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Bates v. Northwestern Human Services

December 11, 2006

BARBARA BATES, ET AL., PLAINTIFFS,
v.
NORTHWESTERN HUMAN SERVICES, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Reggie B. Walton United States District Judge

MEMORANDUM OPINION

Barbara Bates and Bonnie Bell ("the plaintiffs"), on behalf of themselves and a putative class of similarly situated individuals, bring this action against Northwestern Human Services, Inc. ("NHS") and its two wholly-owned subsidiaries, Northwestern Human Services of Lehigh Valley, Inc. ("NHSLV") and NHS MidAtlantic, Inc. ("NHSMA") (collectively "the defendants"), asserting various statutory, regulatory, and common law violations in connection with the defendants' alleged misappropriation and misuse of the plaintiffs' federal benefits payments and other funds while acting as the plaintiffs' representative payee under the Social Security Act. Complaint ("Compl.") ¶¶ 1-11. Currently before the Court is the defendants' motion to dismiss for failure to state a claim upon which relief may be granted ("Defs.' Mot.").*fn1 For the reasons that follow, the Court grants in part and denies in part the defendants' motion to dismiss and permits the plaintiffs to file an amended complaint in accordance with this Opinion.*fn2

I. Factual Background

The plaintiffs allege the following facts in support of their complaint. Plaintiffs Bates and Bell are "poor [and] unemployed" residents of the District of Columbia who are "disabled due to mental illness" and who "rel[y] on government benefits payments, including monthly payments by the federal Social Security Administration ["SSA"], to obtain basic living necessities such as food, clothing and shelter."*fn3 Compl. ¶¶ 6, 7. The District of Columbia, through its Department of Mental Health ("DMH"), is required by federal and District statutes "to provide integrated, comprehensive, and coordinated mental health services to [District] residents, including the homeless mentally ill." Id. ¶ 20; see id. ¶¶ 20-24 (describing the statutory and regulatory scheme); see also 24 U.S.C. §§ 2255 et seq. (2000) (requiring provision of mental health services); D.C. Code §§ 7-1131.01 et seq. and 44-901 et seq. (2005) (same); 22 DCMR §§ 3402 et seq. (2006) (regulations implementing the statutory requirements). This provision of mental health services may be performed by the DMH directly or through certified service providers acting as authorized agents of the District of Columbia. Compl. ¶ 24; 22 DCMR §§ 3402 et seq. Defendant NHS and its two wholly owned subsidiaries, defendants NHSLV and NHSMA, are Pennsylvania corporations which, with the authorization of the DMH, Compl. ¶ 27, "[have] provided mental health and other services to [the] [p]laintiffs and others in the District of Columbia."*fn4 Id. ¶¶ 8-10. In furtherance of these duties, one or more of the defendants were appointed by the SSA to act as a representative payee for certain District of Columbia residents, including the plaintiffs, who were entitled to receive federal Social Security and Supplemental Security Income ("SSI") payments pursuant to the Social Security Act, 42 U.S.C. §§ 405 and 1383 (2000).*fn5 Compl. ¶ 30. The representative payee provisions of these two statutes state that the Commissioner of Social Security may allow the payment of an individual's benefits to be made to a duly certified fiduciary if the Commissioner "determines that the interest of [the] individual . . . would be served thereby" and if the fiduciary, subject to a detailed oversight procedure, applies the benefit payments to the individual's "use and benefit." 42 U.S.C. § 405(j)(1)(a); see also 42 U.S.C. § 1383(a)(2)(A)(ii)(I) (stating that "[u]pon a determination by the Commissioner of Social Security that the interest of [an eligible] individual would be served thereby, such [benefit] payments shall be made . . . to [a representative payee] for the use and benefit of the individual"); 20 C.F.R. §§ 404.2001 et seq. and 416.601 et seq. (2006). Applicants for appointment as representative payees must undergo an investigation by the SSA and must demonstrate "adequate evidence that such certification is in the interest of" the individual for whom representative payee status is sought. 42 U.S.C. §§ 405(j)(2)(A) and 1383(a)(2)(B)(ii); see also 20 C.F.R. §§ 404.2020 et seq. and 416.620 et seq. The statutes state that "preference shall be given to" any applicant who is

