Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_15-cv-01793/USCOURTS-caed-1_15-cv-01793-4/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

EDWARD J. JOHNSON,

Plaintiff,

v.

GERALD JOHNSON,

Defendant.

1:15-cv-01793 MJS 

ORDER ON DEFENDANT’S MOTION TO 

DISMISS COUNTERCLAIM IN REPLY

(ECF No. 43)

GERALD JOHNSON,

Counterclaimant,

v.

EDWARD J. JOHNSON,

Counterdefendant.

I. Introduction

On November 30, 2015, Defendant and Counterclaimant Gerald Johnson 

removed Plaintiff and Counterdefendant Edward Johnson’s complaint to this Court.1

Defendant answered and filed counterclaims. In response, on August 2, 2016, Plaintiff 

filed an answer to the counterclaims, and filed a counterclaim in reply. (ECF No. 42.)

 

1

The parties are brothers and share the same last name. To avoid confusion and unnecessary 

verbiage, the Court will refer to the parties as Plaintiff and Defendant, respectively.

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 1 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

Before the Court is Defendant’s motion to dismiss the counterclaim in reply, or in 

the alternative, require a more definite statement. (ECF No. 43.) 

The counterclaim in reply contained a single claim for damages under the 

Racketeer Influenced and Corrupt Organizations Act (“RICO”). 18 U.S.C. §§ 1961 et 

seq. The first issue to be decided by this motion is whether civil RICO claims survive

bankruptcy discharge. If the Court finds that the claims do survive, Defendant contends 

that the fraudulent conduct on which they rely has not been pled with sufficient 

particularity. 

On September 9, 2016, Defendant filed an opposition to the motion. (ECF No. 

44.) Plaintiff filed a reply on September 16, 2016. (ECF No. 46.) The Court took the 

matter under submission without oral argument on September 21, 2016. Accordingly, the 

matter stands ready for adjudication. 2

II. Factual and Procedural Background

As described in detail in the Court’s previous orders, the parties are brothers who 

partnered together to invest in real estate in the mid to late 2000’s. The partnership 

purchased real property, and suffered significant losses in the housing market crash.

As a result, Defendant and his wife jointly filed a Chapter 7 bankruptcy protection 

in the Bankruptcy Court for the Eastern District of Pennsylvania on December 20, 2012. 

(Compl. at ¶¶ 48-68.) In May 2013, Defendant obtained a discharge from bankruptcy.

In Plaintiff’s original complaint, he alleged state causes of action for contribution, 

promissory estoppel, and unjust enrichment resulting from an alleged breach of 

partnership and wrongful disassociation of the partnership by Defendant. 

On December 7, 2015, Defendant moved to dismiss Plaintiff’s complaint for failure

to state a claim upon which relief can be granted. On March 23, 2016, the Court denied

the motion to dismiss. It noted specifically that Plaintiff was entitled to assert claims 

relating to actions of Defendant occurring after bankruptcy discharge. 

 

2

The parties have consented to Magistrate Judge jurisdiction for all purposes under 28 U.S.C. § 

636(c)(1). (ECF Nos. 12, 16.) 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 2 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

Defendant answered the complaint and filed five counterclaims against Plaintiff 

including negligence, legal malpractice, breach of fiduciary duty, breach of promissory 

note, and breach of contract relating to Plaintiff’s alleged actions as an attorney and

agent of the partnership. (ECF No. 40.) 

Plaintiff filed a motion to strike and dismiss the counterclaims and the affirmative 

defenses to the original complaint. (ECF No. 33-35.) On June 29, 2016, the Court 

granted the motion in part, and required Defendant to file an amended answer and 

counterclaim. (ECF No. 39.) Defendant filed an amended answer and counterclaim on 

July 20, 2016. (ECF No. 40.) 

In response, on August 2, 2016, Plaintiff filed an answer to the counterclaims and 

a counterclaim in reply. (ECF No. 42.) In the counterclaim in reply, Plaintiff brings a civil 

RICO claim alleging that Defendant engaged in a pattern of criminal activity including 

acts of tax, real estate, and bankruptcy fraud that resulted in harm to Plaintiff. 

