California Architectural Bldg. Products, Inc. v. Franciscan Ceramics, Inc.

• Decision Date: 31 July 1987
• Docket Number: Nos. 86-5822,86-5834 and 86-5974,s. 86-5822
• Citation: 818 F.2d 1466
• Parties: RICO Bus.Disp.Guide 6645 CALIFORNIA ARCHITECTURAL BUILDING PRODUCTS, INC., et al., Plaintiff/Appellants/Cross-Appellees, v. FRANCISCAN CERAMICS, INC., et al., Defendants/Appellees/Cross-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1466

818 F.2d 1466

RICO Bus.Disp.Guide 6645

CALIFORNIA ARCHITECTURAL BUILDING PRODUCTS, INC., et al Plaintiff/Appellants/Cross-Appellees, v.FRANCISCAN CERAMICS, INC., et al Defendants/Appellees/Cross-Appellants.

Nos. 86-5822, 86-5834 and 86-5974.

United States Court of Appeals Ninth Circuit.

Argued Feb. 3, 1987.

Submitted March 19, 1987.

Decided June 4, 1987.

As Amended on Denial of Rehearing and Rehearing En Banc July 31, 1987.

Benjamin George Williams, Los Angeles, Cal., for plaintiffs/appellants/cross-appellees.

John W. Cotton, Los Angeles, Cal., for defendants/appellees/cross-appellants.

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

Before SNEED, FARRIS and NOONAN, Circuit Judges.

SNEED, Circuit Judge:

Dealers in ceramic tile brought this civil action against a manufacturer under the Racketeer Influenced and Corrupt Organizations Act (RICO),18 U.S.C. Secs. 1961-1968.The district court granted summary judgment for the manufacturer on the ground that there was no pattern of racketeering.The court also denied the dealers' motion for leave to amend their First Amended Complaint with prejudice as to any claims based on RICO.Finally, the court granted $350 in sanctions against the dealers' attorney under Fed.R.Civ.P. 11.We affirm the summary judgment and the denial of leave to amend, but reverse the award of Rule 11 sanctions.

I.FACTS AND PROCEEDINGS BELOW

Dealers, plaintiffs below and appellants and cross-appellees, are five businesses and six individuals that sold ceramic tile.The appellees and cross-appellants here and defendants below are a manufacturer of ceramic tile, Franciscan Ceramics, Inc.(Franciscan); its American parent, Josiah Wedgwood & Sons, Inc.; and that company's English parent, Wedgwood plc (Wedgwood).

The dealers' First Amended Complaint alleges that Franciscan fraudulently assured them that it would continue in business and supply them with tile until at least the end of March 1984.It further alleges that Franciscan decided prior to May 3, 1983 that it would close in September or October 1983.In fact, Wedgwood's board of directors voted on September 22, 1983 to close Franciscan by the end of October.The dealers charge that Franciscan concealed its plan from them so that they would continue to buy tile.This enabled Franciscan to reduce inventory losses that it otherwise would have suffered had it given notice of its intentions prior to May 3, 1983.

Franciscan made the alleged misrepresentations through the United States mail or through interstate telephone calls.Therefore, the misrepresentations might be the basis of a RICO claim.18 U.S.C. Sec. 1961(1)(B).The dealers claim as damages the costs they incurred in stocking and promoting Franciscan tile on the assumption that Franciscan would continue in business, as well as the profits they lost on both the tile purchased and delivered and the tile ordered but not delivered by Franciscan.Under RICO, damages are trebled.18 U.S.C. Sec. 1964(c).

Shortly before the discovery cutoff date, the dealers moved for permission to file a Second Amended Complaint.The proposed complaint reflected a more narrow focus than did the first.It alleged as an alternative ground for recovery that Franciscan represented that it had a plan to continue in business through March 1984, when it in fact had no such plan.Franciscan subsequently moved for summary judgment on the First Amended Complaint.Franciscan also moved for sanctions under Fed.R.Civ.P. 11.Franciscan alleged that the dealers' attorney had signed the First Amended Complaint and had persisted in prosecuting the lawsuit when a reasonable inquiry would have disclosed that the First Amended Complaint was not well grounded in fact.

At a hearing held March 4, 1986, the district court granted the motion for summary judgment, denied the motion to amend the First Amended Complaint without prejudice as to future claims not based on RICO, and granted $350 in sanctions under Fed.R.Civ.P. 11.On April 2, 1986, the dealers filed a notice of appeal from this order.On April 7, 1986, Franciscan filed a notice of cross-appeal from the award of sanctions, insisting that the sanctions were inadequate.On April 30, 1986, the district court entered a judgment conforming to its earlier order.On May 22, 1986, the dealers filed a notice of appeal from this judgment.All notices were timely under Fed.R.App.P. 4(a).This court has jurisdiction under 28 U.S.C. Sec. 1291.The two appeals and the cross-appeal are consolidated in this action.

