Atmosphere Hospitality Management, LLC v. Shiba Investments, Inc. et al

Filing 67

ORDER denying 56 Motion for Attorney Fees; denying as moot 16 Motion to Dismiss; granting 21 Motion to Dismiss. Signed by U.S. District Judge Karen E. Schreier on 2/20/2014. (KC)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
WESTERN DIVISION
ATMOSPHERE HOSPITALITY
MANAGEMENT, LLC,
Plaintiff,
vs.
ZELIJKA CURTULLO,
Defendant,
and
SHIBA INVESTMENTS, INC.,
KARIM MERALI, and
Defendants and
Third-Party Plaintiffs,
vs.
JAMES HENDERSON,
Third-Party Defendant.

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CIV. 13-5040-KES
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) ORDER GRANTING THIRD-PARTY
) DEFENDANT’S MOTION TO DISMISS
) RICO CLAIM, DENYING PLAINTIFF’S
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MOTION TO DISMISS THE RICO
) COUNTERCLAIMS, AND DENYING
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PLAINTIFF’S MOTION FOR
)
ATTORNEYS’ FEES
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Third-party plaintiffs, Shiba Investments, Inc. and Karim Merali, brought
claims against third-party defendant, James Henderson, alleging violations of
the Racketeer Influenced and Corrupt Organizations (RICO) Act, breach of
contract, conversion, and tortious interference with a business expectancy.
Henderson moved to dismiss the claim alleging RICO violations pursuant to
Federal Rules of Civil Procedure 9(b) and 12(b)(6) on August 21, 2013. Shiba

and Merali have not responded. For the following reasons, Henderson’s motion
is granted.
Also pending before the court is plaintiff, Atmosphere Hospitality
Management, LLC’s, motion to dismiss Shiba and Merali’s RICO counterclaims.
Docket 16. After Atmosphere filed its motion to dismiss the counterclaims,
Atmosphere amended its complaint, and Shiba and Merali amended their
answers. Shiba and Merali no longer assert RICO counterclaims against
Atmosphere. Therefore, Atmosphere’s motion is denied as moot.
Atmosphere is also seeking attorneys’ fees and expenses associated with
its motion for preliminary injunction. Shiba and Merali contend that
Atmosphere is not entitled to attorneys’ fees for a myriad of reasons. Because
D.S.D. LR 54.1C requires a party to move for fees 28 days “after the entry of
judgment”1 and judgment has not been entered, the court finds this motion to
be premature and denies the motion.
BACKGROUND
The facts, according to the third-party complaint, are as follows:
Atmosphere Hospitality Management, LLC is a Delaware limited liability
company. Atmosphere Hospitality Management Services, LLC, (AHMS)—a

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Local Rule 54.1 requires a party seeking attorney’s fees to file a motion
28 calendar days “after the entry of judgment.” D.S.D. Civ. LR 54.1C (emphasis
added).
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nonparty to this litigation—is purportedly a Delaware limited liability company.
Henderson is a managing member and employee of Atmosphere and AHMS.
Shiba is a Texas corporation with its principal place of business in South
Dakota. Merali is a resident of South Dakota.2
Atmosphere and Shiba entered into a licencing agreement involving a
hotel that Shiba owns in Rapid City, South Dakota. AHMS and Shiba entered
into a property management agreement involving the same hotel. Under the
agreement, Henderson was responsible for managing the hotel property.
Due to the confusing nature of the third-party complaint, the court will
quote the remaining relevant factual assertions:
Henderson and AHMS failed to manage the property consistent with
similar facilities by failing to properly account to the owners for
funds generated by the facility or the use of the same, including use
of those funds to: 1) pay unauthorized salaries; 2) commingle or
otherwise place Hotel funds into accounts not approved, authorized
or accessible to owner via interstate, intrastate, wire and mail
transfer; 3) pay personal expenses of Henderson; or 4) otherwise
misappropriate Hotel funds. Docket 8 at ¶ 42.
Henderson and AHMS breached the contract and their fiduciary
duties to Shiba and Merali, on multiple occasions, by paying via
interstate, intrastate, wire and mail transfers, from the income of
the Hotel, overhead or compensation of Atmosphere personnel,
other than employees working at the Rapid City location. Id. at ¶ 44.
Henderson and AHMS breached the contract and their fiduciary
duties to Shiba and Merali, on multiple occasions, by failing to
maintain records and books of accounts for the Property in
accordance with the most-recent version of the Uniform System of

