Grow Mich., LLC v. LT Lender, LLC

50 F.4th 587

GROW MICHIGAN, LLC, Plaintiff-Appellant,

v.LT LENDER, LLC; Jerry Reinhardt ; John Reinhardt; Bruce Campbell; Paul Shamo; Robert Causley ; Damian Kassab; Robert Drake ; Solyco, LLC, Defendants-Appellees.

No. 21-2673

United States Court of Appeals, Sixth Circuit.

Argued: March 10, 2022

Decided and Filed: October 7, 2022

ARGUED: Patrick M. McCarthy, HOWARD & HOWARD ATTORNEYS, PLLC, Royal Oak, Michigan, for Appellant. James R. Bruinsma, MCSHANE & BOWIE, PLC, Grand Rapids, Michigan, for LT Lender Appellees. Stuart A. Best, WELTMAN, WEINBERG & REIS, CO., LPA, Troy, Michigan, for Appellee Shamo. Evan A. Burkholder, O'HAGAN MEYER, PLLC, Northville, Michigan, for Appellee Kassab. Nick Gorga, HONIGMAN LLP, Detroit, Michigan, for Appellee Solyco. ON BRIEF: H. William Burdett, Jr., Kory M. Steen, HOWARD & HOWARD ATTORNEYS, PLLC, Royal Oak, Michigan, for Appellant. James R. Bruinsma, MCSHANE & BOWIE, PLC, Grand Rapids, Michigan, for LT Lender Appellees. Stuart A. Best, Michael P. Herzoff, WELTMAN, WEINBERG & REIS, CO., LPA, Troy, Michigan, for Appellee Shamo. Evan A. Burkholder, O'HAGAN MEYER, PLLC, Northville, Michigan, for Appellee Kassab. Nick Gorga, Andrew W. Clark, Jewel M. Haji, HONIGMAN LLP, Detroit, Michigan, for Appellee Solyco.

Before: BATCHELDER, NALBANDIAN, and READLER, Circuit Judges.

CHAD A. READLER, Circuit Judge.

Grow Michigan (GrowMI) extended a $5,000,000 loan to Michigan-based start-up Lightning Technologies. Lightning eventually defaulted on the loan. GrowMI believes that Lightning's default was the result of the actions of individuals and entities associated with Lightning that intentionally drove the company into the ground as part of a scheme to seize control of the company.

To recoup the losses, GrowMI sued those allegedly scheming parties for violating the Racketeer Influenced and Corrupt Organizations Act. GrowMI's claims, however, rest on its status as Lightning's creditor, making its injury derivative of the harm incurred by Lightning. Because GrowMI does not plausibly allege that it was directly injured by reason of defendants’ alleged racketeering activities, we affirm the district court's dismissal of GrowMI's complaint.

I.

At the center of this dispute are two Michigan-based corporations. One is GrowMI, an entity created and partially funded by the Michigan Economic Development Corporation, an arm of the Michigan state government. GrowMI's mission is to spur job growth by lending capital to small and mid-sized businesses in Michigan. The other is Lightning Technologies, a start-up company incorporated in Delaware. Lightning owns intellectual properties protecting designs for a lightweight, hybrid pallet used for transporting cold foods.

In 2019, Lightning sought $26 million in outside funding to retire debt, cover operational expenses, and purchase equipment needed to begin pallet production. GrowMI agreed to loan $5 million to Lightning. It also utilized its relationship with Flagstar Bank to secure an additional $7 million loan for Lightning from Flagstar.

Both GrowMI and Flagstar conditioned their loans on Lightning's securing the rest of the $26 million. Lightning purportedly planned to raise the remaining capital by selling equity and securing lines of credit from two Lightning shareholders. All told, Lightning (in theory) was set to receive $26 million in new funding: a $5 million loan from GrowMI, a $7 million loan from Flagstar, $4 million from equity sales, and $10 million from lines of credit. Damian Kassab, who served as Lightning's executive vice president with exclusive responsibility for the company's financial affairs, represented to GrowMI and Flagstar that, with this additional funding, Lightning would purchase production equipment by the end of 2019, become fully operational by mid-summer 2020, and generate profit by the fall of 2020.

Before Lightning closed on the GrowMI and Flagstar loans, Lightning creditor LT Lender LLC sent GrowMI a "payoff" letter indicating that Lightning owed LT Lender $3.3 million, a debt secured by an interest in Lightning's intellectual properties. That posed a problem for GrowMI, which wanted to secure its loan with the same intellectual properties. So, in conjunction with Lightning's closing on the loan, GrowMI allowed Lightning to use a portion of GrowMI's loan to repay the LT Lender debt, ensuring that GrowMI had a first secured position on Lightning's intellectual properties.

