Cordero-Hernandez v. Hernandez-Ballesteros

• Decision Date: 02 June 2006
• Docket Number: No. 04-2435.,04-2435.
• Citation: 449 F.3d 240
• Court: U.S. Court of Appeals — First Circuit
• Parties: Ana M. CORDERO-HERNÁNDEZ, Plaintiff, Appellant, Paris Paris Boutique, Inc., Plaintiff, v. María Teresa HERNÁNDEZ-BALLESTEROS; George Moll; Arnaldo Peñalvert-Vázquez; Elba María Martínez; Firstbank of Puerto Rico, Inc., Defendants, Appellees.

449 F.3d 240

Ana M. CORDERO-HERNÁNDEZ, Plaintiff, Appellant, Paris Paris Boutique, Inc., Plaintiff, v. María Teresa HERNÁNDEZ-BALLESTEROS; George Moll; Arnaldo Peñalvert-Vázquez; Elba María Martínez; Firstbank of Puerto Rico, Inc., Defendants, Appellees.

No. 04-2435.

United States Court of Appeals, First Circuit.

Heard December 7, 2005.

Decided June 2, 2006.

Alexander Zeno for appellant.

William Santiago-Sastre, with whom Meléndez Perez, Moran & Santiago was on brief, for appellee First Bank of Puerto Rico.

Before TORRUELLA, Circuit Judge, CYR and STAHL, Senior Circuit Judges.

STAHL, Senior Circuit Judge.

The Paris Paris Boutique was a small shop located in San Juan, Puerto Rico. It was founded several years ago by María Teresa Hernández-Ballesteros (Hernández), an entrepreneur who has also founded and operated at least two other shops in San Juan. Under Hernández's management, the shop apparently dealt primarily in women's clothing and accessories, and had at least two employees, a professional manager and a sales clerk. It purchased clothing from Puerto Rican and New York-based retailers and sold the goods to walk-in customers, primarily targeting passing tourists.

Hernández decided to give up the business in 2000 or 2001, and put Paris Paris Boutique, Inc. on the market. Among a number of interested buyers, Ana M. Cordero-Hernández (Cordero) won out. This suit was brought by Cordero and the boutique over the fallout from that purchase. Cordero and the Paris Paris company alleged various fraud- and contract-related claims against Hernández and George Moll, who was the realtor on the sale of the boutique. They also brought claims against Arnaldo Peñalvert-Vázquez (Peñalvert), Hernández's accountant; FirstBank of Puerto Rico, which holds the mortgage that Cordero assumed when she purchased the property; and Elba María Martínez (Martínez), the proprietor of the building in which the Paris Paris was located.

Cordero purchased 100% of the shares of the boutique from Hernández on St. Valentine's Day, 2001. The purchase price for the store was $69,000 in cash and the assumption of $156,000 in debt owed by Hernández to FirstBank. Included in the deal were promises by Hernández to offer training to Cordero in dealing with suppliers and in the other particulars of running the store, but none of these promises were ever honored. While Cordero had also been promised an easy and immediate monthly profit, earnings lagged behind expectations, and Cordero and the store quickly began to experience financial difficulties. Cordero argues that the store's plight was worsened by the fact that Hernández almost immediately set up a new dress shop, named El Sol de Puerto Rico, in the same building as the Paris Paris.

Soon after she established El Sol, Hernández put it on the market, just as she had done with the Paris Paris. Believing that she had herself been defrauded, suspecting that Hernández was planning to perpetrate a similar fraud in the upcoming sale of El Sol, and hoping to catch Hernández in a pattern of fraudulent activity, Cordero hired two investigators to come to El Sol and pretend to be interested purchasers. Hernández allegedly made representations about the new store to this pair, Damian Soto and Ester Morell, that sounded in the same register as her representations to Cordero about Paris Paris — high margins, valuable inventory, established clientele, and easy money. The hired detectives did not, of course, buy El Sol, and neither did anyone else. Finding no buyer, Hernández abandoned the store less than a year after opening it.

Meanwhile, in May 2001, with her financial problems worsening, Cordero and the Paris Paris company filed voluntary petitions for bankruptcy protection under Chapter 11. In the course of the bankruptcy proceedings, Cordero attempted to assert a handful of legal claims against Hernández and the other defendants in this action, all involved in the sale of the Paris Paris or the establishment of El Sol, and these claims were eventually removed to federal district court. In her original complaint in the district court, Cordero alleged that Hernández and her agents had misrepresented the value and profitability of the Paris Paris Boutique, and that Hernández had breached her contract with Cordero and had engaged in unfair competition by opening the competing store in the same building as the Paris Paris. In particular, she alleged that Hernández, personally and through Moll and Peñalvert, misled her about the past profitability of the store and about its likely value going forward. She also alleged that FirstBank of Puerto Rico, which provided partial financing for the deal, had failed to abide by several of its own risk-management policies, was less than fully candid with Cordero about its interest in the transaction going ahead, and so ultimately contributed to Cordero's injuries. In addition, Cordero also claimed that Hernández had violated an implied contractual obligation not to compete with her by opening up the new shop in the same building as the Paris Paris, and that Martínez, who leased space to both the Paris Paris and El Sol, violated a term of Cordero's lease by permitting Hernández to open her new store next door to the Paris Paris.

