Krasny v. Bagga, Bankruptcy No. 04-37130

Marvin Krasny, in His Capacity as Chapter 7 Trustee of United Management Services, Inc.; Marvin Krasny, in His Capacity asChapter 7 Trustee of Jamuna Real Estate Llc; Gary Seitz, in His Capacity as Chapter 7 Trustee of Bagga Enterprises, Inc., Wilmington Trust Company In its Capacity as Owner Trustee of Fl Receivables Trust 2002-a and Fl Receivables Trust 2002-aPlaintiffs

v.Pratpal Bagga; Khushvinder Bagga; Ravinder Chawla; Hardeep Chawla; EtAl. Defendants

Bankruptcy No. 04-37130

Bankruptcy No. 04-37132

Bankruptcy No. 04-37136

Adv No. 06-128

06-129

06-130

United States Bankruptcy Court For The Eastern District Of Pennsylvania

July 13, 2010

Opinion

By: Stephen Raslavich, Chief United States Bankruptcy Judge.

Introduction

Stephen Raslavich, Judge

Before the Court is the Motion of Mr. and Mrs. Bagga to dismiss Counts I and IIof the Plaintiffs' Second Amended Complaint (the SAC).¹ The Motion is opposed by the Plaintiffs FL Trust and Wilmington Trust. After a hearing held on April 22, 2010, the Court took the matter under advisement. For the reasons which follow, the Motion will be granted in part and denied in part.

Summary of Holding

Count I-RICO (Plaintiffs against Pratpal Bagga and Khushvinder Bagga)

. Basis for Contention: Pratpal and Khushvinder Bagga maintain that this count fails to state a claim under RICO against them.

. Holding: The Motion will be granted as to Khushvinder Bagga because Count I fails to state a substantive RICO violation on her part. The Court finds that Count I does state such a claim as to Pratpal Bagga.

Count II-Conspiracy to Violate RICO (Plaintiffs against All Defendants)

. Basis for Contention: The Baggas maintain that Count I's failure to state a claim against them means ipso facto that any RICO conspiracy claim must likewise fail.

. Holding: As with Count I, the Court finds that Count II states a RICO conspiracy claim only as to Pratpal Bagga. The request for dismissal will be granted as to Khushvinder Bagga.

Grounds for Dismissal

The Baggas' Motion is premised on F.R.C.P. 12(b)(6)²; to wit, that the SAC fails to state a claim upon which relief can be granted. Those deficiencies are alleged to beof a dual nature: a lack of standing on the Plaintiffs' part as well as a general failure to sufficiently plead the causes of action.³ Because standing has been described as the "irreducible constitutional minimum, "⁴ it would at first blush seem obvious that it must be taken up first. But the Court's March 5, 2009 Opinion observed that the essence of standing is injury. In the context of RICO, a plaintiff must allege injury which has resulted from a violation of the statute: "Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor..." 18 U.S.C. § 1964(c). At bottom, where RICO is implicated this becomes a question of causation. What this means from a methodology standpoint is that the Court must analyze whether first a RICO violation occurred and, if so, then was the plaintiff harmed as a result of that violation. The Court will address the standing question in this way. See Maio v. Aetna, Inc., 221 F.3d 472, 482 n. 7 (3d Cir.2000) (discussing similarity between standing analysis and RICO violation and resulting injury analysis).

Standard Required

for Stating a Claim

In order 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.' "Ashcroft v. Iqbal, U.S.,, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2008)); see also Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir.2009) (explaining that pleading standards have seemingly shifted from simple notice pleading to a more heightened form of pleading, requiring a plaintiff to plead more than the possibility of relief to survive a motion to dismiss). The Supreme Court explained that although factual allegations are to be accepted as true for purposes of legal sufficiency, the same does not apply to legal conclusions; therefore, the factual allegations must sufficiently support the legal claims asserted. Iqbal, 129 S.Ct. at 1949, 1950. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. at 1949 (citing Twombly, 550 U.S. at 555); see also Fowler, 578 F.3d at 210; and Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir.2008). Count I-RICO

Against this background, the Court turns to the RICO claim. Count I alleges that Pratpal Bagga⁵ and Khushvinder Bagga violated § 1962 of RICO.⁶ That sectionprovides, in pertinent part, that:

[i]t 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). In order to plead a violation of RICO, a plaintiff must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Lum v.Bank America, 361 F.3d 217, 223 (3d Cir. 2004); citing Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285 (1985).

