Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_10-cv-01630/USCOURTS-casd-3_10-cv-01630-2/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 18:1961 Racketeering (RICO) Act

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 Defendants withdrew their motion to dismiss as to Plaintiff’s claim for violation of

California Business and Professions Code sections 17200 et seq. (Reply at 10.)

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

ARKAN HAMANA,

Plaintiff,

Case No. 10cv1630 BTM (BGS)

ORDER RE MOTIONS TO DISMISS

v. AND STRIKE

SAM KHOLI, et al.,

Defendants.

Defendants move to dismiss the third amended complaint (“TAC”) [dock. #40].

Plaintiff moves to strike certain allegations in the counter-complaint [dock. #43]. For the

reasons that follow, Defendants motion to dismiss is GRANTED in part and DENIED in part,

and Plaintiff’s motion to strike is DENIED.

 I. MOTION TO DISMISS

Defendants move to dismiss Plaintiff’s claims for usury, RICO violations, breach of

contract, and intentional infliction of emotional distress.1 Plaintiff asserts that Defendants are

barred from attacking some of these claims because they failed to argue for dismissal in their

earlier motion to dismiss. The Court does not find this position to be persuasive. Under Fed.

R. Civ. P. 12(h)(2), a defense of failure to state a claim is not waived by the failure to raise

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2

 In the standard of review section of Defendants’ opening brief, Defendants assert

that “[a] review of the TAC establishes Plaintiff failed to meet [Rule 9(b)’s] heightened fraud

standard.” (Mem. at 5.) Nowhere in Defendants’ opening brief do Defendants argue that

Plaintiff “rel[ied] entirely” on a “unified course of fraudulent conduct” as the basis of the usury

claim, such that this claim would be subject to the heightened pleading standard pursuant

to Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003). Defendants’ general

statements about the heightened pleading standard are insufficient to put Plaintiff on notice

that the particularity of the usury allegations would be an issue in the motion to dismiss. 

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it in a first motion. See Wilson-Combs v. Cal. Dep't of Consumer Affairs, 555 F. Supp. 2d

1110, 1113 n.3 (E.D. Cal. 2008). Under Fed. R. Civ. P. 12(g)(2), a defendant can move to

dismiss an amended complaint for failure to state a claim based on arguments not raised in

its first motion to dismiss. See id.; In re Harmonic, Inc., Sec. Litig., No. C 00-2287 PJH, 2006

U.S. Dist. LEXIS 90450, *39-40 (N.D. Cal. Dec. 11, 2006); see also CAL. PRACTICE GUIDE:

FED. CIV.P.BEFORE TRIAL, §§ 9:18, 9:20 (“After [Plaintiff] amends, [Defendant] may move to

dismiss the same cause of action or any other cause of action.”) (emphasis in original). The

Court addresses each challenged claim in turn.

A. Usury

Defendants seek dismissal of the usury claim on the ground that Defendants qualify

for a statutory exemption from the usury law under Cal. Corp. Code § 25118(b). (Mem. at

8-10.) However, this statutory exemption does not apply to “[a]ny evidence of indebtedness

issued or guaranteed . . . by an individual.” § 25118(e)(1). 

Here, Plaintiff pled that the loans at issue were made to him personally. (TAC ¶¶7-8.)

Defendants, in their counterclaim, admit that these loans were made to Plaintiff personally.

(Counterclaim ¶¶5-9.) Accordingly, the statutory exemption relied upon by Defendants is

inapplicable to the loans alleged in the TAC. 

Defendants, in their reply, do not pursue this argument further, and instead, for the

first time, argue that the usury claim is not pled with particularity.2

 (Reply 2-4.) The Court

does not address this argument. Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007) (“The

district court need not consider arguments raised for the first time in a reply brief.”).

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Defendants’ motion to dismiss the usury claim is DENIED.

B. RICO Violations

Defendants challenge Plaintiff’s RICO claim on multiple grounds. Several of

Defendants’ arguments can be disposed of quickly, as they are premised on an incorrect

assumption that Plaintiff’s RICO claim is based on a pattern of racketeering. 

