Lui Ciro, Inc. v. Ciro, Inc., CV. No. 94-00629-DAE.

• Decision Date: 26 July 1995
• Docket Number: CV. No. 94-00629-DAE.
• Citation: 895 F. Supp. 1365
• Parties: LUI CIRO, INC., a Hawaii corporation; Calvin W. Lui; and Theresa M. Lui, Plaintiffs, v. CIRO, INC., a Delaware corporation; Ciro of Bondstreet Inc., a Delaware corporation; Ciro Creations, Inc., a Maryland corporation; Ciro Hawaii, Inc., a Delaware corporation; Jack B. Levine; Abraham Gold; Howard Rubin; John Does 1-50; Jane Does 1-50; Doe Partnerships 1-50 Doe Corporations 1-50; Doe Entities 1-50; and Doe Governmental Units 1-50, Defendants.
• Court: U.S. District Court — District of Hawaii

895 F. Supp. 1365

LUI CIRO, INC., a Hawaii corporation; Calvin W. Lui; and Theresa M. Lui, Plaintiffs, v. CIRO, INC., a Delaware corporation; Ciro of Bondstreet Inc., a Delaware corporation; Ciro Creations, Inc., a Maryland corporation; Ciro Hawaii, Inc., a Delaware corporation; Jack B. Levine; Abraham Gold; Howard Rubin; John Does 1-50; Jane Does 1-50; Doe Partnerships 1-50 Doe Corporations 1-50; Doe Entities 1-50; and Doe Governmental Units 1-50, Defendants.

CV. No. 94-00629-DAE.

United States District Court, D. Hawai`i.

July 26, 1995.

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Jeff N. Miyashiro, Watanabe Ing & Kawashima, Honolulu, HI, for plaintiffs.

Jack B. Levine, Key Biscayne, FL, pro se.

Philip R. Brown, Carlsmith Ball Wichman Murray Case Mukai & Ichiki, Honolulu, HI, Stephen P. Rinehart, Parker Chapin Flattau & Klimpl, New York City, for defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT GOLD'S MOTION TO DISMISS AMENDED COMPLAINT

DAVID ALAN EZRA, District Judge.

Defendant Abraham Gold's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) came before this court on July 17, 1995. At the hearing, William Gilardy, Jr., Esq., and Jeff Miyashiro, Esq., appeared for Plaintiffs Lui Ciro, Inc., Calvin W. Lui, and Theresa M. Lui (collectively, "the Luis"); Philip R. Brown, Esq. and Stephen G. Rinehart, Esq., appeared for Defendant Abraham Gold ("Gold"). The court having reviewed the motion and the supporting and opposing memoranda and having heard oral argument of counsel, GRANTS in part and DENIES in part Defendant's motion to dismiss the Amended Complaint.

BACKGROUND

Plaintiffs Calvin and Theresa Lui are the sole shareholders and officers of Lui Ciro, Inc., a Hawaii corporation which entered into a series of agreements with Defendant Ciro, Inc. and/or its wholly owned subsidiaries ("Ciro") to jointly own and operate four Ciro franchise jewelry stores in Hawaii. Defendant Abraham Gold acquired an interest in Ciro by purchasing a controlling interest in Ciro's holding company in 1987. Gold served as Chairman of the Board of Ciro until April 1993. Co-Defendant Jack Levine ("Levine") was President and Chief Operating Officer of Ciro from 1990 until April 1993.

The Luis allege that Levine initially approached them in April 1991 about investing in Ciro franchises. That contact was followed up by Gold's meeting with the Luis during trips to Hawaii in May and November of 1991. The Luis also allege that Gold spoke to them on the telephone about the investment. The Luis claim that during these discussions, Gold and Levine made affirmative material misrepresentations regarding Ciro's management, financial condition, and the anticipated performance of the franchises. In addition to oral misrepresentations, Plaintiffs allege they were provided with printed information, such as a Franchise Offering Circular and Ciro's financial statements for 1988 to 1991, that contained materially false information. The Luis point to a number of specific documents that were sent by United States mail and also by facsimile transmission that they allege were fraudulent. See Amended Complaint at ¶ 30.

The Luis do not claim that the documents were prepared or sent by Gold in particular, arguing that the production and transmission of the documents were part of an ongoing effort on the part of all Defendants to induce the Luis to invest in the franchise. However, the Luis specifically allege that Gold represented that he would buy back the Luis' interest in the franchises at their cost if they became dissatisfied for any reason. With specific reference to Gold, the Luis also claim that he made certain other misrepresentations: (1) Gold had been president of Marks & Spencer, a large English company; (2) he possessed in excess of $25 million in liquid assets; (3) the stores would do a tremendous amount of business, estimated at $750,000 gross per year; and (4) sales activity would allow the Luis to recoup their investment in the first year. Amended Complaint at ¶ 73.

