Pillsbury, Madison & Sutro v. Lerner

• Decision Date: 15 August 1994
• Docket Number: No. 92-16596,92-16596
• Citation: 31 F.3d 924
• Court: U.S. Court of Appeals — Ninth Circuit
• Parties: RICO Bus.Disp.Guide 8618 PILLSBURY, MADISON & SUTRO, a California corporation, Plaintiff-Appellant, v. Abraham Avi LERNER; Jonathan Beare; Christopher Ellis; Michael Katz; Richard Bergman; Baxter Ellis Inc.; Fifty-Fivecal Corp.; 114 Sansome Associates, Ltd.; Nathanna Financial Corp.; Vertovest Properties, Inc.; Alan Lawrence Lee; Maurice Debbah; Princeton Investments PLC; Princeton Sansome Corp.; 114 Sansome Street Ltd. Partnership; Princeton San Fran, Inc.; Zapala N.V. c/o Curacao Corp. Co. N.V.; Jones Lang Wootton USA; Jones Lang Wootton US Inc., Defendants-Appellees.

Page 924

31 F.3d 924

RICO Bus.Disp.Guide 8618

PILLSBURY, MADISON & SUTRO, a California corporation Plaintiff-Appellant, v. Abraham Avi LERNER; Jonathan Beare; Christopher Ellis Michael Katz; Richard Bergman; Baxter Ellis Inc. Fifty-Fivecal Corp.; 114 Sansome Associates, Ltd. Nathanna Financial Corp.; Vertovest Properties, Inc.; Alan Lawrence Lee; Maurice Debbah; Princeton Investments PLC; Princeton Sansome Corp.; 114 Sansome Street Ltd. Partnership; Princeton San Fran, Inc.; Zapala N.V. c/o Curacao Corp. Co. N.V.; Jones Lang Wootton USA; Jones Lang Wootton US Inc., Defendants-Appellees.

No. 92-16596.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 10, 1994.

Decided Aug. 15, 1994.

John J. Bartko, Bartko, Welsh, Tarrant & Miller, San Francisco, CA, for plaintiff-appellant.

Stephen V. Bomse, Heller, Ehrman, White & McAuliffe, Roger B. Mead, Folger & Levin, San Francisco, CA; Mark D. Plevin, Crowell & Moring, Washington, DC; Jeffrey T. Golenbock, Golenbock, Eiseman, Assor & Bell, New York City, for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before: POOLE, BEEZER, and T.G. NELSON, Circuit Judges.

T.G. NELSON, Circuit Judge:

This appeal arises out of various transactions involving the Adam Grant building, 114 Sansome Street, San Francisco, where appellant, the law firm of Pillsbury, Madison & Sutro (Pillsbury), rents office space, and the effect of those transactions on the amount of rent to be paid by Pillsbury. Pillsbury appeals the district court's Fed.R.Civ.P. 12(b)(6) dismissal for failure to state a claim of its action under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968, against the past and present owners of the building and the real estate broker. Pillsbury alleges that as part of an international money laundering and fraud enterprise, defendants engaged in a fraudulent transfer of 114 Sansome Street in order to inflate the property's ostensible value and inflate Pillsbury's rent. The district court's order dismissing Pillsbury's case was based on the failure to meet the proximate cause requirement imposed for civil RICO actions. See Holmes v. Securities Investor Protection Corp., --- U.S. ----, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992); Imagineering, Inc. v. Kiewit Pac. Co., 976 F.2d 1303, 1311-12 (9th Cir.1992), cert. denied, --- U.S. ----,

113 S.Ct. 1644, 123 L.Ed.2d 266 (1993). We affirm.

BACKGROUND AND PROCEEDINGS

Pillsbury is the major tenant in the Adam Grant Building, occupying about fifty percent of the building's office space. Pillsbury subleases the space from Sansome Realty Corporation (SRC), the master tenant of the property. SRC leases the building pursuant to a thirty-year lease originally entered into in 1970. The annual rent was originally set at $270,000 for ten years. The lease provided that after the initial ten-year period, the rent would be adjusted for two successive ten-year terms, either by agreement of the parties or by arbitration before three real estate appraisers. When the renewal issue first arose in 1980, the parties could not agree on the revised rent, so the matter was arbitrated. The annual rent for 1980 to 1990 was increased approximately three-fold to $780,000.

In 1989 the Grant Company decided to sell the building, and listed it at $18,750,000. A limited partnership (the "new owner" or "seller defendants") purchased the building for approximately $17.5 million. The new owner and SRC could not agree upon a revised rent for the second ten-year term, so the issue was referred to arbitration. The new owner contacted real estate broker Timothy Mason (a managing director of defendant Jones Lang Wootton) to serve as a potential expert witness in the arbitration. Mason, who later suggested he might have a buyer for the building, in fact negotiated a resale of the building to a partnership (the Princeton defendants) for $32 million.

