Vicom, Inc. v. Harbridge Merchant Services, Inc.

• Decision Date: 05 April 1994
• Docket Number: 93-1329,Nos. 93-1328,s. 93-1328
• Citation: 20 F.3d 771
• Parties: RICO Bus.Disp.Guide 8541 VICOM, INC., Plaintiff-Appellant, v. HARBRIDGE MERCHANT SERVICES, INC., as Successor in Interest to Peach Tree Bancard Corporation, Judy Elliot, James Elliot, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 771

20 F.3d 771

RICO Bus.Disp.Guide 8541

VICOM, INC., Plaintiff-Appellant, v. HARBRIDGE MERCHANT SERVICES, INC., as Successor in Interest

to Peach Tree Bancard Corporation, Judy Elliot,

James Elliot, et al., Defendants-Appellees.

Nos. 93-1328, 93-1329.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 28, 1993.

Decided April 5, 1994.

Diane I. Jennings (argued), Lord, Bissell & Brook, Chicago, IL, George W. Hamman, Marvin Benn, Dawn M. Cassie, Richard J. Superfine, Hamman & Benn, Chicago, IL, Eric M. Alderman, Lawrence A. Zimmerman Kevin E. White, Thomas A. Reynolds, III, Winston & Strawn, Chicago, IL, Cynthia Photos Abbott, Raymond E. Stachnik (argued), Stewart T. Kusper, Katten, Muchin & Zavis, Chicago, IL, Thomas C. Buckel, Jr., Hancock & Estabrook, Syracuse, NY, Robert G. Peterson, Chicago, IL, for defendants-appellees.

Lisa DiPoala Haber, Devorsetz, Stinziano, Gilberti & Smith, Syracuse, NY, for plaintiff-appellant.

Before CUDAHY, RIPPLE and MANION, Circuit Judges.

RIPPLE, Circuit Judge.

Vicom, Inc. ("Vicom") brought an action against the defendants under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-68, and supplemental state law claims. The district court dismissed Vicom's nine-count amended complaint for failure to allege fraud with particularity and for failure to state a claim upon which relief can be granted. See Fed.R.Civ.P. 9(b) & 12(b)(6). Following dismissal, the district court denied Vicom's motion for leave to file a second amended complaint. Vicom now appeals. For the reasons that follow, we affirm the judgment of the district court.

I BACKGROUND

A. Facts ¹

At the time of the events at issue in this lawsuit, Vicom was the managing and general partner of American Network Leasing Partnership No. A-3, a partnership organized to purchase and lease electronic credit card processing equipment. Vicom's duties included purchasing the equipment and arranging, negotiating, and entering into leases with interested merchants. One of the defendants in this action, Consolidated Funding Corporation ("Consolidated"), provides lease brokerage services. In May 1988, it introduced Vicom to another defendant in this action, Peach Tree Bancard Corporation ("Peach Tree"). Peach Tree sold, installed, and maintained electronic credit card processing equipment. Peach Tree also served as a clearinghouse for electronic credit card transactions performed on the equipment. Consolidated introduced Vicom to Peach Tree with the aim of facilitating an agreement between those two parties under which Vicom would purchase electronic credit card processing equipment from Peach Tree and lease it to merchants, and Peach Tree would service the merchants with credit card transaction processing.

On July 15, 1988, following several months of negotiations, Vicom and Peach Tree entered into a vendor agreement which provided that Peach Tree would identify prospective lessees and forward any completed applications and initial payments to Vicom. If Vicom approved the application and executed the lease, Peach Tree would install the equipment. After the merchant accepted delivery of the equipment and Vicom confirmed the delivery, Vicom would pay Peach Tree the purchase price of the equipment. Vicom assumed the responsibility of collecting the lease charges, except when Peach Tree elected to guarantee a merchant's account under the "Vendor Recourse" provision. (Under the Vendor Recourse provision, Peach Tree could request Vicom to reconsider a lease application that it had rejected if Peach Tree agreed to guarantee the lessee's payments in the event the lessee defaulted.) At the end of a merchant's lease term, both Vicom and Peach Tree were to share in the residual value of the equipment.

