Cordero-Hernández v. Hernández-Ballesteros , 449 F.3d 240 ( 2006 )

STAHL, Senior Circuit Judge.

The Paris Paris Boutique was a small shop located in San Juan, Puerto Rico. It was founded several years ago by Maria Teresa Hernández-Ballesteros (Hernán-dez), an entrepreneur who has also founded and operated at least two other shops in San Juan. Under Hernández’s management, the shop apparently dealt primarily in women’s clothing and accessories, and had at least two employees, a professional manager and a sales clerk. It purchased clothing from Puerto Rican and New York-based retailers and sold the goods to walk-in customers, primarily targeting passing tourists.

Hernández decided to give up the business in 2000 or 2001, and put Paris Paris Boutique, Inc. on the market. Among a number of interested buyers, Ana M. Cordero-Hernández (Cordero) won out. This suit was brought by Cordero and the boutique over the fallout from that purchase. Cordero and the Paris Paris company alleged various fraud- and contract-related claims against Hernández and George Moll, who was the realtor on the sale of the boutique. They also brought claims against Arnaldo Peñalvert-Vázquez (Peñalvert), Hernandez’s accountant; FirstBank of Puei"to Rico, which holds the mortgage that Cordero assumed when she purchased the property; and Elba Maria Martinez (Martinez), the proprietor of the building in which the Paris Paris was located.

Cordero purchased 100% of the shares of the boutique from Hernandez on St. Valentine’s Day, 2001. The purchase price for the store was $69,000 in cash and the assumption of $156,000 in debt owed by Hernández to FirstBank. Included in the deal were promises by Hernández to offer training to Cordero in dealing with suppliers and in the other particulars of running the store, but none of these promises were ever honored. While Cordero had also been promised an easy and immediate monthly profit, earnings lagged behind expectations, and Cordero and the store quickly began to experience financial difficulties. Cordero argues that the store’s plight was worsened by the fact that Her-nández almost immediately set up a new dress shop, named El Sol de Puerto Rico, in the same building as the Paris Paris.

Soon after she established El Sol, Her-nández put it on the market, just as she had done with the Paris Paris. Believing that she had herself been defrauded, suspecting that Hernández was planning to perpetrate a similar fraud in the upcoming sale of El Sol, and hoping to catch Hernán-dez in a pattern of fraudulent activity, Cordero hired two investigators to come to El Sol and pretend to be interested purchasers. Hernández allegedly made representations about the new store to this pair, Damian Soto and Ester Morell, that sounded in the same register as her representations to Cordero about Paris Paris— high margins, valuable inventory, established clientele, and easy money. The hired detectives did not, of course, buy El Sol, and neither did anyone else. Finding no buyer, Hernández abandoned the store less than a year after opening it.

Meanwhile, in May 2001, with her financial problems worsening, Cordero and the Paris Paris company filed voluntary petitions for bankruptcy protection under Chapter 11. In the course of the bankruptcy proceedings, Cordero attempted to assert a handful of legal claims against Hernández and the other defendants in this action, all involved in the sale of the Paris Paris or the establishment of El Sol, and these claims were eventually removed to federal district court. In her original complaint in the district court, Cordero alleged that Hernández and her agents had misrepresented the value and profitability of the Paris Paris Boutique, and that Hernández had breached her contract with Cordero and had engaged in unfair competition by opening the competing store in the same building as the Paris Paris. In particular, she alleged that Hernández, personally and through Moll and Peñal-vert, misled her about the past profitability of the store and about its likely value going forward. She also alleged that FirstBank of Puerto Rico, which provided partial financing for the deal, had failed to abide by several of its own risk-management policies, was less than fully candid with Cordero about its interest in the transaction going ahead, and so ultimately contributed to Cordero’s injuries. In addition, Cordero also claimed that Hernández had violated an implied contractual obligation not to compete with her by opening up the new shop in the same building as the Paris Paris, and that Martinez, who leased space to both the Paris Paris and El Sol, violated a term of Cordero’s lease by permitting Hernández to open her new store next door to the Paris Paris.

Cordero amended her complaint in April 2002 to include a cause of action under the Racketeer Influenced and Corrupt Organizations (RICO) Act, 18 U.S.C. § 1964(c). In the newly added portion of the complaint stating a claim under RICO, Corde-ro incorporated her fraud allegations against all defendants, and further alleged that the defendants together comprised an enterprise organized for the purpose of defrauding potential buyers of the boutiques they developed. The specific RICO predicate that Cordero attempted to allege was interstate wire fraud under 18 U.S.C. § 1343 (defining wire fraud) and § 1961(5) (incorporating wire fraud as a RICO predicate): Cordero claimed that Hernández, along with other defendants, made fraudulent representations first to Cordero and later to her hired investigators, and that some of these representations were made over the phone. Cordero never explicitly alleged, however, that the phone calls were interstate calls nor stated specifically during which calls, when, and by whom, the fraudulent representations were made, failings which are the nub of this appeal.

