misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff."
Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990); see also Graue Mill Dev. Corp. v. Colonial Bank &
Trust Co,, 927 F.2d 988, 992-93 (7th Cir. 1991); DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.
1990).

In the present case, we must determine whethcr the plaintiff's descriptions of the mail and wire
fraud allegations are stated with the particularity required. In the RICO context, courts adhere closely
to the particularity requirement and, thus:

a plaintiff who relies upon acts of mail and wire fraud as the basis for a RICO claim must do

more than outline a scheme and make loose references to mailings and telephone calls; rather,

the plaintiffmust be careful to allege such particulars as who initiated the communication, when
the communication took place, the contents of the communication, and how that communication
furthered the scheme to defraud.

RE. Davis Chem. Carp. v. Naleo Chem. Co,, 757 F, Supp. 1499, 1515 (N.D. Ill. 1990); see also
Landon v. GTE Communications Servs., Ine., 696 F. Supp. 1213, 1218 (N.D. Til, 1988) (Aspen, J.). In
the context of a RICO claim, such specificity is necessary to assess whether the predicate acts are
“ongoing over an identificd period of time so that they can fairly be viewed as constituting separate
transactions.” Balabanos v. North Am. Inv. Group, Lid., 684 F. Supp. 503, 507 (N.D. Ill. 1988) (citing
Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir. 1986)).

In its complaint, although Builders Bank alludes to the parties who may have been involved in
the alleged communications (Comp1, {ff 13, 17, 27, 33, 40), it does not sufficiently describe the “time,
place, and content” of those communications, Sears, 912 F.2d at 893. When referring to the predicate
acts of mail and wire fraud, the complaint mercly claims that the alleged rackeleering activity was

furthered as “First Bank, Hershenhorn and Winter used interstate mails and wires in conducting banking

business.” (Compl., | 27.) Never does the complaint identify a specific communication, but rather

speaks of the predicate acts gencrally, saying, “[t]he repeated sending of mail and wire communications



reccived funds. Builders Bank has not met that standard, thercfore dismissal of the complaint is proper
on that ground,

Concerning the third issue, plainti{f'must plead that a conspiracy cxisted to use the racketecring
activity income in the operation of First Bank. Schiffels v. Kemper Fin, Servs., 978 F.2d 344, 352 (7th
Cir, 1992), Further, Builders Bank must allege that each defendant, including Winter, actively took part
in that conspiracy; it cannot rely on conclusory allegations of conspiracy to do so. Jd. Because Builders
Bank has not met the standard required for this issue, dismissal of the complaint is proper on that
ground.

D. State Law Claims and Supplemental Jurisdiction

Because we dismiss the RICO claims without prejudice, we must consider whether we should
exercise supplemental jurisdiction over Builders Bank’s state law claims. While district courts have
discretion as to whether they will continuc to exercise supplemental jurisdiction, the Seventh Circuit
generally dismisses without prejudice supplemental state law claims once all federal claims have been
eliminated. See Groce v. Eli Lily & Co., 193 F.3d 496, 501 (7th Cir. 1999); see also United Mine
Workers of Am. v. Gibbs, 383 U.S. 715, 726 (1966). However, the present case offers a unique set of
circumstances. Two co-defendants have already answered the very complaint which defendant
challenged with this motion. The state claims against Winter arise from the same set of facts as those
claims against the other defendants and, as is required by 28 U.S.C. § 1367, are “‘so related to claims in
the action within such original jurisdiction that they form part of the same case or controversy under
Article TT of the United States Constitution.”