As an initial matter, Defendants’ assertion that Plaintiff cannot plead a RICO claim

based on the collection of unlawful debt (Mem. at 12) plainly lacks merit. This position is

expressly contradicted by the text of the statute and is wholly unsupported by case law. See

§ 1962(a)-(c); Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1398 n.4 (9th

Cir. 1986) (“One of the essential elements a plaintiff must prove in a private RICO action

under § 1962(a)-1962(d) is ‘a pattern of racketeering activity’ or the ‘collection of an unlawful

debt.’”) (emphasis added).

Plaintiff’s RICO claim for violation of 18 U.S.C. § 1962(a)-(d) is based on the collection

of an unlawful debt. See TAC ¶¶98-101. Accordingly, Defendants’ arguments regarding

Plaintiff’s failure to allege predicate acts “to support a claim that there was a ‘pattern of

racketeering activity’” (Mem. at 14-16) are inapposite. Similarly, Plaintiff need not allege that

“predicate acts are related and amount to or pose a threat of continued activity” (Mem. at 16)

in order to satisfy the definition of “collection of unlawful debt.” See United States v.

Giovanelli, 945 F.2d 479, 490 (2d Cir. 1991). “Unlike a ‘pattern of racketeering activity’

which requires proof of two or more predicate acts, to satisfy RICO's ‘collection of unlawful

debt’ definition the government need only demonstrate a single collection.” Id.; United States

v. Weiner, 3 F.3d 17, 24 (1st Cir. 1993) (same); c.f. Religious Technology Center v.

Wollersheim, 971 F.2d 364, 366 (9th Cir. 1992) (discussing the relatedness and continuity

requirement as necessary to establish a pattern of racketeering activity). 

In contrast, Defendants’ arguments that Plaintiff failed to plead the existence of a

RICO “enterprise” and failed to plead an effect on interstate commerce are relevant to RICO

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3

 Defendants fail to address the en banc decision in Odom or the Supreme Court

decision in Boyle in their discussion of this issue. (Mem. at 12-14; Reply at 6-8.) The case

law they rely on predates these decisions. Moreover, because Plaintiff alleges the existence

of an association in fact, as opposed to a legal entity like a corporation, Defendants’

argument that Plaintiff cannot establish a RICO violation by “naming a corporate entity as the

Defendant and the combination of that entity and its employees as the enterprise” (Mem. at

14) is inapposite. 

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claims for collection of unlawful debt. These issues merit closer consideration. 

1. Existence Of A RICO Enterprise

A RICO enterprise “includes any individual, partnership, corporation, association, or

other legal entity, and any union or group of individuals associated in fact although not a legal

entity.” 18 U.S.C. § 1961(4). Plaintiff alleges that Defendants are an association in fact.

(TAC ¶¶79-81) An associated in fact enterprise is “a group of persons associated together

for a common purpose of engaging in a course of conduct.” See Odom v. Microsoft Corp.,

486 F.3d 541, 552 (9th Cir. 2007) (en banc) (citation and quotation omitted). Further, an

associated in fact enterprise must have at least three structural features: “a purpose,

relationships among those associated with the enterprise, and longevity sufficient to permit

these associates to pursue the enterprise's purpose.” Boyle v. U.S., 129 S. Ct. 2237, 2244

(2009); see also Lizalde v. Advanced Planning Servs., No. 10cv0834-LAB (RBB), 2011 U.S.

Dist. LEXIS 31277, at *22 (S.D. Cal. Mar. 24, 2011) (applying Boyle at the pleadings stage

of proceedings).3 The test does not establish a high threshold for pleading an association

in fact enterprise, as “the very concept of an association in fact is expansive.” Boyle, 129

S. Ct. at 2243. Contrary to Defendants’ position, because the enterprise element of a RICO

claim does not sound in fraud, it need not be pled with particularity. See In re Park West

Galleries, Inc., 732 F. Supp. 2d 1181, 1185 (W.D. Wash. 2010). 

