July 30, 2013
WUXI CITY RUNYUAN KEJI ZIAOE DAIKUAN CO. LTD., Plaintiff,
XUEWEI XU, an individual; SHENG XU, an individual; HAIRONG CAO, et al., Defendants.
ORDER GRANTING MOTION TO DISMISS [Dkt. No. 12]
DEAN D. PREGERSON, District Judge.
Presently before the court is Defendant's Motion to Dismiss Plaintiffs' Complaint ("Motion"). Having reviewed the parties' submissions, the Court grants the Motion and adopts the following Order.
Plaintiff Wuxi City Runyan Keji XiaoE Daikuan Co., Ltd. ("Wuxi" or "Plaintiff") is a Chinese business entity with its principal place of business in the Jiangsu Province of the People's Republic of China. (Complaint at ¶ 7.) Plaintiff "is licensed by the Government of the People's Republic of China to lend small amounts of money to qualified borrowers for approved and legitimate use." (Id.) Plaintiff alleges that Defendants Xuexi Xu, Sheng Xu, Shubin Zhao, and Hairong Cao conspired to defraud Plaintiff of funds and to divert the funds to Defendants Repet, Repet Group, and America TBS. (Id. at ¶ 22.) Defendants Xuewei Xu, Sheng Xu, Cao, and Zhao maintain an ownership interest in, are employees of, and operate Repet, Repet Group, and America TBS. (Id. at ¶¶ 17-20.) Repet, Repet Group, and America TBS are all California companies engaged in the business of processing post-consumer plastic used in making water bottles and polyethylene terephthalate flakes. (Id. at ¶¶ 17-19, 21.) The companies are alleged to be alter egos. (Id. at ¶ 21.) Repet was incorporated in 2009, America TBS was incorporated in 2010, and Repet Group was incorporated on December 4, 2012. (Id. at ¶¶ 17-10.)
Plaintiff alleges that Defendants Xu and Cao arranged for a series of ten commercial loans in the amount of RMB ¥ Five Million, or approximately $806, 452.00, on the following dates: August 1-6, 2012 (loan 1), August 17, 2012 (loan 2), August 28, 2012 (loans 3-5), September 10, 2012 (loans 6-8), October 19, 2012 (loans 9-10). (Id. at ¶¶ 24-33.) In each case, Plaintiff distributed the loan proceeds to an account over which Cao and Xu had access and control. (Id.) The loans were intended to provide working capital for Jiangyin City XinRong HuaXian Co., Ltd. (owned by Cao) and Jiangyin City ShengChang KeJi Co., Ltd. (owned by Xu), but they were not used for that purpose. (Id. at ¶ 36.)
Instead, the Defendants "diverted the proceeds of the above-referenced loans out of the People's Republic of China, and upon information and belief, to bank accounts controlled by Repet, Repet Group, and America TBS, as well as other accounts for Defendants' personal use." (Id. at ¶ 37)(capitalizations omitted). The Plaintiff alleges that the Defendants were able to divert the proceeds by using a complex scheme of transfers. (Id. at ¶ 102.) The Plaintiff alleges that from August 9, 2010, to April 28, 2012, a group of Chinese nationals, including Jingxia Gu, Huixiang Xu, Xuewei Xu, Pang Zhang, Xinjun Hu, Junhong Gu, and Feifan Chen transferred ¥ 28, 442, 000 from Defendants' bank accounts to bank accounts controlled by Xiaoting Li and Yishong Chen. (Id.) Chen and Li are alleged to regularly engage in illegal cross-border transfers of money from the People's Republic of China to Hong Kong. (Id.) Once the money was transferred to Chen and Li in Hong Kong, they transferred it to the Defendants' U.S. bank accounts. (Id.)
The funds were diverted for operating capital to Repet, Repet Group, and America TBS, and for the individual Defendants' personal use. (Id. at ¶ 37.) Xu left China for the United States on November 21, 2012, and he now resides in California. (Id. at ¶ 34.) Cao left China on an unknown date and now resides in California. (Id. at ¶ 35.) Plaintiff asserts claims for breach of contract, fraud in the inducement, fraud, conversion, unjust enrichment, vicarious liability, and civil RICO.
Plaintiff has previously filed a complaint with the same allegations against the Defendants. (Case No. 5:12-cv-00274-DDP-SP.) The Court granted the Defendants' motion to dismiss while giving the Plaintiff leave to amend. (Id. at Dkt. No. 38.) The Plaintiff failed to file an amended complaint within the time limits, and the Court dismissed the case without prejudice. (Id. at Dkt. No. 40.)
