Brooks v. Bank of Boulder

• Decision Date: 01 July 1995
• Docket Number: Civ. A. No. 94-K-2689.
• Parties: John BROOKS and Lorraine Brooks, Plaintiffs, v. BANK OF BOULDER, Robert G. Joseph, Daniel F. Hatch, David D. Parrish, Steven K. Bosley, Charles Jensen, Bruce McDowell, and Thomas Ratterree, Defendants.
• Court: U.S. District Court — District of Colorado

891 F. Supp. 1469

John BROOKS and Lorraine Brooks, Plaintiffs, v. BANK OF BOULDER, Robert G. Joseph, Daniel F. Hatch, David D. Parrish, Steven K. Bosley, Charles Jensen, Bruce McDowell, and Thomas Ratterree, Defendants.

Civ. A. No. 94-K-2689.

United States District Court, D. Colorado.

July 1, 1995.

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Douglas M. Tisdale and Theodore A. Ulrich, Popham, Haik, Schnobrich & Kaufman, Ltd., Denver, CO, for plaintiffs.

Joseph French, French & Stone, Boulder, CO, for Bank of Boulder.

David R. Eason, Berenbaum, Weinshienk & Eason, P.C., Denver, CO, for Bosley.

Susan M. Hargleroad, Pendleton & Sabian, Denver, CO, for Jensen, McDowell and Ratterree.

MEMORANDUM OPINION AND ORDER

KANE, Senior District Judge.

Plaintiffs, John and Lorraine Brooks, allege they were defrauded by a Ponzi scheme and check-kiting scheme orchestrated by M & L Business Machines Co. ("M & L"). Plaintiffs further allege the Bank of Boulder ("the Bank") aggravated their losses because it discovered the schemes and, rather than halting them and alerting investors, perpetuated the schemes in order to minimize its own losses.

Defendants consist of the Bank and seven individual defendants. Three of the individual defendants, Robert G. Joseph, Daniel F. Hatch, and David D. Parrish, were directors of M & L and are referred to collectively as the "M & L Defendants". Court records disclose the M & L Defendants were not served. Plaintiffs voluntarily dismissed Parrish without prejudice and Joseph and Hatch have not responded to Plaintiffs' allegations.

The remaining four individual defendants, Steven K. Bosley, Charles Jensen, Bruce McDowell, and Thomas Ratterree, were officers and/or employees of the Bank and are referred to collectively as the "Individual Bank Defendants".

The Bank and the Individual Bank Defendants move to dismiss Plaintiffs' Amended Complaint.

Plaintiffs make the following allegations: In 1987, the M & L Defendants began a classic Ponzi scheme in which M & L provided investors with very attractive rates of return in order to entice further investment. The investors were told the returns were from the resale of computers and office equipment. The equipment did not exist, however, and the returns were funded by investor capital, loan proceeds and check kiting.

M & L maintained accounts at the Bank from March 1989 through early 1991. M & L deposited funds from the Ponzi scheme into the accounts but generated a negative account balance by kiting checks without sufficient funds. This check kiting scheme funded the returns of the Ponzi scheme.

The Bank allegedly knew of the kiting scheme by January 1990 and knew or should have known of the Ponzi scheme by June 1990. To mitigate possible losses to the Bank from a collapse of the Ponzi scheme, however, it is further alleged the Bank perpetuated both schemes.

The Bank benefited from its participation in the kiting scheme because it: charged various service fees; shifted the risks from the Bank to investors; and reduced its risk by directly transferring fraudulently obtained funds from investors to the Bank. The Bank also benefitted from its perpetuation of the Ponzi scheme because it received, used and invested the proceeds of the scheme deposited at the Bank.

In October 1990, M & L filed for bankruptcy. The Bank violated the Bankruptcy Code by engaging in transactions which reduced the M & L estate property after a bankruptcy petition was filed in October of 1990. It also made loans to the M & L Defendants to change the Bank's debt position from unsecured to secured to reduce the Bank's exposure and shift it to creditors of M & L.

Plaintiffs claim all Defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(a), (c) and (d), and the Colorado Organized Crime Control Act ("COCCA"), Colo.Rev.Stat. § 18-17-104(1)(a), (3), and (4) (1986). Plaintiffs claim the Bank was negligent, was unjustly enriched, and violated the Colorado Consumer Protection Act, Colo.Rev.Stat. § 6-1-105(1)(q) (1992). They also bring a separate claim for exemplary damages against the Bank.

In their responses to the motions to dismiss, Plaintiffs withdraw their fourth (RICO) and tenth (COCCA) claims for relief against the Bank.

Jurisdiction is based upon 28 U.S.C. §§ 1331 (federal question), 1332 (diversity), and 1367 (supplemental jurisdiction over state claims).

For the reasons which follow I dismiss the RICO, COCCA, Colorado Consumer Protection Act, negligence, and exemplary damages claims; and deny the motion to dismiss the unjust enrichment claim.

