Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-16526/USCOURTS-ca9-12-16526-0/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ECLECTIC PROPERTIES EAST, LLC, a

California limited liability company;

RISOLA FAMILY LP II, a Florida

limited partnership; CECA 3000, LP,

a Nevada limited partnership;

CHEATHAM PROPERTIES, LLC, a

California limited liability company,

successor in interest of John and

Mary Cheatham; VAS ENTERPRISES I

LLC, a California limited liability

company; AMNON DANUS; RIVKA

DANUS; LINDA FARRELL; JOSEPH W.

AMIRKHAS; JOSEPH W. AMIRKHAS,

as Trustee under the Amirkhas Trust,

dated January 14, 2000; JUSTUS L.

AHREND; SUSAN W. AHREND,

Trustees of the Justus and Susan

Ahrend Trust, dated December 6,

1990; KEVORK BELIKIAN; SYLVIA S.

BELIKIAN, Trustees under the

Kevork Belikian and Sylvia S.

Belikian Living Trust, dated July 10,

2000; MANI ETEMAD; SUSAN

KHOSHNOOD, Trustee of the Mani

Etemad and Susan Khoshhood 2001

Revocable Trust; EUGENIA GAGNON,

Trustee of the Genie Debs

Revocable Trust, dated October 10,

1995; THOMAS H. LINDEN; SYLVIA

No. 12-16526

D.C. No.

5:09-cv-00511-

RMW

OPINION

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2 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

E. LINDEN, Trustees of the Thomas

H. Linden and Sylvia E. Linden

Family Trust, dated September 19,

2000; JOHANNES MODERBACHER;

EILEEN STARR MODERBACHER, as

Trustees of the Moderbacher Family

Trust, established by Declaration of

Trust, dated February 1, 2006;

RICHARD W. SIEBERT; DEBRA M.

SIEBERT, Trustees of the Siebert

Family Trust U/DT, dated January

13, 2003; ALLEN ERNEST HOM,

Trustee for the Allen Ernest Hom

Trust, dated August 19, 1992; LINDA

J. CALL, Trustee for the Linda

Jeanne Call Family Trust, dated

September 12, 2002,

Plaintiffs-Appellants,

v.

THE MARCUS & MILLICHAP

COMPANY, a California corporation;

MARCUS & MILLICHAP REAL

ESTATE INVESTMENT SERVICES INC.,

a California corporation; MARCUS &

MILLICHAP REAL ESTATE

INVESTMENT BROKERAGE

COMPANY, a California corporation;

SOVEREIGN INVESTMENT COMPANY,

a California corporation; SOVEREIGN

SCRANTON LLC, a Delaware limited

liability company; SOVEREIGN CC,

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 3

LLC, a Delaware limited liability

company; SOVEREIGN JF, LLC, a

California limited liability company;

PAUL A. MORABITO, individually

and as the alter-ego of Eureka

Petroleum Inc., a New York

corporation, Tibarom Inc., a

Delaware corporation, Tibarom NY

LLC, a Nevada limited liability

company, Tibarom PA LLC, a

Nevada limited liability company,

Scranton Lube, LLC a Delaware

limited liability company; EUREKA

PETROLEUM, a New York

corporation; TIBAROM INC., a

Delaware corporation; TIBAROM NY

LLC, a Nevada limited liability

company; TIBAROM PA LLC, a

Nevada limited liability company;

SCRANTON LUBE, LLC, a Delaware

limited liability company; NY

SEVEN LUBE, LLC, a Delaware

limited liability company; NEW

YORK LUBE NUMBER 3, LLC, a

Delaware limited liability company;

ROCHESTER LUBE, LLC, a Delaware

limited liability company; BARUK

MANAGEMENT, INC., a California

corporation; JACK WAELTI,

individually and as the alter-ego of

the QSR Group One, LLC, a Florida

limited liability company, The QSR

Group, LLC, a Florida limited

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4 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

liability company, and the QSR

Group II, LLC, a Florida limited

liability company AKA The QSR

Group Two, LLC; THE QSR GROUP

ONE, LLC, a Florida limited liability

company; THE QSR GROUP, LLC, a

Florida limited liability company;

THE QSR GROUP II, LLC, a Florida

limited liability company, AKA The

QSR Group Two, LLC; PGP

VALUATION, INC., an Oregon

corporation; GLEN D. KUNOFSKY;

MARCUS MUIRHEAD; ALEXANDER

MICKLE; SEAN PERKIN; DONALD

EMAS; ANDREW LESHER; STEWART

WESTON; BRICE HEAD; DAIZY

GOMEZ; BRET KING,

Defendants-Appellees.

