Court Opinion

ID: 175739
Source: CourtListenerOpinion
Date Created: 2010-09-22 19:12:57+00
Date Added: 2024-06-11T17:25:36.419320
License: Public Domain

United States Court of Appeals
                         For the First Circuit
No. 09-1874

    MÉNDEZ INTERNET MANAGEMENT SERVICES, INC.; JAMES MÉNDEZ,

                        Plaintiffs, Appellants,

                                   v.

  BANCO SANTANDER DE PUERTO RICO; BANCO POPULAR DE PUERTO RICO;
DORAL BANK; RG PREMIER BANK OF PUERTO RICO; WESTERNBANK OF PUERTO
         RICO; GILBERTO ARVELO; DOCTORSHOPER.COM, INC.,*

                         Defendants, Appellees.

              APPEAL FROM THE UNITED STATES DISTRICT COURT
                     FOR THE DISTRICT OF PUERTO RICO

            [Hon. José Antonio Fusté,   U.S. District Judge]

                                  Before
                       Boudin, Selya and Gajarsa,**
                             Circuit Judges.

     Nicolás Nogueras-Cartagena, Julio C. Alejandro-Serrano and
Office of Nicolás Nogueras-Cartagena on brief for appellants.
     Eduardo A. Zayas-Marxuach, Alejandro J. Cepeda-Díaz, McConnell
Valdés LLC, Néstor J. Navas-D'Acosta, Navas & Rodríguez, P.S.C.,
Harold D. Vicente-Colón and Vicente & Cuebas on brief for appellees
Banco Popular de Puerto Rico, Inc., Banco Santander Puerto Rico,
and Doral Bank.

     *
      By order of the court, Federal Deposit Insurance Corporation
was substituted for RG Premier Bank of Puerto Rico and Westernbank
of Puerto Rico.
     **
          Of the Federal Circuit, sitting by designation.
     Sonia B. Alfaro-de la Vega and Law Offices of Gilberto Oliver
on brief for appellee RG Premier Bank of Puerto Rico.

                       September 22, 2010
          BOUDIN, Circuit Judge.          James Méndez and Méndez Internet

Management Services, Inc. (collectively "Méndez") appeal from the

dismissal of their claims against five banks1 and against Gilberto

Arvelo and his website doctorshoper.com, described as a consumer

watchdog service (collectively "Arvelo").              Because the case was

disposed of in the district court on a motion to dismiss, Fed. R.

Civ. P. 12(b)(6), our review is de novo, and we accept the factual

allegations of the operative amended complaint, Rule v. Fort Dodge

Animal Health, Inc., 607 F.3d 250, 251-52 (1st Cir. 2010).

          Based     in   Puerto    Rico,     Méndez    sells   Iraqi   dinars

("dinars"),   the   official      Iraqi    currency.     According     to   the

complaint, between September 2007 and August 2008, a number of

banks in Puerto Rico closed or refused to open accounts for Méndez.

Most objected to serving money services businesses ("MSBs") or

stated related administrative reasons, including "the sheer volume

of transactions."    The banks, Méndez says, also

          have conditioned the opening and continuation
          of regular checking accounts, lines of credit,
          savings accounts and all other regular bank
          services . . . upon plaintiff not depositing
          or withdrawing from any such bank account or
          credit lines, United States of America
          currency or legal tender money derived from
          the sale of . . . dinars.

     1
      The banks named as defendants were Banco Santander de Puerto
Rico, Banco Popular de Puerto Rico, Doral Bank, RG Premier Bank of
Puerto Rico, and Westernbank of Puerto Rico. The Federal Deposit
Insurance Corporation ("FDIC") has since substituted itself for RG
Premier Bank and Westernbank. FirstBank Puerto Rico is named in
the complaint, but is not a defendant.

                                     -3-
           In   the    same    time   frame,    Arvelo      (according    to   the

complaint) published critical comments and articles on his website

and also made unspecified public statements about Méndez' sale of

dinars in Puerto Rico, which Méndez claims have prompted                 closures

of his accounts as well as government oversight of his business.

Arvelo's   postings        apparently    suggest     that     the   dinars     are

counterfeit; that Méndez has been operating illegally; that the

general sale of Iraqi dinars is illegal; and that "the sale of

dinars   [is]    not   a    legitimate    business    accepted      by   banking

institutions."

