Appellate Case: 20-4095 Document: 010110789844 Date Filed: 12/28/2022 Page: 1
FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS December 28, 2022
Christopher M. Wolpert
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
HARRY S. JOHNSON, an individual,
Plaintiff - Appellant/Cross-Appellee,
Nos. 20-4095 & 20-4103
v.
MICHAEL HEATH, an individual;
DAWN HEATH, an individual,
Defendants - Appellees/CrossAppellants.
_________________________________
Appeals from the United States District Court
for the District of Utah
(D.C. No. 2:17-CV-00416-RJS)
_________________________________
Kirk C. Lusty, Salt Lake City, Utah, for Plaintiff-Appellant/Cross-Appellee
James W. Jensen, Jensen Law Office, Cedar City, Utah, and Steven W. Call, Ray
Quinney & Nebeker P.C., Salt Lake City, Utah, for Defendants-Appellees/CrossAppellants
_________________________________
Before BACHARACH, KELLY, and CARSON, Circuit Judges.
_________________________________
CARSON, Circuit Judge.
_________________________________
This case arises from a business deal gone sideways. Defendants Michael and
Dawn Heath sold Plaintiff Harry Johnson a gasoline and automobile-service station
Appellate Case: 20-4095 Document: 010110789844 Date Filed: 12/28/2022 Page: 2
in Wells, Nevada. But soon after the sale, Plaintiff allegedly discovered that the
property had material, undisclosed defects and that Defendants had artificially
inflated the business’s profits by scamming customers over the years. So Plaintiff
sued them.
Plaintiff asserted many state-law claims against both Defendants and a claim
against Defendant Michael Heath under the federal Racketeer Influenced and Corrupt
Organizations Act (“RICO”). The district court dismissed Plaintiff’s RICO claim for
failure to state a claim upon which relief can be granted and declined to exercise
supplemental jurisdiction over the remaining state claims. Plaintiff appeals.
Our task is not to determine whether Defendants acted honorably or within the
bounds of the law generally; we must decide only whether Defendants’ actions as
alleged plausibly violated the federal RICO statute. Because we conclude they did
not, we exercise jurisdiction under 28 U.S.C. § 1291 and affirm. We also affirm the
district court’s denial of Defendants’ motion for attorney’s fees.1
I.
Defendants first operated a Chevron-branded gas station in Elko, Nevada in
2000. After receiving many customer complaints about “over-solicitation”, Chevron
allegedly declined to renew its branding agreement with Defendants. As a result,
Defendants stopped operating the Elko station.
1
We also deny Defendants’ motion to strike Plaintiff’s notice of supplemental
authority.
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Defendants next purchased and began operating a gasoline and automobile-
service station in Wells, Nevada in 2003. Customers allegedly began complaining
about credit-card charges for higher-than-advertised fuel prices, unauthorized or
unnecessary automobile repairs, and parts or repairs that no one installed or
completed. For example, Defendants allegedly switched off their marquee sign that
displayed the gasoline price, illuminating only the sign displaying the price of
propane. This tricked some customers into believing that Defendants were selling
gasoline at the less expensive propane price. Twenty-four customers filed complaints
about this alleged practice. Besides their alleged customer scams, Defendants
allegedly performed little maintenance on the property, leaving the gasoline storage
tanks, propane tanks, and sewage system in disrepair.
In 2013, Defendants decided to sell the Wells station. They hired real estate
agent Jon Walter to market the gas station in Utah. To facilitate Walter’s marketing
of the station, Defendants provided Walter with information about its finances and
profitability. But Defendants allegedly inflated the profitability data by basing it on
revenue from overcharging customers. Defendants also allegedly failed to disclose
that they spent little revenue on necessary repairs to the property, further inflating the
property’s value.
That same year, Plaintiff, through his son, contacted Walter and expressed
interest in the Wells station. Walter provided Plaintiff with the Wells station’s
allegedly inflated financial information. Over the next year, Plaintiff requested
additional financial records and information. Defendants continued to provide
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allegedly false and inflated data about the station’s finances. Plaintiff also asked if
the station needed any foreseeable repairs, which Defendants allegedly denied despite
knowing that the gasoline storage tanks, propane tanks, and the sewage system all
needed repairs. And when Plaintiff asked why Defendants were selling the station,
they allegedly responded that they intended to retire from the gasoline- and service-
station business and move to Idaho. Based on the allegedly fraudulent information
Defendants provided, Plaintiff bought the Wells station in 2014.
After selling the Wells station to Plaintiff, Defendants bought a gas and
service station in New Harmony, Utah, which they currently operate. Defendants
have allegedly continued to charge customers for unnecessary tires and automobile
repairs at the New Harmony station.
Plaintiff sued Defendants in the District of Utah, asserting nine state-law
claims and a federal RICO claim against Defendant Michael Heath. Plaintiff alleged
that Michael Heath ran his company, Heath Enterprises Inc., as a racketeering
scheme Plaintiff calls “burning the station.” “Burning the station” involves buying a
gas and automobile-service station, squeezing as much profit out of it as possible by
fraudulently overcharging customers and neglecting necessary repairs to the property,
and then selling the station to a buyer who is unaware that a lawfully operated station
cannot sustain the station’s current profits.
Defendants moved to dismiss Plaintiff’s claims. The district court dismissed
the RICO claim for failure to state a claim and declined to exercise supplemental
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jurisdiction over Plaintiff’s remaining state claims. Defendants then moved for
attorney’s fees, which the district court denied. All parties appeal.
II.
A.
We first address the dismissal of Plaintiff’s RICO claim. We review de novo a
district court’s dismissal for failure to state a claim. Sacchi v. IHC Health Servs.,
918 F.3d 1155, 1157 (10th Cir. 2019). While doing so, we accept the factual
allegations in Plaintiff’s complaint as true and construe them in the light most
favorable to him. See
id. We then determine whether Plaintiff’s factual allegations,
so construed, plausibly entitle Plaintiff to relief under the cause of action asserted.