Plaintiff has sufficiently pled an association in fact enterprise. Plaintiff alleges that

Defendants have worked with a common purpose of operating an ongoing loan-sharking

operation and identifies the roles individual defendants play in the operation. (TAC ¶¶79-86.)

These allegations are sufficient to establish a common purpose and relationships among

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those associated with the enterprise. 

Plaintiff alleges that he made payments on an unlawful debt from October 2007 to

May 2010 and that these payments helped fund the operation of other loan-sharking

activities. (TAC ¶¶ 79-86.) Even considering only these dates, this two-year-plus time span

is more than sufficient to establish longevity. See Winger v. Best Buy Co., No. CV

10-923-PHX-MHM, 2011 U.S. Dist. LEXIS 29569, at *18-19 (D. Ariz. Mar. 21, 2011); cf.

Odom, 486 F.3d at 553 (finding “[a]n almost two-year time span is far more than adequate"

to establish continuity).

2. Effect On Interstate Commerce

To prevail on a RICO claim, Plaintiff “must demonstrate that the enterprise which is

involved in or benefits from the racketeering activity is one engaged in, or having an effect

on, interstate commerce.” Musick v. Burke, 913 F.2d 1390, 1398 (9th Cir. 1990). Although

this interstate nexus need only be “minimal”, id., the TAC fails to meet this standard. 

Plaintiff states that the association in fact “has engaged in substantial economic

activity that has affected interstate commerce.” (TAC ¶ 81.) This conclusory statement is

insufficient to establish the interstate nexus. See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1954

(2009) (“The Federal Rules do not require courts to credit a complaint’s conclusory

statements without reference to its factual context.”). 

Plaintiff’s more specific allegations relate to illegal loans made in California, collection

of unlawful debt in California, and foreclosure of property in California. Plaintiff does not

plead how any of these intrastate acts affect interstate commerce or cite to any case law that

states that these acts affect interstate commerce as a matter of law. Because Plaintiff has

not established an interstate nexus, Plaintiff’s RICO claim is DISMISSED without prejudice.

//

//

//

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C. Breach Of Contract

Plaintiff received $1,000,000 in three separate loans from Defendants. Defendant

claims that two written agreements (FAC Ex. A and B) evidence the terms of the first of these

three loans (accounting for $400,000). (Mem. at 1-2, 19-20.) According to Plaintiff, these

two written agreements “ostensibly memorialized a lawful loan transaction by which Hamana

would receive $400,000 from Kholi Enterprises in two installments, make interest-only

payments on this money from November, 2007 until November, 2008, pay the entire principal

in November, 2008, and pledge the two Trust Deeds and Business Lien as security for the

loan agreement.” (TAC ¶ 11; see also id. at ¶¶ 107, 109.) The first of these two written

agreements contained an integration clause providing that “[t]his Agreement can be modified

or rescinded only by a writing signed by both of the parties.” (FAC Ex. A at ¶12.) The

second written agreement, providing for a loan of an additional $100,000, was properly

integrated into the first agreement. (FAC Ex. B at ¶ 7.) The terms of the second and third

loans (totaling $600,000) were not memorialized in writing. (Id. at ¶¶ 20, 23.)

Plaintiff alleges that the written agreement described in the preceding paragraph did

not contain “[t]he actual loan arrangement.” (Id. at ¶12.) Specifically, Plaintiff alleges (a) that

the actual annual interest rate on the $400,000 first loan was 16.8% (id.); (b) that the parties

agreed plaintiff would pay an additional sum of $50,000 up front to secure the loan (id. at ¶¶

12-13); (c) that Plaintiff would pay all or most of his interest payments in cash (id. at ¶ 12);

and (d) that the loan would remain open indefinitely and Defendants would not foreclose on

the loan collateral so long as Plaintiff timely paid the actual interest on the loan (id.). Plaintiff

further alleges that he timely made interest payments from November 15, 2008 until May

2010. (Id. at ¶109.) Plaintiff alleges that Defendants breached their usurious oral agreement

by calling all three loans on May 17, 2010, over a year after the written deadline for repayment on the loan principal, and initiating foreclosure proceedings. (TAC ¶110.)

