Johnson v. Heath

• Decision Date: 28 December 2022
• Docket Number: s. 20-4095 & 20-4103
• Citation: 56 F.4th 851
• Parties: Harry S. JOHNSON, an individual, Plaintiff - Appellant/Cross-Appellee, v. Michael HEATH, an individual; Dawn Heath, an individual, Defendants - Appellees/Cross-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

56 F.4th 851

Harry S. JOHNSON, an individual, Plaintiff - Appellant/Cross-Appellee,

v.Michael HEATH, an individual; Dawn Heath, an individual, Defendants - Appellees/Cross-Appellants.

Nos. 20-4095 & 20-4103

United States Court of Appeals, Tenth Circuit.

FILED December 28, 2022

Kirk C. Lusty, Salt Lake City, Utah, for Plaintiff-Appellant/Cross-Appellee

James W. Jensen, Jensen Law Office, Cedar City, Utah, and Steven W. Call, Ray Quinney & Nebeker P.C., Salt Lake City, Utah, for Defendants-Appellees/Cross-Appellants

Before BACHARACH, KELLY, and CARSON, Circuit Judges.

CARSON, Circuit Judge.

This case arises from a business deal gone sideways. Defendants Michael and Dawn Heath sold Plaintiff Harry Johnson a gasoline and automobile-service station in Wells, Nevada. But soon after the sale, Plaintiff allegedly discovered that the property had material, undisclosed defects and that Defendants had artificially inflated the business's profits by scamming customers over the years. So Plaintiff sued them.

Plaintiff asserted many state-law claims against both Defendants and a claim against Defendant Michael Heath under the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"). The district court dismissed Plaintiff's RICO claim for failure to state a claim upon which relief can be granted and declined to exercise supplemental jurisdiction over the remaining state claims. Plaintiff appeals.

Our task is not to determine whether Defendants acted honorably or within the bounds of the law generally; we must decide only whether Defendants’ actions as alleged plausibly violated the federal RICO statute. Because we conclude they did not, we exercise jurisdiction under 28 U.S.C. § 1291 and affirm. We also affirm the district court's denial of Defendants’ motion for attorney's fees.¹

I.

Defendants first operated a Chevron-branded gas station in Elko, Nevada in 2000. After receiving many customer complaints about "over-solicitation", Chevron allegedly declined to renew its branding agreement with Defendants. As a result, Defendants stopped operating the Elko station.

Defendants next purchased and began operating a gasoline and automobile-service station in Wells, Nevada in 2003. Customers allegedly began complaining about credit-card charges for higher-than-advertised fuel prices, unauthorized or unnecessary automobile repairs, and parts or repairs that no one installed or completed. For example, Defendants allegedly switched off their marquee sign that displayed the gasoline price, illuminating only the sign displaying the price of propane. This tricked some customers into believing that Defendants were selling gasoline at the less expensive propane price. Twenty-four customers filed complaints about this alleged practice. Besides their alleged customer scams, Defendants allegedly performed little maintenance on the property, leaving the gasoline storage tanks, propane tanks, and sewage system in disrepair.

In 2013, Defendants decided to sell the Wells station. They hired real estate agent Jon Walter to market the gas station in Utah. To facilitate Walter's marketing of the station, Defendants provided Walter with information about its finances and profitability. But Defendants allegedly inflated the profitability data by basing it on revenue from overcharging customers. Defendants also allegedly failed to disclose that they spent little revenue on necessary repairs to the property, further inflating the property's value.

That same year, Plaintiff, through his son, contacted Walter and expressed interest in the Wells station. Walter provided Plaintiff with the Wells station's allegedly inflated financial information. Over the next year, Plaintiff requested additional financial records and information. Defendants continued to provide allegedly false and inflated data about the station's finances. Plaintiff also asked if the station needed any foreseeable repairs, which Defendants allegedly denied despite knowing that the gasoline storage tanks, propane tanks, and the sewage system all needed repairs. And when Plaintiff asked why Defendants were selling the station, they allegedly responded that they intended to retire from the gasoline- and service-station business and move to Idaho. Based on the allegedly fraudulent information Defendants provided, Plaintiff bought the Wells station in 2014.

After selling the Wells station to Plaintiff, Defendants bought a gas and service station in New Harmony, Utah, which they currently operate. Defendants have allegedly continued to charge customers for unnecessary tires and automobile repairs at the New Harmony station.

