Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_09-cv-00511/USCOURTS-cand-5_09-cv-00511-14/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 18:1962 Racketeering (RICO) Act

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United States District Court

For the Northern District of California

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ORDER—No. C-09-0511 RMW

TER

United States District Court

For the Northern District of California

E-FILED on 1/29/10

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

ECLECTIC PROPERTIES EAST, LLC, a

California Limited Liability Company, et al.,

Plaintiffs,

v.

THE MARCUS & MILLICHAP COMPANY,

a California corporation, et al.,

Defendants.

No. C-09-0511 RMW

ORDER

[Re Docket Nos. 53, 55, 58, 64, 68, 219 and

227]

On January 22, 2010, the court heard seven motions in this case: (1) a motion to dismiss by

defendants The Marcus & Millichap Company, Sovereign Investment Company, Sovereign

Scranton, LLC, Sovereign CC, LLC, and Sovereign JF LLC (collectively, the "Sovereign

Defendants"), which was joined by defendants Marcus & Millichap Real Estate Investment Services

Inc., Marcus & Millichap Real Estate Investment Brokerage Company, Marcus Muirhead, Sean

Perkin, Donald Emas, Andrew Lesher, Stewart Weston, Brice Head, and Bret King (collectively, the

"Broker Defendants"); (2) a motion to dismiss by the Broker Defendants, which was joined by

defendants Glen Kunofksy and Daisy Gomez; (3) a motion to dismiss by real estate appraiser

defendant PGP Valuation, Inc.; (4) a motion to dismiss, sever or transfer by defendants Paul

Morabito and Baruk Management, Inc., which was joined by defendants Tibarom NY, LLC, and

Tibarom PA, LLC; (5) a motion by plaintiffs to compel the deposition of defendant Morabito on

Case 5:09-cv-00511-RMW Document 253 Filed 01/29/10 Page 1 of 8
United States District Court

For the Northern District of California

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 Additionally, the Sovereign defendants' request for judicial notice (Docket 62) is denied without

prejudice; the Morabito defendants' motion to strike plaintiffs' opposition (Docket 144) is denied.

ORDER—No. C-09-0511 RMW

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jurisdictional issues; (6) defendant Morabito's motion for a protective order to preclude the taking of

his deposition; and (7) a motion to strike plaintiffs' jury demand by the Sovereign Defendants. All

motions are opposed. Having considered the papers submitted by the parties and the arguments of

counsel at the hearing, and for good cause appearing for the reasons set forth below and stated at the

hearing, the motions to dismiss are granted with leave to amend, the motion to compel defendant

Morabito's deposition is denied, the motion for a protective order is granted, and the motion to strike

plaintiffs' jury demand is denied without prejudice.1

This is a complex real estate investment fraud case where the complexity arises largely

because of the number of plaintiffs, defendants, and transactions with little obvious connection to

each other. Twenty-six plaintiffs filed suit against thirty-one defendants relating to twenty-two

commercial real estate 1031 exchanges into commercial properties with long-term triple net leases. 

Fourteen of the properties involved Jiffy Lube franchises, eight of the properties involved Church's

Chicken franchises. None of the properties are located in California. Instead, the properties are

located in New York, Florida, Pennsylvania and Georgia. The complaint breaks out seventeen

groups of transactions, each involving a separate individual or couple who purchased the property

(and sometimes two or three properties), and generally separate groups of defendants. The

defendants include real estate investment firms (including parent corporations with no direct

involvement in the complained of transactions), subsidiaries, individual employees, real estate

brokers and agents, an appraiser, tenants and the tenants' corporate owners. The complaint is long –

174 pages, 624 paragraphs – and seeks to assert seven causes of action: 

1. RICO (18 U.S.C. §1962(c)-(d));

2. Negligent Misrepresentation;

3. Fraudulent Concealment under California Civil Code §1710;

4. Unjust enrichment and imposition of a constructive trust;

5. Money had and received;

6. Violation of California Business and Professions Code Section 17500; and,

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2

 The alleged scheme did not always follow this pattern, however. In the case of plaintiffs Gagnon

and Call, each purchased directly from either a Morabito-related entity or a Waelti-related entity. 

Additionally, in five of the transactions, the first "inflated" sale is alleged to have been for the same

price that was paid by the Morabito or Waelti-related entity when acquiring the property. See the

transactions involving Cheatham (Complaint at 122), Danus (Complaint, p. 127); Engelberg

(Complaint at 142); and Armenta (Complaint at 149) and the third purchase by Hom (Complaint at

115). In a sixth transaction, the inflated price is only $600 higher than the original price. See

Amirkas purchase (Complaint at 104). Moreover, the length of time in which the allegedly inflated

lease was in place before the tenant walked away varied tremendously, ranging from six months to

four years.

