Arroyo v. Oprona, Inc. et al
ORDER ADOPTING 53 Memorandum and Recommendations GRANTING 35 MOTION to Dismiss 34 Amended Complaint/Counterclaim/Crossclaim etc. . Arroyo's RICO claims are DISMISSED WITH PREJUDICE. Arroyo's remaining state law claim is REMANDED to 269th Judicial District Court of Harris County, Texas. (Signed by Judge Gray H Miller) Parties notified.(rkonieczny, 4)
United States District Court
Southern District of Texas
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
OPRONA, INC., et al.,
September 05, 2017
David J. Bradley, Clerk
CIVIL ACTION H-16-852
MEMORANDUM OPINION & ORDER
Pending before the court is a Memorandum and Recommendation (“M&R”) in which the
Magistrate Judge recommends that the defendants Oprona, Inc. (“Oprona”) and Chris F. Yoxall’s
motion to dismiss (Dkt. 35) plaintiff Erika Arroyo’s RICO claims should be granted and that
Arroyo’s state law claim should be remanded. Dkt. 53. Arroyo filed timely objections to the M&R
and moved for leave to amend her complaint. Dkt. 56. Having considered the M&R, objections,
response, reply, and surreply, the court is of the opinion that Arroyo’s objections (Dkt. 56) should
be OVERRULED and the M&R (Dkt. 53) should be ADOPTED IN FULL.
Arroyo alleges that she was terminated by defendants Oprona, Rosen Swiss AG, and Yoxall
because of her refusal to participate in an alleged tax fraud scheme. Dkt. 34 at 4. Arroyo alleges that
after she reported Yoxall, the chief operations officer of Oprona, to his management at Rosen Swiss
AG for the misuse of company funds to pay for his personal income taxes, her employment was
terminated as a result.1 Dkt. 34 at 7–11.
A more detailed background on Arroyo’s allegations are provided in the M&R and
incorporated herein. Dkt. 53 at 1–4.
On March 3, 2016, Arroyo filed suit against the defendants in the 269th Judicial District
Court of Harris County. Dkt. 1, Ex. B. Arroyo sued the defendants for violations of the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961–1968, and for discharge
contrary to public policy under Texas common law. Id.; Dkt. 35 at 38 (citing Sabine Pilot Serv., Inc.
v. Hauck, 687 S.W.2d 733, 735 (Tex. 1985)). On November 1, 2016, Arroyo amended her
complaint. Dkt. 34. On November 7, 2016, the defendants filed a motion to dismiss. Dkt. 35.
Arroyo responded, the defendants replied, and Arroyo filed a surreply. Dkts. 36, 39, 40. On March
24, 2017, the court dismissed the claims against defendant Rosen Swiss AG due to improper service.
Dkt. 51. On April 11, 2017, the Magistrate Judge issued an M&R recommending that the court grant
the defendants’ motion to dismiss Arroyo’s RICO claims and remand her Texas common law claim
to state court. Dkt. 53. Arroyo filed objections and a motion to amend her complaint. Dkt. 56. The
defendants responded to the objections, Arroyo replied, and the defendants filed a surreply.
Dkts. 61, 63, 66.
II. LEGAL STANDARDS
Review of an M&R
For dispositive matters, the court “determine(s) de novo any part of the magistrate judge’s
disposition that has been properly objected to.” See Fed. R. Civ. P. 72(b)(3). “The district judge
may accept, reject, or modify the recommended disposition; receive further evidence; or return the
matter to the magistrate judge with instructions.” Id. “When no timely objection is filed, the court
need only satisfy itself that there is no clear error on the face of the record in order to accept the
recommendation.” Fed. R. Civ. P. 72(b), Advisory Comm. Note (1983). For non-dispositive
matters, the court may set aside the magistrate judge’s order only to the extent that it is “clearly
erroneous or contrary to law.” Fed. R. Civ. P. 72(a).
Motion to Dismiss
“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, 127 S. Ct.
