d 346 (8th
Cir. 2011)(quoting Gregory P. Joseph, Civil RICO: A Definitive Guide § 23, at 207 (3rd ed.
In their motion, Defendants claim that Plaintiff has not alleged the predicate acts, mail
and wire fraud, with particularity and only pleaded a pattern of racketeering activity in a
conclusory manner. (ECF No. 14 at 8; ECF No. 16 at 8). Defendants note that “[t]here is no
particularity as to what specific items of mail and wire fraud are alleged, how any of the alleged
e-mails, telephone calls or mailings were fraudulent, when they specifically occurred, what they
contained, when they happened or who did them.” (ECF No. 14 at 8-9). Defendants assert that
Plaintiff’s Amended Complaint contains only formulaic statements that Defendants committed
mail and wire fraud, and fails to provide any details as to how this allegedly injured Plaintiff.
(Id. at 9). In sum, Defendants contend that Plaintiff’s purported RICO action is merely a
dressed-up garden variety tort claim, and a RICO claim is not pleaded simply because of
Defendants’ incidental use of mails and wires. (Id. at 9-10).
In response, Plaintiff asserts that it has sufficiently identified the “who, what, when,
where and how” of its RICO claim, as required by Fed.R.Civ.P. 9(b). (ECF No. 15 at 6-9); see
also Crest Const. II, Inc., 660 F.3d at 353; Summerhill, 637 F.3d at 880. Plaintiff notes that
Horton, in Missouri, used interstate telephone calls on an almost daily basis from 2000 until
2011 to DeWitt’s employees, DePond and Bommarito in Florida or Texas, and Horton sent
interstate emails to DePond, Bommarito and Denise Lowery. (ECF No. 15 at 10). In addition,
Plaintiff made interstate telephone calls and sent interstate emails almost daily from July 2000
through January 2012 to DeWitt personnel about his sales and commission. (Id.).
further notes that as a result of these actions, DeWitt sent Zigzak a commission check through
the U.S. Mail or direct deposit every month from July 2000 through January 2012.
Specifically, Plaintiff alleges that Defendants used interstate emails and telephone calls in the
first part of 2000 to form Zigzak; Defendants exchanged monthly emails from 2000 until 2011
with John DePond and Lowery at DeWitt to report Zigzak’s sales and commissions; and
Defendants used monthly interstate telephone calls between Horton and DePond and between
Horton and Theresa Bommarito to report Zigzak’s sales and commissions. (Amended Complaint,
¶65). Plaintiff allege that Defendants employed the United States Mail, the internet, email, and
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telephone, which constitutes mail fraud and wire fraud, in violation of 18 U.S.C. §1961(1)(B).
(Amended Complaint, ¶66).
The Court holds that the circumstances allegedly constituting the fraud are stated with
sufficient particularity as required by Rule 9(b). Plaintiff alleges the approximate dates that the
mail and wire frauds occurred. Plaintiff also alleges the parties involved in setting up Zigzak, the
parties who made the monthly telephone calls, and the parties that received the monthly
excessive commission checks. Based upon these allegations, the Court finds that the allegedly
fraudulent scheme is set out with sufficient reference to the who, what, when, where and how
and, therefore, is unpersuaded that Plaintiff’s pleading should be dismissed for failure to comply
with Rule 9(b).
