Ideal Steel Supply Corp. v. Anza

• Decision Date: 02 July 2004
• Docket Number: Docket No. 03-7381.
• Citation: 373 F.3d 251
• Parties: IDEAL STEEL SUPPLY CORP., Plaintiff-Appellant, v. Joseph ANZA, Vincent Anza, and National Steel Supply, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 251

373 F.3d 251

IDEAL STEEL SUPPLY CORP., Plaintiff-Appellant, v. Joseph ANZA, Vincent Anza, and National Steel Supply, Inc., Defendants-Appellees.

Docket No. 03-7381.

United States Court of Appeals, Second Circuit.

Argued: December 16, 2003.

Decided: July 2, 2004.

COPYRIGHT MATERIAL OMITTED

Marshall Beil, New York, New York (Lisa J. Borodkin, Holly M. Travis, McGuireWoods, New York, New York, on the brief) for Plaintiff-Appellant.

Richard L. Huffman, New York, New York (William M. Brodsky, Marijke van Ekris, Fox Horan & Camerini, New York, New York, on the brief), for Defendants-Appellees.

Before: WALKER, Chief Judge, and KEARSE and CABRANES, Circuit Judges.

KEARSE, Circuit Judge.

Plaintiff Ideal Steel Supply Corp. ("Ideal") appeals from a judgment of the United States District Court for the Southern District of New York, Richard M. Berman, Judge, dismissing its amended complaint, brought principally under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (2000) ("RICO"), alleging that Ideal's business had been injured by reason of the practice of defendants National Steel Supply, Inc. ("National"), et al., of failing to charge certain customers sales taxes as required by New York State ("State") law and thereafter sending the State Department of Taxation and Finance ("State Tax Department") fraudulent sales tax reports by mail and wire, in violation of 18 U.S.C. §§ 1341 and 1343. Ideal also asserted a state-law claim for breach of contract. The district court dismissed the RICO claims pursuant to Fed.R.Civ.P. 12(b)(6), ruling that the complaint did not state a claim under 18 U.S.C. § 1964(c) because it failed to allege the necessary causation, in that it did not, and could not, assert that the alleged misrepresentations had been relied on by Ideal. The court declined to exercise supplemental jurisdiction over the contract claim and dismissed that claim without prejudice. On appeal, Ideal contends that it adequately pleaded that its lost sales were proximately caused by National's pattern of offering customers lower bottom-line cost by means of the unlawful omission of state sales tax and concealing those omissions by means of mail and wire fraud. For the reasons that follow, we agree.

I. BACKGROUND

We summarize below the allegations of the amended complaint ("complaint"), the truth of which is assumed as is required on review of a Rule 12(b)(6) dismissal. We take those allegations, and the reasonable inferences that can be drawn from them, in the light most favorable to Ideal.

A. The Competitors

Ideal is in the business of purchasing steel mill products from manufacturers outside of New York State and selling those products and related hardware and services to professional ironworkers, small steel fabricators, and do-it-yourself homeowners, for use in the New York, New Jersey, and Connecticut area. It has retail stores in Queens and the Bronx.

National, which is owned by defendants Joseph and Vincent Anza (collectively "the Anzas"), sells substantially the same products as Ideal to essentially the same customer base. National has retail outlets in Queens and the Bronx, located a few minutes' drive from Ideal's stores.

Ideal and National are the only substantial competitors in the Bronx or Queens for sales of the steel products they carry. No businesses in those areas other than Ideal and National carry "the same or a similar comprehensive array of products and services or compete for the same customers." (Complaint ¶ 3.) Given the similarity of their product lines (which comprise "generic commodities," id.) and the proximity of their retail outlets to each other in each Borough, Ideal and National compete against one another "primarily on the basis of price" (Complaint ¶ 21); "differences in prices charged by Ideal and National affect customers' decisions to purchase from one or the other" (Complaint ¶ 22). Price fluctuation, however, does not affect overall demand for the products offered by Ideal and National; rather, overall demand is determined by "economic activity in the real estate and construction businesses" and other considerations beyond the control of National or Ideal. (Id.)

B. The Allegedly Fraudulent Scheme

Under State law, Ideal and National are required to charge, collect, and remit to the State a combined state and local sales tax of 8¼ percent on any sale for which the customer does not qualify for an exemption. (See Complaint ¶¶ 23-25.) All sales are presumed by law to be taxable unless, within 90 days of purchase, the purchaser presents to the seller a valid resale or exemption certificate. (Complaint ¶ 23.)

Both Ideal and National conduct much of their business on a cash-and-carry basis. According to the complaint, Ideal complies with the state-law requirements that it charge and pay sales taxes, but National does not. The complaint alleged that, at the direction of the Anzas, National does not charge cash-paying non-exempt customers any sales tax; this allows those customers to save 8 ¼ percent on their purchases, thereby incurring a substantially lower bottom-line cost than they would incur by purchasing the same items from Ideal.