1955, 1964-65 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99 (1957)). In
considering 12(b)(6) motions, courts generally must accept the factual allegations contained in the
complaint as true. Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d
1045, 1050 (5th Cir. 1982). The court does not look beyond the face of the pleadings when
determining whether the plaintiff has stated a claim under Rule 12(b)(6). Spivey v. Robertson, 197
F.3d 772, 774 (5th Cir. 1999). “[A] complaint attacked by a Rule 12(b)(6) motion to dismiss does
not need detailed factual allegations, [but] a plaintiff's obligation to provide the ‘grounds' of his
‘entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the
elements of a cause of action will not do.” Twombly, 127 S. Ct. at 1964–65 (citing Sanjuan v. Am.
Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994)) (internal citations omitted).
And, “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Id.
at 1965 (supporting facts must be plausible—enough to raise a reasonable expectation).
In the M&R, the Magistrate Judge recommended that the court grant the defendants’ motion
to dismiss Arroyo’s RICO claims brought under sections 1962(c) and 1962(d). Dkt. 53. To bring
a RICO claim under section 1962(c), a plaintiff must establish that a person or entity has engaged
in (1) a pattern of racketeering activity that is (2) connected to an “enterprise.” Abraham v. Singh,
480 F.3d 351, 355 (5th Cir. 2007). Section 1961(d) makes it unlawful to conspire to violate the
RICO statute. 18 U.S.C. § 1961(d). The substantive requirements for proving a RICO claim are the
same for a criminal case or civil suit. St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 446
n.15 (5th Cir. 2000).
The Magistrate Judge recommend dismissing Arroyo’s RICO claims for three independent
reasons: (1) Arroyo did not allege the required predicate acts, (2) Arroyo did not show that she was
proximately harmed by the alleged fraud, and (3) Arroyo failed to establish the continuity of the
racketeering activity. Dkt. 53. Arroyo objects to each of these grounds for dismissal. Dkt. 56.
Because each reason for dismissal is individually sufficient to dismiss Arroyo’s RICO claims, the
court need only address one of the Magistrate Judge’s grounds for dismissal and Arroyo’s
corresponding objections. The court will first address Arroyo’s objections with regard to the
predicate acts and then turn to Arroyo’s motion for leave to amend.
To establish a “pattern of racketeering activity” under RICO, the plaintiff must allege two
or more related predicate offenses. Word of Faith World Outreach Ctr. Church, Inc. v. Sawyer, 90
F.3d 118, 122 (5th Cir. 1996) (citing in H.J. Inc. v. Nw. Bell Telephone, Co., 492 U.S. 229, 109 S.
Ct. 2893 (1989)). The predicate offenses are enumerated in the RICO statute. 18 U.S.C. § 1961(1).
Arroyo argues that she established the following as predicate acts: (1) Yoxall’s mailing of an
allegedly fraudulent tax return was mail and/or wire fraud, and (2) Arroyo’s termination was witness
tampering and/or retaliation. Dkt. 56 at 3–4, 7.
1. Mail and/or Wire Fraud
Under RICO, wire and mail fraud are predicate acts. 18 U.S.C. § 1961(1) (citing §§ 1341,
1343). The mail and wire fraud statutes make it illegal to obtain money by fraud through the use of
the mail or wire communications. 18 U.S.C. §§ 1341, 1343. Arroyo objects to the Magistrate
Judge’s conclusion that Yoxall’s transmission of his tax return that contained false information did
not constitute mail or wire fraud. Dkt. 58 at 3. Arroyo argues that Yoxall’s tax returns contained
false representations which were then transmitted to the government via mail or wire, making the
transmission mail or wire fraud. Id.
In her reply, Arroyo cites to a Tenth Circuit decision for the proposition that mail fraud and
tax evasion are separate crimes with separate elements. Dkt. 63 at 2 (citing United States v.
Peterson, 312 F.3d 1300, 1302 (10th Cir. 2002) (holding that grouping mail fraud and tax evasion
together for an adjustment to the sentencing guidelines was not proper.)). Therefore, Arroyo argues,
that Yoxall’s alleged filing of a false tax return meets the elements of both mail and wire fraud and
tax evasion. However, the court does not find the Peterson case analogous at all to the present
matter—the mail fraud in Peterson has nothing to do with mailing a falsified tax return to the
Internal Revenue Service (“IRS”) like Arroyo is alleging happened here. Peterson, 312 F.3d at 1301.
