Schreiber Distributing Co. v. Serv-Well Furniture Co., Inc.

• Decision Date: 24 December 1986
• Docket Number: SERV-WELL,No. 84-6018,84-6018
• Citation: 806 F.2d 1393
• Parties: , RICO Bus.Disp.Guide 6469 SCHREIBER DISTRIBUTING CO., a Division of Schreiber Enterprises, Inc., a California corporation, Plaintiff-Appellant, v.FURNITURE COMPANY, INC., a California corporation; Landmark Development Corporation, a Washington corporation; John W. Lee; James A. Lee; Bernard A. Schaub; Larry Schaub; and Bill Helf, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1393

806 F.2d 1393

55 USLW 2364, RICO Bus.Disp.Guide 6469

SCHREIBER DISTRIBUTING CO., a Division of Schreiber

Enterprises, Inc., a California corporation, Plaintiff-Appellant, v. SERV-WELL FURNITURE COMPANY, INC., a California corporation;

Landmark Development Corporation, a Washington corporation;

John W. Lee; James A. Lee; Bernard A. Schaub; Larry

Schaub; and Bill Helf, Defendants-Appellees.

No. 84-6018.

United States Court of Appeals, Ninth Circuit.

Argued Feb. 6, 1986.

Submitted Dec. 19, 1986.

Decided Dec. 24, 1986.

Stephen J. Holtman, Simmons, Perrine, Albright & Ellwood, Cedar Rapids, Iowa, Louis W. Shaffer, Stewart & Shaffer, Los Angeles, Cal., for plaintiff-appellant.

Howard F. Daniels, Blecher, Collins & Weinstein, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before KENNEDY, SKOPIL and ALARCON, Circuit Judges.

ALARCON, Circuit Judge:

This is an appeal from a judgment dismissing with prejudice the plaintiff's claims under the federal Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C Secs. 1961-1968 (1982) (hereinafter RICO). We must decide whether the district court erred in dismissing the RICO claims and abused its discretion in failing to grant plaintiff leave to amend the complaint. We reverse and remand with instructions.

I. FACTS AND PROCEDURAL HISTORY

Plaintiff-appellant Schreiber Distributing Company (hereinafter Schreiber) is the exclusive wholesale distributor in Southern California of appliances manufactured by Chambers Corporation (hereinafter Chambers). Defendant-appellee Serv-Well Furniture Company, Inc. (hereinafter Serv-Well) is a wholesaler and retailer of appliances. Defendants-appellees John W. Lee and Larry Schaub are officers of Serv-Well. John Lee and Larry Schaub also are owners and officers of a Washington corporation, defendant-appellee Landmark Development Corporation (hereinafter Landmark). Defendant-appellee James A. Lee is an owner, officer, and director of Landmark. Defendant-appellee Bernard A. Schaub is an owner, officer, and director of Serv-Well.

Prior to 1982, Schreiber was the principal supplier of Chambers' appliances to Serv-Well for resale by Serv-Well to consumers. In early 1982, Serv-Well sought to purchase products directly from Chambers and by-pass Schreiber, Chambers' exclusive distributor in the 48 contiguous states. To accomplish this, Serv-Well used Landmark as a "diverter." John and James Lee represented to Chambers that Landmark wished to distribute Chambers' products only in Canada and along the Alaskan North Slope. Because this arrangement would not violate Schreiber's exclusive distributorship, Chambers agreed and sent two rail cars of Chambers' products to Landmark in Washington for further transportation to Alaska. Landmark paid Chambers with funds provided by Serv-Well.

Unknown to Chambers, the rail cars were diverted during shipment by John and James Lee, Landmark, and Serv-Well to the Los Angeles area where Serv-Well sold the products in competition with Schreiber.

Schreiber filed suit in district court alleging violations of 18 U.S.C. Secs. 1961-1968 (1982), along with 15 pendent state claims. ¹ The defendants' motion to dismiss was granted. The RICO counts were dismissed with prejudice for failure to state a cause of action. The pendent state claims were dismissed without prejudice to filing in state court.