Defendants move to dismiss because: (1) the doctrine of collateral estoppel bars Plaintiff from reltiigating its RICO claim, which is the basis of this Court's subject matter jurisdiction, (2)Plaintiff failed to state a claim for civil RICO and, without that cause of action, the Court will lack jurisdiction over the action, (3) Plaintiff lacks standing to bring a RICO claim, and (4) a forum selection clause agreed to by the parties requires any litigation to occur in China.
II. Legal Standard
A complaint will survive a motion to dismiss when it contains "sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570 (2007)). When considering a Rule 12(b)(6) motion, a court must "accept as true all allegations of material fact and must construe those facts in the light most favorable to the plaintiff." Resnick v. Hayes , 213 F.3d 443, 447 (9th Cir. 2000). Although a complaint need not include "detailed factual allegations, " it must offer "more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Iqbal , 556 U.S. at 678. Conclusory allegations or allegations that are no more than a statement of a legal conclusion "are not entitled to the assumption of truth." Id. at 679. In other words, a pleading that merely offers "labels and conclusions, " a "formulaic recitation of the elements, " or "naked assertions" will not be sufficient to state a claim upon which relief can be granted. Id. at 678 (citations and internal quotation marks omitted).
"When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. at 679. Plaintiffs must allege "plausible grounds to infer" that their claims rise "above the speculative level." Twombly , 550 U.S. at 555, 556. "Determining whether a complaint states a plausible claim for relief" is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal , 556 U.S. at 679.
Defendants move to dismiss due to issue preclusion, lack of subject matter jurisdiction, lack of standing, and improper forum.
A. Collateral Estoppel
Defendants argue that the Plaintiff's claim ought to be barred by the doctrine of collateral estoppel because the Plaintiff has already litigated its claims. (Mot. to Dismiss at p. 4.)
Collateral Estoppel, or issue preclusion, is available as a defense when "(1) the issue necessarily decided at the previous proceeding is identical to the one which is sought to be relitigated; (2) the first proceeding ended with a final judgment on the merits; and (3) the party against whom [issue preclusion] is asserted was a party or in privity with a party at the first proceeding." Paulo v. Holder , 669 F.3d 911, 917 (9th Cir. 2011) (citing Hydranautics v. FilmTec Corp. , 204 F.3d 880, 885 (9th Cir. 2000)). Generally, dismissal without prejudice does not bar the plaintiff from returning later, to the same court, with the same underlying claim. Semtek Int'l Inc. v. Lockheed Martin Corp. , 531 U.S. 497, 505 (2001). Although this Court dismissed without prejudice Plaintiff's last complaint against the Defendants for failure to state a claim upon which relief could be granted, the Defendants contend that collateral estoppel ought to apply because the Court was fully briefed on the RICO claim in the previous Motion to Dismiss. (Case No. 12-02274.)
Defendants rely on In re Duncan to support their argument. In Duncan, petitioner appealed the denial of his petition for naturalization on the grounds that the questions he failed to answer were unconstitutional. In re Duncan , 713 F.2d 538, 540 (9th Cir. 1983). The court, after being fully briefed on the constitutional challenges, determined that his challenges were without merit and dismissed the case without prejudice. Id . On appeal, plaintiff was barred from relitigating his constitutional claims even though the case was dismissed without prejudice because his constitutional claims had been substantively denied; the lower court included the language "without prejudice" to describe the status of his right to re-petition for naturalization. Id. at 544.
Duncan is inapposite because the issue being precluded, his constitutional challenges, had previously been "substantive[ly] den[ied] on the merits"; dismissing the case without prejudice meant only that he could re-file a petition for naturalization. Id . In contrast, in Wuxi's prior case, Case No. 12-02274, the RICO claims were discussed and deemed faulty but not substantively denied. Thus, the Plaintiff here is not barred by issue preclusion; the prior case was dismissed without prejudice to allow an amended complaint to correct, if possible, the RICO pleading.
