RICO — Enterprise Consisting of Corporate President, His Assistant and His Off-the-Books Wholly-Owned Entity Satisfies Distinctiveness Requirement of § 1962(c) Where All 3 Are Also Defendants

Mega Concrete, Inc. v. Smith, 2013 U.S. Dist. LEXIS 98660 (E.D. Pa. July 15, 2013):

This lawsuit involves allegations that two former employees of the plaintiff construction companies, defendants Michael Smith and Kimberly Lawson, conspired and collaborated with others to steal the plaintiffs' resources, manpower, business opportunities, and payments owed on certain construction projects. The plaintiffs, Mega Concrete, Inc., Mega Sitework, LLC, and Capponi Enterprises, Inc., originally filed suit against six individuals and six corporate entities in addition to Smith and Lawson. The plaintiffs voluntarily dismissed their claims against two of the defendants, and the Court dismissed all claims against seven of the defendants. Currently, five defendants remain in this suit. They are Smith, Lawson, Paramount Concrete Construction, Inc. ("Paramount"), Jerry Frajdenberg, and U.S. Concrete, Inc. ("U.S. Concrete").

The second amended complaint ("SAC"), which is the operative pleading in this case, alleges claims against the remaining defendants under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq., as well as various state law causes of action. In addition, the plaintiffs bring a claim against Smith for violation of the Lanham Act, 15 U.S.C. § 1125(a)(1)(A).

Lawson has not responded to any of the plaintiffs' pleadings, and default has been entered against her. Smith and Paramount (together, and with Lawson, the "Smith Defendants") have moved to dismiss the federal claims against them under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Frajdenberg and U.S. Concrete (together, the "U.S. Concrete Defendants") have moved for judgment on the pleadings under Rule 12(c), also only with respect to the plaintiffs' federal claims. ***

I. Factual Allegations

Mega specializes in cast-in-place concrete and site work, typically in a subcontractor capacity, throughout the Delaware Valley and elsewhere. Mega identifies potential projects; prepares bids to the owner, general contractor, or construction manager overseeing the project; and negotiates the price of the contract and the scope of the work to be done. Mega sometimes subcontracts portions of the work it has been awarded. SAC ¶¶ 19-25.

Mega projects are recorded in an internal accounting system and assigned a job number to track the work performed, payments received or made, the amount of Mega's original contract, and "change orders," which modify the scope or price of work as set forth in the initial contract. Change orders may become necessary for a variety of reasons, including unexpected field conditions or the addition or deletion of new work, and are used on "[v]irtually every construction project." Other internal systems track the assignment of employees ("manpower schedules") and equipment to Mega projects. Id. ¶¶ 26-28, 38, 40.

Michael Smith began working for Mega in August 2004 as an estimator and project manager responsible for analyzing, bidding on, and managing projects. His duties gradually expanded and he became Mega's chief operating officer in January 2006. He was then responsible for preparing bids; negotiating contracts with project owners, general contractors, subcontractors and construction managers; and assigning employees and equipment to those projects. Smith was also responsible for submitting change orders when projects required additional work. Id. ¶¶ 34-37.

The plaintiffs assert that, beginning in 2005, Smith began a scheme to divert revenue, materials, equipment, and manpower from Mega in conjunction with Kimberly Lawson, his assistant and a Mega accounting clerk, who he "recruited" to aid him in his plans, and defendant Paramount, a company he controls.... Paramount was incorporated on May 8, 2008, and Smith serves as the company's president.... Prior to that point, Smith and Paramount "used Paramount Concrete Construction, LLC as a trade-name." ...

Smith's scheme allegedly involved manipulation or concealment of work orders to increase the amount of work Mega performed on a given project without a corresponding entry in Mega's system. He and Lawson would alter books and records to conceal the use of Mega equipment and labor. This resulted in Mega employees performing work on projects for which Mega was not compensated. Smith also allegedly used his managerial position at Mega to divert business opportunities to the Paramount entities he controlled. The plaintiffs allege that Smith's scheme lasted from January 2005 through September 17, 2008, when he was terminated by Mega, and for an unspecified period thereafter. ***

II. Analysis

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3. Smith Enterprise

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a. Enterprise

Smith and Paramount argue that Mega fails to establish collaboration among Smith, Paramount, and Lawson rising to the level of an association in fact. They assert that the allegations regarding Lawson are all too conclusory to demonstrate her shared purpose and involvement in a common scheme with Smith and his company. They also argue that Smith and Paramount are indistinguishable, given that Smith is Paramount's sole owner and president, and cannot be considered separate members of a single enterprise. In essence, they contend that, to the extent Mega has stated a claim, it is for state law business torts against Smith, and Smith alone.

