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Ed Fiala, Individually and On Behalf of Other Similarly Situated Persons Who Reside Within the Wasco Sanitary District, and Tim v. Wasco Sanitary District

March 16, 2012

ED FIALA, INDIVIDUALLY AND ON BEHALF OF OTHER SIMILARLY SITUATED PERSONS WHO RESIDE WITHIN THE WASCO SANITARY DISTRICT, AND TIM KOBLER CUSTOM HOMES, INC., PLAINTIFFS,
v.
WASCO SANITARY DISTRICT, ROBERT SKIDMORE, RAUL BRIZUELA, GARY SINDELAR, CHARLES V. MUSCARELLO, PATRICK GRIFFIN,
JERRY BOOSE, KENNETH BLOOD, FOX MILL LIMITED PARTNERSHIP, B&B ENTERPRISES, AND HUDSON HARRISON, DEFENDANTS.



The opinion of the court was delivered by: Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiffs Ed Fiala and Tim Kobler Custom Homes, Inc. brought this action in the Circuit Court of the Sixteenth Judicial Circuit, Kane County, Illinois, against Defendants Wasco Sanitary District, Robert Skidmore, Raul Brizuela, Gary Sindelar, Charles Muscarello, Patrick Griffin, Jerry Boose, Kenneth Blood, Fox Mill Limited Partnership ("FMLP"), B&B Enterprises, and Hudson Harrison, alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and Illinois law. After the case was removed to federal court, Defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Docs. 18, 21, 24, 28, 32. Because Plaintiffs' alleged injuries do not satisfy the requirements of RICO standing, the RICO claims are dismissed. And having disposed of the only federal claims in the case, the court remands the state law claims to state court.

Background

A complaint's well-pleaded facts generally are assumed true on Rule 12(b)(1) and 12(b)(6) motions, and all reasonable inferences are drawn in the plaintiff's favor. See Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 763 (7th Cir. 2010); Patel v. City of Chi., 383 F.3d 569, 572 (7th Cir. 2004). Also pertinent at the Rule 12(b) stage are exhibits attached to the complaint, see Fed. R. Civ. P. 10(c); Witzke v. Femal, 376 F.3d 744, 749 (7th Cir. 2004), and exhibits attached to the parties' briefs that are "referred to" in the complaint and "central to [the plaintiff's] claim," Wright v. Associated Ins. Cos., 29 F.3d 1244, 1248 (7th Cir. 1994). See Hecker v. Deere & Co., 556 F.3d 575, 582-83 (7th Cir. 2009) (collecting cases). In addition, orders entered and filings made in this and other courts are subject to judicial notice, as are "adjudicative facts capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." United States v. Stevens, 500 F.3d 625, 628 n.4 (7th Cir. 2007) (internal quotation marks omitted); see Cancer Found., Inc. v. Cerberus Capital Mgmt. LP, 559 F.3d 671, 676 n.2 (7th Cir. 2009). To the extent an exhibit or a judicially noticed court document or fact contradicts the complaint's allegations, the exhibit or court document takes precedence. See Forrest v. Universal Sav. Bank, F.A., 507 F.3d 540, 542 (7th Cir. 2007). The following facts are stated as favorably to Plaintiffs as permitted by the complaint and other materials that may be considered on a Rule 12(b) motion.

Fiala owns a home in the Fox Mill subdivision, which is located within the borders of the Wasco Sanitary District, a municipal entity that provides its constituents with water and sanitary sewer services. Doc. 88 at ¶¶ 1, 3. Kobler is a developer that built homes in Fox Mill. Id. at ¶ 2. According to the second amended complaint, which is the operative pleading, Defendants for many years have engaged in an illegal scheme to misdirect funds from the District to B&B and FMLP, which own homes in Fox Mill and which allegedly are corporate alter egos. Id. at ¶¶ 18, 19(f), 46(a) & (ww). The scheme allegedly commenced in 1994, when the District and FMLP entered into an annexation agreement ("Fox Mill Agreement") under which the District would annex the Fox Mill subdivision, id. at ¶ 20, which in turn would receive water and sewer services from the District, Doc. 1-3 at 10-11. The Fox Mill Agreement further provided that the District would enter into agreements for reimbursement to FMLP for a portion of the cost of wastewater and water facilities constructed or paid for by FMLP. Doc. 1-4 at 2-3. Although the District and FMLP never executed any such agreement, Doc. 88 at ¶ 28, the District has since 1994 reimbursed FMLP and B&B by allowing them to collect connection fees from existing and prospective District customers, id. at ¶ 25.

The complaint alleges that these reimbursements were prohibited by the Sanitary Act of 1936, 70 ILCS 2805/1 et seq., as it stood at the time the Fox Mill Agreement was executed. Doc. 88 at ¶ 27. The Sanitary Act later was amended to permit such reimbursements, but Plaintiffs contend that the amended statute still requires that the connection fees first be paid to the District and only then turned over to FMLP. Doc. 42 at 23. Plaintiffs assert that the District, notwithstanding the amendment, directed developers to pay connection fees directly to FMLP and B&B prior to their receiving sanitation services. Doc. 88 at ¶ 26; Doc. 42 at 2. Kobler paid connection fees to FMLP and B&B, as have numerous others. As a result, funds that should have been used by the District for infrastructure and capacity instead were paid to FMLP or B&B. This diversion of funds has required the District to charge higher fees, assessments, and property taxes, which Fiala would not have paid absent the illegal arrangement.