           On October 2, 2008, Méndez brought suit in federal

district court in Puerto Rico against the named banks and Arvelo,

seeking $14 million plus treble damages.           He alleged three federal

causes of action based respectively on the Racketeer Influenced and

Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 (2006), the

Sherman Act, 15 U.S.C. § 1 (2006), and the Bank Holding Company Act

("BHCA"), 12 U.S.C. § 1972(1)(E) (2006).                 The complaint also

included claims of abuse of right and defamation under Puerto Rico

law.

           Banco Popular de Puerto Rico filed a motion to dismiss

the federal causes of action for failure to state a claim, which

was joined by the other defendants.            The district court dismissed

the three federal claims on the merits, and declined to exercise

supplemental jurisdiction over the Puerto Rico claims, dismissing

                                        -4-
them without prejudice.      Méndez Internet Mgmt. Servs., Inc. v.

Banco Santander de Puerto Rico, Civil No. 08-2140, 2009 WL 1392189,

at *6 (D.P.R. May 15, 2009).

             Méndez now appeals from the dismissal of the RICO and

BHCA claims; he ignores his Sherman Act claim, which is thus

abandoned.     Our review, as already noted, is de novo, and is

informed by recent Supreme Court decisions that require in a

complaint "more than labels and conclusions" and stress that "a

formulaic recital of the elements of a cause of action will not

do."   Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); see

also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1953 (2009) (holding

Twombly to apply to all civil actions).

             To read through Méndez' complaint and opening brief (he

filed no reply) and the answering briefs of the banks (Arvelo has

remained silent) is to be left initially in a state of puzzlement.

The banks do not deny that they have refused to provide Méndez with

accounts for his dinar business, but do not trouble to explain why;

Méndez alleges conspiracy, seemingly among the banks and clearly

between Arvelo and the banks, also without explaining why the banks

or Arvelo have any motive to cooperate or to undermine him.

             Yet modest research among public documents provides some

enlightening information about the phase of the case that involves

the banks.    It turns out that the USA PATRIOT Act of 2001, Pub. L.

No. 107-56, 115 Stat. 272 (codified in scattered sections of the

                                  -5-
U.S.C.), amended the Bank Secrecy Act ("BSA"), 31 U.S.C. §§ 5311-

5330 (2006), in ways that imposed more stringent requirements aimed

at money laundering.

           One consequence has been several high-profile criminal

cases brought against banks doing business with MSBs, including one

of the bank defendants in the case before us.2        Given these cases

and general uncertainty about regulation under the amended BSA,

many banks believe they could bear responsibility for the BSA

compliance of MSB customers despite statements to the contrary from

the Office of the Comptroller of the Currency.        Bank Secrecy Act's

Impact on Money Services Businesses: Hearing Before the Subcomm. on

Fin. Insts. & Consumer Credit of the H. Comm. on Fin. Servs., 109th

Cong. 20 (2006) (statements of Rep. Jeb Hensarling & Ann F.

Jaedicke, Deputy Comptroller for Compliance Policy, Office of the

Comptroller of the Currency).

           Unsurprisingly banks have increasingly shunned risky

entanglement with MSBs.    At a House hearing in 2006 it was noted

that "[o]ver the past year, at least three national banks have

ceased   offering   services   to   MSB's,   and   some   State-chartered

     2
      In January 2003, Banco Popular "forfeited $21.6 million . .
. and entered into a deferred prosecution agreement with the
Justice Department in a case involving a single count of failing to
file a SAR [suspicious activity report] on an MSB customer in
violation of the BSA."     An Update on Money Services Businesses
Under Bank Secrecy and USA PATRIOT Regulation: Hearing Before the
S. Comm. on Banking, Housing & Urban Affairs, 109th Cong. 47 (2005)
(prepared statement of Julie L. Williams, Acting Comptroller of the
Currency).

                                    -6-
institutions have also discontinued service, and this is across-

the-board blanket discontinuance by these institutions of all

MSB's."    Id. at 2 (statement of Rep. Spencer Bachus, Chairman, H.

Subcomm. on Fin. Insts. & Consumer Credit). Similarly, a 2009 bill

proposed congressional findings that, due to regulatory guidance

and expectations of federal banking agencies and the Secretary of

the Treasury,

               many insured depository institutions have
               refused or closed money services businesses'
               accounts in order either not to incur the
               burden, risk or potential liability for
               undertaking a de facto regulatory function, or
               else to avoid supervisory sanctions for not
               exercising such oversight.

H.R. 2893, 111th Cong. § 2(4) (2009).

               The defendant banks now before us may have no incentive

at the motion to dismiss stage to offer explanations that may raise

factual issues unfit for resolution except upon summary judgment or

trial.    But, happily for them, they have no need to establish their

own motives unless and until Méndez makes out a plausible federal

claim under Twombly and Iqbal         standards.     This case bears out the

wisdom    of    the   Supreme    Court's   requirements   in    screening     out

rhetoric masquerading as litigation.

