Eclectic Properties East, LLC v. Marcus & Millichap Co.
2014 U.S. App. LEXIS 8579
| 9th Cir. | 2014Background
- Morabito and Waelti purchased 22 commercial properties for about $20.3 million and placed franchises on them.
- They executed sale-leaseback transactions with Sovereign Investment Company or related entities, becoming tenants on the properties.
- Plaintiffs purchased all properties for a combined $30.3 million in 2004–2006, financed in part by rents paid to Plaintiffs.
- Plaintiffs allege inflated rents and sham appraisals by PGP Valuation to market the properties at higher values through M&M.
- Franchisees began defaulting on rents around 2006–2007, resulting in over $59 million in future unpaid rent; markets were in a deep recession.
- District court dismissed under Rule 12(b)(6) for failure to plead plausible intent to defraud; on appeal, plaintiffs challenge only RICO pleading sufficiency.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Plausibility of RICO claim | Plaintiffs argue scheme shows intent to defraud via inflated values and concealed risks. | Defendants contend allegations amount to business deals gone bad and lack specific intent to defraud. | Plaintiffs’ RICO claims were not plausible; dismissal affirmed. |
| .Mere conclusory allegations vs. plausible facts | Plaintiffs claim detailed facts show a fraudulent scheme with mens rea. | Defendants argue allegations are conclusory and fail to show plausible intent. | Pleading fails to meet plausibility standard; allegations insufficient to infer specific intent. |
| Adequacy of specific intent to defraud under 1341/1343 | Defendants’ actions in inflating values and concealment imply intent to defraud. | Statements of 'puffery' and non-deceitful concealment do not establish fraud. | Insufficient facts to establish specific intent to defraud; authority requires more than innocent market forces. |
| Plausibility framework application to RICO | Plausibility should be evaluated considering Starr’s two alternative explanations rule. | Century requires exclusion of plausible innocent explanations for plausibility. | Plaintiffs’ theory could not exclude innocent market explanations; claim dismissed. |
| RICO conspiracy viability | If individual RICO claims fail, conspiracy claims should survive. | Without a plausible RICO claim, conspiracy claims fail too. | RICO conspiracy claims are dismissed along with RICO claims. |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (plausibility standard for pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (two-step plausibility standard; eliminate conclusory pleadings)
- Starr v. Baca, 652 F.3d 1202 (9th Cir.2011) (explains plausibility and alternatives framework)
- In re Century Aluminum Co. Secs. Litig., 729 F.3d 1104 (9th Cir.2013) (requires facts to exclude non-fraudulent explanations to be plausible)
- Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479 (U.S. 1985) (elements of a RICO violation; proximate causation)
- United States v. Green, 745 F.2d 1205 (9th Cir.1984) (inference of specific intent from scheme)
- Schreiber Distrib. Co. v. Serv-Well Furniture Co., Inc., 806 F.2d 1393 (9th Cir.1986) (elements of mail and wire fraud; specific intent to defraud)
- First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir.1994) (unreliable appraisal not sufficient to prove value)
- W. Coast Hotel Co. v. Parrish, 300 U.S. 379 (U.S. 1937) (judicial notice of economic depression era conditions)