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Jupiter Aluminum Corp. v. Sabaitis

United States District Court, N.D. Indiana, Hammond Division

September 13, 2016




         Something went very wrong at Jupiter Aluminum Corporation in fiscal year 2014. Jupiter is an Indiana corporation in the business of converting scrap aluminum into coils. It contracts with vendors to provide the scrap. Jupiter claims that a FY2014 audit revealed that Jupiter processed less scrap that year than it ordered, yet Jupiter still paid all of its vendors for the full amount ordered. The result was Jupiter paying for about eight million dollars in scrap that it never processed. Jupiter alleges that defendants conspired to submit falsified paperwork to cover up schemes to divert scrap that Jupiter ordered away from Jupiter and to make off with scrap that was already delivered to Jupiter.

         Jupiter sued Philip Sabaitis, Jupiter's receiving/inventory supervisor from 2009-2015; Loren Jahn, Jupiter's CFO from 2007-2014; Scrap Metal Services (SMS), a scrap vendor, and Michael Thompson, senior manager and partial owner of Scrap Metal Services; and GMI Recycling Services, another scrap vendor, and Gary Longoria, GMI's owner. Jupiter alleges federal and state RICO violations and violations of state law based on fraud, criminal conversion, deception, civil conspiracy, breach of contract and unjust enrichment. All defendants have moved to dismiss Jupiter's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

         This court has jurisdiction under 18 U.S.C. § 1964, 28 U.S.C. § 1331, and 28 U.S.C. § 1367. For the reasons that follow, the court grants all of the motions to dismiss. With no surviving claims over which it has original jurisdiction, the court declines to exercise supplemental jurisdiction over the state law claims, 28 U.S.C. § 1367(c)(3), and dismisses the whole case.

         I. Jupiter's Allegations

         Jupiter describes the process it uses to acquire scrap from vendors. Jupiter first determines the price it's willing to pay for various types of scrap. Jupiter then emails vendors with information about the type and quantity of scrap it wants to buy and the price it's willing to pay. Once a vendor responds and the parties agree on the type, quantity, and price of the scrap to be delivered, Jupiter prepares a quote sheet containing a purchase order number. Jupiter emails the quote sheet to the vendor or provides its information over the phone. Jupiter enters the quote sheet information into its computer system, which prints a purchase order for each transaction detailing the vendor's name, type and quantity of scrap, price, date of delivery, and terms and conditions of the transaction. Jupiter sends the original purchase order to the vendor while keeping a copy for its files. After a purchase order is issued, the vendor schedules a time for delivery.

         Delivery trucks entering Jupiter's premises must first check in at a gate manned by SDG Global, an entity independent from Jupiter. SDG personnel record the names of the carrier and driver, and the times of the truck's arrival and departure. SDG's records don't include any information about the contents of the delivery. Once checked in, trucks proceed to Jupiter's receiving department. They drive onto a scale that weighs and records the full gross weight of the trailer, have the scrap unloaded by Jupiter employees, and then return to the scale so the trailer's empty weight can be recorded. Jupiter issues a receiving ticket showing the weights of the full and the empty trailer, a description, the net weight of the scrap delivered, the purchase order number, and the vendor's name. Drivers typically provide Jupiter with a bill of lading from the vendor showing the type and quantity of the scrap that was on the trailer when it left the carrier's facility. At all times relevant to this action, Philip Sabaitis signed bills of lading acknowledging Jupiter's receipt of shipments.

         Jupiter says it issues payments to vendors based on transaction packets prepared by Mr. Sabaitis. Each packet includes a copy of the purchase order, the receiving ticket, and the signed bill of lading, and is submitted to Jupiter's scrap purchasing department, which approves payment to the vendor. Jupiter then issues a check, CFO Loren Jahn signs the check, and Jupiter mails the check to the vendor within 30 days of the date of the delivery.

         Jupiter reports that in FY2014, it discovered an inventory shortfall: the company had paid over $8 million for inventory it didn't receive or process. Jupiter faults the defendants for that shortfall, alleging that Philip Sabaitis and Loren Jahn “surreptitiously conspired over a substantial period of time” with Scrap Metal Services and its senior manager, Michael Thompson; and GMI Services and its owner, Gary Longoria; to submit falsified paperwork that caused Jupiter to pay for scrap shipments the company never received and scrap shipments that were received by the company but removed from Jupiter's facility before being processed. Jupiter claims the defendants undertook two schemes to defraud the company.

         First is the “ghost truck” scheme, in which the defendants caused Jupiter to pay for scrap shipments the company never received. Jupiter says that during its investigation of the inventory shortfall, it acquired SDG Global's guard gate logs and found “numerous instances where a vendor was paid for a ‘shipment' but the guard gate log didn't reflect a corresponding truck entering Jupiter's facility.” Jupiter says it then contacted its vendors seeking information to help reconcile these “ghost truck” shipments. Jupiter reports that some vendors responded with all the requested information, some with some of the information, some refused to provide any information, and some didn't respond at all. Jupiter reports that while it could reconcile some of those shipments, “95 trucks from 20 different vendors are unreconciled on SDG's guard gate logs; that is, these 95 ‘ghost trucks' never arrived at Jupiter's facility, ” resulting in Jupiter paying about $2.48 million for scrap it never received. Jupiter claims that bills of lading “for almost all of the ‘ghost trucks'” were signed by Mr. Sabaitis, who Jupiter alleges to have conspired with the other defendants “to divert the ‘ghost truck' shipments and sell the scrap back to Jupiter or to third parties for their own personal gain.”