B. Pattern of Racketeering
By statute, the “pattern” element requires a plaintiff to show at least two predicate acts of
“racketeering activity,” which is defined to include violations of specified federal laws, such as
the mail and wire fraud statutes. See 18 U.S.C. § 1961(1)(B),(5). “Although showing two
predicate acts is the only statutory requirement, case law establishes that this is not sufficient to
prove a ‘pattern’-the plaintiff also must demonstrate that the ‘predicates are related, and that they
amount to or pose a threat of continued criminal activity.’” Efron v. Embassy Suites (Puerto
Rico), Inc., 223 F.3d 12, 15 (1st Cir. 2000)(quoting H.J. Inc. v. Northwestern Bell Tel. Co., 492
U.S. 229, 239, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989)); see also Sutherland v. O'Malley, 882
F.2d 1196, 1203 (7th Cir. 1989); see Craig Outdoor Adver., Inc., v. Viacom Outdoor, Inc., 528
F.3d 1001, 1028 (8th Cir.2008)(“[T]o prove a pattern of racketeering activity a plaintiff ... must
show that the racketeering predicates are related, and that they amount to or pose a threat of
continued criminal activity.”)(emphasis in original). “Courts must examine a number of relevant
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factors when determining whether the predicate acts alleged are sufficiently continuous to
constitute a pattern; these factors include the number and variety of predicate acts and the length
of time over which they were committed, the number of victims, the presence of separate
schemes and the occurrence of distinct injuries.”
Sutherland, 882 F.2d at 1204 (internal
“The determination of a pattern of racketeering activity is a factual
determination.” Terry A. Lambert Plumbing, Inc. v. W. Sec. Bank, 934 F.2d 976, 980 (8th Cir.
1991)(citing H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 242, 109 S. Ct. 2893, 2902, 106 L. Ed.
2d 195 (1989)). “The specific facts of each case must be examined to determine whether the
predicate acts relied upon by the plaintiff establish a threat of continuing racketeering activity.”
Terry A. Lambert Plumbing, Inc., 934 F.2d at 980 (quoting Sutherland, 882 F.2d at 1204).
“However, RICO ‘does not cover all instances of wrongdoing. Rather, it is a unique cause of
action that is concerned with eradicating organized, long-term, habitual criminal activity.’” Crest
Const. II, Inc, 660 F.3d at 353 (citing Gamboa v. Velez, 457 F.3d 703, 705 (7th Cir.2006)).
Defendants argue that Plaintiff fails to plead a pattern of racketeering activity. (ECF No.
16 at 7). Defendants assert that mail and wire fraud, without more, does not amount to a RICO
claim. (ECF No. 16 at 7-8). Further, Defendants maintain that Plaintiff has failed to identify
what fraudulent misrepresentations were made in the emails and telephone calls that form the
basis of the alleged RICO claim. (ECF No. 16 at 8).
In response, Plaintiff asserts that it has alleged a pattern of racketeering activity through
Defendants’ activities from July 2000 through January 2012. (ECF No. 15 at 9). Plaintiff alleges
a common purpose of defrauding DeWitt out of portions of commissions. (Amended Complaint,
¶63). Plaintiff claims that Horton accomplished this end through “almost daily” interstate
telephone calls and emails with DeWitt personnel from 2000 until 2011. (ECF No. 15 at 9).
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Plaintiff emphasizes that a pattern is established because Zigzak received commission checks
every month for 139 months. (Id.).
Assuming for the sake of argument that commission payments by different checks can
constitute multiple predicate acts, the Court nonetheless finds that Plaintiff cannot state a claim
under RICO because it has failed to allege the necessary pattern of racketeering activity.
In H.J. Inc. v. Nw. Bell Tel. Co., the Supreme Court rejected a multiple scheme test for
the continuity prong of a RICO pattern. H.J. Inc., 492 U.S. 229, 240 (1989). Although the Court
acknowledges that under H.J. a single scheme can constitute a RICO claim, the “single scheme
must still meet the requirements of relatedness and continuity.” Terry A. Lambert Plumbing,
Inc., 934 F.2d at 981; Larry Good & Associates v. Williams & Co. Consulting, 8:06CV280, 2006
WL 3257180, at *2 (D. Neb. Nov. 9, 2006) (“The Company must allege a pattern of racketeering
activity to show continuing activities and distinct schemes in excess of a single injury, which is
more than garden variety fraud.”). “A single ‘scheme’ may be reached by RICO, see H.J. Inc.,
492 U.S. at 240-41, 109 S.Ct. 2893, but only if it is reasonably broad and far reaching.” Sys.
Mgmt., Inc. v. Loiselle, 303 F.3d 100, 105 (1st Cir. 2002). “[W]hile acknowledging H.J.’s
teaching, … a number of courts since that decision have found the continuity prong to be absent
for allegations involving unlawful activities too small in scale or scope.” AB Mauri Food, Inc. v.
