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Polar Express School Bus, Inc. v. Navistar, Inc.

United States District Court, N.D. Illinois, Eastern Division

December 16, 2016

POLAR EXPRESS SCHOOL BUS, INC., and LAKEVIEW BUS LINES, INC., Plaintiffs,
v.
NAVISTAR, INC., NAVISTAR INTERNATIONAL CORP., and IC BUS, LLC, Defendants.

          MEMORANDUM OPINION AND ORDER

          Harry D. Leinenweber, Judge

         Before the Court is the Defendants' Motion to Dismiss the Plaintiffs' Complaint [ECF No. 13]. For the reasons stated herein, the Court grants the Motion and dismisses the Plaintiffs' claims without prejudice. If the Plaintiffs do not amend their Complaint within twenty-one (21) days from the date of this Memorandum Opinion and Order, the dismissal will convert automatically into a dismissal with prejudice.

         I. BACKGROUND

         The Plaintiffs are an Illinois school bus company, Polar Express School Bus (“Polar”), and a second company that leased buses from Polar, Lakeview Bus Lines (“Lakeview”). The Plaintiffs claim that the Defendants, Navistar, Inc. and its affiliates (collectively, “Navistar”) manufactured and sold buses to Polar knowing that the buses contained defective parts.

         Polar alleges that from 2007 to 2009, it purchased from Navistar approximately 40 buses containing engines with defective emissions control technology and defective brake systems. The Plaintiffs' only claims under federal law are for civil violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), see, 18 U.S.C. §§ 1962(c) and 1962(b), perpetrated through acts of mail and wire fraud. According to the Complaint, Navistar committed the fraud through an enterprise that included Navistar's authorized dealers, who sold the defective vehicles, and Navistar's authorized repair facilities, who serviced the vehicles. The Plaintiffs also bring claims for fraud under Illinois state law.

         According to the allegations, the defects in the engines arise from an “exhaust gas recirculation” system that failed to meet U.S. Environmental Protection Agency (“EPA”) guidelines. Navistar's efforts to redesign the engines to meet the applicable EPA standards actually led to worse performance, Plaintiffs claim, which in turn led to “control failures and other malfunctions.” Ostensibly for support, the Plaintiffs highlight a civil action initiated by the U.S. Securities and Exchange Commission (“SEC”) against Navistar, in which the SEC claims that Navistar made several misleading public statements to investors from the years 2010 to 2012, violating the federal securities laws. Plaintiffs believe that when the SEC alleges Navistar misled its investors through public statements, it means, “by implication, ” that Navistar also deliberately deceived its customers. See, Compl. ¶ 11.

         II. DISCUSSION

         A. COUNT II - RICO CLAIM UNDER 18 U.S.C. § 1962(c)

         The Court first addresses Count II, the Plaintiffs' RICO claim under Section 1962(c). That section “makes it unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity. . . .” Rao v. BP Products North America, 589 F.3d 389, 399 (7th Cir. 2009) (internal quotation and citation omitted). The Plaintiffs therefore must allege facts showing “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Id.

         In addition, because the Plaintiffs' claims of racketeering are premised on mail and wire fraud (“predicate acts” under RICO), the heightened pleading standard of Federal Rule of Civil Procedure 9(b) applies. The Plaintiffs must state with particularity the circumstances, including the “who, what, when, where, and how, ” underlying the fraud. DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990). The Defendants argue, and the Court agrees, that the Plaintiffs' Complaint fails to meet the Rule 9(b) threshold.

         “‘An act of wire fraud requires a showing that (1) Defendants participated in a scheme to defraud; (2) Defendants intended to defraud; and (3) Defendants used wires in furtherance of the fraudulent scheme.'” Triumph Packaging Group v. Ward, 877 F.Supp.2d 629, 643 (N.D. Ill. 2012) (quoting Kaye v. D'Amato, 357 Fed.Appx. 706, 710 (7th Cir. 2009)). Mail fraud requires the same, except as to the third element, which requires the defendant to have used the mails in furtherance of the fraud. See, id. (citing United States v. Boone, 628 F.3d 927, 933 (7th Cir. 2010)). A “scheme to defraud, ” in turn, requires “a false statement or material misrepresentation, or the concealment of a material fact.” Williams v. Aztar Indiana Gaming Corp., 351 F.3d 294, 299 (7th Cir. 2003).

         The Defendants point out that many of their supposed misrepresentations were made well after Polar purchased any buses from Navistar dealers. That's an obvious problem for the Plaintiffs, because there is no way they could have relied on a fraudulent statement from, say, 2012, when they purchased or leased a bus in 2009. Indeed, the SEC action that the Plaintiffs highlight deals with alleged misrepresentations and omissions all occurring from 2010 to 2012. The SEC portrays Navistar as having difficulty developing an engine that would meet impending EPA emissions standards; as a result, the SEC says, Navistar covered up its problems through misleading statements to its investors in violation of various provisions of the federal securities laws. See, Civil Docket Case No. 1:16-cv-03885, ECF No 1. Absent from the SEC complaint are any allegations regarding misrepresentations to Navistar's investors prior to 2010, as well as any allegations of misrepresentation to Navistar's customers. In other words, it is hard to see how the SEC's 2016 suit is relevant to the present matter.

         Regardless, the Plaintiffs are not free to piggy-back on an SEC action. They must state allegations in their own Complaint that would form a plausible claim. In an effort to do so, the Plaintiffs attach several exhibits that they believe contain fraudulent statements. For example, they provide several Form 8-Ks (forms Navistar was required to file with the SEC to disclose various business-related developments) from the relevant time period: 2006, 2007 and 2008. See, Compl. Exs. A, C, D and E. These disclosures from Navistar contain optimistic predictions about its engine development efforts - that is all. They do not by themselves amount to deliberate misrepresentations.

         The Plaintiffs counter that their RICO claim is not based on a misrepresentation about Navistar's engines, but instead based on a failure to disclose the known defects in the engines. A failure to disclose does not automatically constitute fraud, but it may amount to fraud if the failure is accompanied by “acts of concealment or affirmative misrepresentations.” United States v. Stephens,421 F.3d 503, 507 (7th ...


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