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Dennis F. Martinek, Robert Hebel, Jr., Individually and Derivatively v. Rosendo Diaz

July 18, 2012

DENNIS F. MARTINEK, ROBERT HEBEL, JR., INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF POLITICO, LLC, AND MAS VERDE, INC., PLAINTIFFS,
v.
ROSENDO DIAZ, ROSENDO DIAZ D/B/A VINI'S PIZZA OF PALATINE, HV-A- SLICE, INC., D/B/A VINI'S OF PALATINE, VINI'S PIZZA OF UPTOWN, LLC, BRYAN MATSUI, EDDIE SANTIAGO, VINI'S PIZZA OF BARTLETT, LLC, JOHN H. REDFIELD, ESQ., MARY JO LAROCCO, AND JOHN AND JANE DOES, DEFENDANTS.



The opinion of the court was delivered by: Judge Joan B. Gottschall

MEMORANDUM OPINION & ORDER

The plaintiffs in this action have filed a sixty-eight-page complaint alleging some nineteen different causes of action against various defendants,*fn1 including inter alia fraud, conversion, theft, embezzlement, breach of fiduciary duty, tortious interference, civil conspiracy, malpractice, violations of the Illinois Securities Act, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The court is now faced with three motions to dismiss: one filed by Rosendo Diaz and Mary Jo Larocco; one filed by Hv-A-Slce, Inc., Vini's Pizza of Uptown, LLC, Vini's Pizza of Bartlett, LLC, Eddie Santiago, and Bryan Matsui; and one filed by John Redfield. Because the court concludes that the plaintiffs have failed to state a RICO claim, the court grants the motions and dismisses the complaint without prejudice.

I. BACKGROUND

The plaintiffs claim that the conspiracy alleged in the complaint actually started long before they got involved. According to the plaintiffs, in 2003, Defendant Rosendo Diaz and Dion Romano were both 50% shareholders in D.R. Crew, Inc., which owned and operated a pizza shop called Vini's Pizza in Palatine. In August of 2003, Romano agreed to transfer and sell his interest in that Vini's Pizza to Diaz for $250,000. Diaz continued to own and operate the Vini's Pizza, but according to the plaintiffs, Diaz- together with Eddie Santiago, Bryan Matsui, and Diaz's attorney John Redfield- "devised a plan and entered into a conspiracy" to hide Diaz's interest in the business. They did so by incorporating a new business, Hv-A-Slce, Inc. ("Hv-A-Slce"),*fn2 that was registered to do business as "Vini's of Palatine." Matsui was the president of Hv-A-Slce, while Diaz was the owner. Under an October 2004 agreement, Diaz supposedly sold 200 shares in the new corporation to Santiago and Matsui for $100,000; he also purported to give up his proprietary interest and managerial control, although Diaz retained the exclusive right to obtain 800 shares at no cost at any time. No money transferred hands, and eight months later Diaz filed for Chapter 13 bankruptcy. In the bankruptcy proceedings, Diaz and Redfield intentionally failed to disclose Diaz's purchase of the business from Romano, the stock sale he purported to make to Matsui and Santiago, and the $100,000 purchase price. Diaz also misrepresented his income and assets, his employer's name, and his real property holdings. The plaintiffs allege that Diaz, Matsui, and Santiago embezzled money from Vini's of Palatine; that Diaz only sporadically paid Romano the money he owed and gave Romano false financial statements; that Diaz, Matsui, Santiago, and Hv-A-Slce falsely reported income on tax returns; and that Hv-ASlce employed undocumented aliens. (See Compl. ¶¶ 12-20.)

But none of this has to do with the plaintiffs in this case. They did not get involved with Diaz until 2008. In February or March of that year, Diaz proposed to plaintiff Dennis Martinek that Diaz and Martinek should join together to start a Vini's Pizza in the Lincoln Park neighborhood of Chicago. Diaz told Martinek that Vini's Pizza in Palatine was netting over $1 million per year, and sent a summary and projections for the Lincoln Park business to Martinek via mail. (See Compl. Ex. A.) The plaintiffs allege that this information was known to be false, and was provided with the intent to induce Martinek to invest with Diaz. In any event, Martinek and Diaz agreed that Martinek would provide start-up capital of about $253,000; that Martinek and Diaz would each receive 2000 common shares based on an initial capital contribution of $20,000 each; and that instead of receiving a $6000 per month salary for managing the business, Diaz's salary would be used as a capital contribution. Diaz told Martinek that Redfield would form a new company for them called Politico, LLC ("Politico") for $1000-but in truth Politico had already been formed prior to Martinek's involvement, with Diaz as its manager and sole officer. Martinek, without counsel to represent him, executed the agreement forming the LLC ("the Politico LLC Agreement"). Under the Politico LLC Agreement, Martinek was simply a passive investor.