The factual underpinnings for the civil RICO counterclaim in reply involve 

Defendant’s plan for the purchase of a commercial property in Pittsburgh, Pennsylvania

(the “Pittsburgh Property”). (ECF No. 42 at ¶ 73.) From 2006 to 2009, Defendant emailed Plaintiff to induce the partnership to purchase and finance the property. 

Defendant was a licensed real estate salesperson in the state of Pennsylvania. (Id. at ¶ 

74.) Plaintiff contends that Defendant should have known that real estate markets were 

declining during that time period and that the investment potential was limited, but 

instead he misrepresented data to Plaintiff to induce him to purchase. (Id. at ¶ 75.)

In December, 2008 Plaintiff sent a termination of sale letter to Defendant 

regarding the property. (Id. at ¶ 85.) In response, Defendant told Plaintiff that they had 

been threatened with litigation by several parties based on costs incurred for change 

orders that Defendant authorized without Plaintiff’s permission. (Id. at ¶ 86.) Moreover, 

Defendant continued to misrepresent that the purchase was a worthwhile investment, 

and the sale was consummated in April 2009. (Id. at ¶¶ 87-89.) Plaintiff and Defendant 

were not able to refinance or lease the property, and default and foreclosure resulted 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 3 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

financially harming Plaintiff. (Id. at ¶ 89.)

In presenting the civil RICO claim, Plaintiff asserts that in addition to the alleged 

misrepresentations made to persuade Plaintiff to purchase the property, Defendant 

made misrepresentations in his subsequent bankruptcy in an attempt to transfer all 

debts, obligations, and pending legal actions to Plaintiff. (Id. at ¶ 95.) Plaintiff claims that 

such actions constituted bankruptcy fraud. Plaintiff asserts that Defendant represented in 

his bankruptcy petition that certain real property was exempt retirement plan property in 

order to prevent its liquidation in the bankruptcy estate. (Id.) Plaintiff also contends that 

Defendant committed fraud in the bankruptcy proceeding by failing to continue to make 

payments on his residence before he moved to the exempt real property. (Id.) Plaintiff 

also contends that the act was a prohibited transaction under the Internal Revenue Code

and a taxable event, but that Defendant has failed to report or pay the required taxes. 

(Id.) Plaintiff contends that Defendant received rental income from as early as 2007 that 

was not reported to the bankruptcy court or the IRS, thereby constituting both bankruptcy 

and tax fraud. (Id.) Specifically, Plaintiff contends that Defendant committed tax fraud 

when he obtained taxable benefits and rental income from the exempt retirement plan 

property as early as 2007, failed to report taxable benefits and income from that asset on 

his tax returns, concealed the benefits from the bankruptcy trustee, and failed to pay 

taxes owed on the income. (ECF No. 42 at ¶ 110.)

Plaintiff claims that the above acts constitute continuing and numerous qualifying 

racketeering acts based on tax, wire, and mail fraud. (Id. at ¶ 112.) Plaintiff states:

The pattern of RICO fraud began with the continuing tax fraud involving 

“plan” property from approximately 2007 through 2012 which was used as 

a foundation for Defendant’s later bankruptcy petition, continued with real 

estate fraud in 2008-09, continued through the 2012 through 2013 

pendency of the fraudulent bankruptcy filing, and continues through this 

day with the continuing tax fraud involving the very same “plan” property 

for which rental income was concealed and which was reported as exempt 

to the bankruptcy court. The common motive behind all schemes is 

retirement security. This continuing pattern of fraud poses a threat of 

continued criminal activity in continuing pursuit of that motive. (ECF No. 42 

at ¶ 113.)

