RICO Claim Based on Underpayment of Wages Cannot Be Predicated on Pay Stubs That Reveal, Not Promote, the Fraud — Error to Prevent Motion to Amend by Immediate Entry of Judgment on Dismissal of Complaint

Nakahata v. N.Y. -Presbyterian Healthcare Sys., Inc., Nos. 11-0734, 11-0710, 11-0713, 11-0728 (2d Cir. July 11, 2013):

***Plaintiffs -- current and former healthcare employees -- allege that the Defendants -- healthcare systems, hospitals, corporate heads, and affiliated entities -- violated the Fair Labor Standards Act ("FLSA"), New York Labor Law ("NYLL"), Racketeer Influenced and Corrupt Organizations Act ("RICO"), and New York common law by failing to compensate Plaintiffs for work performed during meal breaks, before and after scheduled shifts, and during required training sessions. ***

Plaintiffs allege that it is Defendants' policy not to pay employees for all hours worked, including some overtime hours. In particular, Plaintiffs allege: (1) Defendants have a policy of automatically deducting time for meal breaks from employees' paychecks despite consistently requiring employees to work during meal breaks; (2) employees engage in work activities both before and after their shift without compensation; and (3) Defendants require employees to attend training sessions for which they are not compensated. Based on these allegations, Plaintiffs seek to recover unpaid compensation pursuant to the FLSA, NYLL, and New York common law. Plaintiffs further allege that their paychecks were misleading and part of a fraudulent scheme to hide the underpayment in violation of RICO and New York common law.***

We review a district court's denial of leave to amend for abuse of discretion. See Anatian, 193 F.3d at 89. As a general principle, district courts should freely grant a plaintiff leave to amend the complaint. Kleinman v. Elan Corp., 706 F.3d 145, 156 (2d Cir. 2013). Nonetheless, "we will not deem it an abuse of the district court's discretion to order a case closed when leave to amend has not been sought." Anatian, 193 F.3d at 89 (quoting Campaniello Imps., Ltd. v. Saporiti Italia, S.p.A., 117 F.3d 655, 664-65 n.3 (2d Cir. 1997)) (internal quotation marks omitted). Nor will we upset a decision denying leave to amend if the denial was harmless error. See In re "Agent Orange" Prod. Liability Litig., 517 F.3d 76, 104 (2d Cir. 2008).

While we will not upset a denial of leave to amend where the plaintiff failed to seek such leave, the record in this case indicates that Plaintiffs were not provided an opportunity to seek leave to amend in response to the District Court's order of dismissal. The District Court ordered the cases terminated with no indication that final judgment should await a motion for leave to amend. See Nakahata I, 2011 WL 321186, at *7. The clerk of the court entered final judgment the next business day after the opinion was issued.... Absent an opportunity to seek leave to amend, Plaintiffs cannot be held accountable for failing to make the necessary motion.

Nor can we deem this error harmless. The District Court did permit Plaintiffs to refile their FLSA and NYLL claims in a new action, which obviated much -- but not all -- of the prejudice Plaintiffs experienced from the denial of leave to amend. The option to file a new action preserved the FLSA and NYLL claims that remained timely on the date the new action was filed, but Plaintiffs lost the opportunity to pursue claims that became time-barred pursuant to the statute of limitations in the interim between the filing of the original complaints and the filing of the new complaints. ***

In addition to the claims for unpaid wages, Plaintiffs allege that the Defendants committed mail fraud in violation of RICO. Plaintiffs allege that their paychecks, delivered through the U.S. mail, misleadingly purported to pay Plaintiffs for all hours worked. Plaintiffs further allege that the purportedly complete paychecks concealed a scheme by Defendants to undercompensate the Plaintiffs.

RICO makes it unlawful "for any person employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . ." 18 U.S.C. § 19 62(c) (2006); First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 173 (2d Cir. 2004). Mail fraud, pursuant to 18 U.S.C. § 1341, is among the activities defined as racketeering. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 482 n.3 (1985) (quoting 18 U.S.C. § 1961(1) (1982 ed., Supp. III)).

The District Court dismissed the RICO claims because the paychecks did not perpetuate a fraud; rather, they disclosed any alleged underpayment.... Lundy endorsed this reasoning, holding that the "mailing of pay stubs cannot further the fraudulent scheme because the pay stubs would have revealed (not concealed) that Plaintiffs were not being paid for all of their alleged compensable overtime." Lundy, 711 F.3d at 119. Thus, the District Court properly dismissed the RICO claims, and, because the claims cannot be pled on these facts, they were properly dismissed with prejudice.

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