Harold, 4:07CV811-DJS, 2008 WL 878451, at *3 (E.D. Mo. Mar. 27, 2008)(citing Edmondson
& Gallagher v. Alban Towers Tenants Ass'n, 48 F.3d 1260, 1265 (D.C.Cir.1995); Western
Associates Limited Partnership v. Market Square Associates, 235 F.3d 629, 634 (D.C.Cir.2001);
Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 18-19 (1st Cir.2000)). The Eighth
Circuit has reasoned that “‘it places a real strain on the language [of RICO] to speak of a single
fraudulent effort, implemented by several fraudulent acts, as a pattern of racketeering activity.’”
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Associated Petroleum Producers, Inc. v. Treco 3 Rivers Energy Corp., 692 F.Supp. 1070, 1072
(E.D. Mo. 1988) (quoting Superior Oil Co. v. Fulmer, 785 F.2d 252, 257 (8th Cir.1986)).
Although Plaintiff has alleged that Defendants engaged in multiple fraudulent acts, the
Court holds that the email, mail and wire transfers utilized by Defendants are insufficient to
establish a pattern of racketeering because they were, at most, performed as part of a single effort
to defraud Plaintiff of some commissions and do not sufficiently allege continuity. (Amended
Complaint, ¶67). The alleged predicate acts are Defendants’ alleged mail and wire fraud to set
up Zigzak and obtain excessive commissions from Plaintiff. Plaintiff’s Amended Complaint
does not allege that Defendants acted in regard to any other victims, nor does it allege a threat of
continued fraudulent activity. Plaintiff has alleged merely a “narrow criminal episode,” even if
the regular mailings and wire transfers may constitute several injuries.
Sys. Mgmt., Inc., 303
F.3d at 105; Larry Good & Associates, 2006 WL 3257180, at *2 (citing Madden v. Gluck, 815
F.2d 1163, 1163 (8th Cir.1987))(“Injury resulting from mere subdivisions of one fraudulent
scheme is not sufficient to form a pattern of racketeering activity.”). There is no allegation that
Defendants’ fraud or alleged racketeering activity will continue as to Plaintiff or that
Defendants’ activities threatened or will threaten any other victim. See H.J. Inc., 492 U.S. at 240
(“To establish a RICO pattern it must also be shown that the predicates themselves amount to, or
that they otherwise constitute a threat of, continuing racketeering activity.”)(emphasis in
original). This case involves only one set of perpetrators, one victim and one fraudulent goal.
Plaintiff alleges no “societal” threat, but rather a directed, targeted injury to a then-employer.
See AB Mauri Food, Inc., 2008 WL 878451, at *4. “Viewing the complaint in the light most
favorable to the plaintiff, this case involves, at most, a plan to defraud a single company in
connection with a single contract.”
Larry Good & Associates, 2006 WL 3257180, at *3
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(dismissing RICO civil claim). A single, fraudulent contractual business venture, which is
narrowly tailored toward one victim does not constitute the pattern of racketeering required for
criminal activity under a RICO claim. The Court finds that the alleged acts of everyday business
emails and the monthly commission checks received by Horton/Zigzak are neither broad nor far
reaching enough to constitute a pattern of racketeering under RICO. See Sys. Mgmt., Inc., 303
F.3d at 105.
Further, as noted by several circuit courts, this type of garden variety fraud does not state
a claim under RICO simply because Defendants allegedly used the internet, interstate mail, and
interstate wires to implement their fraud:
Virtually every garden-variety fraud is accomplished through a series of wire or
mail fraud acts that are ‘related’ by purpose and spread over a period of at least
several months. Where such a fraudulent scheme inflicts or threatens only a single
injury, we continue to doubt that Congress intended to make the availability of
treble damages and augmented criminal sanctions dependent solely on whether
the fraudulent scheme is well enough conceived to enjoy prompt success or
requires pursuit for an extended period of time. Given its ‘natural and common
sense approach to RICO's pattern element,’ we think it unlikely that Congress
intended RICO to apply in the absence of a more significant societal threat.