Appeal from the United States District Court

for the Northern District of California

Ronald M. Whyte, Senior District Judge, Presiding

Argued and Submitted

March 14, 2014—San Francisco, California

Filed May 7, 2014

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 5

Before: J. Clifford Wallace and Ronald M. Gould, Circuit

Judges, and Paul C. Huck, Senior District Judge.*

Opinion by Judge Gould

* The Honorable Paul C. Huck, Senior District Judge for the U.S.

District Court for the Southern District of Florida, sitting by designation.

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6 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

SUMMARY**

RICO

The panel affirmed the dismissal of an action under the

Racketeering Influenced and Corrupt Organizations Act.

The panel held that the plaintiffs did not plead facts

sufficient under Federal Rules Civil Procedure 8(a) and 9(b)

to support a plausible theory of RICO and RICO conspiracy

violations in connection with an alleged real estate scheme. 

The panel held that the complaint did not meet the pleading

standards required by Bell Atlantic Corp. v. Twombly and

Ashcroft v. Iqbal because it did not contain adequate factual

allegations to plausibly infer that the defendants specifically

intended to defraud, and therefore did not show a plausible

entitlement to relief.

COUNSEL

Susan Alexander (argued), Sanford Svetcov, and Andrew S.

Love, Robbins Geller Rudman & Dowd LLP, San Francisco,

California; David J. George and Bailie L. Heikkinen, Robbins

Geller Rudman & Dowd LLP, Boca Raton, Florida; and

Bonny E. Sweeney and Phong L. Tran, Robbins Geller

Rudman & Dowd LLP, San Diego, California, for PlaintiffsAppellants.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 7

Daniel Purcell (argued), John W. Keker, and Dan Jackson,

Keker & Van Nest LLP, San Francisco, California, for

Defendants-Appellees The Marcus & Millichap Company,

Sovereign Investment Company, Sovereign Scranton LLC,

Sovereign CC, LLC, and Sovereign JF, LLC.

David C. Scheper, Julio V. Vergara, and Katherine B. Farkas,

Scheper Kim & Harris LLP, Los Angeles, California, for

Defendants-Appellees 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.

Dennis C. Vacco and Brendan H. Little, Lippes Mathias

Wexler Friedman LLP, Buffalo, New York, for DefendantsAppellees Paul A. Morabito and Baruk Management, Inc.

Timothy A. Horton, McKenna Long & Aldridge LLP, San

Diego, California, for Defendants-Appellees Tibarom NY,

LLC and Tibarom PA, LLC.

Scott Wm. Davenport, Manning & Kass, Ellrod, Ramirez,

Trester LLP, Irvine, California, for Defendant-Appelle PGP

Valuation, Inc.

Eugene Ashley, Hopkins & Carley, ALC, San Jose,

California, for Defendants-Appellees Glen Kunofsky and

Daizy Gomez.

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8 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

OPINION

GOULD, Circuit Judge:

We consider whether Plaintiffs-Appellants have pleaded

facts sufficient under Federal Rules of Civil Procedure 8(a)

and 9(b) to support a plausible theory of Racketeering

Influenced and Corrupt Organizations Act (“RICO”) and

RICO conspiracy violations against Defendants-Appellees. 

We have jurisdiction under 28 U.S.C. § 1291, and we hold

that Plaintiffs’ complaint does not meet the pleading

standards required by Bell Atlantic Corp. v. Twombly,

550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009);

Starr v. Baca, 652 F.3d 1202 (9th Cir. 2011); and In re

Century Aluminum Co. Securities Litigation, 729 F.3d 1104

(9th Cir. 2013). The complaint does not contain adequate

factual allegations to plausibly infer that Defendants

specifically intended to defraud, and therefore does not show

a plausible entitlement to relief.1 The district court did not err

in dismissing Plaintiffs’ complaint on the pleadings.

I

The scheme alleged by Plaintiffs began when defendants

Paul Morabito and Jack Waelti purchased 22 commercial

real estate properties in bulk for a total of about $20.3

million. Morabito, Waelti, and their related companies then

added a commercial lease for a franchise on each property. 

