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Bunnett & Company, Inc. v. Gearheart

United States District Court, N.D. California

February 27, 2018

BUNNETT & COMPANY, INC., et al., Plaintiffs,
v.
TODD GEARHEART, et al., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS THE SECOND AMENDED COMPLAINT

          RICHARD SEEBORG, United States District Judge

         INTRODUCTION

         Plaintiffs Bunnett & Company, Inc. (“Bunnett & Co.”) and Energy Feeds International, LLC (“Energy Feeds”) are sister companies and distributors of nutritional supplements for dairy cows. Plaintiffs historically operated under agreements with major suppliers for exclusive distribution rights within the United States. They allege that an enterprise consisting of J.D. Heiskell Holdings, LLC (“JDH”), historically one of Plaintiffs' largest customers; Todd Gearheart, JDH's Vice President; Ray Gearheart, Todd Gearheart's father and Plaintiffs' former sales representative; Gearheart Ag Consulting, Inc. (“Gearheart Ag”), a company affiliated with Ray Gearheart; E&K Ag, LLC (“E&K”), a company affiliated with both Gearhearts; and Frank Dores, Plaintiffs' former General Manager (collectively, “Defendants”), together with Wawasan, one of Plaintiffs' suppliers in Malaysia; several Wawasan employees; and certain other affiliate companies (collectively, “co-conspirators”), devised a scheme to establish and exert control over a new distribution channel for the supply and sale of dairy cow nutritional supplements in the United States, effectively driving Plaintiffs out of business through wrongful conduct.

         Plaintiffs originally brought suit against Defendants and their alleged co-conspirators, but pursuant to stipulation, dismissed their claims against the co-conspirators on July 24, 2017, and stipulated with Defendants on July 28, 2017, to file a Second Amended Complaint (“SAC”). The SAC, filed on August 11, 2017, brings suit alleging twenty claims for relief under federal and state laws. Defendants JDH, the Gearhearts, and the Gearhearts' affiliated companies moved to dismiss all claims against them; Defendant Dores joins their motion. For the reasons stated below, the Motion to Dismiss the Second Amended Complaint is granted in part and denied in part.

         BACKGROUND[1]

         Plaintiffs Bunnett & Co. and Energy Feeds are two affiliated, family-owned businesses founded and led by William Bunnett. SAC ¶ 25. Their business is the distribution of nutritional supplements for dairy cows across the United States. Id. Plaintiffs historically operated under exclusive distribution agreements with major suppliers: Bunnet & Co. with Natural Soda, LLC (“Natural Soda”), and Energy Feeds with Wawasan. Id. ¶ 26. Frank Dores was Plaintiffs' General Manager until his resignation in October of 2015. Id. ¶ 28. Ray Gearheart was a sales agent for Plaintiffs until his resignation in October of 2015. Id.

         JDH is a large animal feed distributor and agricultural trading company, where Todd Gearheart is a Vice President, and his father, Ray Gearheart is a “semi-retired” Vice President. SAC ¶ 28. JDH was one of Plaintiffs' largest customers by volume. Id. ¶ 27.

         Plaintiffs allege that JDH, Dores, the Gearhearts, and the Gearhearts' affiliated companies Gearheart Ag and E&K created a scheme to establish and exert control over a new distribution channel for the supply and sale of dairy cow nutritional supplements and edge Plaintiffs out of business in the Fall of 2015. Defendants worked with certain Wawasan affiliates in order to do so through a number of illegal activities. In order to conceal their illicit activity, Natural Soda, Wawasan, JDH, and Todd Gearheart agreed to compensate Dores and Ray Gearheart through surreptitious payments to other companies or persons rather than to Dores and Ray Gearheart directly. In order to conceal Dores' actions from Plaintiffs before his resignation, Dores claimed he suffered from debilitating stress and could not work, and fraudulently applied for and received disability from the State of California. He later filed for bankruptcy, claiming his disability prevented him from gainful employment, all the while working for and being compensated by JDH. Plaintiffs now bring suit alleging twenty claims for relief against various defendants.

         LEGAL STANDARD

         Under Federal Rule of Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege “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). A claim is facially plausible when the plaintiff pleads facts that “allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. While courts do not require “heightened fact pleading of specifics, ” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 570.

