Kehr Packages, Inc. v. Fidelcor, Inc.

• Decision Date: 27 March 1991
• Docket Number: No. 90-1396,90-1396
• Citation: 926 F.2d 1406
• Parties: RICO Bus.Disp.Guide 7713 KEHR PACKAGES, INC., Charles and Emily McMurtrie, and James McMurtrie, Appellants, v. FIDELCOR, INC., Fidelity Bank, Thomas Donnelly, Neil Cohen, James Noon, and Mario Giannini, Esq.
• Court: U.S. Court of Appeals — Third Circuit

Page 1406

926 F.2d 1406

RICO Bus.Disp.Guide 7713

KEHR PACKAGES, INC., Charles and Emily McMurtrie, and James

McMurtrie, Appellants, v. FIDELCOR, INC., Fidelity Bank, Thomas Donnelly, Neil Cohen, James Noon, and Mario Giannini, Esq.

No. 90-1396.

United States Court of Appeals, Third Circuit.

Argued Nov. 6, 1990.

Decided March 6, 1991.

Rehearing and Rehearing In Banc

Denied March 27, 1991.

Joel H. Slomsky (argued), DiGiacomo & Slomsky, Philadelphia, Pa., for appellants.

Walter Weir, Jr. (argued), Patterson & Weir, Philadelphia, Pa., for appellees.

Before SLOVITER, Chief Judge ^* SCIRICA and ALITO, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This case requires us once again to address the question of what constitutes a "pattern of racketeering activity" under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. Secs. 1961-68 (1984 & Supp.1990). The district court held that plaintiffs did not sufficiently allege such a pattern. We will affirm.

Plaintiffs Kehr Packages, Inc. ("Kehr"), James McMurtrie, Charles McMurtrie, and Emily McMurtrie filed suit against Fidelcor, Inc., Fidelity Bank, N.A. ("Fidelity"), Thomas Donnelly, Neil Cohen, James Noon, and Mario Giannini. The complaint contained both RICO and pendent state law claims arising from an allegedly fraudulent promise to lend money to Kehr. The substantive grounds for the RICO claims were allegations of mail fraud in violation of 18 U.S.C. Sec. 1341. The district court permitted defendants to conduct discovery to determine whether subject matter jurisdiction existed.

Following discovery, defendants filed a motion to dismiss for lack of subject matter jurisdiction under Fed.R.Civ.P. 12(b)(1), and a motion for summary judgment. Plaintiffs opposed the motions and filed their own motion for leave to file an amended complaint. The district court granted defendants' motion to dismiss and denied plaintiffs' motion for leave to amend. The court held that plaintiffs had not sufficiently alleged mail fraud, and assuming they had alleged such fraud, the allegations in the complaint did not constitute a "pattern" under RICO. The district court denied plaintiffs' motion for leave to amend on the grounds that the proposed amended complaint would not cure the defects in the original. Plaintiffs now appeal from these rulings.

I. STANDARD AND SCOPE OF REVIEW

Initially, we must decide what legal standard should govern this appeal. Defendants filed a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1). The district court granted this motion because it found the RICO claims in plaintiffs' complaints to be legally insufficient. Thus, although the court denominated its order as one under Rule 12(b)(1), it appeared to dismiss the complaint under Rule 12(b)(6) for failure to state a claim upon which relief could be granted.

The legal standards governing these two motions are different. A district court can grant a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction based on the legal insufficiency of a claim. But dismissal is proper only when the claim "clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction or ... is wholly insubstantial and frivolous." Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 776, 90 L.Ed. 939 (1946). See also Oneida Indian Nation v. County of Oneida, 414 U.S. 661, 666, 94 S.Ct. 772, 776, 39 L.Ed.2d 73 (1974) (claim must be "so insubstantial, implausible, foreclosed by prior decisions of this Court, or otherwise completely devoid of merit as not to involve a federal controversy"). Ordinarily, a court must assume jurisdiction over a case before deciding legal issues on the merits. Bell, 327 U.S. at 682, 66 S.Ct. at 776. A Rule 12(b)(6) dismissal for failure to state a claim is not subject to the same limitations. The claim need not be wholly insubstantial to be dismissed. As this court has noted, "[t]he threshold to withstand a motion to dismiss under [Rule] 12(b)(1) is thus lower than that required to withstand a Rule 12(b)(6) motion." Lunderstadt v. Colafella, 885 F.2d 66, 70 (3d Cir.1989).

In this case, we believe the district court's order should properly have been denominated a dismissal under Rule 12(b)(6), and we will treat it as such. See Black v. Payne, 591 F.2d 83, 86 n. 1 (9th Cir.) (treating dismissal under Rule 12(b)(1) as one under Rule 12(b)(6)), cert. denied, 444 U.S. 867, 100 S.Ct. 139, 62 L.Ed.2d 90 (1979); see also Kulick v. Pocono Downs Racing Ass'n, Inc., 816 F.2d 895, 899 (3d Cir.1987) (considering whether to treat Rule 12(b)(1) dismissal as one under Rule 12(b)(6), but declining to reach issue). Although the court did not discuss the legal standards under which it decided defendants' motion, it considered only the allegations in the complaints and found them "lacking." The court also denied plaintiffs' motion for leave to amend because "it fail[ed] to establish a valid claim under [RICO], and therefore fail[ed] to correct the defects in the original complaint."

