Commercial Litigation and Arbitration

RICO Standing Established If Plaintiff Is Injured by One Predicate Act — Need Not Be Injured by All Alleged to Form the Pattern

Just Film, Inc. v. Merchant Servs., Inc., 2012 U.S. Dist. LEXIS 173455 (N.D. Cal. Dec. 6, 2012):

Plaintiffs allege that Defendants defrauded them and the putative class members in a scheme involving credit and debit card processing services and equipment.... Plaintiffs divide the Defendants into two categories: Merchant Services Defendants and Leasing Defendants.

Plaintiffs refer to MSI, NPP, UCI and UMS collectively as the Merchant Services Companies and allege that each of them is the alter ego of the others. In the proposed 3AC, Plaintiffs allege that MSI and NPP were created to trick banks and regulators into believing the Merchant Services Companies were legitimate corporations, and that UMS and UCI were created to hide the illegal activities and proceeds thereof from banks and regulators. *** Plaintiffs contend that the Merchant Services Companies are alter egos of Moore, Jurczyk and Parisi.

Leasing Defendants are entities and individuals based outside of California.... Plaintiffs allege that the Leasing Defendants, except Buono, transfer monies obtained through the alleged fraud in shell companies, such as Northern Funding LLC.

In the currently operative second amended complaint (2AC), Plaintiffs generally explain the alleged fraud as follows. Credit and debit card transactions are processed through financial networks, called interchanges, run by entities like Visa and Mastercard. Banks, as members of these interchanges, can sell card processing services directly to merchants, or indirectly through companies and individuals known as Independent Sales Organizations and Merchant Service Providers (ISOs/MSPs). 2AC ¶¶ 67-68. These ISOs/MSPs must be licensed and registered with both Visa and Mastercard, as well as with a bank or a bank-approved processing entity, called a processor. Id. at ¶¶ 67-68.

Merchants pay a fee for each credit and debit card transaction. Id. at ¶ 69. The fee is "shared among (1) the bank that issued the credit or debit card to the customer, (2) the interchange, (3) the bank through whom the merchant is accepting the card, (4) the ISO/MSP that solicited the merchant and/or provides customer service to the merchant (if any) and (5) the third party-processor (if any)." Id. Merchants may also be required to pay for credit and debit card processing equipment, such as card terminals. Id. at ¶ 70.

Plaintiffs alleged that Merchant Services Defendants are ISO/MSPs, and Leasing Defendants provided card processing equipment. Pursuant to a contract, Merchant Services Defendants marketed equipment leases to merchants on behalf of MBF Leasing. 2AC ¶ 133.

When marketing card processing services, the Merchant Services Companies' independent sales agents, such as Walshe, misled merchants about card transaction rates. In particular, these sales agents used a so-called Rate Sheet, which suggested that the merchants would be charged a fixed rate of 1.79 percent for each card transaction plus a flat monthly service fee. In fact, however, the rates for each transaction varied based on the type of credit card a consumer used. Further, not all of the charges associated with card processing services were reflected on the Rate Sheet, even though sales agents represented they were. The Rate Sheet had a signature line for a merchant to affirm that "all fees have been sufficiently explained to my satisfaction." 2AC ¶ 212. If a merchant decided to seek card processing services through Merchant Services Defendants, the merchant generally was asked to sign an Application for Merchant Agreement. Sales agents were instructed to represent that the Application reflected "the entire arrangement with the Merchant Services Defendants." Id. at ¶ 257. However, sales agents did not provide the merchant with the Merchant Card Processing Agreement (MCPA), which provided the terms for card processing services. The Application referred to the MCPA and instructed the merchant "to review the terms and conditions of a 'Merchant Card Processing Agreement included with this application.'" Id. at ¶ 258. According to Plaintiffs, although the MCPAs may have their signatures acknowledging the terms, this is because "Merchant Services Defendants create a signed version using scanners and computer programs to copy the signature . . . onto the document." Id. at ¶ 264.

The sales agents also misrepresented the need for and value of leasing card processing equipment from MBF Leasing. Equipment Finance Leases (EFLs) governed merchants' use of this equipment. Some Plaintiffs signed EFLs and some alleged that their signatures on those documents were forged.

Plaintiffs also complain about various fees they were charged, including for a "first and last month" deposit, which was not credited to class members' accounts, and a "cancellation fee," which the Merchant Services Defendants deducted from class members' accounts.

