Chang v. Chen

Citation80 F.3d 1293
Decision Date04 April 1996
Docket NumberNo. 94-55583,94-55583
PartiesRICO Bus.Disp.Guide 9012, 96 Cal. Daily Op. Serv. 2293, 96 Daily Journal D.A.R. 3847 Ming-Chu CHANG; Kang-Jye Chen; Ching-Chieh Chang; A.C.I. Trading Inc., Plaintiffs-Appellants, and Fu-Nan Chen, aka, George Chen, Plaintiff, v. Shu-Jen Tseng CHEN, Defendant, and Eugene Gabrych; Marian Gabrych; Eddie Lin, aka, Eddy C. Lin, aka, Chi-Chang Lin, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Appeal from the United States District Court for the Central District of California, Mariana R. Pfaelzer, District Judge, Presiding. No. CV-92-05905-MRP.

Mark Riera, Sheppard, Mullin, Richter & Hampton, Los Angeles, California, for the plaintiffs-appellants.

Thomas C. Mundell, Mundell, Odlum & Haws, San Bernardino, California, and Linda Monroe, Law Office of Timothy S. Harris, Los Angeles, California, for the defendants-appellees.

Before: POOLE, BOOCHEVER, and O'Scannlain, Circuit Judges.

OPINION

BOOCHEVER, Circuit Judge:

Ming-Chu Chang, Kang-Jye Chen, Ching-Chieh Chang and A.C.I. Trading, Inc. (collectively "Appellants") appeal a district court decision that dismissed their second amended complaint without leave to amend. Appellants brought their action against Eugene Gabrych, Marian Gabrych and Eddie Lin (collectively "Appellees") for alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68 (1988), arising out of a series of real estate transactions conducted in 1989 and 1990. The district court dismissed the complaint, finding that Appellants failed to allege a cognizable RICO enterprise.

This appeal raises the issue whether the Supreme Court's decision in United States v. Turkette, 452 U.S. 576, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981), requires a RICO enterprise to have an ascertainable structure separate and apart from that inherent in the pattern of racketeering activity, or whether Turkette permits a RICO enterprise to be no more than the sum of the predicate racketeering acts. We hold that a RICO enterprise must have an ascertainable structure separate and apart from the structure inherent in the conduct of the pattern of racketeering activity.

Because the district court properly concluded that Appellants failed to allege a cognizable RICO enterprise under this standard, we affirm the district court's decision to dismiss Appellants' second amended complaint. We also affirm the district court's decision to dismiss without leave to amend because there is no reason to believe that any amendment would cure the deficiency.

FACTS

Appellant Ming-Chu Chang initially filed an action in federal court alleging RICO and state law fraud claims against Appellees. The RICO claim was not properly pled. On February 8, 1993, the district court dismissed the complaint with leave to amend. Chang filed a first amended complaint that realleged both the RICO and the state law fraud claims. Appellants Kang-Jye Chen, Ching-Chieh Chang and A.C.I. Trading, Inc. joined Appellant Ming-Chu Chang as plaintiffs in the first amended complaint. Appellees again moved to dismiss, arguing that Appellants had not adequately pled either a RICO enterprise or a pattern of racketeering activity. Appellees also filed a motion for summary judgment.

On November 4, 1993, the district court denied Appellees' motion for summary judgment. The court also dismissed Appellants' RICO claims with leave to amend. The dismissal order discussed the substantive requirements for a RICO claim and advised Appellants that the court would allow only one more amended complaint. Additionally, the court declined to continue exercising supplemental jurisdiction over Appellants' state law fraud claims, which Appellants had refiled in state court.

On December 6, 1993, Appellants filed a second amended complaint asserting two RICO claims. The complaint described in detail three land transactions between Appellants and Appellees, and referred to twenty-eight additional transactions involving Appellees and buyers who are not parties to the present action. Appellees allegedly conducted each of these transactions in a similar manner.

Appellee Eugene Gabrych and Appellee Marian Gabrych (jointly "Appellees Gabrych") would secure an option to acquire a parcel of land in Riverside County, California. Appellees Gabrych would then enter into a first escrow to purchase the property.

Appellee Lin would solicit potential buyers to invest in the Riverside property by making fraudulent representations. After locating an "unsuspecting" buyer, a second escrow for the property would be opened, with George Realty Company, Inc. ("George Realty") acting as the broker and Appellee Lin serving as the sales agent representing George Realty. Appellee Lin would then sign a land purchase agreement on behalf of George Realty, with Appellees Gabrych listed as the sellers.