(I) a certified community-based nonprofit social service agency . . .,

(II) a Federal, State, or local government agency whose mission is to carry out income maintenance, social service, or health care-related activities,

(III) a State or local government agency with fiduciary responsibilities, or

(IV) a designee of an agency (other than of a Federal agency) referred to in the preceding subclauses of this clause, if the Commissioner of Social Security deems it appropriate.

42 U.S.C. §§ 405(j)(2)(C)(v) and 1383(a)(2)(B)(vii); see also 20 C.F.R. §§ 404.2021 and 416.621. Once appointed, representative payees are authorized to receive an individual's benefit payments and disburse monies to the individual for that individual's use and benefit. 42 U.S.C. §§ 405(j)(1)(A) and 1383(a)(2)(A)(ii)(I); see also 20 C.F.R. §§ 404.2035 and 416.635. The payees are subject to "a system of accountability monitoring" under which they are forbidden from "misus[ing]" an individual's benefit payment in any way, 42 U.S.C. § 405(j)(1)(A); see also 42 U.S.C. § 1383(a)(2)(A)(iv) (stating that "misuse of benefits by a representative payee occurs in any case in which the representative payee receives payment under this subchapter for the use and benefit of another person and converts such payment . . . to a use other than for the use and benefit of [that] person"), and are required to report to the SSA at least once per year "with respect to the use of such payments," 42 U.S.C. §§ 405(j)(3)(A) and 1383(a)(2)(C)(i).*fn6 According to the plaintiffs, the defendants provided them with mental health services and served as their representative payee as of some unspecified date,*fn7 see Compl. ¶ 28 (alleging that the plaintiffs "received mental health rehabilitative services . . . from the [d]efendants"); id. ¶ 30 (alleging that "[t]he [d]efendants applied to the [SSA] to be appointed as [the] [p]laintiffs' representative payee for benefits payments . . . [and] were eventually approved"), until some date no later than June 2004, see id. ¶ 34 (alleging that the defendants "stopped providing mental health services in the District of Columbia"); id. ¶ 47 (alleging that "on June 30, 2004, the [d]efendants closed the [NHSMA] office" in the District of Columbia"). The plaintiffs allege that the defendants, in their capacity as the plaintiffs' representative payee, "misused and/or misappropriated a substantial amount of [the plaintiffs' federal benefits payments] for their own purposes," id. ¶ 2; see also id. ¶ 33 (alleging that the defendants "misappropriated and misused the federal payments and other funds that they received as [the] [p]laintiffs' representative payees, and thereby deprived the [p]laintiffs of the benefits to which they were entitled"), and subsequently "left the jurisdiction[] without ever properly accounting for or returning the [p]laintiffs' misspent and unaccounted for funds," id. ¶ 2; see also id. ¶ 34 (alleging that the defendants "left the jurisdiction without returning all of the [p]laintiffs' funds in the [d]efendants' possession"). The plaintiffs further allege that the defendants, contrary to federal law, "failed to implement policies or procedures to enable them to account properly for [the] [p]laintiffs' funds." Id. ¶ 35.

