Pacmar Technologies LLC, fka Martin Defense Group, LLC, et al. v. Kao, et al.

UNITED STATES DISTRICT COURT
DISTRICT OF HAWAII
PACMAR TECHNOLOGIES LLC,
FORMERLY KNOWN AS MARTIN DEFENSE
GROUP LLC,
Plaintiff,
vs.
MARTIN KAO, et al.
Defendants.
CIV. NO. 22-00283 LEK-WRP
ORDER GRANTING IN PART AND DENYING IN PART:
DEFENDANT DUKE HARTMAN’S MOTION TO DISMISS SECOND AMENDED
COMPLAINT, FILED APRIL 21, 2023 [ECF 97]; DEFENDANT/CROSS-
CLAIMANT CLIFFORD CHEN’S AND DEFENDANT/CROSS-CLAIMANT LAWRENCE
KAHELE LUM KEE’S RESPECTIVE JOINDERS IN HARTMAN’S MOTION
Before the Court is Defendant Duke Hartman’s
(“Hartman”) Motion to Dismiss Second Amended Complaint, Filed
April 21, 2023 [ECF 97] (“Motion”), filed on May 19, 2023. [Dkt.
no. 101.] Plaintiff Pacmar Technologies LLC, formerly known as
Martin Defense Group, LLC (“PacMar”), filed its memorandum in
opposition on August 17, 2023, and Hartman filed his reply on
August 25, 2023. [Dkt. nos. 106, 110.] On August 18, 2023,
Defendant/Cross-Claimant Clifford Chen (“Chen”) and
Defendant/Cross-Claimant Lawrence Kahele Lum Kee (“Lum Kee”)
filed joinders in Hartman’s Motion (“Chen Joinder” and “Lum Kee
Joinder”). [Dkt. nos. 107, 108.] Also on August 18, 2023,
Defendant/Cross-Defendant Martin Kao (“Kao”), Defendant Tiffany
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Jennifer Lam (“Lam”), and Defendant Society of Young Women
Scientists and Engineers, LLC (“SYWSE”) filed their Statement of
No Position Re: Defendant Duke Hartman’s Motion to Dismiss
Second Amended Complaint. [Dkt. no. 109.] These matters came on
for hearing on September 8, 2023 (“9/8 Hearing”). Hartman’s
Motion, Chen’s Joinder, and Lum Kee’s Joinder are hereby granted
in part and denied in part:
Counts III and IV are dismissed without prejudice in
their entirety against all defendants for lack of RICO standing.
Count X against Hartman is dismissed with prejudice.
As to Count I against Hartman, certain portions of
this claim are not alleged with requisite particularity and
therefore must be dismissed with prejudice. Specifically, the
allegations as to Hartman’s facilitation of fund transfers from
PacMar to SYWSE; the transfer of the $60,000 to fund
scholarships; Hartman’s alleged stealing of PacMar’s money to
fund SYWSE’s initial start-up costs; and Hartman’s receipt of a
pay raise are dismissed with prejudice. The remainder of Count I
against Hartman is not dismissed.
As to Count V against Hartman, certain portions of
this claim are not alleged with requisite particularity and
therefore must be dismissed with prejudice. Specifically, the
allegations as to the claims of PPP fraud stemming from
Hartman’s withholding of information; campaign finance fraud as
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it relates to Hartman’s facilitation of laundering money and
receipt of a pay raise; Hartman’s alleged breach of duty by
charging time worked on illegal schemes; and illegal transfer
fraud are dismissed with prejudice. The remainder of Count V
against Hartman is not dismissed.
Counts II, VI, VII, IX, XI, XII, and XIV against Hartman
are not dismissed.
BACKGROUND
On March 24, 2023, the Court issued an entering order
granting Hartman’s Motion to Dismiss First Amended Complaint,
Filed January 9, 2023 [ECF 68], [filed 2/9/23 (dkt. no. 73),]
and dismissing without prejudice PacMar’s First Amended
Complaint. [Minute Order, filed 3/24/23 (dkt. no. 96) (“3/24
EO”).] PacMar filed its Second Amended Complaint on April 21,
2023. [Dkt. no. 97.]
In the Second Amended Complaint, PacMar alleges
Hartman participated in an enterprise – as defined under the
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.
§ 1961 et seq. (“RICO”) – with Kao, Lam, Chen, Lum Kee, and
SYWSE. See Second Amended Complaint at ¶¶ 11–12. “[T]he purpose
of the enterprise was twofold: (i) to obtain government
benefits, contracts, and money through illegal means, the
[Paycheck Protection Program (‘PPP’)] fraud, and illegal
campaign contributions; and (ii) use [PacMar]’s money to coverup
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these crimes and obstruct investigations into these same
crimes.” [Id. at ¶ 13.]
Hartman was originally hired by Kao as PacMar’s
Director of Programs, but was promoted to PacMar’s Senior Vice
President of Strategic Partnerships. Hartman reported directly
to Kao – who was PacMar’s Chief Executive Officer (“CEO”) – and
worked closely with Chen – who was PacMar’s Chief Financial
Officer (“CFO”) from January 2019 to January 2021. See id. at
¶¶ 25–27. Hartman “was responsible for, among other things, the
overall performance of [PacMar]’s portfolio of programs,
business development, and hiring Washington D.C. political
consultants to lobby on [PacMar]’s behalf.” [Id. at ¶ 39.]
I. 	Campaign Contributions
On September 17, 2019, Kao emailed Chen and Lum Kee
regarding a political action committee named 1820 PAC. 1820 PAC
supported United States Senator Susan Collins. See id. at ¶¶ 61–
62. Between August 2019 and August 2020, Kao, Lam, Chen, and Lum
Kee made at least thirty-nine illegal political contributions to
1820 PAC worth approximately $173,968 of funds taken from
PacMar. See id. at ¶¶ 69–70. $150,000 of those contributions was
through a check sent from SYWSE to 1820 PAC. The contribution
from SYWSE was money originally transferred to SYWSE from
PacMar. See id. ¶¶ 80–83. On February 3, 2020, a complaint was
filed with the Federal Election Commission (“FEC”), see id. at
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¶ 84, against SYWSE, Lam, and “‘other persons who created and
operated SYWSE, and made contributions to 1820 PAC in the name
of SYWSE,’” [id. at ¶ 85 (brackets omitted)].
SYWSE was created on November 26, 2019 with Lam named
as its registered agent and manager. 1 See id. at ¶ 76. SYWSE was
created “by Kao, Tiffany Lam, Chen, and Lum Kee for the sole
purpose of making the illegal campaign donation to 1820 PAC.”
[Id. at ¶ 78.] Hartman was allegedly “enlisted by Kao, Chen, and
Lum Kee to direct and operate the SYWSE in its efforts to
coverup the SYWSE’s illegal campaign donations[.]” [Id. at
¶ 88.] Federal criminal charges were brought against Kao, Chen,
and Lum Kee, and Kao pled guilty to the charges against him. See
id. at ¶¶ 91–92.
II. 	The Coverup of SYWSE’s Campaign Contributions
PacMar alleges that around February 5, 2020, Kao,
Chen, Lum Kee, and Hartman planned to coverup SYWSE’s campaign
contributions “by creating a scholarship program whereby the
enterprise took [PacMar]’s money, laundered it through transfers
to Kao, Tiffany Lam, and eventually to SYWSE, before donating
the laundered funds to universities to create a façade of
legitimacy for SYWSE that could be used to deflect
1 SYWSE’s articles of organization named “Jennifer Lam” as
its registered agent and manager, which PacMar alleges was an
alias Lam used. See Second Amended Complaint at ¶ 76.
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investigators’ attention and scrutiny.” [Id. at ¶ 93.] Hartman
was responsible for contacting universities to offer
scholarships. [Id. at ¶ 99.] Hartman stated in a February 28,
2020 email that he committed at least $155,000 to twelve
universities. [Id. at ¶ 100.] Subsequently, Hartman made
additional commitments, making the total commitment around
$185,000. [Id. at ¶ 101.] “Between March and June 2020, Hartman
oversaw and directed the payment of at least $60,000 for these
‘scholarships’ . . . .” [Id. at ¶ 103.]
PacMar alleges that, “in an email sent on February 20,
2020 between Kao, Hartman, and third-party political consultants
hired by Kao, Kao admitted that the 1820 PAC donation was a
‘screwup’ and instruct[ed] Hartman to ‘do EVERYTHING we can to
now fix this.’” [Id. at ¶ 105 (emphasis in original).] “On
March 25, 2020, Kao, Hartman, Chen, and Lum Kee sent each other
emails showing that [they] expressly recognized the purpose of
the coverup and their intention to obstruct justice through this
plan.” [Id. at ¶ 106.] The March 25, 2020 emails included an
email from an attorney representing SYWSE – Bill Canfield, Esq.
(“Canfield”) – to Kao and Hartman, which contained “a draft
letter that would ‘explain the purpose of [SYWSE] in response to
the FEC and that there is a factual basis for asserting that
[SYWSE] was not formed for the purpose of making that
contribution.’” [Id. at ¶ 107 (some alterations and brackets
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omitted).] PacMar states that “[t]he phrase ‘that contribution’
– as used by Bill Canfield in the March 25, 2020 emails to Kao,
Hartman, Chen, and Lum Kee – referred to the $150,000 donation
made by SYWSE to 1820 PAC using [PacMar]’s money that was the
subject of the FEC Complaint and federal investigation.” [Id. at
¶ 108.]