Cordero amended her complaint in April 2002 to include a cause of action under the Racketeer Influenced and Corrupt Organizations (RICO) Act, 18 U.S.C. § 1964(c). In the newly added portion of the complaint stating a claim under RICO, Cordero incorporated her fraud allegations against all defendants, and further alleged that the defendants together comprised an enterprise organized for the purpose of defrauding potential buyers of the boutiques they developed. The specific RICO predicate that Cordero attempted to allege was interstate wire fraud under 18 U.S.C. § 1343 (defining wire fraud) and § 1961(5) (incorporating wire fraud as a RICO predicate): Cordero claimed that Hernández, along with other defendants, made fraudulent representations first to Cordero and later to her hired investigators, and that some of these representations were made over the phone. Cordero never explicitly alleged, however, that the phone calls were interstate calls nor stated specifically during which calls, when, and by whom, the fraudulent representations were made, failings which are the nub of this appeal.

A drawn-out discovery battle ensued, during which Cordero filed no fewer than four motions to compel discovery from a seemingly reluctant set of defendants, and the court noted in one of its orders compelling discovery that it was running out of patience with the parties. Early on in the discovery period, defendants moved together for 12(b)(6) dismissal for failure to state a claim, and Cordero responded. Discovery proceeded apace, while the motion to dismiss lingered on the docket. A year later, the district court issued an order dismissing the RICO action with prejudice pursuant to the defendants' 12(b)(6) motion and dismissing the state law claims, over which it claimed¹ only supplemental jurisdiction, without prejudice.²

In order to make out a civil claim under RICO by way of wire fraud, a plaintiff must allege that a group of defendants "engaged in a scheme to defraud with the specific intent to defraud and that they used . . . the interstate wires in furtherance of the scheme," McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 790 (1st Cir.1990), and in particular that defendants engaged in at least two instances of such predicate wire use, Ahmed v. Rosenblatt, 118 F.3d 886, 888 (1st Cir.1997). The Federal Rules of Civil Procedure usually permit a plaintiff to make general allegations in a complaint, see Fed.R.Civ.P. 8, but require more specific pleading where a plaintiff alleges fraud, see id., 9(b). In particular, under Rule 9 "the pleader is required `to go beyond a showing of fraud and state the time, place and content of the alleged mail and wire communications perpetrating that fraud.'" N. Bridge Assocs., Inc. v. Boldt, 274 F.3d 38, 43 (1st Cir.2001) (quoting Feinstein v. Resolution Trust Corp., 942 F.2d 34, 42 (1st Cir.1991)). "It is not enough for a plaintiff to file a RICO claim, chant the statutory mantra, and leave the identification of predicate acts to the time of trial." Id. (quoting Feinstein, 942 F.2d at 42). As noted, while plaintiffs asserted conclusorily in their amended complaint that they were alleging wire fraud, they did not make the requisite allegations identifying specific interstate phone calls by time, place, and content.³

Failure to plead with specificity in a RICO action may merit dismissal. See id. at 44. Because, however, it will often be difficult for a plaintiff to plead with specificity when the facts that would support her claim are solely in the possession of a defendant, we held in New England Data Services, Inc. v. Becher, 829 F.2d 286 (1st Cir.1987), that a court faced with an insufficiently specific claim may permit limited discovery in order to give a plaintiff an opportunity to develop the claim and amend the complaint. Id. at 290. Among the particular facts that a plaintiff might under some circumstances have difficulty proving without access to discovery is whether or not a particular communication passed over the interstate wires, and Becher discovery therefore may be called for, though is not necessarily required, when the interstate nature of a wire transaction is in question. But Becher discovery (with concomitant leave to amend) "is neither automatic, nor of right, for every plaintiff." Ahmed, 118 F.3d at 890. The threshold questions are whether "the specific allegations of the plaintiff make it likely that the defendant used interstate mail or telecommunications facilities, and the specific information as to use is likely in the exclusive control of the defendant." Becher, 829 F.2d at 290.

The court here considered, and decided against, permitting further discovery under B...