The plaintiffs brought this action on December 6, 2004, asserting a panoply of statutory, regulatory, and common law claims against all three defendants. Id. ¶¶ 48-124. First, the plaintiffs allege that the defendants violated Sections 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 (2000) ("RICO"), by "participat[ing and conspiring] in the conduct of an enterprise's affairs through a pattern of racketeering activity"-specifically, repeated acts of mail and wire fraud-in order to misappropriate the plaintiffs' federal benefits payments. Compl. ¶¶ 52, 62, 72; 18 U.S.C. § 1962(c) ("Section 1962(c)"); see generally Compl. ¶¶ 48-83. Second, the plaintiffs allege that the defendants violated 42 U.S.C. § 1983 (2000) ("Section 1983") by acting under color of state law to deprive them of a federally protected right to receive their benefits payments. Compl. ¶¶ 84-90. Third, the plaintiffs allege that the defendants violated 42 U.S.C. §§ 405 and 1383, as well as their associated regulations, by failing to comply with the requirements of the relevant representative payee provisions. Compl. ¶¶ 91-104. Finally, the plaintiffs assert claims of breach of fiduciary duty, negligence, conversion, and "money had and received" in connection with the allegedly misused and misappropriated funds. Id. ¶¶ 110-124. The plaintiffs seek an accounting of all funds received, spent, and possessed by the defendants in their capacity as the plaintiffs' representative payee, as well as "a court determination of all unlawful and unauthorized expenditures" of those funds. Id. at 30; see also id. ¶¶ 105-109. The plaintiffs also seek, inter alia, compensatory, consequential, and punitive damages. Id. at 30.

On January 25, 2005, the defendants moved to dismiss all but three counts of the plaintiffs' complaint for failure to state a claim upon which relief can be granted.*fn8 Specifically, the defendants argue that (1) the plaintiffs' civil RICO claims fail to allege the existence of an "enterprise" separate and distinct from the defendants themselves, as required by 18 U.S.C. § 1962(c), Defs.' Mem. at 4-9; (2) the plaintiffs' allegations of mail and wire fraud in connection with their civil RICO claims are not set forth with sufficient particularity to satisfy the heightened pleading requirement of Federal Rule of Civil Procedure 9(b), id. at 9-13; (3) the plaintiffs' Section 1983 claims fail because the defendants were not acting under color of state law, id. at 20-26; (4) the plaintiffs' claims under 42 U.S.C. §§ 405, 1383, and 1983 fail because the plaintiffs do not possess a relevant and enforceable private right of action, id. at 13-17, 26-27; (5) the plaintiffs' claims under 42 U.S.C. §§ 405 and 1383 also fail because Congress did not intend to create a private remedy to enforce those statutes and their implementing regulations, id. at 17-20; (6) the plaintiffs fail to allege the elements necessary to establish a claim for money had and received, id. at 29-30; (7) the plaintiffs' claims for money had and received and for an equitable accounting should be dismissed because the plaintiffs have an adequate remedy at law, id. at 28-29; and (8) the plaintiffs fail to allege facts sufficient to support their request for punitive damages, id. at 27-28. The plaintiffs challenge all of these arguments. See generally Pls.' Opp.

II. Standard of Review

When evaluating a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court "must treat the complaint's factual allegations as true and must grant [the] plaintiff[s] the benefit of all reasonable inferences [that can be derived] from the facts alleged." Trudeau v. FTC, 456 F.3d 178, 193 (D.C. Cir. 2006) (internal quotation marks and citations omitted). However, the Court need not accept inferences that are unsupported by the facts set forth in the complaint or "legal conclusion[s] couched as . . . factual allegation[s]." Id. (internal quotation marks and citations omitted); see also M.K. v. Tenet, 99 F. Supp. 2d 12, 17 (D.D.C. 2000) (stating that "[b]are conclusions of law and sweeping and unwarranted averments of fact will not be deemed admitted" for the purposes of a Rule 12(b)(6) motion) (citing Haynesworth v. Miller, 820 F.2d 1245, 1254 (D.C. Cir. 1987)). The Court may only consider the facts alleged in the complaint, any documents attached as exhibits, and matters about which the Court may take judicial notice in addressing a Rule 12(b)(6) motion. EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624-25 (D.C. Cir. 1997). A complaint may be dismissed under Rule 12(b)(6) "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema, 534 U.S. 506, 514 (2002). Finally, "a complaint that omits certain essential facts and thus fails to state a claim warrants dismissal under Rule 12(b)(6)[,] but not dismissal with prejudice." Belizan v. Hershon, 434 F.3d 579, 583 (D.C. Cir. 2006).