                A cardinal requirement of civil RICO liability is the

allegation of the commission, or attempt or conspiracy to commit,

defined    predicate      acts    needed     to   establish    "a   pattern   of

racketeering activity or collection of unlawful debt."                18 U.S.C.

                                       -7-
§ 1962(c).     Acts in two defined predicate-act categories were

alleged by Méndez:    mail or wire fraud, 18 U.S.C. §§ 1341, 1343,

and   extortion, 18 U.S.C. § 1951.   We begin with the allegations of

fraud which, under applicable pleading rules, Fed. R. Civ. P. 9(b),

must be alleged with particularity.

           As to the banks, Méndez' complaint states that the

"cancellations contained misrepresentations inasmuch as the banks

knew that the plaintiff was not a money service business, and that,

even if the plaintiff was, the banks had substantial regulatory

guidance to effectively provide the services with no regulatory

risk."    So, his first theory is that the banks denied him the use

of accounts for his dinar sales because they deemed him to be

within the MSB category; this, he says, must be fraudulent because

he "does not operate as one" since he does not provide the "myriad

of services" associated with MSB operations.

           But the very regulation he cites makes clear that to do

any buying or selling of currency, exceeding $1,000 with any other

person in one day, is enough for MSB status under the regulation.3

Further, Méndez goes on in his own complaint to say that while he

does not provide a full bevy of services listed in the regulation,

      3
      MSBs may engage in a range of money-related transactions--
including trading of currency, check cashing, and transmission--but
entities conducting only one type of transaction also can fall into
the category; buyers or sellers of currency in a substantial amount
are one type of MSB.       31 C.F.R. § 103.11(uu) (2009) (FDIC
definition).

                                 -8-
"regulations require that [his business] register because the

business might qualify as such," that is, as an MSB.    This is not

an allegation of fraud but an affirmation of the truth of the

supposed false statements.

            On appeal, Méndez instead asserts the second theory, in

which a different falsehood is being perpetrated, namely, that the

banks say that they do not want to have accounts used to conduct

MSB activities but their real reason for refusing to deal with

Méndez is that they wish to drive him out of the dinar selling

business in order to take it over for themselves.   But there is no

allegation that the banks supply dinars to anyone, that they have

taken any steps to become such suppliers, or that they have

expressed any interest in doing so.

            In all events, the predicate fraud statutes cover only

material falsehood, which has "a natural tendency to influence, or

is capable of influencing, the decision of the decisionmaking body

to which it was addressed."   United States v. Moran, 393 F.3d 1, 13

(1st Cir. 2004) (quoting Neder v. United States, 527 U.S. 1, 16

(1999)).    Even if the banks were implicitly misrepresenting their

motive for not dealing with Méndez, it is not the falsity of their

excuse that causes him damage but their refusal to provide him with

accounts.

            As to Arvelo, in fraud cases, the familiar pattern is a

material deceitful statement or omission causing the victim to

                                 -9-
undertake   a   transaction   that    inflicts   economic   loss   on   the

defrauded party and ordinarily benefits the deceiving party.4

There is no suggestion that Arvelo stands to gain financially by

causing Méndez to fail.    And there is no suggestion that anyone was

swayed by Arvelo's statements: Méndez himself certainly was not

beguiled by any lies told about him by Arvelo, nor does he claim

that the banks were deceived, charging instead that they were

conspirators with Arvelo.

            Admittedly,   "fraud"     is   a   concept   with   indistinct

boundaries.     There may perhaps be situations in which a "scheme or

artifice to defraud," 18 U.S.C. §§ 1341, 1343, can have some

purpose other than the usual aim "to obtain . . . money or other

property" by means of deceit,        United States v. Kenrick, 221 F.3d

19, 26-27 (1st Cir. 2000) (discussing parallel language for bank

fraud under 18 U.S.C. § 1344); and the federal statutes can reach

beyond common-law fraud.5 But merely alleging defamation--which is

     4
      See, e.g., Restatement (Second) of Torts § 531 (1977) (one is
liable for fraud to people "whom he intends or has reason to expect
to act or to refrain from action in reliance upon the
misrepresentation, for pecuniary loss suffered by them through
their justifiable reliance in the type of transaction in which he
intends or has reason to expect their conduct to be influenced").
     5
      In particular, unlike common-law fraud, mail and wire fraud
does not require first-party reliance, though "it may well be that
a RICO plaintiff alleging injury by reason of a pattern of mail
fraud must establish at least third-party reliance in order to
prove causation." Bridge v. Phoenix Bond & Indem. Co., 128 S. Ct.
2131, 2144-45 (2008).