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 4 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

III. Legal Standard for Motion to Dismiss

A. Federal Rule of Civil Procedure 12(b)(6)

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims 

alleged in the complaint. See Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th 

Cir. 1995). When reviewing a motion to dismiss for failing to state a claim, the court must 

"accept as true all of the factual allegations contained in the complaint," Erickson v. 

Pardus, 551 U.S. 89, 94, 127 S. Ct. 2197, 167 L. Ed. 2d 1081 (2007) (per curiam) 

(citation omitted), and may dismiss the case "only where there is no cognizable legal 

theory or an absence of sufficient facts alleged to support a cognizable legal theory." 

Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) 

(citation & quotation marks omitted). When a complaint presents a cognizable legal 

theory, the court may grant the motion if the complaint lacks "sufficient factual matter to 

state a facially plausible claim to relief." Id. (citing Ashcroft v. Iqbal, 556 U.S. 662, 129 S. 

Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009)). A claim has facial plausibility when a plaintiff 

"pleads factual content that allows the court to draw the reasonable inference that the 

defendant is liable for the misconduct alleged." Iqbal, 129 S. Ct. at 1949 (citation 

omitted).

When evaluating such a motion, the court must accept all material allegations in 

the complaint as true, even if doubtful, and construe them in the light most favorable to 

the non-moving party. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 

1955, 167 L. Ed. 2d 929 (2007); Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th 

Cir. 1996). "[C]onclusory allegations of law and unwarranted inferences," however, "are 

insufficient to defeat a motion to dismiss for failure to state a claim." Epstein v. Wash. 

Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996).

B. Granting Leave to Amend

If a court dismisses a complaint under Rule 12(b)(6), it must then decide whether 

to grant leave to amend. The Ninth Circuit has "repeatedly held that a district court 

should grant leave to amend even if no request to amend the pleading was made, 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 5 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

unless it determines that the pleading could not possibly be cured by the allegation of 

other facts." Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (citations & quotation 

marks omitted). 

IV. Discussion

A. Counterclaim in Reply

Defendant has moved to dismiss Plaintiff’s counterclaim in reply. The Court will 

first determine whether the claim is procedurally appropriate as a counterclaim in reply, 

or whether it should be filed as a claim in an amended complaint. 

While not expressly authorized by the Federal Rules of Civil Procedure, the Ninth 

Circuit has allowed counterclaims in reply, but only if they are compulsory in nature. 

Mattel, Inc. v. MGA Entm't, Inc., 705 F.3d 1108, 1110-1111 (9th Cir. 2013) (citing Davis 

& Cox v. Summa Corp., 751 F.2d 1507, 1525 (9th Cir. 1985)). To be compulsory, a 

counterclaim must "arise[] out of the transaction or occurrence that is the subject matter 

of the opposing party's claim." Fed R. Civ. P. 13(a)(1)(A). The logical relationship test 

applies for compulsory counterclaims. Mattel, Inc., 705 F.3d at 1110-1111 (citing In re 

Pegasus Gold Corp., 394 F.3d 1189, 1195-96 (9th Cir. 2005)). "A logical relationship 

exists when the counterclaim arises from the same aggregate set of operative facts as 

the initial claim, in that the same operative facts serve as the basis of both claims or the 

aggregate core of facts upon which the claim rests activates additional legal rights 

otherwise dormant in the defendant." Id.

What matters is not the legal theory but the facts. Id. "[E]ven the most liberal 

construction of ['transaction'] cannot operate to make a counterclaim that arises out of an 

entirely different or independent transaction or occurrence compulsory under Rule 

13(a)." Id. (citing 6 Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 

1410, at 52 (3d ed. 2010)).