The Smith Defendants are correct that the allegations against Lawson are limited and lacking in some fine-grained detail. Nevertheless, the Court finds that they are sufficient, though just barely, to plausibly suggest that she combined with Smith and Paramount to form an enterprise. The SAC and amended RICO case statement allege that Lawson was "recruited" by Smith and played a role in Smith's scheme to divert Mega's resources and payments on all four of the projects involved in the Smith Enterprise. Specifically, Mega claims that Lawson helped solicit non-enterprise partners on the Locust Towers, Barnes & Noble, and Rite Aid Projects as part of a concerted effort to defraud the plaintiffs, forged a Mega executive's signature on an invoice receipt, caused Mega to perform work on the Rondo-Pak and Barnes & Noble Projects for which it was not paid, coordinated with Smith to obtain work assignments for the benefit of his side business ventures, and agreed with the participants in the Rite Aid Project that, if Mega was selected to perform work at the site, she, Smith, and Plumbline would siphon off Mega's payments for themselves. Lawson also helped Smith divert and then kept money that was properly owed to Mega. See, e.g., SAC ¶¶ 43, 71, 78, 82, 87, 90, 94, 121, 153-54, 164; Am. RICO Case Stmt. at 4, 42, 47. In short, Mega alleges that Lawson assisted Smith on several key facets of the scheme that he had devised.

Viewing the allegations in the light most favorable to the plaintiffs, this entire scheme involved projects spanning from 2006 through 2008, with a break of only a few months between enterprise-related activities from the summer of 2007 until early 2008. These allegations demonstrate commonality of purpose, i.e., using insider roles at Mega to divert its funds and resources, and structural relationships of a sufficient duration to establish a RICO enterprise. See Boyle, 556 U.S. at 946. The fact that Lawson served as Smith's assistant enforces the fact that a continuing relationship existed between them, separate and apart from the pattern of unlawful conduct. See id. at 947; Turkette, 452 U.S. at 583. Whether Mega can substantiate these allegations against Lawson at a later stage of these proceedings is a separate question and one the Court need not now address.

The Court now turns to the Smith Defendants' contention that Paramount and Smith, a company and its owner/president, cannot combine as part of an association-in-fact enterprise. The defendants appear to assert two related arguments: that (1) neither Smith nor Paramount can be held liable as a person who conducted the affairs of the Smith Enterprise because they are also members of that alleged association-in-fact enterprise and (2) Smith and Paramount cannot combine to form an enterprise because they are one and the same. Smith and Paramount have not offered sufficient support to carry the day on either argument.

It is well-established that to state a claim under § 1962(c), a plaintiff "must allege . . . the existence of two distinct entities: (1) a 'person' [who operates or manages the enterprise]; and (2) an 'enterprise' that is not simply the same 'person' referred to by a different name." Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001); see also Jaguar Cars, Inc. v. Royal Oaks Motor Car Co., 46 F.3d 258, 263 (3d Cir. 1995). This principle flows from the language of the RICO statute, itself. To be a person "employed by or associated with" a RICO enterprise, "a defendant must be a 'person' legally distinct from the 'enterprise' with which the person is employed or associated." Bergrin, 650 F.3d at 266.

The defendants have not demonstrated that inclusion of both Smith and Paramount as members of the Smith Enterprise runs afoul of § 1962(c)'s distinctiveness requirement. The cases they cite simply confirm the basic proposition that an enterprise and its participants must be distinct. In Banks v. Wolk and Haroco, Inc. v. American National Bank & Trust Co., the Third and Seventh Circuits, respectively, held that a company cannot serve as both the RICO enterprise and a defendant enterprise member. Banks, 918 F.2d 418, 421 (3d Cir. 1990); Haroco, 747 F.2d 384, 399-402 (7th Cir. 1984). That reasoning would presumably apply with equal force to an individual; he cannot be both participant and enterprise. Here, however, it is not alleged that Paramount or Smith was the enterprise. Mega instead contends that they were participants in a multi-member enterprise.