The Racketeer Influenced and Corrupt Organizations ("RICO") Act, passed in 1970 as Title IX of the Organized Crime Control Act, provides for both criminal and civil liability. Pub.L. No. 91-452, § 901, 84 Stat. 922 (1970) (codified at 18 U.S.C. §§ 1961-1968). To state a claim under § 1962(c), a civil plaintiff must allege "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co. , 473 U.S. 479, 496 (1985). To bring a RICO claim, a plaintiff must prove two or more acts of racketeering activity. 18 U.S.C. § 1961. Racketeering activity is defined as any act chargeable under several generically described state criminal laws, any act indictable under numerous specific federal criminal provisions, including mail and wire fraud, and any offense involving bankruptcy or securities fraud or drug-related activities punishable under federal law. Sedima , 473 U.S. at 481-82; 18 U.S.C. § 1961. Here, the Plaintiff alleges that the Defendants engaged in the following predicate acts: (1) wire fraud, a racketeering activity defined under 18 U.S.C. § 1343, and (2) money laundering, a racketeering activity defined under 18 U.S.C. § 1957.
i. Wire Fraud as a Predicate Act
The elements of wire fraud are: (1) a scheme to defraud, (2) the use of the wires in furtherance of the scheme, and (3) a specific intent to deceive or defraud. United States v. Shipsey , 363 F.3d 962, 971 (9th Cir. 2004); 18 U.S.C. § 1343. The fraud must take place in interstate or foreign commerce. 18 U.S.C. § 1343. All allegations of fraud under the RICO statute must be pleaded with particularity. Moore v. Kayport Package Express, Inc. , 885 F.2d 531, 541 (9th Cir. 1989).
a. Interstate/Foreign Commerce
In order for the use of wires to satisfy the wire fraud statute, the wires must be used "in interstate or foreign commerce." 18 U.S.C. § 1343. "Foreign commerce" is a term of art which means "commerce with a foreign country." 18 U.S.C § 10. The use of a wire to transfer money occurring between foreign countries "without any territorial nexus to the United States" is not criminalized by the wire fraud statute. United States v. Weingarten , 632 F.3d 60, 71 (2d Cir. 2011).
Plaintiff does not specifically allege any wire transfers, but there are two possible transfers that may have been made by wire: (1) the transfers that occurred in China from various banks including Jiangyin Rural Commercial Bank and China Industrial and Commercial Bank to the Defendants' Chinese bank accounts and (2) the transfer of the money from China to the United States. (Compl. at ¶¶ 97; 102.) The intra-China transfers are not subject to the wire fraud statute, 18 U.S.C. § 1343, and thus cannot be the predicate act required under the RICO statute, 18 U.S.C. §§ 1961-1968. Therefore, the relevant inquiry is whether the Defendants (1) had a scheme to defraud, (2) that used the wire transfers from China to the United States in furtherance of the scheme, and (3)had a specific intent to deceive or defraud. 18 U.S.C. § 1343.
b. In Furtherance
In their Motion to Dismiss, the Defendants challenge whether the wires were used "in furtherance" of the alleged fraud. (Mot. at ¶ 8.) The Supreme Court determined that for mail fraud, the mailing need not be an essential element of the scheme; rather, it is sufficient if the mailing is "incident to an essential part of the scheme." Pereira v. United States , 347 U.S. 1, 8 (1954). This has been applied to the analogous case of wire fraud. The Ninth Circuit has ruled that, "to be in furtherance of a scheme [the use of wires] need not be an essential element of the scheme, just a step in the plot.'" Shipsey , 363 F.3d at 971 (quoting Schmuck v. United States , 489 U.S. 705, 711 (1989)). The use of wires may not simply be part of an after-the-fact transaction that, although foreseeable, was not in furtherance of the defendant's fraudulent scheme. Shipsey , 363 F.3d at 971; United States v. Lo , 231 F.3d 471, 478 (9th Cir. 2000).
The Ninth Circuit has held that the use of wires to transfer funds that have already been embezzled is not a use of wires in furtherance of a scheme to defraud. United States v. Wood, 259 Fed.App'x 48, 49-50 (9th Cir. 2007). In Wood, the defendant embezzled money from his employer by check and then used a wire to send the embezzled funds to a third party for an unrelated business venture, a golf course investment managed by a businessman not otherwise involved. Id . While there was no doubt the defendant stole from his employer by check, the Ninth Circuit held that wire transfer was not in furtherance of his scheme to defraud. Id . Instead, the wire transfer at issue was in furtherance of the investment opportunity with the businessman and was "unrelated [to the employer-victim because the victim] could neither gain nor lose from the [the investment in the golf course.]" Id . The scheme to defraud was complete after the defendant embezzled the funds, and the wire transfer, which occurred one day after the funds were embezzled, could not be in furtherance of an already completed scheme. Id . While the second transfer may have furthered the eventual spending of the theft proceeds by moving it to a different country, it did not further the scheme to obtain Plaintiff's money in the first place.