To the extent that the counterclaim is not compulsory pursuant to Rule 13(a), the 

claim is permissive, and Plaintiff would be required to seek leave to amend to add the 

claim in an amended complaint. See Vieste, LLC v. Hill Redwood Dev., 2011 U.S. Dist. 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 6 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

LEXIS 157915, 9-10 (N.D. Cal. Apr. 5, 2011). Regardless, counterclaims in reply are 

generally disfavored; rather, such claims should be treated an amendment to the 

complaint under Federal Rule of Civil Procedure 15. See The Rutter Group, Civil 

Procedure Before Trial, Shwarzer & Tashima § 8:1280.4; Wright & Miller, Federal 

Practice and Procedure: Civil 3d § 1188 (arguing that courts should not allow permissive 

counterclaims in reply, but that parties should seek leave to amend their complaint 

instead); Electroglas, Inc. v. Dynatex Corp., 473 F. Supp. 1167, 1171 (N.D. Cal. 1979)

(“For reasons of clarity and practicality, it would be better to treat a ‘counterclaim in reply’

as an amendment to the complaint.”); Fujitsu Ltd. v. Nanya Tech. Corp., 2007 U.S. Dist. 

LEXIS 44386 (N.D. Cal. June 6, 2007) (directing party to amend complaint to add 

counterclaims in reply to simplify the pleadings). 

The counterclaim in reply presented here is based on Defendant’s alleged pattern 

of criminal behavior including tax, real estate, and bankruptcy acts constituting

racketeering. The claims necessarily therefore are based on actions of Defendant in 

committing that conduct. Defendant’s claims, on the other hand, address legal 

malpractice, breach of duty, and breach of contract by Plaintiff, and will necessarily be 

factually based on Plaintiff’s conduct, not Defendants. The Court does not find the claims 

to be compulsory. Even if the claim is compulsory, the Court holds that for simplicity’s 

sake, all of Plaintiffs claims should be contained in one complaint.3

In an exercise of judicial efficiency, the Court will consider Plaintiffs’ counterclaim 

in reply as a request to amend the complaint.

Rule 15(a) of the Federal Rules of Civil Procedure provides that after a 

responsive pleading has been served, a party may amend its complaint only with the 

opposing party's written consent or the court's leave. Fed. R. Civ. P. 15(a). "The court 

should freely give leave when justice so requires," and apply this policy with "extreme 

 

3

It appears the usual reason to file a counterclaim in reply rather than moving to amend the 

complaint is the lack of ability to amend the complaint (i.e., the motion to amend deadline has already 

passed). Here, there appears to be no such concern. The Court has yet to hold an initial scheduling 

conference or set a deadline for amendments. 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 7 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

liberality." Id.; DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). The 

Court considers five factors in assessing a motion for leave to amend: (1) bad faith, (2) 

undue delay, (3) prejudice to the opposing party, (4) futility of the amendment, and (5) 

whether the plaintiff has previously amended the complaint. Johnson v. Buckley, 356 

F.3d 1067, 1077 (9th Cir. 2004); see also Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct. 

227, 9 L. Ed. 2d 222 (1962). The party opposing amendment bears the burden of 

showing any of the factors above. See DCD Programs, 833 F.2d at 186. Plaintiff’s civil 

RICO claim was filed during the pendency of the pleading stage of this proceeding. The 

Court has yet to set a deadline for discovery or a trial date. Defendant is not prejudiced 

by the amendment. Accordingly, Plaintiff is provided leave to amend. Plaintiff is hereby 

ordered to incorporate the counterclaim in reply into an amended complaint. 

B. Effect of the Bankruptcy Discharge

1. Parties’ Arguments

The main contention raised in the motion to dismiss is that Defendant’s 

bankruptcy discharge prevents Plaintiff from seeking pre-discharge damages from 

Defendant. Plaintiff responds that the bankruptcy proceeding itself was used as a 

vehicle for Defendant to effectuate fraudulent acts against Plaintiff and therefore 

allowable as part of Petitioner’s civil RICO claim. (See ECF No. 44 at 9 (“[T]hose 

discharged debts were themselves the injuries Plaintiff sustained as a result of 

Defendant’s pattern of racketeering activity.”).) 

Plaintiff appears to focus on two main arguments. First, he contends that the 

bankruptcy discharge does not prevent recovery for criminal acts occurring prior to 

discharge and so the civil RICO claims survive bankruptcy. Second, Plaintiff argues that 

the civil RICO claim is based on continuing conduct occurring post-bankruptcy 

discharge. 