A drawn-out discovery battle ensued, during which Cordero filed no fewer than four motions to compel discovery from a seemingly reluctant set of defendants, and the court noted in one of its orders compelling discovery that it was running out of patience with the parties. Early on in the discovery period, defendants moved together for 12(b)(6) dismissal for failure to state a claim, and Cordero responded. Discovery proceeded apace, while the motion to dismiss lingered on the docket. A year later, the district court issued an order dismissing the RICO action with prejudice pursuant to the defendants’ 12(b)(6) motion and dismissing the state law claims, over which it claimed¹ only supplemental jurisdiction, without prejudice.²

In order to make out a civil claim under RICO by way of wire fraud, a plaintiff must allege that a group of defendants “engaged in a scheme to defraud with the specific intent to defraud and that they used ... the interstate wires in furtherance of the scheme,” McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 790 (1st Cir.1990), and in particular that defendants engaged in at least two instances of such predicate wire use, Ahmed v. Rosenblatt, 118 F.3d 886, 888 (1st Cir.1997). The Federal Rules of Civil Procedure usually permit a plaintiff to make general allegations in a complaint, see Fed.R.Civ.P. 8, but require more specific pleading where a plaintiff alleges fraud, see id., 9(b). In particular, under Rule 9 “the pleader is required ‘to go beyond a showing of fraud and state the time, place and content of the alleged mail and wire communications perpetrating that fraud.’ ” N. Bridge Assocs., Inc. v. Boldt, 274 F.3d 38, 43 (1st Cir.2001) (quoting Feinstein v. Resolution Trust Corp., 942 F.2d 34, 42 (1st Cir.1991)). “It is not enough for a plaintiff to file a RICO claim, chant the statutory mantra, and leave the identification of predicate acts to the time of trial.” Id. (quoting Feinstein, 942 F.2d at 42). As noted, while plaintiffs asserted conclusorily in their amended complaint that they were alleging wire fraud, they did not make the requisite allegations identifying specific interstate phone calls by time, place, and content.³

Failure to plead with specificity in a RICO action may merit dismissal. See id. at 44. Because, however, it will often be difficult for a plaintiff to plead with specificity when the facts that would support her claim are solely in the possession of a defendant, we held in New England Data Services, Inc. v. Becher, 829 F.2d 286 (1st Cir.1987), that a court faced with an insufficiently specific claim may permit limited discovery in order to give a plaintiff an opportunity to develop the claim and amend the complaint. Id. at 290. Among the particular facts that a plaintiff might under some circumstances have difficulty proving without access to discovery is whether or not a particular communication passed over the interstate wires, and Becher discovery therefore may be called for, though is not necessarily required, when the interstate nature of a wire transaction is in question. But Becher discovery (with concomitant leave to amend) “is neither automatic, nor of right, for every plaintiff.” Ahmed, 118 F.3d at 890. The threshold questions are whether “the specific allegations of the plaintiff make it likely that the defendant used interstate mail or telecommunications facilities, and the specific information as to use is likely in the exclusive control of the defendant.” Becher, 829 F.2d at 290.

The court here considered, and decided against, permitting further discovery under Becher. In doing so, the court noted that discovery had already proceeded for three years. Finding inter alia that the plaintiffs had not been diligent in attempting to collect information that would allow them to fully allege a RICO claim, cf. N. Bridge Assocs., 274 F.3d at 44, the court thought there was no need to drag the case on further, and dismissed the RICO claim with prejudice and the state law claims without. Cordero timely appealed, arguing that the court’s denial of Becher discovery was in error.⁴ We conclude that the district court’s order dismissing the suit was justified. There was no showing under Becher that the defendants were in exclusive control of any crucial information, and appellant had not demonstrated a high likelihood that useful information would result from further discovery.

First, there is little indication that the discovery requested by the appellant would have produced any information that would have permitted her to allege the requisite two interstate communications with particularity. Appellant conceded below, in her motion to reconsider, that all she was seeking was the fulfillment of then-pending discovery requests, but every indication is that appellant’s discovery efforts were never directed towards producing information that would enable her to make out a RICO claim. The district court’s opinion noted that discovery had been underway for three years, and Cordero avers that throughout that time the defendants in the case were stubbornly resistant to her efforts to eke information out of them. She attributes her lack of knowledge about the interstate nature of any communications to the defendants’ foot-dragging throughout the discovery process.