Diaz found a location for the business in Lincoln Park, and entered into a five-year lease in May 2008. Martinek then made capital contributions and provided money for start-up costs to Politico's bank account, which by September of that year totaled $329,000. Diaz never made any capital contributions to Politico, but withdrew over $318,537 from Politico's bank account. Diaz told Martinek that he was paying cash for items to save money, and refused to provide detailed bills and receipts when pressed. The amounts Diaz purported to pay for equipment and build-out were grossly inflated; although Diaz and Matsui compiled figures showing the equipment costs were $161,126.00 and that the improvements made to the store totaled $178,290.00, in fact neither of these expenses should have exceeded $50,000. Diaz made these same misrepresentations to the Internal Revenue Service.

Vini's Pizza of Lincoln Park opened in late October 2008. In managing the business, Diaz used a point-of-sale system called "Revention POS." This system was not a comprehensive accounting system, and allowed for entries to be manually entered, removed, or canceled. A comparison between the Revention records and Politico's bank records show that a substantial amount of cash and check sales proceeds were never deposited into Politico's bank account. Diaz represented to Martinek that the Lincoln Park pizza shop was not making enough money to meet its obligations, and requested additional funds. Martinek asked Robert Hebel, Jr. for help. Hebel contributed $163,660 to the business in consideration for receiving shares in Politico as set forth in the Politico LLC Agreement. Martinek and Hebel also made payments to various creditors of Politico, including rent payments and late fees paid directly to restaurant's landlord. In the meantime, Diaz was issuing checks from the Politico account to himself and to Mary Jo Larocco (the woman with whom Diaz lived at the time). In addition to simply not depositing the proceeds of sales, Diaz or Santiago would at times instruct customers to send payment directly to other, non-Vini's of Lincoln Park addresses.

The only distribution Martinek ever received from the Vini's Pizza business was in February 2009. In order to hide Politico's income from Martinek and Hebel, Diaz, Matsui and Santiago diverted the proceeds to other bank accounts, including accounts for Hv-A-Slce, Inc.; Diaz, Santiago, or Matsui's personal accounts; and accounts for other Vini's Pizza locations. Diaz also secretly opened up additional Politico or personal bank accounts into which he deposited some sales proceeds. Diaz used these accounts to pay personal expenses, as well as to open and operate other Vini's restaurants (including Vini's Pizza of Uptown, LLC and Vini's Pizza of Bartlett, LLC, both of which purported to be owned by Santiago or Santiago's mother). Diaz, Matsui, and Santiago would arrange for employees to take supplies belonging to Vini's of Lincoln Park to other Vini's locations, without reimbursing the Lincoln Park location for costs. Diaz also wrote checks to various Politico employees, but failed to withhold the amounts owed for federal and state taxes, Social Security, Medicare, and unemployment, although those amounts were deduced from employee paychecks. Diaz, Matsui and Santiago did not pay the full amounts owed to the federal and state government, nor did they file appropriate W2 forms for their employees. Diaz also lied on Politico's tax returns, stating that Politico had not paid its officers any compensation, nor had it paid salaries or wages to employees. Diaz told Hebel and Martinek that he maximized profits by hiring undocumented aliens, particularly those from Mexico, and paid them in cash. When Hebel and Martinek objected, Diaz ultimately told them he had stopped the practice as of February 2009.

Vini's Pizza of Lincoln Park incurred significant overdraft charges as a result of Diaz's practice of writing bad checks. In May 2009, Hebel insisted that Politico open a new bank account, one which Hebel would be able to link to his private account so as to avoid future overdraft fees. Diaz somehow managed to open yet another bank account that was linked to the new Politico account, and continued to transfer money from the Politico account to his personal account.

The plaintiffs claim that Diaz et al.'s diversions of funds continued until August 2010. On or about August 4, 2010, Diaz telephoned Martinek and told Martinek that he was closing the business that day because it had never made any money. Based on the assurances Martinek had heard from Diaz, Martinek was "shocked and surprised." When Martinek went to the Lincoln Park store, employees told him that they lacked the food and supplies needed to make pizzas for customers, and that Diaz was at a new Vini's Pizza location located on Lawrence Avenue in Chicago's Uptown neighborhood. Martinek had no idea Diaz had opened a new store, and he later learned that Diaz had taken equipment and supplies from the Lincoln Park location to the Uptown location.