Morabito and his related entities placed Jiffy Lube franchises

1 Because we hold that Plaintiffs did not plead a plausible intent to

defraud as to all Defendants, we do not reach the individual defendants’

independent personal defenses as to other elements of RICO or corporate

liability.

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 9

on the properties he owned, while Waelti and his related

entities placed Church’s Chicken franchises on theirs.2 The

Morabito and Waelti entities executed sale-leaseback

transactions with Sovereign Investment Company or a related

entity,

3

becoming tenants on the real estate that they had

purchased. According to Plaintiffs, the fair market value of

the 22 commercial real estate properties was not $20.3

million, but $11.1 million.

Plaintiffs allege that the Morabito, Waelti, and Sovereign

entities conspired to pay inflated rent payments so that the

properties would appear far more valuable to third parties. 

Sovereign Investments then marketed the properties for sale

to the public through the Marcus & Millichap Company

2 Some of the Jiffy Lube leases were held by Defendants Eureka

Petroleum, Tibarom Inc., Tibarom NY, LLC, Tibarom PA, LLC, and

Scranton Lube, LLC, all of which are alleged to be alter-egos of Paul

Morabito and are also separately named as defendants. Other Jiffy Lube

leases were held by Defendants New York Seven Lube LLC, New York

Lube Number 3, LLC, and Rochester Lube, LLC. These Defendants are

alleged to have been controlled by Morabito. We refer to these two

groups collectively as the “Morabito entities.” The Church’s Chicken

leases were held by Defendants The QSR Group, LLC, The QSR Group

One, LLC, all of which are alleged to be alter-egos of Jack Waelti and are

also separately named as defendants. Collectively, we refer to this group

as the “Waelti entities.” We take no position on the allegations relating

to the corporate relationships in these groups alleged in the complaint. See

footnote 1, supra.

3 The complaint alleges that Defendants Sovereign Scranton LLC,

Sovereign CC, LLC, and Sovereign JF, LLC, are all alter-egos of

Defendant Sovereign Investment Company. We refer to this group as the

“Sovereign entities.” Again, we take no position on the allegations in the

complaint relating to the corporate relationships in this group. See

footnote 1, supra.

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10 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

(“M&M”).4 Plaintiffs allege that the brokers used sham

appraisals performed by defendant PGP Valuation, Inc., to

support the inflated property values. Plaintiffs purchased all

of the properties in a series of independent transactions for a

combined $30.3 million in 2004, 2005, and 2006. The

Morabito and Waelti entities at first performed on their

leases, some for up to four years, making a total of about $8.1

million in rent payments to Plaintiffs. The franchisees began

having problems making their rent payments in 2006 and

2007, and eventually each breached its lease, leaving more

than $59 million in future rent payments unpaid. Plaintiffs

tried to mitigate their losses, but could not find tenants at

comparable rents.

Plaintiffs filed suit alleging that each of the defendants

had violated RICO, 18 U.S.C. § 1962(c), and that Defendants

had collectivelyviolated 18 U.S.C. § 1962(d)’s prohibition on

RICO conspiracies, along with related state common law and

statutory claims. The district court dismissed the case under

Federal Rule of Civil Procedure 12(b)(6), concluding that

Plaintiffs had not met their burden under Rules 8(a) and 9(b)

to plausibly allege that Defendants specifically intended to

defraud Plaintiffs. Because the district court dismissed the

individual RICO claims, it also dismissed the RICO

conspiracy claim against all Defendants. Finally, after

dismissing all of the federal claims, the district court declined

4 The complaint alleges that Marcus & Millichap Real Estate Investment

Services, Inc. and Marcus & Millichap Real Estate Investment Brokerage

Company are alter egos of the Marcus & Millichap Company. The

complaint also lists a number of individual employees of the M&M

entities as individual defendants. We refer to this group collectively as

“M&M” but take no position on the allegations relating to the corporate

relationships in this group. See footnote 1, supra.

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 11

to exercise supplemental jurisdiction over Plaintiffs’ state law

claims. Plaintiffs filed a timely notice of appeal.

II

We review de novo the district court’s judgment granting

a motion to dismiss for failure to state a claim under Rule

12(b)(6). Odom v. Microsoft Corp., 486 F.3d 541, 545 (9th

Cir. 2007). In reviewing an appeal from a motion to dismiss,

all facts are taken from the complaint and construed in the

light most favorable to the non-moving party. Id.