II.PATTERN OF RACKETEERING

A.Standard of Review for Summary Judgment

As we regularly recite, this court reviews de novo a grant of summary judgment.Gabrielson v. Montgomery Ward & Co., 785 F.2d 762, 764(9th Cir.1986).Under Fed.R.Civ.P. 56(c), summary judgment is appropriate if the pleadings and supporting materials "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

In three recent cases, the Supreme Court, by clarifying what the non-moving party must do to withstand a motion for summary judgment, has increased the utility of summary judgment.First, the Court has made clear that if the nonmoving party will bear the burden of proof at trial as to an element essential to its case, and that party fails to make a showing sufficient to establish a genuine dispute of fact with respect to the existence of that element, then summary judgment is appropriate.SeeCelotex Corp. v. Catrett, --- U.S. ----, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265(1986).Second, to withstand a motion for summary judgment, the non-moving party must show that there are "genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party."Anderson v. Liberty Lobby, Inc., --- U.S. ----, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202(1986)(emphasis added).Finally, if the factual context makes the non-moving party's claim implausible, that party must come forward with more persuasive evidence than would otherwise be necessary to show that there is a genuine issue for trial.Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538(1986).No longer can it be argued that any disagreement about a material issue of fact precludes the use of summary judgment.

B.Summary Judgment was Appropriate

The district court based its grant of summary judgment on the ground that the dealers had not shown a "pattern" of racketeering activity under RICO.Although we cannot agree with this conclusion, we do hold that the dealers failed to show that there is a genuine issue of fact regarding the acts of fraud on which the RICO charge is based.Therefore summary judgment was appropriate and we affirm the district court.

1.RICO's "pattern" requirement.

Turning to the "pattern" requirement, our starting point is to recognize that a "pattern of racketeering activity" consists of at least two acts of racketeering activity.18 U.S.C. Sec. 1961(5).The theory of the dealers, set forth in their First Amended Complaint, is that Franciscan committed at least twenty-four separate acts of mail and wire fraud, which are acts of racketeering activity under 18 U.S.C. Sec. 1961(1)(B), and thus constitute a "pattern."

Franciscan replies by expanding the focus of inquiry.In its view the alleged acts of mail and wire fraud do not constitute a "pattern" of racketeering activity because they pertain to a single alleged criminal episode, the closing of Franciscan.A "pattern," Franciscan points out, requires " 'continuity plus relationship.' "Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n. 14, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346(1985)(quotingS.Rep. No. 617, 91st Cong., 1st Sess. 158(1969)(emphasis added)).Continuity is lacking, Franciscan insists, when acts pertain to a single criminal episode.Under these circumstances there is no ongoing illegal activity.

This approach is not without its appeal.However, the plain words of RICO preclude it.RICO defines "pattern of racketeering activity" without mentioning continuity.See18 U.S.C. Sec. 1961(5).There is no suggestion that the underlying illegal acts must be part of different criminal episodes.The dictum in Sedima is suggestive, but without additional explication by the Supreme Courtwe decline to follow its lead.Nor does our recent decision in Schreiber Distributing Co. v. Serv-Well Furniture Co., 806 F.2d 1393(9th Cir.1986), require us to do so.There we held that plaintiffs failed to state a RICO claim by alleging acts of mail and wire fraud relating to the diversion of a single shipment of products.Id. at 1399.That was a single fraud perpetrated on a single victim.By contrast, here the dealers allege that Franciscan made multiple fraudulent sales to them as multiple victims.Furthermore, Franciscan's alleged misrepresentations constituted continuing activity from May 1983 to September 1983--a period of five months.Therefore the dealers have alleged two or more acts of racketeering activity, and this, we hold, constitutes a "pattern."¹

2.The alleged intent to defraud.

The elements of the alleged mail and wire fraud consist of, first, a scheme or artifice devised with specific intent to defraud and, second, use of the United States mails or interstate telephone wires in furtherance thereof.Schreiber, 806 F.2d at 1399-400;seeUnited States v. Bohonus, 628 F.2d 1167, 1171 & n. 7(9th Cir.), cert. denied, 447 U.S. 928, 100 S.Ct. 3026, 65 L.Ed.2d 1122(1980).In the context of Franciscan's motion for summary judgment, the issue is whether there exists a genuine issue of fact with respect to whether Franciscan had an intent to defraud.The dealers allege that Franciscan has actually admitted this intent.We disagree.

The record, on the basis of which Franciscan's motion must be judged, reveals...