Virden v. Graphics One

• Decision Date: 03 January 1986
• Docket Number: No. 83-2420 RG(Bx).,83-2420 RG(Bx).
• Citation: 623 F. Supp. 1417
• Parties: Dean VIRDEN, et al., Plaintiffs, v. GRAPHICS ONE, et al., Defendants.
• Court: U.S. District Court — Central District of California

623 F. Supp. 1417

Dean VIRDEN, et al., Plaintiffs, v. GRAPHICS ONE, et al., Defendants.

No. 83-2420 RG(Bx).

United States District Court, C.D. California.

December 2, 1985.

On Reconsideration January 3, 1986.

John E. Hill, David H. Schwartz, Raymond P. Hermann, Hill, Schwartz, Stenson & Boutin, A Law Corp., San Francisco, Cal., Harold Brown, Joseph Kropp, Kevin McLean Law Offices of Harold Brown, Boston, Mass., for plaintiffs.

Richard B. Cutler, Eric F. Edmunds, Jr., Robert A. Merring, Cutler & Cutler, A Professional Law Corp., Los Angeles, Cal., John J. Lynch, New York City, for defendants, Itek Corp. and Itek Leasing Corp.

MEMORANDUM & ORDER (AMENDED)

GADBOIS, District Judge.

The parties' cross-motions for summary judgment were heard by this court on January 21, 1985. This court has read and considered all the pleadings, declarations, exhibits, documents on file, oral arguments, and the memoranda of points and authorities submitted by the parties in support of and in opposition to these cross motions for summary judgment. This court holds that: (1) defendants Itek and ILC's motion for summary judgment is denied in its entirety; and (2) the plaintiffs' motion for partial summary judgment is granted in its entirety.

BACKGROUND:

The plaintiffs are the owners of nine so-called graphics centers ("graphics centers" or "franchises") that they bought from defendant Graphics One, Inc. ("G-1"), a California corporation that developed, licensed, and sold these centers as franchises. These graphics centers provide to the public "pre-press" services, such as typesetting, camera work, layout and design, which are used in the production of "camera-ready" copy for printing. The graphics centers owned by the plaintiffs do not provide the actual printing or reproduction services.

G-1 was allegedly created, financed, and controlled by Itek Corp. ("Itek") and, more particularly, by Itek Graphics Products ("IGP"), a division of Itek that makes equipment used at all stages of the printing process, comprising both the pre-press and actual printing stages. This equipment includes printing presses, plate makers, daylight cameras, and computer typesetters. Although IGP had been successful in the past in selling those products used at the actual printing stage to quick print franchises such as "Sir Speedy" and "Big Red Q," IGP apparently had failed to sell its pre-press equipment to these customers. In this action the plaintiffs charge that IGP established G-1 to market and sell its less popular pre-press equipment through the creation of franchises.

G-1's franchise agreements required each franchisee to acquire the pre-press equipment that was marketed as a package called the Itek "`graphics center' franchise equipment package" (the "franchise equipment package" or the "package"). In order to make the package available to potential franchisees unable to pay the full purchase price, Itek in turn created Itek Leasing Corp. ("ILC"), a wholly owned subsidiary, to provide optional lease financing of the package to the franchisees. Most plaintiffs in this action chose this option and elected to lease the complete package through ILC. Darryl Chattayar, a former Itek employee who had earned an outstanding reputation at Itek as a salesman, was installed as president of G-1.

The plaintiffs allege that G-1 and Chattayar made oral misstatements and written misrepresentations in order to induce the plaintiffs and others to purchase franchises and the package of pre-press equipment. In particular, the plaintiffs allege that G-1 and Chattayar falsely represented that the franchises: (1) were a unique business concept that had no competition; (2) had a proven record of high growth and profitability; and (3) were a "turnkey graphic arts business" that could be run successfully with a minimum of training and no prior business experience in graphics arts.

Contrary to G-1 and Chattayar's optimistic statements concerning the financial prospects of the graphics centers, the plaintiffs allege that their franchises began losing money almost immediately after they opened for business. The plaintiffs claim that during this period G-1 and Chattayar fraudulently encouraged or intimidated each franchisee to incur additional debt and spend additional time and energy to keep his unprofitable franchise operating so that lease payments would continue to flow to ILC. Most of the plaintiffs' franchises nevertheless eventually failed financially and the plaintiffs evidently incurred substantial financial losses as a result of their investments in these franchises. In addition, both G-1 and Chattayar encountered financial difficulties and are now bankrupt.

