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MIDWEST GRINDING CO. v. SPITZ

June 19, 1991

MIDWEST GRINDING CO., INC., an Illinois corporation, Plaintiff,
v.
JOSHUA M. SPITZ, an individual, ARON GRUNFELD, an individual, and U.S. GRINDING & FABRICATING, INC., an Illinois corporation, Defendants


Ilana Diamond Rovner, United States District Judge.


The opinion of the court was delivered by: ROVNER

ILANA DIAMOND ROVNER, UNITED STATES DISTRICT JUDGE

 I. INTRODUCTION

 In its second amended complaint, plaintiff Midwest Grinding Company, Inc. ("Midwest") alleges that its former employee, defendant Joshua M. Spitz ("Spitz"), and the new corporation which Spitz allegedly helped to form and operate, defendant U.S. Grinding & Fabricating, Inc. ("U.S. Grinding"), violated the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68, by among other things, soliciting and servicing customers of plaintiff's grinding services. *fn1" In addition to this federal RICO claim, Midwest also alleges, pursuant to Illinois common law, that Spitz breached his fiduciary duties owed to plaintiff and that U.S. Grinding and defendant Aron Grunfeld ("Grunfeld") tortiously interfered with plaintiff's contractual relationships and reasonable business expectations with its grinding customers. As a result, plaintiff requests that the Court order the defendants to account to Midwest for all proceeds from sales by U.S. Grinding and that the Court impose a constructive trust in favor of plaintiff on all such proceeds.

 Pending before the Court are defendants' motion for summary judgment and motion to strike plaintiff's statement of additional material facts, which plaintiff submitted in conjunction with its opposition to defendants' summary judgment motion. For the reasons stated herein, the Court will grant defendants' motion for summary judgment on plaintiff's RICO claim. The evidence presented by plaintiff in opposition to defendants' motion fails to establish a "pattern of racketeering activity" under the RICO statute. Such a pattern of illegal conduct is an essential element of a RICO claim pursuant to §§ 1962(c) & (d). Because the Court will grant summary judgment in favor of defendants on the RICO claim and because that claim provides the only basis for the Court's jurisdiction over plaintiff's second amended complaint, the Court also will dismiss plaintiff's pendent state law claims without prejudice to a subsequent state court action on those claims. The Court's resolution of the motion for summary judgment makes it unnecessary to address the merits of defendants' motion to strike plaintiff's statement of additional material facts. That motion, therefore, is denied as moot.

 II. FACTS

 The competing corporation, U.S. Grinding, was incorporated on January 27, 1986. (Pl. Add. 12(n) para. 28; Def. 12(m) para. 16.) Plaintiff's evidence gives rise to the reasonable inference that Spitz assisted Grunfeld in the incorporation of U.S. Grinding. (Pl. Add. 12(n) paras. 31-35.) The records of U.S. Grinding show that, since the time of its incorporation, Grunfeld has been the only stockholder, and Grunfeld and his wife Rachel Grunfeld have been the only directors and officers of that corporation. (Def. 12(m) paras. 17, 18.) Although the records show that Spitz has never been an owner, officer, or director of U.S. Grinding, plaintiff's evidence suggests that Spitz was involved in the direction of the company during the time that he was an officer and director of Midwest. (See Def. 12(m) para. 19; see also infra at 5-8.) *fn3"

 Viewed in the light most favorable to plaintiff, the evidence establishes that the scheme to defraud alleged in the complaint began in December 1985. It was then that Spitz accompanied Grunfeld to Michigan for the purpose of examining grinding machinery to be used by a new corporation which Grunfeld and Spitz had agreed to form. (Pl. Add. 12(n) paras. 14-17; see also Def. 12(m) para. 20.) In January 1986, Grunfeld signed a real estate sale contract for property that would be used by U.S. Grinding. (Pl. Add. 12(n) para. 21.) He also executed an industrial building lease for the same premises; that lease took effect on March 1, 1986. (Id. para. 22.) Although Grunfeld executed these documents on behalf of U.S. Grinding, Spitz also had viewed the property and was involved in negotiating the industrial building lease. (See Pl. Add. 12(n) paras. 23-25, 27.)

 U.S. Grinding commenced operations in the Spring of 1986. Prior to the time that he left Midwest in August of that year, Spitz was observed entering and exiting U.S. Grinding's business premises on a number of occasions. (Id. paras. 77, 79-80, 82-84, 86-88, 89; see also Def. 12(m) para. 23.) In traveling to and from the office of U.S. Grinding, Spitz often used a van owned by Midwest. (Pl. Add. 12(n) para. 90; see also id. para. 147.) Telephone records indicate that numerous telephone calls were made from U.S. Grinding both to Midwest and to the Spitz residence. (Id. paras. 70-73, 78, 168; see also id. para. 69.) On July 14, 1986, a Midwest pickup truck was observed at U.S. Grinding, although it was unclear for what purpose the truck was there. (Id. paras. 76, 206.) Moreover, Spitz made at least one "pickup" for U.S. Grinding while he was still employed by Midwest. (Id. para. 92.)