Plaintiffs allege that certain Defendants, without a permissible purpose, inquired into and placed negative notations on certain Plaintiffs' consumer credit reports.

Von Glasenapp, Jordan and other merchants received "letters a couple times a year informing them of their obligation to pay a personal property tax on the equipment they" leased. 2AC ¶ 274. Leasing Defendants determined the amount of this tax and debited it, along with a processing fee, from Von Glasenapp's, Jordan's and other merchants' bank accounts. However, the collected taxes "are not actually due to, nor are they remitted to, any taxing authority." Id. ¶ 278. Instead, the funds were transferred to shell companies owned by Leasing Defendants.

***On August 23, 2012, Plaintiffs filed the instant motion for leave to file a third amended complaint and simultaneously filed their motion for class certification to prosecute the claims in the proposed third amended complaint. Docket Nos. 383, 387. ***

II. New RICO predicate acts

The Court has already found that Plaintiffs' RICO claims were properly plead against the Merchant Services Defendants and the Leasing Defendants, except Northern Leasing. In this motion, Plaintiffs seek leave to add additional predicate acts and allegations to their already existing and properly plead RICO claims, which were originally based on wire and mail fraud. Defendants only challenge Plaintiffs' amendments that fall into two categories: (1) misrepresentations made by the Merchant Services Defendants to third parties, other than class members, including alleged breaches of these third parties' regulations or contracts with them, as further acts of wire and mail fraud; and (2) allegations that Northern Leasing, Cohen and Mezei engaged in bribery and witness tampering, new predicate acts. Although Defendants characterize the first of these as new claims for fraud or misrepresentation, they are alleged only as RICO predicate acts, not as a new basis for the fraud and misrepresentation claims.

A. Fraud involving third parties

In the proposed 3AC, Plaintiffs seek to add the following allegations regarding third parties. To become an ISO/MSP, a sales company must agree to adhere to rigid rules set by Visa, MasterCard and the authorizing processors. Proposed 3AC ¶ 67. These rules and their agreements with these entities, among other things, govern the types of fees that ISOs are allowed to charge and collect from merchants, forbid subcontracting of sales and marketing services and require ISOs to assume all liability for their employees' and agents' acts. Id. at ¶¶ 67, 240. MSI and NPP are registered with Visa, MasterCard and the processors, while UCI is not, but is subcontracted to perform all marketing, sales and support in connection with the Merchant Services Defendants' credit card processing, in violation of the agreements with the processors, Visa and MasterCard. Id. at ¶¶ 70, 239-40, 275.

Moore, in concert with Parisi and Jurcyzk, allegedly has made numerous false representations to Visa, MasterCard and the processors to induce them to grant NPP and MSI the authority to market and sell credit card services, and to trick them into believing that NPP and MSI continue to be in compliance. Id. at ¶ 240. NPP and MSI told these entities that they were based at an address in Irvine, California, which is actually UCI's address, instead of at the address in Corona del Mar, California that they have stated was theirs during this litigation. Id. at ¶¶ 241, 698. They did this because they knew that, if Visa, Mastercard or the processors ever conducted an audit, they would immediately know that the Corona del Mar location did not meet basic security standards which would reveal that these are not legitimate companies. Id. Jurcyzk regularly corresponds with the processors and holds himself out as the Vice President but does not tell them that he is the Vice President of UCI, not of NPP or MSI. Id. at ¶ 242. Moore, Jurcyzk and UCI tell the processors that NPP and MSI do business as "Merchant Services," although they have not registered this name and denied at deposition that they do business as "Merchant Services." Id. at ¶ 243. UCI, however, does do business under this name. Id. NPP and MSI do not tell the processors that the sales agents and staff of UCI are independent contractors, which cannot be used pursuant to their contracts. Id. at ¶ 245. Instead, UCI gives these agents legitimate-sounding titles, like "Account Executive," to obscure this fact. Id. UCI also requires the agents to use business cards with the logo of "Merchant Services" and a statement that "Merchant Services" is a "Registered ISO/MSP" of the processor. Id. Merchant Services Defendants entered into credit card payment processing contracts with class members on behalf of the processors and mailed, faxed and emailed these to the processors, "making the implicit representation that the contracts were secured in compliance with NPP's and MSI's contracts with the Processors, as well as governing Visa and Mastercard rules." Id. at ¶¶ 702, 722.