However, using wires after a fraud is completed is not an absolute bar to liability under § 1343. Lo , 231 F.3d at 478 ("[S]ubsequent mailings can in some circumstances provide the basis for an indictment under the mail fraud statutes[.]" (quoting United States v. Sampson , 371 U.S. 75, 80, 83 (1962))). If the perpetrator conceives his or her scheme with the use of wires in mind, then using the wires after completion of the fraud makes the fraud subject to § 1343. Id . For example, in Lo, the Defendant, a real estate broker, obtained loans for home purchases using fraudulent information. Id. at 474-75. The use of the mails occurred after the loans were completed when the County Record Office mailed deeds to the lenders and to the owners, real and sham, of the properties at issue. Id. at 478. The court in Lo held that although the wires were used after the fraud was technically complete, the mailings were still considered to be part of the fraud as they were used to "lull" the victims to believing everything was normal. Id. at 479. By lulling the victim, the apprehension of the defendants was made less likely because it assured the victims that the conveyance of the property had gone forward in accordance with the usual procedures of the Recorder's office and provided the victims with documentary proof of the conveyance. Id.
Here, the Defendants are accused of "conspir[ing] to defraud and in fact defraud[ing] several financial institutions located in the People's Republic of China of monies through fraudulent loan applications, and divert[ing] said proceeds to finance the operations of Defendants Repet, Repet Group, and America TBS, and for their personal use." (Compl. at ¶ 22.) As discussed above, the relevant action by the Defendants is the transfer of monies from China to the United States. Like in Wood, the alleged wire transfers occurred after the loan proceeds had been issued. The relevant wire transfers from China to the United States did not play any role in inducing the lenders to make the loans to the Defendants. The Complaint details how the Defendants provided false financial statements misrepresenting their liquid assets and forged audit reports to obtain loans to complete their scheme. (Id. at ¶¶ 94, 96.) The Plaintiff admits that once the loans were complete, wires were used to "divert the proceeds of the loans" from the Defendants' Chinese bank accounts to "U.S. bank accounts controlled by [the] Defendants." (Id. at ¶ 102.) Thus, the Defendants' actions are similar to Wood, in which the use of wires occurred in a separate action after the completed fraud.
While the Defendants allegedly used wires to transfer money out of China, the issue is whether the fraud would have been completed without their use. Shipsey , 363 F.3d at 971. Unlike Shipsey, in which the entire fraud scheme would have been unsuccessful without the use of wires because the bank the defendant was attempting to defraud would not have paid him without the wired reimbursements from the third party, here the fraud took place because of forged documents, not because of wire use. Thus, the use of wires was not essential to the fraud and that the fraud would have been completed as soon as the Defendants received the money while in China. Therefore, like Lo, this is an after-the-fact transaction that, although foreseeable, was not in furtherance of the defendant's fraudulent scheme.
The Court finds that, although the Defendants may have used wires in foreign commerce, the use of wires was not in furtherance of any scheme to defraud the Plaintiff.
ii. Money Laundering as a Predicate Act
An individual is guilty of money laundering when he or she, "in any of the circumstances set forth in subsection (d), knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10, 000 and is derived from specified unlawful activity." 18 U.S.C. § 1957(a). The circumstances required by § 1957(d) are either "(1) that the offense under this section takes place in the United States or in the special maritime and territorial jurisdiction of the United States; or (2) that the offense under this section takes place outside the United States and such special jurisdiction, but the defendant is a United States person." 18 U.S.C. § 1957(d). In the present case, the money laundering did not occur within the territorial jurisdiction of the United States therefore, the Defendants must be shown to fall under the second set of required circumstances.
The Defendants do not contest that the present action involves a monetary transaction involving property worth more than $10, 000. The Defendants contest that the monetary transaction (1) occurred in interstate or foreign commerce, and (2) was undertaken by a U.S. person as required by § 1957.
a. Interstate/Foreign Commerce
For the purposes of § 1957, the term "monetary transaction" means "the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument by, through, or to a financial institutionincluding any transaction that would be a financial transaction under section 1956(c)(4)(B) of this title, but such term does not include any transaction necessary to preserve a person's right to representation as guaranteed by the sixth amendment to the Constitution." 18 U.S.C. § 1957(f)(1). Here, the Defendants contest that the money laundering involved foreign commerce. (Mot. to Dismiss at ¶ 11.)
