Midwest Grinding Co., Inc. v. Spitz

• Decision Date: 16 September 1992
• Docket Number: Nos. 91-2686,91-2834,s. 91-2686
• Citation: 976 F.2d 1016
• Parties: , RICO Bus.Disp.Guide 8080 MIDWEST GRINDING COMPANY, INC., an Illinois Corporation, Plaintiff-Appellant, Cross-Appellee, v. Joshua M. SPITZ, an individual, Aron Grunfeld, an individual, and U.S. Grinding & Fabricating, Inc., an Illinois Corporation, Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1016

976 F.2d 1016

23 Fed.R.Serv.3d 629, RICO Bus.Disp.Guide 8080

MIDWEST GRINDING COMPANY, INC., an Illinois Corporation, Plaintiff-Appellant, Cross-Appellee, v. Joshua M. SPITZ, an individual, Aron Grunfeld, an

individual, and U.S. Grinding & Fabricating, Inc.,

an Illinois Corporation,

Defendants-Appellees, Cross-Appellants.

Nos. 91-2686, 91-2834.

United States Court of Appeals, Seventh Circuit.

Argued March 30, 1992.

Decided Sept. 16, 1992.

Weston W. Hanscom, Richard J. Jacobson (argued), Michael K. Cavanaugh, Keck, Mahin & Cate, Chicago, Ill., for plaintiff-appellant.

Stephen L. Tyma (argued), William L. Kabaker, Lawrence L. Grazian, Schwartz & Freeman, Chicago, Ill., for defendants-appellees.

Before COFFEY, FLAUM, and KANNE, Circuit Judges.

FLAUM, Circuit Judge.

Midwest Grinding Co., Inc. (Midwest) filed suit against defendants Joshua Spitz, Aron Grunfeld, and U.S. Grinding & Fabricating, Inc. (U.S. Grinding), alleging that they had engaged in a fraudulent scheme to divert customers and employees away from Midwest in violation of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962 et seq., and state common law. The defendants filed a motion to dismiss, which the district court granted in part. The court subsequently disposed of Midwest's remaining claims on a motion for summary judgment. Midwest appeals both of those rulings, and the defendants cross-appeal the district court's partial denial of their motion to dismiss. We affirm.

I.

Midwest entered into the metal grinding business in 1976. For over a decade, Spitz, who held a one-third stake in Midwest, managed the company's day-to-day operations as president and board member. As will later become relevant, Spitz's relationship with Midwest was not governed by a non-competition or confidentiality agreement, which would have prevented him from competing with Midwest or soliciting its customers in the event he left its employ. In 1984, one of Midwest's customers, Klein Tools, Inc., bought a two-thirds interest in Midwest.

In January 1986, a close friend of Spitz, Aron Grunfeld, decided that he, too, would get into the metal grinding business, and formed U.S. Grinding. Although Spitz was never an owner or officer of Grunfeld's new venture, evidence suggests that, while still employed by Midwest, he did play a role in its formation: he accompanied Grunfeld to an attorney's office to discuss incorporation, made a trip to Michigan to examine machinery for U.S. Grinding, and assisted in selecting real estate for its manufacturing facility. Moreover, after U.S. Grinding was up and running, several witnesses observed Spitz making visits to U.S. Grinding's facility, often in a Midwest company van, and telephone records revealed numerous calls between Grunfeld and Spitz during this period. Furthermore, a number of Midwest employees went to work for U.S. Grinding between April and July 1986, and evidence indicated that Spitz may have induced some of these transfers; in June 1986, for example, Spitz fired or laid off Midwest's entire night shift of six workers, several of whom mysteriously reappeared as employees of U.S. Grinding. All of this suspect activity coincided with a steady stream of Midwest customers jumping ship to utilize the services of upstart U.S. Grinding. Indeed, from February through August 1986, Midwest suffered a 40% drop in net sales compared to the previous year. Alarmed by this decline, Midwest's directors asked Spitz for an explanation; he attributed the decline to a depressed market, assuring them that he had been devoting substantial time out of the office trying to generate new business.

That reassurance notwithstanding, Spitz resigned from Midwest in August 1986 and immediately went to work for U.S. Grinding. In a letter to his co-shareholder (Klein Tools), Spitz offered to sell his one-third ownership in Midwest, neglecting to disclose his past or present relationship with U.S. Grinding. In response to Spitz's departure, Midwest filed this suit seeking to enjoin Spitz and U.S. Grinding from soliciting its customers and asking for damages under RICO. 18 U.S.C. §§ 1962(c) and (d). ¹ Midwest also asserted pendent common-law claims alleging breach of fiduciary duty and tortious interference with business relationships.