         In deciding whether the plaintiff has stated a claim upon which relief can be granted, the court accepts the plaintiff's allegations as true and draws all reasonable inferences in favor of the plaintiff. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

         If the court dismisses a complaint, it “should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). In making this determination, the court should consider factors such as “the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party and futility of the proposed amendment.” See Moore v. Kayport Package Express, 885 F.2d 531, 538 (9th Cir. 1989).

         DISCUSSION

         I. Sufficiency of Plaintiffs' RICO Claim

         Defendants first argue that Plaintiffs' RICO claims fail as a matter of law because Plaintiffs do not sufficiently plead the required elements of a RICO claim. Plaintiffs bring claims for violations of both 18 U.S.C. § 1962(c) and 18 U.S.C. § 1962(d). Section 1962(c) provides:

It shall be 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.

         Section 1962(d) prohibits conspiracy to violate Section 1962(c). In order to state a claim under Section 1962(c), Plaintiffs must show “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985). Relatedly, in order to state a claim under Section 1962(d), “Plaintiffs must allege either an agreement that is a substantive violation of RICO or that the defendants agreed to commit, or participated in, a violation of two predicate offenses.” Howard v. Am. Online Inc., 208 F.3d 741, 751 (9th Cir. 2000). Defendants argue that Plaintiffs fail to meet a number of the above elements to establish either RICO claim.

         A. Plaintiffs' Allegations in Support of the “Enterprise” Element of a Civil RICO Claim

         Defendants argue that Plaintiffs fail to allege an “enterprise” separate from a pattern of racketeering activity as required by Section 1962(c). An “enterprise” is statutorily defined as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. § 1961(4). For purposes of a Section 1962(c) claim, an enterprise is “an entity, for present purposes a group of persons associated together for a common purpose of engaging in a course of conduct.” United States v. Turkette, 452 U.S. 576, 583 (1981). In order to establish an enterprise, “a plaintiff must provide both evidence of an ongoing organization, formal or informal, and evidence that the various associates function as a continuing unit.” Turkette, 452 U.S. at 583. The Ninth Circuit has expressly rejected that a plaintiff need show or allege “any particular organizational structure, separate or otherwise.” Odom v. Microsoft Corp., 486 F.3d 541, 551 (9th Cir. 2007). The Supreme Court has clarified that an enterprise must be “separate and apart from the pattern of activity in which it engages.” Turkette, 452 U.S. at 583. “While the proof used to establish these separate elements may in particular cases coalesce, proof of one does not necessarily establish the other.” Id. Thus, at the pleadings stage, Plaintiffs need to allege (1) a common purpose among defendants, (2) ongoing organization, formal or informal, and (3) a continuing unit. See Odom, 486 F.3d at 552-53.

         Plaintiffs' allegations are sufficient to establish the “enterprise” element. In the SAC, Plaintiffs allege that Defendants, along with the alleged coconspirators, formed an entity “for the common purpose of creating and carrying out a distribution channel for the sale of specialty feed fat and other nutritional supplements within the United States, in part by importing specialty feed fat from Malaysia.” SAC ¶ 142. This is a sufficiently pled “common purpose.” Plaintiffs further allege that the leaders of the enterprise are JDH, the Gearhearts, Gearheart Ag, Dores, Wawasan, and certain Wawasan affiliates. These leaders “work together in making decisions with respect to distribution of inert fats within the United States market and direct the activities of the individual members of the enterprise and the enterprise itself.” Id. E&K “is a current member and associate” of the enterprise and “indirectly manages the affairs of the enterprise.” Id. This description of the alleged enterprise's leaders and members and their roles constitutes sufficiently pled “ongoing organization.” Finally, Plaintiffs allege that Defendants' established and continue to maintain the alternative distribution channel, facilitated through various criminal activities taking place over the course of at least 18 months. These allegations are sufficient to establish that Defendants functioned as a continuing unit whose activities were ongoing rather than isolated. See Odom, 486 F.3d at 553.

         B. Plaintiffs' Alleged “Pattern” of Racketeering Activity

         Defendants next contend that Plaintiffs fail to plead a “pattern” of racketeering activity. This element requires Plaintiffs to “show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 220, 239 (1989). The Supreme Court has explained that “‘[c]ontinuity is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition.” Id. at 241. Plaintiffs may demonstrate closed continuity “by proving a series of related predicates extending over a substantial period of time.” Id. at 242. “In other cases, the threat of continuity may be established by showing that the predicate acts or offenses are part of an ongoing entity's regular way of doing business.” Id.