The "unsuspecting" buyer would make a nonrefundable deposit into the second escrow without being informed of the existence of the first escrow. A trust deed on the property would secure the financing, which was arranged to require a nonrefundable deposit, interest-only payments for a limited time, and a balloon payment at the end of that time for the remainder of the purchase price. In some cases, Appellees would utilize a "straw man" who would "purchase" the property for an inflated price just prior to the closing of the second escrow in order to conceal the property's true value from the "unsuspecting" buyer.

According to the second amended complaint, Appellee Eddie Lin, Appellee Eugene Gabrych, Appellee Marian Gabrych and George Realty formed a RICO enterprise by associating in fact to conduct the above described fraudulent real estate transactions. Each Appellee allegedly was in charge of and played a vitally important role in controlling and managing a specific phase of the enterprise's activities. Specifically, Appellees Gabrych were in charge of locating and securing the right to purchase the properties at nominal costs. Appellees Gabrych also would direct Appellee Lin to solicit "unsuspecting" buyers and to misrepresent the value of the Riverside properties to those buyers. Appellee Lin was in charge of having the buyers execute real property purchase agreements. In return for their respective roles, Appellees profited from the nonrefundable deposits.

On February 28, 1994, the district court held a hearing on Appellees' motion to dismiss the second amended complaint. After the hearing, the district court found that the complaint did not allege a cognizable RICO enterprise and that the complaint did not allege with sufficient particularity two predicate acts against either Appellee Marian Gabrych or Appellee Lin. The district court also found that Appellants could not cure these deficiencies by amendment. Consequently, the district court granted Appellees' motion to dismiss the second amended complaint without leave to amend. Judgment was entered in favor of Appellees on March 28, 1994. This appeal followed.

STANDARD OF REVIEW

A dismissal for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) is reviewed de novo. Everest and Jennings, Inc. v. American Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir.1994). Review is limited to the contents of the complaint. Love v. United States, 915 F.2d 1242, 1245 (9th Cir.1989) (as amended). All allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Everest and Jennings, 23 F.3d at 228. Absent unusual circumstances, "[d]ismissal without leave to amend is improper unless it is clear, upon de novo review, that the complaint could not be saved by any amendment." Polich v. Burlington N., Inc., 942 F.2d 1467, 1472 (9th Cir.1991).

DISCUSSION

RICO provides, in pertinent part, that:

It shall be unlawful for 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 U.S.C. § 1962(c) (emphasis added). RICO also makes it unlawful for any person to conspire to violate any provision of this subsection. Id. § 1962(d).

RICO defines the term "enterprise" to include (1) "any individual, partnership, corporation, association, or other legal entity," and (2) "any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). At issue in the present appeal are the minimum requirements for an associated-in-fact enterprise.

The Supreme Court has held that a group of individuals associated in fact for wholly unlawful ends could constitute an enterprise for purposes of RICO. United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981). According to the Court, establishing the existence of an associated-in-fact enterprise requires proof (1) of an ongoing organization, formal or informal, and (2) that the various associates function as a continuing unit. Id. at 583, 101 S.Ct. at 2528.

The second amended complaint adequately alleged that Appellees, as associates, functioned as a continuing unit. According to the district court, however, the second amended complaint failed to allege an organization, formal or informal, with sufficient structure to constitute an enterprise for purposes of RICO.

Turkette does not specify how much structure an organization must have to be an enterprise under RICO. This issue has divided the circuit courts that have considered it. Six circuits have interpreted the Supreme Court's decision in Turkette to require a RICO enterprise to have an ascertainable structure separate and apart from the pattern of racketeering activity in which it engages. See United States v. Riccobene, 709 F.2d 214, 223-24 (3d Cir.) (as amended), ...

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    ...7-3), especially for perceived defects in a complaint, answer or counterclaim which could be corrected by amendment. See: Chang v. Chen, 80 F. 3d 1293, 1296 (9th Cir. 1996) (where a motion to dismiss is granted, a district court should provide leave to Moreover, where a party has amended hi......
  • Patent Law And The Supreme Court: Certiorari Petitions Pending (July 2014)
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    • Mondaq United States
    • July 8, 2014
    ...7-3), especially for perceived defects in a complaint, answer or counterclaim which could be corrected by amendment. See: Chang v. Chen, 80 F. 3d 1293, 1296 (9th Cir. 1996) (where a motion to dismiss is granted, a district court should provide leave to Moreover, where a party has amended hi......
  • Patent Law and the Supreme Court: Certiorari Petitions Denied (July 2014)
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