“After Kao, Chen, and Hartman all made edits to this
letter, Kao emailed Chen, Lum Kee, and Hartman the following
description of the scholarships and their intended recipients
that formed the so-called legitimate purpose of SYWSE: ‘Whatever
. . . just a pack of bitches getting free $.’” [Id. at ¶ 110.]
PacMar further alleges “Kao, Chen, Lum Kee, and Hartman all
understood and knew that the SYWSE scholarship program was
intended to impede and obstruct the investigation into the
illegal campaign contributions previously made by the
enterprise.” [Id. at ¶ 113.] Because SYWSE did not possess its
own funds, “Kao, Chen, Lum Kee, and Hartman stole [PacMar’s]
money to pay Canfield’s legal bills in furtherance of the
obstructionist scheme.” [Id. at ¶ 114.]
On February 26, 2020, Hartman emailed PacMar employees
with instructions regarding how the scholarship donations were
to be made, including instructions that the donations must be
sent by SYWSE. See id. at ¶¶ 115–16. Hartman directed and
oversaw SYWSE’s scholarship program and the public relations
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plan for the scholarship program. See id. at ¶ 118. Hartman
wrote in a March 30, 2020 email that the public relations plan
should not reference Kao, Lam, or PacMar. See id. at ¶ 121.
PacMar alleges that “[a]t least $60,000 paid out by SYWSE to
fund these scholarships was money that the enterprise stole from
[PacMar].” [Id. at ¶ 126.] The $60,000 was first transferred
from PacMar to Kao and/or Lam, then transferred to SYSWE, then
finally transferred to the universities as scholarship
donations. Hartman, along with others, allegedly helped
facilitate the money transfers, although the physical act of
transferring the money was performed by Chen and Lum Kee. See
id. at ¶¶ 127–28. For instance, on April 14, 2020, Hartman
emailed Lum Kee stating “that they need to ‘go . . . to Martin
Kao for funding’ of the scholarships.” [Id. at ¶ 136 (brackets
omitted) (ellipsis in original).]
III. The PPP Scheme
PacMar alleges that, beginning in March 2020, Kao, Lum
Kee, and Chen “conspired to commit fraud against numerous
financial institutions through the PPP loan program,” [id. at
¶ 151,] which was created through the Coronavirus Aid, Relief,
and Economic Security Act (“CARES Act”), see id. at ¶ 150. Kao,
Chen, and Lum Kee allegedly completed and submitted PPP loan
applications containing false information to obtain PPP loans
for more money than they would have otherwise been able to
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obtain had correct information been used. See id. at ¶¶ 152–53.
The enterprise applied for three PPP loans and was approved for
two of the PPP loans for a total amount of $12,841,490. See id.
at ¶ 187.
Hartman allegedly knew about the PPP loans because he
assisted Kao, Chen, and Lum Kee in the scheme. See id. at ¶ 219.
On April 1, 2020, which was two days before the first PPP loan
application was sent, Hartman emailed Kao asking why a former
employee was still being paid through PacMar’s payroll, and “Kao
responded that it did not matter because they will ‘recover most
of it via the stimulus relief.’” [Id. at ¶ 221.] In April and
May 2020, Hartman sent emails to Kao, Chen, and Lum Kee
regarding PPP loan information and explaining changes to the PPP
loan program. See id. at ¶¶ 222–23. In a March 26, 2020 email,
Hartman told the Chief Operating Officer (“COO”) to “‘be
consistent with [Kao]’s message that we are bracing for “severe
impacts” to our businesses,’ even though Hartman recognized in
the same email that there were no ‘severe impacts’ to [PacMar]’s
business.” [Id. at ¶ 227 (brackets omitted).] Hartman’s email
was a response to “the COO’s email to a third-party stating that
[PacMar]’s business had ‘seen little to no impact’ or loss due
to the COVID pandemic.” [Id. at ¶ 228.]
PacMar also alleges “Hartman was tasked with opening
new offices in various cities to increase the number of [PacMar]
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employees to match the fraudulent figures stated in the PPP loan
applications submitted by Kao, Chen, and Lum Kee.” [Id. at
¶ 230.] Hartman allegedly signed leases for new offices in South
Carolina and Maine to justify the information submitted for the
PPP loan applications. See id. at ¶¶ 232–33. PacMar further
states that Hartman “masterminded a fraudulent PPP scheme
involving the immediate signing bonuses of $121,298 . . . paid
by [PacMar] to four (4) prospective employees.” [Id. at ¶ 235.]
According to PacMar, Hartman “fraudulently and intentionally
mischaracterize[d] these bonus payments as vacation payments in
submissions to the PPP lenders in order to illegally charge
those expenses against the PPP loan proceeds.” [Id. at ¶ 236.]
The signing bonuses were paid in June 2020, at Hartman’s
direction. See id. at ¶ 240. PacMar states it was damaged
because, once the signing bonus payments were made, “the
employees were told not to come to work until the ‘vacation’
time period was over.” [Id. at ¶ 242.]
PacMar alleges its records show that, on March 23,
2020, Hartman was approved for a $20,000 annual pay increase.
See id. at ¶ 253. Approximately one week later, Hartman also
received a title promotion. In August 2020, after PacMar
received the PPP loans, Hartman received another title
promotion. See id. at ¶¶ 254, 256.
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IV. 	Legal Fees and Expenses
PacMar states that, on February 19, 2021, it agreed to
pay a limited advance of $15,000 for legal fees and expenses to
a law firm on behalf of Hartman. [Id. at ¶ 299.] The payment was
subject to Hartman’s representations and warranties in a
February 24, 2021 letter to PacMar requesting the advance. See
id. at ¶ 300. In the letter, Hartman stated:
I have at all times acted in good faith, without
active or deliberate dishonesty, and in a manner
I reasonably believed to be in or not opposed to
the best interests of [PacMar] . . . I did not
receive any improper personal benefit in money,
property, or services as a result of the acts or
omissions alleged.
[Id. at ¶ 301 (ellipsis in Second Amended Complaint).] PacMar
states Hartman agreed to repay the advance if it was determined
that Hartman was not eligible to receive indemnification. See
id. at ¶ 303.
V. 	Claims Alleged Against Hartman
PacMar alleges the following claims against Hartman:
(1) a campaign contribution RICO claim pursuant to 18 U.S.C.
§ 1962(c) (“Count I”); (2) an 18 U.S.C. § 1962(d) claim alleging
a conspiracy to commit the campaign contribution RICO violation
(“Count II”); (3) a PPP loan fraud RICO claim pursuant to
§ 1962(c) (“Count III”); (4) a § 1962(d) claim alleging a
conspiracy to commit the PPP loan fraud RICO (“Count IV”); (5) a
fraud claim (“Count V”); (6) a civil conspiracy claim
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(“Count VI”); (7) a breach of fiduciary duty claim
(“Count VIII”); (8) a conversion claim (“Count IX”); (9) an
embezzlement claim (“Count X”); (10) an unjust enrichment claim
(“Count XI”); (11) a gross negligence claim (“Count XII”); and
(12) a breach of contract claim (“Count XIV”).
In Hartman’s Motion, he argues the RICO claims against
him should be dismissed pursuant to Fed. R. Civ. P. 9(b) and
12(b)(6) and, since those claims should be dismissed, the Court
should decline to exercise supplemental jurisdiction over
PacMar’s state law claims against him. See Motion at 2.
DISCUSSION
I. 	RICO Standing
Hartman argues PacMar has not sufficiently alleged
RICO standing regarding its RICO claims as to the campaign
contributions and the PPP scheme. See Motion, Mem. in Supp. at
6-7. The Court concludes that PacMar has sufficiently alleged
RICO standing as to the campaign contribution claims against
Hartman (Counts I and II), but not as to the PPP scheme claims
against any defendant (Counts III and IV).
“The Racketeer Influenced and Corrupt Organizations
Act (RICO or Act), 18 U.S.C. §§ 1961–1968, provides a private
right of action for treble damages to ‘[a]ny person injured in
his business or property by reason of a violation’ of the Act’s
criminal prohibitions.” Bridge v. Phoenix Bond & Indem. Co., 553
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U.S. 639, 641 (2008) (alteration in Bridge) (quoting 18 U.S.C.
§ 1964(c)).
Under 18 U.S.C. § 1962(c),
[i]t shall be unlawful for any person employed by
or associated with any enterprise engaged in, or
the activities of which affect, interstate or
foreign commerce, to conduct or participate,
directly or indirectly, in the conduct of such
enterprise’s affairs through a pattern of
racketeering activity or collection of unlawful
debt.
“Broadly speaking, there are two parts to a civil RICO claim.”
Painters & Allied Trades Dist. Council 82 Health Care Fund v.
Takeda Pharms. Co., 943 F.3d 1243, 1248 (9th Cir. 2019)
(“Painters”). There is “[t]he civil RICO violation . . . defined
under 18 U.S.C. § 1962,” and then there is “‘RICO standing’
. . . defined under 18 U.S.C. § 1964(c).” Id. The first part
“sets out four elements: a defendant must participate in (1) the
conduct of (2) an enterprise that affects interstate commerce
(3) through a pattern (4) of racketeering activity or collection
of unlawful debt.” Eclectic Props. E., LLC v. Marcus & Millichap
Co., 751 F.3d 990, 997 (9th Cir. 2014) (citing 18 U.S.C.
