Body Brother, Inc. v. Zhou

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Body Brother, Inc., Plaintiff, v. Yu Zhou and Hang Yu, Defendants.

Civil Action No. H-21-2559

United States District Court, S.D. Texas, Houston Division

November 7, 2022

MEMORANDUM AND RECOMMENDATION

Peter Bray United States Magistrate Judge.

Pending before the court are Plaintiff Body Brother Inc.'s (Body Brother) motion for summary judgment, ECF No. 41, and Defendants Yu Zhou and Hang Yu's motion to dismiss or, in the alternative, for summary judgment, ECF No. 43. The court recommends that Plaintiff's federal-law claim be dismissed with prejudice, that the court decline to exercise supplemental jurisdiction over the remaining state-law claim and that the case be remanded to the 151st Judicial District Court of Harris County, Texas.

1. Procedural Posture and Allegations

Body Brother brought this suit against Hang Yu and Yu Zhou in Texas state court on July 20, 2020. ECF No. 1-2. On August 6 2020, Hang Yu and Yu Zhou filed third-party claims against Dr. Liu Yang, an alleged legal representative of Body Brother, and Rongyan Lu, the alleged “owner” and admitted initial director of Body Brother, for tortious interference with contractual relationships and breach of fiduciary duty. ECF No. 2-6. The suit proceeded in state court for a year. See ECF Nos. 1-12. The case was procedurally complex and significant discovery was exchanged. Id. The state court judge entered several orders, and Defendants filed a petition for a writ of mandamus, which the Fourteenth Court of Appeals denied. See ECF Nos. 1-12 (filing 225 exhibits documenting the state court proceedings); ECF No. 12-13 (denying Hang Yu and Yu Zhou's petition for a writ of mandamus). On July 7, 2021, Body Brother amended its state court petition to include a federal-law claim under the Racketeer Influenced Corrupt Organization Act (RICO), 18 U.S.C. §§ 1961-68. ECF No. 46-1 (Am. Pet.). Defendants Hang Yu and Yu Zhou removed the suit to this court on August 6, 2021, based on federal question jurisdiction. ECF No. 1. Body Brother has not filed an amended complaint in this court, so its state court Amended Petition, ECF No. 46-1, is the live pleading.

According to the Amended Petition, Body Brother is a Texas corporation that imports and sells massage chairs. Am. Pet. at 3. Body Brother stores its inventory and operates out of its warehouse in Houston, Texas. Id. Body Brother is managed by a team located in China. Id. at 4. In October 2018, the Chinese managers directed Yu Zhou to form Body Brother. Id. Yu Zhou reportedly received the filing fee to form Body Brother from Rongyan Lu, who was to be the “owner” of Body Brother. Id. at 4-5. In April 2019, Yu Zhou was hired to manage the warehouse and Hang Yu, Yu Zhou's wife, was hired as a bookkeeper. Id. at 5.

In 2020, a conflict developed between Body Brother and Yu Zhou. Am. Pet. at 5. Yu Zhou did not provide the management team in China with requested documentation, refused to ship products from the warehouse, refused to have an accountant perform an audit, and threatened to sell the inventory for personal gain. Id. at 5-6. On June 8, 2020, Body Brother sent a representative to the warehouse, but Yu Zhou and Hang Yu refused to leave the warehouse and threatened the representative. Id. at 6. Body Brother then sent a former employee, Dr. Yang, to investigate. Id. at 6-7. From June to July 2020, Yu Zhou denied Dr. Yang access to the warehouse, threatened her, informed her that the entire inventory had been sold, and refused to leave the warehouse. Id. at 7.

Body Brother's original state court petition filed on July 20, 2020, alleged that Defendants violated the Texas Theft Liability Act (TTLA) by wrongfully appropriating the warehouse inventory with the intent to permanently deprive Body Brother of the property. ECF No. 1-2 at 5. Body Brother amended its state court petition on July 7, 2021, to add the RICO claim. Am. Pet. at 8-13. Body Brother alleges that Yu Zhou committed a pattern of racketeering activity to gain control of Body Brother so that he could sell the warehouse inventory for personal gain. Id. at 10.

Body Brother now moves for summary judgment solely on the question of Yu Zhou's ownership of the company. ECF No. 41. Hang Yu and Yu Zhou move to dismiss all of Body Brother's claims based on Body Brother's failure to state claims upon which relief can be granted. ECF No. 43.

2. Analysis

A. Defendants Yu Zhou and Hang Yu's Motion to Dismiss

Because Defendants move to dismiss the federal-law claim, which provides the sole basis of the court's jurisdiction, the court must first consider Defendant's motion to dismiss. See Arena v. Graybar Elec. Co., Inc., 669 F.3d 214, 233 (5th Cir. 2012) (“Proper jurisdiction for a federal court is fundamental and necessary before touching the substantive claims of a lawsuit.”)