The Court will address the parties’ arguments in turn. 

2. Analysis

Defendant contends that his debts were discharged by his bankruptcy 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 8 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

proceeding, and the only avenue to challenge the discharge was to seek revocation of 

the discharge under 11 U.S.C. § 727(d-e). The Court agrees. 

In general, bankruptcy discharge serves to void any judgment as to personal 

liability debts of the debtor. 11 U.S.C. § 524(a)(1); 2-524 Collier Bankruptcy Manual §

524.01. Bankruptcy discharge also operates as an injunction against the 

commencement or continuation of an action to collect, recover or offset any discharged 

debt as a personal liability of the debtor. Id. at § 524(a)(2). Thus, bankruptcy discharge 

protects the debtor from a subsequent suit in a state court, or any other act to collect, by 

a creditor whose claim had been discharged. 4-524 Collier on Bankruptcy § 524.02.

The definition of debt under the Bankruptcy Code has been interpreted broadly. 

“Under the Bankruptcy Code, ‘debt’ means ‘liability on a claim,’ 11 U.S.C. § 101(12), and 

‘claim,’ in turn, includes any ‘right to payment,’ § 101(5)(A).” FCC v. NextWave Pers. 

Communs. Inc., 537 U.S. 293, 302-303 (2003). The Supreme Court has held that ‘claim’

has "the broadest available definition," and that the "plain meaning of a right to payment

is nothing more nor less than an enforceable obligation...” NextWave Pers. Communs. 

Inc., 537 U.S. at 302-303 (citing Johnson v. Home State Bank, 501 U.S. 78, 83 (1991); 

Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 559 (1990)). 

Plaintiff has provided the Court insufficient authority as to why his legal claim for 

right of payment under civil RICO is not subject to the injunctive power of Defendant’s 

bankruptcy discharge. Plaintiff previously conceded that his original claims stated in his 

complaint for breach of partnership are subject to Defendant’s bankruptcy discharge. 

(ECF No. 26 at 6:10-12.) In his opposition, Plaintiff explains that the RICO claim “does 

not address pre-discharge behavior exclusively,” but that the conduct at issue continues 

to the present. (Opp’n at 7-8.) Plaintiff also explains that the claim is not limited to 

damages arising pre-bankruptcy, but includes damages arising post discharge. (Id.) 

While the Court agrees that Plaintiff is entitled to seek damages relating to postdischarge conduct of Defendant, Plaintiffs statements make clear that he is seeking 

damages for pre-discharge conduct. Plaintiff states that “any allegedly discharged debts 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 9 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10

are among the injuries that were directly and proximately caused by Defendant’s 

bankruptcy fraud RICO predicate and pattern of racketeering activity, and are thus 

actionable RICO injuries.” See Opp’n at 8. He also claims that the “discharged debts 

were themselves the injuries Plaintiff sustained as a result of Defendant’s pattern of 

racketeering activity,” and “that Plaintiff was injured by the fraudulently obtained 

discharge.” (Id. at 9.)

In Plaintiff’s view, it appears that claims of Civil RICO are not subject to 

bankruptcy discharge, and moreover, the discharge itself, if fraudulent and part of the 

pattern of racketeering, can form the basis of the claim. It is true that certain types of 

debt are excepted from discharge including those arising from fraud or embezzlement, or 

debt based on criminal restitution orders under Title 18 of the United States Code. 11 

U.S.C. § 523(a). However, the applicable provisions of 11 U.S.C. § 524 and the contents 

of the discharge order apply to debts that might have been found nondischargeable 

under subsection 523(a) (such as fraud), but for which complaints to determine 

dischargeability were not timely filed. 4-524 Collier on Bankruptcy § 524.02. Once the 

debt is discharged, even if it a debt that may have been excluded from discharge, it will 

be considered discharged unless a creditor files for revocation of the discharge within a 

year. 11 U.S.C. § 727(d-e). 