See Young v. Davis,
554 F.3d 1254, 1256 (10th Cir. 2009).
Plaintiff brought a RICO claim under 18 U.S.C. §§ 1962(c) and 1964(c)
against Defendant Michael Heath. Section 1962(c) prohibits “any person employed
by or associated with any enterprise engaged in, or the activities of which affect,
interstate or foreign commerce, [from] conduct[ing] or participat[ing], directly or
indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering
activity.” And § 1964(c) provides a private cause of action for persons harmed by
violations of § 1962.
To plead a valid RICO claim, a plaintiff must plausibly allege that a defendant
“(1) conducted the affairs (2) of an enterprise (3) through a pattern (4) of
racketeering activity.” George v. Urb. Settlement Servs., 833 F.3d 1242, 1248 (10th
5
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Cir. 2016). “Racketeering activity” consists of the criminal offenses listed in 18
U.S.C. § 1961(1), and a “pattern” requires at least two racketeering acts committed
within ten years of each other.
18 U.S.C. § 1961(5).
Plaintiff alleged that Defendant Michael Heath conducted the affairs of Heath
Enterprises Inc., an enterprise, through a pattern of wire fraud, bank fraud, and
access-device fraud—crimes that § 1961(1) classifies as racketeering activity.
According to Plaintiff, Defendant committed these crimes by fraudulently inducing
customers to use their credit cards to buy gasoline and services and then fraudulently
inducing Plaintiff to buy the station for more than it was worth. Plaintiff alleged that
these predicate crimes formed the RICO pattern Plaintiff calls “burning the station.”
The parties do not dispute that Heath Enterprises Inc. qualifies as an enterprise
or that Defendant conducted its affairs. They dispute only whether Plaintiff
adequately alleged that Defendant engaged in racketeering activity and if so, whether
Plaintiff adequately alleged a pattern of that activity. The district court assumed
without deciding that Plaintiff adequately alleged Defendant’s commission of bank
and wire fraud but determined that Plaintiff failed to adequately allege a pattern of
such acts under RICO. We agree with the district court that even assuming Plaintiff
adequately alleged predicate racketeering acts, he failed to state a RICO claim
because he did not adequately allege a RICO pattern.
Determining what constitutes a RICO pattern is no easy task. See H. J. Inc. v.
Nw. Bell Tel. Co., 492 U.S. 229, 255 (1989) (Scalia, J., concurring) (“[T]he word
‘pattern’ in the phrase ‘pattern of racketeering activity’ was meant to import some
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requirement beyond the mere existence of multiple predicate acts. . . . But what that
something more is, is beyond me.”). The statute offers little help. Section 1961(5)
tells us that a single racketeering act or racketeering acts separated by more than ten
years are not a pattern but provides no insight beyond that. See Sedima, S. P. R. L.
v. Imrex Co., 473 U.S. 479, 496 n.14 (1985) (explaining that § 1961(5) establishes a
necessary—but not sufficient—condition for finding a RICO pattern).
The Supreme Court has attempted to provide some guidance—though whether
that guidance provides any more clarity than the statute is subject to dispute. See
H.J. Inc., 492 U.S. at 252 (Scalia, J., concurring) (“I doubt that the lower courts will
find the Court’s instructions much more helpful than telling them to look for a
‘pattern’—which is what the statute already says.”). According to the Supreme
Court, a RICO pattern requires that the racketeering predicates relate to each other
and amount to a threat of continued racketeering activity.
Id. at 239. No pattern
exists without this “continuity plus relationship.”
Id. (emphasis omitted).
Turning first to the relationship requirement, racketeering predicates relate to
each other if they “have the same or similar purposes, results, participants, victims,
or methods of commission, or otherwise are interrelated by distinguishing
characteristics and are not isolated events.” Id. at 240. We have described this
standard as “not a cumbersome one.” Bixler v. Foster,
596 F.3d 751, 761 (10th Cir.
2010) (quoting Boone v. Carlsbad Bancorporation, Inc.,
972 F.2d 1545, 1555 (10th
Cir. 1992)). Predicate acts satisfy the relationship requirement when they make up
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one common scheme. See Sil-Flo, Inc. v. SFHC, Inc., 917 F.2d 1507, 1516 (10th
Cir. 1990).
Plaintiff alleges the following predicate acts: the fraudulent sale of the Wells
station to him, the fraudulent charges to customers of the Wells station, and the
fraudulent charges to customers of the Elko and New Harmony stations. We agree
with the district court that the predicate acts involving the Wells Station relate to
each other. Plaintiff alleged that the fraudulent charges to the customers of the Wells
station were part of a broader scheme to fraudulently sell the station to Plaintiff at an
inflated price. According to Plaintiff’s allegations, Defendants defrauded the Wells-
station customers so that the station would seem more profitable to a purchaser of the
station. Thus, the fraudulent sales to the customers of the station and the fraudulent
sale of the station to Plaintiff made up a common scheme, had similar purposes, and
were interrelated under the loose relationship standard.
But Plaintiff did not allege an adequate relationship between the scheme to
inflate the value of the Wells station and the allegedly fraudulent sales to customers
at the Elko and New Harmony stations. Plaintiff did not allege that Defendants sold
the Elko station to an unsuspecting purchaser at an inflated price due to the
fraudulent sales. And Plaintiff’s allegations do not suggest that Defendants have any
plans to do so with the New Harmony station. The scheme that allegedly victimized
Plaintiff—the scheme to sell the Wells station based on fraudulently obtained
profits—did not include fraudulent transactions at other gas stations. Nor has
Plaintiff adequately alleged that fraudulent sales at other gas stations were part of any
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similar or related schemes. Thus, as to the “burning-the-station” scheme that harmed
Plaintiff, his allegations do not reveal that the fraudulent sales at other gas stations
were anything but isolated events.
Although Plaintiff sufficiently alleges a relationship among predicate acts at
the Wells station, he must also allege that the acts amounted to or threaten continued
racketeering activity. See H.J. Inc., 492 U.S. at 239. This standard is more stringent
than the relationship standard. See Bixler,
596 F.3d at 761 (“The showing required
for continuity . . . is more difficult to meet.” (quotation omitted)).
No universal standard precisely defining continuity exists because it
ultimately “depends on the specific facts of each case.” H.J. Inc., 492 U.S.
at 241–42. Continuity can be either closed or open ended. Id. at 241. Closed-ended
continuity is a closed period of repeated racketeering conduct, while open-ended
continuity consists of racketeering conduct that threatens future repetition. Id.
