Gregory Malley v. San Jose Midtown Development LLC;

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GREGORY MALLEY,
Plaintiff-Appellant,
v.
SAN JOSE MIDTOWN DEVELOPMENT
LLC; et al.,
Defendants-Appellees.
No. 22-15190
D.C. No. 5:20-cv-01925-EJD
MEMORANDUM*
GREGORY MALLEY,
Plaintiff-Appellee,
v.
SAN JOSE MIDTOWN DEVELOPMENT
LLC; et al.,
Defendants-Appellants.
No. 22-15191
D.C. No. 5:20-cv-01925-EJD
Appeal from the United States District Court
for the Northern District of California
Edward J. Davila, District Judge, Presiding
Argued and Submitted February 6, 2023
San Francisco, California
* This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
FILED
FEB 27 2023
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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Before: BYBEE and BUMATAY, Circuit Judges, and BENNETT,** District
Judge.
In this civil RICO action, Plaintiff-Appellant Gregory Malley contends that
the Defendants-Appellees, San Jose Midtown Development, LLC (“SJMD”) and its
majority stakeholders, used a capital call investment process to issue usurious loans.
On direct appeal, Malley challenges the dismissal of his federal civil racketeering
claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18
U.S.C. § 1961 et seq. On cross-appeal, Defendants challenge the denial of their
motion for attorney’s fees. We have jurisdiction pursuant to 28 U.S.C. § 1291, and
we AFFIRM both decisions.
In 2014, SJMD decided to sell real property located at 777 West San Carlos
Street, San Jose, CA. In order to obtain the necessary capital to close this sale, SJMD
expanded its membership and welcomed several new members, including Malley.
The sale became embroiled in three years of litigation over environmental
remediation costs, requiring SJMD to raise additional capital from its membership.
To accomplish this, SJMD amended the Operating Agreement to streamline the
process for making “capital calls” to its members. As amended, if any member
refused to contribute the requested amount in response to a capital call, the remaining
members would be authorized to pay an advance on the shortfall. Should this occur,
** The Honorable Richard D. Bennett, United States District Judge for
the District of Maryland, sitting by designation.

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the defaulting member would face a proportionate loss of their equity in SJMD and
their economic interest in the Property unless they reimburse the advancing member
with interest. Moreover, members who contributed additional funds to capital calls
would also receive a “preferred return” on their investments if the Property was sold
at a premium and proceeds remained after primary distributions.
I. Direct Appeal
On direct appeal, Malley contends that the amendments to the Operating
Agreement allowed the Defendants to issue usurious loans to the Minority Members.
RICO “provides a private cause of action for ‘[a]ny person injured in his business or
property by reason of a violation of [18 U.S.C. § 1962].” United Broth. of Carpenters
& Joiners of Am. v. Bldg. & Const. Trades Dep’t, AFL-CIO, 770 F.3d 834, 837 (9th
Cir. 2014) (quoting 18 U.S.C. § 1964(c)) (alterations in original). To state a civil
RICO claim, a plaintiff must allege “(1) conduct (2) of an enterprise (3) through a
pattern (4) of racketeering activity (known as ‘predicate acts’) (5) causing injury to
plaintiff’s business or property.” United Broth., 770 F.3d at 837 (quoting Living
Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353, 361 (9th Cir. 2005)).
The central issue on direct appeal is whether Malley has alleged any predicate acts
sufficient to sustain a RICO claim.
Malley primarily contends that the Defendants operated an enterprise engaged
in the collection of unlawful debt, a RICO predicate offense. 18 U.S.C. § 1961(6).