In the months that followed, GrowMI became suspicious of wrongdoing at Lightning. GrowMI was troubled by the fact that Kassab refused to draw on the loan from GrowMI for any purpose other than repaying LT Lender. Likewise, GrowMI began to view the payoff letter it received from LT Lender as containing material misstatements and omissions. For example, although the letter indicated that Lightning owed LT Lender $3.3 million, GrowMI discovered that Lightning in fact owed LT Lender only $2.2 million. To GrowMI, the extra million appeared to be a bribe to LT Lender and its principals, all of whom were also Lightning shareholders. In exchange for the payment, LT Lender agreed to settle what GrowMI describes as a "bogus" claim against Lightning. In addition, the payoff letter neglected to mention that Lightning had licensed its proprietary technology to another company—in which Lightning held a 35% interest and LT Lender a 65% interest—yet had received no payment in return. In GrowMI's mind, these discrepancies cast doubt on a number of representations made to GrowMI to procure the loan.

GrowMI alleges that Kassab never intended to use the loans from GrowMI and Flagstar or the lines of credit to make Lightning operational. Instead, says GrowMI, Kassab and the shareholders agreed that their lines of credit would be used only to induce GrowMI and Flagstar to lend money to Lightning, and that GrowMI's loan would be used to pay off LT Lender. Tellingly, GrowMI adds, no one at Lightning ever purchased the equipment needed to begin production.

Why did Kassab fail to draw on Lightning's available credit? GrowMI provides two explanations. First, financial self-interest. Kassab owns a separate consulting business—Solyco, LLC—that connects lenders with companies in need of capital. Rather than use the funds from GrowMI, Kassab, GrowMI theorizes, sought to take on additional debt through lenders referred to Lightning by Solyco. In return for each referral, Kassab (through Solyco) received a "finder's fee" paid by Lightning. Case in point, GrowMI alleges that Lightning took on an additional $1.8 million in short-term, high-interest loans from Solyco-referred entities, including another $1 million from a Lightning shareholder in a transaction that generated a $400,000 finder's fee for Kassab.

Second, GrowMI surmises, failing to draw on the loan would aid Kassab and the other defendants in seizing control of Lightning from Jeffrey Owen, the company's president, CEO, and chairman. By racking up additional debt and then refusing to spend it, says GrowMI, Kassab and his allies could plunge Lightning into financial turmoil and discredit Owen's leadership, allowing them to launch a proxy battle to take control of the company. And that alleged plan showed initial promise: by the time GrowMI filed this lawsuit, Lightning was losing $500,000 per month. The ensuing proxy battle, however, ultimately proved unsuccessful. Although Lightning's board removed Owen, the Delaware Chancery Court later voided that decision and reinstated Owen.

In the midst of this corporate tug-of-war, a Lightning employee, GrowMI alleges, downloaded Lightning's confidential trade secrets to his personal computers "at the behest of other [d]efendants." GrowMI believes those actions were part of defendants’ "backup plan"; if their proxy battle failed, defendants could recreate Lightning's proprietary products on their own using the stolen trade secrets.

As these events were unfolding, Lightning defaulted on its debt to GrowMI. That shortcoming spurred GrowMI to file a number of state court lawsuits as well as this federal one to recoup its losses. In this action, GrowMI names nine defendants: LT Lender and its principals; two Lightning shareholders; two Lightning employees, including Kassab; and Kassab's consulting company, Solyco. In its complaint, GrowMI alleged that defendants violated the Racketeer Influenced and Corrupt Organizations Act—RICO, for short—by engaging in a pattern of racketeering activity that included two acts of bank fraud, one act of transactions involving money derived from that bank fraud, one act of trade secrets misappropriation, and one act of wire fraud.

Defendants moved to dismiss GrowMI's complaint. The district court did so, holding that GrowMI failed to state a claim under 18 U.S.C. § 1962. GrowMI now appeals that dismissal.

II.

Before we may hear the merits of GrowMI's appeal, we must assure ourselves that GrowMI has Article III standing to bring this suit. U.S. CONST. art. III, § 2; Spokeo, Inc. v. Robins , 578 U.S. 330, 337–38, 136 S.Ct. 1540, 194 L.Ed.2d 635 (2016). To have standing, GrowMI must satisfy three elements: (1) an injury in fact that is (2) fairly traceable to the defendant's conduct and (3) likely to be redressed by judicial action. Spokeo , 578 U.S. at 338, 136 S.Ct. 1540.

Defendants turn our focus to the second element: traceability. As it is generally understood, traceability requires that a plaintiff's claimed injury flow from the defendant's conduct rather than the plaintiff's own actions or the actions of a third party. Turaani v. Wray , 988 F.3d 313, 316 (6th Cir. 2021) ; Buchholz v. Meyer Njus Tanick, PA , 946 F.3d 855, 866 (6th Cir. 2020). Beyond that threshold, however, "the plaintiff's burden of alleging that their injury is fairly traceable to the defendant's challenged conduct is relatively modest." Buchholz , 946 F.3d at 866 (cleaned up). Any harm flowing from the defendant's conduct, even indirectly, is said to be "fairly traceable." Id. (citation omitted).

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