In determining whether to entertain its state law claims against Winter, this Court should also
measure “considerations of judicial economy, convenience and faimess to liligants.” United Mine

Workers, 383 U.S. at 726. Given the already complicated history of this litigation (laid out on pages



(7th Cir. 1986). Together, these factors “provide the lens through which the courts may focus on the
existence of ‘continuity plus relationship.”” Meyer Material Co., vy. Mooshal, 188 I. Supp.2d 936, 941
(NLD. Til, 2002), We address each factor in turn.

i) The Number and Variety of Predicate Acts

Although Winter claims that mail and wire fraud do not necessarily constitute predicate acts
forming a pattern of racketccring activity, the Seventh Circuit has found instances where multiple
examples of fraud were seen as a pattern when they involved separate and distinct transactions. See
Ashland Oil, Inc. v. Arnett, 875 F.2d 1271, 1279 (7th Cir. 1989); see also Liquid Air Corp. v. Rogers,
834 F.2d 1297 (7th Cir. 1987); Appley v. West, 832 F.2d 1021 (7th Cir. 1987). ‘The facts as alleged in
Builders Bank’s complaint imply that the mail and wire communications did indeed involve many
different transactions despite the fact that the transactions themselves were similar in nature. (Compl.,
4] 47.) At the same time, “the raw number of predicate acts [alleged] has never been determinative,
especially when only mail and wire fraud are alleged.” Ashland Oil, 875 F.2d at 1278. We thus move
on to the next factor of the Morgan test.

ii) The Time Period of the Alleged Activity

Each of the Seventh Circuit cases cited above (Ashland Oil, Liquid Air Corp., and Appley) was
found to involve a pattern of racketeering activity in part because the activily threatened to continue in
the future. McDonald v. Schencker, 18 F.3d 491, 498 (7th Cir, 1994), In formulating the RICO statute,
Congress was addressing the problem of “longterm criminal conduct.” ZZ. J., 492 U.S. at 242. In other
words, "predicate acts extending over a few weeks or months and threatening no future criminal
conduct" do not establish a pattern of racketeering activity. Jd.

Because the complaint does not meet the particularity required of a RICO allegation, we cannot

properly assess the time period over which the predicate acts (in this case, the instances of mail and wire



by First Bank, as well as recciving mail and wire transfers from Builders in connection with each of the
above loans were predicate acts which constitute a pattern of racketeering activity in violation of 18
U.S.C. §1962(c)...” The RICO standard requires the plaintiff to identify exact dates, the content of, and
participants in alleged mail and wire fraud. Builders Bank has failed to meet this requirement. Given
the strict adherence to Rule 9(b)’s particularity requirements in RICO actions, the complaint’s brief’
sketch ofa string of communications regarding the alleged racketecring activity is insufficient to support
a RICO claim.!

B. The Morgan Factors

The particularity requirement notwithstanding, Winter further argues that the plaintiffs
complaint fails to meet a second requirement for a RICO allegation: showing a pattern of racketeering
activity, Richmond, 52 F.3d at 644. The RICO statute roughly defines a pattern of racketecring activity
as consisting of at least two predicate acts within a ten-year period. 18 U.S.C. § 1961(5). ‘The Supreme
Court furthered that definition by requiring a “continuity plus relationship” formula, saying “a
plaintiff... must show that the racketeering predicates are related, and that they amount to or pose a
threat ofcontinued criminal activity.” AJ, Inc. v. Northwestern Bell Tel. Co., 492 U.S.229, 239 (1989).
The Seventh Circuit has consistently assessed the presence of a pattern of racketeering activity by
evaluating the allegations in the context of the following factors: 1) the number and variety of predicate
acts; 2) the time period of the alleged activity; 3) the number of victims; 4) the presence of separate

schemes; and 5) the occurrence of distinct injuries. Morgan v. Bank of Waukegan, 804 F.2d 970, 975

"The Seventh Circuit generally relaxes 9(b)’s particularity requirement when the plaintiff lacks
access to information required to state his claim with particularity, especially when that information is in
the hands of the defendant and will likely come out in discovery. Corley v. Rosewood Care Ctr., Inc.,
142 F.3d 1041, 1050 (7th Cir. 1998); see also Schiffels v. Kemper Fin. Serv., Inc., 978 F.2d 344, 353 (7th
Cir. 1992), However, the plaintiff has not indicated that this exception to the particularity requirement is
applicable to the present case.



v) The Occurrence of Distinct Injuries

Plaintiff correctly points out in its response to the motion to dismiss that “repeated infliction of
economic injury” may be considered distinct injuries and thus provide sufficient support for a pattern
of racketeering. Uniroyal Goodrich Tire Co. v. Mutual Trading Corp., 749 F, Supp. 869, 874 (N.D. Ill.
1990). Therefore, if Builders Bank can allege separate instances of economic injury with particularity,
those allegations may be sufficient to meet the standard.