§ 1962(c)). The second part – RICO standing – requires that “a
plaintiff must show:(1) that his alleged harm qualifies as
injury to his business or property; and (2) that his harm was
‘by reason of’ the RICO violation.” Painters, 943 F.3d at 1248
(citation and some internal quotation marks omitted).
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A plaintiff alleging injury to property must
sufficiently plead a “concrete financial loss.” Canyon Cnty. v.
Syngenta Seeds, Inc., 519 F.3d 969, 975 (9th Cir. 2008)
(quotation marks and citation omitted). “Financial loss alone,
however, is insufficient. ‘Without a harm to a specific business
or property interest — a categorical inquiry typically
determined by reference to state law — there is no injury to
business or property within the meaning of RICO.’” Id. (quoting
Diaz v. Gates, 420 F.3d 897, 900 (9th Cir. 2005) (en banc),
cert. denied, 546 U.S. 1131, 126 S. Ct. 1069, 163 L. Ed. 2d 928
(2006)). “[S]peculative injuries do not serve to confer standing
under RICO, unless they become concrete and actual.” Steele v.
Hosp. Corp. of Am., 36 F.3d 69, 71 (9th Cir. 1994) (citations
omitted).
Additionally, RICO standing has a causation
requirement. Specifically,
“[a] plaintiff must show that the defendant’s
RICO violation was not only a ‘but for’ cause of
his injury, but that it was a proximate cause as
well.” Oki Semiconductor Co. v. Wells Fargo Bank,
Nat. Ass’n, 298 F.3d 768, 773 (9th Cir. 2002)
(citing Holmes v. Sec. Inv’r Prot. Corp., 503
U.S. 258, 268–69, 112 S. Ct. 1311, 117 L. Ed. 2d
532 (1992)). “Some ‘direct relationship’ between
the injury asserted and the injurious conduct is
necessary.” Oki Semiconductor Co., 298 F.3d at
773 (quoting Holmes, 503 U.S. at 269, 112 S. Ct.
1311). “To establish proximate cause, plaintiffs
must show that their injury flows directly from
the defendants’ commission of the predicate
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acts.” Pedrina v. Chun, 906 F. Supp. 1377, 1415
(D. Haw. 1995) (citation omitted).
Ryan v. Salisbury, 382 F. Supp. 3d 1031, 1056 (D. Hawai`i 2019)
(alteration in Ryan).
A. 	PPP Scheme: Counts III and IV
In Count III, PacMar alleges a RICO claim against
Defendants Kao, Chen, Lum Kee and Hartman for the role they
purportedly played in covering up false information to
legitimatize the PPP loans. See, e.g., Second Amended Complaint
at ¶¶ 368–76. PacMar further alleges:
As a direct and proximate result of the
Count III Defendants’[ 2 ] racketeering activities
and violations of 18 U.S.C. § 1962(c), PacMar has
been injured in its business and property in
amounts to be proven at trial including but not
limited to: (i) $602,000 of [PacMar’s] money to
cancel various contracts the enterprise caused
[PacMar] to enter related to the Maine office and
to justify the fraudulent PPP applications;
(ii) $1,250,000 of [PacMar’s] money spent on the
South Carolina office and to justify the
fraudulent PPP applications; (iii) $121,298 (plus
taxes and other amounts) [PacMar] paid for
signing bonuses to four (4) employees in or
around June 2020 as a result of Hartman’s
fraudulent scheme to further defraud the PPP
lenders by intentionally mischaracterizing the
amounts as vacation payments; and
(iv) $201,249.60 in pay raises the enterprise
caused [PacMar] to give to Hartman, Chen, and Lum
Kee as rewards for their loyalty to the
enterprise.
2 Kao, Chen, Lum Kee, and Hartman are the “Count III
Defendants.” [Second Amended Complaint at ¶ 362.]
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[Id. at ¶ 380.] Hartman argues these amounts are not concrete
financial losses to PacMar’s business or property interest
because they stem from the PPP money. See Motion, Mem. in Supp.
at 9–10. The Court agrees in part and disagrees in part.
PacMar received $12,841,490 in PPP loans. [Second
Amended Complaint at ¶ 187.] When the Second Amended Complaint
was filed, the United States government had seized $8,693,986.72
from PacMar’s accounts. [Id. at ¶ 190.] The Small Business
Administration (“SBA”) informed PacMar “that outstanding PPP
balances, which may include interest, have been ‘referred to
Treasury for collection.’” [Id. at ¶ 192.] PacMar alleges it has
been injured for a total of approximately $2,174,548 in relation
to the PPP scheme. See id. at ¶ 380. For purposes of the instant
Motion, this Court accepts as true PacMar’s allegations
regarding the amount of its PPP loans and the amount seized. See
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (“Although for the
purposes of a motion to dismiss we must take all of the factual
allegations in the complaint as true, we are not bound to accept
as true a legal conclusion couched as a factual allegation.”
(citation and internal quotation marks omitted)).
Based on the allegations in the Second Amended
Complaint, $8,693,986.72 has been seized of the $12,841,490
received in PPP loans, leaving approximately $4,147,504 in PPP
loan funds that have not been seized. In other words, at the
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time that the Second Amended Complaint was filed, PacMar had
more money in its account, at least on paper, than it would have
otherwise had without the PPP loans. Although PacMar alleges the
SBA referred the outstanding balance to the Department of
Treasury for collection, PacMar does not allege that the
outstanding balance has been collected. The injuries that PacMar
is alleged to have sustained after the PPP loans were received
are speculative, and, thus, they “do not serve to confer
standing under RICO, unless they become concrete and actual.”
See Steele, 36 F.3d at 71 (citations omitted). These injuries
consist of all damages alleged in Count II aside from the pay
raises: the $602,000 spent to cancel contracts related to the
Maine office; $1,250,000 spent on the South Carolina office; and
$121,298 (plus taxes and other amounts) paid for signing bonuses
to four employees around June 2020. [Amended Complaint at
¶ 380.] These injuries occurred after the PPP loans were
received, are speculative, and fail to confer standing. See
Steele, 36 F.3d at 71.
However, PacMar alleged it was injured by employee pay
raises before the PPP loans were issued. Of the $2,174,548 of
alleged damages based on the PPP scheme, $101,249.60 in damages
from the first round of pay raises are alleged to have occurred
before receipt of PPP funds. See Second Amended Complaint at
¶¶ 245-46, 248-49, 253, 372, 380. The Court therefore rejects
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Hartman’s argument that Count III should be dismissed for lack
of concrete injury stemming from the PPP scheme as to the
$101,249.60 in damages from the first round of pay raises.
To confer standing, the defendants’ unlawful conduct
must be the “but for” and proximate cause of the injury. See
Harmoni Int’l Spice, Inc. v. Hume, 914 F.3d 648, 651 (9th Cir.
2019). Proximate cause requires “some direct relation between
the injury asserted and the injurious conduct alleged.” Holmes,
503 U.S. at 268. The injurious conduct alleged in relation to
the PPP scheme is the fraudulent submission of applications for
PPP loans. See Second Amended Complaint at ¶¶ 368-71. The March
and early April 2020 pay raise damages, however, are not
directly linked to the submission of fraudulent PPP loan
applications. First, the pay raises were alleged not just in
connection to the PPP scheme, but also as rewards for the
campaign contribution scheme, thus making them appear less
directly tied to the PPP scheme. See id. at ¶¶ 351, 354. Second,
Chen and Lum Kee each received a second raise after PacMar
received the PPP funds, making this second round of raises
(rather than the first round of raises) appear more likely to be
a reward for the PPP scheme. [Id. at ¶¶ 246, 249.] The
relationship between the unlawful conduct alleged in relation to
the PPP scheme and the first round of pay raises is “too
attenuated to support a finding of proximate cause.” Harmoni,
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914 F.3d at 651. PacMar has not alleged factual content that
would allow this court to draw the reasonable inference that the
pay raises occurring before April 17, 2020 were the direct
result of fraudulent PPP applications. See Iqbal, 556 U.S. at
678 (“To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face. A claim has facial
plausibility when the plaintiff pleads factual content that
allow the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” (citations and
internal quotation marks omitted)). Rather, more than one
possible cause for the pay raises exists. Count III must
therefore be dismissed for lack of standing as to all of the
Count III defendants (Kao, Chen, Lum Kee and Hartman).
Because PacMar fails to demonstrate standing to pursue
a RICO claim under § 1962(c) in Count III, PacMar’s conspiracy
claim under § 1962(d) in Count IV also fails. See Howard v. Am.
Online Inc., 208 F.3d 741, 751 (9th Cir. 2000) (“Plaintiffs
cannot claim that a conspiracy to violate RICO existed if they
do not adequately plead a substantive violation of RICO.”).
Counts III and IV are therefore dismissed without prejudice
against all defendants.
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B. 	Campaign Contributions: Counts I and II
Hartman contends that PacMar did not suffer a concrete
financial loss, and none of the injuries alleged in Count I are
traceable to Hartman, because the predicate acts alleged in
relation to the coverup scheme occurred after the campaign
contributions were made. [Motion, Mem. in Supp. at 7.] Hartman’s
arguments fail.
As to injury for purposes of standing, Hartman is
mistaken. PacMar need not allege it was injured by all of the
predicate acts alleged, but rather by a pattern of racketeering
activity.
