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Michael Walther v. Nalin Patel

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


February 4, 2011

MICHAEL WALTHER, PLAINTIFF,
v.
NALIN PATEL, D.M.D. ET AL. , DEFENDANTS.

The opinion of the court was delivered by: Rufe, J.

MEMORANDUM OPINION AND ORDER

Before the Court are motions to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure by Defendants Nalin Patel DMD, Nalin Patel DMD PC, Advanced Dental Care, Advanced Dental Care LLC, and Fairless Hills Dental Center ("Dental Defendants") [doc. no. 20]; and Defendants Capital One Bank (USA), N.A., Capital One Financial Corporation, and Capital One N.A. ("Capital One Defendants") [doc. no. 16]. *fn1 For the reasons that follow, the Court will dismiss Plaintiff's claims that the Dental Defendants and the Capital One Defendants violated Sections 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act for failure to state a claim. The Court will also dismiss the state claims for lack of subject matter jurisdiction pursuant to 28 U.S.C. § 1367(c).

I. P ROCEDURAL & F ACTUAL B ACKGROUND

Plaintiff Michael Walther, a resident of Fairless Hills, Pennsylvania, is a developmentally disabled adult who is unemployed but lives independently on a small fixed income. *fn2 During the relevant period he had no guardian or attorney. *fn3 Dental Defendants maintain their principal places of business in Bucks County, Pennsylvania. *fn4 Capital One Defendants maintain their principal places of business in Virginia. *fn5

In February 2008, Walther contacted Dental Defendants *fn6 via phone to obtain an examination, cleaning, and teeth whitening, claiming he wanted a "beautiful smile as seen on TV," and was told he would need to appear in the office for an examination and an estimate. *fn7

During that first visit, Walther was given an estimate of $600, which he was told he could pay in installments. *fn8 He scheduled the treatment for February 22, 2008.*fn9

Walther alleges that during that February 22 appointment, he was "subjected to a barrage of cosmetic dentistry promotional media including brochures, posters and video." *fn10 He avers he arrived at the Dental Defendants' office with "the purpose of acquiring the beautiful smile that Dental Defendants had promised him, such as he sees both on TV and in the Dental Defendants' video." *fn11 Dental Defendants told Walther they could complete the treatment that day. *fn12

After examining Walther and unsuccessfully attempting to explain the proposed treatment and financing plan to Walther, Walther instructed Dental Defendants to telephone his friend, who, Walther claims, did not bind Walther to that proposed plan or represent that she had the authority to do so. *fn13 Thereafter, Dental Defendants contacted Capital One Defendants regarding a $25,000 loan to finance the proposed treatment. *fn14 Walther never spoke with or otherwise directly communicated with the Capital One Defendants. *fn15

Dental Defendants gave Walther a series of documents to sign, including: (1) the Advanced Dental Care Financial Policy; (2) the Treatment Plan; (3) an Advanced Dental Care General Dentistry Treatment Form; (4) consent forms for "Fillings, Inlays, and Onlays," and for "Cosmetic Dentistry;" and (5) a Capital One Health Care Finance Credit Application. *fn16

Walther characterizes the dental work as a "full-mouth restoration," and, indeed, the detailed, three-page treatment plan includes a listing of procedures to be provided-scaling and root planing, dental crowns, inlays and veneers-and the prices for each procedure, totaling $26,525. *fn17 Walther signed a copy of that treatment plan, declaring that he had "not been pressurized [sic] by the staff or the doctor of Advanced Dental Care" and that he understood "all the guidelines of the treatment and the loan." *fn18 Walther also signed the General Dentistry Treatment form authorizing "the dental restoration and treatments as explained to [him]," and the two consent forms authorizing "A. Patel" and associates to render any treatments deemed necessary or advisable. *fn19

The Advanced Dental Care Financial Policy provided to Walther discloses that full payment for services is due the day treatment begins and offers financing through "third party finance offices," including Capital One and several other lenders, with loans up to 5 years. *fn20