Marshall–Silver Constr. Co., Inc. v. Mendel, 894 F.2d 593, 597 (3d Cir.1990); U.S. Textiles, Inc.
v. Anheuser-Busch Companies, Inc., 911 F.2d 1261, 1268 (7th Cir. 1990); see also Menasco,
Inc. v. Wasserman, 886 F.2d 681, 685 (4th Cir. 1989)(“ If the pattern requirement has any force
whatsoever, it is to prevent this type of ordinary commercial fraud from being transformed into a
federal RICO claim.”); Larry Good & Associates, 2006 WL 3257180, at *2 (“The Company
must allege a pattern of racketeering activity to show continuing activities and distinct schemes
in excess of a single injury, which is more than garden variety fraud.”). “Repetitive fraudulent
conduct by one set of perpetrators against a single victim, narrowly directed toward a single
fraudulent goal-there as here recovering excessive commissions from plaintiff beyond those
contemplated by the parties’ agreement-is a ‘garden variety fraud’ rather than a ‘pattern’ with the
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species of continuity required for RICO liability.” AB Mauri Food, Inc., 2008 WL 878451, at *4;
Secure Energy, Inc. v. Coal Synthetics, LLC, 4:08CV1719 JCH, 2010 WL 1691327, at *2 (E.D.
Mo. Apr. 27, 2010). The Court finds that the fraud alleged in the Amended Complaint is simple,
garden variety fraud and does not allege a pattern of racketeering for a RICO action. Applying a
“natural and commonsense approach to RICO's pattern element,” the Court believes that the
facts alleged are no different from those alleged in any common, repetitive fraud claim. See H.J.
Inc., 492 U.S. at 237.
Because the Court finds that Plaintiff has not alleged a pattern of racketeering, the Court
grants Defendants’ Motion to Dismiss the RICO count and dismisses Count IV under
Fed.R.Civ.P. 12(b)(6) for failure to state a claim.
State Law Claims
Federal Rule of Civil Procedure 12(b)(1) requires dismissal if the Court lacks subject matter
jurisdiction over the claim. Plaintiff alleged that this Court has subject matter jurisdiction over
this action pursuant to 28 U.S.C. §1331. The Court dismisses Counts II and IV, the only counts
alleging claims under federal law.
Plaintiff alleged that that this Court had supplemental
jurisdiction under 28 U.S.C. §1367(a) over the remaining state law claims in Counts I, III, and V.
Because this Court dismisses the federal claims, the Court declines to exercise supplemental
jurisdiction over Counts I, III, and V. The Court also declines to rule on the pending motion to
dismiss as to the state law claims. Such arguments can be addressed if the state law claims are
refiled in state court.
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IT IS HEREBY ORDERED that Defendants Gregory R. Horton and Sarah A. King’s
Motion to Dismiss Plaintiff’s Complaint for Failure to State a Claim Upon Which Relief Can Be
Granted And To Decline Supplemental Jurisdiction of State Claims  is DENIED as moot.
IT IS FURTHER ORDERED that Defendants Gregory R. Horton and Sarah A. King’s
Motion to Dismiss Plaintiff’s Amended Complaint for Failure to State a Claim Upon Which
Relief Can Be Granted And To Decline Supplemental Jurisdiction of State Claims  is
GRANTED, in part, and DENIED, in part. The Court DISMISSES Counts II and IV for failure
to state a claim pursuant to Fed.R.Civ.P. 12(b)(6). The Court DISMISSES Counts I, III, and V
for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1).
Dated this 28th day of May, 2014.
JOHN A. ROSS
UNITED STATES DISTRICT JUDGE
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