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City of Bowling Green v. Mills Family Realty, Inc.

United States District Court, W.D. Kentucky, Bowling Green Division

December 19, 2017



          Joseph H. McKinley, Jr., Chief Judge United States District Court

          This matter is before the Court on a motion to dismiss by defendants Mills Family Realty, Inc. (“MFR”), MR Group, Inc. (“MRG”), Chris Mills, Clinton Mills, and Ed Mills. (DN 7.) Also before the Court is a motion by the same defendants for leave to file a reply in excess of fifteen pages. (DN 13.) These matters are ripe for decision.

         I. Background

         This case arises from a construction project in downtown Bowling Green (“the city”) known as the Block 6 WRAP Project. The project was to consist of “wrapping” a parking garage with office, retail, and restaurant space. (Pl.'s Compl. [DN 1] ¶ 18.) To pay for the project, Warren County issued industrial revenue bonds (“IRBs”), which were to be repaid from three sources of revenue. (Id. ¶¶ 23-24.) First, payments were to come from the city, as it pledged its increased tax revenues generated within the tax increment financing (“TIF”) district that included the area in which the project was being developed. (Id.) Second, sublease payments from subtenants leasing the newly-built structure were to support the bond payments. (Id.) And third, the city agreed to serve as a “backstop” for the debt payments; if there was any shortfall in making the payments, the city agreed to lease the parking garage so that those funds could be used to repay the debt. (Id. ¶¶ 23-25.)

         The original subdeveloper on the project was Circus Square Development, LLC, a now-defunct company owned and operated by defendant Rick Kelley. (Id. ¶ 19.) After Circus Square was unable to perform due to financial difficulties, Kelley approached defendants Chris, Clinton, and Ed Mills about becoming the new subdeveloper. (Id. ¶¶ 19-20.) The Mills agreed and formed MFR to act as the subdeveloper on the project. (Id. ¶ 20.) In its application to serve as subdeveloper, MFR represented that the project would cost $21.5 million. (Id. ¶ 22.) Warren County approved the issuance of $22 million in IRBs to pay for the construction of the project. (Id. ¶ 25.)

         The complaint alleges that the defendants devised a scheme to gain access to monies beyond those available to it as subdeveloper and use those funds for unauthorized purposes. The city alleges that the defendants made arrangements and agreements, without the city's consent or knowledge, that allowed the general construction fund to be comingled with TIF revenue that the city was entitled to and was to be used solely to meet the city's bond obligations. (Id. ¶¶ 26-28.) The city also alleges that the defendants changed the operating agreement after the city had reviewed and given its final approval, and in doing so, allowed one of the subtenants, MRG, to have access to bond funds as working capital, despite the fact that the city had not approved this language, had a right to review the final operating agreement, and no other tenant had the same access to bond funds. (Id. ¶¶ 31-42.) The defendants allegedly took bond proceeds that were to be used for constructing the project, as well as TIF revenue that it had no right to use at all, and instead put this money towards developing their own personal restaurants that were to be located in the project, all while concealing the fact that the money was being used in this way or that defendant Kelley was even involved in the restaurant projects. (Id. ¶¶ 43-50.) Additionally, every time the defendants withdrew money from the bond trustee, U.S. Bank, they allegedly made fraudulent representations about the status of their work and the purpose towards which the funds were to be used. (Id. ¶¶ 56-60.) This scheme allowed the defendants to wrongfully spend both bond proceeds and TIF revenue and resulted in there being insufficient funds to pay for certain work that had been done on the project. (Id. ¶¶ 61-67.)

         The city filed the present action on September 11, 2017, asserting nine claims. It asserts two claims for violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and one claim for conspiracy to violate RICO against all defendants. (Counts I-III, id. ¶¶ 68- 89.) It asserts a claim of common law fraud against all defendants (Count IV, id. ¶¶ 90-93), while asserting claims for breach of contract and breach of duty of good faith and fair dealing against MFR only. (Counts V-VI, id. ¶¶ 94-102.) It asserts claims for breach of fiduciary duty and conversion against all defendants except MRG (Counts VII-VIII, id. ¶¶ 103-110), and it also asserts a claim for civil conspiracy against all defendants. (Count IX, id. ¶¶ 111-114.) All defendants but Kelley have moved to dismiss all counts against them. (DN 7.) The city has responded in opposition to dismissal (DN 12), and the moving defendants have filed a reply (DN 14), with an accompanying motion for leave to file the reply, as it exceeds the fifteen-page limit imposed by Local Rule 7.1(d). (DN 13.)

         II. Standard of Review

         Upon a motion to dismiss for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6), a court “must construe the complaint in the light most favorable to plaintiffs, ” League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007) (citation omitted), “accept all well-pled factual allegations as true, ” id., and determine whether the “complaint . . . states a plausible claim for relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Under this standard, the plaintiff must provide the grounds for its entitlement to relief, which “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A plaintiff satisfies this standard only when it “pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. A complaint falls short if it pleads facts “merely consistent with a defendant's liability” or if the alleged facts do not “permit the court to infer more than the mere possibility of misconduct.” Id. at 678-79. Instead, it “must contain a ‘short and plain statement of the claim showing that the pleader is entitled to relief.'” Id. at 677 (quoting Fed.R.Civ.P. 8(a)(2)). “But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.'” Id. at 679 (quoting Fed.R.Civ.P. 8(a)(2)).

         III. Discussion

         As a preliminary matter, the Court GRANTS the motion for leave to file a reply in excess of fifteen pages. The defendants have adequately demonstrated that the complexity of the case, the number of claims at issue, and the individual grounds asserted both in support and in opposition to their motion justifies the length of their brief.

         A. RICO Claims

         The moving defendants argue that the three RICO claims must be dismissed for a variety of reasons. The Court will focus on one, the city's failure to allege an investment injury, as it finds that issue to be dispositive.

         The city's two claims based upon actual violations of RICO (as opposed to the conspiracy claim) are brought pursuant to ...

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