Walther signed that form, declaring that he understood and accepted the terms of the policy. *fn21

Dental Defendants contacted Capital One Defendants online to arrange for a $25,000 loan. *fn22 Walther signed the credit application, *fn23 and, within ten minutes after it was sent, Dental Defendants received telephone approval of the application for a $25,000 loan at 19.99% interest over a five-year term, at an actual cost of $40,000 over the life of the loan. *fn24 Although Walther alleges that the $25,000 was to be immediately disbursed to Dental Defendants, he also asserts that weeks after the treatment, he received the loan documents from Capital One and a bill from Dental Defendants. *fn25

Dental Defendants performed most of the extensive cosmetic dentistry described in the treatment plan in a single day. Subsequently, the caps, crowns, and veneers loosened or completely detached, "leaving plaintiff with missing and deformed teeth, altering and worsening his bite, and substantially aggravating his pre-existing speech impediment." *fn26 Walther also complains of abnormal or loss of sensation in his mouth, loss and improper spacing of teeth, difficulty eating, and the risk of future periodontal and other dental disease. *fn27 In addition, his credit has suffered. *fn28

Walther generally alleges that the Dental Defendants manipulated or deceived Walther into signing the loan documents "by the in-office promotional media and by representing that Dental Defendants could and would provide Plaintiff virtually instantly with the clean, white teeth and beautiful smile that he desired." *fn29 Defendants also purportedly misrepresented that the treatments were medically necessary. *fn30 Walther claims Defendants knew or should have known that he did not understand or appreciate either the documents presented to him or Defendants' representations *fn31 about the cost and nature of the dental services and financing to be provided, and took advantage of his disability. *fn32 Walther also alleges that Defendants failed to inform him of the extent and cost of the dental and financial services. *fn33 Walther believed, based on his prior visit, that he was financing only $600-the estimated cost of cleaning and whitening presented at his first visit. *fn34

On February 19, 2010, Walther filed the pending action against the Dental and Capital One Defendants in this Court [doc. no. 1], alleging:

* two state law claims against only the Dental Defendants: Negligence (Count I) and Negligence Under Restatement (Second) of Torts §§ 323 & 324 (Count II);

* four state law claims against all Defendants: violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa. C.S.A. § 201 et seq . (Count III); Negligent Misrepresentation (Count IV); Intentional Misrepresentation (Count V); and Common Law Deceit (Count VI);

* two federal claims against all Defendants: violation of the Section 1962(c) of the Racketeer Influenced and Corrupt Organizations Act ("RICO") (Count VII); and RICO Conspiracy (Count VIII).

Dental Defendants move under Rule 12(b)(6) to dismiss all but Count I. Capital One Defendants move to dismiss all of the claims against them (Counts III through VIII).

II. S TANDARD OF R REVIEW

In reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted, the Court must accept a plaintiff's factual allegations as true and draw all logical inferences in favor of the non-moving party. *fn35 Courts are not, however, bound to accept as true legal conclusions couched as factual allegations. *fn36 The Complaint must set forth direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory. *fn37 And the plaintiff must allege "enough facts to state a claim for relief that is plausible on its face." *fn38 The Court has no duty to "conjure up unpleaded facts that might turn a frivolous action . . . into a substantial one." *fn39

Under Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff must plead mail and wire fraud with particularity. *fn40 This burden is satisfied by pleading the "date, place or time" of the fraud or using "alternative means of injecting precision and some measure of substantiation into their allegations of fraud." *fn41 The plaintiff must also allege "who made a misrepresentation to whom and the general content of the misrepresentation." *fn42 The pleading must be sufficiently detailed to put the defendant on notice of the "precise misconduct" of which it is accused, *fn43 by pleading "the who, what, when, where, and how" of the fraud. *fn44 To successfully plead specific intent to defraud, however, a plaintiff need only satisfy the pleading standards under Rule 8(a)(2). *fn45