Plaintiffs can establish open-ended continuity by showing that the racketeering acts
involved implicit or explicit threats of repetition, that they formed the operations of
an association that exists for criminal purposes, or that they were the defendants’
regular way of conducting a legitimate enterprise. Id. at 242–43.
Plaintiff alleged that Defendants operated the Wells station for about eleven
years. In that span, Defendants allegedly scammed at least twenty-four customers by
tricking them into thinking the propane price applied to gasoline. Defendants also
allegedly fraudulently overcharged at least twenty-five customers for gasoline, tires,
or automobile repairs. And then Defendants allegedly fraudulently sold Plaintiff the
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station. Plaintiff argues that each fraudulent transaction constituted a RICO predicate
and that the RICO predicates are a regular way Defendants conduct their business—
thus establishing open-ended continuity. [Appellant’s Opening Br. at 26]
But Plaintiff claims that a particular racketeering scheme harmed him—the
scheme to fraudulently sell the Wells station based on inflated profits from
racketeering activity to an unwitting buyer. Although Plaintiff alleged some
unrelated fraudulent sales at the Elko and New Harmony stations, he failed to
connect those sales to any similar scheme to “burn the station.” Thus, Plaintiff failed
to allege that “burning the station” presents Defendants’ regular way of conducting
business or that it threatens future repetition.
Plaintiff alternatively argues that he adequately pleaded closed-ended
continuity. Unlike open-ended continuity, closed-ended continuity consists of a
closed period of repeated, related racketeering acts that do not necessarily threaten
future repetition. See H.J. Inc., 492 U.S. at 241–42. Because RICO targets long-
term racketeering conduct, closed-ended continuity requires a series of related
racketeering acts over a “substantial period of time.” Id. at 242. We thus consider
two factors when determining the existence of closed-ended continuity—the duration
of the related predicate acts and the extensiveness of the racketeering scheme.
United States v. Smith, 413 F.3d 1253, 1271–72 (10th Cir. 2005) (citing Resol. Tr.
Corp. v. Stone,
998 F.2d 1534, 1543 (10th Cir. 1993)), abrogated on other grounds by
Boyle v. United States,
556 U.S. 938 (2009).
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Plaintiff argues that he adequately pleaded closed-ended continuity because he
alleged related predicate acts spanning multiple years during Defendants’ ownership
of the Wells station. We agree with Plaintiff that the duration of the alleged
predicate acts supports finding closed-ended continuity. See Resol. Tr., 998 F.2d at
1544 (finding a duration of seven to eighteen months sufficient for closed-ended
continuity). But under our precedent, duration alone may not establish closed-ended
continuity—we also consider the extensiveness of the alleged racketeering scheme. 2
See Smith, 413 F.3d at 1272 (citing Resol. Tr., 998 F.2d at 1543). When evaluating
extensiveness, we consider “the number of victims, the number of racketeering acts,
the variety of racketeering acts, whether the injuries were distinct, the complexity
and size of the scheme, and the nature or character of the enterprise.” Id. (citation
omitted). No factor is required or dispositive; the factors merely guide us in seeking
“a natural and commonsense result.” Resol. Tr., 998 F.2d at 1543 n.9, 1544
(quotation omitted).
Having considered the extensiveness factors, we find that Plaintiff did not
allege a sufficiently extensive scheme to warrant a finding of closed-ended
continuity. Plaintiff’s third amended complaint potentially alleged twenty-four times
2
The dissent cites authority from outside of this circuit for the propositions
that duration is the single most important factor in the continuity analysis and that
sufficient duration alone is enough to allege continuity. But our cases make clear
that duration and extensiveness are both “especially relevant factors” that guide this
Court’s inquiry. See Smith, 413 F.3d at 1271–72 (citing Stone, 998 F.2d at 1543).
We express no opinion on the conclusions our sister circuits have reached when
applying their own precedents.
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Defendant tricked customers with the propane-price sign and twenty-five times
Defendant overcharged customers for gasoline, tires, or automobile repairs.
Assuming that Plaintiff adequately pleaded that each of those transactions constituted
a predicate racketeering crime—which we do not decide—Plaintiff alleged fifty
racketeering acts, including the fraudulent sale of the station to him. Although many
predicate acts and victims can suggest an extensive scheme, all other factors weigh
against finding that Plaintiff pleaded an extensive “burn-the-station” scheme.
First, the variety of the alleged predicate acts and injuries was minimal. Every
alleged predicate act except for the sale of the station to Plaintiff consisted of
overcharging unsuspecting customers. Even if the transactions violated multiple
statutes, the underlying fraudulent conduct hardly varied.
Second, Plaintiff did not allege a large or complex scheme. Some facts that
we have held relevant to complexity include the number of perpetrators involved, the
extent of the planning required to perform the scheme, the extent of the management
required to run the scheme, the sophistication of products involved in running the
scheme, and the amount of money involved. See Resol. Tr., 998 F.2d at 1545.
Plaintiff did not allege that many perpetrators “burned the station.” Plaintiff
attributed most of the activity involved in selling the station to Defendant Michael
Heath and his agent Jon Walter. And Plaintiff attributed the allegedly fraudulent
overcharging of customers to Defendant and at most four employees. Plaintiff also
did not allege that the scheme required extensive planning or management. Plaintiff
alleged only that Defendant ripped off some customers at his gas station, failed to
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perform routine maintenance on the station, and then sold it to Plaintiff without
revealing those facts. Defendant accomplished nearly half of the alleged racketeering
predicates by simply switching off a marquee sign displaying the price of gasoline—
no extensive planning or management required. And nearly all the alleged
racketeering predicates—the fraudulent transactions with customers—involved small
amounts of money. Although Plaintiff alleged that he purchased the Wells station for
$1.3 million, he did not allege what portion of this purchase price resulted from the
inflated profits and concealment of defects. In other words, Plaintiff’s failure to
allege how much the racketeering predicates inflated the purchase price makes it
unclear how much money Defendants defrauded Plaintiff out of in the sale of the
station. In any event, the scheme Plaintiff alleged—a scheme to inflate the value of a
single property by overcharging some customers and then selling that property to an
unwitting buyer without disclosing needed repairs—was neither large nor complex.