Rather, Darryl Peterson was charged with mail fraud because of his use of the mail to send checks
to conceal embezzling. Id. The only similarity between Peterson and the present case is that the
defendants in both cases were also accused of tax evasion. Id. Notably, Peterson was only charged
with tax evasion for filing fraudulent tax returns, and not mail or wire fraud for the act of
transmitting those returns to the IRS. Id.
The Magistrate Judge reasoned that Arroyo is merely attempting to re-label an alleged offense
of tax evasion, making a false statement on a tax return, or conspiracy to defraud the United States
as a different offense that qualifies as a predicate act. Dkt. 53 at 7 (citing 26 U.S.C. §§ 7201, 7206
and 18 U.S.C. § 371). None of these tax offenses is a predicate act under RICO. 18 U.S.C. §
1961(1). The court agrees with the Magistrate Judge’s reasoning, that Arroyo did not establish that
Yoxall committed a predicate act of mail or wire fraud.2 Arroyo’s objection regarding the mail and
wire fraud predicate act is OVERRULED.
2. Witness Tampering and Witness Retaliation
Under RICO, witness tampering and witness retaliation are predicate acts. 18 U.S.C. 1961(1)
(citing 18 U.S.C. §§ 1512(b), (e)). Arroyo argues that the Magistrate Judge erred when she did not
find that Arroyo’s termination was a form of witness tampering and/or witness retaliation. Dkt. 56
a. Witness Tampering
The witness tampering statute makes it unlawful for someone to intimidate, threaten, or
corruptly persuade a person in order to “influence, delay or prevent the testimony” in an “official
proceeding.” 18 U.S.C. § 1512(b). The Magistrate Judge reasoned that Arroyo did not establish a
case of witness tampering because (1) Arroyo did not identify an “official proceeding,” and (2)
Arroyo did not establish that Yoxall or Oprona actually delayed or prevented her from participating
in any IRS proceeding. Dkt. 43 at 13–14.
This reasoning assumes that Arroyo properly plead fraud under the requirements of Federal
Rule of Civil Procedure 9(b). See Dkt. 61 at 13.
First, Arroyo argues that the Magistrate Judge erred in concluding that there was no “official
proceeding,” because an IRS audit is an official proceeding. Dkt. 56 at 7. Under the witness
tampering statute, an official proceeding itself need not be pending at the time of the offense, but
there must be a foreseeable proceeding. Arthur Andersen LLP v. United States, 544 U.S. 696, 708,
125 S. Ct. 2129 (2005). However, for a proceeding to be “foreseen” for the purposes of witness, the
defendant must have some “contemplation” that his tampering might destroy material evidence.
United States v. Simpson, 741 F.3d 539, 552 (5th Cir. 2014). The defendants rightfully argue that
the doctrine of “foreseeing” an official proceeding should not extend to any regulatory or
enforcement action that might occur as a consequence of wrongdoing without a more specific
connection to the alleged tampering. Dkt. 61 at 15. In other words, there needs to be a “nexus
between the obstructive act and some official government proceeding.” Simpson, 741 F.3d at 552.
The Magistrate Judge reasoned that Arroyo made no allegations that the defendants terminated her
employment out of “any awareness that an IRS investigation was foreseeable.” Dkt. 53 at 13–14.
The court agrees with the Magistrate Judge’s reasoning.
Second, Arroyo argues that her allegations in the first amended complaint that state that the
that the defendants attempted to prevent Arroyo from providing information to the IRS as part of an
official audit are sufficient to establish the predicate act of witness tampering. Dkt. 56 at 8 (citing
Dkt. 34). However, the court finds that this is a mere conclusory allegation and Arroyo did not
allege how her termination prevented her from communicating with the IRS.3
Accordingly, Arroyo’s objection is OVERRULED.
Arroyo also argues if “specific details” are required, that she can provide them in the
amendment. Dkt. 56 at 8. However, Arroyo does not offer a single example of a specific detail that
might cure this pleading deficiency. Dkt. 56 at 10.
b. Witness Retaliation
The witness retaliation statute prohibits retaliation against a party for providing truthful
information to a law enforcement officer. 18 U.S.C. § 1512(e). With respect to witness retaliation,
the Magistrate Judge reasoned that Arroyo did not establish a case of witness retaliation because
Arroyo did not allege that she had already initiated a complaint with the IRS prior to her termination.
Dkt. 53 at 14–15. Arroyo does not object to the Magistrate Judge’s conclusion that she failed to
allege witness retaliation. Dkt. 56.