I. Standards for Motions to Dismiss.

Federal Rule of Civil Procedure 8(a) requires a plaintiff to provide a short and plain statement of the claim showing the pleader is entitled to relief. Rule 9(b), however, requires a plaintiff pleading fraud to state with particularity the circumstances constituting the fraud. The dismissal of a claim for failing to satisfy Rule 9(b) is treated as a dismissal under Rule 12(b)(6) for failure to state a claim upon which relief may be granted. Ambraziunas v. Bank of Boulder, 846 F.Supp. 1459, 1462 (D.Colo.1994). In ruling on a motion to dismiss under Rule 12(b)(6), all factual allegations must be accepted as true and all reasonable inferences must be drawn in favor of the pleader. A claim should not be dismissed under Rule 12(b)(6) unless it appears beyond doubt that plaintiff can prove no set of facts which would entitle him or her to relief. Id.

II. Merits.

A. RICO and COCCA Claims (Claims 1 through 12).

1. RICO Claims (18 U.S.C. §§ 1962(a).(c)) (Claims 1, 2, 3, 5).

The Bank and the Individual Bank Defendants contend Plaintiffs' RICO claims fail under Rule 12(b)(6) because they have failed to plead fraud with the specificity required by Rule 9(b).

Section 1962 of RICO sets out numerous activities prohibited under the Act. Section 1962(a) makes it unlawful to invest funds derived from a pattern of racketeering activity in an enterprise engaged in interstate commerce. Section 1962(c) provides for the liability of any person associated with an enterprise which affects interstate commerce to conduct or participate in the affairs of such enterprise through a pattern of racketeering activity.

In pleading a claim under RICO, eight elements are critical:

1) That the defendant

2) through the commission of two or more of the enumerated predicate acts

3) which constitute a "pattern"

4) of "racketeering activity"

5) directly or indirectly participates in the conduct of

6) an enterprise

7) the activities of which affect interstate commerce, and, that

8) the plaintiff was injured in his or her business or property by reason of such conduct.

Ambraziunas v. Bank of Boulder, 846 F.Supp. 1459, 1462-63 (D.Colo.1994); Saine v. A.I.A., Inc., 582 F.Supp. 1299, 1302 (D.Colo.1984). Each of these elements must be pled with particularity under Rule 9(b). Ambraziunas, 846 F.Supp. at 1463; Farlow v. Peat, Marwick, Mitchell & Co., 956 F.2d 982, 989 (10th Cir.1992). In accordance with Rule 9(b), Plaintiffs must "set forth the time, place and contents of the false representation, the identity of the party making the false statement and the consequences thereof." Ambraziunas, 846 F.Supp. at 1462.

The purpose of Rule 9(b) is to inhibit the filing of complaints as a pretext to discover unknown wrongs, to protect the defendant's reputation, and to give notice to the defendant regarding the complained of conduct. Farlow, 956 F.2d at 987 (10th Cir. 1992). A plaintiff alleging fraud must know what the claim is at the time the complaint is filed. Id. at 990. Finally,

because it is a complicated statute that covers conduct ranging from sports bribery to white slave traffic, a defendant needs a substantial amount of information to prepare a response. A RICO defendant also needs to be protected from unscrupulous claimants lured by the prospect of treble damages, and it should be the policy of the law, within the procedural constraints of our system, to provide this protection. A charge of racketeering, with its implications of links to organized crime and attendant consequences to a person's reputation and goodwill, should not be easier to make than accusations of fraud. RICO should not be construed to give a pleader license to bully and intimidate nor to fire salvos from a loose cannon. Irresponsible or inadequately considered allegations should be met with severe sanctions pursuant to Rule 11, F.R.Civ.P.

Saine, 582 F.Supp. at 1306 n. 5. In filing such serious allegations one may not shoot first and aim later.

a. Predicate Acts.

Rule 9(b) also governs the pleading of a RICO or COCCA predicate offense which involves fraud. Cayman Exploration Corp. v. United Gas Pipe Line Co., 873 F.2d 1357, 1362 (10th Cir.1989); Saine v. A.I.A., Inc., 582 F.Supp. 1299, 1303 (D.Colo.1984). To meet Rule 9(b), a plaintiff must identify with specificity the circumstances constituting the fraud in the predicate acts. Ambraziunas, 846 F.Supp. at 1463; Saine, 582 F.Supp. at 1303. When plaintiff is dealing with more than one defendant, he or she is under a Rule 9(b) obligation to specify which defendant told which lie and under what circumstances. Saine, 582 F.Supp. at 1303.

The Amended Complaint alleges the RICO predicate acts to be mail, wire and bank fraud.

(i) Bank and Bankruptcy Fraud.

Plaintiffs concede they have not alleged a separate predicate act of bank fraud with respect to the Bank and the Individual Bank Defendants, and withdraw all allegations of bank fraud.¹ The Amended Complaint alleges bankruptcy fraud by the M & L Defendants only and does not identify it as a predicate act.

(ii) Mail and Wire Fraud.

To establish mail fraud a plaintiff must show: (1) a scheme or artifice to defraud or obtain money or property by false pretenses, representations, or promises; and (2) the use of...