         Jupiter alleges a second, “scrap removal” scheme to account for the remaining $5.5 million in missing inventory. This scam was part of a conspiracy by the defendants to remove unprocessed scrap from Jupiter's premises and then to sell that scrap back to Jupiter or to third parties for the defendants' own personal gain. Jupiter offers possible scenarios the defendants could have employed to facilitate the scheme.

         Jupiter alleges that Messrs. Sabaitis and Jahn agreed to and knowingly conducted and participated in those schemes to intentionally defraud Jupiter. Jupiter claims they used wire services and the United States Postal Service to execute their fraud against Jupiter, causing Jupiter to pay more than $8 million for scrap metal it never received and scrap metal that was taken from Jupiter before being processed. Jupiter maintains that Messrs. Sabaitis and Jahn's use of wire and mail services to carry out the fraud constituted a pattern of racketeering activity under 18 U.S.C. § 1961(5).

         Jupiter alleges that all six defendants knowingly and intentionally agreed and conspired to participate in the affairs of Jupiter through a pattern of racketeering. Jupiter says the defendants knew the acts of wire and mail fraud were part of the pattern of racketeering activity, they agreed to the commission of those acts to further the “ghost truck” and “scrap removal” schemes, and they knowingly and intentionally acquired or maintained proceeds belonging to Jupiter through the pattern of racketeering, causing Jupiter to pay more than $8 million for scrap metal it never received and scrap that was diverted from Jupiter before the company was able to process it into coils.

         Jupiter filed suit, alleging a federal RICO claim against defendants Messrs. Sabaitis and Jahn, 18 U.S.C. § 1962(c) [Count 1]; a RICO conspiracy claim against all defendants, 18 U.S.C. § 1962(d) [Count 2]; a RICO claim under Indiana law, Ind. Code § 35-45-6-2 [Count 3], and a common law fraud claim [Count 4] against defendants Sabaitis and Jahn; claims for criminal conversion, Ind. Code § 35-43-4-3(a) [Count 5], deception, Ind. Code § 35-42-5-3(a)(2) [Count 6], civil conspiracy [Count 7], and unjust enrichment [Count 9] against all defendants; and a breach of contract claim [Count 8] against defendants Scrap Metal Services, LLC and GMI Recycling Services, Inc. Each of the defendants filed a motion to dismiss Jupiter's claims against them for failure to state a claim under Fed.R.Civ.P. 12(b)(6).

         II. Standard of Review

         Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal of a complaint that fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion, the complaint typically must meet the “notice pleading” requirement of Federal Rule of Civil Procedure 8(a), that the complaint set forth “a short and plain statement of the claim showing that the pleader is entitled to relief, ” so the defendant has “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

         A court considering a motion under Rule 12(b)(6) must accept as true the factual allegations of the complaint and draw all reasonable inferences in favor of the plaintiff without engaging in fact-finding. Reynolds v. CB Sports Bar, Inc., 623 F.3d 1143, 1146 (7th Cir. 2010). Detailed factual allegations aren't necessary, but merely reciting the elements of a cause of action isn't sufficient. The factual allegations must be sufficient to raise the possibility of relief above the “speculative level.” Bell Atlantic v. Twombly, 550 U.S. at 555. The plaintiff must allege facts that, when “accepted as true, [ ] ‘state a claim to relief that is plausible on its face.' . . . A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A plaintiff's claim need not be probable, only plausible, but “a plaintiff must do better than putting a few words on paper that, in the hands of an imaginative reader, might suggest that something has happened to her that might be redressed by the law.” Swanson v. Citibank, N.A., 614 F.3d 400, 403 (7th Cir. 2010) (emphasis in original).

         When claiming fraud, a plaintiff must state the circumstances “with particularity.” Fed.R.Civ.P. 9(b). Allegations of fraud in a civil RICO complaint are subject to the heightened pleading standard of Rule 9(b). “The particularity requirement ensures that plaintiffs do their homework before filing suit and protects defendants from baseless suits that tarnish reputations.” Perelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 439 (7th Cir. 2011); Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007) (“This heightened pleading requirement is a response to the great harm to the reputation of a business firm or other enterprise a fraud claim can do.”). “Because fair notice is perhaps the most basic consideration underlying Rule 9(b), the plaintiff who pleads fraud must reasonably notify the defendants of their purported role in the scheme.” Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994) (internal citations and quotations omitted). Thus, Rule 9(b) requires a plaintiff alleging fraud to plead the “who, what, when, where, and how of the fraud.” Camasta v. Joseph A. Bank Clothiers, Inc., 761 F.3d 732, 737 (7th Cir. 2014).

         The applicability of Rules 8(a) and 9(b) to the claims of Jupiter's complaint is at issue in each defendant's motion to dismiss. The court of appeals hasn't decided whether the heightened standard of Rule 9(b) applies to each element of a fraud-based RICO claim or only to the underlying fraud allegations. Kostovetsky v. Ambit Energy Holdings, LLC, 15 C 2553, 2016 WL 105980, at *3 (N.D. Ill. Jan. 8, 2016). Jupiter argues that its allegations of mail and wire fraud are only applicable to the § 1962(c) defendants and that the heightened pleading standard only applies to the predicate acts themselves, not the other elements of the § 1962(c) claim. The court will apply the requirement of Rule 9(b) to Jupiter's claims of mail and wire fraud and the requirements of ...

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