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Capital Lighting and Supply, LLC v. Wirtz

United States District Court, D. Maryland

August 20, 2018

CAPITAL LIGHTING AND SUPPLY, LLC, Plaintiff,
v.
KENNETH L. WIRTZ, et al., Defendants.

          MEMORANDUM

          James K. Bredar Chief Judge.

         Capital Lighting and Supply, LLC, d/b/a Capital Tristate (“Plaintiff”), filed a thirty-one count, ninety-nine page Complaint against thirteen defendants: Kenneth L. Wirtz, Kristen R. Wirtz, TK Lighting Supply, LLC (“TK Lighting”), MEKW, LLC (“MEKW”), Todd Sibel, Sibel Sales Inc. (“Sibel Sales”), Adam J. Harmon, AXIS LED Group, LLC (“AXIS”), Volturno Solutions, LLC (“Volturno”), JC Sons, LLC (“JC Sons”), Baltimore's Light Source, LLC (“BLS”), Jeffrey D. Smith, and Christine A. Smith (collectively “Defendants”). The Complaint alleges that various groupings of Defendants created and operated criminal enterprises designed to defraud Plaintiff of millions of dollars over a roughly five-year period. Specifically, the Complaint alleges that the defendants violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 15 U.S.C. § 1961 et seq. In addition, Plaintiff asserts a host of state common law causes of action, including breach of the duty of loyalty, fraud, constructive fraud, negligence, conversion, unjust enrichment, money had and received, tortious interference with contractual relationships, conspiracy, aiding and abetting, and breach of contract. The defendants have filed four separate motions to dismiss (ECF Nos. 32, 33, 35, and 36), which are now ripe. The motions have been briefed (ECF Nos. 32-1, 33-1, 35-1, 36-1, 37, 38, 39, 40, and 41) and no hearing is required, see Local Rule 105.6 (D. Md. 2016). For the reasons set forth below, Defendants' Motions will be DENIED IN PART and GRANTED IN PART.

         I. Background

         Plaintiff, Capital Tristate, is an electrical distributor. It provides “electrical products, lighting, and services to contractors, builders, and end-users in Maryland, Pennsylvania, West Virginia, [the] District of Columbia, and Virginia.” (Compl., ECF No. 1 ¶ 5.) Defendant Kenneth Wirtz was employed by plaintiff as an Account Manager in its Energy & Maintenance Service (“EMS) division from August 14, 2006, through April 12, 2017. (Id. ¶ 32.) The EMS division “provides a suite of products and services including consultation, lighting supplies, and project management for electrical and lighting energy-efficiency projects to property owners and others.” (Id. ¶ 24.) The EMS division provides design and analysis services for clients and also “often acts as the general contractor for those projects.” (Id. ¶ 27.) Plaintiff often employs subcontractors on its jobs and also purchases products and materials from electrical suppliers.

         Defendants, with the exception of Mr. Wirtz, are individuals and corporate entities that served as subcontractors and/or suppliers for Plaintiff's EMS division projects. Defendants can generally be divided into four groups; however, there is significant overlap between the various groups.

         A. The Wirtz Defendants

         This group of Defendants consists of Mr. Wirtz, his wife Kristen Wirtz, TK Lighting, and MEKW. As an Account manager in Plaintiff's EMS division, Mr. Wirtz:

(a) obtained new customer leads, (b) interfaced with potential new customers regarding their retrofitting and lighting needs, (c) managed the bid process, including assisting with developing the cost analysis and ultimate price to charge the customer, (d) was the point-person on the job, interfacing with the customer and the subcontractors, (e) instructed other CapitalTristate employees on the type and quantity of products to purchase for each job, (f) handled product inventory, (g) retained and oversaw subcontractors and suppliers, (h) reviewed and approved subcontractor and supplier invoices, and (i) instructed other CapitalTristate employees to approve invoices and to apply credits to various accounts.

(Id. ¶ 35.) Mr. Wirtz's wife, Kristen Wirtz, is the sole owner of MEKW and the co-owner, along with defendant Todd Sibel, of TK Lighting. (Id. ¶ 7.) Defendant MEKW is a Pennsylvania limited liability company that was formed by Mrs. Wirtz on November 7, 2014. (Id. ¶ 9.)

         Defendant TK Lighting is a Maryland limited liability company that is “owned and operated by Defendants Todd Sibel and Kristen Wirtz, and is in the business of selling lighting supplies to businesses and acting as a general contractor on retrofitting projects.” (Id. ¶ 8.)

         B. The Sibel Defendants

         Defendant Todd Sibel is “an energy management solutions expert” based in Pikesville, Maryland. (Id. ¶ 10, 33.) In addition to co-owning TK Lighting with Mrs. Wirtz, Mr. Sibel is the sole owner of Defendants Sibel Sales and Volturno. (Id. ¶ 11-12.) Defendant Sibel Sales's scope of work is unclear from the Complaint; however, it appears to be a subcontractor (or possibly a lighting supplier) frequently used by Plaintiff. Defendant Volturno “provides sales and consulting services for energy efficiency in commercial real estate.” (Id. ¶ 12.) Sibel Sales and Volturno both appear to have been approved subcontractors/suppliers used by Plaintiff on its EMS projects.

