Malley v. San Jose Midtown Development LLC

Background

Gregory Malley brought claims against San Jose Midtown Development LLC, Sangeeth Peruri, Ashish Patel, Peruri Capital Partners, LLC, Four Gates Capital, LLC, Procurator Holdings, LLC, and Thomas Malgesini. The dispute concerned SJMD's development and sale of property at 777 W. San Carlos Street in San Jose. Under SJMD's amended operating agreement, Malley held a 16.33% voting interest and a 16.67% economic interest, while the defendants collectively held a 51% voting interest.

Malley alleged that a group of SJMD's majority members used additional capital calls to make minority members bear development and litigation costs. He also alleged that amendments to the operating agreement allowed SJMD to charge interest connected to members' contributions and that Peruri falsely claimed to be a licensed real-estate broker who could charge more than the legal interest rate. After SJMD sold the property for $11.2 million in March 2020, Malley alleged that defendants withheld his sale proceeds because he refused to waive claims against them.

Malley had previously amended his complaint after the court dismissed his initial RICO and usury claims. The second amended complaint asserted the same RICO and state-law claims and added a wire-fraud claim without first obtaining permission to add it.

Motions and Legal Standards

The defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(6), for failure to state a claim, and 12(b)(1), for lack of subject-matter jurisdiction. The court considered operating agreements and amendments incorporated into the complaint, as well as an email supporting the wire-fraud allegations. It declined to take judicial notice of materials concerning Malley's real-estate license and personal bankruptcy.

RICO and Usury Analysis

Malley based his RICO claims on two theories: that defendants collected unlawful debts through alleged usurious charges, and that they committed predicate acts of attempted extortion and wire fraud. A civil RICO claim requires conduct involving an enterprise, a pattern of racketeering activity, and injury to the plaintiff's business or property.

The court held that the alleged contribution arrangements were part of a joint venture, not loans. The operating agreement did not require a defaulting member to repay the money used to cover a capital contribution, and repayment was not due on a fixed date. The members also faced a risk of losing their investments and had rights to participate in management decisions. Because the joint-venture exception to California usury law applied, Malley could not base his RICO claims on the alleged collection of unlawful debts.

The court also found that Malley had not adequately pleaded wire fraud. Although the complaint identified who allegedly made the statement, what was said, when it was sent, and where it was sent, it did not explain how Peruri's statement caused the collection of unlawful interest in a joint venture. The court therefore found that Malley had not pleaded the required predicate acts or a pattern of racketeering activity. The RICO conspiracy claim also failed because the underlying RICO claim failed.

Disposition

The court granted the defendants' motion to dismiss the RICO claims without leave to amend. It declined to exercise supplemental jurisdiction—the court's authority to hear related state-law claims after the federal claims are gone—over the remaining state-law claims and dismissed those claims without prejudice. The court also granted the separate motion filed by SJMD, Patel, and Malgesini to dismiss the state-law claims asserted against them. It concluded that another amendment would be futile, directed the clerk to close the file, and stated that a judgment in favor of defendants would follow.