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RWB Services, LLC v. Hart Ford Computer Group

August 25, 2008


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 07 C 1073- Ruben Castillo, Judge.

The opinion of the court was delivered by: Flaum, Circuit Judge

ARGUED MAY 9, 2008

Before FLAUM, KANNE, and TINDER,Circuit Judges.

The plaintiff-appellant, RWB Services, LLC, says that the defendants misappropriated used cameras in which it had security interests and then resold the cameras as new to Wal-Mart. In the district court, the vessels for this allegation were a number of state-law claims and one civil count under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1964(c)-the latter of which forms the basis of this appeal. Below, the defendants moved to dismiss the RICO count under Rule 12(b)(1), arguing that the plaintiff lacked the requisite standing and, as a result, the district court did not have subject matter jurisdiction. The district court agreed, dismissed the RICO claim, and remanded the remaining state-law claims to the Circuit Court of Cook County. This appeal resulted, and for the reasons that follow, we reverse.

I. Background

The allegations in this case stem from a commercial lending agreement originally entered into between RWB Services and a now-defunct company called Old Argus in 2003. The agreement was for the purchase and sale of cameras. Under the terms of the agreement, Old Argus would secure the sale of a number of cameras to a particular retailer, in this case Wal-Mart. After being notified of the sale, RWB Services would purchase the needed number of cameras from vendors on Old Argus's behalf, and Old Argus would then deliver the cameras to and receive payment from Wal-Mart. The proceeds from these sales would go into a bank account held by a special purpose entity, WIP Marketing, Inc., created for purposes of the lending arrangement. RWB Services would then draw down Old Argus's debt from this account. To ensure that this would happen, RWB Services retained a security interest in all of WIP Marketing's assets including, specifically, the purchased cameras.*fn1

With one minor hitch, the parties followed this process the first time through, and on June 3, 2003, RWB Services loaned Old Argus an additional $951,000 to purchase another set of cameras. Unbeknownst to RWB Services, however, storm clouds had gathered over Old Argus's general ledger, and shortly after agreeing to the second round of financing, Old Argus entered into an assignment for the benefit of creditors, with a company called Rally Capital Services, LLC as the assignee. After allegedly chasing off two other bidders,*fn2 Rally Capital eventually sold all of Old Argus's assets for approximately $1.3 million to another defendant, Hartford Computer Group, Inc. As part of the sale, Hartford agreed to collect Old Argus's existing receivables but was expressly precluded from obtaining any interest in the WIP Marketing inventory or any of the cameras funded by RWB Services. All moneys owed for the cameras were to go to RWB Services, as were, importantly, any returned cameras.

It is what followed that resulted in this case. RWB Services alleges that Hartford and its managers-defendants Anthony Graffia Senior and Junior-cooked up a scheme to defraud Old Argus's former customers. For any number of reasons, retailers like WalMart will return cameras to their distributors; customers may return unwanted but functioning cameras or there could be something wrong with the camera itself. When this happened under Old Argus's watch, Old Argus would give its customer a credit for any returned cameras, which the customer could then draw from in making future purchases. When Hartford took over Old Argus's assets, there were a number of returned cameras from Wal-Mart that Old Argus still had in its possession. RWB Services alleges that, rather than return these cameras to RWB Services as required, Hartford instead repackaged and then resold them to Wal-Mart as new. In addition, it claims that Hartford both told Wal-Mart to pay amounts owed for kept cameras directly to Hartford- rather than to RWB Services-and took possession of returned cameras from Wal-Mart-rather than send them to RWB Services as promised. RWB Services claims that Hartford sold 50,000 repackaged cameras as new.

Realizing that the faucet of payments for its loan had dried, RWB Services demanded payment from Hartford, a request that Hartford refused. RWB Services claims that this scheme of repackaging cameras and selling them as new continued apace through at least March 2005, involving both its cameras and those of others. That month, Hartford transferred most of its assets to a new company, Impero Electronics, which RWB Services alleges was a shell for the Graffias. Impero allegedly continued on with Hartford's alleged scheme, repackaging different brands of returned cameras as new.

RWB Services initially filed suit against Hartford, Impero, Rally Capital Services, and the Graffias in 2004. In January 2007, RWB Services filed its Fourth Amended Verified Complaint, which added to the nine state-law claims a new one alleging a RICO violation against the Graffias, Hartford, and Impero. The defendants removed the case to the Northern District of Illinois. And on August 22, 2007, the district court granted the defendants' motion to dismiss, reasoning that RWB Services had failed to show standing to sue under RICO. The basis for its jurisdiction was the federal RICO claim, and, after this claim fell, the court relinquished supplemental jurisdiction over the remaining state claims. This appeal followed.

II. Discussion

The civil RICO cause of action arises under 18 U.S.C. § 1964(c), which provides

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.

As is relevant here, this cause of action requires RWB Services to adequately plead three things: (1) an "injure[y] in [its] business or property" (2) "by reason of" (3) the defendants' "violation of section 1962." See 18 U.S.C. ยง 1962(c). The district court held that RWB Services failed at step two, a decision we review de novo, accepting any factual allegations that RWB Services has ...

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