III. Analysis

A. The Plaintiffs' Civil RICO Claim

The defendants argue that the plaintiffs do not allege the existence of a RICO "enterprise" separate and distinct from any of the defendants-NHS, NHSLV, or NHSMA-as required by 18 U.S.C. § 1962(c). Defs.' Mem. at 4-9; Defs.' Reply at 3-11. The defendants further contend that the plaintiffs fail to plead the existence of the alleged predicate acts of mail and wire fraud with sufficient specificity to satisfy the heightened pleading requirement of Rule 9(b). Defs.' Mem. at 9-13; Defs.' Reply at 11-14; see Fed. R. Civ. P. 9(b) (stating that "[i]n all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity"). For the reasons discussed below, the Court concludes that the facts alleged by the plaintiffs do not necessarily preclude the existence of a separate and distinct enterprise involving a parent corporation and its wholly-owned subsidiaries sufficient to meet the requirements of Section 1962(c). The Court finds, however, that it is unable to make a conclusive determination on the strength of the facts alleged in the plaintiffs' complaint regarding the distinctiveness of the defendants from each other and from the alleged RICO enterprise in carrying out the purportedly criminal activities. The Court also agrees with the defendants that the plaintiffs' complaint does not provide enough detail regarding the alleged acts of mail and wire fraud and their relationship to the conduct being challenged by the plaintiffs to satisfy Rule 9(b)'s heightened pleading requirement. Accordingly, the Court must dismiss the plaintiffs' RICO claims. However, because it is appropriate to dismiss these claims without prejudice, see Belizan, 434 F.3d at 583, the Court will grant the plaintiffs leave to amend their complaint to plead these allegations with greater particularity.

1. RICO and the Plaintiffs' Allegations

Section 1962(c) of RICO states, in relevant part, that "[i]t 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."*fn9 18 U.S.C. § 1962(c). Thus, to survive a Rule 12(b)(6) motion to dismiss, plaintiffs bringing a Section 1962(c) claim must allege that (1) a person or persons (2) associated with an enterprise (3) conducted (4) the affairs of that enterprise (4) through a pattern (5) of racketeering activity. See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985) (delineating the elements of a Section 1962(c) claim). Among the predicate acts constituting "racketeering activity" under Section 1962(c) are mail fraud and wire fraud. 18 U.S.C. § 1961(1) (2000); see also 18 U.S.C. §§ 1341 and 1343 (2000) (stating the elements of mail and wire fraud). The RICO statute further defines "person" as "any individual or entity capable of holding a legal or beneficial interest in property," 18 U.S.C. § 1961(3), and "enterprise" as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity," 18 U.S.C. § 1961(4).