At this point, Martinek decided to take action. On August 5, 2010, Martinek arranged to reopen the Lincoln Park location: he changed the locks, contacted some employees, bought food supplies, and opened for business. Martinek began to unravel the outstanding liabilities and issues left in Diaz's wake, and decided to form a new corporation, Mas Verde, Inc. ("Mas Verde"), to operate Vini's Pizza of Lincoln Park. Mas Verde initially could not complete its registration with the State of Illinois due to Politico's unpaid taxes. The State demanded that Martinek pay the taxes, and Martinek requested a hearing. As part of that proceeding, Martinek moved to subpoena Diaz's bank records, but Redfield moved to quash the subpoena after Diaz paid the outstanding state taxes. Because Diaz's payment mooted the issue in the eyes of the State, the motion to quash was granted.

Martinek learned that Diaz had informed many of their larger customers that Diaz's new pizza shop, Vini's Pizza of Uptown, would beat any price proposed by Vini's Pizza of Lincoln Park. Still, Mas Verde did fairly well its first week in business as Vini's of Lincoln Park, making over $7500 in sales. First Data was to process the credit card sales, but First Data mistakenly processed certain sales via Politico's merchant account instead of Mas Verde's account, which resulted in the proceeds being deposited into a non-Politico bank account owned by Diaz. Martinek asked Diaz to return the funds, as well as any other Politico property or funds Diaz still had in his possession. Diaz refused. Martinek also requested that Redfield turn over any of Politico's books or records, and that Redfield cease acting as counsel for Politico or Vini's Pizza of Lincoln Park due to the conflict of interest that had arisen. Redfield refused.

Although Mas Verde was beginning to break even by about May 2011, an unexpected increase in the property tax portion of Mas Verde's lease payment forced Mas Verde to have to close Vini's Pizza of Lincoln Park. Martinek has been sued by the landlord for about $100,000 in unpaid rent, including rent that should have been paid while Diaz was managing the Lincoln Park store. The parties met after the dissolution of the business to discuss settlement, but Diaz dropped out of the negotiations, which prompted the plaintiffs to file the instant suit.

II.LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), the defendant may seek to dismiss the case if the plaintiff "fail[s] to state a claim upon which relief can be granted." The court accepts as true all well-pleaded facts and draws all reasonable inferences in favor of the plaintiff. Stayart v. Yahoo! Inc., 623 F.3d 436, 438 (7th Cir. 2010). But although Federal Rule of Civil Procedure 8(a) requires only that the complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief," nonetheless the complaint must include "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); see Ashcroft v. Iqbal, 566 U.S. 662 (2009) (noting that while Rule 8 does not require detailed factual allegations, "it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation"). The relevant question is whether the complaint includes enough factual allegations to "raise a right to relief above the speculative level." Id. In other words, to survive a motion to dismiss post-Twombly, "'the plaintiff must give enough details about the subject-matter of the case to present a story that holds together,' and the question the court should ask is 'could these things have happened, not did they happen.'" Estate of Davis v. Wells Fargo Bank, 633 F.3d 529, 533 (7th Cir. 2011) (quoting Swanson v. Citibank, N.A., 614 F.3d 400, 404-05 (7th Cir. 2010)).

In addition, any fraud-based allegations, such as allegations of fraud in a civil RICO complaint, must satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b). See Slaney v. Int'l Amateur Athletic Fed'n, 244 F.3d 580, 597 (7th Cir. 2001); Goren v. New Vision Int'l, Inc., 156 F.3d 721, 726 (7th Cir. 1998) ("Rule 9(b) is of course applicable to allegations of fraud in a civil RICO complaint."). This means the plaintiff must, at a minimum, provide the time, place, and content of the alleged false representations, the method by which the representations were communicated, and the identities of the parties to those representations. Slaney, 244 F.3d at 597.

III.ANALYSIS

In this case, federal jurisdiction is predicated on the viability of the plaintiffs' RICO claims. The plaintiffs state that the defendants (except for Larocco) committed mail fraud and wire fraud, unlawfully employed aliens, engaged in money laundering, and transacted in property derived from illegal activity. Together, the plaintiffs allege these acts violated 18 U.S.C. ยงยง 1962(a)-(d)-in other words, all fourof the ...


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