The Merchant Services Defendants also allegedly charged merchant customers fees in violation of Visa and Mastercard's regulations and NPP's and MSI's agreements with the processors.*** Plaintiffs allege that, when Merchant Services Defendants enrolled merchants in processing services with Transfirst, they altered Transfirst's terms of service to contain an early termination fee, although they did not usually show these terms to customers at all. Id. at ¶¶ 350-52. Plaintiffs also allege that, when customers cancelled their contracts with processors, Merchant Services Defendants either used this early termination fee to scare the customers into continuing with their contracts (if the customers were valuable ones) or directly collected the fee from the customers' bank accounts, using the banking information that the customer provided when enrolling in the processing services. Id. at ¶¶ 353-56.

Plaintiffs also allege that the Merchant Services Defendants improperly tried to collect monies that merchants did not pay to the processor. In their agreements with processors, in exchange for being paid a higher share of revenue, MSI and NPP agreed to accept the financial risks related to the merchants that they enrolled; under this arrangement, if a merchant defaulted on debts owed to the processor, the processor could deduct those fees from the amount paid to MSI and NPP. Id. at ¶ 420. Although, under the Visa and Mastercard regulations, they were prohibited from collecting directly from merchants debts owed under the agreements between the merchants and processors, MSI and NPP have orally purported to subcontract to UCI the non-existent "right" to collect losses. Id. at ¶ 421. As a result, UCI has mailed hundreds or thousands of collections letters to merchants, conducted credit inquiries, reported debts to credit bureaus and turned over debts to third party collection agencies. Id. at ¶ 422.

Finally, Plaintiffs allege that the Merchant Services Defendants used "fraudulent ACH forms" to represent falsely to banks that they were authorized to deduct money from class members' accounts. Plaintiffs allege that these forms were fraudulent because they listed a non-existent entity as the recipient and merchants were never told what entity would be receiving the funds. See, e.g., id. at ¶¶ 358-361, 461. Thus, according to Plaintiffs, when "UCI, on behalf of itself, other Defendants, or its alter-egos, make the ACH withdrawal, they are making a false representation to the bank that that entity has explicit authorization of the merchant to conduct the withdrawal to induce the bank to permit them to deduct the funds from the class member's account," which "UCI knows . . . to be false, as the class cannot give authorization to a fictitious non-entity." Id. at ¶ 358; see also id. at ¶ 372. Plaintiffs also state that Merchant Services Defendants falsely represented to the banks that they were authorized to make the ACH withdrawals for certain sums of money to which they were not actually entitled, including for the improper cancellation fees and other debts under the processing contract between the merchant and the processor that are described above. See, e.g., id. at ¶¶ 353, 461, 481, 501, 517, 545, 580, 718.

Merchant Services Defendants argue that Plaintiffs have not plead adequately that they themselves relied on these purported misrepresentations to third parties. They also contend that Plaintiffs do not have standing to bring claims based on misrepresentations to third parties, because they have not alleged sufficiently that they suffered an injury in fact that was caused by the misconduct. RICO creates a private cause of action for "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter." 18 U.S.C. § 1964(c). Section 1962(c), in turn, makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate . . . commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity," and § 1962(d) makes it "unlawful for any person to conspire to violate" subsection (c). "Racketeering activity" is defined to encompass a variety of predicate acts that are set forth in 18 U.S.C. § 1961(1), including mail fraud, wire fraud, witness tampering, and bribery. A "'pattern of racketeering activity' requires at least two acts of racketeering activity." 18 U.S.C. § 1961(5).