                                    -10-
the gravamen of Méndez' charge against Arvelo--can standing alone

hardly be enough to comprise fraud.

          As for extortion--the other predicate alleged--it too

fails on the face of the complaint.         Extortion, under the Hobbs

Act, is "the obtaining of property from another, with his consent,

induced by wrongful use of actual or threatened force, violence, or

fear, or under color of official right."         18 U.S.C. § 1951(b)(2).

There is no allegation in the complaint of actual extortion, as

Méndez concedes; as for conspiracy or attempt, the complaint says

only that the defendants "entered into a conspiracy to extort the

plaintiff," a conclusory assertion inadequate under Twombly, 550

U.S. at 555.

          In his appellate brief, Méndez now alleges that the

defendants sought his business in selling dinars and argues that

they "attempted to obtain such property . . . even if the property

would   not    be   used   by   them."     His   explanation   betrays   a

misunderstanding of "obtain"--disrupting or attempting to close a

business is not an attempt to obtain that business, Scheidler v.

Nat'l Org. for Women, Inc., 537 U.S. 393, 404-05, 410 (2003)--and

again there is no allegation in the complaint that any of the

defendants in fact sell dinars or that they sought to supplant

Méndez or acquire any of his customers.

          Thus, lacking a proper allegation of either class of

predicate acts, Méndez' RICO claim fails at the pleading stage. In

                                    -11-
addition, Méndez' claim is based upon a RICO enterprise, 18 U.S.C.

§ 1961(4), that he describes as a "conspiracy" and "joint effort"

between the defendants.    But there is no indication, apart from

these empty epithets, to indicate that Arvelo's negative statements

were made by or in cooperation with any of the banks; mere

conclusory allegations are, again, not enough.

           The complaint also fails to state a claim under the BHCA.

The act provides in relevant part that a "bank shall not in any

manner . . . furnish any service . . . on the condition or

requirement . . . that the customer shall not obtain some other

credit, property, or service from a competitor of such bank."    12

U.S.C. § 1972(1)(E).   Seemingly, the charge is that the banks are

refusing to give Méndez accounts in order to suppress competition

between the banks and an unidentified entity or entities that

supply Méndez with dinars to resell.

           But yet again there is no allegation that banks supply

dinars to anyone or that they have sought to replace the unnamed

entities and become the suppliers of dinars to Méndez or anyone

else.   It would be a different matter if the complaint alleged that

the banks had offered to give Méndez accounts so long as he bought

his dinars from the banks rather than his current suppliers; but

there is no allegation to this effect, let alone evidence that the

banks want to become Méndez' suppliers of dinars.   As such, Méndez

                                -12-
has not offered sufficient supporting facts to plead his BHCA

claim.    As we have explained,

             the price of entry, even to discovery, is for
             the plaintiff to allege a factual predicate
             concrete    enough    to    warrant    further
             proceedings. . . . Conclusory allegations in a
             complaint, if they stand alone, are a danger
             sign that the plaintiff is engaged in a
             fishing expedition.

DM Research, Inc. v. Coll. of Am. Pathologists, 170 F.3d 53, 55

(1st Cir. 1999).

             The complaint does identify the content, although not the

occasions of publication, of statements by Arvelo about Méndez'

operations      that--if    false--might    conceivably   be    defamatory.

Because   the    district   court   declined   to   exercise   supplemental

jurisdiction, 28 U.S.C. § 1367(c)(3) (2006), the dismissal of the

non-federal claims was without prejudice, which leaves Méndez free

to pursue such local causes of action, if any he has.

             This brings us finally to a tail-end issue occasioned by

the   fact    that   certain   of   the    defendant   banks   are   now   in

receivership and the FDIC succeeds to their interest and has

intervened in the appeal.       Under the statutory scheme, 12 U.S.C. §

1821(d), the FDIC says that the plaintiffs had to file timely

administrative claims with the agency, absent which their claims

would be barred entirely.

             According to the FDIC, Méndez asserts that such claims

were filed, but the FDIC has questioned this, saying its records

                                    -13-
show nothing but admitting that its records may be incomplete at

the early stage of receivership.   However, since we are affirming

the district court's dismissal, the outcome is the same; Méndez'

claims are foreclosed against the receivership banks whether the

foreclosure results from the merits or time bar, and we need not

pursue this inquiry.

          Affirmed.

                              -14-