The plaintiffs brought this action against Itek, ILC, G-1, and Chattayar alleging claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1985), and on various state law grounds. This court has jurisdiction over this action because it involves a federal question, i.e., the interpretation of RICO. See 28 U.S.C. § 1331 (1985).

The matter is before the court on various cross-motions for summary judgment and partial summary judgment. Fed.R.Civ.P. 56. Defendants Itek and ILC move for summary judgment dismissing them from this action or, in the alternative for partial summary judgment on all the plaintiffs' RICO claims. Because these defendants have failed to put forth any argument in support of their position that they should be dismissed from this action beyond their arguments attacking the sufficiency of the plaintiffs' RICO claims, this court will treat defendant Itek and ILC's summary judgment motion as attacking only those claims. Defendants Itek and ILC suggest also that should this court dismiss the plaintiffs' RICO claims, it also should dismiss the plaintiffs' pendent state claims pursuant to United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). The plaintiffs, on the other hand, have moved for partial summary judgment on certain elements of one particular RICO claim against defendants Itek and ILC.

It should be noted at this point that since the time that the parties made these cross-motions for summary judgment the United States Supreme Court has handed down its decisions in the companion cases of Sedima, S.P.R.L. v. Imrex Co., ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), and American National Bank and Trust Co. of Chicago v. Haroco, ___ U.S. ___, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985) (per curiam). These decisions, particularly Sedima, decided many of the issues raised by these cross-motions for summary judgment. These issues are discussed below.

ANALYSIS:

I. A GENERAL OVERVIEW OF THE RICO STATUTE AND THE PLAINTIFFS' RICO CLAIMS.

The principal section of RICO, 18 U.S.C. § 1962 (1985),¹ prohibits the following activities:

(1) The use of income or proceeds from a pattern of racketeering activity by a principal in that activity to acquire an interest in or to establish an enterprise engaged in interstate commerce. § 1962(d).

(2) Acquisition of an interest in or control of an enterprise engaged in interstate commerce through a pattern of racketeering activity. § 1962(b).

(3) Participation in or operation of an enterprise engaged in interstate commerce through a pattern of racketeering activity. § 1962(c).

(4) Conspiracy to commit any of the above activities. § 1962(d).

See Harper v. New Japan Securities International, Inc., 545 F.Supp. 1002, 1004 (C.D.Cal.1982).

The important terms in section 1962 are defined in 18 U.S.C. section 1961, 18 U.S.C. § 1961 (1985). "Racketeering activity" is defined to include a wide range of both federal and state offenses. See id. Each act of racketeering commonly is referred to as a "predicate act." A "pattern of racketeering activity" requires at least two predicate acts occurring within ten years of each other, one of which must have occurred after RICO's effective date, October 15, 1970. Id. "Enterprise" is defined to include "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity. ..." Id.

18 U.S.C. section 1964(c), 18 U.S.C. § 1964(c) (1985), provides a private cause of action for violations of section 1962. Section 1964(c) states: "Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee." Id.

As the Sedima Court noted, "RICO is to be read broadly. This is the lesson not only of Congress' self-consciously expansive language and overall approach ... but also of its express admonition that RICO is to `be liberally construed to effectuate its remedial purposes' ...." Sedima, ___ U.S. at ___, 105 S.Ct. at 3286. Although some courts have expressed distress at the "extraordinary, if not outrageous," uses to which the civil provisions of RICO have been put, Sedima S.P.R.L. v. Imrex Co., 741 F.2d 482, 487 (2d Cir.1984), rev'd, ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), "this defect — if defect it is — is inherent in the statute as written, and its correction must lie with Congress. It is not for the judiciary to eliminate the private action in situations where Congress has provided it simply because plaintiffs are not taking advantage of it in its more difficult applications." Sedima, ___ U.S. at ___, 105 S.Ct. at 3287.

In their eleventh claim the plaintiffs charge that three defendants, Itek, ILC, and Chattayar, violated subsections (a), (b), and (c) of section 1962 by establishing, acquiring an interest in, participating in, or controlling an enterprise, namely G-1, through a pattern of racketeering activity. G-1 is not a named defendant in this claim. In their thirteenth claim, the plaintiffs allege that those same three defendants...