Defendants contend that Plaintiff’s breach of contract claim on the first loan is barred

by the parol evidence rule, since the integrated written loan agreements provided Defendants

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4

This exception to the parol evidence rule is widespread and longstanding in American

jurisprudence. See, e.g., Wilson Industries, Inc. v. Newton County Bank, 245 So.2d 27, 31

(Miss. 1971) (“In cases involving usury, parol evidence is admissible to show that writings

are not what they seem and to establish the true facts with respect to the transaction. In

such cases it may be shown by parol that a document, legal in form, was in fact a device to

disguise usurious interest or does not reflect the real agreement, and that sums mentioned

are in truth, usurious interest.”); St. Maries v. Polleys, 1 N.W. 389, 391 (Wis. 1879) (“[W]e

suppose it too plain for argument that [a party] might prove by parol the usurious agreement,

if one was made. Parties do not generally reduce their usurious contracts to writing, and

unless the real agreement could be shown by parol, the statute would practically be evaded

in all cases.”). 

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the right to foreclose on the loan collateral if the loan principal was not paid in full by

November 2008. (Mem. at 19-20.) However, Defendants (and Plaintiff) overlook the rule

that “extrinsic evidence is admissible to show that an ostensibly legal transaction is actually

usurious[.]“ Patwardhan v. Kale, No. E031792, 2003 WL 21130236 at *8 (Cal. App. 4th Dist.

May 16, 2003); see also Martyn v. Leslie, 290 P.2d 58, 68 (Cal. App. 1955) ("[T]he parol

evidence rule is not applicable in cases involving the claim of usury and . . . parol evidence

is, in such cases, admissible to show the actual nature of the transaction, and in no way

depends upon the existence of an ambiguity in a written contract.").4 

Essentially, Plaintiff has alleged that the two written agreements are a disguise for an

illegal, usurious transaction. “It then must follow that every circumstance surrounding or

connected with the transaction is material, if in any manner it will reveal the intention of the

parties.” Miley Petroleum Corp. v. Amerada Petroleum Corp., 63 P.2d 1210, 1214 (Cal. App.

4th Dist. 1936) (elaborating on usury exception to parol evidence rule). Here, Plaintiff alleges

that Defendants’ oral promise not to initiate foreclosure proceedings for failure to timely repay

the loan principal was a term of the actual usurious agreement. (TAC ¶ 12.) Extrinsic

evidence surrounding this and other terms of the alleged oral agreement is clearly admissible

to establish the parties’ true intentions with respect to the loan agreement.

Therefore, Defendants’ motion to dismiss Plaintiff’s claim for breach of contract, as

it applies to the first loan agreement and modification totaling $400,000, is DENIED. The

Court also notes that Defendants’ motion to dismiss based on the parol evidence rule is

inapplicable to the second and third loans totaling $600,000, as these loans were not made

pursuant to a written instrument. 

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D. Intentional Infliction Of Emotional Distress

To state a claim for intentional infliction of emotional distress, a plaintiff must allege:

“(1) extreme and outrageous conduct by the defendant with the intention of causing, or

reckless disregard of the probability of causing, emotional distress; (2) the plaintiff's suffering

severe or extreme emotional distress; and (3) actual and proximate causation of the

emotional distress by the defendant's outrageous conduct.” Prevost v. First Western Bank,

193 Cal. App. 3d 1492, 1503 (4th Dist. 1987) (citation and quotation omitted). “Behavior may

be considered outrageous if a defendant (1) abuses a relation or position which gives him

power to damage the plaintiff's interest; (2) knows the plaintiff is susceptible to injuries

through mental distress; or (3) acts intentionally or unreasonably with the recognition that the

acts are likely to result in illness through mental distress.” Cole v. Fair Oaks Fire Protection

Dist., 43 Cal. 3d 148, 155 n.7 (1987).