The district court dismissed Schreiber's RICO counts because Schreiber failed to allege: (1) a connection to organized crime; (2) a separate racketeering injury; (3) special facts relating to standing; and (4) an "enterprise" separate and distinct from the "persons" involved in the alleged scheme. The parties agree that the Supreme Court's decision in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), has eliminated from this appeal the first three grounds for dismissal. The defendants concede that the district court erred in requiring Schreiber to allege a connection to organized crime, a separate racketeering injury, and special facts concerning standing. See Sedima, 105 S.Ct. at 3284-85, 3287. Thus, the only remaining issue is whether Schreiber has alleged a RICO enterprise sufficient to withstand a motion to dismiss. We raise two additional issues sua sponte in reviewing the sufficiency of Schreiber's allegations: (1) whether Schreiber has alleged a pattern of racketeering activity; and (2) whether Schreiber has alleged the RICO predicate acts with sufficient specificity under Fed.R.Civ.P. 9(b). We also must determine whether the district court abused its discretion in dismissing the RICO counts without leave to amend.

We review de novo the granting of a motion to dismiss for failure to state a claim upon which relief can be granted. Miller v. Glen & Helen Aircraft, Inc., 777 F.2d 496, 498 (9th Cir.1985). We review "strictly" a denial of leave to amend for abuse of discretion. Mayes v. Leipziger, 729 F.2d 605, 608 (9th Cir.1984).

II. PLEADING A RICO ENTERPRISE

The district court dismissed Schreiber's RICO counts because, inter alia, it concluded Schreiber failed to allege an "enterprise" separate and distinct from the "persons" involved in the alleged scheme. Schreiber's complaint contains allegations against the individual defendants, John Lee and James Lee, as well as the corporate defendants, Serv-Well and Landmark. We address the sufficiency of the allegations involving these two groups under separate headings.

A. The Corporate Defendants

Paragraph 31 of the complaint alleged that defendants John Lee, James Lee, Serv-Well, and Landmark received income derived from a pattern of racketeering activity and used that income in the operation of the enterprises Serv-Well and Landmark in violation of section 1962(a). Title 18 U.S.C. Sec. 1962(a) provides in pertinent part as follows:

It shall be unlawful for 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, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce....

Paragraph 32 alleged that the same four defendants maintained an interest in or control of the enterprises Serv-Well and Landmark through a pattern of racketeering activity in violation of section 1962(b). Title 18 U.S.C. Sec. 1962(b) provides in pertinent part as follows:

It shall be 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 which is engaged in, or the activities of which affect, interstate or foreign commerce.

The word "person" as used in section 1962 is defined in section 1961(3) as "any individual or entity capable of holding a legal or beneficial interest in property...." An enterprise is defined in section 1961(4) as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity...." Because the defendant "person" can be an entity, the issue arises whether that person can also be the affected enterprise.

The courts have consistently held that in an action under section 1962(c) the "person" must be a separate and distinct entity from the "enterprise." ² Title 18 U.S.C. Sec. 1962(c) provides:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

Schreiber has identified the defendant corporations as "persons" and "enterprises" under section 1962(a) and (b) only. Whether an "enterprise" must be separate and distinct from the "person" under sections 1962(a) and (b) is a novel question in this circuit. ³

The Seventh Circuit analyzed the necessary relationship between a person and an enterprise under section 1962(a) in Haroco, Inc. v. American National Bank & Trust Co., 747 F.2d 384 (7th Cir.1984), aff'd on other grounds, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). The court in Haroco held that subsection (c) of section 1962 required separate entities as the person and the enterprise. 747 F.2d at 401-02. However, the court then recognized the significant differences between subsections (a) and (c):

However, a corporation-enterprise may be held liable under subsection (a) when the corporation is also a perpetrator. As we parse subsection (a), a "person" (such as a corporation-enterprise) acts unlawfully if it receives income derived directly or indirectly from a pattern of racketeering activity in which the person has participated as a principal within the meaning of 18 U.S.C. Sec. 2, and if the person uses the income in the establishment or operation of an enterprise affecting commerce. Subsection (a) does not contain any of the language in subsection (c) which suggests that the liable person and the enterprise must be separate. Under subsection (a), therefore, the liable person may be a corporation using the proceeds of a pattern of racketeering activity in its operations. This approach to subsection (a) thus makes the corporation-enterprise liable under RICO when the corporation is actually the direct or indirect beneficiary of the pattern of racketeering activity, but not when it is merely the victim, prize, or passive instrument of racketeering. This result is in accord with the primary purpose of RICO, which, after all, is to reach those who ultimately profit from racketeering, not those who are victimized by it.

Id. at 402 (footnotes omitted) (emphasis in original). Because the...