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Cement-Lock v. Gas Technology Institute

November 1, 2006

CEMENT-LOCK, AN ILLINOIS LIMITED LIABILITY COMPANY, AND RICHARD MELL, AN INDIVIDUAL, PLAINTIFFS,
v.
GAS TECHNOLOGY INSTITUTE, AN ILLINOIS CORPORATION, INSTITUTE OF GAS TECHNOLOGY, AN ILLINOIS CORPORATION, ENDESCO SERVICES, INC., AN ILLINOIS CORPORATION, ENDESCO CLEAN HARBORS, LLC, AN ILLINOIS LIMITED LIABILITY COMPANY, STANLEY S. BORYS, AN INDIVIDUAL, JAMES E. DUNNE, AN INDIVIDUAL, FRANCIS S. LAU, AN ) INDIVIDUAL, CEMENT-LOCK GROUP, LLC, A DELAWARE LIMITED LIABILITY COMPANY AND NOMINAL DEFENDANT, DEFENDANTS.



The opinion of the court was delivered by: Judge Rebecca Pallmeyer

MEMORANDUM OPINION AND ORDER

Plaintiffs Cement-Lock, LLC and Richard Mell, as members of Cement-Lock Group, LLC, have filed an eleven-count derivative Amended Complaint against Defendants Gas Technology Institute ("GTI"), Institute of Gas Technology ("IGT"), Endesco Services, Inc. ("ESI"), Endesco Clean Harbors, LLC ("ECH"), Stanley S. Borys, James E. Dunne, Francis S. Lau, and nominal defendant Cement-Lock Group, LLC. On September 30, 2005, this court dismissed without prejudice Counts II and III of Plaintiffs' original complaint for failing to state a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. § 1962(c) & (d). See Cement-Lock v. Gas Tech. Inst., No. 05 C 0018, 2005 WL 2420374, *23 (N.D. Ill. Sept. 30, 2005) (Cement-Lock I). Plaintiffs again allege violations of RICO sections 1962(c) and (d), claiming that they have addressed the shortcomings of their previous filing. Defendants have again moved this court to dismiss these counts pursuant to FED. R. CIV. P. 12(b)(6). Defendants have also for the first time moved this court to dismiss Count IV (fraudulent concealment), Count V (fraudulent misrepresentation), and Count VI (negligent misrepresentation) against Defendant Francis S. Lau. For the reasons discussed here, the court denies Defendants' motion to dismiss.

BACKGROUND

The facts of this case, as set forth in Plaintiffs' original complaint, were presented at some length in this court's September 30, 2005 Memorandum Opinion and Order. As Plaintiffs largely restate these facts in their Amended Complaint, the court will assume the reader's familiarity with that decision and will recite only those facts relevant to Defendants' current motion to dismiss. See Cement-Lock I, 2005 WL 2420374, *1-10; see also "Blacklined" Comparison of Complaint and Amended Complaint, Ex. A to Plaintiffs' Mem. in Opp'n to Defs.' Partial Motion to Dismiss (hereinafter "Pl.'s Opp'n").*fn1

In Cement-Lock I, this court dismissed without prejudice Counts II and III of Plaintiffs' original Complaint for failing to state a claim under RICO sections 1962(c) and (d). See Cement-Lock I, 2005 WL 2420374, *18. This court concluded that Plaintiffs sufficiently alleged that Defendants' conduct proximately caused Plaintiffs' injuries, as required by 18 U.S.C. § 1964(c), but had not alleged a RICO enterprise with sufficient structure. Id. at *16. Some members of the alleged enterprise were insufficiently described, and others were superfluous. Id. at *18-19. After removing these individuals and entities from the enterprise, the court concluded that Plaintiffs had failed to allege a common purpose among the remaining enterprise members "other than their individual gain." Id. (citing Okaya (U.S.A.), Inc. v. Denne Indus., Inc., No. 00 C 1203, 2000 WL 1727785, *3 (N.D. Ill. Nov. 20, 2000)). Instead, the court concluded that, "so far as the complaint in this case reveals, Defendants' only purpose was to divert grant money meant for Cement-Lock Group." Id. Concluding that Plaintiffs had failed to plead a substantive RICO violation under section 1962(c), the court dismissed the RICO conspiracy claim under section 1962(d). Id. at *18 (citing Stachon v. United Consumers Club, Inc., 229 F.3d 673, 677 (7th Cir. 2000)).

The court denied Defendants' motion to dismiss the remaining counts of Plaintiffs' complaint. Id. at *23. Most relevant to the present decision, this court held that Plaintiffs had stated claims for fraudulent misrepresentation (Count IV), fraudulent concealment (Count V), and negligent misrepresentation (Count VI). See id. at *22-23. Specifically, this court held that Plaintiffs had "adequately stated 'with particularity' their claims of fraudulent concealment and fraudulent misrepresentation." Id. at *22 (quoting FED. R. CIV. P. 9(b)). Defendants' motion to dismiss Plaintiffs' claim for negligent misrepresentation, predicated on the same underlying facts, was likewise denied. Id. at *23. The court did not, however, specifically address Plaintiffs' reliance on Defendants' alleged misrepresentations and omissions.