         Defendants also contend that Plaintiffs must show each defendant's separate involvement in the commission of two predicate acts in order to establish a pattern. See Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris, Inc., 113 F.Supp.2d 345, 367 (E.D.N.Y. 2000) (denying summary judgment where “it cannot be concluded on a motion for summary judgment that [defendant] did not ‘participate' or was not ‘involved'” in alleged pattern of racketeering activity given defendant's “apparent active direction of [another's] fraudulent conduct”). While they are correct, it is also true, as Plaintiffs argue, that they may meet their burden by showing “involve[ment], direct[] or indirect[], ” or “that [the] defendant bears responsibility” for an alleged offense. Id. at 368.

         As another judge in this district has observed, “[c]ase law suggests that the burden on plaintiffs to plead the ‘pattern' element is relatively low.” Slack v. Int'l Union of Operating Eng'rs, No. C-13-5001 EMC, 2014 WL 4090383, at *24 (N.D. Cal. Aug. 19, 2014) (citing cases). “Thus, at the pleading stage, if the threat of continuing racketeering activity is inferable from the complaint, then whether defendants' actions are continuing in nature or isolated or sporadic will be the subject of proof at trial.'” Id. (internal quotation marks and alterations omitted); see also Uthe Tech. Corp. v. Allen, No. C 95-02377 WHA, 2016 WL 1427557, at *2-3 (N.D. Cal. Apr. 12, 2016) (denying summary judgment where defendants argued the record demonstrated the alleged conspiracy had only a solitary goal but “plaintiff offered evidence that, at least at its inception, the alleged conspiracy intended to siphon off sales from [plaintiff] indefinitely into the future”).

         Given the current stage of proceedings, Plaintiffs' allegations are sufficient to plead both closed and open-ended continuity. With respect to closed continuity, Plaintiffs plead several predicate acts, such as wire fraud, money laundering, and perjury, each relating to the same alleged scheme of interfering with Plaintiffs' business, and extending over a period of at least eighteen months. While Defendants argue that the allegations pertaining to Todd Gearheart took place only between January and March of 2016, they are incorrect. The SAC alleges that Todd Gearheart also participated in a predicate act in July of 2017. Plaintiffs further plead that Defendants and their co-conspirators “will continue to commit unlawful acts in the ordinary course of its business, ” including “provid[ing] false testimony and commit[ing] perjury” in an effort to protect their business interests. Id. ¶ 168. These allegations constitute an ongoing threat sufficient to allege open-ended continuity. As Plaintiffs have sufficiently pled continuity, as well as related predicate acts, they have fulfilled their pleading burden to allege a “pattern” of racketeering activity within the meaning of Section 1962(c).

         C. Plaintiffs' Alleged Predicate Acts

         Defendants argue that Plaintiffs fail properly to plead any predicate acts that could support RICO liability, either because Plaintiffs fail to state a claim, or because Plaintiffs' predicate acts do not qualify as racketeering activity within the meaning of the RICO statute. While not all of Plaintiffs' predicate acts are well pled, Plaintiffs successfully plead at least two predicate acts supporting RICO liability against each defendant.

         1. Wire and Mail Fraud

         Defendants contend that Plaintiffs' wire and mail fraud predicate acts are insufficient for failure to plead that Plaintiffs were deceived, deprived of property, or relied on alleged false statements. Mail and wire fraud consist of using the mail or wires in “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. §§ 1341, 1343; see also United States v. Manion, 339 F.3d 1153, 1156 (9th Cir. 2003) (“The elements of mail and wire fraud are: (1) proof of a scheme or artifice to defraud, and (2) using or causing the use of the mails or wires in order to further the fraudulent scheme.”). Contrary to Defendants' argument, there is no requirement that Plaintiffs plead that they were deceived. See Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 458 (2006) (discussing for purposes of proximate cause analysis and not elements of mail and wire fraud whether plaintiff showed injury). Nor need Plaintiffs plead that they were deprived of property. Defendants cite Lancaster Community Hospital v. Antelope Valley Hospital District, 940 F.2d 397, 406 (9th Cir. 1991), for that proposition, but that case dealt with conduct occurring prior to the passage of 18 U.S.C. § 1346, in which Congress specifically brought “a scheme or artifice to deprive another of the intangible right of honest services” within the wire and mail fraud statutes' purview. See also Skilling v. United States, 561 U.S. 358, 407-08 (2010) (construing Section 1346 to criminalize “honest-services cases involv[ing] offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes”). Defendants' argument regarding reliance similarly fails. ...


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