Beginning in December 1991, the Luis proceeded to enter into a number of franchise agreements with Ciro. See Amended Complaint at ¶ 35. Plaintiffs also claim they were induced to execute, as partners of a Ciro subsidiary, two promissory notes in the amount of $243,777.73, dated June 19, 1992, and $78,410.83, dated April 1, 1993, as part of the transaction establishing three of the Ciro shops. Amended Complaint at ¶ 35(d). In addition, the Luis claim they were fraudulently induced to sign as personal guarantors of a $725,000 loan from First Hawaiian Bank to provide working capital for the Hawaii stores, using their personal residence to secure the loan. Amended Complaint at ¶ 35(h). The Luis allege that the Defendants' fraudulent conduct continued during the entire course of their business relationship, with deception concerning Ciro's income, inventory, expenses, use of funds, and overall financial condition.

In July 1993, after conducting an internal investigation, Ciro filed an 8-K Report with the Securities and Exchange Commission which revealed that the 1990 and 1991 financial statements were misleading. The 8-K Report reduced the company's net income by more than $4 million for the years 1990 through 1992. Amended Complaint at ¶¶ 65-68, 89-93. The report also acknowledged misconduct on the part of Gold and Levine, see Amended Complaint, Exh. A at 6-7, resulting in the dismissal of Levine in April 1993 and the barring of Gold from acting on behalf of the company as of the same date. In addition, the report indicated that Gold and others were the subject of an investigation by the United States Attorney for the Southern District of New York.

The Luis claim that Ciro did not inform them of these occurrences and that they only learned of the 8-K Report by chance in August 1993. The Plaintiffs allege that the fraudulent representations have injured them by inducing them to invest and to guarantee certain loans and that Defendants' failure to make lease payments on Ciro stores and to provide sufficient or appropriate inventory to the shops presently jeopardizes their investment. Consequently, the Luis filed a 21-count complaint in Hawaii state court on July 1, 1994 alleging claims of fraud, tortious interference with contractual relations, breach of fiduciary duty and of the covenant of good faith, negligent infliction of mental and emotional distress, and violations of Hawaii's Franchise Investment Law, Haw.Rev.Stat. ch. 482E, Hawaii's Unfair or Deceptive Acts or Practices and Unfair Methods of Competition statute, Haw.Rev.Stat. ch. 480, as well as a cause of action under the federal Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO").

On August 12, 1994, Defendant Gold removed the action to this court based on federal subject matter jurisdiction over RICO. In addition, on or about July 19, 1994, Defendants Ciro, Inc., Ciro of Bondstreet, Inc., and Ciro Creations, Inc. filed petitions for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York.¹ Pursuant to 11 U.S.C. § 362(a)(1), this filing activated the automatic stay of the continuation of the litigation with respect to these Defendants.

On September 9, 1994, Gold filed a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b). In response, the Luis filed an amended complaint on or about December 14, 1994. Gold then filed the instant motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) on January 20, 1995.

Gold brings his motion to dismiss on several grounds. First, he argues that the Amended Complaint fails to state claims for fraud with sufficient particularity under Rule 9(b). Next, he contends that the Amended Complaint fails to state a cause of action under RICO because it lacks allegations of: (1) a threat of continuing activity or closed ended continuity; (2) predicate acts; (3) injury resulting from the alleged racketeering activity; (4) a conspiracy involving Gold; and (5) an enterprise distinct from defendants. Gold also argues that Plaintiffs' lack of standing to bring a cause of action under RICO and failure to file a RICO case statement justify dismissal. Finally, Gold contends that the state claims suffer from various infirmities and should be dismissed.

STANDARD OF REVIEW

I. Dismissal under 12(b)(6)

A motion to dismiss pursuant to Fed. R.Civ.P. 12(b)(6) for failure to state a claim is proper only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Chandler v. McMinnville School Dist., 978 F.2d 524, 527 (9th Cir.1992) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)). The court must accept as true all allegations of material fact in the complaint and must construe these facts in the light most favorable to the plaintiff. Imagineering, Inc. v. Kiewit Pacific Co., 976 F.2d 1303, 1306 (9th Cir. 1992), cert. denied, ___ U.S. ___, 113 S.Ct. 1644, 123 L.Ed.2d 266 (1993).

II. Dismissal under 9(b)

Rule 9(b) requires that in any averment of fraud, the "circumstances constituting fraud ... shall be stated with particularity." Fed.R.Civ.P. 9(b). Although the pleading of detailed evidentiary matter is not necessary, Walling v. Beverly Enters., 476 F.2d 393, 397 (9th Cir.1973); Nakamoto v. Hartley, 758 F.Supp. 1357, 1366 (D.Haw.1991), "Rule 9(b) requires particularized allegations of the circumstances constituting fraud." In re GlenFed, Inc. Securities Litigation, 42 F.3d 1541, 1547 (9th Cir.1994). This circuit has found that the plaintiff must include statements concerning the time, place, and nature of the alleged fraudulent activities and that "mere conclusory allegations of fraud are insufficient." Id. at 1548 (quoting Moore v....