III. D ISCUSSION

A. RICO Claims

Because the federal RICO *fn46 claims provide the only basis for subject matter jurisdiction over this Complaint, the Court's analysis begins there. *fn47 Counts VII and VIII of Walther's Complaint allege that the Dental Defendants and Capital One Defendants violated both Section 1962(c) of RICO by "engaging in an institutionalized pattern of deceptive practices designed to promote buying of elective dental procedures via impulse, instant borrowing," and Section 1962(d) by conspiring to violate Section 1962(c). *fn48

Section 1962(c) of the RICO statute provides that: It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

To plead a Section 1962(c) violation, Walther "must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." *fn49 Walther alleges Capital One and Dental Defendants engaged in the predicate acts of mail and wire fraud, pursuant to Section 1961(1) and 18 U.S.C. §§ 1341 and 1343, by using the telephone, internet and mail to perpetuate their alleged fraud. *fn50 Defendants argue that the RICO claims must be dismissed because Walther has failed to allege the elements of a RICO claim by insufficiently pleading: (1) the existence of a RICO enterprise; (2) facts to support the predicate acts of mail and wire fraud; or (3) a pattern of racketeering activity.*fn51

1. Enterprise

The Court finds Walther has sufficiently pleaded the enterprise element. A RICO "enterprise" may include "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." *fn52 In addition, the enterprise and RICO "person" (e.g., the defendant) must be "two distinct entities:

(1) a 'person;' and (2) an 'enterprise' that is not simply the same 'person' referred to by a different name." *fn53 Here, Walther pleads that the enterprise consists of an "association-in-fact" enterprise made up of Dental Defendants and Capital One Defendants. *fn54

a. Distinctiveness

Capital One Defendants argue that Walther has violated the distinctiveness principle embodied in Section 1962(c) by naming as RICO persons all of the individuals or corporate entities that together form the alleged RICO enterprise. But they overstate the strength of the case law supporting that conclusion. *fn55 Though the Third Circuit has never decided this specific question, many district courts within this circuit have held otherwise, *fn56 and the weight of authority in the circuit courts of appeals is contrary to Defendants' approach. *fn57 It is clear that a defendant may not, on its own, make up the entire enterprise-for example, when a corporation is named as both the "person" and the "enterprise." *fn58 But there is no sound reason for concluding that a person that forms only part of an alleged association-in-fact made up of multiple unaffiliated corporate entities or individuals should be deemed synonymous with the enterprise: "A part of the whole does not share identity with the whole." *fn59 Here, Walther alleges an enterprise made up of a natural person and various separate corporate entities. Each are separable and legally distinct from the enterprise itself and thus satisfy the distinctiveness requirement. Moreover, the policy basis offered by the Eighth Circuit in rejecting Defendants' proposed rule is persuasive:

A collective entity is something more than the members of which it is comprised. If five persons form an association in fact and engage in a pattern of racketeering activity such as drug smuggling and murder, an individual member could never be prosecuted for violating RICO under the appellants' reasoning because he or she would not be considered distinct from the enterprise. We do not believe that Congress envisioned that this type of conduct would be insulated from RICO prosecutions. *fn60

This Court agrees and joins other courts that have concluded the distinctiveness principle is not violated merely by naming as a RICO person a legally distinct entity that is also a member of the alleged association-in-fact enterprise so long as that person is not the enterprise's sole member or does not merely conduct the regular affairs of the alleged enterprise such that it is indistinguishable from it. *fn61

Capital One Defendants also argue that even if the distinctiveness requirement is satisfied by naming as defendants fewer than all members of an association-in-fact, it is violated if all members of the enterprise are named. *fn62 Defendants have offered no principled basis for why this should be so, and this Court declines to conjure one up for them. Indeed, such a rule would prevent a plaintiff or the government from prosecuting all potentially liable members of an association-in-fact enterprise.

b. Structure

Both sets of Defendants contend that Walther has not sufficiently pleaded the enterprise's organizational structure. *fn63 An "association-in-fact enterprise must have at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purpose." *fn64 Under this "undemanding standard," *fn65 the enterprise need not have formal mechanisms for controlling the enterprise's affairs, and can be an entity where decisions are made on an ad hoc basis. *fn66