In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479
(1985), the Supreme Court stated that the
plaintiff is required to plead “compensable
injury [consisting of] harm caused by predicate
acts sufficiently related to constitute a
pattern.” Id. at 497. The Seventh Circuit has
explained that, after establishing that predicate
acts are sufficiently related to constitute a
pattern of racketeering activity, “a plaintiff
need not demonstrate injury to himself from each
and every predicate act making up the RICO
claim.” Corley v. Rosewood Care Ctr., 388 F.3d
990, 1004 (7th Cir. 2004) (discussing Marshall &
Ilsley Trust Co. v. Pate, 819 F.2d 806, 809–10
(7th Cir. 1987)). Instead, the plaintiff must
prove only “an injury directly resulting from
some or all of the activities comprising the
violation.” Marshall, 819 F.2d at 809. See also
Deppe v. Trippe, 863 F.2d 1356, 1366 (7th Cir.
1988) (“no requirement exists that the plaintiff
must suffer an injury from two or more predicate
acts, or from all of the predicate acts . . .
Thus, a RICO verdict can be sustained when a
pattern of racketeering acts existed, but when
only one act caused injury.”); Kearny v. Hudson
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Meadows Urban Renewal Corp., 829 F.2d 1263, 1268
(3d Cir. 1987) (finding that the statute required
only injury from “any predicate act,” not all,
and stating that a contrary holding would mean
that, “[f]or example, if an organized crime group
were to operate a protection racket, extorting
money from each merchant in a community, then
each merchant’s injury would be separate, and
therefore, . . . none could recover”); Edgenet,
Inc. v. GS1, AISBL, 742 F. Supp. 2d 997, 1015 n.6
(E.D. Wis. 2010) (noting that the Supreme Court
did not hold otherwise in Hemi Group); Gregory P.
Joseph, Civil RICO: A Definitive Guide 58–59 (3d
ed. 2010) (“As long as the pattern of
racketeering activity has caused harm to the
plaintiff’s business or property, the plaintiff
has RICO standing. The plaintiff is not obliged
to plead or prove that it has been injured by
multiple predicate acts, as long []as it has been
injured by at least one predicate act.”).
Just Film, Inc. v. Merch. Servs., Inc., No. C 10-1993 CW, 2012
WL 6087210, at *12 (N.D. Cal. Dec. 6, 2012) (alterations in Just
Film); see also In re JUUL Labs, Inc., Mktg., Sales Pracs., &
Prods. Liab. Litig., 533 F. Supp. 3d 858, 871–72 (N.D. Cal.
2021) (“Plaintiffs are not required to show that each RICO
defendant including Bowen personally committed at least two acts
of mail or wire fraud to establish a pattern of
racketeering. . . . [I]t is only necessary that plaintiffs
allege that each defendant knowingly participated in the scheme
to defraud, with the requisite intent, and that some member or
members of the Enterprise commit at least two acts of mail or
wire fraud.” (emphasis in original) (citation omitted)).
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Here, PacMar alleges a pattern of racketeering
activity based on the campaign contributions, and the
scholarship scheme intended to cover up prior illegal campaign
contributions and to make further illegal campaign
contributions. [Second Amended Complaint at ¶¶ 61-114, 140.]
PacMar sufficiently alleges it has been injured by the
campaign contribution scheme. PacMar alleges that, in September
2019, SYWSE was incorporated and, in November or December 2019,
Kao, Lam, Chen, and Lum Kee stole $150,000 from PacMar and
transferred the money to SYWSE, which used the money to make
contributions to 1820 PAC. See id. at ¶ 332. Kao, Lam, Chen, and
Lum Kee allegedly made or arranged at least thirty-nine
political contributions using at least $173,968 of PacMar’s
funds, all between May 2019 and December 2019. See id. at ¶ 335.
Although it is unclear if the $150,000 and $173,968 campaign
donations are separate donation amounts, or if the $150,000
donation is part of the $173,968, PacMar alleges those amounts
were taken from its own funds to make illegal campaign
contributions. See, e.g., id. at ¶¶ 333, 335. PacMar has
therefore sufficiently alleged that these amounts are concrete
financial losses.
Further, PacMar states the scholarship scheme was a
continuation of the campaign contribution scheme because the
former was meant to cover up the latter. Specifically, PacMar
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alleges that, to give legitimacy to SYWSE’s existence – i.e.,
that SYWSE was not created solely to make campaign contributions
to 1820 PAC – Kao, Chen, Lum Kee, Hartman, and Lam planned to
cover up the purported illegal scheme behind SYSWE by making
scholarship donations to numerous universities. See id. at
¶¶ 336–43. Between March 2020 and June 2020, $60,000 was
transferred from PacMar to SYWSE, and SYWSE used the $60,000 to
fund scholarships at universities. See id. at ¶¶ 344-45.
PacMar adequately alleges concrete financial injury
sufficient for standing stemming from the campaign contribution
coverup scheme. PacMar alleges that some portion of the $60,000
used to fund scholarships was derived directly from PacMar’s
funds - not PPP funds. The Second Amended Complaint alleges: “At
least $60,000 paid out by SYWSE to fund these scholarships was
money that the enterprise stole from [PacMar].” Id. at ¶ 126,
see also id. at ¶ 125. The Second Amended Complaint alleges some
portion of the $60,000 of scholarship money was used in March to
fund scholarships, before the PPP funds arrived in PacMar’s
account in April 2020. See Second Amended Complaint at ¶ 137
(“The SYWSE started paying out scholarships in or around March
2020[.]”]; ¶ 166 (“on April 17, 2020, the loan was funded and
[Central Pacific Bank] deposited $10,000,000 into [PacMar]’s
bank account[.]”). While it is unclear what portion of the
$60,000 was derived directly from PacMar’s funds, rather than
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being derived from PPP loan money, 3 the allegations are
sufficient to plead a plausible basis that would support RICO
standing. A portion of the $60,000 was used in March 2020 to
fund scholarships, and was derived from PacMar’s funds, thereby
resulting in concrete financial injury to PacMar. See
Chattanooga Foundry & Pipe Works v. City of Atlanta, 203 U.S.
390, 396 (1906) (“A person whose property is diminished by a
payment of money wrongfully induced is injured in his
property.”).
As to Hartman’s proximate cause argument, PacMar need
not prove Hartman directly caused PacMar injury through a
predicate act; rather, “the inquiry must include the harm caused
by all of the predicate acts, regardless of which Defendants
actually committed, or agreed to commit, the alleged acts.”
Pedrina v. Chun, 906 F. Supp. 1377, 1414 (D. Hawai`i 1995). 4 The
Ninth Circuit has formulated a non-exhaustive test to evaluate
proximate cause:
3 The Second Amended Complaint alleges that “the majority
of” PacMar’s money used to pay for the scholarships “was made in
May 2020 or later, which was after [PacMar] had received and
‘washed’ the PPP funds.” [Second Amended Complaint at ¶ 137.]
PacMar also alleges that “[a] total of at least $60,000 was paid
out by SYWSE using [PacMar]’s funds through this bogus
scholarship program and with the ‘washed’ PPP money.” [Id. at
¶ 139 (emphasis added).] It therefore is unclear what portion of
the $60,000 is not derived from PPP funds.
4 Pedrina, 906 F. Supp. 1337, was affirmed on appeal. 97
F.3d 1296 (9th Cir. 1996).
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(1) whether there are more direct victims of the
alleged wrongful conduct who can be counted on to
vindicate the law as private attorneys general;
(2) whether it will be difficult to ascertain the
amount of the plaintiff’s damages attributable to
defendant’s wrongful conduct; and (3) whether the
courts will have to adopt complicated rules
apportioning damages to obviate the risk of
multiple recoveries.
Mendoza v. Zirkle Fruit Co., 301 F.3d 1163, 1169 (9th Cir. 2002)
(citation omitted). As to the coverup scheme, all three factors
are met: PacMar is the direct victim of the predicate acts
alleged, including the $60,000 allegedly stolen to fund
scholarships. The amount stolen from PacMar is not difficult to
ascertain – it is funds stolen directly from PacMar. There is no
risk of multiple recoveries. PacMar has therefore pled a
plausible basis that would support a conclusion that proximate
cause exists for the coverup scheme.
To the extent that Hartman seeks dismissal of PacMar’s
claims against him in Counts I and II based on lack of standing,
the Motion is denied.
III. Counts I and II
A. 	Alleging Fraudulent Predicate Conduct
Hartman contends PacMar fails to allege with
particularity Hartman’s fraudulent predicate conduct as to
Count I. [Motion, Mem. in Supp. at 14.] Predicate acts based on
a theory of fraudulent conduct must be pled with particularity
to comply with Rule 9(b). Fed. R. Civ. P. 9(b); see Schreiber
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Distrib. Co. v. Serv–Well Furniture Co., 806 F.2d 1393, 1400–01
(9th Cir. 1986). PacMar alleges the coverup scheme itself is a
predicate act, and alleges numerous other predicate acts that
constitute the coverup scheme. Second Amended Complaint at
¶ 341; see also id. at ¶¶ 326-48, 351. Of the predicate acts
alleged to comprise the coverup scheme, some sound in fraud and
some do not. Nonfraudulent conduct need not be pled with
particularity. See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097,
1104-05 (9th Cir. 2003). However, the fraudulent conduct alleged
must be stated with particularity.
