H & Q Properties, Inc. v. David Doll

Appellants H & Q Properties, Inc., John Quandahl, and Mark Houlton

(collectively, "H&Q") appeal the district court's1 dismissal of their claims and denial

of their motion for leave to file a second amended complaint alleging violations of

both state law and the Racketeer Influenced and Corrupt Organizations Act (RICO),

18 U.S.C. §§ 1961–1968, against appellees. We affirm.

I. Background2

H & Q Properties, Inc. and appellees Double D Properties, L.L.C.; DDE, Inc.;

and HNGC, Inc. owned membership units of Double D Excavating, L.L.C. (the

"LLC").3 On March 2, 2010, certain appellees (collectively, the "Doll Companies"4)

opened account number 121224 ("Account 121224") at Malvern Trust & Savings

Bank ("Malvern Bank") in the name of "Double D Excavating" and deposited into that

account a check made payable to the LLC. That same day, the Doll Companies also

opened account number 119992 ("Account 119992") at Malvern Bank in the name of

"David E. Doll."

In the coming weeks, the Doll Companies deposited into Account 121224

multiple payments that the LLC's customers made to the LLC. The Doll Companies

thereafter transferred funds from Account 121224 to Account 119992, commingled

1The Honorable Laurie Smith Camp, Chief Judge, United States District Court

for the District of Nebraska.

2The following summary of material facts is derived from H&Q's amended

complaint. We assume these facts are true for purposes of this appeal. Rochling v.

Dep't of Veterans Affairs, 725 F.3d 927, 930 (8th Cir. 2013) (citation omitted).

3The LLC was formerly known as Doll Excavating, L.L.C.

4The "Doll Companies" include appellees David E. Doll; Double D Properties,

L.L.C.; DDE, Inc.; HNGC, Inc.; Nebraska Lowboy Services, Inc.; Double D

Excavating, Inc.; and Load Rite Excavating, L.L.C.

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funds from Account 119992 with funds belonging to the Doll Companies, and used

those funds to pay certain of the Doll Companies' own expenses.

H&Q asserts that the Doll Companies failed to give notice or obtain consent for

any of the foregoing activities, which H&Q deems actionable. In addition, the Doll

Companies allegedly represented to H&Q that the LLC was struggling financially and

needed additional financial assistance from H&Q. The Doll Companies contributed

a portion of the funds from Account 119992 back to the LLC and, according to H&Q,

represented to H&Q that these were fresh capital contributions to the LLC. Thereafter,

H&Q also invested additional capital into the LLC.

After discovering the Doll Companies' alleged conduct, H&Q filed this suit

asserting various state law and RICO claims against the Doll Companies, two entities

associated with the Doll Companies (Doll Construction, L.L.C. and New Era

Excavation Company), and Malvern Bank. The appellees moved to dismiss the claims

under Federal Rule of Civil Procedure 12(b)(6), and H&Q then moved for leave to file

a second amended complaint.

The district court ultimately granted the appellees' motions to dismiss and

denied H&Q's motion for leave to amend. The court found, among other things, that

H&Q failed to state a RICO claim because it did not sufficiently allege any

racketeering activity. The court also denied H&Q's motion to file a second amended

complaint because the proffered complaint would not cure the existing pleading

deficiencies. The court chose not to exercise supplemental jurisdiction over the

remaining state law claims and dismissed them without prejudice.

II. Discussion

On appeal, H&Q argues that the court erred in dismissing its RICO claims and

likewise erred in denying its motion for leave to amend. "We review a grant of a

motion to dismiss under a de novo standard of review." Grand River Enters. Six

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Nations, Ltd. v. Beebe, 574 F.3d 929, 935 (8th Cir. 2009) (citing Taxi Connection v.

Dakota, Minn. & E. R.R. Corp., 513 F.3d 823, 825 (8th Cir. 2008)). "Generally, we

review the denial of leave to amend a complaint under an abuse of discretion standard;

however, 'when the district court bases its denial on the futility of the proposed

amendments, we review the underlying legal conclusions de novo.'" Crest Const. II,

Inc. v. Doe, 660 F.3d 346, 359 (8th Cir. 2011) (quoting Walker v. Barrett, 650 F.3d

1198, 1210 (8th Cir. 2011)).

A. RICO

RICO prohibits "any person employed by or associated with any enterprise

engaged in . . . interstate . . . commerce, 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). RICO, however, "'does not cover all instances of

wrongdoing. Rather, it is a unique cause of action that is concerned with eradicating

organized, long-term, habitual criminal activity.'" Doe, 660 F.3d at 353 (quoting

Gamboa v. Velez, 457 F.3d 703, 705 (7th Cir. 2006)). To establish their civil claim

under RICO, H&Q must show that the appellees engaged in "'(1) conduct (2) of an

enterprise (3) through a pattern (4) of racketeering activity.'" Nitro Distrib., Inc. v.

