Investment Fraud, Racketeering Case Tossed

Investors in 22 commercial real estate properties containing Jiffy Lubes or Church’s Chicken franchises have lost an appeal to reinstate a racketeering conspiracy lawsuit against the property owners.

The 9th U.S. Circuit Court of Appeals Wednesday found the plaintiffs presented insufficient facts to support a plausible theory of racketeering.

‘The complaint does not contain adequate factual allegations to plausibly infer that defendants specifically intended to defraud, and therefore does not show a plausible entitlement to relief,” wrote Judge Ronald Gould.

Paul Morabito and Jack Waelti purchased 22 commercial properties for $20.3 million and added commercial leases to each, with Morabito’s containing Jiffy Lube franchises and Waelti’s containing Church’s Chicken restaurants.

They executed a sale-leaseback transactions with an investment company, becoming tenants on the properties, according to the court.

Plaintiffs are a group of investors who allege the pair conspired with their investment firm, Sovereign Investment Co., to pay inflated rents so the properties would appear far more valuable to third parties.  The plaintiffs argued that the real estate was actually worth $11 million, not $20 million.

The plaintiffs, who purchased the properties for $30 million over the course of 2004, 2005 and 2006, accused the brokers in the deal of using sham appraisals to support the allegedly inflated values.

The two men paid their leases for four years but the franchises ran into trouble and in 2006 and 2007 they failed to make payments, eventually leaving $59 million in future rent unpaid, according to the court.

The plaintiffs could not find new tenants at comparable rents, according to the suit.  The sued claiming racketeering conspiracy but the U.S. District Judge Ronald Whyte in San Jose dismissed the case for failure to make a plausible showing of an intent to defraud.

The 9th Circuit affirmed.

“Plaintiffs’ fraud theory requires them to show more than a business deal gone bad for economic and non-fraudulent reasons,” Gould wrote.  “The must establish that defendants had the specific intent to defraud, and plaintiffs may establish that intent by showing the existence of a plausible fraudulent scheme,” he said.

Judges Clifford Wallace and visiting Judge Paul Huck of the Southern District of Florida joined in the opinion.

Case:  Eclectic Props. East v. Marcus & Millichap Co., No. 12-16526


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