III

Rule 8 requires a complaint to include “a short and plain

statement of the claim showing that the pleader is entitled to

relief.” Fed. R. Civ. P. 8(a)(2). To meet this requirement, the

Supreme Court has held that an “entitlement to relief”

requires “more than labels and conclusions . . . . Factual

allegations must be enough to raise a right to relief above a

speculative level.” Twombly, 550 U.S. at 555. Although “a

well-pleaded complaint may proceed even if it strikes a savvy

judge that actual proof is improbable,” id. at 556, plaintiffs

must include sufficient “factual enhancement” to cross “the

line between possibility and plausibility.” Id. at 557.5 This

5 Rule 9(b) requires that “circumstances constituting fraud” must be

alleged with particularity but allows fraudulent intent to be alleged

generally. Federal Rule of Civil Procedure 9(b). We have held that the

plausibility analysis of Twombly and Iqbal applies equally to Rule 9 as it

does to Rule 8. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047,

1055 (9th Cir. 2011). Accordingly, although the language of Rule 9 poses

no barrier in itself to general pleading of fraudulent intent, Twombly and

Iqbal’s pleading standards must still be applied to test complaints that

contain claims of fraud.

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12 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

standard represents a balance between Rule 8’s roots in

relatively liberal notice pleading and the need to prevent “a

plaintiff with a largely groundless claim” from “‘tak[ing] up

the time of a number of other people, with the right to do so

representing an in terrorem increment of settlement value.’” 

Id. at 557–58 (quotingDura Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336, 347 (2005)).

Establishing the plausibility of a complaint’s allegations

is a two-step process that is “context-specific” and “requires

the reviewing court to draw on its judicial experience and

common sense.” Iqbal, 556 U.S. at 679. First, a court should

“identif[y] pleadings that, because they are no more than

conclusions, are not entitled to the assumption of truth.” Id. 

Then, a court should “assume the[] veracity” of “well pleaded

factual allegations” and “determine whether they plausibly

give rise to an entitlement to relief.” Id. “Where a complaint

pleads facts that are merely consistent with a defendant’s

liability, it stops short of the line between possibility and

plausibility of entitlement to relief.” Id. at 678 (citation

omitted). When considering plausibility, courts must also

consider an “obvious alternative explanation” for defendant’s

behavior. Id. at 682 (quoting Twombly, 550 U.S. at 567).

We have applied Twombly and Iqbal’s plausibility

standard in two recent cases. In Starr v. Baca, 652 F.3d 1202

(9th Cir. 2011), we analyzed the apparent shift in the

Supreme Court’s analysis of Rule 8 pleading standards,

comparing the “more demanding” Twombly and Iqbal

standard to the “more lenient” rule applied in Swierkiewicz v.

Sorema, N.A., 534 U.S. 506 (2002) and Erickson v. Pardus,

551 U.S. 89 (2007) (per curiam). Starr, 652 F.3d at 1216. 

We noted that in Swierkiewicz, the Supreme Court held that

“Rule 8(a) establishes a pleading standard without regard to

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 13

whether a claim will succeed on the merits. Indeed, it may

appear on the face of the pleadings that a recovery is very

remote and unlikely but that is not the test.” Starr, 652 F.3d

at 1215 (quoting Swierkewicz, 534 U.S. at 514–15). 

Similarly, we recognized that in Erickson, the Supreme Court

reversed our sister circuit’s determination that a complaint

was overly conclusory and held that a relatively sparse

complaint satisfied Rule 8(a)’s pleading standards. Starr,

652 F.3d at 1215 (citing Erickson, 551 U.S. at 94). Despite

a potential conflict between the two groups of cases, we

concluded that the Supreme Court’s precedents established

the following principles:

First, to be entitled to the presumption of

truth, allegations in a complaint or

counterclaim may not simply recite the

elements of a cause of action, but must

contain sufficient allegations of underlying

facts to give fair notice and to enable the

opposing party to defend itself effectively.

Second, the factual allegations that are taken

as true must plausibly suggest an entitlement

to relief, such that it is not unfair to require

the opposing party to be subjected to the

expense of discovery and continued litigation.

Starr, 652 F.3d at 1216. We applied these principles to hold: 

“If there are two alternative explanations, one advanced by

defendant and the other advanced by plaintiff, both of which

are plausible, plaintiff’s complaint survives a motion to

dismiss under Rule 12(b)(6). Plaintiff's complaint may be

dismissed only when defendant’s plausible alternative

explanation is so convincing that plaintiff's explanation is

implausible.” Id. (emphasis in original).