ORDER—No. C-09-0511 RMW

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7. Violation of California Business and Professions Code Section 17200.

The court's subject matter jurisdiction is based solely on the RICO claim.

The overarching theory is that each plaintiff was defrauded into investing in a commercial

property which was subject to a long-term triple net lease. The "scheme," as described by plaintiffs,

took place in three stages: first, defendant Morabito or Waelti (or one of their respective companies)

sold a commercial property to an entity (generally, one of the Sovereign defendants) at an inflated

price and immediately entered into a leaseback transaction, with the lease payments set significantly

higher than fair rental value. These long-term, high rent, triple net, leases made each property

appear to be worth significantly more than its true market value. Second, the Sovereign entity then

marketed the properties for sale (through the Broker defendants) to real estate investors, such as

plaintiffs, using allegedly sham appraisals to support the artificially high values. Third, after a

plaintiff's purchase, the underlying tenant walked away from the lease, causing the value of the

property to plummet.2

 Through this scheme, each plaintiff was allegedly defrauded into paying

significantly more than the property was actually worth, based on misrepresentations regarding the

underlying leases and tenants. 

 But, while the complaint repeatedly alleges that each purported "scam" was executed "with

mathematical precision," the facts that are pleaded show significant differences between the

transactions, including the amount of the purported price inflation, the amount of time between the

inflated sales price and the ultimate sale to a plaintiff during which the tenant is alleged to have paid

artificially high rent under the "sham" lease (as long as 19 months), the amount of time after that

passed after a plaintiff acquired the property and the abandonment of the lease by the tenant

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ORDER—No. C-09-0511 RMW

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(generally measured in years). A plain reading of the seventeen narratives alleged in the complaint

does not give rise to a plausible inference of a single fraudulent scheme executed with precision.

Each of the motions to dismiss challenges the adequacy of the RICO allegations. The court

agrees that the complaint does not adequately plead the RICO claim with adequate particularity. 

The fundamental difficulty with the complaint is that it fails to allege facts sufficient to put each

defendant on notice of what it is that he, she or it is alleged to have done that gives rise to the claims

asserted against him, her, or it. While long and colorful, the complaint nevertheless fails to

adequately plead facts sufficient to inform each defendant of the specific allegations against it under

each asserted cause of action, and many of the allegations simply lump all of the defendants together

in a group. The complaint does not adequately allege the misrepresentations and omissions that

form the foundation of the fraud and knowledge of falsity by the defendants who are alleged to have

made them. The complaint similarly does not allege facts which plausibly suggest each defendant's

knowledge of the alleged fraudulent scheme. For example, the complaint is silent with regard to the

individual broker's knowledge that the offered sales price was artificially inflated, that the

underlying lease which purportedly supported the sale price was a sham, or that the tenant intended

to walk away from the underlying lease after a plaintiff purchased the property.

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 the enterprise's affairs through a

pattern of racketeering activity. 18 U.S.C. §1962(c). "To state a claim under § 1962(c), a plaintiff

must allege '(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.'" 

Odom v. Microsoft Corp., 486 F.3d 541, 547 (9th Cir. 2006) (quoting Sedima S.P.R.L. v. Imrex Co.,

473 U.S. 479, 496 (1985)). These requirements must be established as to each individual defendant. 

Craig Outdoor Advertising Inc. v. Viacom Outdoor, Inc., 528 F.3d 1001, 1027 (8th Cir. 2008). 

Plaintiffs have not done so.

First, plaintiffs simply have failed to plead RICO with the requisite degree of particularity. 

Section X of the Complaint, ¶¶ 534-572, sets forth only conclusory boilerplate RICO allegations,

with little factual specificity to establish the RICO enterprise, or each defendant's conduct in relation

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ORDER—No. C-09-0511 RMW

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to the enterprise, the pattern of racketeering activity, and the predicate acts of mail fraud and wire

fraud. For example, with regard to the "pattern of racketeering activity," Paragraph 550 alleges:

Defendants conducted the affairs of the M&M Enterprise by a "pattern of

racketeering activity," as defined by 18 U.S.C. §1961(5), by committing or aiding and

abetting in the commission of at least two acts of racketeering activity, i.e., indictable

violations of 18 U.S.C. §§1341 and 1343 as described above, within the past 10

years. In fact, Defendants have committed or aided and abetted in the commission of

hundreds of acts of racketeering activity. Each racketeering act was related, had a

similar purpose, involved the same or similar participants and method of commission,

had similar results and impacted similar victims, including the Plaintiffs.