The defendants responded to Midwest's complaint with a motion to dismiss for failure to state a claim, Fed.R.Civ.P. 12(b)(6), and for failure to plead fraud with particularity. Fed.R.Civ.P. 9(b). While this motion was pending, Midwest amended its complaint twice and supplemented it once, adding, among other things, Grunfeld as a defendant and allegations of two new schemes uncovered during discovery. The first alleged scheme involved Cardinal Metals, Inc. (Cardinal), a steel supplier which occasionally purchased grinding services from Midwest. According to Midwest, Spitz and Grunfeld maintained a secret 50% stake in Cardinal and, as part of the scheme to defraud Midwest, Spitz routinely undercharged Cardinal for metal grinding services via invoices sent through the mails (the undercharging scheme). In the second new scheme, Midwest maintained that the defendants tried to cover their tracks during the course of this lawsuit by lying about Spitz's involvement with U.S. Grinding in depositions and in requests to admit (the cover-up scheme). Thus, the alleged pattern of racketeering now entailed three separate stages, covering a 35-month period, all designed to inflict economic injury on Midwest: routine undercharges of Cardinal in 1985 and 1986, repeated diversion of customers and employees from Midwest to U.S. Grinding in 1986, and a cover-up of those activities during the course of this litigation.

The district court subsequently granted in part the defendants' motion to dismiss. Midwest Grinding Co., Inc. v. Spitz, 716 F.Supp. 1087, 1090-92 (N.D.Ill.1989). First, it dismissed the allegations of a scheme to undercharge Cardinal Steel for lack of specificity, id. at 1093, second, it dismissed the allegations of a cover-up for failure to state a claim, id. at 1093, and third, it dismissed the RICO claims against Grunfeld under 18 U.S.C. §§ 1962(c) and (d) for lack of specificity. Id. at 1094. However, the court refused to dismiss the § 1962(c) RICO count against Spitz, and the § 1962(d) RICO conspiracy count against Spitz and U.S. Grinding, concluding that Midwest had sufficiently pled a pattern of racketeering. Id. at 1095-96. The court added in a footnote that Midwest was denied leave to file a third amended complaint to correct its pleading deficiencies. Id. at 1094 n. 4.

After several years of additional discovery, the district court granted the defendants' motion for summary judgment on the remaining §§ 1962(c) & (d) RICO counts, Midwest Grinding Co., Inc. v. Spitz, 769 F.Supp. 1457 (N.D.Ill.1991), reversing its earlier decision that Midwest had adequately pled a pattern of racketeering. On appeal, Midwest challenges both that ruling and the earlier rulings dismissing portions of its complaint. The defendants cross-appeal, alleging that the district court erred in not disposing of the entire case on its motion to dismiss.

We review de novo the court's decision to dismiss portions of Midwest's complaint, assuming the truth of all well-pleaded factual allegations and drawing all reasonable inferences in its favor. Prince v. Rescorp Realty, 940 F.2d 1104, 1106 (7th Cir.1991). Likewise, we review de novo the district court's decision to grant the defendants' motion for summary judgment, Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986), again viewing the facts and inferences in Midwest's favor. Id. With these familiar standards in mind, we turn to each of the parties' contentions on appeal.

II.

Congress enacted RICO in an attempt to eradicate organized, long-term criminal activity. To that end, Congress chose to supplement criminal enforcement of its provisions with a civil cause of action for persons whose business or property has been injured by such criminal activity. 18 U.S.C. § 1964(c). To encourage private enforcement, Congress provided civil RICO plaintiffs with the opportunity to recover treble damages, costs, and attorney's fees if they can successfully establish the elements of a RICO violation by a preponderance of the evidence. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 491-93, 105 S.Ct. 3275, 3282-83, 87 L.Ed.2d 346 (1985). The elements of a RICO violation consist of "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Id. at 496, 105 S.Ct. at 3285. A pattern of racketeering activity consists of at least two predicate acts of racketeering committed within a ten-year period. 18 U.S.C. § 1961(5). Predicate acts are acts indictable under a specified list of criminal laws, 18 U.S.C. § 1961(1)(B), including mail fraud under 18 U.S.C. § 1341, and wire fraud under 18 U.S.C. § 1343. Midwest accused the defendants of committing hundreds of acts of mail and wire fraud in the process of carrying out the alleged diversion scheme.

The principal issue before us is whether the district court erred in finding that Midwest had not alleged a pattern of racketeering. Before reaching that issue, however, we first examine the court's decision to dismiss certain portions of Midwest's complaint on the defendants' Rule 12(b)(6) motion, because those rulings directly impact our pattern analysis. In that regard, Midwest contends that the district court erred in dismissing both the undercharging and cover-up allegations, and compounded that error by denying Midwest leave to correct its pleading deficiencies. These erroneous rulings, Midwest contends, severed the head (the undercharging scheme) and tail (the cover-up scheme) from the conspiracy, truncating the racketeering activity from thirty-five to nine months. This in turn provided the foundation, Midwest maintains, for the...