Malley v. San Jose Midtown Development LLC

Background

Gregory Malley sued San Jose Midtown Development LLC, Sangeeth Peruri, Ashish Patel, Peruri Capital Partners, LLC, Four Gates Capital, LLC, Procurator Holding, LLC, and Thomas Malgesini. He asserted federal claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) and several state-law claims.

Malley alleged that he held a 16.66 percent economic interest in SJMD and that amendments to its operating agreement required minority stakeholders to bear development costs. He alleged that SJMD charged him more than $300,000 in usury interest and withheld part of proceeds related to a loan from Malgesini. He asserted fifteen causes of action, including usury, RICO violations, RICO conspiracy, conversion, wrongful garnishment, contract claims, fraud, negligent misrepresentation, duress, and material alteration of a written instrument.

Judicial Notice

The court took notice of several operating-agreement documents, related amendments, court filings, and loan documents. It declined to take notice of documents concerning Malley’s prior real-estate license and personal bankruptcy because defendants had not sufficiently shown their relevance. The court did not take notice of disputed facts contained in the noticed documents.

Usury Claim

The court held that Malley had not established that the operating agreement and its amendments created a loan transaction. The agreement instead showed a real-estate joint venture: it did not require repayment of capital contributions, and it provided preferred returns tied to a future property sale. The court concluded that the use of terms such as “interest” and “line of credit” in some financial discussions did not overcome the agreement’s actual terms. It dismissed the usury claim.

RICO Claims

Malley based his RICO and RICO-conspiracy claims on the alleged collection of unlawful debt. Because he had not established the collection of usurious interest, the court rejected that basis for the RICO claims. The court also found that the claims concerned a single real-estate transaction and did not allege the continuing pattern of related racketeering activity required for a RICO claim. The court dismissed both the RICO claim under 18 U.S.C. § 1962(c) and the RICO-conspiracy claim under § 1962(d).

Remaining State Claims

After dismissing the federal claims, the court declined to exercise supplemental jurisdiction, meaning authority to hear related state-law claims, over Malley’s remaining twelve state-law claims. The court found that the relevant considerations favored dismissal because the case was still at the pleading stage and discovery had not begun. It granted the motions to dismiss those claims without prejudice.

Discovery Stay

The court granted defendants’ motion to stay discovery. It found that the motions to dismiss could potentially resolve the entire case and could be decided without discovery. The jurisdiction challenge to the state-law claims provided an additional reason for the stay.

Disposition

The court granted defendants’ motions to dismiss the usury and federal RICO claims, declined to exercise supplemental jurisdiction over the remaining state-law claims, and dismissed those state-law claims without prejudice. It also granted the motion to stay discovery. The court dismissed Malley’s claims with leave to amend and set October 23, 2020, as the deadline to file an amended complaint. It stated that failure to amend or cure the identified deficiencies would result in dismissal with prejudice. Judge Edward J. Davila signed the order.