Defendants allegedly perpetrated this scheme through a host of illegal and fraudulent activities. The District's three trustees during the relevant time period-Skidmore, Brizuela, and Sindelar-had undisclosed financial or familial relations to B&B and its principals, Boose and Blood. Doc. 88 at ¶ 46(s), (t), (y), (z), (aa), (dd), (ee). The trustees filed statements of financial interest that failed to reveal those interests. Id. at ¶ 46(u), (y), (z), (aa), (dd), (ee). The trustees, FMLP, B&B, Boose, and Blood, with the assistance of Griffin (B&B's attorney) and Muscarello (the District's attorney), filed or caused to be filed false applications and certifications with state regulators concerning the District's wastewater capacity. Id. at ¶ 46(e), (n), (r), (v), (bb), (gg), (hh), (oo).

Harrison is another home developer in the District. In 2005, Harrison sought to annex into the District an area called Norton Farms that he wanted to develop. Id. at ¶ 29. The District denied Harrison's request. Id. at ¶ 30. Harrison renewed the application in 2008, this time retaining Griffin as his attorney. Id. at ¶ 31. Harrison then agreed to pay $2.65 million in exchange for the annexation and the receipt of sufficient wastewater capacity for the homes in Norton Farms ("Norton Farms Agreement"). Id. at ¶ 33. The 2008 application was approved. Id. at ¶ 32. Plaintiffs maintain that Harrison bribed Brizuela (one of the trustees) by giving him a recorded interest in real property. Id. at ¶¶ 46(ss) & (tt); Doc. 42 at 11. Plaintiffs also allege that Harrison's retention of Griffin as his attorney was another bribe intended to gain the District's approval. Doc. 88 at ¶ 46(rr).

The Norton Farms Agreement had negative consequences for Fiala. According to the second amended complaint, Fiala received 3.5 "population equivalents" ("PEs") with the purchase of his home. Id. at ¶ 1; Doc. 42 at 27; Doc. 105 at 6. A PE represents the amount of wastewater one individual is expected to generate in one day, which state law estimates to be 100 gallons. See 225 ILCS 225/3(6). Applicable regulations assume that a single-family home uses 3.5 PEs. See 35 Ill. Admin. Code § 370 App. A. The second amended complaint alleges that Fiala, by virtue of purchasing a single-family home that was connected to the District's facilities, "owns" 3.5 PEs. Doc. 88 at ¶ 1. As a result of the Norton Farms Agreement, one PE was "stolen" from Fiala and every other homeowner in the Fox Mill subdivision and then "sold" to Harrison to give the Norton Farms development sufficient wastewater capacity. Id. at ¶ 46(j), (o), (x), (ii), (pp), (vv). Each PE allegedly is worth $10,000. Ibid. The District's "sale" of Fiala's and other homeowners' PEs to Harrison increased the District's wastewater usage beyond its capacity, resulting in the spraying of wastewater effluent into public waterways. Id. at ¶ 46(ww).

The second amended complaint purports to state claims under RICO and Illinois law. Id. at ¶ 15. For the RICO claim, which is set forth in Count I of the second amended complaint, Plaintiffs seek actual damages, treble damages, attorney fees, and costs. Id. at p. 46. For the state law claims, which are set forth in Counts II-V, Plaintiffs seek compensatory and punitive damages, and ask the court to nullify the Norton Farms Agreement; to declare that the Fox Mill Agreement does not permit FMLP or B&B to seek the reimbursements; to require that all monies received by B&B, FMLP, or "the B&B Family" be returned to the individuals and entities from whom the monies were wrongfully obtained; to declare that the amendment to the Sanitary District Act of 1936 does not apply retroactively to any project constructed prior to its enactment; and to declare that any excess PEs are the District's property. Id. at ¶ 67(a), (b), (c), (e) (f), and p. 50. Plaintiffs ask the court under the Illinois Public Officer Prohibited Activities Act, 50 ILCS 105/3, to declare that the trustee defendants violated that statute and to nullify any District contract executed while one of the trustees held office, and, pursuant to 50 ILCS 105/4, to remove the trustees from public office and to appoint a receiver until a proper election for successor trustees can be held. Id. at ¶¶ 70(a) & (b), 73, 74.

Discussion

Five sets of defendants have filed five separate motions to dismiss. One argument made or adopted by all Defendants is that Plaintiffs lack RICO standing. That argument, which is correct and which disposes of the RICO claims, is addressed first, followed by consideration of the state law claims.

I. RICO Claims

RICO provides that "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue . 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." 18 U.S.C. § 1964(c). "The phrase 'injured in [his] business or property' has been interpreted as a standing requirement-rather than an element of the cause of action-which must be satisfied in order to prevail on a RICO claim." Evans v. City of Chi., 434 F.3d 916, 924 (7th Cir. 2006) (citing Gagan v. Am. Cablevision, Inc., 77 F.3d 951, 958-59 (7th Cir. 1996)). Therefore, "to establish standing to sue for a violation of § 1962, a plaintiff must allege that the defendant's overt act in furtherance of the RICO conspiracy injured the plaintiff's business or property." Gagan, 77 F.3d at 959.

The portions of Plaintiffs' second amended complaint and briefs that conceivably bear upon RICO standing generously can be read to maintain that Plaintiffs suffered the following injuries: (1) Defendants misappropriated one of Fiala's PEs and reassigned it to Harrison's homes in Norton Farms; (2) Defendants' actions "endangered the health and welfare of Fiala and others similarly situated"; (3) because Kobler and other developers paid B&B or FMLP the connection fees that should have been paid to the District, insufficient investments were made in infrastructure and capacity, leading the District to charge Fiala and other homeowners higher fees, assessments, and property taxes to make up the shortfall; (4) as a result of Defendants' actions, Kobler was forced to pay "illegal fees" to B&B that it would not have paid "but for Defendants' wrongful acts." Doc. 42 at 26-27; Doc. 88 at ΒΆΒΆ 18, 19(m) 38, 46(ww) & (zz), 51, 59, 62; Doc. 105 at 4-6. Plaintiff ...


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