Cordero cites to her early discovery requests pressing Hernandez and other defendants for telephone records in order to demonstrate that continued discovery would have been useful, but it would require a strained reading of those requests to conclude that Cordero had requested phone records relating to the sale of Hernandez’s stores or that any potentially useful request was pending at the time the case was dismissed.⁵ The discovery requests do not suggest that Cordero would be able to produce information about the interstate nature of any communication with any particular person during the course of the (allegedly fraudulent) sale of the Paris Paris. The district court, which has the best information about compliance with discovery, evidently so concluded, disagreeing with plaintiffs that the problem was a problem of obstruction on the part of the defendants.⁶ It did not demonstrably err in concluding under Beeher that further discovery was unlikely to produce information that would make it possible for plaintiffs to satisfactorily plead their complaint.

Nor is it anywhere explained why Cordero could not have alleged interstate communications on the basis of information already in her possession if there was any interstate activity to be alleged. Cordero had hired detectives who allegedly spoke on the telephone with defendant Moll. If these detectives called Moll while Moll was in Puerto Rico and they were themselves in New York or otherwise in another state, that information was in fact uniquely in the plaintiffs’ possession, not the defendants’. Thus it is not clear why Cordero insists on appeal that discovery was necessary in order to reveal information about the interstate nature of any communications.

Beeher discovery balances the general liberal pleading policy of the Federal Rules against the more specific policy that requires heightened pleading in fraud cases in order to filter out frivolous, harassing claims. The decision to grant or deny Beeher discovery must be based, in the final analysis, on good, common sense, and here there is every reason to doubt that any of the calls between Cordero and the defendants were interstate calls, as all parties were, so far as the record reveals, based in Puerto Rico at all relevant times.⁷ Cf. N. Bridge Assocs., 274 F.3d at 44 (where allegations “strongly suggest” fraud was conducted without use of interstate wires, Beeher discovery was inappropriate). It is also telling that Cordero failed to even allege interstate communications on information and belief. Without any independent reason to believe that the alleged calls were interstate communications, the district court could permissibly have weighed Cordero’s failure to allege such in favor of an inference that the calls were all intrastate. While information- and-belief pleading is not sufficient to satisfy the rule requiring pleading with particularity, see Becker, 829 F.2d at 288 (citing Wayne Investment, Inc. v. Gulf Oil Corp., 739 F.2d 11, 13 (1st Cir.1984)), in this case such pleading would have at least given the district court some reason to think that interstate communications might be at issue. Because there was no allegation that any calls went over the interstate wires nor a credible suggestion from the plaintiffs that the obstacle to their making such allegations was insufficient discovery, this case appears on its face to be not a RICO action, but an instance of that “localized fraud” that “Congress intended to exclude from the scope of’ the wire fraud statute. United States v. Giovengo, 637 F.2d 941, 943 (3d Cir.1980). Since, as we have noted, the appellant has conceded that on the basis of information currently in her possession she could not make out a RICO claim, and because the district court by all appearances correctly determined that further discovery was unlikely to produce more and relevant information, it properly dismissed the suit.

For the foregoing reasons, the order of the district court is affirmed.

1 . The district court asserted that its jurisdiction over the state law claims was under the supplemental jurisdiction provision of 28 U.S.C. § 1367, and declined to exercise that supplemental jurisdiction. Never discussed was the possibility that the state law claims related to the original bankruptcy proceedings and thus came within the court's bankruptcy jurisdiction under 28 U.S.C. § 1334, but appellant does not raise the issue and does not seek independent reinstatement of the state law claims.

2 . Plaintiff accuses the court of dismissing the case sua sponte, but there is some difference between dismissal of a claim that has never been challenged, see, e.g., Cepero-Rivera v. Fagundo, 414 F.3d 124, 130 (1st Cir.2005), and dismissal where, as here, the court acts in response to a defendant's motion but on grounds not fully briefed by the movant. Nevertheless, if the district court had any doubt that plaintiffs understood that they were in danger of having their complaint dismissed on grounds they had not had an opportunity to argue, the safest course would have been to give notice of the proposed grounds for dismissal and to take arguments on the question. See Ruiz Varela v. Sanchez Velez, 814 F.2d 821, 823 (1st Cir.1987). While here we think the defendants may not have raised the issue with sufficient clarity to have given plaintiffs reason to anticipate dismissal on those grounds, we find any resultant error to have been harmless. If there was error, it did not unduly prejudice appellant, because she has now fully argued her position, both here and in a motion to reconsider submitted to the district court, and after hearing arguments we are convinced that the substance of the district court's determination was correct. See Cepero-Rivera, 414 F.3d at 130.