Walther has alleged sufficient facts as to the structure of the alleged enterprise. He has alleged that the enterprise had the "common purpose . . . of defrauding [patients by] engaging in an institutionalized pattern of deceptive practices designed to promote impulse buying of elective dental procedures via impulse borrowing." *fn67 And because Walther has alleged that Dental Defendants and Capital One Defendants have a contractual relationship to provide reciprocal benefits to one another-the availability of in-office instant credit to dental patients that facilitates the purchase of dental services *fn68 - he has sufficiently pleaded details from which this court can infer not only a relationship among the members, but also one of sufficient duration to carry out the purpose. *fn69 Finally, though Walther must allege an enterprise that is separate from the pattern of racketeering activity, *fn70 he has done so here. "Allegations that members of the enterprise . . . provided 'legitimate services during the period in which they were engaged in racketeering activities' satisfies this element." *fn71 Walther has alleged a legitimate contractual business relationship between the Dental Defendants and Capital One Defendants to offer real-time financing to patients that was allegedly used to facilitate the fraud. Walther has thus sufficiently pleaded the enterprise element.

2. Pattern of Racketeering Activity

a. Predicate Acts & Federal Rule of Civil Procedure 9(b)

Defendants argue that Walther has not sufficiently pleaded facts that constitute mail and wire fraud predicates. *fn72 The mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343, "prohibit the use of the mail or interstate wires for purposes of carrying out any scheme or artifice to defraud." *fn73 Both require fraudulent intent. *fn74 The scheme must involve a "fraudulent misrepresentation or omission reasonably calculated to deceive persons of ordinary prudence and comprehension," *fn75 though the communication via the mails or interstate wires need not itself be fraudulent so long as it is "incident to an essential part of the scheme." *fn76 An omission may be sufficient to state a claim if it results in "'the deprivation of something of value by trick, deceit, chicane, or overreaching.'" *fn77 Here, though Walther has pleaded with particularity the time, date and place of the alleged conduct, he has failed with respect to the "who," "what" and "how" of the mail and wire fraud as required under Rule 9(b) of the Federal Rules of Civil Procedure.

Walther does not sufficiently plead who made the alleged misrepresentations because he merely identifies "Dental Defendants," as a group, as "the deceiver." *fn78 The failure to identify the speaker of the deceptive statements is alone sufficient to dismiss the RICO claim. *fn79 This is not a case where the general identity of the speaker or actor would not be in a plaintiff's possession such that this requirement might be relaxed. *fn80 All of the alleged misrepresentations or omissions allegedly occurred while Walther was at Advanced Dental Care's offices on the day of his treatment. Surely he is aware of with whom he spoke or interacted, at least generally by function or position, if not by name. His failure to identify those persons in the Complaint is fatal; it does not provide the Defendants notice of the precise misconduct of which they are accused.

Moreover, Walther has not sufficiently pleaded the "what" or "how" required to state a claim for mail and wire fraud, though this is arguably a closer question. As an initial matter, the Court must disregard the allegations that are generalized and conclusory, *fn81 such as allegations that Defendants "engaged in deceptive and fraudulent conduct"; "manipulated" Walther into signing loan papers; "committ[ed] consumer fraud;" "acted deceptively;" "deceived Plaintiff into signing a contract to borrow $25,000." *fn82 None of these statements are backed by facts suggesting how Walther was deceived or manipulated. And though Walther repeatedly and generally refers to Defendants' "representations" regarding the treatment, its costs and the costs of financing, *fn83 he says almost nothing about what those representations were. In fact, in the entire Complaint, Walther identifies only three representations ever made by any Defendant.*fn84

First, Walther alleges that "Defendants recklessly and intentionally misrepresented that [he] would receive dental care including clean, white teeth and a beautiful smile as he sees on TV" when they knew he could not understand the nature of the financial and dental services or their costs. *fn85 Though this allegation identifies the general content of the representation, it does not present any facts suggesting the representations were made knowing of their falsity. And because Walther clearly received "dental care" that involved teeth cleaning and cosmetic dentistry, *fn86 the alleged "falsity" here apparently arises from the resulting poor quality of those services and harm to Walther. But that complaint sounds in negligence or breach of contract, and Walther cannot convert it to fraud by labeling the statement a "misrepresentation" *fn87 without any facts from which this court can plausibly infer that Dental Defendants knew they could not deliver on the promised services.