 After U.S. Grinding commenced operations, a number of Midwest customers began sending a portion of their grinding work to this new competitor in the industry. With respect to certain customers, this occurred as early as May 1986, while Spitz still was employed by Midwest. The record is replete with factual issues regarding whether Spitz was involved in obtaining some or all of this business for U.S. Grinding. The evidence presented by plaintiff permits the reasonable inference that Spitz, during the time that he was employed by Midwest, participated in the transfer of some or all of this grinding work to defendant U.S. Grinding. (See, e.g., id. paras. 67, 94, 96, 98, 100, 103-24, 125, 127, 129-31, 133-37, 140-42.) Similarly, after Spitz resigned from Midwest, other Midwest customers began to send grinding work to U.S. Grinding. (See id. paras. 138-39.)

 In June 1986, after Spitz already had been soliciting business for U.S. Grinding, Midwest presumably experienced a decline in its grinding orders. Spitz reported to plaintiff's Board of Directors that the grinding business was in a depressed state and that he had been spending a substantial amount of his time in the field in an effort to obtain new business. (Id. para. 207; see also id. paras. 208, 216.)

 The Midwest customers who began to utilize the services of U.S. Grinding placed orders with that company in one of two ways -- either orally (by telephone or in person) or by preparing and mailing to U.S. Grinding a purchase order. (Def. 12(m) para. 28.) At times, a customer would place an order verbally and then confirm that order in writing. (Pl. 12(n) para. 28.) After U.S. Grinding received an order, it would prepare five copies of an invoice, one of which eventually would be mailed to the customer as a bill for the grinding work performed. (Def. 12(m) para. 29.)

 Plaintiff also presented evidence suggesting that Spitz may have induced other Midwest employees to become involved with U.S. Grinding during the time that they were employed by Midwest. (Pl. Add. 12(n) paras. 56, 201-03; see also Def. 12(m) paras. 31-36.) For example, Dick Harrison and Carolyn Mathewson both were employed by Midwest, both purportedly were involved with U.S. Grinding while still employed by Midwest, and both accepted positions with U.S. Grinding shortly after Spitz did so in August 1986. (Pl. Add. 12(n) para. 169, 175, 178-79, 181-83, 184, 187-88, 190-92, 195, 198.) Moreover, in June 1986, Spitz fired or laid off Midwest's entire night shift, which consisted of approximately six men. (Id. paras. 210, 212; cf. id. paras. 213-14.) Certain of these individuals were later employed by U.S. Grinding. (Def. 12(m) paras. 31-36.)

 On August 12, 1986, Spitz mailed to the Board of Directors of Klein Tool a request that Klein Tool buy his stock in Midwest, effective August 11, 1986. (Pl. Add. 12(n) para. 217; see also Def. 12(m) para. 9.) In that letter, Spitz neither disclosed the existence of U.S. Grinding nor his involvement with that company. (Pl. Add. 12(n) para. 217.) At the time of his resignation, Spitz knew that certain Midwest customers had been sending grinding work to U.S. Grinding. (Id. para. 218.) He also knew that certain grinders who once had been employed by plaintiff were now working for U.S. Grinding. (Id.) On the same day that he mailed the above letter, Spitz became an employee of U.S. Grinding. (Id. para. 42.) The U.S. Grinding payroll ledgers reflect that, beginning on September 7, 1986, that company paid Spitz a net salary of $ 775.00 per week. (Id. para. 58.)

 Plaintiff retained an expert to ascertain the measure of its damages. The expert's opinion, as submitted to the Court with the materials on summary judgment, is that Midwest was damaged by defendants' conduct in the following ways: (1) sales lost to U.S. Grinding prior to the date of Spitz' departure from Midwest; (2) sales lost to U.S. Grinding between August 11 and December 31, 1986 as a result of contacts initiated by Spitz while still employed by Midwest; (3) loss of profit margins on sales retained by Midwest during the relevant time period as a result of competition from U.S. Grinding; and (4) compensation paid to Spitz by plaintiff when Spitz actually was helping to form and to operate U.S. Grinding. (Id. para. 228.)

 Defendants have moved for summary judgment with respect to all of plaintiff's claims, contending that Midwest has failed to establish a genuine issue of material fact as to any of the four counts in its second amended complaint. The Court reaches only the RICO claim.

 III. ANALYSIS

 In moving for summary judgment, defendants bear the burden of establishing that there is no genuine issue of material fact and that they are entitled to judgment as a matter of law. New Burnham Prairie Homes, Inc. v. Village of Burnham, 910 F.2d 1474, 1477 (7th Cir. 1990); Fed.R.Civ.P. 56(c). The Court must consider the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmovant, and where there are doubts as to whether a genuine factual dispute exists, the Court must resolve such doubts in favor of Midwest, the nonmoving party. Burnham, 910 F.2d at 1477. However, once the movants have satisfied their initial burden, the nonmovant has the affirmative burden to come forward with evidence demonstrating that there is a genuine issue of material fact which must reach the factfinder. Id.; Baucher v. Eastern Indiana Production Credit Association, 906 F.2d 332, 334 (7th Cir. 1990). A disputed fact is material when it is "outcome determinative under the governing law." Whetstine v. Gates Rubber Co., 895 F.2d 388, 392 (7th Cir. 1990); see also Shlay v. Montgomery, 802 F.2d 918, ...


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