         C. The AXIS Defendants

         Defendant AXIS is a limited liability company registered in both Maryland and Ohio that supplies lighting products to contractors, including Plaintiff. (Id. ¶ 14.) Defendant Adam Harmon is “the National Director, Senior Account Manager, and agent of Defendant AXIS.” (Id. ¶ 74.)

         D. The Smith Defendants

         The Smith Defendants include Jeffrey and Christine Smith, a married couple living in Glen Burnie, Maryland. (Id. ¶ 15-18.) The Smiths own two companies that provide electrical contracting services. (Id.) Those companies are Defendant JC Sons and Defendant Baltimore's Light Source. (Id.) Both JC Sons and Baltimore's Light Source provided electrical contracting services for Plaintiff's EMS division. (Id.)

         E. Allegations in the Complaint

         Plaintiff's Complaint, which is laid out over ninety-nine pages and 464 paragraphs, describes multiple schemes orchestrated by Defendants in order to defraud Plaintiff of millions of dollars. In essence, Kenneth Wirtz used his position of authority within Plaintiff's EMS division to orchestrate a series of overbilling, over ordering, and kickback schemes with the other Defendants who provided services and supplies to Plaintiff. These schemes were primarily orchestrated by Kenneth Wirtz, Kristen Wirtz, and Todd Sibel, although the Smith Defendants also played a critical role.

         The apparent initial scheme, repeated many times, was rather straightforward. Mr. Wirtz, with the assistance of Mr. Sibel, would secure EMS retrofit projects for Plaintiff. After Plaintiff was hired by a client to execute a retrofit project, Mr. Wirtz would hire JC Sons, his “preferred electrical contractor, ” to perform the work. Mr. Wirtz and Mr. Sibel would then discuss how much to overbill Plaintiff for supplies and services needed for the project. One of the two would then instruct the Smith Defendants to submit JC Sons' invoices for the work to Volturno, an entity wholly owned and controlled by Mr. Sibel. Subsequently, Mr. Sibel would significantly inflate the amount of the invoice and submit it to Plaintiff through his other company, Sibel Sales. Mr. Wirtz would then approve payment of the invoice (or instruct others to approve payment), knowing that it was inflated. In addition to inflating real invoices from JC Sons, Mr. Wirtz, Mr. Sibel, and the Smiths would also create wholly fake invoices from JC Sons and Baltimore's Light Source.[1] The Wirtzs and Mr. Sibel would then divide the excess money between themselves, funneling it through TK Lighting and MEKW to conceal their fraudulent scheme. (Id. ¶¶ 45-71.)

         The Smiths did not receive any of the excess money obtained from the inflated invoices. They did, however, receive money from the fake invoices. The Smiths retained money from payments made by Plaintiff to JC Sons and Baltimore's Light Source that referenced invoice numbers they knew to be fraudulent. At Mr. Wirtz's instruction, the Smith's would retain a portion of this money and apply it to older, valid and outstanding invoices they had sent to Plaintiff. The Smiths would then provide the remainder of the money to Mr. Sibel or Mr. Wirtz by leaving a personal check made out to one of them in the Smiths' mailbox. The Smith, Wirtz, and Sibel Defendants also submitted fake invoices as credits to Plaintiffs in an attempt to conceal from Plaintiff just how much money it was losing through its EMS division. The inflated and fake invoice scheme involving the Wirtz, Sibel, and Smith Defendants began sometime in 2014 and lasted through Mr. Wirtz's termination in 2017. (Id. ¶¶ 97-117, 118-121.)

         In addition to the invoice schemes, the Wirtz, Sibel, and Smith Defendants caused Plaintiff to order an excessive amount of product for retrofit projects and then used the excess product on TK Lighting, JC Sons, and Baltimore's Light Source projects. TK Lighting, JC Sons, and Baltimore's Light Source did not pay for these products and therefore received a windfall at Plaintiff's expense when they were paid by their customers. (Id. ¶¶ 146-53.)

         The fraudulent scheme involving the AXIS defendants appears to have been simpler. Defendants Mr. Wirtz, Mr. Sibel, and Mr. Harmon created an inflated price list for AXIS products “typically used and purchased by Capital Tristate for the EMS division's retrofit projects.” (Id. ¶ 76.) Mr. Wirtz then distributed this inflated price list to his colleagues within the EMS division, knowing full well that it contained an additional markup that he would personally profit from. After Plaintiff purchased products from AXIS at these inflated prices, AXIS would pay TK Lighting-the company owned by Todd Sibel and Kristen Wirtz-five percent of the total product price plus fifty percent of the additional markup amount. Defendant Harmon allegedly retained the other fifty percent of the additional markup amount. This scheme began in the summer of 2015 and continued through Mr. Wirtz's termination in 2017.[2]

         The Wirtzs and Mr. Sibel also carried out a number of schemes that did not involve their other codefendants. For example, beginning in 2014 and continuing through August 2016, Sibel Sales would submit fake credits to Plaintiff. (Id. ¶¶ 133-37.) Mr. Wirtz would then instruct other Capital Tristate employees “to use the Sibel Sales credits to clear accounts receivables on various jobs.” (Id. ¶ 135.) This was done to forestall Plaintiff from discovering how much money the EMS division was losing as a result of Defendants' fraudulent schemes. In another scheme, the Wirtzs and Mr. Sibel would instruct Plaintiff's customers to pay TK Lighting rather than Capital Tristate for work. TK Lighting would then bill the customers and receive payment from them while Plaintiff paid for all of the materials and labor on the job and received no payment.[3] (Id. ¶¶ 138-45.)