Plaintiff bases this claim on two allegations. First, Plaintiff alleges that Defendant

Kholi “threatened Hamana, exclaiming and shrieking in an intimidating, menacing manner

that Kholi or Kholi’s henchmen would grievously injure or murder Hamana, his wife, and their

children.” (TAC ¶135.) Second, Plaintiff states that Mr. Kholi “maliciously and oppressively

proceeded to foreclose under the Trust Deeds.” Id.

These allegations are sufficient to state a claim for intentional infliction of emotional

distress. First, contrary to Defendants’ assertion, the first allegation cannot be characterized

as a “mere insult[], indignit[y], or other trivialit[y].” Mem. at 23 (quoting Cole, 43 Cal. 3d at

155 n.7.) The Court concludes that a threat to murder Plaintiff and his family is an action that

is “likely to result in illness through mental distress.” Cole, 43 Cal. 3d at 155 n.7. Plaintiff

has stated a claim based on this allegation.

Second, Plaintiff has alleged that the loans were structured in a way to provide

Defendants with the sole discretion to initiate foreclosure proceedings at a time of their

choosing. (TAC ¶119.) This provided Defendants with the power to damage Plaintiff’s

interests, a power that was abused by “abruptly declaring default on all three loans.” (TAC

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¶124.) A claim for intentional infliction of emotional distress may rest on this allegation as

well.

Defendants correctly observe that if the initiation of foreclosure proceedings was

lawful, this claim cannot be based solely on the foreclosure. This is because “[w]hether

treated as an element of the prima facie case or as a matter of defense, it must also appear

that the defendants’ conduct was unprivileged.” Prevost, 193 Cal. App. 3d at 1503 (citation

and quotation omitted). However, because Plaintiff’s intentional misrepresentation claim

does not rely exclusively on the foreclosure, the issue of whether foreclosure proceedings

were unprivileged need not be determined at the present time. Defendants’ motion to

dismiss the intentional infliction of emotional distress claim is DENIED.

//

//

E. Motion To File Sur-Reply

Plaintiff’s motion to file a sur-reply is DENIED. The majority of Plaintiff’s proposed surreply discusses legal arguments that were first raised in Plaintiff’s opposition brief. Plaintiff’s

desire to further argue these points does not present good cause for filing a sur-reply. 

Plaintiff correctly identifies Defendants’ argument that the usury claim failed to meet

the heightened pleading standard as being improperly raised. Because the Court does not

address this argument, a sur-reply is unnecessary.

II. MOTION TO STRIKE

Motions to strike are generally viewed with disfavor. See Esoimeme v. Wells Fargo

Bank, 2011 U.S. Dist. LEXIS 98492, at *54 (E.D. Cal. Sept. 1, 2011) (citing 5A C. Wright &

A. Miller, Federal Practice and Procedure: Civil 2d 1380). Such motions will usually be

denied unless the allegations in the pleading have no possible relation to the controversy,

and may cause prejudice to one of the parties. Id.

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Plaintiff seeks to strike all of the allegations in the counter-complaint that concern or

describe the first loan and loan modification on the ground that these allegations are

“immaterial” and “irrelevant.” This argument lacks merit.

First, Plaintiff’s position that the loan is “immaterial” when referenced in Defendants’

counterclaim cannot be supported when Plaintiff’s TAC discusses the first loan and loan

modification at length. Second, Defendants allege a breach of contract for Plaintiff’s failure

to perform its obligations under the terms of the first loan agreement and modification. At a

minimum, allegations that relate to this loan agreement and modification are clearly relevant

to this claim. Plaintiff’s motion to strike is DENIED.

 //

//

III. CONCLUSION

Defendants motion to dismiss [Dock. #40] is GRANTED in part and DENIED in

part. Plaintiff’s RICO claim is DISMISSED without prejudice. If Plaintiff seeks to cure the

deficiencies in this claim, Plaintiff must file an amended complaint within twenty days of

entry of this order. All other claims remain operative. 

Plaintiff’s motion to file a sur-reply [Dock. #50] is DENIED.

Plaintiff’s motion to strike [Dock. #43] is DENIED.

IT IS SO ORDERED.

Dated: October 24, 2011 

HONORABLE BARRY TED MOSKOWITZ

United States District Judge

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