"To have standing under civil RICO, [a plaintiff] is required to show that the racketeering activity was both a but-for cause and a proximate cause of his injury." Rezner v. Bayerische Hypo-Und Vereinsbank AG, 630 F.3d 866, 873 (9th Cir. 2010). See also Hemi Group, LLC v. City of New York, 130 S. Ct. 983, 989 (2010) (citing Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992)). "When a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff's injuries." Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006) (emphasis added). There must be "'a direct causal connection' between the predicate wrong and the harm." Hemi Group, 130 S. Ct. at 994 (quoting Anza, 547 U.S. at 460). "A link that is too remote, purely contingent, or indirect is insufficient." Id. at 989 (internal quotation marks and formatting omitted). "In some cases, reliance may be 'a milepost on the road to causation.'" Poulos v. Caesars World, Inc., 379 F.3d 654, 664 (9th Cir. 2004) (quoting Blackie v. Barrack, 524 F.2d 891, 906 n.22 (9th Cir. 1975)). However, Merchant Services Defendants are incorrect when they argue that Plaintiffs must allege that they themselves were aware of, and personally relied upon, the purported misrepresentations. In Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2008), the Supreme Court held that first-party reliance is not an element of a RICO claim based on mail fraud or required to establish proximate causation, and that "a person can be injured 'by reason of' a pattern of mail fraud even if he has not relied on any misrepresentations." Id. at 649-54. In so holding, the Court noted that plaintiffs still may be required to show that someone had relied on the misrepresentations in order to prove proximate causation ultimately. Id. at 658-59 ("none of this is to say that a RICO plaintiff who alleges injury 'by reason of' a pattern of mail fraud can prevail without showing that someone relied on the defendant's misrepresentations") (emphasis in original). In Bridge, the Court emphasized that proximate causation is "a flexible concept that does not lend itself to a black-letter rule that will dictate the result in every case." Id. at 654 (internal quotation marks and citations omitted). Instead, proximate causation is the label given to "the judicial tools used to limit a person's responsibility for the consequences of that person's own acts, with a particular emphasis on the demand for some direct relation between the injury asserted and the injurious conduct alleged." Id. (internal quotation marks and citations omitted). Further, as Plaintiffs argue, to establish standing, they are not required to show that each individual predicate act caused them an injury, but rather that the pattern of racketeering activity did. In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985), the Supreme Court stated that the plaintiff is required to plead "compensable injury [consisting of] harm caused by predicate acts sufficiently related to constitute a pattern." Id. at 497. The Seventh Circuit has explained that, after establishing that predicate acts are sufficiently related to constitute a pattern of racketeering activity, "a plaintiff need not demonstrate injury to himself from each and every predicate act making up the RICO claim." Corley v. Rosewood Care Ctr., 388 F.3d 990, 1004 (7th Cir. 2004) (discussing Marshall & Ilsley Trust Co. v. Pate, 819 F.2d 806, 809-10 (7th Cir. 1987)). Instead, the plaintiff must prove only "an injury directly resulting from some or all of the activities comprising the violation." Marshall, 819 F.2d at 809. See also Deppe v. Trippe, 863 F.2d 1356, 1366 (7th Cir. 1988)("no requirement exists that the plaintiff must suffer an injury from two or more predicate acts, or from all of the predicate acts. . . Thus, a RICO verdict can be sustained when a pattern of racketeering acts existed, but when only one act caused injury."); Kearny v. Hudson Meadows Urban Renewal Corp., 829 F.2d 1263, 1268 (3d Cir. 1987) (finding that the statute required only injury from "any predicate act," not all, and stating that a contrary holding would mean that, "[f]or example, if an organized crime group were to operate a protection racket, extorting money from each merchant in a community, then each merchant's injury would be separate, and therefore, . . . none could recover"); Edgenet, Inc. v. GS1, AISBL, 742 F. Supp. 2d 997, 1015 n.6 (E.D. Wis. 2010) (noting that the Supreme Court did not hold otherwise in Hemi Group); Gregory P. Joseph, Civil RICO: A Definitive Guide 58-59 (3d ed. 2010) ("As long as the pattern of racketeering activity has caused harm to the plaintiff's business or property, the plaintiff has RICO standing. The plaintiff is not obliged to plead or prove that it has been injured by multiple predicate acts, as long []as it has been injured by at least one predicate act."). Defendants cite no cases stating that plaintiffs must plead or prove that they were harmed by each predicate act alleged.

Here, the Court has already found that Plaintiffs have properly plead RICO claims, which they had standing to pursue. See Docket No. 179, 29-30. In addition, they allege that they have been directly injured by at least one of the new predicate acts; Plaintiffs have alleged that Merchant Services Defendants represented to banks and ACH providers that they were authorized to debit money from class members' accounts, even though they were not entitled to collect these amounts, and that money was unlawfully taken from their bank accounts as a result. Merchant Services Defendants do not contest that the new alleged predicate acts are related enough to the predicate acts previously plead or to each other to constitute part of the same pattern of racketeering. Accordingly, the Court finds that these are not barred as a matter of law for failure to plead standing or reliance. ***Accordingly, the Court grants Plaintiffs' request to amend to allege new predicate acts based on Merchant Services Defendants' purported misrepresentations to third parties.

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