Taking all of the Morgan factors together, Builders Bank has not demonstrated a pattern of
racketeering activity because it has not alleged each of the Morgan factors with sufficient particularily.

Lon Failure to Plead Other Elements of Plaintiff’s RICO Claims

Winter claims that Builders Bank’s complaint fails to meet the requirements for a RICO
allegation on three additional fronts by: 1) failing to allege receipt of income from racketeering
activities; 2) failing to allege RICO injury; and 3) failing to allege RICO conspiracy.

Plaintiff does not address the first requirement, receipt of income from racketeering activities,
in its response, Such an allegation is required to state a claim against a defendant under 18 U.S.C. §
1962(a) because the statute specifies unlawful activity as first “receiv[ing] any income derived, directly
or indirectly, from a pattern of racketecring activity or through collection of an unlawful debt...” To
properly assert a RICO claim against Winter, Builders Bank must allege that Winter reccived some
income [rom the alleged frauduleni scheme. Thus, dismissal of the complaint is proper on that ground.

On the second issuc, a RICO injury, Builders Bank’s complaint also fails to satisfy the RICO
pleading standard. (Compl. {{ 17, 29-31, 37.) As defendant states, § 1962(a) requircs that the plaintiff
allege an injury that was “proximately caused by the defendant’s use or investment of the income derived

from racketeering activity.” (Motion p. 13) Again, the standard for claiming such an allegation requires

ahigh level of specificity since Builders Bank must claim some direct injury from the use of fraudulently



Minute Qvidar Farm (16/97)

United States District Court, Northern District of IHinois

Name of Assigned Judge
or Magistrate Judge

Marvin Aspen

Sitting Judge if Other
than Assigned Judge

CASE NUMBER

03 C 4959

DATE

6/28/2004

CASE Builders Bank vs. First Bank & Trust Co., et al
TITLE
[In the toilnwing box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) stale briefly the mature
MOTION: of the motion being presented. |

DOCKET ENTRY:

a a Filed motion of [ use listing in “Motion” box above. ]

(2) ao Brief in support of motion due

Q) Oo Answer brief to motion due. . Reply to answer brief due___

(4) Oo Ruling/Hearing on ____set for _ at

(3) a Status hearing re-set for 8/12/2004 at 10:30 A.M,

(6) Oo Pretrial conference[held/continued to] [set for/re-sct for] on setfor at

(7) a Trial{set for/re-set for]on___ at

(8) o [BenclyJury trial] [Hearing] held/continued to at

(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
QFRCP4(m) OLocal Rule 41.1 OFRCP41(aj(1) OO FRCP41(a)(2).

(io) +o [Other docket entry] © Enter Memorandum Opinion and Order: Defendant Winter

dismiss (33-1 & 33-2) is granted. Because the mail and wire allegations do not meet (9b)'s
requirements, Counts ITT, TV and V are dismissed without prejudice. We also will exercise s

to file an amended complaint, The status hearing set for 6/29/04 is stricken.

ay oo

[For further detail see order (on reverse side offattached to) the original minute order.]