Generally, to sufficiently plead fraud, “the pleader
must state the time, place, and specific content of the false
representations as well as the identities of the parties to the
misrepresentation.” Schreiber, 806 F.2d at 1400–01 (citations
omitted). When the fraud involves multiple defendants, the
pleader may not lump defendants together, but must
“differentiate their allegations” and “inform each defendant
separately of the allegations surrounding his alleged
participation in the fraud.” Swartz v. KPMG LLP, 476 F.3d 756,
764–65 (9th Cir. 2007) (per curiam) (quotation marks and
citation omitted). At minimum, the pleader must identify the
role each defendant had in the alleged fraudulent scheme. Id. at
765. Rule 9(b)’s requirements may be relaxed regarding matters
that are exclusively within the opposing party’s knowledge.
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Rubenstein v. Neiman Marcus Grp. LLC, 687 F. App’x 564, 567 (9th
Cir. 2017) (quoting Moore v. Kayport Package Express, Inc., 885
F.2d 531, 540 (9th Cir. 1989)). In this instance, a pleading is
sufficient under Rule 9(b) “if it identifies the circumstances
constituting fraud so that a defendant can prepare an adequate
answer from the allegations.” Id. at 568 (quoting Moore, 885
F.2d at 540).
Among the initial predicate acts alleged to make up
the coverup scheme are the fund transfers from PacMar to SYWSE
that Hartman, along with other defendants, is alleged to have
“arranged and carried out” and “facilitated and directed.”
[Second Amended Complaint at ¶¶ 128, 346.] These allegedly
fraudulent predicate acts are not pled with particularity as to
Hartman. PacMar makes broad allegations against Hartman, such as
that Hartman “co-mingled PacMar funds with those of SYWSE,” [id.
at ¶ 31], and “orchestrated and directed the payment of [PacMar]
money through various conduits designed to launder and hide the
source of the money for these scholarships,” [id. at ¶ 102].
These broad allegations are deficient. It is unclear how Hartman
directed the fund transfer from PacMar to SYWSE. The only
particular action alleged in this regard against Hartman is that
Hartman emailed Lum Kee on April 14, 2020 that “they need to go
to Martin Kao for funding of the scholarships.” [Id. at ¶ 136
(brackets, ellipsis, and internal quotation marks omitted).]
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PacMar does not allege Hartman took any other action to make
these transfers – rather, PacMar alleges Chen and Lum Kee
carried out the physical transfer of funds, [id. at ¶ 128], and
“Tiffany Lam was directly responsible for receiving these funds
from [PacMar] after they had been laundered through Kao and
herself.” [Id. at ¶ 130.]
Further, PacMar does not provide sufficient
specificity regarding the transfer of the $60,000 –
specifically, when the transfer was made. See Schreiber, 806
F.2d at 1400–01. Rule 9(b)’s pleading standard cannot be relaxed
due to PacMar’s lack of access to the information because, here,
PacMar alleges the $60,000 was stolen from PacMar itself, and
PacMar presumably has access to its own records. As such,
PacMar’s allegation of the $60,000 funds stolen from it for
scholarship donations is not alleged with specificity to comply
with Rule 9(b).
PacMar also alleges Hartman and other defendants stole
money from it to fund SYWSE’s initial start-up costs, but this
allegation, too, is not pled with particularity as to Hartman.
PacMar alleges: “Because SYWSE was a sham entity and had no
money of its own, the amounts that Kao, Tiffany Lam, Hartman,
Chen, and Lum Kee stole from [PacMar] to pay for SYWSE
administrative, incorporation, PR consultants and PR plans, and
legal costs, were predicate acts that damaged [PacMar].” [Second
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Amended Complaint at ¶ 348.] The only further detail alleged
regarding Hartman is that Hartman and others “stole [PacMar’s]
money to pay Canfield’s legal bills[.]” [Id. at ¶ 114.] This
does not satisfy Rule 9(b) because these are broad allegations
against Hartman with “no particularized supporting detail.” See
Bly-Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001).
Rule 9(b) “require[s] ‘plaintiffs to differentiate their
allegations when suing more than one defendant . . . and inform
each defendant separately of the allegations surrounding his
alleged participation in the fraud.’” Swartz, 476 F.3d at 764-65
(quoting Haskin v. R.J. Reynolds Tobacco Co., 995 F. Supp. 1437,
1439 (M.D. Fla. 1998)).
PacMar also alleges Hartman received a pay raise to
reward him for his participation in the enterprise. See Second
Amended Complaint at ¶ 351. However, Hartman is not alleged to
be responsible for the pay raise. Rather, Martin Kao recommended
Hartman for the raise, and Chen approved the raise. [Id. at
¶ 253.] Hartman is not alleged to have taken any action
regarding the pay raise. As such, Hartman’s fraudulent predicate
conduct is not pled with particularity as to the pay raise.
The only remaining predicate act alleged - aside from
the coverup scheme as a whole - is PacMar’s allegations
regarding Hartman’s direction of funds from SYWSE to the
universities. See Second Amended Complaint at ¶ 347. Here,
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PacMar does allege sufficient detail with the required
particularity as to Hartman’s direction of money from SYWSE to
scholarships. See id. at ¶¶ 103, 115-16, 136, 139, 347. These
allegations sufficiently identify Hartman’s role in the
allegedly fraudulent scheme, and inform Hartman of the
allegations surrounding his alleged participation in the fraud.
See Swartz, 476 F.3d at 764-65.
Although some of the predicate acts are not pled with
particularity under Rule 9(b), PacMar has sufficiently alleged
Hartman’s participation in the predicate acts of the coverup
scheme and directing money to scholarships. Therefore, Count I
cannot be dismissed against Hartman for failure to allege
Hartman’s participation in predicate acts under Rule 9(b). The
Motion is denied as to Count I’s allegations regarding the
alleged scholarship fraud scheme.
B. 	Specific Intent to Defraud
In the Motion, Hartman argues “specific intent to
engage in mail fraud, the underlying predicate act claimed by
PacMar, is lacking and the [Second Amended Complaint] must be
dismissed as implausible.” [Motion, Mem. in Supp. at 11.] Mail
fraud was not a predicate act alleged for Count I in relation to
Hartman. Rather, the predicate acts alleged for Count I that
involve Hartman are violations of 18 U.S.C. §§ 1503, 1952, 1956,
1957, 2314, 2315. [Second Amended Complaint at ¶¶ 341-51.]
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Hartman also argues the Second Amended Complaint does
not exclude a plausible and innocuous explanation for Hartman’s
conduct. This is not the correct standard. See Starr v. Baca,
652 F.3d 1202, 1216 (9th Cir. 2011) (“If there are two
alternative explanations, one advanced by defendant and the
other advanced by plaintiff, both of which are plausible,
plaintiff’s complaint survives a motion to dismiss under
Rule 12(b)(6). Plaintiff’s complaint may be dismissed only when
defendant’s plausible alternative explanation is so convincing
that plaintiff’s explanation is implausible.” (emphasis in
original)). The Court rejects Hartman’s arguments related to
mail fraud.
C. 	Conduct
Hartman also argues the Second Amended Complaint fails
to plead specific factual allegations demonstrating Hartman
directed the enterprise’s affairs because, rather than directing
the affairs, he reported to and was instructed by Martin Kao.
[Motion, Mem. in Supp. at 16.] Hartman notes the Amended
Complaint specifies Hartman co-mingled PacMar and SYWSE funds
“under [Kao and Lam’s] direction.” [Id. at 17 (emphasis
omitted).]
Because Counts III and IV are dismissed, Hartman’s
alleged conduct is evaluated as to the campaign finance fraud
and coverup scheme alleged in Counts I and II.
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In order to “participate, directly or indirectly,
in the conduct of such enterprise’s affairs,” one
must have some part in directing those affairs.
Of course, the word “participate” makes clear
that RICO liability is not limited to those with
primary responsibility for the enterprise’s
affairs, just as the phrase “directly or
indirectly” makes clear that RICO liability is
not limited to those with a formal position in
the enterprise, but some part in directing the
enterprise’s affairs is required.
Reves v. Ernst & Young, 507 U.S. 170, 179 (1993) (footnote
omitted). Further, the United States Supreme Court has stated
that “[a]n enterprise is ‘operated’ not just by upper management
but also by lower rung participants in the enterprise who are
under the direction of upper management.” Id. at 184.
PacMar sufficiently alleges that Hartman had some part
in directing the enterprise’s affairs regarding the campaign
contribution scheme. PacMar alleges that Hartman: was an
enterprise member who directed SYWSE and its scholarship program
to coverup the campaign finance contribution; [Second Amended
Complaint at ¶¶ 30, 88, 324;] facilitated the transfer of funds
from PacMar to SYWSE; [id. at 128;] oversaw and directed the
payment of the $60,000 for scholarships; [id. at ¶¶ 103, 118;]
and instructed employees on how to make the scholarship
donations, [id. at ¶¶ 115-16,] among other allegations. PacMar
alleged Hartman’s conduct in Counts I and II with requisite
specificity.
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D. 	Pattern
Hartman argues PacMar “fails to state plausible
allegations of either a closed-ended or open-ended criminal
activity.” [Motion, Mem. in Supp. at 18.] Hartman argues there
is no “closed-end” continuity because the fraudulent incidents
occurred in an eleven-month period, and there is no open-ended
continuity because Kao, Chen, Lum Kee were dismissed from the
company in 2021. [Id. at 18-20.]
“‘[R]acketeering activity’ is any act indictable
under several provisions of Title 18 of the
United States Code . . . .” Turner v. Cook, 362
F.3d 1219, 1229 (9th Cir. 2004) (some citations
omitted) (citing 18 U.S.C. § 1961(1)). A
“‘pattern of racketeering activity’ requires at
least two acts of racketeering activity . . . .”