Because Arroyo failed to establish that the defendants committed any predicate acts, the court
agrees with the Magistrate Judge that the defendants’ motion to dismiss Arroyo’s RICO claims
should be GRANTED. Further, Arroyo did not object to the Magistrate Judge’s recommendation
that the remaining state law claim be REMANDED. Dkt. 56. Therefore, the court concludes that
the M&R should be ADOPTED IN FULL.
Leave to Amend
In the alternative, Arroyo offers six proposed amendments to her complaint to cure pleading
deficiencies. Dkt. 56 at 10–11. Rule15(a)(2) allows a party to “amend its pleading only with the
opposing party’s written consent or the court’s leave.” Fed. R. Civ. P. 15(a)(2). Courts grant leave
to amend liberally unless the party has acted in bad faith or if granting leave to amend would cause
prejudice. Jebaco, Inc. v. Harrah’s Operating Co., Inc., 587 F.3d 314, 322 (5th Cir. 2009). Federal
courts often give plaintiffs at least one opportunity to cure pleading deficiencies. Great Plains Tr.
Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir. 2002). However, granting
leave to amend is within the sound discretion of the district court, and leave may be denied if the
court has good reason, including the futility of an amendment. Rosenzweig v. Azurix Corp ., 332
F.3d 854, 864 (5th Cir. 2003); Foman v. Davis , 371 U.S. 178, 182, 83 S. Ct. 227 (1962).
Here, the court has already granted Arroyo leave to amend her complaint once. Dkt. 33.
Now Arroyo proposes two amendments to correct pleading deficiencies with respect to the predicate
acts: (1) that she provided information to the IRS in the course of an official audit of the defendants,
and (2) that the defendants continued to prevent her from providing information to the IRS. Dkt. 56
However, the court finds that these two proposed amendments do not include the necessary
allegations to establish the elements of witness tampering or retaliation. Notably, Arroyo does not
allege that she provided information to the IRS prior to her termination. Id.; Dkt. 61 at 17. Also,
Arroyo does not specify how her termination served to influence, delay, or prevent her from
providing information to the IRS. Id.
Further, Arroyo proposes to amend her pleading to state that her employment termination is
“continuing [in]to the present” in a manner that prevents her from providing information to the IRS
during an official audit, meaning any tampering is an ongoing offense. Id. Arroyo does not provide
any facts to support her conclusory allegation that she is currently prevented from providing
information to the IRS. Id. Because Arroyo’s employment relationship with the defendants is over,
the court cannot fathom how the defendants could “continue” to prevent Arroyo from cooperating
with the IRS. Therefore, the court concludes these two amendments are conclusory in nature and
do not contain any additional factual basis to establish the predicate acts of witness tampering or
retaliation. The court also observes that the proposed amendments do not appear to address Arroyo’s
failure to allege that her injury was proximately caused by RICO violations. Dkt. 53 at 8–9.
The remainder of Arroyo’s proposed amendments are directed toward the “continuity”
requirement of establishing a pattern of racketeering activity. Dkt. 56 at 10–11. However, the court
finds that the remaining proposed amendments lack specificity and are conclusory in nature such as
the allegation that “the unlawful practices of Defendants have continued.” Id.; Dkt. 61 at 17. Even
assuming, arguendo, that the proposed amendments would cure the continuity defects in Arroyo’s
claim, curing the continuity defects is futile because the claim already fails because of the lack of
predicate acts and lack of proximate cause.
Thus, the court finds that giving Arroyo another opportunity to amend would be futile.
Arroyo’s motion for leave to amend (Dkt. 56) the first amended complaint is DENIED.
Arroyo’s objections (Dkt. 56) are OVERRULED, and the M&R (Dkt. 53) is hereby
ADOPTED IN FULL. Arroyo’s motion for leave to amend her complaint (Dkt. 56) is DENIED.
The defendants’ motion to dismiss (Dkt. 35) Arroyo’s RICO claims is GRANTED. Arroyo’s
RICO claims are DISMISSED WITH PREJUDICE. Arroyo’s remaining state law claim is
REMANDED to 269th Judicial District Court of Harris County, Texas.
Signed at Houston, Texas on September 5, 2017.
Gray H. Miller
United States District Judge
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