P & P MARKETING, INC. v. Ditton

• Decision Date: 26 September 1990
• Docket Number: No. 90 C 1045.,90 C 1045.
• Parties: P & P MARKETING, INC., Plaintiff, v. Richard A. DITTON & Elaine Ditton, Defendants.
• Court: U.S. District Court — Northern District of Illinois

746 F. Supp. 1354

P & P MARKETING, INC., Plaintiff, v. Richard A. DITTON & Elaine Ditton, Defendants.

No. 90 C 1045.

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

September 26, 1990.

COPYRIGHT MATERIAL OMITTED

Michael A. Reiter, Kathleen C. Spears, Holleb & Coff, Chicago, Ill., for plaintiff.

Nathan H. Dardick, Morton Denlow, Stuart Gimbel, Dardick & Denlow, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

LINDBERG, District Judge.

This matter comes before the court on defendants', Richard and Elaine Ditton, motion to dismiss plaintiff's, P & P Marketing, Inc. ("P & P"), complaint for failure to state a cause of action or in the alternative to stay the proceedings pending resolution of a related state-court action. This action arises out of certain allegedly fraudulent transactions between plaintiff, P & P, and a corporation, Incredible Technologies, Inc. ("IT"), of which defendants are officers and directors and majority shareholders. Jurisdiction is founded upon a federal question involving Count I, which alleges a violation of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 USC §§ 1961 et seq. Count II is a state law fraud claim based upon the same facts as Count I.

Motion to Dismiss

Defendants have moved to dismiss plaintiff's Section 1962(c) RICO count for failure to state a cause of action. FRCP Rule 12(b)(6). In considering such a motion, a court should not dismiss a complaint unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to the relief requested. Cruz v. Beto, 405 U.S. 319, 323, 92 S.Ct. 1079, 1081, 31 L.Ed.2d 263 (1972); Morgan v. Bank of Waukegan, 804 F.2d 970, 973 (7th Cir. 1986). The court must accept all well pleaded material facts as true and make all reasonable inferences therefrom in favor of the plaintiff. Bruss Co. v. Allnet Communication Services, Inc., 606 F.Supp. 401, 404 (N.D.Ill.1985). However, the court should not strain to find inferences that do not appear from the face of the complaint. Id.

RICO

Civil actions for RICO violations are authorized by Section 1964(c) which provides that "any person injured in his business or property by reason of a violation of Section 1962" may recover treble damages and costs including attorney's fees. 18 USC § 1964(c); H.G. Gallimore, Inc. v. Abdula, 652 F.Supp. 437 (N.D.Ill.1987). Section 1962 sets out the prohibited conduct. 18 USC § 1962(a)-(d); see Id. at 439, 440. Plaintiff has alleged that defendants violated Section 1962(c) which prohibits

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.

18 USC § 1962(c).

Regardless of which subsection of Section 1962 defendants are alleged to have violated, five elements are common and necessary to every civil RICO claim. These essential elements are: (1) a "person"; (2) an "enterprise" engaged in or affecting interstate commerce; (3) "racketeering activity" which (4) occurred in a "pattern" and (5) an injury. Id. at 440; 18 USC § 1962(a)-(d). Defendants' motion to dismiss is directed at two of these elements. Defendants contend that (1) plaintiff has failed to sufficiently plead the necessary predicate acts of "racketeering activity" and (2) have failed to allege facts sufficient to demonstrate a "pattern of racketeering activity".

(I) Plaintiff's Allegations

The following is taken from the first twenty-six paragraphs of plaintiff's complaint.

The Parties

Plaintiff, P & P, is engaged in the business of marketing and distributing computer-based entertainment products. Edward Pellegrini is an officer and director of P & P and owns 50% of P & P's outstanding shares.

Defendants, the Dittons, are officers and directors and majority shareholders of IT and Strata Inc. ("Strata"). The Dittons control both IT and Strata. IT is engaged in the business of designing computer software and hardware for use in video games and related applications. Strata is a company through which a video game "Strata Bowling" was developed. Additionally, it is alleged that at all relevant times, IT has been engaged in, or the activities of IT have affected, interstate commerce and that IT is an "enterprise" as that term is defined in 18 USC § 1961(4).