         Finally, Mr. Wirtz also profited individually at Plaintiff's expense. First, Mr. Wirtz performed labor for Sibel Sales on non-Capital Tristate projects during regular business. Thus, according to the Complaint, Mr. Wirtz was being paid for purported labor with money Sibel Sales fraudulently obtained from Plaintiff at the same time he was employed full time by and receiving a salary from Plaintiff. (Id. ¶ 65.) Second, as part of his employment agreement with Plaintiff, Mr. Wirtz was entitled to commissions on all of his sales. Mr. Wirtz allegedly concealed the losses his various schemes caused Plaintiff, which allowed him to receive “approximately $500, 000 more in commissions than he was entitled to receive.” (Id. ¶¶ 154- 59.)

         In October 2016, Plaintiff was alerted to possible accounting issues in its EMS division and initiated an internal review and audit of the division. Through its ongoing investigation, Plaintiff has identified approximately $6 million of losses, “most, if not all, of [which] can be traced back to retrofit projects coordinated by, or otherwise involving, Defendant Ken Wirtz, in concert and coordination with the other named Defendants in this Complaint.” (Id. ¶ 42.)

         II. Standard for Dismissal under Rule 12(b)(6)

         A complaint must contain “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Facial plausibility exists “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. An inference of a “mere possibility of misconduct” is not sufficient to support a plausible claim. Id. at 679. However, “a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable.” Twombly, 550 U.S. at 556. Even so, “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Id. at 555. “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.'” Iqbal, 556 U.S. at 678 (alteration in original) (citation omitted) (quoting Twombly, 550 U.S. at 555, 557).

         To state a claim for fraud, a plaintiff must do more. Rule 9(b) states, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” The “circumstances constituting fraud or mistake” include “the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.” Weidman v. Exxon Mobil Corp., 776 F.3d 214, 219 (4th Cir. 2015) (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999)).

         III. Analysis

         Each Defendant has filed a separate motion to dismiss; however, all make the same fundamental argument: Defendants may have engaged in fraud they say, but their alleged criminal activity does not rise to the level of a RICO violation. While largely focusing on the adequacy, or lack thereof, of the RICO counts, most Defendants also challenge the adequacy of several of the state common law claims raised by Plaintiff. As explained in detail below, the Court disagrees with Defendants on most fronts. At least as to Counts One and Four, the Complaint describes a closely aligned group of individuals and companies, who carried out multiple, related schemes, over a significant period of time. In other words, it describes an enterprise that engaged in a pattern of racketeering activity. The same cannot be said of the other RICO counts, however, and therefore they will be dismissed. The Court also concludes that Plaintiff has plausibly alleged its state law claims.

         A. RICO Claims

         RICO provides a civil private right of action to “[a]ny person injured in his business or property” by a substantive violation of the statute. 18 U.S.C. § 1964(c). A prevailing plaintiff in a RICO civil action “is entitled to treble damages, costs and attorney's fees.” Friedler v. Cole, No. CIV.A. CCB-04-1983, 2005 WL 465089, at *7 (D. Md. Feb. 28, 2005). A plaintiff seeking civil damages under RICO must plausibly allege four elements to state a claim: “(1) conduct [causing injury to business or property], (2) of an enterprise, (3) through a pattern, (4) of racketeering activity.” Sedima S.P.R.L. v. Imrex Company, Inc., 473 U.S. 479, 496 (1995). Racketeering activity is defined under 18 U.S.C. § 1961(1), and includes certain felony acts “chargeable” under state law as well as any act that is “indictable” under specific listed provisions of the federal criminal code, including mail (18 U.S.C. § 1341) and wire fraud (18 U.S.C. § 1343).

         The AXIS and Sibel Defendants contend that Plaintiff fails to adequately plead facts in support of the second and third element-enterprise and pattern-while the other Defendants argue that Plaintiff's claims fail as to all four RICO elements. The Court begins with the pattern element because it is largely dispositive.

         i. Pattern of Racketeering Activity

         A “pattern of racketeering activity” is statutorily defined and “requires at least two acts of racketeering activity, . . . the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity.” 18 U.S.C. § 1961(5). To prove a pattern, a plaintiff is required to show that the predicate acts “are [1] related and [2] that they amount to or pose a threat of continued criminal activity.” H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989). Acts are related 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. “‘Continuity' is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct ...


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