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To constitute usury, “[t]he [challenged] transaction must be a loan or forbearance.”
Korchemny v. Piterman, 68 Cal. App. 5th 1032, 1043 (2021). SJMD’s Operating
Agreement creates a mechanism by which members who invest in the acquisition of
the Property will receive additional equity in SJMD, while members who refuse to
contribute capital may have their equity reduced if other members make an advance
on their obligations. This is “a bona fide joint venture,” not a loan. Junkin v. Golden
W. Foreclosure Serv., Inc., 180 Cal. App. 4th 1150, 1155–56 (2010). The Operating
Agreement does not impose “an absolute obligation of repayment,” id. at 1155, as
delinquent members may exit SJMD or forfeit their equity instead of remunerating
advances on their capital obligations. Additionally, the capital call process does not
eliminate the risk of loss for advancing members, and all SJMD members retain
voting control over the organization’s affairs.
In the alternative, Malley contends that the Defendants engaged in one of three
predicate offenses: attempted extortion, wire fraud, and RICO conspiracy. To allege
a pattern of racketeering activity, plaintiff must show at least two valid predicate acts
that are “indictable” under RICO. 18 U.S.C. §§ 1961(5), 1962(c); accord Clark v.
Time Warner Cable, 523 F.3d 1110, 1116 (9th Cir. 2008). Malley has not done so.
His allegations of attempted extortion and wire fraud amount to “isolated” incidents
that “present[] no threat of continuing.” Jarvis v. Regan, 833 F.2d 149, 153 (9th Cir.
1987); accord H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989) (holding that

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a RICO plaintiff must “show that the racketeering predicates are related, and that
they amount to or pose a threat of continued criminal activity” (emphasis in
original)).1 Finally, as Malley has failed to allege a substantive RICO offense, he
cannot sustain a RICO conspiracy claim. See Howard v. America Online Inc., 208
F.3d 741, 751 (9th Cir. 2000). Accordingly, we AFFIRM the dismissal of Malley’s
civil RICO claims.
II. Cross Appeal
On cross-appeal, Defendants challenge the district court’s refusal to award the
$237,718.50 in attorney’s fees they incurred defending this action. Defendants argue
that a fee award is authorized by Section 10.1 of the Amended Operating Agreement,
which provides that any dispute “shall be settled by arbitration,” and that “[t]he
prevailing party shall be entitled to reimbursement of attorney fees, costs, and
expenses incurred in connection with the arbitration.” The district court declined to
issue a fee award after concluding that Section 10.1 is limited to arbitration and
1 In any event, neither predicate offense is adequately pled. First, Malley
alleges that the Defendants extorted him by warning him that his distribution from
the sale of the Property would be withheld unless he waived his right to sue SJMD.
However, this warning was not “unlawful,” as the Fifth Amendment to the Operating
Agreement required all members to sign a general release in order to receive their
distributions. See Cal. Pen. Code § 519(1). Second, Malley claims that Defendant
Peruri committed wire fraud by stating that he was a licensed real estate broker in
response to usury allegations. However, the email he relies on does not reference
any usury allegations, and Peruri does not appear to have claimed authority to charge
above the legal rate of interest.

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determining that the Defendants are not a prevailing party. We review the denial of
attorney’s fees for an abuse of discretion. Berkla v. Corel Corp., 302 F.3d 909, 917
(9th Cir. 2002).
We affirm the denial of attorney’s fees on the district court’s first rationale.2
As the plain language of Section 10.1 only authorizes an award of attorney fees in
connection with arbitration, this provision is inapplicable in the event of litigation.
See Kalai v. Gray, 109 Cal. App. 4th 768, 777 (2003) (holding that a clause
authorizing an award of “attorney’s fees and costs incurred by [the] prevailing party
in connection with the Arbitration proceedings” was inapplicable to litigation).
Although Defendants sent Malley a letter demanding arbitration, and Malley instead
elected to pursue his claims in federal court, the record reflects that Defendants never
submitted a motion to compel arbitration. Additionally, Defendants fail to invoke
any other contractual or statutory provision authorizing fees in these circumstances.
Accordingly, we AFFIRM the district court’s denial of attorney’s fees.
2 The district court’s second rationale is incorrect as a matter of law. Although
there is no “prevailing party” with respect to Malley’s state law claims, which were
dismissed without prejudice and subsequently re-filed in state court, Defendants are
the prevailing party on Malley’s federal RICO claim, which has been dismissed with
prejudice. See, e.g., Miles v. California, 320 F.3d 986, 988 (9th Cir. 2003).
Nevertheless, we affirm on the district court’s first rationale standing alone.

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