Lastly, the nature of the scheme does not support a finding of continuity.
According to Plaintiff’s third amended complaint, the RICO scheme of “burning the
station” is a process of buying gasoline and automobile-service stations, inflating the
property’s apparent value by fraudulently overcharging customers and neglecting
necessary repairs to the property, and then selling the station to an unsuspecting
buyer at an inflated price. But Plaintiff alleged that Defendant has performed this
scheme only once. Although Plaintiff alleged that Defendant overcharged customers
at the Elko and New Harmony stations, Plaintiff failed to allege that any of those
transactions formed part of a similar scheme to “burn” those stations.
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Although establishing continuity does not require the existence of multiple
racketeering schemes, the number of schemes is still “highly relevant.” H.J. Inc., 492
U.S. at 240. Without a threat of continued illegal activity, a single scheme rarely
supports finding continuity. See Sil-Flo,
917 F.2d at 1516 (“While a single scheme
may suffice in some instances, here there is simply no indication of a threat of
continuing illegal activity.”). And a single scheme even less likely supports a
continuity finding when the scheme targets only “one discrete goal.” See
id.
Plaintiff alleged only a single scheme with the discrete goal of “burning” the Wells
station—inflating its value and dumping it off on an unsuspecting buyer.3 Thus, the
nature of the alleged RICO scheme does not support a finding of extensiveness.
Even if all the allegedly fraudulent transactions committed in operating and
selling the Wells station constitute RICO predicates, the predicates were all similar
and amounted to a single, noncomplex scheme with a discrete goal. Using these
factors to guide us to a “natural and commonsense result,” Resol. Tr., 998 F.2d at
1544, and considering the long-term criminal activity RICO targets, see Boone, 972
F.2d at 1556, we hold that Plaintiff did not allege a sufficiently extensive scheme to
plausibly support a finding of closed-ended continuity. “At most, what has been
alleged is a business deal gone sour . . . and various other torts by the defendants.”
3
While the dissent disputes that Plaintiff alleged a single scheme, a plain
reading of the third amended complaint makes clear that Plaintiff did exactly that.
See Appellant’s App. Vol. I at 2 (“Harry S. Johnson alleges a recurring pattern of
dishonesty and fraudulent business practices. . . that constitute a racketeering scheme
known as “burning the station”) (emphasis added); see also id. at 54, 55, 55 n. 1, 58,
68, 82 (repeatedly referring Defendants’ singular “burning the station” scheme).
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Sil-Flo, 917 F.2d at 1516. Thus, we affirm the district court’s dismissal of Plaintiff’s
RICO claim for failure to state a claim upon which relief may be granted.4
B.
After the district court dismissed Plaintiff’s RICO claim and declined to
exercise supplemental jurisdiction over his state claims, Defendants moved for an
award of attorney’s fees. Defendants argued that three agreements with Plaintiff
entitled them to attorney’s fees as the prevailing parties.
When Plaintiff and Defendants agreed to the sale of the Wells station, they
signed a purchase agreement. They also agreed that Plaintiff would pay $400,000 of
the purchase price in quarterly $25,000 payments and signed a promissory note to
that effect. As security for the promissory note, the parties executed a deed of trust
on the Wells station.
The purchase agreement, promissory note, and deed of trust all include
attorney’s-fees provisions that Defendants argued entitled them to fees as the
4
After dismissing Plaintiff’s RICO claim—his only federal claim—the district
court declined to exercise supplemental jurisdiction over Plaintiff’s remaining state
claims. See Crane v. Utah Dep’t of Corr., 15 F.4th 1296, 1314 (10th Cir. 2021)
(“When all federal claims have been dismissed, the court may, and usually should,
decline to exercise jurisdiction over any remaining state claims.” (citation omitted)).
Plaintiff appeals the dismissal of his state claims only because he believes the district
court erred in dismissing his RICO claim. Plaintiff does not argue that the district
court abused its discretion in dismissing his state claims if the district court properly
dismissed his RICO claim. Thus, because we affirm the dismissal of Plaintiff’s
RICO claim, we also conclude that the district court did not abuse its discretion in
declining to exercise supplemental jurisdiction over Plaintiff’s remaining state-law
claims.
15
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prevailing parties on Plaintiff’s RICO claim. But the district court determined that
none of the agreements applied to Plaintiff’s RICO claim. The court found that a
RICO claim falls outside the scope of the fee provisions in the purchase agreement
and promissory note. The court also found that the fee provision in the deed of trust
does not apply to Defendants because they were neither the beneficiaries nor the
trustees of the deed of trust. Defendants appeal the denial of their motion for
attorney’s fees. In their opening brief, Defendants argue only that the district court
erred in concluding that they were not beneficiaries and thus not entitled to attorney’s
fees under the deed of trust. We thus limit our review to that issue. See City of
Colorado Springs v. Solis, 589 F.3d 1121, 1135 n.5 (10th Cir. 2009) (“[A]rguments
not raised in the opening brief are waived.”).
We generally review a denial of attorney’s fees for an abuse of discretion.
Griffin v. Steeltek, Inc., 261 F.3d 1026, 1028 (10th Cir. 2001). But when the district
court offers a basis for denying attorney’s fees, we review its legal analysis de novo.
ClearOne Commc’ns, Inc. v. Bowers,
643 F.3d 735, 777 (10th Cir. 2011). Contract
interpretation is a question of law we review de novo. Level 3 Commc’ns, LLC v.
Liebert Corp.,
535 F.3d 1146, 1154 (10th Cir. 2008).
The deed of trust’s fees provision provides:
To protect the security of the deed of trust, Trustor agrees: . . . To appear
in and defend any action or proceeding to affect the security hereof or the
rights or powers of Beneficiary or Trustee; and to pay all costs and
expenses of Beneficiary and Trustee, including cost of evidence of title
and attorney's fees in a reasonable sum, in any such action or proceeding
in which Beneficiary or Trustee may appear or be named, and in any suit
brought by Beneficiary or Trustee to foreclose this Deed of Trust.