Plaintiff neither argues that the debt was excepted from discharge, nor that he 

sought to revoke the discharge within the relevant period. Accordingly, Defendant’s 

discharge remains in effect with regard to the debt in question, even if procured by fraud, 

as asserted by Plaintiff. 

Next the Court turns to Plaintiff’s contention that the cause of action for Civil RICO 

is somehow not subject to discharge of debts under bankruptcy laws. The statutory 

language creating a civil action for RICO states:

Any person injured in his business or property by reason of a violation of 

section 1962 of this chapter [18 USCS § 1962] may sue therefor in any 

appropriate United States district court and shall recover threefold the 

damages he sustains and the cost of the suit, including a reasonable 

attorney's fee...

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 10 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11

18 U.S.C. § 1964(c). The civil cause of action created by RICO entitles parties to create 

an enforceable legal obligation to a right to payment if the elements of the action are 

proven in a civil action. The civil RICO action is not part of a criminal RICO prosecution, 

and may be brought by a party regardless whether a criminal action was ever initiated by 

the government. 

The civil RICO action appears to be a claim, as broadly defined by the Supreme 

Court, under the Bankruptcy Code. See NextWave Pers. Communs. Inc., 537 U.S. at 

302-303. Further, a review of cases shows that courts have treated civil RICO claims the 

same as any other bankruptcy claims. In Katahn Assocs. v. Wien, 155 B.R. 479, 489-

490 (Bankr. N.D. Ill. 1993), the creditor obtained a civil judgment in a RICO action, and 

after the fact, the debtor filed for bankruptcy protection. The creditor initiated an 

adversary proceeding during the bankruptcy to determine whether the debts associated 

with the judgment were non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A) and 

523(a)(6) as they were based on debtor’s fraudulent acts that were both willful and 

malicious. Id. The bankruptcy court found for the creditors and excluded the debt from 

the bankruptcy discharge. Id. While the debt was excluded, not only was it incumbent on 

the creditor to move to have the bankruptcy court determine the debt was non 

dischargeable, the burden of proof was on creditor to show that the debt was based on 

fraudulent acts. Id. at 487. Other courts have issued similar rulings. See Metromedia 

Co. v. Fugazy, 157 B.R. 761, 765-766 (Bankr. S.D.N.Y. 1993).

In Walsh v. Jordan, 1990 U.S. Dist. LEXIS 6121, 4-5 (N.D. Ill. May 18, 1990), the 

court found that the creditor failed to move before the bankruptcy court to find the debts 

relating to a civil RICO claim to be non-dischargeable based on fraud. Accordingly, the 

court found the creditor unable to seek relief in a separate subsequent action for such 

debts:

Plaintiff's claims in the instant action are grounded in fraud, either common 

law or as predicate acts of RICO. Certain debts are exceptions to the 

discharge of an individual debtor and survive a discharge in bankruptcy. 

Debts based on fraud and RICO are encompassed within Section 

523(a)(2) and (4) and are generally non-dischargeable. A creditor cannot, 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 11 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

12

however, sit on his hands and not take action in order to establish the fact 

and nature of his claim, particularly as to its non-dischargeability features. 

When a creditor has actual notice of bankruptcy, he cannot ignore the 

bankruptcy proceeding and therefore seek to recover damages in another 

court and in another proceeding. 

Id.

Plaintiff has not provided and the Court is not aware of any legal authority that 

exempts civil RICO claims from the rules of bankruptcy. As Plaintiff did not attempt to 

challenge the dischargeability of the debt in the bankruptcy proceeding, he may not now 

assert claims for debt arising from Defendant’s pre-discharge conduct. Defendant’s 

motion to dismiss is granted, in part.

However, Plaintiff alleges damages based on Defendant’s post-discharge 

conduct. To the extent that Plaintiff attempts to assert a civil RICO action based on 

Defendant’s actions after the bankruptcy, he may file an amended complaint reasserting 

the claim.