In order to maintain its profit margin while drawing customers away from Ideal with these unlawful "cash, no tax" sales, National, having refused to charge and collect the sales tax, simply does not pay the tax due on those sales. To conceal the amounts due, National has, since at least 1998, submitted fraudulent sales tax reports to the State Tax Department, failing to report those sales and misrepresenting its total taxable sales. (Complaint ¶¶ 29-30.) National has filed the fraudulent reports, which are essential to the success of this scheme, by mail and wire, in violation of 18 U.S.C. §§ 1341 and 1343.

Ideal commenced the present action in 2002, alleging that National's "cash, no tax" sales, along with the necessary fraudulent reporting, were intended to and did injure Ideal's business. The complaint alleged that National's repeated fraudulent mailings and/or wire transmissions — on which the State Tax Department relied and continues to rely, enabling National to avoid paying sales tax on a significant portion of its taxable sales — constituted a pattern of racketeering activity that "continues to the present day." (Complaint ¶ 30.) Ideal alleged that its own list prices were, on average, no higher than those of National, and that but for defendants' "cash, no tax" scheme, National would have had no competitively significant price advantage over Ideal. The complaint alleged that as a result of the Anzas' operation of National through the above pattern of racketeering activity, in violation of RICO § 1962(c), Ideal had suffered "lost profits in an amount ... believed to exceed $5,000,000." (Complaint ¶ 51.)

In addition, the complaint alleged that the Anzas and National had violated RICO § 1962(a) by using profits gained from the "cash, no tax" scheme at National's Queens facility to open its outlet in the Bronx. (See Complaint ¶ 55.) That investment of racketeering income, along with defendants' implementation of the "`cash, no tax' scheme at that location" as well caused Ideal's Bronx outlet to "los[e] significant business and market share" (Complaint ¶ 57) resulting in damages in excess of $2,000,000 (see Complaint ¶ 58).

The complaint also alleged that defendants'"cash, no tax" scheme violated the terms of an agreement that had settled an earlier lawsuit between the parties. (Complaint ¶ 66.) The complaint requested treble damages on each RICO claim and single damages on the contract claim.

C. The Decision of the District Court

Defendants moved to dismiss the complaint pursuant to, inter alia, Fed.R.Civ.P. 12(b)(6), arguing that Ideal lacked standing to bring its RICO claims because it had not adequately alleged that its injuries were proximately caused by defendants' alleged violations of § 1962. In a Decision and Order reported at 254 F.Supp.2d 464 (2003), the district court granted the motion, stating in part as follows:

Generally, to satisfy RICO's causation element a complaint must allege that a defendant's violation was both a "but for" or factual cause of plaintiff's injury and the proximate cause, as well. Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 265-68, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992). In complaints predicated on mail or wire fraud, a plaintiff must plead "`loss causation,' meaning that the misrepresentation must be both an actual and a proximate source of the loss that the plaintiffs suffered," Moore v. PaineWebber, Inc., 189 F.3d 165, 169-70 (2d Cir.1999), and "transaction causation," which requires a plaintiff to "demonstrate that [plaintiff] relied on [d]efendants' misrepresentations." Mezzonen, S.A. v. Wright, 97 CIV. 9380, 1999 WL 1037866, at *5 (S.D.N.Y. Nov.16, 1999); Odyssey Re (London) Ltd. v. Stirling Cooke Brown Holdings, 85 F.Supp.2d 282, 302 (S.D.N.Y.2000), aff'd 2 Fed.Appx. 109, 2001 WL 46565 (2d Cir. Jan.18, 2001); see also Moore, 189 F.3d at 171-72; Powers v. British Vita, P.L.C., 57 F.3d 176, 189 (2d Cir.1995)....

254 F.Supp.2d at 467-68 (emphasis in original). The court ruled that Ideal had failed to plead transaction causation:

Although Ideal alleges that the New York State Department of Taxation and Finance relied on Defendants' alleged misrepresentations (AC¶ 30), Ideal has not alleged — indeed can not allege — that Plaintiff relied on the sales tax returns Defendants mailed or wired to the New York State Department of Taxation and Finance. As a result, Ideal's RICO claims fail.

Id. at 468.

The court stated that although some RICO claims, such as those asserted in Commercial Cleaning Services, L.L.C. v. Colin Service Systems, Inc., 271 F.3d 374 (2d Cir.2001), are based on predicate acts that do not involve reliance, a RICO plaintiff must be able to show reliance — its own reliance — when the alleged racketeering activity on which its RIC...