Congress enacted Section 1962(c), and RICO generally, "to target . . . the exploitation and appropriation of legitimate business by corrupt individuals." Yellow Bus Lines, Inc. v. Drivers, Chauffeurs & Helpers Local Union 639, 883 F.2d 132, 139 (D.C. Cir. 1989), modified on other grounds, 913 F.2d 948 (D.C. Cir. 1990), cert. denied, 501 U.S. 1222 (1991) (citation omitted); see also Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 165 (2001) (noting that the legislative history of Section 1962(c) "refers frequently to the importance of undermining organized crime's influence upon legitimate businesses . . . [as well as] the need to protect the public from those who would run organizations in a manner detrimental to the public interest") (internal quotation marks and citation omitted). A RICO enterprise may therefore be either a "victim" or a "tool" of the persons who conduct its affairs to achieve criminal objectives, Kushner, 533 U.S. at 162, for "RICO both protects a legitimate 'enterprise' from those who would use unlawful acts to victimize it, and . . . protects the public from those who would unlawfully use an 'enterprise' (whether legitimate or illegitimate) as a 'vehicle' through which 'unlawful activity is committed,'" id. at 164 (internal citations omitted). Regardless of its nature, however, such an enterprise must be "proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates [comprising the enterprise] function as a continuing unit." United States v. Turkette, 452 U.S. 576, 583 (1981); see also United States v. Johnson, 440 F.3d 832, 840 (6th Cir. 2006) (observing that "[a] RICO enterprise is an ongoing structure of persons associated through time, joined in purpose, and organized in a manner amenable to hierarchical or consensual decision-making") (internal quotation marks, citation, and emphases omitted). The enterprise must also be legally distinct from the RICO person or persons who are alleged to be engaging in a pattern of racketeering activity through the enterprise's affairs. Kushner, 533 U.S. at 161; see also Yellow Bus Lines, 883 F.2d at 139 (stating that "[l]ogic alone dictates that one entity may not serve as the enterprise and the person associated with it") (citation omitted); Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994) (observing that the distinctiveness requirement of Section 1962(c) "focuses the section on the culpable party and recognizes that the enterprise itself is often a passive instrument or victim of the racketeering activity") (internal quotation marks and citations omitted). Finally, "[a]ny person injured in his business or property" by a violation of Section 1962(c) may bring a civil action against the alleged violators. 18 U.S.C. § 1964(c). If successful, a Section 1962(c) plaintiff shall be awarded, inter alia, treble the damages caused by the racketeering activity. Id.

Here, the plaintiffs attempt to satisfy the "enterprise" requirement of Section 1962(c) by covering all possible bases, alleging that (1) NHS acted as a RICO person through a RICO enterprise "consisting of at least (i) NHS, NHSLV and/or [NHSMA], individually and/or as an association in fact, and/or (ii) NHS, NHSLV, [NHSMA] and the District of Columbia . . ., individually and/or as an association in fact," Compl. ¶ 50; (2) NHSLV acted as a RICO person through a RICO enterprise "consisting of at least (i) NHS and/or [NHSMA], individually and/or as an association in fact, and/or (ii) NHS, NHSLV, [NHSMA] and the District of Columbia . . ., individually and/or as an association in fact," id. ¶ 60; and (3) NHSMA acted as a RICO person through a RICO enterprise "consisting of at least (i) NHS and/or NHSLV, individually and/or as an association in fact, and/or (ii) NHS, NHSLV, [NHSMA] and the District of Columbia . . ., individually and/or as an association in fact," id. ¶ 70.*fn10 The plaintiffs also bring an action under 18 U.S.C. § 1962(d), alleging that all three defendants "conspired to violate [Section 1962(c)] to the [p]laintiffs' detriment." Compl. ¶ 81; see also 18 U.S.C. § 1962(d) (stating that "[i]t shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section").

As for the predicate acts of mail and wire fraud, the plaintiffs allege that "[t]he [d]efendants repeatedly used or caused others to use the United States mails and interstate wires to further their scheme to misappropriate the [p]laintiffs' funds." Compl. ¶ 39. Specifically, the plaintiffs contend that the defendants committed mail and wire fraud when they (1) maintained bank accounts in the plaintiffs' names and "fraudulently misrepresented to the banks that they were holding and properly managing the [p]laintiffs' funds in these accounts in a fiduciary capacity as the [p]laintiffs' representative payee," id. ¶ 40; (2) "caused banks . . . to use the United States mails to send" a monthly bank statement to them containing information relating to the plaintiffs' accounts and then "used these monthly statements to monitor their unlawful activity," id. ¶ 41; (3) "regularly used the mails and interstate wires to have money transferred" between the plaintiffs' business and personal accounts, id. ¶ 42; (4) "using the interstate wires, caused the federal government, the District of Columbia government, and other persons to deposit federal benefits payments and other monies" into the plaintiffs' bank accounts on a monthly basis, and then "used these wired deposits to obtain possession of and then to misappropriate the [p]laintiffs' funds," id. ¶ 43; and (5) "using the United States mails, . . . caused the federal government, the District of Columbia government, and other persons to send the [p]laintiffs' monthly federal benefits and other payments" to the defendants' offices on a monthly basis, id. ¶ 44. Finally, the plaintiffs assert, somewhat cryptically, that "[t]he [d]efendants' mail and wire fraud was composed of discrete acts having the same or similar purposes, results, participants, victims or methods of operation, or otherwise were interrelated by distinguishing characteristics and are not isolated events." Id. ¶¶ 53, 63, 73.