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14 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

A more recent examination of Rule 8(a) confronted the

application of the plausibility standard to a complaint with

less factual support than that in Starr. In re Century

Aluminum Co. Secs. Litig., 729 F.3d 1104 (9th Cir. 2013). 

We affirmed the dismissal of the complaint in Century

because, “[w]hen faced with two possible explanations, only

one of which can be true and only one of which results in

liability, plaintiffs cannot offer allegations that are merely

consistent with their favored explanation but are also

consistent with the alternative explanation. Something more

is needed, such as facts tending to exclude the possibility that

the alternative explanation is true, in order to render

plaintiffs’ allegations plausible.” 729 F.3d at 1108 (internal

quotation marks and citations omitted) (quoting Iqbal,

556 U.S. at 678; citing Twombly, 550 U.S. at 554). Unlike

Starr, where the plaintiff’s plausible complaint survived a

motion to dismiss by offering facts that tended to exclude the

defendant’s innocuous alternative explanation, we held that

the complaint in Century established only a “possible”

entitlement to relief, and thus could not support further

proceedings. Century, 729 F.3d at 1108.

IV

Applying Twombly, Iqbal, Starr, and Century to the

complaint at issue in this appeal, we conclude that Plaintiffs

have not made the kind of factual allegations that “nudg[e]

their claims across the line from conceivable to plausible.” 

Twombly, 550 U.S. at 570.

A

We start with the elements a plaintiff must plead to state

a RICO violation. See Iqbal, 556 U.S. at 675. The RICO

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 15

statute sets out four elements: a defendant must participate in

(1) the conduct of (2) an enterprise that affects interstate

commerce (3) through a pattern (4) of racketeering activity or

collection of unlawful debt. 18 U.S.C. § 1962(c). In

addition, the conduct must be (5) the proximate cause of harm

to the victim. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S.

479, 496-97 (1985). To show the existence of an enterprise

under the second element, plaintiffs must plead that the

enterprise has (A) a common purpose, (B) a structure or

organization, and (C) longevity necessary to accomplish the

purpose. Boyle v. United States, 556 U.S. 938, 946 (2009). 

Racketeering activity, the fourth element, requires predicate

acts, which in this case are alleged to be mail and wire fraud

under 18 U.S.C. §§ 1341 and 1343. The mail and wire fraud

statutes are identical except for the particular method used to

disseminate the fraud, and contain three elements: (A) the

formation of a scheme to defraud, (B) the use of the mails or

wires in furtherance of that scheme, and (C) the specific

intent to defraud. Schreiber Distrib. Co. v. Serv-Well

Furniture Co., Inc., 806 F.2d 1393, 1399 (9th Cir. 1986). It

is this final sub-element, the defendant’s specific intent to

defraud, that is at issue here.

“In order to prove a violation of 18 U.S.C. § 1341, there

must be a showing of a specific intent to defraud. The intent

to defraud may be inferred from a defendant’s statements and

conduct.” United States v. Peters, 962 F.2d 1410, 1414 (9th

Cir. 1992). In the absence of direct evidence of intent, the

party asserting fraud must first prove “the existence of a

scheme which was reasonably calculated to deceive persons

of ordinary prudence and comprehension,” and then, “by

examining the scheme itself” the court may infer a

defendant’s specific intent to defraud. United States v.

Green, 745 F.2d 1205, 1207 (9th Cir. 1984) (internal

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16 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

quotation marks omitted) (quoting United States v. Bohonus,

628 F.2d 1167, 1172 (9th Cir. 1980)).

Plaintiffs’ fraud theory requires them to show more than

a business deal gone bad for economic and non-fraudulent

reasons. Theymust establish that Defendants had the specific

intent to defraud, and Plaintiffs may establish that intent by

showing the existence of a plausible fraudulent scheme. “The

level of factual specificity needed to satisfy this pleading

requirement will vary depending on the context.” Century,

729 F.3d at 1107 (citing Robbins v. Oklahoma, 519 F.3d

1242, 1248 (10th Cir. 2008)). When companies engage in

sale-leaseback transactions that are facially legitimate, pay

rent and operate legitimate businesses for years thereafter,

and otherwise act as routine participants in American

commerce, a significant level of factual specificity is required

to allow a court to infer reasonably that such conduct is

plausibly part of a fraudulent scheme.