The Joint Venture/"Capcom Bowling Kit"

In April 1987, IT, P & P and a Joseph Kaminkov entered into an oral joint venture agreement to develop and market a video bowling kit (the "Capcom Bowling Kit"). Pursuant to this agreement, the parties agreed, inter alia, that IT would develop both the software and hardware for the kits; P & P would market and sell the kits; P & P would advance or reimburse to IT certain funds for the development of the kits; and Kaminkov would assist in the design of the kit and its graphics and would assist in marketing the kits. The members of the joint venture agreed that the technology, graphics, software and hardware would be owned in the following ratios: 40% by IT; 40% by P & P; and 20% by Kaminkov.

Sometime after the joint venture was formed, the Dittons on behalf of IT, orally requested that P & P allow IT to order the electronic components and hardware for the Capcom Bowling Kits directly from third-party suppliers in IT's name. In this way the Dittons and IT could make important industry contacts and establish IT's reputation and credit in the industry. IT would be advanced or reimbursed for the actual costs of these parts by P & P. P & P orally agreed and thereafter from approximately September of 1987 through October of 1989, IT ordered the parts for the Capcom Bowling Kits directly from third-party suppliers and upon periodic requests by IT, P & P would advance or reimburse IT for the actual costs of the parts. IT represented to P & P that the actual cost of the parts for each Capcom Bowling Kit was approximately $223, of which $145 represented the cost of the printed circuit board ("PCB") for each kit and the balance represented the cost of the other electronic components.

The Dittons' Scheme to Defraud P & P/Capcom Overcharges

P & P alleges that from September 1987 through October 1989, the Dittons caused IT to overcharge P & P for the PCB and electronics to be used by IT in the Capcom Bowling Kits. Specifically, P & P claims that although IT represented to P & P that the actual cost of each PCB was $145. IT's actual cost was less than $130 per PCB. P & P alleges that the Dittons caused IT to purchase the parts for the Capcom Bowling Kits at significant discounts offered by third-party suppliers but caused IT to send invoices and other documents to P & P which reflected the higher non-discounted cost of these parts. The Dittons caused IT to wrongfully keep the difference between the actual or discounted price of the parts and the price charged by IT to P & P without informing P & P of the discounted prices.

From approximately September 1987 through October 1989, P & P reimbursed or advanced IT as least $165,000 in overcharges which the Dittons, on behalf of IT, represented to be the actual cost of just the PCB for the Capcom Kits alone. The Dittons have caused IT to fail or refuse to comply with P & P's request for full disclosure of information concerning IT's actual costs for the parts for the Capcom Bowling Kits.

Additionally, the Dittons have caused IT to buy an excessive number of parts and other unnecessary services related to the Capcom Bowling Kits. The Dittons caused IT to deliver or mail to P & P invoices on IT's stationary for these parts and services in vague terms and to demand reimbursement from P & P. P & P, in reasonable reliance on the Dittons' representations that such parts and services were necessary to the production of the Capcom Bowling Kits, paid the IT invoices. P & P alleges it paid to IT approximately $207,681 for these excessive parts and services and further alleges that the Dittons caused IT to use the extra parts and unnecessary services for IT's development of its own video games and projects.

Finally, P & P alleges the Dittons caused IT to send other invoices to P & P for parts wholly unrelated to the Capcom Bowling Kits or any other projects related to the joint venture. P & P claims they paid in excess of $6,000 on such invoices.

Strata Bowling

P & P also alleges that the Dittons, through their company, Strata Inc., developed their own video game "Strata Bowling" which copied much of the Capcom Bowling Kit's features and used the same hardware as the Capcom Bowling Kits and Grudge Match Wrestling Kits referred to below. The Dittons' actions were in disregard of and in violation of the joint venture concerning the Capcom Bowling Kits.

When P & P learned of the development of the Strata Bowling Game and warned the Dittons that they were violating the joint venture agreement, the Dittons caused IT to turn over to P & P certain electronic parts and components which IT had intended to use for the Strata Bowling game. The Dittons, on behalf of IT, demanded that P & P pay to IT, IT's actual cost of these parts which the Dittons represented to be approximately $75,000. In reasonable reliance on the Dittons' representations concerning the actual cost of such parts, P & P paid IT $75,000 for these parts. On information and belief, P & P alleges that the Dittons caused IT to misrepresent to P & P the actual cost of such parts.

Grudge Match Wrestling Kit

Sometime after the joint venture involving the Capcom Bowling Kit was formed and before P & P discovered the alleged fraud, P & P and the Dittons, on behalf of IT, entered into an additional oral agreement concerning the development of a coin-operated video wrestling kit to be called "Grudge Match" and to be sold by P & P. Similar to the agreement concerning the Capcom Bowling Kits,...