The vendor agreement included a merger clause, providing that the written agreement composed the entire agreement between the parties. In addition, neither party could orally waive any provision in the agreement, and any modification had to be in writing. The vendor agreement also covered the form of the merchants' leases, stating that they were to be noncancelable, which the merchant leases stated in large boxed type. Further, the agreement required merchants Between July 15, 1988 and April 9, 1989, Vicom entered into 2,252 leases with merchants Peach Tree had introduced to it. As a result, Vicom purchased from Peach Tree over $4.1 million of electronic credit card processing equipment. During this time period, however, Vicom alleges that Peach Tree and the other named defendants engaged in a course of deceitful dealing and fraudulent activity. Vicom alleges that Peach Tree sales representatives fraudulently informed certain merchants that the leases were cancelable, and that the merchants would own the equipment at the end of the lease. Vicom elsewhere alleges that Peach Tree led other merchants to believe that defendant Dallas Leasing Company ("DLC"), a Peach Tree affiliate, owned the equipment. Peach Tree thereby induced merchants to return the equipment to DLC upon termination of the lease, whereupon Peach Tree fraudulently converted the property.

to allow direct withdrawal from their bank accounts for any amounts they owed in conjunction with the lease. Finally, merchant-lessees had to agree to allow Peach Tree to install and maintain the equipment, as well as to provide for training and transaction processing, for which Peach Tree received a fee. Once formed, however, the relationship between Peach Tree and a merchant was terminable at will.

Vicom further alleges that, because many of Peach Tree's referrals failed to meet Vicom's credit requirements, Peach Tree officials orally agreed to guarantee the leases of various noncreditworthy merchants in the event of a default pursuant to the Vendor Recourse provision of the vendor agreement. Vicom states that Peach Tree never paid Vicom for the defaulting merchants' accounts it guaranteed and, notwithstanding the fact that the vendor agreement required all modifications of the agreement to be in writing, alleges that it reasonably relied on these oral guarantees in entering into leases with merchants who eventually defaulted. In addition, Vicom's amended complaint alleges that Peach Tree failed to maintain properly the leased equipment and to process credit card sales on time. It also asserts that much of the leased equipment was incomplete or not functional. As a result, the amended complaint states, merchants stopped making lease payments to Vicom. In response to these problems, Vicom alleges that Peach Tree fraudulently assured Vicom that it was correcting the troubles. On April 9, 1989, Vicom terminated its relationship with Peach Tree, citing Peach Tree's deceptive activities as the reason. In April 1991, James Elliot, owner and president of Peach Tree and a defendant in this action, sold Peach Tree for $87 million to Peach Tree Acquisition Corporation, which subsequently changed Peach Tree's name to Harbridge Merchants Services, Inc.

B. District Court Proceedings

On November 14, 1991, Vicom initiated this case by filing a complaint in the United States District Court for the Northern District of New York; it alleged various RICO and supplemental state law claims. In March 1992, following the defendants' January 1992 motion for dismissal, the case was transferred by stipulation of the parties to the Northern District of Illinois. Soon thereafter, Vicom filed a 119-page, 385-paragraph, nine-count amended complaint in which Vicom sought relief under RICO and supplemental state law theories. The amended complaint alleged five schemes upon which Vicom based various predicate acts of mail and wire fraud:

(1) a scheme to induce Vicom to enter into leases falling outside of Vicom's established credit parameters;

(2) a scheme to induce merchants to enter into leases upon terms materially different from those Vicom had previously approved as acceptable for its lease portfolio;

(3) a scheme to interfere with Vicom's lease arrangements;

(4) a scheme to commit larceny by conversion;

(5) an overall scheme to inflate Peach Tree's net worth.

Following transfer to the Northern District of Illinois, the defendants renewed their motions to dismiss.

On January 8, 1993, the district court dismissed the nine RICO causes of actions Vicom On January 26, 1993, the district court heard arguments on Vicom's motion for leave to file a second amended complaint, but Vicom's counsel failed to make an appearance. The court indicated that it was inclined to deny Vicom's motion, but to allow Vicom to refile the motion if Vicom attached its proposed second amended complaint to it. But before the district court made its decision, the defendants' counsel pointed out that Vicom had made its motion not under Rules 59(e) or 60(b), as required following a Rule 58 judgment, but rather under Rule 15(a). As a result, the court denied Vicom's motion for leave to file a second amended complaint as an inappropriate post-judgment motion.

alleged in its amended complaint. Because federal jurisdiction was based solely on the RICO counts, the court also dismissed Vicom's supplemental state law claims and entered judgment for the defendants. The district court noted at the outset of its Memorandum Opinion and Order that it found it "tempting" to strike such a prolix complaint in its entirety under Federal Rule of Civil Procedure 8(a). Mem. Op. at 7. However, because Vicom had already amended the complaint once, the court expressed little hope that Vicom's third attempt would have resulted in anything substantially better. Instead, the court decided to dismiss the amended complaint under Rules 9(b) and 12(b)(6). The district court's Rule 12(b)(6) grounds for dismissing the various RICO counts ranged from duplicative pleading to failure to state a RICO investment-use injury under Sec. 1962(a).

II ANALYSIS

Vicom presents two issues on appeal. First, Vicom submits that the...