3 . On a motion to dismiss, a court is required to accept as true all well-pleaded factual allegations and draw reasonable inferences in favor of the plaintiff. In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 200 (1st Cir.2005). The court need not accept a plaintiff's assertion that a factual allegation satisfies an element of a claim, however, nor must a court infer from the assertion of a legal conclusion that factual allegations could be made that would justify drawing such a conclusion. Resolution Trust Corp. v. Driscoll, 985 F.2d 44, 48 (1st Cir.1993); see also 5B Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 (3d ed. 2004) ("[Tjhe court will not accept conclusory allegations concerning the legal effect of the events the plaintiff has set out if these allegations do not reasonably follow from the pleader's description of what happened....”). The court was under no obligation to read the plaintiffs’ complaint, which failed to allege with specificity the factual predicates for a RICO violation, as implying that a RICO claim could have been made out with specificity.

4 . The only issue on appeal is whether the district court should have given plaintiffs both more discoveiy and subsequent leave to amend the complaint. This is because this case is not one in which the deficiency in the pleading is a mere drafting oversight. The question of Becher discoveiy plays no role in such a case, because the issue of a drafting oversight or other inadvertent deficiency in the pleading is a formal one that goes to the sufficiency of the written complaint itself and not to the underlying case that the complaint is supposed to express. In such a case, the liberal approach the Federal Rules take to pleading would almost certainly demand that a plaintiff be given leave to amend. Here, however, appellant has conceded that leave to amend without more discoveiy would be useless. In a motion to reconsider filed with the district court after the entry of judgment, plaintiffs asserted that they "could not specify” which communications were interstate communications because they did not have information to back up such specific claims. On appeal, appellant argues on various grounds that leave to amend without further discovery should have been granted, but those arguments are precluded by this earlier concession. Leave to amend standing alone is thus off the table, and we need consider only whether further discovery should have been ordered under Becher.

5 . The requests are unhelpful to appellant for two reasons. First, George Moll, the only defendant now argued to have engaged in interstate communications, responded to the request to the apparent satisfaction of the plaintiffs, meaning no discoveiy request was pending against the one defendant whose response could perhaps have fleshed out the RICO claim.

Second, the requests asked various defendants for records showing dialed telephone numbers and to identify "which of those numbers belong to a potential customer of Paris Paris Boutique, Inc., El Sol de Puerto Rico, and/or any other business deal between yourself and Mrs. Hernandez-Ballesteros.” The implication on appeal is that this request would have produced identifiable records of telephone calls involving the sale of the Paris Paris, but the request asks only for numbers "belong[ing] to customer[s] of” Hernandez’s various enterprises, and not for potential buyers of those stores. Were there any doubt about how expansively the question might be construed, we note that Moll responded to the discoveiy request by saying, "I don't have that kind of information. As a real estate broker, my job merely consisted in obtaining a buyer for the purchase of Hernandez’s businesses). As such, I was contacted by the prospective buyers of Paris Paris’ shares and of El Sol de Puerto Rico.” Plaintiffs' acceptance of this response indicates that Moll correctly interpreted the question to relate only to customers and not buyers of the stores, and that plaintiffs never sought telephone records relating to the sale of the store.

6 . Cordero filed four motions to compel discovery. The first, second, and fourth were all granted, and the third was never decided. The docket sheet thus indicates that Cordero had some difficulty getting the defendants to produce some of the information she requested. On the other hand, it is instructive that the district court, while it threatened to impose sanctions on the defendants at one point, and on both parties at another, never did impose such sanctions, suggesting that in its view the parties’ responses to one another’s discovery requests were at least minimally satisfactory. Because management of discovery is primarily the business of the district court, the record ultimately compels the conclusion that the district court was satisfied with the efforts each party made to comply with discovery.

7 . The hired detective, Esther Morrell, was a resident of New York, a fact noted in the complaint. Her affidavit, however, gives no indication that she performed any part of her investigation while based anywhere but Puer-to Rico. The question on appeal under Beeher is whether the district court was compelled to conclude that it was likely that additional discovery would have produced useful evidence, and the state of residence of the detective is not enough, standing alone, to tip the balance in the appellant’s favor.