C. Pleading Fraud with Particularity

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." Sedima v. Imrex Co., 473 

U.S. 479, 496 (1985) (footnote omitted); Odom v. Microsoft Corp., 486 F.3d 541, 547-

548 (9th Cir. 2007). In this case, Plaintiff has identified bankruptcy, mortgage and tax 

fraud as predicate acts of "racketeering activity." However, Defendant alleges that

Plaintiff has not pled fraud with particularity. 

Federal Rule of Civil Procedure 9(b) provides that "[i]n alleging fraud . . . , a party 

must state with particularity the circumstances constituting fraud," while "[m]alice, intent, 

knowledge, and other conditions of a person's mind may be averred generally." Sanford 

v. MemberWorks, Inc., 625 F.3d 550, 557-558 (9th Cir. 2010). "Rule 9(b) demands that 

the circumstances constituting the alleged fraud be specific enough to give defendants 

notice of the particular misconduct . . . so that they can defend against the charge and 

not just deny that they have done anything wrong." Id. (citing Kearns v. Ford Motor Co., 

567 F.3d 1120, 1124 (9th Cir. 2009). “To avoid dismissal for inadequacy under Rule 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 12 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

13

9(b), [the] complaint would need to state the time, place, and specific content of the false 

representations as well as the identities of the parties to the misrepresentation." Id.

(citing Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004).) Courts have 

routinely applied the particularity requirement to fraudulent activity that is the predicate 

offense of civil RICO claims. Sanford, 625 F.3d at 557-558; Odom, 486 F.3d at 547-548.

Plaintiff’s factual assertions in support of his civil RICO claim appear to 

characterize pre-discharge conduct of Defendant as real estate and bankruptcy fraud. 

Plaintiff alleges that the real estate fraud involved the sale of the Pittsburgh Property. 

ECF No. 42 at ¶ 95. (“Defendant used his influence as a licenced real estate 

professional to misrepresent the benefit of the purchase [of the Pittsburgh Property] to 

induce Plaintiff into completing the sale, constituting real estate fraud.”) (ECF No. 42 at ¶ 

42.) The sale occurred in 2009, and therefore is subject to the bankruptcy discharge. 

Further, the claims of bankruptcy fraud relate to alleged fraudulent acts of Defendant in 

obtaining the bankruptcy discharge, and likewise are inactionable given the discharge. 

The only factual allegations that support tax fraud occurring post-discharge state that the 

tax fraud “continues through this day with the continuing tax fraud involving the very 

same ‘plan’ property for which rental income was concealed and which was reported as

exempt to the bankruptcy court.” (Id. at ¶ 113.)

The Court finds Plaintiff’s allegations of predicate offenses for post-discharge 

fraud lack particularity. The factual allegations in the counterclaim in reply do not give 

Defendant sufficient information to properly defend the claim. Defendant’s request for a 

more definite statement is granted. To the extent that Plaintiff desires to pursue a civil 

RICO claim based on the post-discharge actions, he must allege such claims with further 

particularity in an amended complaint.

V. Order

The Court hereby orders that the motion to dismiss be GRANTED IN PART. 

Plaintiff may not pursue any claims for damages against Defendant arising from prebankruptcy discharge conduct. To the extent that Plaintiff’s civil RICO claim was based 

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 13 of 14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

14

on such conduct, it is dismissed. However, Plaintiff is given leave to amend to allege 

such a claim based on post-discharge behavior. Defendant’s motion requiring Plaintiff to 

provide a more definite statement of the claims is granted. If Plaintiff chooses to so 

amend, he must allege with specificity the fraudulent conduct of Defendant and he must 

do so within twenty-one (21) days of the date of service of this Order.

IT IS SO ORDERED.

Dated: September 21, 2016 /s/Michael J. Seng 

UNITED STATES MAGISTRATE JUDGE

Case 1:15-cv-01793-MJS Document 48 Filed 09/21/16 Page 14 of 14