Similarly, with regard to the predicate acts, Paragraph 553 alleges:

For the purpose of executing and/or attempting to execute the above-described

fraudulent scheme, Defendants, in violation of 18 U.S.C. § 1341 (mail fraud), placed

in post offices and/or in authorized repositories, matter and things to be sent or

delivered by the U.S. Postal Service, caused matters and things to be delivered by

commercial interstate carriers, and received matter and things from the U.S. Postal

Service and/or commercial interstate carriers, including, but not limited to, marketing

and sale materials, financial information, correspondence, contract, sales and lending

documents, escrow and title documents, and other materials relating to the properties

sold to Plaintiffs.

These allegations are not pleaded with sufficient factual particularity. Lancaster Community

Hospital v. Antelope Valley Hospital Dist., 940 F.2d 397, 405 (9th Cir.1 991). 

The complaint does not adequately allege facts showing that each defendant conducted the

enterprise through a pattern of racketeering activity, in particular lacking facts for the individual

broker defendants who are alleged to have been involved in only one transaction, or a couple of

transactions within a relatively short amount of time. Craig Outdoor Advertising Inc. v. Viacom

Outdoor, Inc., 528 F.3d 1001, 1027 (8th Cir. 2008). The complaint also does not adequately allege

facts that each defendant who plaintiffs seek to hold liable under RICO acted with a common

purpose. Odom v. Microsoft Corp., 486 F.3d 541, 549 (9th Cir. 2005). The "common purpose"

allegations, for example, allege only that:

537. Defendants have engaged in a common course of conduct and conspiracy with

the common purpose of defrauding Plaintiffs into purchasing the Properties at

artificially inflated prices. To achieve their common purpose, Defendants have

associated-in-fact as an ongoing "enterprise" within the meaning of 18 U.S.C.

§1961(4).

567. The objects of the conspiracy were, and are: (a) to sell the Properties and

other real property at artificially inflated prices; (b) to maximize sales for Defendants;

and (c) to defraud Plaintiffs and other members of the public.

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ORDER—No. C-09-0511 RMW

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No facts are alleged to show a common purpose. Similarly, the complaint does not allege facts

demonstrating that each defendant conducted or participated in the conduct of the enterprise's

affairs, i.e. participated in the operation or management of the enterprise itself. Reves v. Ernst &

Young, 507 U.S. 170, 183 (1993); Walter v. Drayson, 538 F.3d 1244, 1247-48 (9th Cir. 2008). 

Additionally, the complaint does not adequately allege that each defendant proximately caused

plaintiff's damages. Oki Semiconductor v. Wells Fargo Bank, 298 F.3d 768, 774. The allegations

are insufficient. 

There are other pleading deficiencies as well. Plaintiffs seek to impose liability on several

defendants through an alter ego theory, but the alter ego allegations are insufficient. No facts – as

opposed to conclusory assertions – have been pleaded to support the alter ego theory. For example,

Paragraph 53 alleges:

At all times alleged herein, M&M owned, managed, maintained, and controlled the

activities of its agents M&M Investment and Sovereign Investment, as well as those

entities' subsidiaries and affiliates. Therefore, the activities, acts, and omissions of

M&M Investment and Sovereign Investment were and are, in reality, the activities,

acts, and omissions of M&M. Accordingly, M&M is fully responsible and liable for

the wrongdoing of its agents as alleged in this complaint.

Similarly, paragraph 69 alleges:

At all relevant times, Waelti controlled and dominated the affairs of QSR, QSR One,

and QSR II, directed the business and financial activities of those entities, used assets

of the corporate entities for his personal use, and caused assets of those entities to be

transferred to him personally without adequate consideration as well as to other

business entities which he controlled. At all relevant times, each of those entities

were a mere shell, instrumentality and conduit through which Waelti carried on his

business, including his participation as a co-conspirator in Defendants; scheme.

