Midwest Grinding Co., Inc. v. Spitz

• Decision Date: 11 May 1989
• Docket Number: No. 86 C 6480.,86 C 6480.
• Citation: 716 F. Supp. 1087
• Court: U.S. District Court — Northern District of Illinois
• Parties: MIDWEST GRINDING CO., INC., an Illinois Corporation, Plaintiff, v. Joshua M. SPITZ, an individual, Aron Grunfeld, an individual, and U.S. Grinding & Fabricating, Inc., an Illinois Corporation, Defendants.

716 F. Supp. 1087

MIDWEST GRINDING CO., INC., an Illinois Corporation, Plaintiff, v. Joshua M. SPITZ, an individual, Aron Grunfeld, an individual, and U.S. Grinding & Fabricating, Inc., an Illinois Corporation, Defendants.

No. 86 C 6480.

United States District Court, N.D. Illinois, E.D.

May 11, 1989.

Richard J. Jacobson, Weston W. Hanscom, Jill E. Evans, Keck Mahin & Cate, Chicago, Ill., for plaintiff.

William L. Kabaker, Epton, Mullin & Druth, Ltd., Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ROVNER, District Judge.

I. INTRODUCTION

Plaintiff, Midwest Grinding Company, Inc. ("Midwest"), alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, and asserts common law claims for breach of fiduciary duty, tortious interference and for accounting. Defendants, Joshua M. Spitz, Aron Grunfeld and U.S. Grinding & Fabricating, Inc. ("U.S. Grinding"), have moved to dismiss Midwest's Second Amended Complaint (the "complaint") in its entirety, arguing that Midwest's allegations fail to state a RICO claim and that federal jurisdiction is lacking for the common law claims. For the reasons stated herein, the Court finds plaintiff's RICO allegations sufficient to state a claim against defendant Spitz as to section 1962(c) and against Spitz and U.S. Grinding as to section 1962(d). The Court retains jurisdiction over the pendent common law claims and dismisses the RICO allegations based on section 1962(a) and (b).

II. FACTS AND PROCEDURAL BACKGROUND

In reviewing a motion to dismiss, the Court must construe all allegations as true and view them in the light most favorable to plaintiff. Ed Miniat, Inc. v. Globe Life Ins. Group, Inc., 805 F.2d 732, 733 (7th Cir.1986), cert. denied. 482 U.S. 915, 107 S.Ct. 3188, 96 L.Ed.2d 676 (1987). Hence the Court describes the facts as alleged by Midwest in its complaint.

Midwest is in the business of supplying metal grinding services. In July, 1984, Klein Tools, Inc. ("Klein Tools"), a Midwest customer, purchased two-thirds of the outstanding capital stock of Midwest. Spitz owned the other third. As president and a director of Midwest, Spitz was responsible for managing the company's day-to-day business operations. In November, 1984, he secretly became a twenty-five percent owner of Cardinal Metals, Inc. (Cardinal), a competitor and supplier of Midwest. Grunfeld also became a twenty-five percent owner of Cardinal at this time.

During 1985 and 1986, Spitz routinely undercharged Cardinal and overcharged Klein Tools for Midwest's services. In December 1985, Spitz and Grunfeld agreed to form U.S. Grinding, which would compete directly with Midwest. Spitz and Grunfeld participated in the incorporation process, purchased machinery and secured a factory lease for U.S. Grinding.

In February, 1986, Midwest began to experience a sharp decline in business. Spitz told Midwest that the decline was due to a depressed market for grinding services. In fact, it was due to Spitz' solicitation of Midwest's customers on behalf of U.S. Grinding. Between March and August, 1986, Spitz solicited the following former Midwest clients: Acme Tool & Specialties Company (17 invoices); Ultra Specialties (21 invoices); W.S. Holmes (35 invoices); Courtesy Mold & Tool Corporation (17 invoices); and Northwestern Tool & Die (2 invoices). U.S. Grinding used Midwest's truck to make deliveries. The number of employees at Midwest dropped from twenty-six to fourteen. Spitz fired three of the employees and then had them hired by U.S. Grinding. Other Midwest employees resigned their positions to be hired by U.S. Grinding.

In August 1986, Spitz resigned from Midwest and started working full time at U.S. Grinding. Spitz offered to sell his shares in Midwest to Klein Tools, without revealing his prior work on behalf of U.S. Grinding. Klein Tools refused to buy these shares. In their November, 1986 depositions in this case, both Spitz and Grunfeld denied that Spitz had been involved in U.S. Grinding prior to his resignation. In response to Midwest's requests to admit, defendants made similar denials.

Midwest's complaint asserts that defendants made certain material representations and omissions which constitute mail and wire fraud and which are included in RICO's definition of "racketeering activity." See 18 U.S.C. § 1961(1). Midwest claims that the defendants' fraudulent acts, viewed as a whole, constitute a "pattern of racketeering" for which defendants are liable under section 1962(a) through (d) of RICO. In addition, Midwest asserts common law claims based on breach of fiduciary duty, tortious interference and constructive trust and accounting.