A plaintiff may be prejudiced if what is, in essence, a Rule 12(b)(6) challenge to the complaint is treated as a Rule 12(b)(1) motion. When subject matter jurisdiction is challenged under Rule 12(b)(1), the plaintiff must bear the burden of persuasion. See Mortensen v. First Fed. Sav. and Loan Ass'n, 549 F.2d 884, 891 (3d Cir.1977). On the other hand, under Rule 12(b)(6) the defendant has the burden of showing no claim has been stated. In Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir.1980), we found that transforming a 12(b)(1) motion into a 12(b)(6) motion would "deprive[ ] the plaintiffs of the procedural safeguards to which they were entitled." Id. In this case, however, there is no reason not to treat the motion as having been made under Rule 12(b)(6). In opposing defendants' motion to dismiss, plaintiffs recognized that the motion had been made under Rule 12(b)(1), but stated that "Plaintiffs are treating the Motion of Defendants entitled a 'Motion to Dismiss' as one filed under Rule 12(b)(6)." Memorandum of Law in Support of Plaintiffs Answer in Opposition to Defendants' Motion to Dismiss at 15. In this situation, there is no harm in treating the district court's dismissal as having been made under Rule 12(b)(6). We stress, however, that challenges for failure to state a claim ordinarily should be made under Rule 12(b)(6). See Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 776 (1946).

The district court denied plaintiffs' motion for leave to amend because the proposed amended complaint would also fail to withstand a motion to dismiss. Denials of leave to amend a complaint under Fed.R.Civ.P. 15(a) are reviewed for abuse of discretion. Kiser v. General Elec. Corp., 831 F.2d 423, 426-27 (3d Cir.1987), cert. denied, 485 U.S. 906, 108 S.Ct. 1078, 99 L.Ed.2d 238 (1988). However, reversal is proper when the district court bases its denial on an erroneous rule of law. Banks v. Wolk, 918 F.2d 418, 419 (3d Cir.1990); Centifanti v. Nix, 865 F.2d 1422, 1431 (3d Cir.1989).

Since plaintiffs sought to amend their complaint to rectify certain defects, the allegations in the proposed amended complaint are the relevant ones for purposes of this appeal. This fact is not of great significance, since the amended complaint adds little additional information to that contained in the original. One difference is that the amended complaint drops Fidelcor Inc. and Mario Giannini as defendants; thus, we do not consider any allegations against them. Since we have treated the district court's order as a Rule 12(b)(6) dismissal, we must accept as true all factual allegations in the amended complaint and all reasonable inferences that can be drawn from them. The amended complaint must be construed in the light most favorable to the plaintiffs, and can be dismissed only if the plaintiffs have alleged no set of facts upon which relief could be granted. Banks, 918 F.2d at 419.

II. FACTUAL ALLEGATIONS

This case stems from the leveraged buyout of Kehr by James McMurtrie and Charles McMurtrie. The allegations of the amended complaint are as follows. See Amended Complaint at pp 15-31. On December 12, 1986, the McMurtries entered into an agreement to purchase Kehr. Fidelity agreed to provide $4,165,000 in financing, secured by the assets and accounts of Kehr, and by real estate owned by Charles McMurtrie and his wife Emily McMurtrie. The terms of the loans ranged from five to seven years. Neil Cohen and James Noon handled this loan package for Fidelity. At that time, Cohen was a commercial loan officer at the bank, and Noon was a vice-president.

The original understanding of the parties was that Fidelity would provide, as part of the total $4,165,000 loan, a credit line of $350,000 to be used as working capital for Kehr. Id. at pp 17-18. The eventual loan agreement included a $600,000 line of credit to be used as working capital, and to finance closing costs and pay off Kehr's prior debts. However, at the settlement on December 12, James McMurtrie discovered that this line of credit would be insufficient to fund the necessary $350,000 in working capital. During the settlement, Cohen and Noon, on behalf of Fidelity, made an oral commitment to lend an additional $185,000 for working capital. Cohen and Noon knew that Kehr would operate at a deficit during 1987, and that the working capital would be critically important. In reliance on this commitment, the McMurtries closed the deal and began operating Kehr. Id. at p 31.

Between December, 1986 and August, 1987, Cohen and Noon informed James McMurtrie by telephone "numerous" times that the $185,000 would be available as promised. Id. at p 32. However, Cohen and Noon had no intention of providing the money, and "made such commitments in order to induce Plaintiffs to complete the settlement and to insure that Defendant Fidelity Bank would be the recipient of large monthly interest payments, profits and collateral." Id. at p 33...