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The deed of trust identifies the trustor as Plaintiff Harry Johnson, the trustee as Stewart
Title Company, and the beneficiary as Land Exchange Corporation, qualified
intermediary for Defendants Michael and Dawn Heath. The district court determined that
Land Exchange Corporation—not Defendants—is the beneficiary under the deed of trust
and thus the provision does not apply in a lawsuit against Defendants. Defendants
dispute the district court’s determination that they are not the beneficiaries under the deed
of trust.
But even if Defendants are the beneficiaries under the deed of trust, the fees
provision does not entitle them to attorney’s fees for prevailing against Plaintiff’s RICO
claim.5 The plain text of the fees provision shows that it applies only to actions affecting
the Wells station property or the rights and powers of the beneficiaries under the deed of
trust. Plaintiff’s RICO claim was simply a claim for damages from an alleged criminal
scheme run by Defendant Michael Heath. It did not seek to affect any property interests
in the Wells station or any of Defendants’ rights under the deed of trust.6 Thus, the deed
5
We have discretion to affirm on any ground supported by the record, even if
not the same reasoning relied on by the district court. Richison v. Ernest Grp., Inc.,
634 F.3d 1123, 1130 (10th Cir. 2011); Elkins v. Comfort,
392 F.3d 1159, 1162 (10th
Cir. 2004). The exercise of this discretion is appropriate for this contract
interpretation issue which requires no factual development, where the contract was
presented to the district court for interpretation, where there is no dispute as to the
authenticity of the contract, and where we need only decide a question of law.
6
In their reply brief, Defendants argue that the district court erred in
determining that they were prevailing parties only as to the RICO claim. Thus,
Defendants argue, we should consider Plaintiff’s state claims when assessing the
applicability of the attorney’s-fees provisions. But we do not consider this argument
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of trust’s fees provision does not apply to Plaintiff’s RICO claim, and the district court
correctly determined that the deed of trust does not entitle Defendants to an award of
attorney’s fees.
AFFIRMED.
because Defendants did not include it in their opening brief. See Gutierrez v. Cobos,
841 F.3d 895, 902 (10th Cir. 2016) (“[A] party waives issues and arguments raised
for the first time in a reply brief.”) (citation omitted).
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Harry S. Johnson v. Michael Heath, et al., Nos. 20-4095, 20-4103
BACHARACH, J., concurring in No. 20-4103 and dissenting in
No. 20-4095
This appeal involves allegations that Mr. Michael Heath committed
fraud in operating and selling a gas station to Mr. Harry Johnson. After
buying the gas station, Mr. Johnson learned that many customers had
complained to Mr. Heath about fraudulent practices. The complaints led
Mr. Johnson to sue Mr. Heath under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. §§ 1961–1968. 1 According to
Mr. Johnson, Mr. Heath had inflated profits by cheating customers, which
in turn increased the gas station’s sale price by creating a façade of
profitability.
The district court dismissed all of the claims, and Mr. Heath and his
wife unsuccessfully sought an award of attorney fees. Both sides appeal.
The majority affirms the dismissal and the denial of a fee award. I agree
with the majority on the denial of a fee award and respectfully dissent from
the affirmance of the dismissal.
On the RICO claim, the district court found a failure to adequately
allege continuity. In my view, however, the district court should have
considered the allegations that Mr. Heath had inflated profits by cheating
1
Mr. Johnson also asserted state-law claims against both Mr. Heath
and his wife. But Mr. Johnson’s appeal involves only the RICO claim
against Mr. Heath.
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customers of the gas station. Unlike the majority, I believe that these
allegations establish continuity.
I. Mr. Johnson needed to allege a pattern of racketeering activity,
which required continuity.
Under RICO, Mr. Johnson had to allege facts showing that Mr. Heath
had “(1) conducted the affairs (2) of an enterprise (3) through a pattern
(4) of racketeering activity.” George v. Urban Settlement Servs., 833 F.3d
1242, 1248 (10th Cir. 2016) (first citing
18 U.S.C. § 1962(c), and then
citing Robbins v. Wilkie,
300 F.3d 1208, 1210 (10th Cir. 2002)). Together,
these elements required continuity of the racketeering activity. Boone v.
Carlsbad Corp.,
972 F.2d 1545, 1555 (10th Cir. 1992).
The alleged RICO enterprise. The alleged RICO enterprise
consisted of a corporation run by Mr. Heath and his associates. The
corporation had allegedly engaged in a scheme of “burning the station.”
Appellant’s App’x vol. 1, at 25.
The alleged scheme began with Mr. Heath’s purchase of a gas station.
After purchasing the station, Mr. Heath allegedly maximized profits by
cheating customers and neglecting routine maintenance. When profits
inevitably dwindled, Mr. Heath would allegedly sell the gas station to an
unsuspecting buyer.
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The acts of racketeering. Mr. Johnson alleges racketeering through
various crimes, including wire fraud. The alleged wire fraud consisted of
lies to customers and Mr. Johnson. See id. at 46–50, 78–82.
The alleged lies to customers included trickery to increase gas sales
for roughly 2½ years (January 2012 to May 2014). Mr. Heath would turn
off his sign for gas prices, showing instead only a cheaper price for
propane. Showcasing the lower propane price, Mr. Heath allegedly tricked
customers into thinking that was the price for gas. When customers
stopped and bought gas, they would pay the higher gas prices with credit
cards.
Mr. Johnson also alleges trickery to increase revenue from tire sales,
which led to administrative complaints in 2005, 2007, 2008, 2009, 2011,
and 2012. Mr. Heath allegedly hid the complaints from his franchisor by
selling tires through a side business.
Mr. Heath allegedly deceived not only customers but also
Mr. Johnson through electronic communications
containing false information about the profitability of the gas
station and
failing to disclose defects in the gas station’s fuel tanks and
sewer system.
Mr. Heath also allegedly failed to disclose liabilities, like a fuel supplier ’s
notice of default. The notice referred to complaints of misleading
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advertisements about gas prices, jeopardizing the continued availability of
fuel.
The pattern of racketeering. Under RICO, Mr. Johnson needed to
allege “related” racketeering activities “amount[ing] to or pos[ing] a threat
of continued criminal activity.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S.
