CEQA Meets RICO: Round Two

Miller Starr Regalia
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Miller Starr Regalia

A little over a year ago, I posted about the filing of a federal RICO (the federal “Racketeer Influenced and Corrupt Organizations Act”; 18 U.S.C. § 1962 et seq.) lawsuit by developer Relevant Group, LLC and related entities (“Relevant”) alleging that defendants (Stephan “Saeed” Nourmand and Michael Nourmand and their business entities) filed and threatened frivolous CEQA suits solely to “shake down” and extort monetary settlements – without regard to environmental concerns – from economically vulnerable hotel project developers.  (See CEQA Meets RICO:  True Stories Of Extortion and Litigation Abuse in Tinseltown,” posted July 12, 2019.)  Since then, the litigation has progressed significantly.  After surviving a robust motion to dismiss, the case has become “at issue” with defendants’ filing of an answer to plaintiffs’ Second Amended Complaint (“SAC”) on June 24, 2020, and the District Court filing a Scheduling and Case Management Order on July 24, 2020.

The “death knell” for defendants’ attempt to dispense with plaintiff’s RICO action at the pleadings stage was the Federal (Central) District Court’s May 18, 2020 “Order Granting In Part Defendants’ Motions to Dismiss And Denying Motion For Sanctions” (the “Order”).  The Order partially granted defendants’ motion to dismiss (with leave to amend) on the sole ground that the First Amended Petition failed to adequately allege the RICO element of an “enterprise” or “ongoing organization” between one defendant entity (“Nourmand & Associates” or “N & A”) and the other defendants (“Saaed” Nourmand and The Sunset Landmark Investment LLC, or the “S Defendants”).  After plaintiffs filed a beefed-up Second Amended Complaint, which dropped N & A as a defendant while alleging all the same RICO claims against the S Defendants, an answer was filed by the S Defendants, putting the case at issue.

The gist of the plaintiffs’ RICO action is that defendants operate as a unified enterprise in Los Angeles that “conspire[s] against and extort[s] millions of dollars from competing developers by reflexively initiating frivolous litigation under [CEQA] without intention of reducing adverse environmental impact.”  (Order 2:13-17.)

The Order rejected defendants’ arguments that plaintiffs’ RICO claims were barred by the Noerr-Pennington doctrine, released by a settlement agreement, or barred by lack of standing, and also rejected defendants’ absention arguments.

While the Noerr-Pennington doctrine provides statutory immunity for “petitioning conduct”, including litigation, the Ninth Circuit has identified a “sham litigation” exception that applies in three situations:  (1) “where the lawsuit is objectively baseless and the defendant’s motive in bringing it was unlawful”; (2) “where the conduct involves a series of lawsuits brought pursuant to a policy of starting legal proceedings without regard to the merits and for an unlawful purpose”; and (3) unlawful conduct consisting of knowing fraud upon or intentional misrepresentations to the court.  (Order, at 6.)  Finding the first two of these exceptions relevant, the Court noted that there is a two-part test under the first whereby the lawsuit (1) must be objectively baseless such that no reasonable litigant could realistically expect success, and (2) conceals an attempt to interfere directly with a competitor’s business relationships.  But the two-part test doesn’t strictly apply under the second exception – known as the USS-POSCO exception – where the question is not the merit of any particular lawsuit, but whether a series of improper suits (as few as four, per Third Circuit precedent) is brought “pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival.”  In the context of this second “sham litigation” exception, “the legal success of an occasional sham suit is irrelevant.”  (Order, at 7.)  This is significant because it is notoriously easy to state a colorable CEQA challenge – and even a broken clock is right twice a day.  The bringing of a CEQA suit to extort money or other value that could not be obtained as judicial relief if successful – whether the suit has a scintilla of legal merit or not – is still a wrongful abuse of process.

Here, the Relevant plaintiffs appropriately alleged conduct fitting within the second exception, i.e., four instances of the initiation of reflexive sham CEQA suits for the sole purpose of delaying competing real estate projects and extorting money from the competing developers.  This was sufficient at the pleading stage to allege the “sham litigation” exception to Noerr-Pennington immunity.  Further, because the settlement agreements relied on by defendants to argue the RICO claims were released were subject to varying reasonable interpretations, they did not support a motion to dismiss at the pleading stage.

The District Court also rejected defendants’ “[borderline] frivolous” argument that the settlement agreements’ California choice of law clauses constituted forum selection clauses barring the federal action, as well as their res judicata arguments, as plaintiffs’ RICO claims could not have been brought in the prior CEQA actions.  It found Younger abstention inapplicable because Los Angeles, sued by plaintiffs for not enforcing CEQA, was not taking an “enforcement posture.”  It further found plaintiffs adequately alleged harm to their business or property – in the form of attorneys’ fees incurred defending the sham CEQA suits and loss of funding and other income due to development delays – so as to have standing to assert RICO violations.

The District Court also pointedly rejected defendants’ arguments for sanctions against the Relevant plaintiffs as “all dead on arrival,” and found at least one of them to be “[borderline] frivolous.”  In closing its discussion, the Order “cautioned [the parties] that this Court shall not tolerate frivolous filings or arguments, bad faith negotiation tactics, or the use of ellipses to mischaracterize statements” and that such future conduct could result in an OSC re sanctions.

The issue whether the Relevant plaintiffs alleged legally viable RICO claims based on defendants’ asserted serial and reflexive filing of sham CEQA claims to damage and extort business competitors has now been settled – they did.  The litigation will now proceed to the discovery stage and the issue will become whether plaintiffs can prove their claims with evidence.  But one message from the District Court is crystal clear at this stage:  as a matter of federal law, extortion is not okay, even when it’s dressed up as a CEQA action.

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