B

We proceed in our analysis by removing conclusory

statements of law from the complaint. Iqbal, 556 U.S. at 679. 

Trimmed of “legal conclusions” and “threadbare recitals of a

cause of action,” Id. at 678, Plaintiffs’ argument that the

alleged scheme reflects an intent to defraud contains two

prongs. First, Plaintiffs point to the rapid increase in the price

of the properties from the alleged “true market value” at the

time of the Morabito or Waelti entities’ initial purchase to the

prices at the time that the properties were sold to Plaintiffs,

and the Plaintiffs’ subsequent inability to sell the properties

at those higher prices, or to lease the properties at rental rates

reflecting those higher prices, after the leases were breached. 

Second, they argue that Defendants portrayed the real estate

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 17

investments as “safe and secure,” despite the fact that the

tenants were not rated by credit agencies. We conclude that

neither argument contains sufficient factual allegations to

state a plausible entitlement to relief.

1

The key factual allegation that supports Plaintiffs’ first

argument is that Defendants sold property worth $11.1

million to Plaintiffs for $30.3 million while spending $8.1

million on rent to maintain the alleged scheme until all

properties were sold. We conclude that this allegation does

not create a plausible entitlement to relief for two reasons.

First, although the increase in price is consistent with

Defendants’ alleged fraudulent intent, it does not tend to

exclude a plausible and innocuous alternative explanation. 

See Century, 729 F.3d at 1108. The alternative explanation

in this case comes from Plaintiffs’ own complaint: they allege

that long-term commercial real estate leases typically support

future property sales “at a multiple of the actual market

value.” Although the increase here appears large—nearly

three times the alleged original true value—Plaintiffs plead

no facts that would tend to show that this increase was not

typical, appropriate, or the product of legitimate market

forces. Further, relying on our “judicial experience and

common sense,” Iqbal, 556 U.S. at 679, we note that real

estate values can be variable, and that fluctuations in prices

over a period of years are not necessarily unusual, nor are

they conclusive proof of wrong-doing, as changes may reflect

market conditions. This is particularly true when, as here, the

culminating events that harmed Plaintiffs took place in the

midst of a deep national recession that seriously affected the

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18 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

real estate market.6 All of the facts Plaintiffs have presented

are consistent with both their theory of liability and this

innocent alternative, that the recession decreased business

viability and property values. Plaintiffs have not met their

burden to do “[s]omething more” to “render [their]

allegations plausible within the meaning of Iqbal and

Twombly.” Century, 729 F.3d at 1108.

Second, the complaint alleges no specific facts supporting

its conclusion that the properties’ “true fair market valu[e]”

was just $11.1 million. The complaint does not cite any

documents or sources for this value, nor does it explain the

methodology by which this value was derived. Further,

Plaintiffs’ complaint alleges that Defendants had purchased

the properties from independent third parties (not alleged to

be a part of the conspiracy or named as defendants in this

case) for about $20.3 million. Absent factual support

showing that the true market value was $11.1 million, and

taking into account the evidence in Plaintiffs’ own complaint

that undermines their allegation that the property was worth

only $11.1 million, we decline to accept the conclusory

assertions of property values as facts. See First Nationwide

6 We take judicial notice of the recession in the US economy from

December 2007 to June 2009. See W. Coast Hotel Co. v. Parrish,

300 U.S. 379, 399 (1937) (“We may take judicial notice of the

unparalleled demands for relief which arose during the recent period of

depression and still continue to an alarming extent despite the degree of

economic recovery which has been achieved.”); see also The National

Bureau of Economic Research, “U.S. Business Cycle Expansions and

Contractions,” http://www.nber.org/cycles (establishing the dates of the

recession); The Bureau of Labor Statistics, United States Department of

Labor, “TheRecession of 2007–2009,” http://www.bls.gov/spotlight/2012

/recession/pdf/recession_bls_spotlight.pdf (compiling data on

employment, consumer spending, and economic output).