Defendants Yu Zhou and Hang Yu move to dismiss Body Brother's claims against them under Rule 12(b)(6). ECF No. 43. Body Brother argues that Defendants' motion is untimely and should properly be considered as a Rule 12(c) motion for judgment on the pleadings rather than a Rule 12(b)(6) motion to dismiss. ECF No. 46 at 1-2. Body Brother argues the Amended Petition states a claim under both RICO and the TTLA. Id. at 2-6.

While a post-answer Rule 12(b)(6) motion is untimely, “courts do not mechanically or routinely deny any motion made after a responsive pleading as untimely.” Puckett v. United States, 82 F.Supp.2d 660, 663 (S.D. Tex. 1999), aff'd sub nom. Puckett v. C.I.R., 213 F.3d 636 (5th Cir. 2000). “The courts consider Rule 12(b)(6) motions to dismiss filed after a responsive pleading, not as a Rule 12(b) motion, but as a Rule 12(c) motion for judgment on the pleadings.” Id. Rule 12(c) motions for judgment on the pleadings are reviewed under the same standard as Rule 12(b)(6) motions to dismiss for failure to state a claim. See Waller v. Hanlon, 922 F.3d 590, 599 (5th Cir. 2019).

A complaint that does not allege “enough facts to state a claim to relief that is plausible on its face” should be dismissed. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “Regardless of how well-pleaded the factual allegations may be, they must demonstrate that the party is entitled to relief under a valid legal theory.” Langen v. Sanchez Oil & Gas Corp., No. CV 4:18-2840, 2019 WL 1674348, at *3 (S.D. Tex. Apr. 17, 2019). While a complaint does not require detailed factual allegations, a plaintiff must provide more than labels and conclusions. Twombly, 550 U.S. at 555. “[C]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss.” Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir. 1995).

i. RICO

Body Brother alleges a civil RICO^[1] violation under 18 U.S.C. § 1962(b). Am. Pet. at 9-14. Defendants argue that Body Brother's Amended Complaint does not adequately plead a violation of 18 U.S.C. § 1962(b). ECF No. 43 at 3-8.

It appears that Body Brother is proceeding under 18 U.S.C. § 1964(c), which provides civil remedies and a private cause of action for “[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter.” 18 U.S.C. § 1964(c). Section 1962(b) prohibits a person from employing “a pattern of racketeering activity. . . to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.” 18 U.S.C. § 1962(b); see also Davis v. City of Alvarado, 835 Fed.Appx. 714, 720 (5th Cir. 2020) (quoting Abraham v. Singh, 480 F.3d 351, 355 (5th Cir. 2007), and explaining that all RICO claims “have three common elements: ‘(1) a person who engages in (2) a pattern of racketeering activity, (3) connected to the acquisition, establishment, conduct, or control of an enterprise'”). “Racketeering activity” is defined in 18 U.S.C. § 1961, which lists all manner of criminal activities that may form the basis for a RICO violation. These activities are often referred to as “predicate acts.” Body Brother relies on 18 U.S.C. § 1961(1)(B), which lists as predicate acts dozens of federal criminal statutes. Finally, a “pattern of racketeering activity” is defined in 18 U.S.C. § 1961(5) to “require at least two acts of racketeering activity” occurring no more than ten years apart.

Section 1962 lists several “[p]rohibited [a]ctivities,” each of which “targets distinct acts.” 18 U.S.C. § 1962; Gil Ramirez Grp., LLC v. Houston Indep. Sch. Dist., No. 4:10-cv-4872, 2012 WL 5633880, at *12 (S.D. Tex. 2012). “[T]he purpose of Section 1962(b) is to prohibit the takeover of a legitimate business through racketeering, typically extortion or loansharking.” Vanderbilt Mortg. & Fin., Inc. v. Flores, 735 F.Supp.2d 679, 701 (S.D. Tex. 2010) (emphasis added). “[T]he gravamen of a [Section] 1962(b) violation is that, through a pattern of racketeering, the defendant acquires or maintains an interest in or control of an enterprise.” Id. Importantly, the injury caused by the acquisition of the enterprise must be distinct from the injury caused by the acts used to acquire control of the enterprise. Id.; see also Gil Ramirez Grp., LLC, 2012 WL 5633880, at *12. In other words, it is not enough to show predicate acts. Rather a plaintiff must show that the predicate acts caused the takeover of the legitimate enterprise. “A claim under Section 1962(b) will be dismissed if the allegations indicate injury resulting from the commission of the predicate acts and do not suggest a distinct injury to the plaintiff by virtue of acquiring or maintaining an enterprise.” Vanderbilt Mortg., 735 F.Supp.2d at 70203 (internal quotations and citation omitted).

In its Amended Petition, Body Brother alleges that it employed Defe...