Defendants' arguments, which will be elaborated below, are as follows:

(1) Midwest has failed to plead mail and wire fraud with particularity as required by Fed.R.Civ.P. 9(b);

(2) Midwest has failed to plead a pattern of racketeering activity as required for plaintiff's RICO claims based on section 1962(a)-(d);

(3) Midwest has failed to plead facts sufficient to establish any injury resulting from a violation of section 1962(a) and (b); and

(4) Midwest has failed to plead facts sufficient to establish a conspiracy pursuant to section 1962(d).

Upon the failure of the RICO claims, defendants argue that the pendent claims arising under state law should be dismissed.

III. DISCUSSION

A. Violation of RICO Section 1962(a) and (b)

Section 1964(c) of RICO provides a civil damage remedy only to those persons injured "by reason of a violation of section 1962." In the instant case, Midwest alleges that defendants violated section 1962(a) and (b). Section 1962(a) prohibits "any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity ... to use or invest, directly or indirectly, any part of such income, ... in ... the operation of, any enterprise. ..." Section 1962(b) makes it unlawful "for any person through a pattern of racketeering activity ... to acquire or maintain, directly or indirectly, any interest in or control of any enterprise...." Defendants argue that Midwest must allege that the investment back into Cardinal and U.S. and the acquisition or maintenance of control of those companies harmed Midwest in order to satisfy the "by reason of" language of section 1964. Specifically, defendants argue that the section 1962(a) claim is deficient because Midwest has failed to allege sufficiently that it suffered an injury from the defendants' use or investment of the money which defendants allegedly derived from a pattern of racketeering and that the section 1962(b) claim is deficient because Midwest has failed to allege that it suffered an injury from the defendants' acquisition or maintenance of an interest in or control of an enterprise.

In determining the scope of RICO, the Court must first look to the language of the statute. Russello v. United States, 464 U.S. 16, 20, 104 S.Ct. 296, 299, 78 L.Ed.2d 17 (1983). "If the statutory language is unambiguous, in the absence of a `clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive.'" Russello, 464 U.S. at 20, 104 S.Ct. at 299 quoting U.S. v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981). Section 1962(a) does not state that it is unlawful to receive racketeering income. The statute prohibits a person who has received such income from using or investing it or acquiring in the proscribed manner. Similarly, section 1962(b) provides that it is unlawful to acquire or maintain an interest or control of an enterprise in the proscribed manner.

From the plain language of these provisions, a plaintiff seeking civil damages for a violation of section 1962(a) must plead facts tending to show that he was injured by the use or investment of racketeering income. Injury from the racketeering acts themselves is not sufficient because section 1962(a) does not prohibit those acts. Likewise, under section 1962(b), the plaintiff must plead facts tending to show that the acquisition or control of an interest injured the plaintiff.

A minority of courts have held that a RICO claim based on a violation of section 1962(a) is sufficient where the plaintiff alleges he sustained injury solely by reason of the underlying racketeering acts. See, e.g., Mid-State Fertilizer Co. v. The Exchange National Bank of Chicago, 693 F.Supp. 666, 671-72 (N.D.Ill.1988) (Hart, J.); Avirgan v. Hull, 691 F.Supp. 1357, 1362 (S.D.Fla.1988); Continental Grain Co. v. Pullman Standard, Inc., 690 F.Supp. 628 (N.D.Ill.1988) (Leinenweber, J.); In re National Mortgage Equity Corporation Pool Certificates Securities Litigation, 682 F.Supp. 1073, 1081-82 (C.D.Cal. 1987); Smith v. MCI Telecommunications Corp., 678 F.Supp. 823, 828-29 (D.Kan. 1987); Louisiana Power & Light Co. v. United Gas Pipe Line Co., 642 F.Supp. 781, 805-07 (E.D.La.1986); Haroco, Inc. v. American National Bank, 647 F.Supp. 1026, 1032-33 (N.D.Ill.1986) (Decker, J.). The majority, however, have held that in order to state a claim for violation of section 1962(a), the plaintiff must allege injury suffered by reason of the use or investment of the funds derived from the racketeering activity. See e.g., Grider v. Texas Oil & Gas Corp., 868 F.2d 1147, 1149 (10th Cir.1989) (citing cases); Palumbo v. I.M. Simon & Co., 701 F.Supp. 1407, 1409-10 (N.D.Ill.1988) (Bua, J.); P.M.F. Services, Inc. v. Grady, 681 F.Supp. 549, 555 (N.D. Ill.1988) (Shadur, J.); Heritage Insurance Co. v. First National Bank of Cicero, 629 F.Supp. 1412, 1417 (N.D.Ill.1986) (Getzendanner, J.).

Some courts in the minority position rely on the Supreme Court's opinion in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), which held that a plaintiff has standing to assert a section 1962(c) claim upon showing an injury from racketeering activity itself. Id. 473 U.S. at 496, 105 S.Ct. at 3286. See National Mortgage Equity, 682...