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 19

Bank v. Gelt Funding Corp., 27 F.3d 763, 770 (2d Cir. 1994)

(holding that allegations of a methodologically unreliable

appraisal were not sufficient to establish property values as a

fact in a RICO complaint).7 Removing this conclusory

valuation allegation from our consideration of the complaint’s

factual allegations supports the Defendants’ alternative

explanation that the changing sale prices reflected not fraud

but changing market conditions. Removal of this allegation

shrinks the amount the property values were alleged to have

changed over time and establishes that Defendants paid out

most of their alleged gains to Plaintiffs in rental payments

and other operating expenses required to run the fast food and

auto maintenance businesses for up to four years. Far from

establishing a plausible entitlement to relief, Plaintiffs’

preferred reading of the complaint requires us to draw

“implausible” inferences that Defendants had the specific

intent to defraud Plaintiffs. Starr, 652 F.3d at 1216

(emphasis in original).

8 The Plaintiffs’ fraud theory is not

plausible when considered in light of the innocent explanation

that failure of franchise businesses in making rental

payments, and their abandonment of leases, took place in the

context of a deep national recession. We hold the Plaintiffs’

7 Plaintiffs’ theory—and its after-the-fact, conclusory property

valuations—requires us to believe that Defendants also overpaid for the

properties by more than $9 million, a proposition that itself is implausible.

8 Our conclusion here is not in conflict with Starr. The principle that

case establishes is that a tie goes to the plaintiffs when there are multiple

plausible theories at the pleadings stage of litigation. Starr, 652 F.3d at

1216–17. But the problem here is that in the context of Defendants’

specific intent to defraud, Plaintiffs’ complaint alleges facts that

support—at best—a “possible” basis to believe that Defendants

specifically intended to defraud, not a “plausible” one. See Century,

729 F.3d at 1108 (distinguishing Starr).

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20 ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO.

fraud theory is not plausible, but we do not consider or make

any statement about whether their theory is “probable” or

dismiss their complaint because it does not meet a

“probability requirement.” Rule 8 does not impose such a

requirement. Twombly, 550 U.S. at 556; Starr, 652 F.3d at

1217.

2

Plaintiffs also contend that we can infer Defendants’

specific intent to defraud from the fact that Defendants

allegedly concealed the risky nature of the real estate

investments. Plaintiffs contend that their argument that

Defendants concealed the risks is supported by the allegation

of three sets of facts: 1) that the tenants had not been rated by

credit agencies, 2) that Defendants were aware of this, and

3) that Defendants described the investments as “safe and

secure” or other similar assertions.

But these facts do not allow us to make the Plaintiffs’

preferred inference that Defendants had the necessary

specific intent to defraud Plaintiffs. First, the statements by

Defendants about the relative security of the investments

constitute “puffing” or related expressions of opinion that are

common in sales and not actionable as fraud. See United

States v. Gay, 967 F.2d 322, 328–29 (9th Cir. 1992). Second,

for this kind of behavior to support a claim of fraud, Plaintiffs

must show “deceitful concealment of material facts,”

Bohonus, 628 F.2d at 1172 (9th Cir. 1980), but the complaint

does not allege deceit. There is no allegation that Plaintiffs

requested properties with credit-rated tenants, or even

requested information about whether the tenants on the

properties they were being sold had been so rated. In short,

Plaintiffs have not alleged facts sufficient to show “the

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ECLECTIC PROPS. EAST V. MARCUS & MILLICHAP CO. 21

existence of a scheme which was reasonably calculated to

deceive persons of ordinary prudence and comprehension,”

Green, 745 F.2d at 1207 (9th Cir. 1984), and without such a

showing, we cannot properly infer fraudulent intent.

V

The complaint purported to allege intentional fraud in the

inflation of property values on properties sold to Plaintiffs. 

However, the complaint’s factual allegations do not support

a plausible inference that Defendants had the required

specific intent to defraud, nor do they tend to exclude the

alternative explanation that the transactions were merely a

group of business deals gone bad during a deep recession. 

Because we affirm the dismissal of Plaintiffs’ RICO

allegations, we also affirm the dismissal of Plaintiffs’

allegations of RICO conspiracy. See Religious Tech. Ctr. v.

Wollersheim, 971 F.2d 364, 368 n.8 (9th Cir. 1992). We

affirm the district court’s dismissal of this complaint.9

AFFIRMED.

 

9 Plaintiffs did not raise the district court’s dismissal without prejudice

of their state law claims or its denial of their complaint without leave to

amend in their briefing to us, so the state law and leave to amend issues

are waived. United States v. Kama, 394 F.3d 1236, 1238 (9th Cir. 2005). 

We express no opinion on whether viable state law claims have been or

could be pleaded by Plaintiffs.

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