United Energy Owners Committee, Inc. v. U.S. Energy Management Systems, Inc.

Citation837 F.2d 356
Decision Date10 March 1988
Docket NumberNos. 86-6050,86-6404,s. 86-6050
Parties, RICO Bus.Disp.Guide 6843 UNITED ENERGY OWNERS COMMITTEE, INC., et al., Plaintiffs-Appellants, and Robert T. Gilleran, Appellant, v. UNITED STATES ENERGY MANAGEMENT SYSTEMS, INC., et al., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Robert T. Gilleran, Los Angeles, Cal., for plaintiffs-appellants.

Steven P. Krakowsky, Wolfe & Linden, Frank P. Morse and Karen M. Durfee, Sandler, Rolnick & Morse, H. Steven Schiffres, Rosoff, Schiffres & Barta, Los Angeles, Cal., Francis Schwartz, Beverly Hills, Cal., for defendants-appellees.

Jose Chavez, Orange, Cal., pro se.

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

Before NELSON, HALL and THOMPSON, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

I.

In No. 86-6050, plaintiffs appeal the dismissal of their second amended complaint which alleges, as the sole basis for federal jurisdiction, two causes of action under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968 (1982). On May 19, 1986, the district court entered an order dismissing these claims for plaintiffs' supposed failure to allege properly two elements of a RICO cause of action: (1) a "pattern of racketeering activity" and (2) an "enterprise."

Plaintiffs also appeal dismissal of their pendent state law claims and the vacation of certain writs of attachment. The district court dismissed the state law claims and vacated the writs of attachment because it found that it had no independent basis for jurisdiction over these matters after it had dismissed the RICO claims.

The district court had jurisdiction over the complaint pursuant to 18 U.S.C. Sec. 1964(c) and the doctrine of pendent jurisdiction. We have jurisdiction over the judgment of dismissal pursuant to 28 U.S.C. Sec. 1291. See California v. Harvier, 700 F.2d 1217, 1218 (9th Cir.) (dismissal before entry of final judgment appealable where it is clear that district court did not think complaint could be saved by any amendment), cert. denied, 464 U.S. 820, 104 S.Ct. 82, 78 L.Ed.2d 92 (1983).

In No. 86-6404, plaintiffs and plaintiffs' counsel appeal the district court's imposition of sanctions in the amount of $9,465 pursuant to Fed.R.Civ.P. 11 for plaintiffs' failure to act in a timely and diligent manner in releasing the writs of attachment after dismissal of the above claims. On July 29, 1986, while the plaintiffs' appeal from the judgment of dismissal was pending, the district court ordered the plaintiffs to pay these sanctions.

The district court had jurisdiction to impose sanctions under the reasoning of our decision in Masalosalo v. Stonewall Ins. Co., 718 F.2d 955, 956-57 (9th Cir.1983) (district court retains jurisdiction to award attorney's fees after filing of notice of appeal from decision on merits). We also have jurisdiction over the district court's imposition of sanctions under our ruling in Masalosalo, 718 F.2d at 957 ("If a district court decides a fee issue early in the course of a pending appeal on the merits, and the fee order is appealed, the appeals may be consolidated."). Cf. Kordich v. Marine Clerks Ass'n, 715 F.2d 1392, 1393 (9th Cir.1983) (imposition of sanctions against party and attorney is appealable after final judgment).

Because the district court's decision is in conflict with our recent decisions in the RICO arena, 1 we reverse in No. 86-6050. Because Rule 11 does not provide a basis for the district court's imposition of sanctions, we also reverse in No. 86-6404.

II.

On August 21, 1985, the plaintiffs filed a complaint that included two claims against the defendants for relief pursuant to RICO section 1964(c). 2 The defendants did not file a responsive pleading; instead, they filed motions to dismiss or for a more definite statement. After the district court granted defendants' motion for a more definite statement, the plaintiffs filed their first amended complaint. The district court then decided that it must dismiss the first amended complaint because the plaintiffs had failed to comply with our decision in Rae v. Union Bank, 725 F.2d 478 (9th Cir.1984), which held that the RICO defendant and the RICO enterprise cannot be the same entity under RICO section 1962(c). Id. at 480-81. The district court therefore dismissed the first amended complaint with leave to amend. After the plaintiffs filed their second amended complaint, the district court granted defendants' subsequent motion to dismiss for failure to state a claim. See Fed.R.Civ.P. 12(b)(6). Plaintiffs timely appealed.