*s motion to
particularity
upplemental

jurisdiction over the state law claims against Winter. Plaintiffis given to and including 7/20/04, in which

No notices required, advised in open court

No notices required ser of nu

Document
Number

| Notices mailed by judge’s statt

YUN 8 0 204

Notified counsel by telephone. dane dackgiod

Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge.

courtroom
deputy’s

initials

GL

oe pDaye/tigys,reecived in
{GiepepEgics
+7

rly deputy initials



one, two and three of Builders Bank’s response (o the motion to dismiss) and the presence of this case
in this court against other parties, we will exercise supplemental jurisdiction over the state claims
against Winter.
CONCLUSION
Because the mail and wire allegations do not meet 9(b)’s particularity requirements, Counts TI, [V,

and V are dismissed without prejudice.’ We also will exercise smpplemental jurisdiction over the state

law claims against Winter. It is so ordered. JJAn

MARVIN E. ASPEN
United States District Judge

Dated blab
of

"In his motion to dismiss, Winter argues that the dismissal should be with prejudice, bul we
disagree. Although Builders Bank has already filed a second amended complaint, the changes made did
not concern these RICO allegations and the plaintiff has not previously been put on notice that the 9(b)
particularity requirements have not been met.

10



fraud) were committed or whether or not they threaten future criminal conduct. Plaintiff alleges that the
predicate acts occurred over a period of at least two years. As Builders Bank points out, this district has
indeed found periods of two years or less sufficient to meet the RICO standard. See Northbrook v.
Baker, No. 94 C 3827, 1994 U.S. Dist. LEXIS 16064 (N.D. Ill. Nov. 4, 1994) (Zagel, J.).

iii) The Number of Victims

Builders Bank fails to allege with particularity the victims affected by the alleged RICO
violations. See Shoshuo v. Bruti Assoc., Ltd., No. 90 C 6388, 1991 U.S. Dist. LEXIS 8834, *8 (N.D. IIL,
July 1, 1991) (granting a motion to dismiss where the plaintiff failed to identify with particularity other
homeowncrs allegedly defrauded by the defendant), Despite ils assertion that Builders Bank
shareholders were also injured by defendant’s activity, its complaint only specifically identifies one
victim: Builders Bank. The plaintiff has therefore failed to meet this element of the particularity
requirement.

iy) The Presence of Separate Schemes

“[A] single scheme with only one injury, even though it required several acts of wire or mail
fraud to accomplish it, does not fall within the ambit of RICO.” Continental Grain Co. v. Pullman
Standard, Inc., 690 F. Supp. 628, 632 (citing Marks v. Pannell Kerr Forster, 811 F.2d 1108 (7th Cir.
1987); Liquid Air Corp. v. Rogers, 834 F.2d 1297 (7th Cir, 1987)). However, the acts alleged against
the defendant may not be merely “fraudulent representations with respect to only a single transaction.”
Greenberg v. Technicare Corp., No. 85 C 5436, 1986 U.S, Dist. LEXIS 15721 *16 (N.D. Ill. Jan. 2,
1987). Builders Bank does allege separate transactions in each of the purchased loans and, if pled with
particularity, Builders Bank may be able to show that each individual loan purchased constitutes a

singular scheme to defraud and cause specific monetary injury.



ANALYSIS
I, Standard of Review
The purpose of a motion to dismiss under Rule 12(b)(6) is to decide the adequacy of the
complaint, not the merits of the case. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990).
Inconsidcring a motion to dismiss, we must accept all well-pled allegations in the complaint as true and
draw all reasonable inferences in the plaintiff's favor, See MCM Partners, Inc. v. Andrews-Bartlett &
Assoc., Inc., 62 F.3d 967, 972 (7th Cir, 1995), aff'd 161 F.3d 443 (7th Cir. 1998), cert. denied 528 U.S.
810(1999). Theretore, a complaint should not be dismissed “unless it appears beyond all doubt that the
plaintiff can prove no set of facts in support of his claim which would entitle him to relicl.” Conley v.
Gibson, 355 U.S. 41, 45-46 (1957).
If, Counts UI, [V and V: The RICO Claims
To survive a motion to dismiss on a RICO claim, a plaintitf must allege with particularity the “1)
conduct; 2) of an enterprise; 3) through a pattern 4) of racketeering activity.” Richmond v. Nationwide
Cassel, L.P., 52 F.3d 640, 644 (7th Cir. 1995) (citing Sedima, S.P.R.L. v. Imrex Co., 473 U.S, 479, 496
(1985)). Defendant alleges that Builders Bank, has failed to meet this standard by not pleading his
RICO claim with particularily as required by Federal Rule of Civil Procedure 9(b) and by failing to
allege a pattem of racketeering activity.
A. The Fed. R. Civ. P, 9(b) Particularity Requirement
Winter claims that Builders Bank has not met the Fed. R. Civ. P. 9(b) particularity requirement
and, therefore, we cannot rely on allegations of mail and wire fraud to allege a pattern of racketeering
activity. Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity." To state a claim under RICO, a plaintiff must allege