Plaintiff sued Defendants in the District of Utah, asserting nine state-law claims and a federal RICO claim against Defendant Michael Heath. Plaintiff alleged that Michael Heath ran his company, Heath Enterprises Inc., as a racketeering scheme Plaintiff calls "burning the station." "Burning the station" involves buying a gas and automobile-service station, squeezing as much profit out of it as possible by fraudulently overcharging customers and neglecting necessary repairs to the property, and then selling the station to a buyer who is unaware that a lawfully operated station cannot sustain the station's current profits.

Defendants moved to dismiss Plaintiff's claims. The district court dismissed the RICO claim for failure to state a claim and declined to exercise supplemental jurisdiction over Plaintiff's remaining state claims. Defendants then moved for attorney's fees, which the district court denied. All parties appeal.

II.

A.

We first address the dismissal of Plaintiff's RICO claim. We review de novo a district court's dismissal for failure to state a claim. Sacchi v. IHC Health Servs., 918 F.3d 1155, 1157 (10th Cir. 2019). While doing so, we accept the factual allegations in Plaintiff's complaint as true and construe them in the light most favorable to him. See id. We then determine whether Plaintiff's factual allegations, so construed, plausibly entitle Plaintiff to relief under the cause of action asserted. See Young v. Davis, 554 F.3d 1254, 1256 (10th Cir. 2009).

Plaintiff brought a RICO claim under 18 U.S.C. §§ 1962(c) and 1964(c) against Defendant Michael Heath. Section 1962(c) prohibits "any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, [from] conduct[ing] or participat[ing], directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." And § 1964(c) provides a private cause of action for persons harmed by violations of § 1962.

To plead a valid RICO claim, a plaintiff must plausibly allege that a defendant "(1) conducted the affairs (2) of an enterprise (3) through a pattern (4) of racketeering activity." George v. Urb. Settlement Servs., 833 F.3d 1242, 1248 (10th Cir. 2016). "Racketeering activity" consists of the criminal offenses listed in 18 U.S.C. § 1961(1), and a "pattern" requires at least two racketeering acts committed within ten years of each other. 18 U.S.C. § 1961(5).

Plaintiff alleged that Defendant Michael Heath conducted the affairs of Heath Enterprises Inc., an enterprise, through a pattern of wire fraud, bank fraud, and access-device fraud—crimes that § 1961(1) classifies as racketeering activity. According to Plaintiff, Defendant committed these crimes by fraudulently inducing customers to use their credit cards to buy gasoline and services and then fraudulently inducing Plaintiff to buy the station for more than it was worth. Plaintiff alleged that these predicate crimes formed the RICO pattern Plaintiff calls "burning the station."

The parties do not dispute that Heath Enterprises Inc. qualifies as an enterprise or that Defendant conducted its affairs. They dispute only whether Plaintiff adequately alleged that Defendant engaged in racketeering activity and if so, whether Plaintiff adequately alleged a pattern of that activity. The district court assumed without deciding that Plaintiff adequately alleged Defendant's commission of bank and wire fraud but determined that Plaintiff failed to adequately allege a pattern of such acts under RICO. We agree with the district court that even assuming Plaintiff adequately alleged predicate racketeering acts, he failed to state a RICO claim because he did not adequately allege a RICO pattern.

Determining what constitutes a RICO pattern is no easy task. See H. J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 255, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989) (Scalia, J., concurring) ("[T]he word ‘pattern’ in the phrase ‘pattern of racketeering activity’ was meant to import some requirement beyond the mere existence of multiple predicate acts. ... But what that something more is, is beyond me."). The statute offers little help. Section 1961(5) tells us that a single racketeering act or racketeering acts separated by more than ten years are not a pattern but provides no insight beyond that. See Sedima, S. P. R. L. v. Imrex Co., 473 U.S. 479, 496 n.14, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) (explaining that § 1961(5) establishes a necessary—but not sufficient—condition for finding a RICO pattern).

The Supreme Court has attempted to provide some guidance—though whether that guidance provides any more clarity than the statute is subject to dispute. See H.J. Inc., 492 U.S. at 252, 109 S.Ct. 2893 (Scalia, J., concurring) ("I doubt that the lower courts will find the Court's instructions much more helpful than telling them to look for a ‘pattern’—which is what the statute already says."). According to the Supreme Court, a RICO pattern requires that the racketeering predicates relate to each other and amount to a threat of continued racketeering activity.

Id. at 239, 109 S.Ct. 2893. No pattern exists without this "continuity plus relationship." Id. (emphasis omitted).

Turning first to the relationship requirement, racketeering predicates relate to each other if they "have the same or similar...