As discussed above, "foreign commerce" is a term of art which means "commerce with a foreign country." 18 U.S.C § 10. Defendants reiterate their argument that the Plaintiff failed to allege the relevant RICO predicate with adequate particularity and that the relevant transactions did not involve foreign commerce. While RICO claims must be plead with adequate particularity, the Plaintiff has satisfied that requirement. Moore , 885 F.2d at 541 (explaining that RICO claims must be plead with the who, what, when, where, and how). In the Plaintiff's complaint, there are specific details of how the money was methodically transferred from banks on the Chinese mainland to banks in Hong Kong and then finally to banks in the United States. (Compl. at ¶ 102.)
Therefore, the Defendants did engage in a transfer of money in foreign commerce.
b. Undertaken by a U.S. Person
Money laundering also requires the relevant action to be taken by "a United States person." 18 U.S.C. § 1957(d). For the purposes of § 1957(d), person is defined pursuant 18 U.S.C. § 3077 as "(A) a national of the United States as defined in section 101(a)(22) of the Immigration and Nationality Act (8 U.S.C. 1101(a)(22)); (B) an alien lawfully admitted for permanent residence in the United States as defined in section 101(a)(20) of the Immigration and Nationality Act (8 U.S.C. 1101(a)(20)); (C) any person within the United States; (D) any employee or contractor of the United States Government, regardless of nationality, who is the victim or intended victim of an act of terrorism by virtue of that employment; (E) a sole proprietorship, partnership, company, or association composed principally of nationals or permanent resident aliens of the United States; and (F) a corporation organized under the laws of the United States, any State, the District of Columbia, or any territory or possession of the United States, and a foreign subsidiary of such corporation." 18 U.S.C. § 3077(2).
Here, Defendants X.Xu, S.Xu, Cao, and Zhao were not United States persons at the time of the alleged money laundering. Although the money was funneled to corporations incorporated in the United States, these corporations were not themselves engaged in money laundering, nor does the Plaintiff argue so in its opposition brief. Plaintiff's Complaint does not allege that either X.Xu or Cao are United States persons; the Complaint merely alleges that their status is unknown. (Compl. at ¶ 4.) Defendants admit that X.Xu and Cao are currently lawful permanent residents but were not between August 9, 2010, and April 28, 2012, when the alleged money laundering occurred. (Id. at ¶ 102.) Plaintiff also admits that Defendant Zhao is neither a legal resident or citizen of the United States. (Id. at ¶ 5.) The Plaintiff does not contest that the Defendants do not meet the required conditions of the money laundering statute.
The Court finds that money laundering is insufficiently plead to be a predicate act for the RICO claim because any alleged money laundering occurred at the hands of non-US citizens.
iii. Conclusion on RICO
Because Plaintiff's complaint fails to state a claim upon which relief can be granted due to the shortcomings in its RICO claim, the Court does not have subject matter jurisdiction over Plaintiff's case through a federal question. The Court therefore declines to decide (1) whether Repet, Repet Group, and America TBS can be RICO Defendants, and (2) whether the Plaintiff has standing to bring a RICO claim.
C. Diversity Jurisdiction
As this Court previously held, once the RICO cause of action is dismissed this Court will lack subject matter jurisdiction over the action because "[d]iversity jurisdiction does not encompass foreign plaintiffs suing foreign defendants." Mutuelles Unies v. Kroll & Linstrom , 957 F.2d 707, 711 (9th Cir. 1992). Here, Plaintiff is a Chinese business entity. (Compl. at ¶ 7.) Defendants X.Xu, Sheng Xu, and Cao are domiciled in California, but hail from China. (Id. at ¶ 4.) Defendant Zhao is a Chinese citizen. (Id. at ¶ 5.) Defendants Repet, Repet Group, and America TBS are all California companies. (Id. at ¶ 21.) As discussed in the Order Granting Motion to Dismiss in case EDCV 12-02274, Plaintiff Wuxi failed to show Defendants X.Xu, S.Xu, Zhao, and Cao were citizens of the United States. (Order Granting Motion to Dismiss, No. 12-02774, Dkt. No. 38 ¶ 7 (C.D. Cal. May 1, 2013).) Moreover, Defendants Xu and Cao provided evidence that they are citizens of China. (Id.) Because there were foreign citizens on both sides of the case, the Court did not have jurisdiction; this remains the case in this action, and the Court, likewise, lacks diversity jurisdiction.
Because this Court lacks subject matter jurisdiction, either through federal question or diversity, it need not evaluate the Defendants' claim that the forum selection clause dictates China as the exclusive forum for this lawsuit.
For the reasons stated above, the RICO claims are DISMISSED with prejudice. The Court declines to exercise supplemental jurisdiction over the remaining state law claims.
IT IS SO ORDERED.