Second, Walther alleges that Defendants "intentionally misrepresented" to Plaintiff that the treatment was "medically necessary dental work and restoration." Defendants argue that not only is this statement inadequate because it fails to allege what specifically Walther was told about medical necessity, it is contradicted by Walther's assertion that he believed he was going to receive treatments to obtain white, clean teeth and a beautiful smile-e.g., cosmetic procedures. *fn88

Additionally, the Court notes Walther signed the "Cosmetic Dentistry" consent form. *fn89 In light of those facts, Walther's allegation is not sufficiently particular.

Third, Walther alleges that Defendants misrepresented that the "dental and financial services to be rendered were of high quality, well above minimal standards of acceptable care in the community." *fn90 Not only does this allegation lack the specificity required under Rule 9(b), it seems plain that such subjective and unverifiable statements are more puffery than dirty pool, and are thus not actionable as mail or wire fraud. *fn91

Walther's allegations of material omissions likewise are insufficient. He claims that defendants knowingly "conceal[ed], suppress[ed] or omitt[ed]" material facts by failing to inform him of the extent and costs of the dental and financial services. *fn92 This allegation is far too general to satisfy Rule 9(b) since it states nothing about what material information Defendants failed to reveal to Walther. And mere non-disclosure, without more, is insufficient to state a mail or wire fraud claim. *fn93 Because the Complaint never states what Walther was told on February 22 regarding the services he was to receive that day and their costs, this Court cannot even infer what omission might rise to the level of fraud. Moreover, the detailed treatment and consent documents that Walther signed demonstrate that Walther was informed not only about the number and nature of the services he was to receive, which went far beyond cleaning and whitening, but also about their individual cost. Under these circumstances, the Complaint does not plead with particularity "the deprivation of something of value by trick, deceit, chicane, or overreaching."

The gravamen of Walther's Complaint is that Defendants took advantage of his inability to comprehend what he was told and his susceptibility to marketing information. *fn94 Though the "ordinary prudence" standard for mail or wire fraud does "not . . . grant permission to take advantage" of those with lesser mental abilities through a deliberately fraudulent scheme, *fn95

Walther cannot successfully allege fraud based on those vulnerabilities without some facts suggesting how Defendants knew or should have known of those limitations and their intent to deceive him through misrepresentations or omissions. Not only has Walther insufficiently pleaded a misrepresentation or omission, he has not alleged any facts suggesting how Defendants may have had notice of his disabilities. Moreover, he asserts he lived independently and without an appointed guardian. *fn96 Walther's allegation that the Dental Defendants spoke with Walther's friend to explain the dental services and financing might suggest some knowledge of his limitations, *fn97 but without some facts as to what Dental Defendants said during that conversation or what rationale Walther gave them for requesting that they phone his friend, Walther's allegations are insufficient for this Court to infer their knowledge of his limitations and any intent to take advantage of them. At base Walther appears to allege that the combination of the video and other marketing materials that he was exposed to while in the dental office, none of which are alleged to be false or misleading, the availability of instant credit to finance the dental services, and Walther's susceptibility to those marketing tactics caused him to purchase the treatments and take out the loan. *fn98 While the Court is not unsympathetic to Walther's plight, he has not sufficiently pleaded mail or wire fraud.

b. Pattern of Racketeering Activity

Even if this Court accepts that Walther sufficiently alleged fraudulent activity, he has not sufficiently alleged a pattern of racketeering activity. A pattern of racketeering activity requires, at least two acts of racketeering activity within a ten-year period *fn99 that are related to each other and "amount to or pose a threat of continued criminal activity." *fn100 Though Walther has sufficiently pleaded relatedness, he has not pleaded facts that meet the continuity requirement.