Alticor, Inc., 565 F.3d 417, 428 (8th Cir. 2009) (quoting Sedima S.P.R.L. v. Imrex Co.,

473 U.S. 479, 496 (1985)). Additionally, Federal Rule of Civil Procedure 9(b)

requires that "[i]n alleging fraud . . . a party must state with particularity the

circumstances constituting fraud." The "[c]ircumstances" of the fraud include "such

matters as the time, place and contents of false representations, as well as the identity

of the person making the misrepresentation and what was obtained or given up

thereby.'" Murr Plumbing, Inc. v. Scherer Bros. Fin. Servs. Co., 48 F.3d 1066, 1069

(8th Cir. 1995) (quoting Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982)).

H&Q contends that the appellees engaged in "a pattern of racketeering activity"

by committing bank fraud, mail fraud, and wire fraud. For the reasons discussed

herein, we disagree.

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1. Bank Fraud

To commit bank fraud, a person must "execute[], or attempt[] to execute, a

scheme or artifice" either "(1) to defraud a financial institution; or (2) to obtain any

of the moneys, funds, credits, assets, securities, or other property owned by, or under

the custody or control of, a financial institution, by means of false or fraudulent

pretenses, representations, or promises." 18 U.S.C. § 1344. "[T]he purpose of the bank

fraud statute 'is not to protect people who write checks to con artists but to protect the

federal government's interest as an insurer of financial institutions.'" United States v.

Staples, 435 F.3d 860, 867 (8th Cir. 2006) (quoting United States v. Davis, 989 F.2d

244, 247 (7th Cir. 1993)); see also Loughrin v. United States, ––– U.S. –––, 134 S. Ct.

2384, 2394–95 (2014) ("[T]he text of § 1344(2) [] limits its scope to deceptions that

have some real connection to a federally insured bank, and thus implicate the pertinent

federal interest." (citation omitted)).

H&Q has failed to allege that any appellee defrauded Malvern Bank. And H&Q

has likewise failed to sufficiently allege that any appellee engaged in the requisite

"false or fraudulent" activities to obtain bank property within the meaning of

§ 1344(2). The mere use of a bank's traditional customer services does not per se

transform the appellees' alleged misconduct into bank fraud; indeed, even assuming

arguendo that H&Q has sufficiently pleaded some kind of fraud, § 1344(2) is not "a

plenary ban on fraud" and does not "federaliz[e] frauds that are only tangentially

related to the banking system." Loughrin, 134 S. Ct. at 2392–93 (also noting that

§ 1344(2) should not be applied "to cover every pedestrian swindle happening to

involve payment by check"). The district court therefore did not err in finding that

H&Q failed to adequately allege bank fraud.

2. Mail and Wire Fraud

"When pled as RICO predicate acts, mail and wire fraud require a showing of:

(1) a plan or scheme to defraud, (2) intent to defraud, (3) reasonable foreseeability that

the mail or wires will be used, and (4) actual use of the mail or wires to further the

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scheme." Wisdom v. First Midwest Bank, of Poplar Bluff, 167 F.3d 402, 406 (8th Cir.

1999) (citing Murr Plumbing, Inc., 48 F.3d at 1069 n.6). "[T]he term 'scheme to

defraud' connotes some degree of planning by the perpetrator, [and] it is essential that

the evidence show the defendant entertained an intent to defraud." Atlas Pile Driving

Co. v. DiCon Fin. Co., 886 F.2d 986, 991 (8th Cir. 1989) (alterations in original)

(quoting United States v. McNeive, 536 F.2d 1245, 1247 (8th Cir. 1976)).

As the district court correctly noted:

[H&Q has] not alleged that their authorization was required for creation

of LLC accounts, or that such authorization was required for the transfer

[of] money from accounts belonging to the LLC. [H&Q's] allegations are

also devoid of any suggestion that [the Doll Companies] attempted to

conceal the existence of either account from [H&Q]. In fact, according

to [H&Q], [the Doll Companies] specifically revealed both accounts, at

the latest, in August of 2011. . . . In sum, there are no allegations from

which the Court can infer that [the Doll Companies] fraudulently sought

to deprive [H&Q] of any right to the customer payments, or that [the

Doll Companies] lacked any right to the customer payments transferred

to Account No. 119992. Thus, the Court cannot conclude that [the Doll

Companies'] representations were false or part of a fraudulent scheme.

Consequently, even assuming the Doll Companies used "mail or wires" to

deposit checks or transfer funds, H&Q's allegations fall woefully short of establishing

mail or wire fraud. See id. Thus, although certain of the appellees' alleged actions may

give rise to various state-law claims, they do not constitute racketeering activity within

the meaning of RICO.5

5Given that H&Q has failed to adequately plead racketeering activity, we need

not address the district court's other reasons for dismissing H&Q's RICO claims. See

Wierman v. Casey's Gen. Stores, 638 F.3d 984, 1002 (8th Cir. 2011) ("[T]his court

may affirm for any reason supported in the record." (citation omitted)).

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B. Leave to Amend

Federal Rule of Civil Procedure 15(a) provides that "court[s] should freely give

leave [to amend a complaint] when justice so requires." Courts need not grant leave

to amend, however, if granting such leave would be futile. Doe, 660 F.3d at 358–59.

And, after reviewing H&Q's proposed second amended complaint, we agree with the

district court that H&Q's proposed amendments do not cure the above-described

deficiencies present in their RICO allegations. The district court therefore did not err

in denying H&Q's motion for leave. See id.

Accordingly, we affirm the decision of the district court.