The Princeton defendants took over the rent arbitration with SRC. After eleven days of hearings, the appraisers unanimously ruled that the fair annual rental was $2.4 million. SRC challenged the arbitrators' decision in San Francisco Superior Court and thereafter in the California Court of Appeal, alleging irregularities in the proceedings. These challenges were unsuccessful and the decision is now final.

Following the arbitration, SRC notified Pillsbury that under the sublease, Pillsbury was obligated to pay $1,035,000 out of an approximate $1.6 million increase in the total annual master lease rent. Pillsbury refused to pay, and entered into a "standstill agreement" with SRC which provides that the parties agree to forbear commencing litigation to enforce the pass-through provision of the sublease, and that Pillsbury has conditionally agreed to pay a significant portion of the rent increase.

Pillsbury then brought suit against the seller defendants, the Princeton defendants and Jones Lang Wootton defendants, alleging RICO violations and several related state tort law claims. The district court dismissed Pillsbury's original complaint with leave to amend on the ground that the RICO allegations were insufficient. Pillsbury then filed a 100-page first amended complaint. Pillsbury alleged the defendants were parties to wide-ranging money laundering and mail fraud schemes designed and implemented by Michael Milken and his associates to hide illicit proceeds of junk bond manipulations. Milken is not named as a party, but the complaint purports to place him at the center of the alleged conspiracy. As part of this alleged scheme, Pillsbury contends that the defendants used sham sales of 114 Sansome Street to inflate the value of the building and to raise rents.

The court granted the defendants' motion to dismiss the first amended complaint on the ground that Pillsbury failed to allege that it was proximately injured by the alleged RICO violations. In so ruling, the district court explained that Holmes, --- U.S. ----, 112 S.Ct. 1311, 117 L.Ed.2d 532, decided eleven days after Pillsbury filed its first amended complaint, "establishes the lack of standing" of Pillsbury, because Pillsbury "cannot meet the proximate cause requirement that the Supreme Court has now imposed for RICO civil actions." In explaining why Pillsbury is "not the party who has a RICO cause of action under the Holmes analysis," the court noted Pillsbury's status as a subtenant and the "filter of the arbitration proceeding." The court dismissed the state law claims for

                lack of jurisdiction. 1  Pillsbury timely appeals
                

STANDARD OF REVIEW

Dismissal of a complaint under Fed.R.Civ.P. 12(b)(6) is reviewed de novo. Imagineering, 976 F.2d at 1306. All allegations of material fact in the complaint are taken as true and are construed in the light most favorable to Pillsbury. Id. "Nonetheless, conclusory allegations without more are insufficient to defeat a motion to dismiss for failure to state a claim." McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir.1988). A dismissal 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, 101-02, 2 L.Ed.2d 80 (1957)). This court may affirm on any ground finding support in the record. Imagineering, 976 F.2d at 1306.

DISCUSSION

To maintain a cause of action under RICO, a plaintiff must show not only that the defendant's violation was a "but for" cause of his injury, but that it was the proximate cause as well. Holmes, --- U.S. at ---- - ----, 112 S.Ct. at 1317-18. "This requires that there must be a direct relationship between the injury asserted and the injurious conduct alleged." Imagineering, 976 F.2d at 1311 (citing Holmes, --- U.S. at ----, 112 S.Ct. at 1318). The Court focused on the directness of the relationship for three reasons. "First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation, as distinct from other, independent, factors." Holmes, --- U.S. at ----, 112 S.Ct. at 1318. Second, courts would have to adopt complicated apportionment rules to avoid multiple recoveries. Id. Third, directly injured victims can generally be counted on to sue, "without any of the problems attendant upon suits by plaintiffs injured more remotely." Id. (citing Associated Gen. Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 541-42, 103 S.Ct. 897, 910-11, 74 L.Ed.2d 723 (1983)). These three policy concerns guide a court's evaluation of the directness of the injury. Id. --- U.S. at ----, 112 S.Ct. at 1321 n. 20.

The reasoning of Holmes was applied by this court in Imagineering, 976 F.2d 1303, which was decided after the district court ruled in the instant case. In Imagineering, a class of minority and woman-owned business enterprises (MWBEs) brought a RICO case against prime contractors which had allegedly engaged in a scheme to procure government contracts for public works construction by circumventing government regulations requiring the use of MWBEs. The plaintiff MWBEs sued to recover the lost profits which they allegedly would have earned on these projects in the absence of the defendants' scheme. Id. at 1306. We found the plaintiffs did not adequately allege RICO proximate causation, explaining:

Assuming the bad conduct by [defendant] deprived the named prime contractors of specified projects, and that in turn foreseeably deprived the MWBE plaintiffs of the subcontracts, "but for" causation appears present. It is much more difficult, however, to take the next step and determine that there exists a direct relationship between [defendant's] conduit scheme and the plaintiffs' failure to earn certain profits on the subcontracts. The...