Galloway v. Martorello

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RENEE GALLOWAY, et al., Plaintiffs, v. JUSTIN MARTORELLO, et al., Defendants.

Civil Action No. 3:19cv314

United States District Court, E.D. Virginia, Richmond Division

September 18, 2023

MEMORANDUM OPINION

Robert E. Payne Senior United States District Judge

This matter is before the Court on the MOTION TO DISMISS ("the MOTION") (ECF No. 541) filed by Bluetech Irrevocable Trust ("Bluetech"). Bluetech requests the Court to "dismiss all claims against Defendant pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure." Id. For the reasons set forth below, Bluetech's MOTION TO DISMISS will be granted in part and denied in part. The MOTION will be granted as to COUNT TWO, denied as to COUNTS ONE, FIVE, TWENTY-EIGHT, and TWENTY-NINE, and denied as moot as to COUNT THIRTY.

BACKGROUND

(A) Factual Background^[1]

This case comes out of a long series of litigation concerning Matt Martorello ("Martorello") and his short-term lending operations. CLASS ACTION COMPLAINT ("Compl.") ¶ 1, 11 (ECF No. 1) . Martorello allegedly engaged in a so-called "rent-a-tribe" online lending operation to make usurious short-term loans with interest rates in the triple digits. Id. at ¶¶ 1, 6-11.

Bluetech is a trust established under the laws of the Cook Islands id. at ¶ 64, and, according to the Complaint is one of several entities allegedly entangled within an elaborate corporate racketeering enterprise established by Martorello. Compl. at ¶ 17. Plaintiffs allege that Martorello created Bluetech as a vehicle to distribute the illegal income of the enterprise to Martorello and his family and to "conceal his ownership interest in the companies involved in the [allegedly illegal lending] scheme and create an additional layer of protection for the illegal money received from consumers." Id. Bluetech is alleged to be a key component of the alleged racketeering enterprise. So, it is necessary to explain the structure of that alleged racketeering enterprise and to understand Bluetech's role in it.

The Lac Vieux Desert Band of Lake Superior Chippewa Indians ("the Tribe"), at Martorello's urging, created Red Rock Tribal Lending ("Red Rock"), later rebranded as Big Picture Loans, LLC ("Big Picture"), to issue high-interest short-term loans by way of the internet. Williams v. Big Picture Loans LLC, 929 F.3d 170, 174 (4th Cir. 2019),^[2] By linking with the Tribe, Martorello hoped to secure for himself, his entities, and the entire alleged RICO enterprise the protection of the Tribe's sovereign immunity.

On October 25, 2011, Red Rock retained Martorello's company Bellicose VI ("Bellicose"), as its servicer to "completely" operate the online lending business while using some tribal members as employees. Williams v. Big Picture, No. 3:17cv461, 2020 WL 6784352, at *5 (E.D. Va. Nov. 18, 2020) ("Misrepresentation Opinion"). Under the Servicing Agreement, Bellicose received 98% of all gross proceeds from the online lending operation.^[3] On July 31, 2012, with retroactive effect to the start of the Bellicose service agreement, Bellicose assigned the service agreement to SourcePoint VI ("SourcePoint"), its wholly owned subsidiary.^[4] As was the case with Bellicose, SourcePoint also received 98% of all net profits from the loan operation. Id. From 2011 to 2016, the money received from the alleged illegal loan payments was run through a complex series of entities from SourcePoint to Bluetech, and then from Bluetech to Martorello and others, including his family members.

From October 25, 2011 to December 31, 2013, Bluetech received 70% of the total revenue from the lending operation, the other 30% went directly to Matt Martorello and his brother, Justin Martorello.^[5] See also Bellicose Capital Corporate Structure at 3 (ECF No. 494-8} . On January 1, 2014, Martorello made several alterations to the corporate structure of the alleged racketeering enterprise and Bluetech's share in the enterprise lowered to 60%.5 See also Bellicose Capital Corporate Structure at 4-^[6]. On March 2, 2015, Bluetech's share of the loan operation's revenue was dropped by 0.5% to 5 9.5%.^[7]