229, 239 (1989). “[C]ontinued criminal activity” may be “closed-” or
“open-ended.”
Id. at 239, 241. “[C]losed-ended” continuity refers to a
discrete but substantial period when the defendant engaged in repeated acts
of racketeering. Resol. Tr. Corp. v. Stone,
998 F.2d 1534, 1543 (10th Cir.
1993). 2
II. The district court dismisses the RICO claim for failure to allege
continued criminal activity.
The district court dismissed the RICO claim. The court acknowledged
the allegations of related predicate acts, but questioned the plausibility of
the alleged scheme to burn a second gas station. 3 In questioning the
2
Mr. Johnson also claimed open-ended continuity, which is “past
conduct that by its nature projects into the future with a threat of
repetition.” H.J. Inc., 492 U.S. at 241 (citation omitted). For this claim,
Mr. Johnson alleged continuing fraud at another gas station. The district
court concluded that the allegations of open-ended continuity were
deficient, and the majority agrees. I don’t address this conclusion because
Mr. Johnson adequately alleged continuity that was closed-ended.
3
In district court, Mr. Heath argued that Mr. Johnson had not
adequately alleged a predicate RICO offense (wire fraud, bank fraud, or
access-device fraud) in selling fuel and services. According to Mr. Heath,
Mr. Johnson had failed to plead a pattern of racketeering activity because
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plausibility of the scheme, the court concluded that Mr. Johnson hadn’t
adequately alleged continued criminal activity.
III. The complaint states a valid RICO claim.
Mr. Johnson challenges the dismissal of his RICO claim, arguing that
he adequately alleged continued criminal activity. I agree.
A. We should credit Mr. Johnson’s allegations.
I would conduct de novo review of the dismissal. Solar v. City of
Farmington, 2 F.4th 1285, 1289 (10th Cir. 2021). In conducting this
review, I would credit the well-pleaded allegations in the third amended
complaint, construing them favorably to Mr. Johnson. Moya v. Garcia,
895 F.3d 1229, 1232 (10th Cir. 2018). To withstand dismissal, the
allegations must “state a claim to relief that is plausible on its face.” Bell
Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007). The claim is plausible
only if the factual allegations in the third amended complaint would have
allowed a reasonable inference of liability. Ashcroft v. Iqbal,
556 U.S. 662,
678 (2009).
he hadn’t adequately alleged predicate acts and
the predicate acts hadn’t related to Mr. Johnson’s economic
injury.
The district court assumed the adequacy of allegations involving wire fraud
and bank fraud.
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B. The allegations create a plausible inference of wire fraud.
On appeal, Mr. Heath contends that Mr. Johnson failed to adequately
allege the elements of wire fraud, bank fraud, or access-device fraud. The
majority does not address this contention, holding instead that
Mr. Johnson’s claim fails because he did not allege a pattern. For the sake
of argument, we can assume that Mr. Johnson hasn’t adequately alleged
bank fraud or access-device fraud. But Mr. Johnson adequately pleaded
wire fraud through misrepresentations to customers.
Wire fraud contains three elements: (1) “a scheme or artifice to
defraud or obtain property by means of false or fraudulent pretenses,
representations, or promises, (2) an intent to defraud, and (3) use of
interstate wire or radio communications to execute the scheme.” United
States v. Zander, 794 F.3d 1220, 1230 (10th Cir. 2015) (citation omitted).
Mr. Heath challenges the third element based on a failure to allege that he
had used a wire or radio communications to defraud customers.
In alleging that Mr. Heath had defrauded customers of the gas
station, Mr. Johnson pointed to the fuel supplier ’s notice of default. The
notice of default stated that for a year, the operator of the gas station had
turned off the sign for gas prices and showed only the propane prices,
deceiving customers as to the actual prices for gas. Appellant’s App’x
vol. 1, at 167. The notice confirmed 24 complaints about this practice. Id.
Given the notice of default, I regard the fraud allegations as plausible.
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Mr. Heath points out that he didn’t use a wire to deceive customers.
But his customers allegedly used wires to pay him, and he could commit
wire fraud even if he weren’t the person using a wire. So a plausible claim
of wire fraud could arise from Mr. Heath’s reasonable expectation that his
customers would use wires to pay him. See Zander, 794 F.3d at 1231
(concluding that the government’s payment through a wire transfer had
sufficed for wire fraud because the defendant could have reasonably
foreseen the use of a wire transfer); see also United States v. Feldman,
931 F.3d 1245, 1257–59 (11th Cir. 2019) (concluding that wire fraud could
consist of a scheme to lure victims into the defendant’s nightclub if they
would use their credit cards to overpay for beverages).
Mr. Johnson adequately alleged such a use of the wires. In the third
amended complaint, Mr. Johnson alleged that
Mr. Heath had made misrepresentations to customers through
misleading signs on gas prices, sales of unnecessary products
and services, and excessive charges for tires, and
those misrepresentations had induced customers to use credit
cards to buy gas, tires, and services.
Appellant’s App’x vol. 1, at 47–51. A factfinder could view payment with a
credit card as reasonably foreseeable, so Mr. Johnson adequately pleaded
wire fraud.
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C. Mr. Johnson adequately alleges closed-ended continuity.
In dismissing the RICO claim, the district court found a failure to
adequately allege closed-ended continuity. Mr. Johnson disagrees, urging
continuity based on Mr. Heath’s alleged acts to inflate profits and then lure
an unsuspecting buyer to purchase the gas station based on a deceptive
record of profitability.
We should assess the adequacy of the third amended complaint based
on the duration and extent of the scheme. See Resol. Tr. Corp. v. Stone, 998
F.2d 1534, 1543 (10th Cir. 1993).
Under this test, we should first consider duration. Id. Because
continuity is “centrally a temporal concept,” H.J. Inc. v. Nw. Bell Tel. Co.,
492 U.S. 229, 242 (1989), duration is “the most important” factor, Vicom,
Inc. v. Harbridge Merch. Servs., Inc.,
20 F.3d 771, 781 (7th Cir. 1994); see
United States v. Pellullo,
964 F.2d 193, 208 (3d Cir. 1992) (stating that
“duration remains the most significant factor” for continuity (citations
omitted)).