Acts are related if they have "the same or similar purposes, results, participants, victims or methods of commission." *fn101 Here, Walther has alleged that Capital One Defendants and Dental Defendants communicated regarding the loan via interstate use of internet and phone lines and that Capital One mailed the loan documents to Walther *fn102 -acts that are alleged to have had the same purpose, same result, same participants and the same victim. *fn103

Continuity is established by alleging either predicates extending over a substantial period of time (closed-end continuity), or predicates that threaten future criminal activity (open-ended continuity). *fn104 Because Walther alleges only three predicate acts of mail or wire fraud that occurred within just several weeks of each other, he has not sufficiently pleaded closed-end continuity. *fn105 Open-ended continuity can be established by demonstrating: (1) a small number of related acts that, though extending over a short period of time, "themselves include a specific threat of repetition extending indefinitely into the future," as in the case of a protection racket where the threat is implicit in the nature of the predicate; or (2) where the predicate acts are a "regular way of conducting [a] defendant's ongoing legitimate business." *fn106 Walther has not pleaded predicate acts that themselves threaten repetition; monthly payments on a loan, even if that loan were fraudulently induced, would not meet the criteria since the initial act of fraudulent inducement is not repeated by otherwise legal requests for payment. Nor has Walther alleged facts to suggest that commission of the predicates are part of the Defendants' regular way of doing business. *fn107 Though Walther has alleged that Capital One and Dental Defendants have an ongoing contractual relationship to provide for instant credit for dental services, he has not asserted any facts to suggest that mere availability or ongoing operation of this financing arrangement is any way fraudulent. It is the predicate fraud that must be the "regular way of doing business," not the operation of the legitimate business. Walther has not alleged any facts to suggest that Defendants have perpetrated the predicates alleged-mail and wire fraud-either before or since Walther's treatment, on Walther or anyone else. His conclusory allegation that Defendants engaged in an "institutionalized pattern of deceptive practices" designed to promote impulse buying and borrowing is insufficient. *fn108 RICO is intended to criminalize long-term criminal conduct, not single instances of fraud. *fn109 Thus even if Walther sufficiently alleged racketeering activity, he has not pleaded the requisite pattern. *fn110

3. RICO Conspiracy

Because Walther has failed to state a claim under Section 1962(c), his conspiracy claim pursuant to Section 1962(d) also fails.*fn111

Accordingly, the Court will dismiss without prejudice both of Walther's RICO claims (Counts VII and VII) for failure to state a claim.

B. Supplemental Jurisdiction Over the State Claims

The only claims remaining (Counts I through VI) are based on Pennsylvania law. Although federal courts with original jurisdiction over a federal claim have supplemental jurisdiction over state claims that form "part of the same case or controversy," a court may decline to exercise supplemental jurisdiction over state law claims if "the district court has dismissed all claims over which it has original jurisdiction." *fn112 The Third Circuit directs that, "where the claim over which the district court has original jurisdiction is dismissed before trial, the district court must decline to decide the pendent state claims unless considerations of judicial economy, convenience, and fairness to the parties provide an affirmative justification for doing so." *fn113

Here, these factors warrant dismissal of Walther's state law claims. First, there is no judicial economy in trying the state claims here: the case is in its earliest stages, an answer has not been filed, discovery has not occurred and trial has not been scheduled. *fn114 Second, state court is an equally, if not more, convenient forum given that the events giving rise to the claim arose in Bucks County and all of the in-state defendants reside there. Because no federal issues remain, the Court will dismiss the state law claims without prejudice pursuant to Section 1367(c)(3), and notes Walther may transfer his state claims to state court under 42 Pa. C.S.A. § 5103(b). *fn115

IV. C ONCLUSION

For the foregoing reasons, the Court will dismiss all claims against all Defendants without prejudice. An appropriate order follows.


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