18 U.S.C. § 1961(5). A “pattern” also “requires
that the predicate criminal acts be ‘related’ and
‘continuous.’” Allwaste, Inc. v. Hecht, 65 F.3d
1523, 1527 (9th Cir. 1995) (quoting H.J. Inc. v.
Northwestern Bell Telephone Co., 492 U.S. 229,
239, 109 S. Ct. 2893, 2900–01, 106 L. Ed. 2d 195
(1989)). “The element of relatedness is the
easier to define . . . .” H.J. Inc., 492 U.S. at
239, 109 S. Ct. 2893. Predicate criminal acts may
be related if they “have the same or similar
purposes, results, participants, victims, or
methods of commission, or otherwise are
interrelated by distinguishing characteristics
and are not isolated events.” Id. at 240, 109 S.
Ct. 2893 (quotation marks and citation omitted).
The element of continuity, however, is more
challenging to define.
In H.J. Inc., the Supreme Court
observed that the term “continuity” escapes
strict definition: “‘[c]ontinuity’ is both a
closed-and open-ended concept, referring
either to a closed period of repeated
conduct or to past conduct that by its
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nature projects into the future with a
threat of repetition.” [492 U.S.] at 241,
109 S. Ct. at 2902. “Closed-ended”
continuity is established by showing that
related predicate acts occurred over a
“substantial period of time.” Id. at 242,
109 S. Ct. at 2902. The Court thus noted
that “[p]redicate acts extending over a few
weeks or months and threatening no future
criminal conduct do not satisfy this
requirement,” and concluded that “Congress
was concerned in RICO with long-term
criminal conduct.” Id.
Where long-term criminal conduct cannot
be established, “open-ended” continuity may
be proved. Id. Open-ended continuity is the
threat that criminal conduct will continue
into the future. It is established by
showing either that the predicate acts
“include a specific threat of repetition
extending indefinitely into the future” or
that the predicate acts were “part of an
ongoing entity’s regular way of doing
business.” Id.
The Court warned that “the precise
methods by which relatedness and continuity
or its threat may be proved, cannot be fixed
in advance with such clarity that it will
always be apparent whether in a particular
case a ‘pattern of racketeering activity’
exists.” Id. at 243, 109 S. Ct. at 2903.
Allwaste, 65 F.3d at 1527 (some alterations in
Allwaste).
Puana v. Kealoha, 587 F. Supp. 3d 1035, 1051–52 (D. Hawai`i
2022) (alterations in Puana).
The predicate acts alleged in Count I that involve
Hartman are:
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-“The scholarship scheme was itself a RICO predicate act in
violation of 18 U.S.C. §§ 1503 and 1952.” [Second
Amended Complaint at ¶ 341.]
-“[A]ll funds used by SYWSE for these scholarships were
first transferred from [PacMar] to Kao and Tiffany
Lam, who then transferred the funds to SYWSE. These
transfers were arranged and carried out by Kao, Chen,
Lum Kee, Hartman, and Tiffany Lam. These transfers
were RICO predicate acts in violation of 18 U.S.C.
§§ 1956, 1957, 1503, 1952, 2314, and 2315.” [Id. at
¶ 346.]
-“Subsequently, and once the funds were received by SYWSE,
Kao, Chen, Lum Kee, Hartman, and Tiffany Lam arranged
and executed payment of these funds to the
universities. Tiffany Lam signed each check from the
SYWSE to each university. These transfers also
occurred between March and June 2020. Accordingly,
these transfers were additional RICO predicate acts in
violation of 18 U.S.C. §§ 1956, 1957, 1503, 1952,
2314, and 2315.” [Id. at ¶ 347.]
-“Because SYWSE was a sham entity and had no money of its
own, the amounts that Kao, Tiffany Lam, Hartman, Chen,
and Lum Kee stole from [PacMar] to pay for SYWSE
administrative, incorporation, PR consultants and PR
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plans, and legal costs, were predicate acts that
damaged [PacMar].” [Id. at ¶ 348.]
-“Kao, Chen, Lum Kee, and Hartman rewarded themselves with
increases to their annual base salary, and rewarded
Hartman with a promotion to his title, for their
participation in the enterprise and its illegal
conduct. Chen received a $100,000 annual pay increase,
Lum Kee received a $81,249.60 annual pay increase, and
Hartman received a $20,000 annual pay increase. These
raises occurred during the period between late - March
2020 and early - May 2020. These raises were
additional RICO predicate acts in violation of 18
U.S.C. §§ 2314, 2315, 1952.” [Id. at ¶ 351.]
These predicate acts sufficiently allege open-ended
continuity. See Turner, 362 F.3d at 1229 (some citations
omitted) (quoting Religious Tech. Ctr. v. Wollersheim, 971 F.2d
364, 366 (9th Cir. 1992)).
Here, Sun Savings & Loan Association v. Dierdorff, 825
F.2d 187 (9th Cir. 1987) is instructive. In that case, Daniel
Dierdorff (“Dierdorff”), the then-president of Sun Savings &
Loan Association (“Sun”), allegedly received kickbacks from
customers, which he deposited in an account under a fictitious
name. Sun brought a RICO claim against Dierdorff, based on four
predicate acts of mail fraud. The predicate acts were based on
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four letters Dierdorff sent to agencies and an auditor to
conceal his wrongdoing. The letters were mailed in April, June,
and September of 1984. Sun Savings, 825 F.2d at 189-90. The
Ninth Circuit found those four letters posed “a threat of
continuing activity because they covered up a whole series of
alleged kickbacks and receipts of favors, occurred over several
months, and in no way completed the criminal scheme.” Id. at
194. Likewise, the allegations about the scholarship scheme
involve activities that took place over a defined time and
involved a series of alleged wrongful actions that did not
complete the criminal scheme.
The Second Amended Complaint alleges “[t]he enterprise
had plans in place to transfer, launder, and give out at least
another $120,000 through the SYWSE’s scholarship plan, but those
plans were interrupted by the indictments of Kao, Chen, and Lum
Kee in the Campaign Contribution Criminal Case, and the
indictment of Kao in the PPP Criminal Case.” [Second Amended
Complaint at ¶ 140.] Hartman allegedly memorialized the scheme
in PacMar’s business strategy in September 2020. [Id. at ¶ 266.]
As in Sun Savings, the coverup appeared to be ongoing – at least
until the indictment of the defendants. Therefore, the Court
rejects Hartman’s argument regarding continuity in Count I.
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IV. 	PacMar’s State Law Claims
Hartman’s Motion is denied with respect to all of the
state law claims, with the exception of Count X. PacMar’s claim
against Hartman in Count X is dismissed, and all of PacMar’s
other state law claims against Hartman remain.
A. 	Count V (Fraud)
Hartman argues the fraud allegations are insufficient
because the reliance element of fraud is not adequately alleged
where PacMar was controlled by Defendants Kao, Chen, and Lum Kee
because PacMar cannot mislead itself. [Motion, Mem. in Supp. at
23; Reply at 11-12.] The Court rejects this argument. Hartman
fails to cite caselaw to support this proposition. Courts in
other jurisdictions have persuasively held that “where officers
and directors have disabling conflicts that give them an
interest in hiding information from a corporation’s independent
directors and stockholders, the conflicted fiduciaries’
knowledge is not imputed to the corporation for purposes of
holding those fiduciaries liable for the harm they caused to the
corporation.” Am. Int’l Grp., Inc. v. Greenberg, 965 A.2d 763,
806 (Del. Ch. 2009) (citation omitted).
1. 	Pleading Fraud with Particularity
Hartman also argues that PacMar fails to plead the
state law fraud claim against him with particularity. See
Motion, Mem. in Supp. at 23. PacMar alleges the specific
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fraudulent conduct alleged includes the PPP fraud, campaign
finance fraud, foundation fraud, illegal transfer fraud, and
personal expense fraud. See Second Amended Complaint at ¶ 394.
Hartman is not alleged to have participated in the foundation
fraud, or committed the personal expense fraud. [Id. at ¶¶ 269-
74, 306.]
As to the PPP fraud, PacMar alleges Hartman
fraudulently breached his duty to PacMar by causing PacMar to
enter into illegal PPP loan applications and by omitting
information that should have been provided to PacMar to allow
PacMar to know these acts were unlawful. [Id. at ¶ 397.] PacMar
has pled with particularly Hartman’s conduct in causing PacMar
to enter into the PPP loan applications. PacMar alleges Hartman
knew of the PPP fraud as the applications were being filed and
provides specific emails that demonstrate this knowledge. [Id.
at ¶¶ 219-22, 224-26.] PacMar also alleges Hartman provided
information to Kao, Chen, and Lum Kee about preparing the loan
applications [id. at ¶¶ 222-23], and directing PacMar’s then-
Chief Operating Officer to keep messaging consistent with what
was stated on the fraudulent PPP loan applications. [Id. at
¶¶ 227-28.] While the thrust of PacMar’s allegations against
Hartman as to the PPP fraud relate to Hartman’s actions after
the loans were received, [id. at ¶¶ 230-243], Hartman’s conduct
prior to the PPP loan submissions is alleged with particularity.