Additionally, various entities are also alleged to be "at all relevant times, controlled by, and the

alter-ego of, Morabito" and the QSR entities are alleged to have been "at all relevant times,

controlled by, and the alter-ego of, Waelti." ¶¶ 55-63 (Morabito), ¶¶ 66-68 (Waelti). Conclusory

allegations of "alter ego" statues are not sufficient. Neilson v. Union Bank of Cal., 290 F. Supp. 2d

1101, 1116 (C.D. Cal. 2003). If plaintiffs seek to hold any defendant liable under an alter ego

theory, plaintiffs must allege facts from which a plausible inference could be drawn that a defendant

is the alter ego of another. 

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ORDER—No. C-09-0511 RMW

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The same pleading defect – lack of factual specificity – also undermines each of the other

asserted claims, all of which rely on the same underlying allegedly fraudulent conduct. Rule 9(b)

requires more. 

Accordingly, the motions to dismiss for failure to plead the asserted claims with the required

level of specificity are granted, with leave to amend.

Turning to defendant Morabito's motion to dismiss for lack of personal jurisdiction, the

motion is denied without prejudice. As became clear at the hearing, if plaintiffs are successful in

pleading a claim under RICO, there will be personal jurisdiction over Morabito pursuant to the

nationwide reach of Section 1965(b). On the other hand, if plaintiffs are not successful in pleading a

claim under RICO, then there is no basis for the court to exercise subject matter jurisdiction, and the

question of personal jurisdiction over Morabito does not arise. Because the court has dismissed the

RICO claim, albeit with leave to amend, there is no present need to address the issue of personal

jurisdiction over defendant Morabito. For the same reason, there is also no reason to require

Morabito to appear for a deposition to be conducted on personal jurisdiction issues. Thus,

Morabito's motion for a protective order is granted and plaintiffs' motion to compel the deposition is

denied.

The Sovereign defendants' motion to strike plaintiffs' jury demand is denied without

prejudice, as are the alternative motions to sever or transfer venue. For the reasons stated at the

hearing, and as a matter of case management, the court prefers to take up the issues regarding jury

waiver, venue, severance, and the like only after the factual basis for plaintiffs' claims and

defendants' liability is pleaded with the requisite degree of specificity.

Accordingly, for the foregoing reasons, the motions to dismiss the complaint are granted in

part. Plaintiffs shall have twenty days' leave in which to file and serve an amended complaint. 

Plaintiffs' motion to compel the deposition of defendant Morabito is denied; defendant Morabito's

motion for a protective order is granted for the reasons stated herein. The Sovereign defendants'

motion to strike the jury demand is denied without prejudice.

DATED: 1/29/10

RONALD M. WHYTE

United States District Judge

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ORDER—No. C-09-0511 RMW

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Notice of this document has been electronically sent to:

Counsel for Plaintiffs:

Bonny E. Sweeney bonnys@csgrr.com 

James L. Davidson jdavidson@csgrr.com 

Phong L. Tran ptran@csgrr.com 

Stuart Andrew Davidson sdavidson@csgrr.com 

Baile L. Heikkinen bheikkinen@csgrr.com

Cullin Avram O'Brien cobrien@csgrr.com

John Granville Crabtree jcrabtree@crabtreelaw.com

Mary B. Clark mclark@csgrr.com

Counsel for Defendants The Marcus & Millichap Company, Sovereign Investment Company, Sovereign Scranton LLC, Sovereign CC, LLC, and Sovereign JF, LLC

John W. Keker jwk@kvn.com

Daniel E. Jackson djackson@kvn.com 

Daniel Edward Purcell dpurcell@kvn.com 

Counsel for Defendants Marcus & Millichap Real Estate Investment Services Inc., Marcus &

Millichap Real Estate Investment Brokerage Company, Marcus Muirhead, Sean Perkin,

Donald Emas, Andrew Lesher, Stewart Weston, Brice Head and Bret King

David Charles Scheper dscheper@obsklaw.com 

Katherine B. Farkas kfarkas@scheperkim.com

Counsel for Defendants Paul A. Morabito and Baruk Management, Inc.

Eric Joseph Schindler es@mslawllp.com 

Robert John McKennon rm@mslawllp.com 

Counsel for Defendants Tibarom NY LLC and Tibarom PA LLC

Timothy Alan Horton thorton@mckennalong.com 

Counsel for Defendant PGP Valuation, Inc.

Michael Lloyd Smith mls@mmker.com 

Counsel for Defendants Glen D. Kunofsky and Daisy Gomez

Eugene Ashley eashley@hopkinscarley.com

Counsel are responsible for distributing copies of this document to co-counsel that have not

registered for e-filing under the court's CM/ECF program.

Dated: 1/29/10 TER

Chambers of Judge Whyte

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