The plaintiffs are Sunbelt Energy Corporation ("Sunbelt") (which is in the business of marketing solar energy systems), and promoters and purchasers (appearing individually or through the United Energy Owners Committee, Inc.) of the Sunbelt systems. 3 The defendants are United States Energy Management Systems, Inc. ("U.S. Energy") (which contracted to locate, install, and maintain solar energy systems on behalf of Sunbelt), and certain individuals and entities affiliated with U.S. Energy, some of whom are subcontractors of U.S. Energy. 4 In their second amended complaint, the plaintiffs allege that: (1) U.S. Energy and certain of the other defendants used falsified information about the business expertise of U.S. Energy to induce Sunbelt to enter into its contract with U.S. Energy; (2) U.S. Energy and the other defendants at no time had the intention or ability to perform or cause U.S. Energy to perform any of its obligations under the contract, but instead intended fraudulently to transfer funds paid to U.S. Energy to the other defendants; (3) the defendant subcontractors at no time had the intention or ability to perform their obligations under their subcontracts, and were also participants in the scheme to siphon money out of U.S. Energy; (4) certain of the defendants participated in a sham sale and purchase of U.S. Energy, a transaction also designed to transfer money fraudulently from U.S. Energy to other of the defendants; (5) certain of the defendants fraudulently misrepresented that progress was being made on the installation of the systems and that the work they had contracted to do would soon be complete, which induced the plaintiffs to make further payments to U.S. Energy; (6) the defendants engaged in these activities from May of 1984 through August of 1985; and (7) the defendants made interstate telephone calls and used interstate mail and wire facilities in furtherance of their scheme. The plaintiffs also allege that U.S. Energy defrauded 2,000 investors who purchased or leased their systems through entities other than Sunbelt in addition to the 274 Sunbelt investors.

The plaintiffs allege that the defendants' activities constitute predicate acts of mail and wire fraud in furtherance of a fraudulent solar energy tax shelter scheme. The plaintiffs claim that the defendants injured them by violating (1) RICO section 1962(c) by participating in the conduct of the affairs of enterprises through a pattern of racketeering activity, 5 and (2) RICO section 1962(a) by using or investing the income or proceeds of the racketeering activity to acquire interests in and to establish and operate other businesses which are engaged in interstate commerce. 6 The plaintiffs also claim that the defendants engaged in a conspiracy in violation of RICO section 1962(d) by their violation of sections 1962(a) and (c). 7

The defendants' motion for sanctions alleged: (1) that the plaintiffs' pleadings were not warranted by existing law or a good faith attempt to extend existing law (citing Rule 11); (2) that plaintiffs acted in bad faith in connection with pleading and pretrial discovery matters (citing Rule 37); and (3) that plaintiffs "fail[ed] to respond to counsel for defendants' request that plaintiffs promptly issue instructions to the United States Marshal directing the Marshal to release funds held pursuant to writ of attachment following [the district court's] order dismissing the action and setting aside the Writs of Attachment." The defendants cited no rule or authority supporting their request for sanctions in connection with the writs of attachment.

The district court held that sanctions were not available for the matters covered by Rules 11 and 37. Nevertheless, the district court granted in part the "Defendants' Motion for the Imposition of Sanctions Pursuant to Federal Rule of Civil Procedure 11" for the plaintiffs' failure "to act in a timely and diligent manner in releasing the Writs of Attachment." The plaintiffs and plaintiffs' counsel again timely appealed.

III.

We review de novo a grant of a motion to dismiss. Sun Sav. & Loan Ass'n v. Dierdorff, 825 F.2d 187, 191 (9th Cir.1987); Schreiber Distributing Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1396 (9th Cir.1986). "A motion to dismiss for failure to state a claim should not be granted unless it appears to a certainty that the plaintiff can prove no set of facts in support of his claims that would entitle him to relief." Rae, 725 F.2d at 479; see Sun Savings, 825 F.2d at 191 (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)). We must construe all of the plaintiffs' allegations in their favor. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Sun Savings, 825 F.2d at 191.

IV.

The district court held that plaintiffs had properly alleged multiple "predicate acts" of "racketeering activity," as defined by RICO section 1961(1), 8 but that these acts failed to satisfy RICO's requirement of a "pattern of racketeering activity." 9 The district court relied on a definition of "pattern" which excludes predicate acts within one and the same "criminal episode." Citing Allington v. Carpenter, 619 F.Supp. 474, 477-78 (C.D.Cal.1985). The Allington court...

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