Plaintiffs' Amended Complaint again alleges violations of RICO sections 1962(c) and 1962(d). See Am. Compl. ¶¶ 271-284. Some of the individuals and entities comprising the alleged enterprise have changed,*fn2 but Plaintiffs' theory of the case remains the same: Defendants misappropriated money that had been provided by various granting agencies for the purpose of developing the Cement-Lock Group's proprietary remediation process (hereinafter, the "Technology."). See id. ¶ 114. Taking their cue from this court's previous decision,*fn3 Plaintiffs now further allege that the Defendants, through the alleged enterprise, "purposely suppressed development and commercialization of the Technology." Id. ¶ 114. Defendants again move to dismiss Counts II and III of Plaintiffs' Amended Complaint. See Motion of Defendants to Dismiss Counts II and III Entirely and Counts II-VI Against Francis Lau in the Amended Complaint (hereinafter, "Motion to Dismiss") ¶¶ 1, 4. In addition, Defendants move to dismiss Counts IV-VI against Defendant Lau, arguing for the first time that Plaintiffs have not sufficiently pleaded justifiable reliance on Lau's alleged misrepresentations and omissions. Id. at ¶ 5.

DISCUSSION

The purpose of a Rule 12(b)(6) motion is to test the sufficiency of the plaintiff's complaint, not to decide its merits. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). On a motion to dismiss, the court accepts the plaintiff's well-pleaded allegations as true and draws all reasonable inferences in the plaintiff's favor. Jackson v. E.J. Brach Corp., 176 F.3d 971, 977-78 (7th Cir. 1999) (citation omitted). A motion to dismiss will be granted only "if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which entitles him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Stated differently, a complaint will survive a Rule 12(b)(6) motion if it "narrates an intelligible grievance that, if proved, shows a legal entitlement to relief." United States Gypsum Co. v. Indiana Gas Co., 350 F.3d 623, 626 (7th Cir. 2003) (citations omitted).*fn4 The court employs these standards in addressing Defendants' challenge to the RICO claims and the claims against Defendant Lau.

A. Plaintiffs' § 1962(c) Allegations

RICO section 1962(c) makes it unlawful "for any person employed by or associated with an enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . ." 18 U.S.C. § 1962(c). Accordingly, to state a claim under §1962(c), Plaintiffs must allege "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Goren v. New Vision Int'l, Inc., 156 F.3d 721, 727 (7th Cir. 1998) (citations and internal quotations omitted). In addition, to establish damages under § 1964(c), Plaintiffs must establish that Defendants' conduct proximately caused their injuries. Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992). Plaintiffs allege that Defendants devised and executed numerous schemes to suppress the Technology's development and commercialization, and misappropriated funds earmarked for that development. See Am. Compl. ¶¶ 4, 140. In carrying out these schemes, Plaintiffs allege that Defendants violated federal mail fraud, wire fraud and money laundering statutes, violations constituting RICO predicate acts. Id. ¶ 140; see 18 U.S.C. § 1961(1)(B).

1. Proximate Causation

In ruling on Defendants' motion to dismiss Plaintiffs' original complaint, this court concluded that Plaintiffs had adequately alleged that Defendants' conduct proximately caused Plaintiffs' injuries. See Cement-Lock I, 2005 WL 2420374, *12 (citing Holmes, 503 U.S. at 268). On June 5, 2006, the Supreme Court issued its decision in Anza v. Ideal Steel Supply Corp., __ U.S. __, 126 S.Ct. 1991 (2006), and Defendants ask this court to revisit its earlier decision in light of Anza. See Supp. Mem. of Defendants in Support of Their Motion to Dismiss RICO Claims (Counts I and II) of the Am. Compl. Pursuant to the Supreme Court Ruling in Anza, et al. v. Ideal Steel Supply Corp (hereinafter, "Anza Supp."). In Anza, the plaintiff, Ideal Steel Supply Corporation, and the defendant, National Steel Supply, Inc., conducted competing businesses selling steel mill products and related supplies and services. Anza, 126 S.Ct. at 1994. Ideal alleged that National adopted a practice of not charging New York State sales tax to cash-paying customers, which allowed National to reduce its prices without impacting its profit margin. Id. In an effort to conceal their scheme, Ideal alleged that National submitted fraudulent tax returns to the New York State Department of Taxation. Id. Ideal alleged that the goal of this scheme was to give National a competitive advantage over Ideal, and sued National's owners, Joseph and Vincent Anza, under RICO § 1962(c). Id. at 1995.

The Supreme Court's analysis in Anza began and "largely end[ed]" with Holmes v. Sec. Investor Prot. Corp. Id. In Holmes, Securities Investor Protection Corporation ("SIPC"), a private corporation charged under the Securities Investor Protect Act with reimbursing the customers of registered broker-dealers who are unable to meet their financial obligations, alleged that the defendant conspired with others to manipulate stock prices. Holmes, 503 U.S. at 261-63. When the market discovered the fraud, the share prices plummeted, bankrupting two broker-dealers and forcing SIPC to cover their customers' claims. Id. at 262--63. The Holmes court held that a RICO plaintiff must demonstrate a "direct relation" between the alleged injury and the ...


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