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As to the allegation of withholding information of the
PPP fraud from PacMar, PacMar appears to be alleging a claim of
fraudulent concealment. “A claim for ‘fraudulent concealment’ is
simply a type of fraud based on fraud by omission and
concealment, and not just affirmative conduct.” Ryan v.
Salisbury, CIV. NO. 18-00406 ACK-RT, 2019 WL 2121518, at *9 (D.
Hawai`i May 14, 2019) (citation and internal quotation marks
omitted). “A defendant may be liable for a ‘fraudulent
concealment’ where it (1) fails to disclose a fact that it knows
may cause the plaintiff to act; and (2) the defendant had a duty
to the plaintiff to exercise reasonable care to disclose that
fact.” Id. (brackets, quotation marks, and citation omitted).
PacMar has sufficiently alleged that Hartman owed a duty to
PacMar. See Second Amended Complaint at ¶¶ 39, 41-43, 388-90.
PacMar also alleged Hartman failed to disclose facts to PacMar
that Hartman knew may cause PacMar to act. [Id. at ¶¶ 390, 392,
397, 404-09, 418.] However, these allegations are not pled with
particularity. PacMar alleges Hartman and other defendants knew
their conduct was unlawful and “intentionally withheld
information from [PacMar], its auditors, employees, attorneys,
and partners that would have revealed and stopped the harmful
actions that Kao, Chen, Lum Kee and Hartman induced [PacMar] to
take.” [Id. at ¶ 404.] PacMar then alleges PacMar’s owner,
through its representative, Steven Loui, requested the PPP loan
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applications and related information around July 2020, but “Kao,
Chen, Lum Kee and Hartman caused [PacMar] to refuse this
request,” [id. at ¶ 405,] and that PacMar’s “former COO was also
intentionally denied information and misled by Kao, Chen, Lum
Kee and Hartman about [PacMar]’s PPP loans in emails that
occurred in and around March 2020,” [id. at ¶ 409]. PacMar fails
to specify what information Hartman denied, and how Hartman
mislead the COO. PacMar also fails to specify how Hartman
refused Steven Loui’s request. PacMar’s allegations lump Hartman
in with other defendants and do not specify the actions Hartman
specifically took, in contravention of Rule 9(b). See Bly-Magee,
236 F.3d at 1018-19. PacMar’s claim of PPP fraud stemming from
Hartman’s withholding of information fails to comply with Rule
9(b).
As to the campaign finance fraud, PacMar alleges
Hartman fraudulently breached his duty to PacMar by causing
PacMar to participate in the scholarship coverup scheme and to
obstruct the investigation of the 1820 PAC donation. [Id. at
¶ 398.] PacMar alleges Hartman further breached his duty to
PacMar by “overseeing and directing the scheme to use [PacMar]’s
money, laundered through the SYWSE, as donations to the
universities in order to coverup the prior illegal conduct and
campaign contributions.” [Id. at ¶ 401.] Insufficiently alleged
coverup scheme allegations – in particular Hartman’s alleged
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facilitation of laundering money and receipt of a pay raise -
are discussed supra Discussion § III.A. However, as noted supra,
some of the fraud allegations as to the coverup scheme are
sufficiently pled.
PacMar further alleges that Hartman breached his duty
“by charging time [he] worked on these illegal schemes as
‘overhead,’ which were not reimbursable amounts” and that this
practice damaged PacMar. [Id. at ¶ 399.] However, PacMar fails
to provide any supporting detail beyond this broad allegation,
which is insufficient to comply with Rule 9(b).
As to the illegal transfer fraud, PacMar alleges
Hartman attended a meeting with PacMar’s security officer Pam
Berry and others, to learn how to transfer classified government
information to a new entity. [Id. at ¶¶ 284-85.] At this
meeting, Hartman allegedly “raised the option of ‘novating’
[PacMar]’s contacts to [Advanced Unmanned Aerospace LLC] without
any consideration given to [PacMar] in return,” which was not in
PacMar’s best interests. [Id. at ¶¶ 286-87.] These allegations
are insufficient to allege fraud against Hartman. See Fisher v.
Grove Farm Co., 123 Hawai`i 82, 103, 230 P.3d 382, 403 (Ct. App.
2009) (“[T]he elements of fraud are: 1) false representations
made by the defendant, 2) with knowledge of their falsity (or
without knowledge of their truth or falsity), 3) in
contemplation of plaintiff’s reliance upon them, and
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4) plaintiff’s detrimental reliance.” (citing Hawaii’s Thousand
Friends v. Anderson, 70 Haw. 276, 286, 768 P.2d 1293, 1301
(1989))).
Because some of the fraud allegations comply with
Rule 9(b), Hartman’s Motion is denied as to Count V on the
claims involving Hartman’s conduct prior to the PPP loan
submission, and the campaign finance fraud as it relates to the
scholarship scheme. Hartman’s motion is granted as to the claims
of PPP fraud stemming from Hartman’s withholding of information,
campaign finance fraud as it related to Hartman’s facilitation
of laundering money and receipt of a pay raise, Hartman’s
alleged breach of duty by charging time worked on illegal
schemes as overhead, and illegal transfer fraud.
B. 	Count VI (Civil Conspiracy)
Hartman also argues he as an agent cannot be
personally liable for acts taken in his official capacity under
the intra-corporate conspiracy doctrine, and that he cannot
conspire with his corporation. See Motion, Mem. in Supp. at 24
(citing Armstrong v. Reynolds, 22 F.4th 1058, 1085 (9th Cir.
2022); Greys Ave. Partners, LLC v. Theyers, 484 F. Supp. 3d 895,
911 (D. Hawai`i 2020)). Hartman fails to cite to any Hawai`i
caselaw supporting these propositions. Armstrong discusses
Nevada’s intercorporate conspiracy doctrine, and therefore is
unavailing. See Armstrong, 22 F.4th at 1085 (citing Collins v.
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Union Fed. Sav. & Loan Ass’n, 99 Nev. 284, 303, 662 P.2d 610
(1983)). Greys Avenue rejected the proposition that an officer
of a corporation cannot conspire with that corporation. The
district court in Greys Avenue clarified that, under Hawai`i
law, “‘when officers of a corporation act for their own personal
purposes, they become independent actors, who can conspire with
the corporation.’” Greys Ave., 484 F. Supp. 3d at 911 (quoting
Robert’s Haw. Sch. Bus, Inc. v. Laupahoehoe Transp. Co., 91
Hawai`i 224, 253, 982 P.2d 853, 882 (1999)). 5 PacMar sufficiently
alleges Hartman acted for personal purposes. See, e.g., Second
Amended Complaint at ¶¶ 244, 251-53. Hartman’s Motion is denied
as to Count VI.
C. 	Count VIII (Breach of Fiduciary Duties)
Hartman argues PacMar lumps him together with the
other defendants, and Hartman argues he cannot be liable for
actions of other defendants. See Motion, Mem. in Supp. at 25. To
state a breach of fiduciary duty claim, Plaintiff must plausibly
allege: “1) the existence of a fiduciary duty; 2) a breach of
the fiduciary duty; and 3) resulting damage.” See Aquilina v.
Certain Underwriters at Lloyd’s Syndicate #2003, 407 F. Supp. 3d
5 Robert’s Hawaii has been superseded by statute on other
grounds. See, e.g., Haw. Med. Ass’n v. Haw. Med. Serv. Ass’n,
113 Hawai`i 77, 106–07, 148 P.3d 1179, 1208–09 (2006).
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1016, 1048 (D. Hawai`i 2019) (quotation marks and citations
omitted).
PacMar’s allegations do not impermissibly lump Hartman
in with other defendants as to the breach element. Rather,
PacMar alleges Hartman: was aware of the nature and scope of the
coverup scheme, and that the purpose of the scholarship scheme
was to coverup illegal conduct by Kao and others [Amended
Complaint at ¶¶ 93, 97-100, 104-13, 144]; directed, along with
other defendants, the transfer of funds from PacMar to SYWSE
[id. at ¶¶ 102-03, 136]; and directed the subsequent donations
to universities [id. at ¶¶ 102-03, 115, 116]. These allegations
are sufficient to state a plausible claim that Hartman breached
his fiduciary duty. Hartman’s Motion is denied as to Count VIII.
D. 	Count IX (Conversion)
Hartman contends the fact that he received a pay raise
is insufficient to support a claim for conversion. [Motion, Mem.
in Supp. at 25.]
The State courts of Hawai`i have stated the
following with respect to conversion: “Conversion
encompasses the following acts: ‘(1) [a] taking
from the owner without his consent; (2) an
unwarranted assumption of ownership; (3) an
illegal use or abuse of the chattel; and (4) a
wrongful detention after demand.’” Freddy Nobriga
Enters., Inc. v. Dep’t of Haw. Home Lands, 295
P.3d 993, 999 (Haw. Ct. App. 2013) (quoting Tsuru
v. Bayer, 25 Haw. 693, 696 (1920)).
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Privratsky v. Liberty Mut. Fire Ins. Co., 637 F. Supp. 3d 1077,
1080 (D. Hawai`i 2022) (alteration in Privratsky).