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The third-party complaint is silent on Merali’s association with Shiba.
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Accounts for the Lodging Industry, Tenth Revised Edition. Id. at
¶ 46.
Henderson and AHMS breached the contract and their fiduciary
duties to Shiba and Merali, on multiple occasions, it is believed, by
failing to obtain Owner’s written consent on payments or transfers
to vendors in excess of $50,000 per year. These payments were
made via interstate, intrastate, wire and mail transfers. Id. at ¶ 48.
Henderson and AHMS breached the contract and their fiduciary
duties to Shiba and Merali, on multiple occasions, it is believed by,
among other things, commingling Hotel funds with those of other
individuals or entities, to the exclusion of the owner, converting the
funds for personal use, including payment of personal bills and
expenses, making unauthorized payments to family members and
business associates and engaging in other acts which constitute a
breach the fiduciary duties, willful neglect, fraud or gross
negligence. AHMS agreed to indemnify Shiba from such acts. § 3.03.
Further, these payments were made via interstate, intrastate, wire
and mail transfers. Id. at ¶ 49.
Henderson and AHMS breached the contract and their fiduciary
duties to Shiba and Merali, it is believed by, among other things,
miscalculating the profit in order to increase the fee that was due.
They also wrongful [sic] converted to their own use funds which
were not due, including pre-paid bookings. Id. at ¶ 50.
Plaintiff and Third Party Defendant intentionally participated in a
scheme to defraud Defendants of money or property during the
period of February 2012 through the present, and used the mails or
wires in furtherance of that scheme on at least two occasions during
that period. Id. at ¶ 55.
At some point, Shiba communicated, verbally and in writing, to
Atmosphere and Henderson its desire to terminate the licensing agreement. It is
not disputed that the licensing agreement was terminated.

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LEGAL STANDARD
When reviewing a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), the court assumes that all facts in the complaint are true and
construes any reasonable inferences from those facts in the light most favorable
to the nonmoving party. Schaaf v. Residential Funding Corp., 517 F.3d 544, 549
(8th Cir. 2008). To decide the motion to dismiss under Rule 12(b)(6), the court
may consider the complaint, some materials that are part of the public record,
and materials embraced by the complaint. Porous Media Corp. v. Pall Corp., 186
F.3d 1077, 1079 (8th Cir. 1999). To survive the motion to dismiss, the
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). The factual
content in the complaint must “allo[w] the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Braden v. WalMart Stores, 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009)).
DISCUSSION
Henderson moves to dismiss third-party plaintiffs’ RICO claim under two
separate theories. First, Henderson alleges that third-party plaintiffs failed to
state a RICO cause of action against him under Rules 9(b) and 12(b)(6). Second,
Henderson alleges that third-party plaintiffs lack standing because they were
not injured “by reason of” any alleged RICO violation.

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The RICO Act contains a civil enforcement scheme that provides as
follows:
Any person injured in his business or property by reason of a
violation of section 1962 of this chapter may sue therefor in any
appropriate United States district court and shall recover threefold
the damages he sustains and the cost of the suit, including a
reasonable attorney’s fee.
18 U.S.C. § 1964(c). As indicated in § 1964(c), RICO violations are listed in 18
U.S.C. § 1962 and include the following:
(1) It is unlawful to use or invest any income derived from a pattern
of racketeering activity in acquisition of any enterprise which is
engaged in interstate commerce (a § 1962(a) violation);
(2) It is unlawful to acquire any interest in any enterprise which is
engaged in interstate commerce through a pattern of racketeering
activity (a § 1962(b) violation);
(3) It is unlawful for any person associated with any enterprise
engaged in interstate commerce to participate in the conduct of
such enterprise’s affairs through a pattern of racketeering activity (a
§ 1962(c) violation); and
(4) It is unlawful to conspire to violate §§ 1962(a), (b), or (c).
See 18 U.S.C. § 1962; Bowman v. W. Auto Supply Co., 985 F.2d 383, 384 n.1
(8th Cir. 1993).
The third-party complaint cites § 1962(c)3 in the count alleging RICO
violations. “A violation of § 1962(c) requires [third-party plaintiffs] to show (1)