"the identity of the person making the misrepresentation, the time, place, and content of the

3



However, we will continuc to exercise supplemental jurisdiction over Counts I, II, VI, VU, VIU and LX,
Winter is instructed to respond to those claims,
BACKGROUND

The following facts are adopted from Builders Bank’s complaint and are assumed to be true for the
purpose ofthis motion. See Marshall-Mosby v. Corporate Receivables, Inc., 205 F 34323, 326 (7th Cir.
2000). Plaintiff Builders Bank alleges that the defendants, including Winter, wrongfully induced
Builders Bank to purchase loans that were in default or otherwise non-performing. The defendants
allegedly convinced Builders Bank that the loans were in good standing by extending their due dates so
that they would not appear to be in default. Builders Bank’s complaint includes state law conspiracy
and fraudulent misrepresentation charges as well as allegations that defendants violated the federal
Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, ef seg, The RICO
allegations are based on predicate acts of alleged mail and wire fraud. Builders Bank further alleges that
Winter breached his fiduciary duty as CEO and Senior Lending Officer of Builders Bank in a variety of
ways, including by misappropriating bank assets, making unauthorized transactions and then covering
them up, failing to obtain and provide the Bank with adequate information conceming the
creditworthiness of potential borrowers, intentionally failing to disclose or obtain information
concerning loan disbursements, and engaging in unsound practices regarding bank loans, Builders Bank
also alleges that Winter breached his employment agreement as well as his contractual agreement to
repay his bonus.

Winter has now moved to dismiss, arguing that Builders Bank failed to meet the particularity
requirement of Fed. R. Civ. P. 9(b) and that the complaint fails to state a RICO claim. Winter also
argues that this court cannot exercise subject matter jurisdiction over the state law claims against him

because once the RICO counts have been dismissed, the court has no original jurisdiction.



UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
BUILDERS BANK, an Illinois state ) ati)
chartered bank, ,) york \
) NGS
) yoo!
Plaintiff, )
)
vy. )
) Case No. 03 C 4959
FIRST BANK & TRUST COMPANY OF )
ILLINOIS, an Illinois state chartered bank; )
MICHAEL WINTER; and ROBERT )
HERSHENIIORN, )
)
)
Defendants. )

MEMORANDUM OPINION AND ORDER
MARVIN E. ASPEN, District Judge:

Plaintiff Builders Bank filed a nine-count Second Amended Complaint (“Complaint”) against
Defendants First Bank & Trust Company of Illinois (“First Bank”), Michael Winter and Robert
Hershenhom alleging conspitacy (Count I), fraudulent misrepresentation (Count II), violation of the
federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) (Counts III, IV, and V), breach
of fiduciary duty against Winter (Count VI), breach of employment agreement against Winter (Count
YIN), and breach of contractual agreement to repay bonus against Winter (Count VIII). Builders Bank
has also requested a declaratory judgment regarding First Bank’s right of set-off against Winter and his
wife (Count IX), Presently before us is Winter’s omnibus motion to dismiss. For the reasons stated

below, we grant Winter’s motion to dismiss as to Counts II, IV and V, though without prejudice.

Yd