I would also consider the extent of the scheme. Resol. Tr. Corp.,
998 F.2d at 1543. The inquiry is fact-specific and no single factor is
dispositive. See Roger Whitmore’s Auto. Servs., Inc. v. Lake Cnty, Ill.,
424 F.3d 659, 672–73 (7th Cir. 2005) (stating that “[n]o one factor is
dispositive” on continuity and the inquiry is “fact-specific” (citation
omitted)). So continuity is ordinarily a fact-issue for the trier of fact. See
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Pelullo, 964 F.2d at 210 (“Ultimately, . . . continuity is a factual issue for
the jury.”).
The majority concludes that Mr. Johnson has adequately alleged the
duration of the alleged predicate acts. Maj. Op. at 10–11. I agree.
For duration in the context of closed-ended continuity, the alleged
predicate acts must “extend[] over a substantial period of time.” H.J. Inc.,
492 U.S. at 242. A period of “a few weeks or months” is not “substantial.”
Id. Though no minimum time-period exists, we’ve regarded a period of 7–
18 months as long enough for continuity. Resol. Tr. Corp., 998 F.2d
at 1542.
Mr. Johnson alleges that he received fraudulent financial data and
statements for at least fifteen months (March 2013 to June 2014). See
Appellant’s App’x vol. 1, at 26–27, 29–30, 78–82. For most of this time,
Mr. Heath was also allegedly deceiving customers of the gas station. See
id. at 31–32, 48–49, 50–52. Like the majority, I conclude that these
allegations satisfy the duration required for closed-ended continuity.
For the extent of the scheme, I would consider the number of victims,
the number and variety of racketeering acts, the complexity and size of the
scheme, and the nature of the scheme. Resol. Tr. Corp., 998 F.2d at 1544–
45. The majority acknowledges that Mr. Johnson’s allegations involve
many predicate acts and victims. But the majority then concludes that
little variety existed in the kinds of predicate acts and injuries,
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the alleged scheme was neither large nor complex, and
Mr. Heath allegedly cheated only one buyer (Mr. Johnson) by
inflating the profits of the gas station.
In the majority’s view, these factors show that the alleged scheme was too
narrow for closed-ended continuity. In my view, however, the majority
fails to apply the party-presentation rule and misapplies the standards for
dismissal and closed-ended continuity.
Though the majority discounts the extent of the scheme, Mr. Heath
never questioned satisfaction of this factor. In district court, Mr. Heath
challenged closed-ended continuity based only on the lack of “any viable
predicate criminal acts.” Appellant’s App’x vol. 2, at 542. And on appeal,
Mr. Heath argued only that the allegations had amounted to “common-law
fraud” rather than “RICO fraud.” Appellees’ Resp. Br. at 47. But Mr. Heath
has never questioned the extent of the alleged scheme.
Because Mr. Heath hasn’t questioned the extent of the alleged
scheme, I don’t think we should, for “we don’t typically ‘craft[] arguments
for affirmance completely sua sponte and, more specifically, without the
benefit of the parties’ adversarial exchange.’” United States v. Woodard,
5 F.4th 1148, 1154 (10th Cir. 2021) (italics and second alteration in
original) (quoting United States v. Chavez,
976 F.3d 1178, 1203 n.17
(10th Cir. 2020)).
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Granted, we can affirm on alternative grounds. Elkins v. Comfort,
392 F.3d 1159, 1162 (10th Cir. 2004). But we generally regard it as
“imprudent” to affirm on alternative grounds when the parties haven’t fully
briefed the issue or had a fair opportunity to develop the record. See
United States v. Woodard,
5 F.4th 1148, 1154 (10th Cir. 2021) (“In the best
of circumstances, we consider it ‘imprudent’ to craft arguments sua sponte
to affirm on alternate grounds.”); United States v. Chavez,
976 F.3d 1178,
1203 n.17 (10th Cir. 2020) (“As a jurisprudential matter, [crafting
arguments for affirmance sua sponte and without the benefit of the parties’
adversarial exchange] is imprudent . . . .”).
Even if we were to address the issue on our own, without the benefit
of briefing either in district court or the appeal, I believe that the majority
has misapplied the standards for dismissal and closed-ended continuity.
In reviewing a dismissal under Rule 12(b)(6), we should not only
credit the allegations in the third amended complaint but also view these
allegations in the light most favorable to Mr. Johnson. Davis-Warren
Auctioneers, J.V. v. FDIC, 215 F.3d 1159, 1161 (10th Cir. 2000). For
continuity, Mr. Johnson needed only to allege “some facts from which at
least a threat of ongoing illegal conduct may be inferred.” Pitts v. Turner &
Boisseau Chartered,
850 F.2d 650, 652 (10th Cir. 1988) (quoting Torwest
DBC, Inc. v. Dick, 810 F.2d 925–27 (10th Cir. 1987)).
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By denying continuity based on extensiveness, the majority overrides
the most important factor: duration. Although the extent of the scheme is
also pertinent, we should generally focus on whether the wrongful acts are
“sporadic” or part of a greater pattern. Resol. Tr. Corp. v. Stone, 998 F.2d
1534, 1543 (10th Cir. 1993). As a result, closed-ended continuity is often
found whenever the duration is sufficient. See Jacobson v. Cooper,
882 F.2d 717, 720 (2d Cir. 1989) (concluding that the plaintiff adequately
alleged continuity because the predicate acts had extended over several
years); Walk v. Balt. & Ohio R.R.,
890 F.2d 688, 690 (4th Cir. 1989)
(concluding that the plaintiff adequately alleged closed-ended continuity
because the activity had lasted ten years); Dana Corp. v. Blue Cross &
Blue Shield Mut. N. Ohio,
900 F.2d 882, 886–87 (6th Cir. 1990)
(concluding that the plaintiff sufficiently alleged continuity as to a scheme
lasting seventeen years). The majority implicitly concludes, with no
briefing or argument, that these circuits are wrong in finding closed-ended
continuity based solely on duration.