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Paragraph 52 of the third-party complaint states: “18 U.S.C.A. § 1961
et seq., makes it a crime ‘to conduct’ an ‘enterprise’s affairs through a pattern
of racketeering activity.’ 18 U.S.C.A. § 1962(c).” Docket 8 at 9.
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conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.”
Nitro Distrib. Inc. v. Alticor, Inc., 565 F.3d 417, 428 (8th Cir. 2009). Third-party
plaintiffs “must, of course, allege each of these elements to state a claim.”
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985). Moreover, a “RICO claim
must be pleaded with particularity under Rule 9(b).” Crest Constr. II, Inc. v. Doe,
660 F.3d 346, 353 (8th Cir. 2011). “Under Rule 9(b)’s heightened pleading
standard, allegations of fraud must be pleaded with particularity. In other
words, Rule 9(b) requires plaintiffs to plead the who, what, when, where, and
how: the first paragraph of any newspaper story.” Id. (citing Summerhill v.
Terminix, Inc., 637 F.3d 877, 880 (8th Cir. 2011)). Henderson argues that thirdparty plaintiffs failed to state a RICO claim because they cannot establish a
sufficient enterprise, failed to plead a pattern of racketeering activity, and did
not plead sufficient predicate acts of mail or wire fraud.
The court begins and ends its analysis by examining whether third-party
plaintiffs sufficiently alleged a pattern of racketeering activity. “A pattern is
shown through two or more related acts of racketeering activity that amount to
or pose a threat of continued criminal activity.” Nitro Distrib. Inc., 565 F.3d at
428. While it is not entirely clear, third-party plaintiffs appear to have alleged
that predicate acts of mail and wire fraud form the necessary pattern of
racketeering activity. See Docket 8 at 9 (“[Atmosphere] and [Henderson]
intentionally participated in a scheme to defraud [third-party plaintiffs] of money

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or property during the period of February 2012 through the present, and used
the mails or wires in furtherance of that scheme on at least two occasions
during that period.”). “Rule 9(b) requires that a party alleging fraud or mistake
‘state with particularity the circumstances constituting a fraud or mistake.’ ”
Nitro Distrib. Inc., 565 F.3d at 428 (quoting Fed. R. Civ. P. 9(b)).4 Third-party
plaintiffs have failed to do so in their third-party complaint.
Most noticeably absent from the third-party complaint is any particular
dates on which the alleged predicate acts of mail and wire fraud took place.
Instead, third-party plaintiffs’ sole reference to a date is the generic allegation
that Henderson and Atmosphere defrauded third-party plaintiffs “during the
period of February 2012 through the present[.]” Docket 8 at 10. Alleging specific
times is necessary, not only under Rule 9(b) requirements, but also because to
sufficiently plead a RICO violation one must plead facts showing there was a
“pattern” of racketeering activity. The pattern must amount to or pose a threat
of continued criminal activity, i.e., the continuity requirement. Crest Constr. II,
Inc., 660 F.3d at 356. To satisfy the continuity requirement, third-party
plaintiffs must allege facts tending to show that multiple predicate acts occurred

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“When examining a motion to dismiss a RICO claim based on mail and
wire fraud, a court must determine ‘whether the plaintiffs have sufficiently
pleaded mail and wire fraud under the standard of Rule 9(b).’ ” Midwest Special
Surgery, P.C. v. Anthem Ins. Cos., Civ. No. 09-646, 2010 WL 716105, at *8 (E.D.
Mo. Feb. 24, 2010) (quoting Abels v. Farmers Commodities Corp., 259 F.3d 910,
918 (8th Cir. 2001)).
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over a substantial period of time or predicate acts threaten to extend into the
future. Id. By not pleading particular times, third-party plaintiffs failed to
establish the continuity requirement and failed to sufficiently plead a pattern of
racketeering activity.
A failure to sufficiency plead one RICO element is cause to dismiss for
failure to state a claim.5 Sedima, S.P.R.L., 473 U.S. at 496. Accordingly, it is
ORDERED that third-party defendant’s motion to dismiss the RICO claim
(Docket 21) is granted without prejudice.
IT IS FURTHER ORDERED that plaintiff’s motion to dismiss the RICO
counterclaims (Docket 16) is denied as moot.
IT IS FURTHER ORDERED that plaintiff’s motion for attorneys’ fees to be
held in abeyance is premature and denied without prejudice.
Dated February 20, 2014.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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Although the court’s ruling is based solely on third-party plaintiffs’
failure to sufficiently plead a pattern of racketeering, concerns also rise
regarding whether an “enterprise” was properly pleaded. “Three elements must
be proven to show that a RICO enterprise existed: (1) a common purpose that
animates the individuals associated with it; (2) an ongoing organization with
members who function as a continuing unit; and (3) an ascertainable structure
distinct from the conduct of a pattern of racketeering.” United States v. Lee, 374
F.3d 637, 647 (8th Cir. 2004); see also 5 Wright and Miller, Federal Practice &
Procedure, § 1251.1.
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