2. Section 1962(c)'s Distinctiveness Requirement

The District of Columbia Circuit, along with eleven other Circuits, has conclusively held that "the same entity cannot be [named as] the RICO enterprise and [as] a RICO defendant." Confederate Mem'l Ass'n v. Hines, 995 F.2d 295, 300 (D.C. Cir. 1993) (citation omitted); see Yellow Bus Lines, 883 F.2d at 139 (concluding that the designation of one entity "as both the 'enterprise' and the defendant 'person' does not comport with statutory language or design"); see also Kushner, 533 U.S. at 162 (noting that "12 Courts of Appeals have interpreted [Section 1962(c)] as embodying some . . . distinctness requirement") (citing cases). Moreover, in 2001, the Supreme Court agreed with the "basic principle" of the Section 1962(c) distinctiveness requirement, observing that "to establish liability under [Section 1962(c)] one must allege and prove the existence of two distinct entities: (1) a 'person'; and (2) an 'enterprise' that is not simply the same 'person' referred to by a different name." Kushner, 533 U.S. at 161 (emphasis added).

In deciding the defendants' motion to dismiss the plaintiffs' RICO claims, the initial inquiry is therefore whether the defendants-as a parent corporation and its two wholly owned subsidiaries-constitute "the same entity" for the purposes of Section 1962(c). Hines, 995 F.2d at 300; see Defs.' Mem. at 6 (arguing that "NHS and its subsidiaries, NHSLV and [NHSMA], constitute one, unitary economic entity"). This question has never been resolved by the District of Columbia Circuit, and other Circuits reached conflicting results prior to Kushner. See Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 449 (1st Cir. 2000) (examining "the allegations in the complaint to determine whether the parent's activities are sufficiently distinct from those of the subsidiary at the time that the alleged RICO violations occurred") (citation omitted); Fogie v. THORN Americas, Inc., 190 F.3d 889, 897 (8th Cir. 1999) (concluding that "to impose liability on a subsidiary for conducting an enterprise comprised solely of the parent of the subsidiary and related businesses would be to misread [Section 1962(c)]"); Brannon v. Boatmen's First Nat'l Bank of Okla., 153 F.3d 1144, 1147 (10th Cir. 1998) (concluding that "in order to state a viable claim under [Section 1962(c)] against a [subsidiary] for conducting the affairs of its parent corporation, a plaintiff must, at the very least, allege the parent somehow made it easier to commit or conceal the fraud of which the plaintiff complains") (internal quotation marks and citation omitted); Discon, Inc. v. NYNEX Corp., 93 F.3d 1055 (2d Cir. 1996), vacated on other grounds, 525 U.S. 128 (1998) (finding that parent corporation and its subsidiaries were not sufficiently distinct for RICO purposes); Jaguar Cars, Inc. v. Royal Oaks Motor Co., 46 F.3d 258, 268 (3d Cir. 1995) (holding that a corporation properly serves as a RICO enterprise where it is a "legally distinct" entity from the persons named as RICO defendants); NCNB Nat'l Bank of N.C. v. Tiller, 814 F.2d 931, 936 (4th Cir. 1987), overruled on other grounds by Busby v. Crown ...


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