The majority concludes that the scheme was not extensive, relying on
a narrow reading of the third amended complaint. This complaint describes
a scheme, committed over multiple years, to ensnare countless drivers
needing gas or repairs. For example, the alleged scheme included acts to
inflate gas sales by tricking customers on the gas price, overcharging
customers’ credit cards for auto repairs and services, altering customer
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invoices, charging customers for parts and repairs that hadn’t been
installed, misrepresenting safety conditions, tricking customers into buying
tires, and installing inferior tires after selling higher quality tires.
The majority characterizes the conduct as only a single scheme
because Mr. Heath would unload the gas station on only a single
unsuspecting buyer. Maj. Op. at 13–14. This characterization is
questionable for two reasons: (1) Mr. Heath has never questioned closed-
ended continuity based on the existence of a single scheme, and (2) the
third amended complaint identifies multiple schemes.
On appeal, Mr. Heath challenges the allegations of open-ended
continuity based in part on the existence of a single scheme. I assume for
the sake of argument that Mr. Johnson hasn’t adequately alleged open-
ended continuity.
But Mr. Heath hasn’t questioned closed-ended continuity based on
the singularity of the scheme. So we lack any briefing or even argument on
whether closed-ended continuity can exist through only a single scheme.
Despite the lack of briefing, the majority rejects closed-ended continuity
based on the existence of a single scheme. I think it imprudent to reject
closed-ended continuity on a theory that Mr. Heath hasn’t presented. See
pp. 10–11, above.
Even if we were to consider the issue, I question how we can
liberally interpret the third amended complaint to allege only a “single”
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scheme. In the third amended complaint, Mr. Johnson alleged that
Mr. Heath had run the tire shop separately from the gas station in order to
hide customer complaints. And in the third amended complaint,
Mr. Johnson had alleged payments from 50 separate victims (including
Mr. Johnson) for discrete acts of fraud. At the motion-to-dismiss stage, I
question how we can shoehorn Mr. Johnson’s allegations into a single
scheme directed at a single individual.
In any event, the existence of a single scheme would not preclude
closed-ended continuity. The issue of continuity focuses on whether the
predicate acts constitute “a regular way of conducting defendant’s ongoing
legitimate business.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 243
(1989). So even when the predicate acts “arise under a single scheme,”
closed-ended continuity may exist when the conduct reflects a regular way
of conducting business. Menasco, Inc. v. Wasserman,
886 F.2d 681, 684
(4th Cir. 1989). And the third amended complaint alleges “a years-long
pattern” of fraudulent business practices at both the gas station and tire
shop. Appellant’s App’x vol. 1, at 51. That pattern could reflect closed-
ended continuity even if Mr. Heath had used only a single fraudulent
scheme.
The majority also downplays the complexity of the scheme even
though Mr. Heath has never challenged closed-ended continuity based on a
lack of complexity. I’d be wary of deciding sua sponte, without any
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briefing or argument, that the alleged scheme—lasting at least 15 months
and involving 49 customers and the plaintiff himself—wasn’t complex
enough for closed-ended continuity. See pp. 10–11, above.
Finally, the majority reasons that Mr. Johnson hasn’t quantified the
amount that he overpaid as a result of the scheme to inflate profits. Maj.
Op. at 13. Mr. Heath has never made this argument, and it doesn’t neatly
fit the inquiry on closed-ended continuity. The majority acknowledges that
Mr. Heath had allegedly defrauded at least 49 customers to inflate profits.
And the majority has not questioned the adequacy of Mr. Johnson’s
allegations that he had overpaid because of those fraudulent acts. Why
would the failure to quantify the amount of the overpayment affect
characterization of the scheme as isolated or sporadic? The answer isn’t
self-evident to me, and Mr. Heath hasn’t suggested that closed-ended
continuity would turn on the amount that he had overpaid.
Given the relation between the predicate acts, I would view them
together when assessing the duration and extent of the scheme. The alleged
scheme spanned at least 15 months and victimized not only Mr. Johnson
but also at least 49 customers. That scheme, if proven, could entail
continuity over a closed period. In my view, the district court thus erred in
finding a failure to adequately allege continued criminal activity. 4
4
Because Mr. Johnson adequately alleged closed-ended continuity, I
don’t address his arguments on open-ended continuity . See p. 13, above.
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D. Mr. Johnson adequately pleaded causation.
Mr. Heath challenges not only plausibility but also causation between
the predicate offenses and Mr. Johnson’s alleged injuries. In reviewing this
challenge, I would conclude that Mr. Johnson adequately pleaded
causation.
To adequately plead a RICO violation, Mr. Johnson needed to allege
predicate acts that had actually and proximately caused his injury. Hemi
Grp., LLC v. City of N.Y., 559 U.S. 1, 9 (2010). Proximate causation
“requires ‘some direct relation between the injury asserted and the
injurious conduct alleged.’”
Id. (quoting Holmes v. Sec. Inv. Prot. Corp.,
503 U.S. 258, 268 (1992)). When the alleged conduct involves fraud, a
direct relation can arise from the plaintiff ’s reliance on misrepresentations.
CGC Holding Co., LLC v. Broad & Cassel,
773 F.3d 1076, 1089 (10th Cir.
2014). Mr. Johnson adequately alleged causation under this standard.
Mr. Heath argues that the allegations of overcharging customers “are
completely unrelated to” Mr. Johnson’s alleged injury. Appellees’ Opening
Br. at 51. But Mr. Johnson has (1) alleged injury from monetary losses in
buying the gas station and (2) tied those losses to predicate acts
constituting wire fraud. Appellant’s App’x vol. 1, at 78–82, 85.
Mr. Johnson alleged that
he had paid too much for the gas station because of Mr. Heath’s
misrepresentations and
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Mr. Heath’s deception of customers had caused Mr. Johnson to
experience unforeseen losses.
These allegations create actual and proximate causation between the
predicate acts of wire fraud and Mr. Johnson’s alleged financial losses. See
Safe Streets All. v. Hickenlooper, 859 F.3d 865, 890–91 (10th Cir. 2017)
(finding proximate causation based on the plaintiffs’ own injuries).
Mr. Johnson has thus adequately alleged causation.
…
Because Mr. Johnson adequately pleaded wire fraud, closed-ended
continuity, and causation, I would reverse the dismissal of the RICO claim.
This reversal would also affect the disposition of the state-law claims, so I
would also reverse the dismissal of those claims.
17