In January 2016, the alleged RICO enterprise went through a general re-structuring. On January 26, 2016, SourcePoint and Bellicose Capital merged into Ascension Technologies, a tribal entity. Before the sale, Martorello had created a new company called Eventide Credit Acquisitions ("Eventide") to facilitate the sale of Bellicose Capital to the Tribe.^[8] However, Martorello structured that sale so that he would continue to profit from the online lending enterprise. In particular, so that the Tribe could pay for Bellicose, the Tribe signed a Secured Promissory Note in which it was obliged to pay Eventide between 94-96% of the enterprise's gross revenue up to $300,000,000.00 for seven years.^[9]The money then flowed from Eventide through a series of entities and persons. After the sale, Eventide's members were as follows: Breakwater (59.5%); Gallant Capital (25.5%); Justin Martorello (10%); Brian McFadden (2%); James Dowd (1.5%); and Simon Liang (1.5%). Id. at Schedule A.^[10] Thus, even after the transfer, it is alleged, with plausible support, that Bluetech continued to derive a significant percentage of income from the alleged racketeering enterprise and then distributed it to Martorello's family, various investors, and others.^[11]

(B) Procedural Background

This case has and long and convoluted procedural history. Plaintiffs originally brought twenty-eight counts^[12] against Bluetech under state and federal laws. Compl. at 55-82. The Court dismissed, without prejudice, COUNTS SIX through TWENTY-SEVEN in their entirety and COUNTS TWENTY-EIGHT through THIRTY, except as they asserted claims under Virginia law. September 23, 2021 MEMORANDUM ORDER (ECF No. 371).

On October 15, 2021 Bluetech filed a MOTION TO DISMISS THE COMPLAINT PURSUANT TO RULE 12(B)(2) AS TO DEFENDANT BLUTECH [sic] IRREVOCABLE TRUST (ECF No. 388) (the "Rule 12(b)(2) Motion") and, on October 22, 2021, it filed a MOTION TO DISMISS THE COMPLAINT PURSUANT TO RULE 12(b)(5) AS TO DEFENDANT BLUTECH [sic] IRREVOCABLE TRUST (ECF No. 401) (the "Rule 12(b)(5) Motion"). On October 22, 2021, Bluetech filed a MOTION TO DISMISS THE COMPLAINT PURSUANT TO

RULE 12(b)(6) BY DEFENDANT BLUETECH IRREVOCABLE TRUST (ECF No. 407) .

On November 3, 2022, the Court ordered the parties to provide supplemental briefing on Bluetech's Rule 12(b) (2) Motion. Nov. 3, 2022 MEMORANDUM ORDER (ECF No. 468) . After that briefing was filed, the Court held an evidentiary hearing on the Rule 12(b)(2) and the Rule 12(b)(5) Motions. Feb. 23, 2023 ORDER (ECF No. 489). On April 6, 2023, "[i]n light of the supplemental briefing and oral argument presented in this case during the hearings on April 4 and 5, 2023," the Court denied Bluetech's 12(b) (6) motion without prejudice as moot. April 6, 2023 ORDER (ECF No. 521).^[13] On August 11, 2023, the Court denied Bluetech's Rule 12(b) (2) Motion and its Rule 12(b) (5) Motion. See ECF Nos. 603, 605, 606, 608. On August 14, 2023, the Court also resolved three related discovery disputes-PLAINTIFFS' OBJECTION TO BLUETECH AND BREAKWATER'S STATEMENT OF POSITIONS AND EVIDENTURY [sic] HEARING EXHIBIT LIST (ECF No. 507); MOTION FOR PROTECTIVE ORDER AS TO DEFENDANTS BLUETECH IRREVOCABLE TRUST AND BREAKWATER HOLDINGS, LLC (ECF No. 533); and PLAINTIFFS' MOTION TO COMPEL AND FOR SANCTIONS (ECF No. 545)-and ordered Bluetech to fully participate in discovery. ECF Nos. 609, 610.

Against the foregoing background, the MOTION will be assessed.

DISCUSSION

(A) Legal Framework

Fed. R Civ. P. 12(b)(6) allows for dismissal for "failure to state a claim upon which relief can be granted." The Supreme Court of the United States has said:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of 'entitlement to relief.'"

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citations omitted).

The Court "must accept as true all of the allegations contained in the complaint." Ashcroft, 55 6 U.S. at 678. However, the Court does not need to accept legal conclusions as true. Id.

A plaintiff's "complaint will not be dismissed as long as he provides sufficient detail about his claim to show that he has a more-than-conceivable chance of success on the merits." Owens v. Baltimore City State's Att'y Office, 767 F.3d 379, 396 (4th Cir. 2014) .

(B) COUNT ONE: Violation of RICO, 18 U.S.C. § 1962(c)

Plaintiffs allege that Bluetech violated the Racketeer Influence and Corrupt Organizations ("RICO") Act through the "collection of unlawful debt." See 18 U.S.C. § 1962(c). Section 1962(c) reads, in full:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

18 U.S.C. § 1962(c) (emphasis added). "[U]nlawful debt" is defined as "the business of lending money or a thing of value at a rate usurious under State or Federal law, where the usurious rate is at least twice the...