Hartman’s argument fails. To establish a claim for
conversion, a defendant need not gain personally from
plaintiff’s property or control over plaintiff’s property – the
defendant needs merely to exercise control over property. See
Tsuru, 25 Haw. at 697 (“The act must be essentially tortious,
but it is not essential to conversion sufficient to support the
action of trover that the defendant should have the complete
mancupation of the property, or that he apply the property to
his own use, if he has exercised dominion over it in exclusion
of, in defiance of, or inconsistent with the owner’s right.”);
see also Freddy Nobriga Enters., 129 Hawai`i at 130, 295 P.3d at
1000 (“So long as he [or she] intends to deal with the property
in a way which is in fact inconsistent with the plaintiff’s
right, he [or she] is a converter.” (alterations in original)
(citation and quotation marks omitted)). Further, “[i]t is
fundamental that directors and officers must use corporate funds
for corporate purposes only or they will be liable for
misappropriation, diversion, or conversion of corporate assets.”
Lussier v. Mau-Van Dev., Inc., 4 Haw. App. 359, 371, 667 P.2d
804, 814 (1983) (citation omitted). Hartman’s Motion is denied
as to Count IX.
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E. 	Count X (Embezzlement)
Hartman argues the fact Hartman received a pay raise
was insufficient to show Hartman fraudulently converted PacMar’s
funds. [Motion, Mem. in Supp. at 26.] However, there is no
common law tort of embezzlement under Hawai`i law. Hartman cites
to Miyashiro v. Roehrig, Roehrig, Wilson & Hara, 122 Hawai`i
461, 484, 228 P.3d 341, 364 (Ct. App. 2010), as stating the
elements of an embezzlement claim. See Motion, Mem. in Supp. at
26. However, under Hawai`i law embezzlement is a criminal
charge. See Territory v. Yim, 39 Haw. 214, 217 (1952) (noting
embezzlement is a crime “against the Territory and not against
the owner of the property embezzled”); see also Kealoha v.
Machado, 131 Hawai`i 62, 81-82, 131 P.3d 213, 232-33 (2013)
(holding that Haw. Rev. Stat. § 708–874, which establishes the
criminal offense of “misapplication of entrusted property,” does
not create a private right of action). Therefore, the Motion is
granted insofar as Count X is dismissed for failure to state a
claim.
F. 	Count XI (Unjust Enrichment)
Hartman argues PacMar impermissibly lumps together all
defendants, and fails to plausibly allege that PacMar conferred
a benefit upon Hartman and that the retention of that benefit
would be unjust. See Motion, Mem. in Supp. at 26-27. A claim for
unjust enrichment requires the plaintiff to demonstrate that
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(1) the plaintiff conferred a benefit upon the defendants, and
(2) the retention of that benefit would be unjust. Durette v.
Aloha Plastic Recycling, Inc., 105 Hawai`i 490, 504, 100 P.3d
60, 74 (2004). PacMar argues that PacMar’s advancement to
Hartman of the $15,000 is the benefit conferred and unjustly
retained by Hartman, given that “Hartman’s inducing promises
were lies.” [Mem. in Opp. at 28 (citing First Amended Complaint
at ¶¶ 470-73). 6 ] The allegations in the Second Amended Complaint
state a plausible claim for unjust enrichment. Hartman’s Motion
is denied as to Count XI.
G. 	Count XII (Gross Negligence)
Hartman contends PacMar fails to sufficiently allege
how he “displayed a ‘conscious indifference to consequences’ of
the alleged breaches by other Defendants.” See Motion, Mem. in
Supp. at 27 (citing Second Amended Complaint at ¶ 450) (emphasis
added). Hartman’s argument ignores PacMar’s allegations of
actions Hartman himself took, which are alleged to have resulted
in a breach of his fiduciary duty. See, e.g., Second Amended
Complaint at ¶¶ 40-41, 126-128, 342, 346. Hartman’s Motion is
denied as to Count XII.
6 The Court assumes these were mistaken citations that were
intended to refer to the Second Amended Complaint. See Mem. in
Opp. at 28.
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H. 	Count XIV (Breach of Contract)
Hartman contends PacMar has not shown Hartman “failed
to act in good faith when he performed his job duties or acted
with active or deliberate dishonesty.” See Motion, Mem. in Supp.
at 27. The Second Amended Complaint sufficiently alleges Hartman
did not act in good faith. See, e.g., Second Amended Complaint
at ¶¶ 93-113. Hartman’s Motion as to Count XIV is denied.
V. 	No Leave to Amend
Counts III and IV are dismissed without prejudice
because PacMar has not sufficiently alleged concrete financial
injury for purposes of RICO standing. See Fleck & Assocs., Inc.
v. City of Phoenix, 471 F.3d 1100, 1106-07 (9th Cir. 2006).
Although PacMar’s counsel represented at the 9/8 Hearing that
approximately $10 million had been seized to date, leaving a
balance of between $1.5-$2 million to be collected, it is
speculative as to whether and when, if ever, PacMar will be
demanded to pay these amounts. If that occurs, PacMar may then
have a cause of action, and could file a claim then. PacMar does
not have leave to amend Counts III and IV in the instant case.
The allegations in Counts I against Hartman that
assert Hartman’s facilitation of fund transfers from PacMar to
SYWSE, the transfer of the $60,000 to fund scholarships,
Hartman’s alleged stealing of PacMar’s money to fund SYWSE’s
initial start-up costs, and Hartman’s receipt of a pay raise are
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not pled with sufficient particularity and thus do not comply
with Rule 9(b). Similarly, the allegations in Count V against
Hartman that assert the PPP fraud stemming from Hartman’s
withholding of information; campaign finance fraud as it related
to Hartman’s facilitation of laundering money and receipt of a
pay raise; Hartman’s alleged breach of duty by charging time
worked on illegal schemes as overhead; and illegal transfer
fraud are not pled with sufficient particularity and thus do not
comply with Rule 9(b). Therefore, these allegations in Counts I
and V are dismissed with prejudice because PacMar has been
afforded ample opportunity to amend its complaint and it is
clear that the allegations sufficient to support the fraud
claims cannot be saved by amendment. The motion to dismiss is
denied as to the remaining allegations and claims in Counts I
and V.
Count X is dismissed, and the dismissal is with
prejudice because it is clear the claim cannot be saved by
amendment. See Hoang, 910 F.3d at 1102.
VI. 	Chen Joinder and Lum Kee Joinder
Chen and Lum Kee do not state whether their respective
joinders are substantive joinders or joiners of simple
agreement. Regardless, because the Chen Joinder and the Lum Kee
Joinder were filed more than three days after Hartman’s Motion,
and neither joinder is “supported by a memorandum that complies
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with LR7.4(a) and (b) supplementing” Hartman’s Motion, the Court
considers them as joinders of simple agreement. See Local
Rule LR7.7. Accordingly, the Chen Joinder and Lum Kee Joinder
are granted in part and denied in part to the same extent as
Hartman’s Motion. In other words, the instant Order does not
rule upon any of PacMar’s claims against Chen and Lum Kee,
except for Counts III and IV.
CONCLUSION
For the foregoing reasons, Hartman’s Motion to Dismiss
Second Amended Complaint, Filed April 21, 2023 [ECF 97], filed
May 19, 2023, is HEREBY GRANTED IN PART AND DENIED IN PART.
-Hartman’s Motion is GRANTED insofar as Counts III and IV are
DISMISSED WITHOUT PREJUDICE as to all defendants, and Count
X against Hartman is DISMISSED WITH PREJUDICE.
-As to Counts I and II, Hartman’s Motion is DENIED to the extent
that it seeks the dismissal of PacMar’s claims against
Hartman, but the Motion is GRANTED insofar as the Court
finds that portions of Count I are not pled with sufficient
particularity, namely: Hartman’s facilitation of fund
transfers from PacMar to SYWSE, the transfer of the $60,000
to fund scholarships, Hartman’s alleged stealing of
PacMar’s money to fund SYWSE’s initial start-up costs, and
Hartman’s receipt of a pay raise. These portions of Count I
are therefore DISMISSED WITH PREJUDICE.
-As to Count V, Hartman’s Motion is DENIED to the extent that it
seeks the dismissal of PacMar’s claim against Hartman, but
the Motion is GRANTED insofar as the Court finds that
portions of Count V are not pled with sufficient
particularity, namely: the claims of PPP fraud stemming
from Hartman’s withholding of information, campaign finance
fraud as it related to Hartman’s facilitation of laundering
money and receipt of a pay raise, Hartman’s alleged breach
of duty by charging time worked on illegal schemes, and
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illegal transfer fraud. These portions of Count V are
therefore DISMISSED WITH PREJUDICE.
-As to Counts VI, VII, IX, XI, XII, and XIV, Hartman’s Motion is
DENIED.
Other than as stated as to Counts III and IV, this
Order does not make any ruling as to any of PacMar’s other
claims against any other defendant. The Chen Joinder and Lum Kee
Joinder are GRANTED IN PART AND DENIED IN PART to the same
extent as Hartman’s Motion.
IT IS SO ORDERED.
DATED AT HONOLULU, HAWAII, DECEMBER 29, 2023
PACMAR TECHNOLOGIES LLC, FORMERLY KNOWN AS MARTIN DEFENSE GROUP
LLC v. KAO, ET AL., CIV. NO. 22-00283, LEK-WRP; ORDER GRANTING
IN PART AND DENYING IN PART: DEFENDANT DUKE HARTMAN’S MOTION TO
DISMISS SECOND AMENDED COMPLAINT, FILED APRIL 21, 2023 [ECF 97];
DEFENDANT/CROSS-CLAIMANT CLIFFORD CHEN’S AND DEFENDANT/CROSS-
CLAIMANT LAWRENCE KAHELE LUM KEE’S RESPECTIVE JOINDERS IN
HARTMAN’S MOTION
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