Conduct⁷

Liability under subsection (c) is predicated on a defendant having "conducted] or participate^], directly or indirectly, in the conduct of [the] affairs of the enterprise." 18 U.S.C. § 1962(c)(emphasis added). In Reves v. Ernst & Young, the Supreme Court held that "'to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs, ' one must participate in the operation or management of theenterprise itself." 507 U.S. 170, 185, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993) (citation omitted).⁸ The High Court understood the word "conduct" to indicate some degree of direction over the affairs of the enterprise. Id. at 178, 113 S.Ct. at 1169. The Court concluded also that the term "participate" meant "to take part in." Id. at 179, 113 S.Ct. at 1170; see also University of Maryland v. Peat, Marwick, Main & Co., 996 F.2d 1534, 1539 (3d Cir. 1993) (adopting "operation or management" test enunciated in Reves); see also United Nat. Ins. Co. v. Equipment Ins. Managers, 1995 WL 631709 at *4 (E.D.Pa.).

Along with Khushvinder Bagga, Pratpal Bagga is alleged to have "directly or indirectly conducted or participated in conducting the affairs" of the enterprise. SAC ¶69. Generally, the conduct is alleged to consist of [mail and wire fraud, money laundering and bankruptcy fraud. Id. ¶ 65-67. Mr. Bagga's conduct begins with his alleged misrepresentation to Captec regarding what the loans were for. Id.¶ 71. Once made, the loans were converted by both husband and wife. Id. ¶l 72. Pratpal is further alleged to have mislead Captec as to what happened to the loan proceeds. Id.¶ 74(a) Both Mr. and Mrs Bagga are alleged to have laundered the Captec funds. Id. ¶ 81(a) and (b). Finally, Pratpal Bagga is charged with having committed bankruptcy fraud. Id. ¶82.

Pleading an Enterprise

The "conduct" or "participation" alleged must have been part of the affairs of an "enterprise." The statute specifically defines an enterprise as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). As to exactly what must be pleaded to state the existence of an enterprise, the Court has previously explained that post-Twombly enough must be set forth to inform the Defendant of the elements of the enterprise with a degree of plausibility. See 416 B.R. at 420-422

The Plaintiffs allege the existence of the "Bagga/Chawla enterprise" at the outset. SAC, ¶ 61. The enterprise is alleged to be an association in fact of persons and entities engaged in clothing, real estate, and restaurant ventures and under the joint direction, control and leadership of Mr. and Mrs. Bagga as well as Ravinder Chawla. Id. Its objective, as alleged, was to obtain corporate loans by means of fraud, to convert the loans proceeds to their own personal use, to intentionally default on the loans, to either compromise the loans for less than their true value or put the companies out of business, to fraudulently transfer any remaining assets beyond the reach of creditors, and to thereby impair the value of the lender's collateral or resulting judgments. The end result was for the Defendants to enrich themselves at the expense of legitimate creditors who had done business with them or the other enterprise members. Id. ¶ 63

As this Court noted in ruling on the motion to dismiss the First Amended Complaint, those allegations serve as the framework around which facts are pleaded to establish the enterprise. 416 B.R. at 422. The same elements of association arepresent: Mr. and Mrs. Bagga and Mr. Chawla are blood relatives who operate entities that do business with each other. Neither individual appears to oversee the others and by all appearances they work by cooperation. As to when these persons arrived at their alleged scheme, the SAC does not specify exactly, but given what is alleged in the way of coordinated deception before, during, and subsequent to the loan process, it is fair to read the SAC to allege that the enterprise was formed at the time Mr. Bagga first approached Captec. Finally, it goes without saying that the enterprise is the alter ego of the Individual Defendants' outwardly legitimate businesses (fast-food franchises, apparel, and real estate businesses). In sum, the Court finds a RICO enterprise to be sufficiently pleaded.

Pattern and Racketeering

The modus operandi of a RICO defendant is through a "pattern of racketeering activity." As explained in prior opinions, this Court will determine first if acts of racketeering were alleged before determining if those...