Moreover, the Third Circuit has determined that an association in fact composed of "a mixture of individual persons and 'entities that they control'" is an entity distinct from its members, satisfying the distinctness principle of § 1962(c). Bergrin, 650 F.3d at 266, 269-70 (quoting United States v. Masters, 924 F.2d 1362, 1366 (7th Cir. 1991) (Posner, J.)).

Footnote 13. The Seventh Circuit appears to have backed away from its reasoning in Masters on which the Bergrin court relied. In a more recent opinion, the Seventh Circuit rejected a plaintiff's contention that four corporations could combine with two of their employees and an unrelated company to constitute a RICO enterprise. Relying on the fact that a corporation acts through its employees, the court noted that "[t]o add the corporations to [the individual defendants], their employees, is thus to add nothing." Bachman v. Bear, Stearns & Co., 178 F.3d 930, 932 (7th Cir. 1999) (Posner, J.).

Under Bergrin, a defendant generally may be a member of an association-in-fact enterprise and also a participant in that enterprise. See also Atlas Pile Driving Co. v. DiCon Fin. Co., 886 F.2d 986, 995 (8th Cir. 1989) (same).

Although Bergrin focused on the distinctiveness of an association-in-fact from its members, it also offers strong guidance as to whether an owner and his company may combine as part of an enterprise in the first place, at least when unrelated parties are also members. The Bergrin court cited with approval the idea that an association in fact can include both individuals and their businesses. Id. at 266. In Bergrin, the court found that five individual defendants and four corporations--including two law firms in which one of the defendants appears to have been a partner, an investment company, and a restaurant--formed a viable association-in-fact enterprise under RICO. Id. at 261-63, 268-70. A similar, though smaller enterprise is alleged here: Smith, his company, and a third party, Lawson. Bergrin suggests that there is no bar to Mega premising a RICO claim on this combination of individuals and an entity controlled by only one of them.

Though uncited by the parties, the Court is aware of decisions by various courts of appeals, including the Court of Appeals for the Third Circuit, finding that a corporation acting in tandem only with its employees cannot form a RICO enterprise and be a distinct "person" who conducts the affairs of that enterprise. In that scenario, the corporation, which can act only through its employees, is truly both enterprise and person, and a claim against it cannot satisfy § 1962(c)'s distinctiveness requirement. See Cruz v. FXDirectDealer, LLC, No. 12-1252, 2013 WL 3021904, at *4 (2d Cir. June 19, 2013) (precedential); Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353, 361 (9th Cir. 2005); Gasoline Sales, Inc. v. Aero Oil Co., 39 F.3d 70, 73 (3d Cir. 1994).

The case at bar raises slightly different issues, however. In contrast to the intra-corporation enterprises discussed in Gasoline Sales and the other above circuit court precedent, the Smith Enterprise involves a third-party member who does not come within the other members' corporate sphere. Inclusion of Lawson tends to negate the notion that the enterprise is Paramount or Smith, simply called by another name, and presents at least reason to doubt that distinctiveness concerns defeat Mega's RICO claim against them. See Bergrin, 650 F.3d at 266; cf. Gregory P. Joseph, Civil RICO: A Definitive Guide § 11(B)(4), at 103 (3d ed. 2010) (noting that the sufficiency of an alleged association in fact depends on "the nexus between the individuals (and any affiliated or subordinate entities), the acts, and the ordinary course of business of the target (organizational) defendant among them").

Additionally, the above-cited cases address the issue of distinctiveness when the corporation is both defendant participant and an entity encompassing all enterprise members. They do not speak to whether an individual employee or owner, such as Smith, is distinct enough from an association in fact comprised of him and his company to also be a "person employed by or associated with" the enterprise. Finally, the Court has not uncovered any court of appeals case directly confronting the viability of a § 1962(c) claim against an owner and his solely owned company when they are both alleged to be enterprise members and persons who "conduct[ed] or participate[d] . . . in the conduct" of the enterprise's affairs through the owner's actions. The Court takes no definitive view on these issues, but merely notes that they present separate, yet pertinent, questions regarding the cognizability of RICO claims based on the Smith Enterprise.

Given the complexity of this area of RICO law and the fact that the parties have not addressed the above enumerated issues implicated by including Smith and Paramount as members and defendant participants in the Smith Enterprise, the Court will not at this time dismiss Count I against one or both of Smith and Paramount for lack of distinctiveness, either between them or between them and the alleged enterprise.

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